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January 14, 2013

Court Reconsiders Dismissal of Fraud Complaint in Light of Ninth Circuit VeriFone Decision

By Anne Sherry, J.D.

Plaintiffs' motion for reconsideration of an order dismissing their class action complaint was granted with respect to certain statements. In September 2012, the district court for the Northern District of California dismissed a class action complaint against Oclaro, Inc., and its CEO and CFO, for failure to plead facts giving rise to a strong inference of scienter. On reconsideration, the court was "persuaded that it erred in failing to adequately credit [p]laintiffs' allegations" that the company's downturn was so massive that the defendants must have been aware of it (Westley v. Oclaro, Inc., January 10, 2013, Chen, E.).

The plaintiffs claimed that certain statements by the defendants violated Exchange Act Section 10(b) and Rule 10b-5 and that the individual defendants were also liable under Section 20(a). Specifically, the plaintiffs claimed that: (1) Oclaro's May 2010 claims of increasing customer demand were false, as the company's book-to-bill ratio was falling and approaching a ratio of 1; (2) the CFO's statements at a conference in June 2010 that Oclaro was experiencing a surge in true customer demand were false because of the declining demand suggested by the book-to-bill ratio; and (3) accelerated forecasts for the first quarter of 2011 released and reiterated in July and August 2010 were false because, despite the defendants' claims that 85 to 90 percent of orders needed to meet the forecast had been booked, a confidential witness reported that Oclaro did not have visibility into customer needs. According to the complaint, the defendants partially disclosed the true picture in a July 2010 conference call, when the CFO admitted that there had been a slowdown in early April, and fully disclosed the truth in a press release in October 2010 disclosing the first quarter financial results. Revenues were on the low end of the range Oclaro had predicted, and it missed its gross margins target. In the conference call, the CEO admitted to customer cancellations and to limited visibility into customer needs.

The court previously determined that the plaintiffs failed to make a strong showing of scienter with respect to the alleged misrepresentations. The plaintiffs' sole argument as to scienter with respect to the May 2010 statements was the defendants' receipt of weekly booking reports, but plaintiffs presented no specific evidence as to the reports' content. Furthermore, officers' knowledge of facts critical to the company's core operations, as well as Oclaro's motive to represent that customer demand was strong, were insufficient by themselves to withstand a motion to dismiss. As to the July and August 2010 statements, the confidential witness' assertions of defendants' knowledge were conclusory and insufficient to support a strong inference of scienter.

The court denied the plaintiffs' motion for leave to file for reconsideration with respect to the July and August 2010 statements, but granted leave to file for reconsideration with respect to the May and June 2010 statements. The court materially erred in interpreting the book-to-bill ratio of 1 as a positive indicator for April 2010, as that ratio was tracked quarterly rather than monthly. It is plausible to infer that the April downturn must have been significant in order for the book-to-bill ratio to have declined during the quarter ending in June, and, therefore, it was also plausible to infer that management was aware of the significance. Other statements by management, as well as management's receipt of weekly bookings reports, while insufficient on their own to establish scienter, have some limited probative value towards demonstrating scienter. Taking the allegations holistically in light of the Ninth Circuit's December 2012 decision in In re VeriFone Holdings, Inc. Securities Litigation, the court concluded that it is reasonable to infer that the defendants were aware of the downturn in April 2010, prior to the May and June 2010 statements about strong customer demand. The defendants did not articulate an opposing inference that was more compelling than that set forth by the plaintiffs.

The case is No. C-11-2448 EMC.

Shawn A. Williams (Robbins Geller Rudman & Dowd LLP) for Curtis and Charlotte Westley. Mark Punzalan (Punzalan Law, P.C.) for Toby Aguilar. Gidon M. Caine (Alston & Bird LLP) for Oclaro Inc., Alain Couder and Jerry Turin.

LitigationEnforcement: CaliforniaNews FraudManipulation

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