Makor Issues & Rights Ltd. v. Tellabs, Inc.

Facts

P alleged the following in the original complaint: The corporate defendant, Tellabs (D), manufactures equipment used in fiber optic cable networks; its principal customers are telephone companies. In December 2000, the beginning of the period of alleged violations of Rule 10b-5, D's principal product, accounting for more than half its sales, was a switching system called TITAN 5500. The product was almost 10 years old when on December 11 D announced that the 5500's successor product, TITAN 6500, was 'available now' and that Sprint had signed a multiyear, $100 million contract to buy the 6500, though in fact no sales pursuant to the contract closed until after the period covered by the complaint. The same announcement added that despite the advent of the 6500, sales of the 5500 would continue to grow. These announcements were made by Richard Notebaert, who was D's chief executive officer and, along with D a principal defendant. The following month, D announced that 'customers are buying more and more D equipment' and that D had 'set the stage for sustained growth' with the successful launch of several products. In February, the company told its stockholders that its growth was 'robust' and that 'customers are embracing' the 6500. In response to a question frequently asked by investors-whether sales of the 5500 had peaked-the company declared that 'although we introduced this product nearly 10 years ago, it's still going strong.' In March the company reduced its sales estimates slightly but said it was doing so because of lower than expected growth in a part of its business unrelated to the 5500 and 6500 systems, and that 'interest in and demand for the 6500 continues to grow' and 'we are satisfying very strong demand and growing customer demand [for the 6500, and] we are as confident as ever-that may be an understatement- about the 6500.' And in response to a securities analyst's question whether D was experiencing 'any weakness at all' in demand for the 5500, Notebaert responded: 'No, we're not. . . . We're still seeing that product continue to maintain its growth rate; it's still experiencing strong acceptance.' D had been flooding its customers with tens of millions of dollars worth of 5500s that the customers had not requested, in order to create an illusion of demand. The company had to lease extra storage space in January and February to accommodate the large number of returns. Just weeks after these statements D reduced its sales projections significantly because its customers were 'exercising a high degree of prudence over every dollar spent.' But it reiterated that the demand for the 6500 was 'very strong.' In April, it said 'we should hit our full manufacturing capacity [for the 6500] in May or June to accommodate the demand we are seeing. Everything we can build, we are building and shipping. The demand is very strong.' In June, D announced a major drop in revenues, and its share price, which at its peak during the period had been $67 and in the middle of the period had varied between $30 and $38, fell to just under $16. The market for the 5500 was evaporating. D's revenues in 2001 were 35 percent lower than the year before and its profits 125 percent lower. The drop in the second quarter (most of which was within the period covered by the complaint) over the year before was even steeper; revenues dropped 43 percent and profits 211 percent. These statements ruled on in our previous opinion were adequately pleaded as materially false. But is an inference of scienter from these allegations cogent and at least as compelling as the contrary inference-that there was no scienter?

Issues

Rule of Law

Holding and Decision

Legal Analysis

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