The opinion of the court was delivered by: OBERDORFER
Plaintiffs are stockholders and former stockholders of defendant Newbridge Networks Corp. ("Newbridge"). These seven different class action cases have been consolidated into this one class action, reiterated in the First Amended Consolidated Complaint which they filed on May 8, 1995. Newbridge is a Canadian corporation that designs, makes, and markets integrated digital networking products for global networking applications, including ATM systems used by banks. The amended complaint names as individual defendants Newbridge's "controlling persons": its founder, Chairman of the Board, and CEO, Terence H. Matthews; its President, COO, and a director, Peter Sommerer; and its Executive Vice-President, Finance, and CFO, Peter D. Charbonneau.
A hearing was held on defendants' motion to dismiss on December 11, 1995. The issue is joined by defendants' motion to dismiss and plaintiffs' pending motion for class certification. Also pending are defendants' motion for an order pursuant to Federal Rules of Civil Procedure 26(c), 26(d), 26(g)(3), and 37(a)(4) and plaintiff's cross-motion to compel discovery pursuant to Federal Rules 30 and 37(a)(2).
Plaintiffs allege that "prior to and during the Class Period, defendants publicly disseminated a series of highly optimistic statements concerning Newbridge's business, operations and profitability that were materially false and misleading." Amended Compl. P 2. Plaintiffs' allegations, which are presumed to be true for purposes of defendants' motion to dismiss, may fairly be summarized as follows.
The amended complaint states that "defendants used communications with securities analysts to promote the Company and to artificially inflate the price of Newbridge stock during the class period." Id. P 32. Newbridge officers and top managers regularly communicated with such analysts; "the investment firm S.G. Warburg & Co. Inc., specifically represented in a June 10, 1994, analyst report concerning Newbridge that it had received 'company guidance' from Newbridge with regard to anticipated revenues and other business matters." Id. P 34. Communications with analysts took the form of conference calls, meetings, and analyst briefings with company officials. Id. P 35. "Newbridge also endorsed the reports of analysts, adopted them as its own, and placed its imprimatur on them as well as on the projections, forecasts, and statements contained therein . . . ." Id.
One specific allegation involved company statements that on February 14, 1994, prior to the beginning of the class period, defendants announced--presumably in a press release, although the amended complaint does not so specify--that GTE Telephone Operations had selected Newbridge to provide its 36150 MainStreet ATMnet switching equipment for several "key" networks. Id. P 45. A February 15, 1994 press release announced "a marketing alliance the Company had entered into with MCI and additional investments Newbridge had made in certain affiliated companies, including ACC, a maker of local area network bridges and routers." Id. That release quoted defendant Matthews as stating that he was "pleased with progress made during the quarter to enter joint development programs with third parties." Id. Following such statements, analysts themselves disseminated positive appraisals of Newbridge. Id. P. 46.
On March 29, 1994, the first day of the class period, Newbridge hosted a securities analyst meeting in New York that was attended by "one or more of the Individual Defendants." Id. P 48. At that meeting, "defendants told the attending analysts, among other things, that Newbridge would experience 'no significant deterioration in its current profit margins'; that demand in the carrier market for the Company's ATM switch 'outpaced expectations'; and that the Company had been awarded a $ 65 million contract to supply networking equipment to a German telecommunications company and also a contract to provide products to a Venezualan company, which contracts, according to a Smith Barney report dated March 30, 1994, 'further increase our confidence in FY94 and FY95 estimates.'" Id. P 49 (citations to March 30, 1994 CS First Boston analyst report omitted). Another analyst report following the March 29, 1994 meeting stated that "the company reiterated," among other things, that it was "'well positioned to sell ATM systems to the telcos and to corporations.'" Id. P 50 (quoting March 30, 1994 S.G. Warburg analyst report).
Defendants Sommerer, Charbonneau, and Rodgers, as well as several other Newbridge officers and directors who are not named as defendants, sold substantial numbers of shares within two weeks of the March 29, 1994 analyst meeting and realized considerable profits from those sales. Id. P 51. Defendant Charbonneau sold all of his shares during this period. Id.
Plaintiffs contend that defendants did not disclose "the significant marketing and advertising expenses the Company would and ultimately did incur in connection with" trade shows during the first week of May 1994, despite their knowledge that such expenses "would adversely impact Newbridge's first fiscal quarter for the period ending July 30, 1994." Id. P 52. Defendants used the trade shows to "hype Newbridge's product lines and also publicly announce a joint venture relationship between Newbridge and Ungermann-Bass, Inc." Id. A May 4, 1994 press release, which quoted defendant Sommerer, made optimistic statements with respect to that joint venture. Id.
At a June 6, 1994 analyst meeting in New York, "attended by one or more of the Individual Defendants and other Newbridge executives," defendants made optimistic statements about a particular family of ATM networking equipment, the "VIVID" product. Id. P 53.
Also in early June 1994, defendants announced results for Newbridge's fiscal fourth quarter and full year ending April 30, 1994. Defendants did not disclose existing business and operational problems; instead, "defendant Matthews referenced in the Company's June 8, 1994 press release the 'substantial contracts being secured with customers throughout the world'; the 'strong acceptance of the Newbridge packet switching products'; the fact that Newbridge's ATM product line 'is attracting increasing interest with the rate of order intake growing as the year progressed; and the May 1994 trade shows." Id. P 54. With these statements before them, analysts issued highly favorable reports about the company. Id. P 55 (citing reports). Defendants issued several press releases during the month following June 8, 1994, which described "various contracts, agreements and joint ventures Newbridge had recently entered into." Id. P 56 (citing press releases).
On July 1, 1994, defendants filed with the SEC Newbridge's Form 10-K for the fiscal year ending April 30, 1994. Each of the individual defendants signed the 10-K, which "described the Company's business and operations only in the most glowing and superlative terms." Id. P 57. The 10-K made representations with respect to Newbridge's product lines, business strategy, research and development activities customer service and support, and manufacturing processes. With respect to the company's manufacturing processes, the 10-K specifically stated that "'to date, Newbridge has not experienced any significant delays relating to the availability of materials.'" Id.
A July 12, 1994 article in The Financial Post concerning Newbridge's July 11, 1994 announcement of a planned share repurchase quoted Sandra Plumbley, a Newbridge spokesperson, as stating that "'nothing has changed in our fundamentals . . . There have been times when the stock is just too good to invest. . . . [The share repurchase] has an anti-dilutive effect. It means earnings per share would go up." Id. P 59. Plaintiffs contend that despite Plumbley's representations, the "fundamentals" had changed as a result of declining earnings, order and shipment delays, increased expenses, and "other adverse business conditions." Id. Two Newbridge executives not named as individual defendants sold many of their shares within one week of the July 11, 1994 announcement "(and only two weeks before the price of the shares plummeted on August 1, 1994)." Id. P 60.
Plaintiffs contend that defendants failed to disclose material information with respect to optimistic statements voluntarily made during the class period. Defendants did not disclose that:
(i) the Company was experiencing long delays in closing several multi-million dollar contracts, which delays were adversely impacting Newbridge's revenues; (ii) several large and important customers were unable to secure financing for their purchase of certain Newbridge products, which likewise was adversely impacting Newbridge's revenues; (iii) Newbridge was not shipping products to certain customers because of a lack of parts in Newbridge's inventory; and (iv) the Company's research and development expenses were actually increasing as a percentage of sales, contrary to all prior trends, which was for such expenses to be declining as a percentage of sales.
Id. P 5; see also id. P 69. Plaintiffs do not specifically identify which contracts defendants were having difficulty closing, but note that the identity of those contracts, some of which were with unspecified companies in Latin America, "is particularly within defendants' knowledge." Id. P 69. Plaintiffs do claim that "Newbridge was unable to ship several . . . contracts . . . in complete form because Newbridge lacked the right mix of parts in its inventory." Id. This claim, if proved, would belie defendants' earlier representation in its 10-K that Newbridge had not experienced delays relating to the availability of materials. Id. According to plaintiffs, other contracts were not shipped because Newbridge had difficulty obtaining financing guarantees. Id.
Moreover, sales in Newbridge's T-1 multiplexer product line were flat or declining, in contrast with prior reporting periods. Similarly, defendants failed to disclose that the company was experiencing increased research and development expenditures (in contrast with representations in the 10-K), increased promotional expenses as a result of 1994 trade shows, and increased expenses "as a result of the consolidation of ACC's results with the Company's results effective June 8, 1995 [sic], when Newbridge acquired a controlling 51% interest in the company." Id. Finally, defendants did not disclose "existing and serious structural deficiencies in the Company's 36150 ATMnet switch" which "placed Newbridge at a serious disadvantage to competitors such as General DataComm Industries, which secured several lucrative ATM equipment contracts with major telecommunications carriers including MCI Communications Corporation." Id.
Our Court of Appeals recently stated that a motion to dismiss should not be granted "unless plaintiffs can prove no set of facts in support of their claim which would entitle them to relief." Kowal v. MCI Communications Corp., 305 U.S. App. D.C. 60, 16 F.3d 1271, 1276 (D.C. Cir. 1994). While plaintiffs are granted the benefit of all inferences that can be derived from the facts alleged, "the court need not accept inferences drawn by plaintiffs if such inferences are unsupported by the facts set out in the complaint. Nor must the court accept legal conclusions cast in the form of factual allegations." Id.
Defendants have moved to dismiss the amended complaint without leave to replead. Defendants contend that the complaint fails to state a claim for securities fraud under Federal Rule of Civil Procedure 12(b)(6). According to defendants, plaintiffs have not alleged securities fraud, instead, plaintiffs have "alleged only the Defendants made projections that missed the mark." Mot. to Dismiss at 10. Defendants also argue that plaintiffs have not pleaded any allegations of fraud with the particularity required by Federal Rule of Civil Procedure 9(b). See id. at 9 (citing Kowal v. MCI Communications Corp., 305 U.S. App. D.C. 60, 16 F.3d 1271 (D.C. Cir. 1994)).