In re Corning Securities Litigation

Full title: IN RE CORNING SECURITIES LITIGATION. THIS DOCUMENT RELATES TO ALL ACTIONS

Court: United States District Court, W.D. New York

Date published: Apr 9, 2004

Master File No. 01-CV-6580-CJS (W.D.N.Y. Apr. 9, 2004)

Opinion

Master File No. 01-CV-6580-CJS.

April 9, 2004

Warren B. Rosenbaum, Esq., Liaison Counsel, Shapiro, Rosenbaum, Liebschutz Nelson, LLP, Rochester, NY, for Plaintiffs.

Carolyn G. Nussbaum, Esq., Nixon Peabody LLP, Rochester, NY, for Defendants.

DECISION AND ORDER

CHARLES SIRAGUSA, District Judge

I. INTRODUCTION

This is a proposed class action for securities fraud brought under Sections 11 and 15 of the Securities Act of 1933 ("Securities Act"), 15 U.S.C. § 77k and 77o, and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78j(b) and 78t(a), as well as the rules and regulations promulgated thereunder by the Securities Exchange Commission ("SEC"), including Rule 10b-5, 17 C.F.R. § 140.10b-5. The case is before the Court on defendants' motion to dismiss (# 21) Plaintiffs' 215 paragraph Consolidated Amended Complaint for Violations of Federal Securities Laws ("Complaint"). For the reasons stated below, the Court grants the motion.

II. BACKGROUND

Plaintiffs consist of two groups, each of which is proposed as a separate class. One group, suing under the Securities Act, consists of all persons who purchased Corning common stock or senior Corning unsecured zero coupon convertible debentures due in 2015, pursuant to, or traceable to, a secondary public offering, which Corning conducted on or about November 6, 2000 ("Offering"). The other group, claiming violations of the Exchange Act, comprises all persons who purchased or otherwise acquired Corning common stock on the open market between September 27, 2000 and July 9, 2001, inclusive ("Class Period"). The Court has not yet made a determination as to class certification under Rule 23.

A. Parties

The lead¹ plaintiffs, appointed by this Court's Order entered on July 30, 2002, are Parkside Capital for the Securities Act claims, and Rodolfo Ciccarello and Kenneth L. Friedman for the Exchange Act claims. For ease of reference, the Court will refer to both groups of plaintiffs as "plaintiffs." Defendants are:

1 See Manual for Complex Litigation (4th ed. 2004).

(1) Corning, Incorporated ("Corning"), a New York corporation with its principal offices in Corning, New York, and whose stock is traded on the New York Stock Exchange as GLW;

(2) Roger G. Ackerman ("Ackerman"), who served during the Class Period as Corning's chief executive officer and as Chairman of Corning's Board of Directors, resigning from the CEO position on or about January 1, 2001 and from the Board on or about June 21, 2001. Ackerman was replaced in both positions by John Loose ("Loose"), who is not named as a defendant in this suit;

(3) Katherine A. Asbeck ("Asbeck"), who served as Corning's senior vice president, controller and principal accounting officer during the Class Period; and

(4) James B. Flaws ("Flaws"), who served as Corning's executive vice president and chief financial officer during the Class Period, and, who, during the Class Period, was responsible for mergers and acquisitions at Corning. Complaint ¶¶ 13-15.

The Complaint refers to defendants Ackerman, Asbeck and Flaws collectively as the "Individual Defendants." It refers to Corning and the individual defendants together as the "Defendants." Complaint ¶ 16. For ease of reference, the Court will adopt the same nomenclature in this decision and order.

B. Plaintiffs' Claims and Causes of Action

Plaintiffs' allege that defendants repeatedly made material misrepresentations regarding: (1) demand for the Company's photonics products; (2) the value of goodwill associated with two multibillion-dollar Corning acquisitions; and (3) the value of Corning's photonics-related inventory. As a result, plaintiffs allege that Corning's securities were offered and traded at artificially inflated prices and that, as certain knowledge became public, Corning's stock significantly decreased in value, causing plaintiffs to suffer losses.

The Complaint contains four counts. Count I alleges that Corning violated Section 11 of the Securities Act. Count II alleges that the individual defendants violated Section 15 of the Securities Act. Count III alleges that defendants violated Section 10(b) of the Exchange Act, and Count IV alleges that the individual defendants violated Section 20(a) of the Exchange Act.

C. Corning's Business

Plaintiffs allege that Corning's primary business was its telecommunications segment, which produced fiber-optic cable, optical components and modules ("photonics products"), optical networking control devices, and optical hardware for the worldwide telecommunications industry. Complaint ¶ 18. The telecommunications segment, plaintiffs allege, represented more than seventy percent of Corning's total reported revenues during the Class Period. Id. The Complaint relates that Corning, as a pioneer in the production of optical fiber, enjoyed a more than fifty percent sharef that market. Plaintiffs further state that beginning in 1999 and continuing during the Class Period, "Corning made aggressive moves, through acquisitions as well as the expansion of its existing manufacturing facilities, to expand beyond its leading fiber business and into photonics products, which defendants perceived to be a faster growing market than fiber." Complaint ¶ 18. Plaintiffs contend that Corning's Photonics Technologies Division focused "on the development, manufacture and sale of photonics technologies, including erbium-doped amplifiers, reman and advanced amplifiers, dispersion compensation modules, fiber-based components, dense wavelength division multiplexers ("DWDM") and pump laser products. . . ." Complaint ¶ 18. Plaintiffs refer to this portion of Corning's telecommunications segment as its Photonics Technologies Division. Id. The Complaint explains that photonics products are "components and modules that are designed to boost, redirect, separate and combine data transmitted through optical networks . . . [and] are essential to the functioning of such networks." Complaint ¶ 19. These products, according to plaintiffs, boost the capabilities of fiber optic networks, "enhancing their flexibility, capacity, performance and reliability." Complaint ¶ 19. Prior to the beginning of the Class Period, plaintiffs claim that Corning "profited handsomely" from the strong demand for fiber optic cables as telecommunications companies invested in expansion of their networks to meet the increased demand for "bandwidth ( i.e., data carrying capacity). . . ." Complaint ¶ 19.

D. Corning's Customers for Telecommunications Products

During the pre-Class Period, plaintiffs allege that Corning's two largest customers were Nortel Networks Corp. ("Nortel") and Lucent Technologies, Inc. ("Lucent"). According to the Complaint, both companies design and build optical network systems for telecommunications carriers and "provided Corning with a steady stream of orders for [Corning's] fiber and photonics products." Complaint ¶ 20. During the Class Period, plaintiffs state that companies such as Nortel, Lucent, Cicso, Alcatel, and new entrants to the market, such as Ciena and Marconi, as well as others,

sat in the middle of the optical networking food chain, buying optical components from companies such as Corning and JDS [a Corning competetor], and using the parts to build optical networking systems and subsystems. These optical system vendors then sold the systems to telecommunications carriers such as ATT, Sprint, Qwest Communications, WorldCom, Williams Communications, Level 3, Global Crossing, and 360networks. According to securities analysts, during the Class Period, Nortel was the dominant optical system vendor with between 40 to 45 percent of the market. Lucent and Cicso lagged behind with smaller shares of the market.

Complaint ¶ 40. "Prior to and during the Class Period, securities analysts reported that Nortel and Lucent were Corning's biggest customers for its photonics products." Complaint ¶ 42.

E. NetOptix Purchase

The Complaint also describes two photonics purchases Corning made, one prior to the Class period, and one just at the beginning of it. Plaintiffs state that on February 14, 2000, Corning announced their agreement to purchase NetOptix Corporation ("NetOptix"), a Sturbridge, Massachusetts company, at a cost of approximately twelve million shares of Corning common stock. Complaint ¶ 21. Through its subsidiaries, plaintiffs relate that NetOptix manufactured thin film filters for use in its DWDM components, which are described above. Complaint ¶ 21. According to the Complaint, on April 13, 2000, Corning issued a press release in which it stated that it expected the purchase to be "mildly dilutive to Corning's earnings per share in 2000 and accretive in 2001 and thereafter." Complaint ¶ 23. Plaintiffs quote from Ackerman's and another Corning officer's public statements and conclude that, "Defendants' decision to acquire NetOptix was based on the assumption that the robust demand for photonics products enjoyed by [Corning] in 1999 and the first half of 2000 would continue, and to compete in the photonics market, Corning had to significantly increase its manufacturing capacity and make more of its own parts for use in its photonics products." Complaint ¶ 24.

Plaintiffs also point out that Corning's chief competitor in this market, JDS Uniphase ("JDS"), made nine acquisitions between September 1999 and September 2000 "to increase its optical components market share and manufacturing capacity." Complaint ¶ 24. In its Form 10-Q² filed with the SEC for the quarter ending on June 30, 2000, the Complaint indicates that Corning stated NetOptix goodwill would be valued at $2.093 billion, which plaintiffs allege was more than 99% of the purchase price. Complaint ¶ 27.

2 A public company's quarterly financial report filed with the SEC, due within 45 days of the end of a company's quarter.

F. Pirelli Acquisition

On the first day of the Class Period, September 27, 2000, plaintiffs state that Corning issued a press release announcing the completion of its purchase of a 90% interest in Pirelli S.p.A.'s ("Pirelli") Optical Technologies USA ("OTUSA") subsidiary. The purchase price was approximately $3.6 billion in cash, "including a contingent payment of $180 million upon the achievement of certain business milestones." Complaint ¶ 29. Plaintiffs further state that OTUSA was an optical components and devices business based in Milan, Italy, that manufactured lithium niobate modulators, pump lasers, certain specialty fibers, and fiber gratings used in optical networks. Complaint ¶ 30.

The Complaint also quotes from an article, "Corning Buys Pirelli Fiber-Optic Unit," published in The Daily Deal on September 27, 2000, in which a Pirelli spokesman is quoted as saying, "that to acquire OTUSA, Corning paid 165 times OTUSA's annual revenues. `The best price so far for comparable companies has been 109 times revenues. What's more, this is an all-cash deal,' [the spokesman] added." Complaint ¶ 31. Plaintiffs also allege that "[a]nalysts were equally [sic] concerned about the price paid by Corning for OTUSA." Complaint ¶ 32. One called the price "astronomical," and another stated that OTUSA had a value of only about $1.1 billion. Complaint ¶ 32.

The Complaint explains that Corning paid the high price to ward off other suitors for the purchase, since Corning had previously been outbid by its rival, JDS. Complaint ¶ 33. The Pirelli deal, plaintiffs state, closed on December 12, 2000, "at which time Corning, in a separate transaction, also acquired the remaining 10% of OTUSA, which was owned by Cisco Systems, Inc. ("Cisco"), in exchange for 5,473,684 shares of Corning stock (collectively, the two deals are referred to [in the Complaint] as the `Pirelli Acquisition')." Complaint ¶ 34.

Corning included information about the Pirelli Acquisition in its Form 10-K405³ for the year ending December 31, 2000, which it filed with the SEC and which is partially quoted in the Complaint. Complaint ¶ 35. Plaintiffs state that Corning's Form 8-K,⁴ filed with the SEC on January 25, 2001, reported that the excess of purchase price for the Pirelli Acquisition over the estimated fair market value of its tangible assets was allocated primarily to goodwill and valued at approximately $3.5 billion. Complaint ¶ 36. Plaintiffs allege that with the Pirelli Acquisition, "Defendants were betting that . . . they could build a submarine pump laser capable of competing with those offered by JDS, a company with far greater experience in developing and testing the highly complex technology." Complaint ¶ 37. The Complaint concludes that Corning's decision to purchase OUTUSA and NetOptix "was based on the underlying assumption that demand for photonics products would continue at the torrid pace enjoyed by Corning in 1999 and early 2000." Complaint ¶ 38.

3 "Item 405 of Regulation S-K requires a company to disclose in its Form 10-K whether any of its insiders (i.e., officers, directors, or holders of more than 10% of the companies shares) have failed to file their Forms 3, 4, and 5 during the year. These forms must be filed by insiders to disclose their holdings (and any purchases or sales) of the company's securities. There's a box on the front of Form 10-K that the company must check (with a check mark or an "x") if the company's 10-K does not list any delinquent filers. Since we previously used the designation "10k405" in our Edgar database to designate that a company had checked off this box, you may find this form type when searching older SEC filings." U.S. Securities and Exchange Commission Fast Answers (available at http://sec.broaddaylight.com/sec/, accessed on March 22, 2004).

4 "Form 8-K is the `current report' used to report material events or corporate changes that have previously not been reported by the company in a quarterly report (Form 10-Q) or annual report (Form 10-K)." U.S. Securities and Exchange Commission Fast Answers (available at http://sec.broad daylight.com/sec/, accessed on March 22, 2004).

G. Obsolescence of Photonics Products

Plaintiffs describe in the Complaint how the photonics industry is characterized by rapidly changing technology that makes its products obsolete in a relatively short time, that is, in less than eighteen months. Complaint ¶ 44. In its Form 10-K filed with the SEC on March 12, 2001, plaintiffs allege Corning disclosed that:

The markets for our products are characterized by rapidly changing technologies, evolving industry standards and frequent new product introductions. Our success is expected to depend, in substantial part, on the timely and successful introduction of new products, upgrades of current products to comply with emerging industry standards, our ability to acquire technologies needed to remain competitive and our ability to address competing technologies and products.

Complaint ¶ 45 (quoting Corning's Form 10-K filed Mar. 12, 2001). The Complaint also includes information from JDS's September 28, 2000 Form 10-K, concluding that their customers expected more complex and flexible products to increase capacity and reduce costs. Complaint ¶ 46. Plaintiffs also refer to a portion of an interview of Carl Russo, Cisco's group vice president of optical networking, published in Light Reading.com on September 14, 2000, in which he stated, inter alia, that, "the truth is that optical components are being obsoleted [sic] every half minute." Complaint ¶ 47.

The Complaint further includes information from an individual identified as "New Business Manager" and who is described as a former Corning manager of new business development, who had worked for Corning for twenty-one years and left in April 2001. According to the Complaint, New Business Manager stated that the majority of Corning's photonics revenues came from custom-made optical amplifiers. Complaint ¶ 48. Plaintiffs reason, therefore, that any slowdown in the order rate for Corning photonics products "threatened [Corning's] ability to sell the products before they became obsolete and would require, under [generally accepted accounting principles], a write-down of such unsaleable inventory." Complaint ¶ 49.

III. LEGAL STANDARDS

A. Motion to Dismiss

Pursuant to Federal Rule of Civil Procedure 12(b)(6), a court may dismiss a complaint for "failure to state a claim upon which relief can be granted." It is well settled that in determining a motion under this Rule, a district court must accept the allegations contained in the complaint as true and draw all reasonable inferences in favor of the nonmoving party. Burnette v. Carothers, 192 F.3d 52, 56 (1999). However, while a court must accept as true a plaintiff's factual allegations, "[c]onclusory allegations of the legal status of the defendants' acts need not be accepted as true for the purposes of ruling on a motion to dismiss." Hirsch v. Arthur Andersen Co., 72 F.3d 1085, 1092 (2d Cir. 1995) ( citing In re American Express Co. Shareholder Litig., 39 F.3d 395, 400-01 n. 3 (2d Cir. 1994)). A court "may dismiss the complaint only if it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Id. (internal quotations omitted) ( citing Conley v. Gibson, 355 U.S. 41, 45-46 (1957)).

Both parties have relied extensively on material outside the Complaint, some of which is reproduced in part in the Complaint. It is generally true that when material outside the complaint is presented to and not excluded by the court, Federal Rule of Civil Procedure 12(b) requires that, after notice to the parties, the motion be converted, to a motion for summary judgment under Rule 56. However, in construing Rule 12(b), the Second Circuit has held that

"the complaint is deemed to include any written instrument attached to it as an exhibit or any statements or documents incorporated in it by reference." Int'l Audiotext Network, Inc. v. Am. Tel. Tel. Co., 62 F.3d 69, 72 (2d Cir. 1995) (per curiam) (quoting Cortec Indus., Inc. v. Sum Holding L.P., 949 F.2d 42, 47 (2d Cir. 1991)); see Fed.R.Civ.P. 10(c) ("A copy of any written instrument which is an exhibit to a pleading is a part thereof for all purposes."). Even where a document is not incorporated by reference, the court may nevertheless consider it where the complaint "relies heavily upon its terms and effect," which renders the document "integral" to the complaint. Int'l Audiotext, 62 F.3d at 72.

Chambers v. Time Warner, Inc., 282 F.3d 147, 152 (2d Cir. 2002). Therefore, the Court concludes that it need not convert defendants' motion to one under Rule 56. Rather, the Court determines that the 215-paragraph Complaint also includes the public documents filed with the SEC and referenced in the Complaint. "Were courts to refrain from considering such documents, complaints that quoted only selected and misleading portions of such documents could not be dismissed under Rule 12(b)(6) even though they would be doomed to failure." Kramer v. Time Warner, Inc., 937 F.2d 767, 773 (2d Cir. 1994).

B. Securities Act

Plaintiffs' first cause of action alleges that defendants violated Section 11 of the Securities Act, 15 U.S.C. § 77k. That section provides, in pertinent part, as follows:

(a) Persons possessing cause of action; persons liable. In case any part of the registration statement,⁵ when such part became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, any person acquiring such security (unless it is proved that at the time of such acquisition he knew of such untruth or omission) may, either at law or in equity, in any court of competent jurisdiction, sue —

(1) every person who signed the registration statement;

(2) every person who was a director of (or person performing similar functions) or partner in, the issuer at the time of the filing of the part of the registration statement with respect to which his liability is asserted;

(3) every person who, with his consent, is named in the registration statement as being or about to become a director, person performing similar functions, or partner;

(4) every accountant, engineer, or appraiser, or any person whose profession gives authority to a statement made by him, who has with his consent been named as having prepared or certified any part of the registration statement, or as having prepared or certified any report or valuation which is used in connection with the registration statement, with respect to the statement, in such registration statement, report, or valuation, which purports to have been prepared or certified by him;

5 The term "registration statement" means the statement provided for in Section 6 [ 15 U.S.C.S § 77f], and includes any amendment thereto and any report, document, or memorandum filed as part of such statement or incorporated therein by reference. 15 U.S.C. § 77b. The regulation pertaining to the contents of the registration statement are in 17 C.F.R. Chapter II, Part 210.

(5) every underwriter with respect to such security.

15 U.S.C. § 77k(a).

As the Eighth Circuit has held, "we read § 11's plain language to state unambiguously that a cause of action exists for any person who purchased a security that was originally registered under the allegedly defective registration statement — so long as the security was indeed issued under that registration statement and not another." Lee v. Ernst Young, LLP, 294 F.3d 969, 976-77 (8th Cir. 2002); see also Joseph v. Q.T. Wiles, 223 F.3d 1155, 1159 (10th Cir. 2000) ("[T]he natural reading of `any person acquiring such security' is simply that the buyer must have purchased a security issued under the registration statement at issue, rather than some other registration statement."). "This understanding of the statutory text conforms with the long-standing practice in this circuit of permitting suit under § 11 by those who can `trace' their shares to the allegedly defective registration statement." Demaria v. Andersen, 318 F.3d 170, 176 (2d Cir. 2003) (citations omitted).

Section 15 of the Securities Act states in full as follows:

Every person who, by or through stock ownership, agency, or otherwise, or who, pursuant to or in connection with an agreement or understanding with one or more other persons by or through stock ownership, agency, or otherwise, controls any person liable under section 11 or 12 [ 15 U.S.C. § 77k or 77l], shall also be liable jointly and severally with and to the same extent as such controlled person to any person to whom such controlled person is liable, unless the controlling person had no knowledge of or reasonable ground to believe in the existence of the facts by reason of which the liability of the controlled person is alleged to exist.

15 U.S.C. § 77o (2004).

C. Exchange Act

Section 10(b) of the Exchange Act provides, in relevant part, that

[i]t shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange — . . . [t]o use or employ, in connection with the purchase or sale of any security registered on a national securities exchange . . . any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.

15 U.S.C. § 78j(b) (2004). Rule 10b-5 states that,

[i]t shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange, (a) To employ any device, scheme, or artifice to defraud, (b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or (c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.

17 C.F.R. § 240.10b-5. To state a claim under Section 10(b) and Rule 10b-5, "plaintiffs must allege that in connection with the purchase or sale of securities: (1) defendants made a false material misrepresentation or omitted to disclose material information; (2) defendants acted with scienter; and (3) plaintiffs detrimentally relied upon defendants' fraudulent acts." In re Indep. Energy Holdings PLC Sec. Litig., 154 F. Supp.2d 741, 762 (S.D.N.Y. 2001) ( citing Ganino v. Citizens Util. Co., 228 F.3d 154, 161 (2d Cir. 2000) (other citations omitted)); Kalnit v. Eichler, 264 F.3d 131, 138 (2d Cir. 2001).

It is well settled that "[a]n omission is material if 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." Halperin v. Ebanker USA.COM, Inc., 295 F.3d 352, 357 (2d Cir. 2002) (citation and internal quotations omitted). Statements containing "simple economic projections, expressions of optimism, and other puffery are insufficient," however, "defendants may be liable for misrepresentations of existing facts." Novak v. Kasaks, 216 F.3d 300, 315 (2d Cir. 2000)March 30, 2004; see also, Rombach v. Chang, 355 F.3d 164, 174 (2d Cir. 2004) ("expressions of puffery and corporate optimism do not give rise to securities violations.").

Section 20(a) of the Exchange Act provides as follows:

(a) Joint and several liability; good faith defense. Every person who, directly or indirectly, controls any person liable under any provision of this title or of any rule or regulation thereunder shall also be liable jointly and severally with and to the same extent as such controlled person to any person to whom such controlled person is liable, unless the controlling person acted in good faith and did not directly or indirectly induce the act or acts constituting the violation or cause of action.

15 U.S.C. § 78t(a) (2004).

D. Pleading Standard for Exchange Act Claim

Claims under Section 10(b) and Rule 10b-5 are subject to heightened pleading requirements. Rule 9(b) of the Federal Rules of Civil Procedure pertains to fraud actions generally and requires that, "[i]n all averments of fraud . . . the circumstances constituting fraud . . . shall be stated with particularity." Particularity requires that the complaint: "(1) specify the statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the statements were made, and (4) explain why the statements were fraudulent." Anatian v. Coutts Bank (Switzerland) Ltd., 193 F.3d 85, 88 (2d Cir. 1999). "The test for whether a statement is materially misleading under Section 10(b) and Section 11 is `whether the defendants' representations, taken together and in context, would have misled a reasonable investor.'" Rombach, 355 F.3d at 172 n. 7 ( quoting I. Meyer Pincus Assoc. v. Oppenheimer Co., 936 F.2d 759, 761 (2d Cir. 1991) (internal brackets omitted in original)).

E. Application of Rule 9(b) to Securities Act Claim

As to Counts I and II, relating to alleged violations of the Securities Act, although the Complaint states, "[t]he claim asserted in Count I [and II] is not based on any allegation of fraud . . .," Complaint ¶¶ 196, 200, the Court nonetheless determines that Federal Rule of Civil Procedure 9(b) does apply to these first two Counts.

Ordinarily, Securities Act claims are not subject to Rule 9(b)'s stringent requirements; however, when Securities Act claims are grounded in fraud, as they are here, Rule 9(b) requires the complaint to "(1) specify the statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the statements were made, and (4) explain why the statements were fraudulent." Mills v. Polar Molecular Corp., 12 F.3d 1170, 1175 (2d Cir. 1993). The Second Circuit adopted this rule in Rombach v. Chang, 355 F.3d at 171 ("We hold that the heightened pleading standard of Rule 9(b) applies to Section 11 and Section 12(a)(2) claims insofar as the claims are premised on allegations of fraud.").

In this case, the Complaint contends that Corning's representations in its November 6, 2000 Prospectus were not merely negligent, but were, "materially false and misleading." See Complaint ¶¶ 1, 70, 73, 75, 196. Plaintiffs also allege that the Registration Statement for the Offering, "contained or incorporated by reference, untrue statements of material facts . . . and concealed and failed adequately to disclose material facts. . . ." Complaint ¶ 192 (part of Count I).

As the Second Circuit explained in Rombach,

By its terms, Rule 9(b) applies to "all averments of fraud." Fed.R.Civ.P. 9(b). This wording is cast in terms of the conduct alleged, and is not limited to allegations styled or denominated as fraud or expressed in terms of the constituent elements of a fraud cause of action. Fraud is not an element or a requisite to a claim under Section 11 or Section 12(a)(2); at the same time, claims under those Sections may be — and often are — predicated on fraud. The same course of conduct that would support a Rule 10b-5 claim may as well support a Section 11 claim or a claim under Section 12(a)(2). So while a Plaintiff need allege no more than negligence to proceed under Section 11 and Section 12(a)(2), claims that do rely upon averments of fraud are subject to the test of Rule 9(b).

Rombach, 355 F.3d at 171. In Rombach, as in this case, plaintiffs argued that their Section 11 claim did not sound in fraud. The Second Circuit, however, disagreed and found that the "wording and imputations of the complaint are classically associated with fraud: that the Registration statement was `inaccurate and misleading;' that it contained `untrue statements of material facts;' and that `materially false and misleading written statements' were issued." Id. at 171. The Court of Appeals also explained that

[t]he particularity requirement of Rule 9(b) serves to "provide a defendant with fair notice of a Plaintiff's claim, to safeguard a defendant's reputation from improvident charges of wrongdoing, and to protect a defendant against the institution of a strike suit." O'Brien v. Nat'l Property Analysts Partners, 936 F.2d 674, 676 (2d Cir. 1991) (internal quotation marks omitted); see also Vess v. CIBA-Geigy Corp. USA, 317 F.3d 1097, 1104 (9th Cir. 2003) ("Fraud allegations may damage a defendant's reputation regardless of the cause of action in which they appear, and they are therefore properly subject to Rule 9(b) in every case."); In re Stac Elecs. Sec. Litig., 89 F.3d at 1405 (" Rule 9(b) serves to . . . prohibit Plaintiffs from unilaterally imposing upon the court, the parties and society enormous social and economic costs absent some factual basis.") (internal quotation marks and alteration marks omitted). These considerations apply with equal force to "averments of fraud" set forth in aid of Section 11 and Section 12(a)(2) claims that are grounded in fraud.

Id. at 171. Therefore, the Court will apply the requirements of Rule 9(b) to the Securities Act claim.

Rule 9(b) requires that the Complaint allege with particularity any averments of fraud. In that respect, a plaintiff is required to state "the specific time, place, and contents of the false representations, along with the identity of the person making the misrepresentations and what the person obtained thereby." Melder v. Morris, 27 F.3d 1097, 1100 (5th Cir. 1994) (other citations and footnote omitted). "In applying the requirement of Rule 9(b) that `circumstances' be pleaded in detail to a securities fraud claim, the Seventh Circuit analogized the requirement to the essentials of the first paragraph of any newspaper story, namely the who, what, when, where, and how. See DiLeo v. Ernst Young, 901 F.2d 624, 627 (7th Cir.), cert. denied, 498 U.S. (1990)." Melder, 27 F.3d at 1100 n. 5.

F. Private Securities Litigation Reform Act

The Private Securities Litigation Reform Act⁶ ("PSLRA"), imposes additional pleading requirements in securities fraud actions. Expanding upon Rule 9(b), the PSLRA requires that,

6 Pub.L. No. 104-67, 109 Stat. 737 (1995) (codified as amended in scattered sections of 15 U.S.C.).

[i]n any private action arising under this chapter in which the Plaintiff alleges that the defendant (A) made an untrue statement of material fact; or (B) omitted to state a material fact necessary in order to make the statements made, in the light of the circumstances in which they were made, not misleading; the complaint shall specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed.

15 U.S.C. § 78u-4(b)(1).

Despite the foregoing pleading requirements, "there is nothing in the caselaw [sic] of this circuit that requires plaintiffs to reveal confidential sources at the pleading stage." Novak v. Kasaks, 216 F.3d at 313. In Novak, the Second Circuit held that 15 U.S.C. § 78u-4(b)(1)

does not require that plaintiffs plead with particularity every single fact upon which their beliefs concerning false or misleading statements are based. Rather, plaintiffs need only plead with particularity sufficient facts to support those beliefs. Accordingly, where plaintiffs rely on confidential personal sources but also on other facts, they need not name their sources as long as the latter facts provide an adequate basis for believing that the defendants' statements were false. Moreover, even if personal sources must be identified, there is no requirement that they be named, provided they are described in the complaint with sufficient particularity to support the probability that a person in the position occupied by the source would possess the information alleged.

Novak v. Kasaks, 216 F.3d at 314 (emphasis in original). Moreover, "[e]ven with the heightened pleading standard under Rule 9(b) and the Securities Reform Act [PSLRA] [courts] do not require the pleading of detailed evidentiary matter in securities litigation." In re Scholastic Corp. Sec. Litig., 252 F.3d 63, 72 (2d Cir. 2001) (citation omitted).

The PSLRA also imposes a heightened pleading standard with regard to the element of scienter:

In any private action under this chapter in which the Plaintiff may recover money damages only on proof that the defendant acted with a particular state of mind, the complaint shall, with respect to each act or omission alleged to violate this chapter, state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.

15 U.S.C. § 78u-4(b)(2). The PSLRA requires, upon application, the dismissal of any securities fraud complaint that fails to comply with the its pleading requirements. 15 U.S.C. § 78u-4(3)(A). The requisite scienter in actions under Section 10(b) and Rule 10b-5 is "an intent to deceive, manipulate or defraud." Kalnit v. Eichler, 264 F.3d at 138. (citations omitted). It is well settled that "[t]he requisite `strong inference' of fraud may be established either (a) by alleging facts to show that defendants had both motive and opportunity to commit fraud, or (b) by alleging facts that constitute strong circumstantial evidence of conscious misbehavior or recklessness." Acito v. Imcera Group, Inc., 47 F.3d 47, 52 (2d Cir. 1995). To properly plead motive, the complaint must describe, with particularity,

concrete benefits that could be realized by one or more of the false statements and wrongful nondisclosures alleged. Motives that are generally possessed by most corporate directors and officers do not suffice; instead, plaintiffs must assert a concrete and personal benefit to the individual defendants resulting from the fraud. Insufficient motives . . . can include (1) the desire for the corporation to appear profitable and (2) the desire to keep stock prices high to increase officer compensation. On the other hand, . . . motive [is] sufficiently pleaded where plaintiff allege[s] that defendants misrepresented corporate performance to inflate stock prices while they sold their own shares.

Kalnit v. Eichler, 264 F.3d at 139 (citations omitted). Therefore, "[t]o allege a motive sufficient to support the inference of fraudulent intent, a plaintiff must do more than merely charge that executives aim to prolong the benefits of the positions they hold," since such allegations are "common to all corporate executives and, thus, too generalized to demonstrate scienter." Id. (citations and internal quotations omitted). Similarly, "incentive compensation can hardly be the basis on which an allegation of fraud is predicated." Id. at 140; see also, Ganino v. Citizens Util. Co., 228 F.3d at 170 ("General allegations that the defendants acted in their economic self-interest are not enough.") (citation omitted).

As indicated above, the second method of establishing scienter is to allege strong circumstantial evidence of conscious misbehavior or recklessness. However, where a plaintiff cannot demonstrate opportunity and motive, he must make a greater showing of conscious misbehavior or recklessness. Kalnit v. Eichler, 264 F.3d at 142 (citation omitted) ("Where motive is not apparent, it is still possible to plead scienter by identifying circumstances indicating conscious behavior by the defendant, though the strength of the circumstantial allegations must be correspondingly greater.") It is well settled that

[t]o survive dismissal under the "conscious misbehavior" theory, [plaintiffs must allege] . . . reckless conduct by the [defendants], which is at the least, conduct which is highly unreasonable and which represents an extreme departure from the standards of ordinary care to the extent that the danger was either known to the defendant or so obvious that the defendant must have been aware of it. Although this is a highly fact-based inquiry, generalities can be drawn. Securities fraud claims typically have sufficed to state a claim based on recklessness when they have specifically alleged defendants' knowledge of facts or access to information contradicting their public statements. Under such circumstances, defendants knew or, more importantly, should have known that they were misrepresenting material facts related to the corporation.

Id. (citations and internal quotations omitted). A company's alleged failure to disclose information in its financial statements, knowingly and in violation of its own accounting policies, is also sufficient to meet the standard for recklessness. Id. at 142-44 ("We conclude that plaintiffs' scienter allegation was adequate, emphasizing that plaintiffs alleged also that the defendants had, after discussion, made a conscious decision not to mark down inventory specifically because of the effect on [the corporation].") However, "allegations of GAAP [generally accepted accounting principles] violations or accounting irregularities, standing alone, are insufficient to state a securities fraud claim. Only where such allegations are coupled with evidence of corresponding fraudulent intent might they be sufficient." Novak v. Kasaks, 216 F.3d at 309 (citations and internal quotations omitted).

Clearly, "[c]orporate officials need not be clairvoyant; they are only responsible for revealing those material facts reasonably available to them." Id. at 308 (citation omitted). In situations "[w]here plaintiffs contend defendants had access to contrary facts, they must specifically identify the reports or statements containing this information." Id. at 309 (citation omitted) Mere "allegations that defendants should have anticipated future events and made certain disclosures earlier than they actually did do not suffice to make out a claim of securities fraud." Id. (citation omitted). Moreover,

[t]he fact that management's optimism about a prosperous future turned out to be unwarranted is not circumstantial evidence of conscious fraudulent behavior or recklessness: People in charge of an enterprise are not required to take a gloomy, fearful or defeatist view of the future; subject to what current data indicates, they can be expected to be confident about their stewardship and the prospects of the business that they manage.

Rothman v. Gregor, 220 F.3d 81, 90 (2d Cir. 2000) (citation and internal quotations omitted).

G. Safe Harbor rule

The safe harbor provision, which was added to the Securities Act by the PSLRA. See 15 U.S.C. § 77z-2, states, in relevant part:

Except as provided in subsection (b)⁷ of this section, in any private action arising under this subchapter that is based on an untrue statement of a material fact or omission of a material fact necessary to make the statement not misleading, a person referred to in subsection (a) of this section shall not be liable with respect to any forward-looking statement, whether written or oral, if and to the extent that —

7 Plaintiffs do not contend that subsection (b) applies here.

(A) the forward-looking statement is —

(i) identified as a forward-looking statement, and is accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statement; or

(ii) immaterial; or

(B) the Plaintiff fails to prove that the forward-looking statement —

(i) if made by a natural person, was made with actual knowledge by that person that the statement was false or misleading; or

(ii) if made by a business entity; was —

(I) made by or with the approval of an executive officer of that entity, and

(II) made or approved by such officer with actual knowledge by that officer that the statement was false or misleading.

15 U.S.C. § 77z-2(c)(1). To prove that a forward-looking statement constitutes a material misrepresentation under the safe harbor provision, plaintiffs must demonstrate through specific factual support that defendants lacked a reasonable basis for their belief. In re Time Warner Securities Litig., 9 F.3d 259, 266 (2d Cir. 1993); see also Robbins v. Moore Medical Corp., 788 F. Supp. 179, 184 (S.D.N.Y. 1992).

H. Bespeaks Caution Doctrine

Further, "[c]ertain alleged misrepresentations in a stock offering are immaterial as a matter of law because it cannot be said that any reasonable investor could consider them important in light of adequate cautionary language set out in the same offering." Halperin v. Ebanker USA.Com, Inc., 295 F.3d at 357. The Second Circuit has referred to this rule of law as the "bespeaks caution" doctrine. Id. "The touchstone of the inquiry is not whether isolated statements within a document were true, but whether defendants' representations or omissions, considered together in context, would affect the total mix of information, and thereby mislead a reasonable investor regarding the nature of the securities offered." Id. To be effective, such cautionary language needs to "identify the allegedly undisclosed risk," and must not be such that it would mislead a reasonable investor "into thinking that the risk that materialized and resulted in his loss did not actually exist." Id. at 359.⁸

8 In addition to the safe harbor provision, defendants may also avail themselves of the "bespeaks caution" doctrine, since Congress indicated that the safe harbor provision was not intended to replace the "bespeaks caution" doctrine: "The Conference Committee does not intend for the safe harbor provisions to replace the judicial "bespeaks caution" doctrine or to foreclose further development of that doctrine by the courts." H.R. Conf. rep. No. 104-369, 1995 U.S.C.C.A.N. 730, 745.

With regard to the "bespeaks caution" doctrine, "`a misstatement or omission [related to a forward-looking statement] will be considered immaterial if cautionary language is sufficiently specific to render reliance on the false or omitted statement unreasonable.'" In re Alliance Pharmacutical Corp. Securities Lit., 279 F. Supp.2d 171, 192 (quoting Olkey v. Hyperion 1999 Term Trust, Inc., 98 F.3d 2, 7-9 (2d Cir. 1996)).

IV. ANALYSIS

A. Securities Act Claim

As stated above, plaintiffs' claims under Sections 11 and 15 of the Securities Act of 1933 relate to all purchases of Corning stock pursuant to, or traceable to, the Registration Statement. Plaintiffs summarized their Securities Act claim as follows:

This claim alleges only that the Registration Statement and the accompanying prospectuses filed October 19 and November 3, 2000 (collectively the "Prospectus"), which form part of the Registration Statement issued in connection with the Offering, falsely stated that due in part to the purported robust demand for Corning's photonics products, Defendants expected earnings to grow by 25% in 2001. Further, the Prospectus failed to indicate the tenuous nature of OTUSA's business prospects, which hinged on the fate of one customer, Cisco, who [sic] was struggling with a downturn in its business and could not be relied upon to place the same number of orders with OTUSA in the future. Additionally, the Prospectus was misleading because at no point did it reveal the extent to which Corning's photonics revenues were bound to the Company's relationship with Nortel and Lucent, each of whom [sic] had previously reported a downturn in . . . business. Complaint ¶ 67. Following the Prospectus' effective date of November 2, 2000, Corning sold 30 million shares of Corning common stock at a price of $71.25 per share. The underwriters purchased 4.5 million shares of Corning common stock upon their exercise of an over-allotment option. The gross proceeds from the sale of Corning common stock, including the exercise of the over-allotment, were approximately $2.389 billion. Corning also sold debentures at an initial public offering price of $741.923 per $1,000 principal amount at maturity generating proceeds of approximately $2 billion. Complaint ¶ 68. The proceeds of this offering were used to pay for the $3.6 billion cash purchase price of OTUSA and fund expansion of Corning's optical production capacity. Complaint ¶ 69.

1. Plaintiffs' Allegations of a False and Misleading Prospectus

Plaintiffs allege that defendants' representations in the Prospectus were false and misleading when issued, or that they omitted adverse existing facts, the disclosure of which was necessary to make the statements not false and misleading. Complaint ¶ 73. While plaintiffs concede that Corning included language pertaining to certain risks associated with a slowdown in demand for its products and the resulting effects on profits, see Complaint ¶ 74, they contend that the cautionary language was also "materially false and misleading." Complaint ¶ 75. Specifically on that issue, they assert that

at the time [the statements] were made, demand for photonics products was not increasing as part of an "upward trend," but was, in fact, rapidly decreasing. While . . . [Corning] had previously benefitted from a stockpiling of optical networks by telecommunications carriers, the photonics industry was contracting. . . . [Corning] was not doing well at the time because current photonics product customers had stopped placing orders at historical levels and . . . [Corning] was unable to replace those orders with orders from new customers. Corning also misrepresented and omitted that its two largest photonics product customers were Nortel and Lucent; that these companies had already announced that buyers of their optical network systems had reduced and would continue to curtail their orders; and that Nortel and Lucent would reduce their orders of photonics technologies from Coming, which would in turn lower Corning's revenues. In fact, neither Nortel's name nor Lucent's name appears anywhere in the Prospectus or any of the Offering Documents. Moreover, Corning was not at risk of not having sufficient manufacturing volumes to satisfy customer demand but rather, . . . [Corning]'s photonics-related manufacturing capacity and inventory had far outstripped demand

These "risks" were also misleading in that they did not disclose the extent of Corning's photonics sales attributable to Nortel or Lucent, or even that . . . [Corning] was dependent on Nortel and Lucent for the bulk of such sales. Rather, . . . [Corning] advised only of the "risks" set forth above, which included that Corning's customer base was "concentrated," without referencing who these "concentrated" customers were.

This was particularly misleading as it prevented even analysts from foreseeing the substantial reduction in Coming's optical components sales to Nortel and Lucent caused by Nortel's and Lucent's customers' (and Nortel's and Lucent's) earlier inventory stockpiling. Had such information been disclosed, it is likely that Coming's stock would have been downgraded at the same time and to the same extent as was JDS's stock.

Complaint ¶¶ 75-77.

2. Ackerman's statements about past demand

"The test for whether a statement is materially misleading under Section 10(b) and Section 11 is `whether the defendants' representations, taken together and in context, would have misled a reasonable investor.'" Rombach v. Chang, 2004 U.S. App. LEXIS 778, *18 (quoting I. Meyer Pincus Assoc. v. Oppenheimer Co., 936 F.2d 759, 761 (2d Cir. 1991) (internal brackets omitted)). In order to determine whether plaintiffs have adequately plead their Section 11 case, the Court must carefully parse the information available to investors, including the information in the Prospectus and information alleged in the Complaint as known to the market in general.

In the Complaint, plaintiffs allege that the following language from the Prospectus represented that Corning's growth would continue to be strong and the Pirelli Acquisition would be accretive to pro forma earnings in 2001:

We expect full year 2000 pro forma dited earnings per share in the range of $1.15 to $1.17, an increase of approximately 70% compared to 1999. We expect earnings to grow at a rate of approximately 25% in 2001. The Pirelli acquisition, as described below, is expected to be less than 5% dilutive to our 2001 pro forma earnings per share and accretive thereafter, resulting in 2001 pro forma diluted earnings per share in the range of $1.40 to $1.43.

Complaint ¶ 71 (emphasis removed). The Prospectus also included an October 23, 2000 press release

announcing earnings for the 2000 third quarter ended September 30, 2000. The press release was attached as an exhibit to Corning's Form 8-K filed with the SEC on October 23, 2000, which was incorporated by reference into the Registration Statement. In the press release, Corning represented that its business had "met exceptionally robust demand" and that the Company's earnings, led by continued growth in the Company's photonics business, would increase by 25% in 2001. In this regard, the press release stated in pertinent part:

["]As the quarter's performance clearly shows, we continue to benefit from delivering powerful optical technologies that provide capacity to double Internet traffic every six months," said Roger G. Ackerman, Corning's chairman and chief executive officer. "We met exceptionally robust demand for our optical-networking technologies by sourcing products from our expanded network of five optical fiber plants and nine photonic technology plants on four continents.["]

* * *

"Looking forward to 2001," Ackerman said, "we believe our key growth businesses will lead the way for strong revenue and earnings growth throughout 2000 Consistent with our long-term growth objectives, we expect earnings to grow next year at a rate of about 25%."

Complaint ¶ 72 (emphasis removed). Plaintiffs argue that these statements were each materially false and misleading for the five reasons detailed in paragraph 73 of their Complaint, the first three of which are as follows:

(a) that demand for the [Corning]'s optical networking technologies was not "exceptionally robust" but, rather, was weakening as the [Corning]'s primary customers Nortel and Lucent were experiencing severe and persistent slowdowns in sales of their optical networking systems, as partially disclosed by these companies in October 2000;

(b) the purportedly "exceptionally robust demand" [Corning] had experienced was the result of a massive inventory buildup by Nortel's and Lucent's telecommunications carrier customers, as well as by Nortel and Lucent, and was therefore, not truly reflective of the market demand for the [Corning]'s products; [and]

(c) that because, inter alia, Corning built custom-made components for Nortel and Lucent in advance of firm orders for these companies, Corning was amassing hundreds of millions of dollars of obsolete inventory which would have to be written-off. . . .

Complaint ¶ 73(a)-(c). The Court finds plaintiffs' argument on these points unpersuasive.

When read in context, it is clear that Ackerman's statement relating to "exceptionally robust demand" was referring to past performance. In that regard, plaintiffs have not alleged that this statement was not an accurate portrayal of Corning's past performance, and specifically for the third quarter of 2000. See Complaint ¶ 88 (quoting the Third Quarter 10-Q, sales were up 113%). His use of the word, "met," plainly related to what Corning had accomplished in the past, and the allegations in the Complaint do not support plaintiffs' claim that the statement was materially false or misleading.The statements were not untrue, and the additional information about Lucent and Nortel was unnecessary to their understanding.

Plaintiffs' argument that Corning's failure to disclose that Nortel and Lucent were its two largest photonics customers does not amount to either an untrue statement of a material fact or an omission to state a material fact necessary to make the statements therein not misleading. As the Complaint makes clear, "[p]rior to and during the Class Period, securities analysts reported that Nortel and Lucent were Corning's biggest customers for its photonics products." Complaint ¶ 42. Further, SEC regulations did not require disclosure of that information. 17 C.F.R. § 229.101(c)(1)(vii) (1999) (registrant must "disclose the name of any customer and its relationship, if any, with the registrant or its subsidiaries . . . if sales to the customer . . . equal 10 percent or more of the registrant's consolidated revenue."). Corning's alleged omission was not, therefore, material, especially when considered in light of the total mix of information in the market. See Halperin, 295 F.3d at 357. Likewise, plaintiffs' argument that the situation with Nortel and Lucent should have tempered Ackerman's statement of Corning's past performance is neither logical, nor persuasive. Three months after Ackerman's October 23, 2000, press statement and two months after the Prospectus was issued, Nortel, Corning's largest customer, announced that its optical networking business would grow by 30% in the coming year. Nortel Form 8-K (Jan. 18, 2001).

3. Ackerman's statements about earnings projections were forward-looking

Plaintiffs offer two other reasons in support of their position that Corning's statements in the Prospectus were materially false and misleading. They are as follows:

(d) that by the time the Prospectus was issued, Cisco, upon whom OTUSA depended for 95% of its total sales, which was comprised entirely of photonics products, had amassed inventories and would be cutting back on its orders of optical components; and

(e) given the foregoing, the projection of 25% earnings growth in 2001 was lacking in [sic] a reasonable basis at all times.

Complaint ¶ 73. These last two points attack the Prospectus' earnings projections in which Ackerman was quoted as predicting a 25% growth rate. However, the Court finds that these statements were "forward looking," and, therefore, protected under the safe harbor rule and "bespeaks caution" doctrine.

A forward-looking statement is:

(A) a statement containing a projection of revenues, income (including income loss), earnings (including earnings loss) per share, capital expenditures, dividends, capital structure, or other financial items;

(B) a statement of the plans and objectives of management for future operations, including plans or objectives relating to the products or services of the issuer;

(C) a statement of future economic performance, including any such statement contained in a discussion and analysis of financial condition by the management or in the results of operations included pursuant to the rules and regulations of the Commission;

(D) any statement of the assumptions underlying or relating to any statement described in subparagraph (A), (B), or (C);

(E) any report issued by an outside reviewer retained by an issuer, to the extent that the report assesses a forward-looking statement made by the issuer; or

(F) a statement containing a projection or estimate of such other items as may be specified by rule or regulation of the Commission.

15 U.S.C. § 77z-2(i)(1). Ackerman's statements, "Looking forward to 2001 . . . we believe our key growth businesses will lead the way for strong revenue and earnings growth throughout 2000," and "[c]onsistent with our long-term growth objectives, we expect earnings to grow next year at a rate of about 25%," clearly fit the definition of forwardlooking.

Defendants maintain that the safe harbor rule and bespeaks caution doctrine, discussed above, support their application to dismiss the Complaint. However, plaintiffs assert that the factual allegations in their Complaint are sufficient to support their causes of action notwithstanding these two principals of law. In this regard, plaintiffs argue that prior to making his "[l]ooking forward" statement, Ackerman had readily available the knowledge that Lucent and Nortel had made announcements reflecting a decline in projected growth for 2000. Moreover, plaintiffs contend that inventories at Nortel and Lucent were "ballooning." Additionally, they point to the allegations in their Complaint relating to: risk factors discussed by Corning, which they contend misrepresented present risks of lowered demand as merely contingent risks; Lucent's press release of October 10, 2000, in which it warned the market that it expected pro forma earnings per share for the third quarter to be in the range of $0.17 to $0.18, down from $0.24 during the previous year's third quarter; Nortel's press release of October 24, 2000, reporting year over revenue growth 5% lower than in the prior quarter; information from the New Business Manager; analysts reports, such as the September 28, 2000 report from Sanford C. Bernstein Co., Inc, analyst Paul Sagawa, who, having surveyed 59 carriers, concluded capital spending would decelerate drastically in 2001, dropping from 28% growth in 2000 to 20% growth in 2001; and Cicso's November 6, 2000 announcement that its inventories had grown 59% during the quarter and that it was receiving fewer orders from telcom service providers, and would therefore, cut back on new orders.

However, the Court disagrees that these allegations are sufficient in the face of the cautionary language contained in the Ackerman press release:

In addition, the following factors related to our products and the markets for them could have an adverse impact on our results of operations and financial performance: — if the level of demand for our products by our customers does not continue. While this demand has been increasing in recent quarters, there is no assurance that this upward trend can be sustained. A leveling or declining demand or an unanticipated change in market demand for products based on a specific technology would adversely impact our ability to sustain recent operating and financial performance;

OUR SALES WOULD SUFFER IF ONE OR MORE OF OUR KEY CUSTOMERS REDUCED ORDERS FOR PRODUCTS

Our customer base is highly concentrated, and relatively few customers account for a high percentage of net sales in our telecommunications, environmental products and advanced display product lines. If we are unable to establish or maintain good relationships with key customers, it could materially adversely affect our results of operations and financial performance. In particular, if our current customers do not continue to place orders at current levels, we may not be able to replace these orders from new customers.

IF WE DO NOT ACHIEVE ACCEPTABLE MANUFACTURING VOLUMES, YIELDS OR SUFFICIENT PRODUCT RELIABILITY, OUR OPERATING RESULTS COULD SUFFER

As our customers' needs for our products increase, we must increase our manufacturing volumes to meet these needs and satisfy customer demand Failure to do so may materially harm our operating results and financial performance.

Complaint ¶ 74 (emphasis removed).

While the cautionary language did not mention that Nortel's purchases from Corning represented 75% of Corning's photonics sales, a reasonable investor would not have relied on Corning's expression of hope that their future earnings would be in the range of 25%. That is, analyzing Ackerman's projected earnings statements in light of these two principals of law, previously discussed, the Court determines that plaintiffs have failed to sufficiently plead facts showing that Ackerman's statements were not protected by the safe harbor provision or bespeaks caution doctrine.

In support of their position, plaintiffs point out that they have plead that Nortel and Lucent were Corning's biggest customers for photonics products and that this information was public knowledge. Complaint ¶¶ 40-42. As discussed below, they also plead information concerning Nortel's and Lucent's announcements as to their decline in projected growth for 2000, and further allege that when Ackerman made his 25% growth projection, this information was readily available. Moreover, in the Complaint, plaintiffs contend that, as a result of studying inventories at Nortel and Lucent, analysts explained those two companies' growth in inventory of photonic products, "would hamper not only Nortel's and Lucent's optical systems sales for several quarters, but also the sales of optical component vendors that supply Nortel and Lucent with the components they use to build those systems." Complaint ¶ 50. The Court will consider each of these points in turn.

a. Lucent's Projections for 2000

Ackerman's comments were contained in a press release dated October 23, 2000 and attached to Corning's Form 8-K filed with the SEC on that date. Complaint ¶ 72. Almost two weeks prior to Corning's press release, on October 10, 2000, Lucent, one of Corning's customers, warned that it expected earnings for the quarter ending September 30, 2000 to be lower than its previously announced guidance. Complaint ¶ 54. It predicted pro forma earnings per share to be $0.17 to $0.18 per share, as contrasted with the same quarter in the prior year, of $0.24 per share. Id. It blamed the shortfall, in part, on declining sales of optical networking systems and announced it needed to implement major cost-cutting and restructuring efforts. Id. Plaintiffs also point out that Lucent warned the market that its customers had slowed their spending on telecommunications networks and that analysts interpreted this as an industry-wide problem that would also affect Lucent's competitor, Nortel. Complaint ¶ 55.

b. Nortel's Proejctions for 2000

Plaintiffs allege, based on the source they call New Business Manager, that Wendell Weeks ("Weeks"), Corning's Executive Vice President of Opto-Electronics from January 1999 through January 2001, met regularly with James Frodsham ("Frodsham"), Corning's key executive contact at Nortel. Complaint ¶ 57. They also allege that in October 2000 (the date is not further identified in the Complaint), New Business Manager was present at a meeting between Gerald J. Fine ("Fine"), vice president and general manager of the Photonics Technologies Division (presumably a Corning division, though the Complaint does not specifically so state), and Ted Preisendanz, former worldwide director of sales for the same division. Complaint ¶ 58. New Business Manager stated that during the meeting, Fine took a call from Weeks, and that after the call, Preisendanz told New Business Manager that Weeks and Fine were afraid that the photonics market would get soft very quickly. Id.

The Complaint also alleges that on October 24, 2000, after the market had closed, Nortel reported that its results for the quarter ending September 30, 2000, "fell short of the market's lofty expectations" and caused Nortel's stock price to drop to $45 per share the next day, a drop plaintiffs allege amounted to 29%. Further, plaintiffs state that Nortel's optical networking division reported sales approximately 5%⁹ lower than in the prior quarter. Complaint ¶ 59.

9 The actual figure in the Complaint is 10%; however, during oral argument, plaintiffs' counsel explained this was a typographical error and the actual figure should be 5%.

c. Analysts' Reports

Plaintiffs also point out in the Complaint that, according to analysts, Nortel's customers were stockpiling their inventories, which they allege helped Nortel, and hence Corning, experience "record-breaking financial results during the first half of 2000." Complaint ¶ 60. Plaintiffs also allege that Lehman Brothers analyst, Arnab Chandra ("Chandra"), downgraded Corning's competitor's stock, JDS, because of JDS's dependance on Nortel and Lucent, which represented 17% and 21%, respectively, of JDS's sales. Complaint ¶ 62. Further, plaintiffs state that had Chandra been aware that Corning was dependant on Nortel and Lucent for 75% and 10%, respectively, of its photonics sales, Chandra would "in all likelihood" have even more severely downgraded Corning's stock as well. Complaint ¶ 62. Plaintiffs also state in the Complaint that the market was aware that "[a]ccording to securities analysts, during the Class Period, Nortel was the dominant optical system vendor with between 40 to 45 percent of the market." Complaint ¶ 40.

d. New Business Manager

As previously indicated, plaintiffs refer to a source, whom they identify as "New Business Manager," a former business manager for new business development who worked at Corning for 21 years and left it in April 2001. Complaint ¶ 48. According to the Complaint, New Business Manager served as a product manager on the Lucent account from 1995 through 1998. He stated that Corning's business with Lucent dropped off "considerably" prior to the fourth quarter of 2000 and opined that, "Lucent should have been a very good leading indicator that the photonics market was softening." Complaint ¶ 56.

e. Cisco's Press Release and Conference Call

On November 6, 2000, plaintiffs allege that Cicso issued a press release and held a conference call to discuss their previous sales results for the period ending on October 28, 2000 (the Complaint does not identify the beginning of the period described, but does later refer to a "quarter"). Complaint ¶ 64. Cisco revealed a 59% increase in inventory during the quarter and announced it would cut its components purchases over the upcoming quarters. Id. Plaintiffs' Complaint also states that in a UBS¹⁰ Warburg report issued May 22, 2001, entitled, "Global Lightwaves Enabling All Optical Network Version 1.1," it was stated that Cisco's $2.2 billion charge for excess inventories during the fiscal quarter ending on April 30, 2001 was for optical components and that USB Warburg "believed `that components from Agilent and Pirelli (now owned by Corning) make up the bulk of this inventory.'" Complaint ¶ 66.

10 UBS Investment Bank. See http://www.ibb.ubs.com/ (accessed Feb. 10, 2004).

4. The forward-looking statements were protected under the bespeaks caution and safe harbor rules

As discussed earlier, "[t]he touchstone of the [bespeaks caution] inquiry is not whether isolated statements within a document were true, but whether defendants' representations or omissions, considered together in context, would affect the total mix of information and thereby mislead a reasonable investor regarding the nature of the securities offered." Halperin v. Ebanker USA.Com, Inc., 295 F.3d 352, 357 (2d Cir. 2002).¹¹ To be effective, such cautionary language needs to "identify the allegedly undisclosed risk," and must not be such that it would mislead a reasonable investor "into thinking that the risk that materialized and resulted in his loss did not actually exist." Id. at 359.

11 Although Halpern concerned an Exchange Act claim, the same principal applies to Securities Act claims. See, e.g., Klein ex rel. Ira v. PDG Remediation, 937 F. Supp. 323, 327 (S.D.N.Y. 1996).

Here, the Complaint fails to sufficiently plead that the cautionary language was insufficient to identify the risk of falling customer demand for Corning's products. The Complaint provides evidence that the market was well aware of the decrease in Lucent's orders. See, e.g., Complaint ¶ 62 (Lehman Brothers analyst downgrades rating of JDS, one of Corning's competitors in this market, on October 25, 2000); ¶ 42 (during the Class Period, analysts reported that Nortel and Lucent were Corning's biggest customers for photonics products); c.f. Klein ex rel. Ira v. PDG Remediation, 937 F. Supp. 323, 327-28 (S.D.N.Y. 1996) (district court could not find as a matter of law that to an investor in New York or Colorado, the workings of a Florida grand jury or a Florida state legislative committee were easily accessible part of the total mix of information reasonably available to the investor).

As plaintiffs point out, Lucent's market share "lagged behind" Nortel's 40 to 45 percent share of the market. See Complaint ¶ 40. Furthermore, the Complaint does not disclose what the New Business Manager meant by "dropped off considerably." The total mix of information in the telecommunications market also included Sanford C. Bernstein Co. Inc. analyst Paul Sagawa's report, published on September 28, 2000, predicting that carriers' "capital spending would decelerate drastically in 2001, dropping from 28 percent growth in 2000 to 20 percent in 2001." Complaint ¶ 52. Here, it cannot be said that Ackerman's rosy depiction of future growth would have caused "any reasonable investor [to] consider [it] important in light of adequate cautionary language set out in the same offering." Halperin v. Ebanker USA.com, Inc., 295 F.3d 352, 357 (2d Cir. 2002). "`[P]uffery' or `misguided optimism' is not actionable as fraud." Rombach, 355 F.3d at 175. Thus, the Complaint fails to "`explain why the statements were fradulent'" and therefore, it does not meet the requirements of Rule 9. See Id. at 172 (quoting Mills v. Polar Molecular Corp., 12 F.3d 1170, 1175 (2d Cir. 1993)). Plaintiffs' Securities Act Section 11 claims are, therefore, dismissed.

With regard to plaintiffs' Securities Act Section 15 claims against the individual defendants, the heightened pleading standard of Rule 9 also applies. Rombach, 355 F.3d at 171-72. Notwithstanding that some of the claims might also be based in mere negligence, they would also be defeated by the bespeaks caution doctrine and safe harbor provisions. See Id. at 176 ("Although the allegations of the relevant claims against the individual defendants sound in fraud, they may also recite some or all of the elements of a claim for negligence. But for the fact that such a negligence claim, if properly pleaded, would be defeated in any event by the bespeaks caution doctrine, we might well affirm the dismissal with a direction to the district court to entertain a motion to re-plead in terms of negligence.") (citation omitted). Thus, the Section 15 claims against the individual defendants are also dismissed.

B. Exchange Act Claim

As previously discussed, in order to state a claim under Section 10(b) and Rule 10b-5, "plaintiffs must allege that in connection with the purchase or sale of securities: (1) defendants made a false material misrepresentation or omitted to disclose material information; (2) defendants acted with scienter; and (3) plaintiffs detrimentally relied upon defendants' fraudulent acts." In re Indep. Energy Holdings PLC Sec. Litig., 154 F. Supp.2d at 762. In support of its Exchange Act claim, plaintiffs allege that in addition to the false and misleading prospectus, discussed in detail above, plaintiffs also detail the following collections of statements:

(1) The Class Period begins: Defendants tout the Pirelli Acquisition;

(2) Defendants report Third Quarter 2000 results and continue to mislead the market;

(3) Defendants report Fourth Quarter and Full Year 2000 results, overstate the value of inventory, and goodwill, and continue to mislead the market;

(4) Defendants fail to announce a necessary write-down of photonics inventory and goodwill despite additional adverse developments; and

(5) Defendants report 2001 First Quarter results, overstate the value of photonics-related inventory and goodwill, and continue to mislead the market.

Complaint ¶¶ 80-138. The Court's analysis of the Prospectus, above, is equally applicable to the Exchange Act claim, except for the added requirement of scienter which will be addressed below.

Plaintiffs also cite to post — Class Period disclosures that OTUSA was exiting the submarine pump laser business, which business was, defendants assert, one of the primary reasons that Corning bought OTUSA. Complaint ¶ 146. Further, defendants allege that Corning never disclosed the difficulties OTUSA was having trying to produce a saleable submarine pump laser, thus impairing the investing public's proper valuation of OTUSA's goodwill. Defendants also assert that analysts from Deutsche Banc Alex. Brown Inc. and A.G. Edwards stated in reports that $200 million of Corning's $300 million inventory write-down represented photonics inventory that was already obsolete. Complaint ¶ 147. Finally, defendants note that Corning's July 25, 2001 announcement of its net loss for the second quarter of 2001 of approximately $4.8 billion, was the largest loss in Corning's history. Complaint ¶ 148.

1. Pirelli Acquisition and Announcement

Plaintiffs allege that defendants' statements about the Pirelli Acquisition on September 27, 2000 in a press release and conference call, were materially misleading because they failed to disclose that the submarine pump laser market was dominated by JDS, Corning's competitor, "a company with far greater experience in developing and testing the highly complex technology." Complaint ¶ 84. The press release is quoted in part in the Complaint as follows:

The addition of lithium niobate technology will broaden Corning's portfolio as the company continues to position itself as a leading supplier of photonic products to optical layer companies. The capabilities of Pirelli's optical components business in 980 nm pump lasers for submarine use directly complements and supplements Corning Lasertron's terrestrial 980 nm pump capabilities.

Lithium niobate modulators are ideally suited for use in high-speed, long haul optical communications networks. The technology has been chosen by a majority of long-haul equipment suppliers because it has the best combination of optical, electronic, and reliability performance.

Complaint ¶ 80 (quoting from Corning press release (Sep. 27, 2000)). Also in the press release was the information that with the purchase of Pirelli, Corning was acquiring the remaining 10% of OTUSA owned by Cicso Systems, Inc. Complaint ¶ 34. With regard to the conference call, plaintiffs allege that Corning's Chief Financial Officer, Jerry Fine ("Fine") noted Corning was paying a premium for OTUSA

in order to gain entry into the submarine pump laser products category . . . [and] [a]ccording to Fine, Corning estimated that optical-component demand was increasing at an 80% compound annual growth rate, and that submarine optical-component demand was increasing at a 60% compound annual growth rate. Fine did note, however, that the only customer for OTUSA's submarine pump laser was its former parent company, Pirelli. Defendant Flaws stated that while OTUSA was not profitable, it would be profitable in 2001 with $80 million in revenue.

Complaint ¶ 82.

The Court reads the representations quoted in the Complaint as describing Corning's entry into a new market — the submarine laser market. The words attributed to Fine, that Corning purchased OTUSA "in order to gain entry into the submarine pump laser products category . . .," clearly indicated that Corning was new to this market, but that the market existed already and was not being created by Corning. A reasonable investor would have known from Corning's representations, therefore, that Corning was a newcomer in the submarine laser market. Additionally, Fine said more about Corning's submarine pump lasers, which is reproduced in defendants' responding affidavit: "we are going to have to be doing quite a bit of work over the next six to nine months with the other submarine players in order to get in . . . [and] the current Pirelli products, in terms of power level, are slightly below what the market requires at the moment." Nussbaum aff. (# 23) Ex. 4, at 5, 9 (Corning, Inc., Conference Call, Wednesday, Sep. 27, 2000, 7:30 a.m., hosted by Ms. Kathy Dietz).¹²

12 Ms. Nussbaum certified in her affidavit that the transcript in Exhibit 4 was an accurate transcription of the recorded conference call and that, upon information and belief, this conversation was referred to in Complaint paragraphs 80, 82 and 84. Nussbaum aff. ¶ 6.

The Complaint also details the market risks identified by analysts. Complaint ¶¶ 31, 32, 39. As previously indicated, a September 27, 2000 article in The Daily Deal quoted Fabio Magrino, a Pirelli spokesman, as stating that "to acquire OTUSA, Corning paid 165 times OTUSA's annual revenues. `The best price so far for comparable companies has been 109 times revenues. What's more, this is an all-cash deal,' Magrino added." Complaint ¶ 31. Plaintiffs also refer to analysts' concerns about the price Corning paid for OTUSA, citing to Raasfin SpA (Milan) analyst Valentino Romeri, who said at the time of the Pirelli acquisition, that IPO valuations for purchases of businesses such as OTUSA were about 20 to 30 times revenues, and that the price Corning paid to purchase OTUSA was "astronomical" when compared with the valuations for other companies in that sector. Complaint ¶ 32. Finally, plaintiffs quote Ackerman's comments from an Associated Press article, "Small Town Gets Big Payoff for Driving the Internet Revolution," dated October 11, 2000: "`We've always been risk takers — there's [sic] just more zeros connected to our numbers now.'"

However, the Court finds that plaintiffs' allegations do not support their contention that Corning failed to state a material fact necessary to make its statements, in the light of the circumstances under which they were made, not misleading. The statements referred to by plaintiffs in the Complaint adequately put prospective purchasers on notice that Corning was facing competition in the laser pump market and that Corning was a new entrant to that field. "Moreover, defendants had no duty to disclose the activities of [their] competitors or to state publicly that the Company was losing ground to competitors. . . ." Steinberg v. PRT Group, Inc., 88 F. Supp.2d 294, 304 (S.D.N.Y. 2000).

2. Third-Quarter Financial Results and Offerings

Plaintiffs next allege that Corning's announcement of third quarter results, and the prospectuses that incorporated those announcements, were materially false and misleading. This claim was thoroughly discussed above, at page 28, et seq. and the Court adheres to its previous determination that the statements about past earnings were true and that the Complaint fails to sufficiently plead that the cautionary language was insufficient to identify the risk of reduced customer demand for Corning's products.

3. Predominance of Nortel and Lucent as Photonics Customers

Plaintiffs next assert that Corning concealed that its photonics business was concentrated with Nortel and Lucent. This claim was also thoroughly discussed above, at page 28, et seq. As the Complaint makes clear, "[p]rior to and during the Class Period, securities analysts reported that Nortel and Lucent were Corning's biggest customers for its photonics products." Complaint ¶ 42. In analyzing the Exchange Act claim, the Court finds no reason to alter its previous decision on this point.

4. Characterizations and Implications that Demand for Photonics was Strong

Plaintiffs allege that Corning's characterization of the demand for its photonics products as "exceptionally robust" is "actionable, and cannot be considered mere puffery or vague optimism, when defendant knows the statements are not truthful." Pls.' Mem. in Opp'n to Defs.' Mot. to Dismiss, at 20. As discussed above, at page 26, Corning's representation was that it had "met exceptionally robust demand" and, in light of that, it anticipated growth of 25% in 2001. Ackerman said,

"We met exceptionally robust demand for our optical-networking technologies by sourcing products from our expanded network of five optical fiber plants and nine photonic technology plants on four continents.["]

* * *

"Looking forward to 2001," Ackerman said, "we believe our key growth businesses will lead the way for strong revenue and earnings growth throughout 2000 Consistent with our long-term growth objectives, we expect earnings to grow next year at a rate of about 25%."

Complaint ¶ 73 (emphasis added). Also as previously discussed, at page 27, the Court does not find that these statements misrepresented the past sales, and that Ackerman's projections about future earnings were protected under the safe harbor rule and bespeaks caution doctrine. The same conclusion applies to the Exchange Act claims.

5. Inventory Build-Up

Plaintiffs allege that Corning "was amassing hundreds of millions of dollars of obsolete inventory, which would have to be written-off," and "Corning was exposed to the undisclosed liability of amassing hundreds of millions of dollars of obsolete inventory, which would have to be written-off if Nortel and Lucent did not actually buy the custom-made components." Complaint ¶¶ 73(c), 78(c), 89(d). Further, referring to Corning's October 23, 2000 press release and third quarter 10-Q, plaintiffs allege that Corning failed to disclose inventory numbers "by Corning's business segments, leaving investors in the dark as to how much photonics products inventory the Company was amassing during the Class Period. This failure was a materially misleading omission, in light of the relatively short time (18 months, at the most) in which photonics products become obsolete." Complaint ¶ 91.

Thus, in three places, the Complaint alleges, in conclusory fashion, that Corning failed to disclose a massing of inventory, and, in one, that Corning disclosed its inventory, but not with sufficient specificity. "Generalized allegations such as these are completely inadequate. There must be allegations of facts amounting to deception in one form or another." Decker v. Massey-Ferguson, Ltd., 681 F.2d 111, 116 (2d Cir. 1982) (citations omitted). In Decker, the Second Circuit analyzed allegations that the defendant failed to write down the value of certain functional, but economically obsolete, manufacturing facilities. In analyzing the allegations in the complaint, the Court of Appeals wrote that

[p]laintiff did not allege the figures at which any of the facilities were carried on Massey's books nor even the approximate figures at which they should have been carried. There is no allegation in the complaint that the book values of the properties in question could not be recovered through sale or use. In 1975, Massey's total depreciated fixed assets were in excess of $4000M. It had developed a manufacturing base of fifty plants, containing 25M square feet and located in twelve countries. The complaint contains no factual allegations to demonstrate the materiality of the alleged over-evaluation in the light of these overall figures.

Decker, 681 F.2d at 116.

Both Nortel and Lucent had announced sales expectations that were anything but negative. Nortel announced 2001 projected revenues "in the 30 to 35 percent range." Nortel news release (Oct. 24, 2000) (Nussbaum aff. Ex. 18 at 1-2). On October 24, 2000, Lucent filed its third quarter results with the SEC and stated that, although it expected revenues to decline about 7% for the first quarter of 2001, it nevertheless expected "results from operations to improve each quarter for the rest of the fiscal year." Lucent 8-K (Oct. 23, 2000) (Nussbaum aff. Ex. 17 at 2-3).

Especially when considered in light of this market information, but even without it, plaintiffs' failure to allege with specificity the necessary facts to support its Exchange Act allegations is readily apparent. As in Decker, plaintiffs here have not valued the allegedly obsolete inventory, other than to repeat that it amounted to "hundreds of millions of dollars" and have not compared the value to the overall value of Corning's inventory, which the Complaint shows was placed at between $943.2 million and $602.2 million. Complaint ¶ 90. The Complaint provides no basis for its conclusion that although Corning's sales were continuing and projected to grow, that it simultaneously had excess inventories. Although plaintiffs allege that "Corning's inventory buildup was becoming readily apparent to workers at the plant," Complaint ¶ 108, the Complaint does not provide factual allegations that Corning's management, or the individual defendants, had a basis for believing that Corning was amassing hundreds of millions of dollars of obsolete inventory which would have to be written-off.

6. Scienter

As discussed above, at page 18, the requisite scienter in actions under Section 10(b) and Rule 10b-5 is "an intent to deceive, manipulate or defraud." Kalnit v. Eichler, 264 F.3d at 138 (citations omitted). It is well settled that "[t]he requisite `strong inference' of fraud may be established either (a) by alleging facts to show that defendants had both motive and opportunity to commit fraud, or (b) by alleging facts that constitute strong circumstantial evidence of conscious misbehavior or recklessness." Acito v. Imcera Group, Inc., 47 F.3d 47, 52 (2d Cir. 1995). Plaintiffs argue that they have shown that senior executives of Corning had the opportunity to manipulate the price of Corning's common stock. Pls.' Mem. in Opp'n to Defs.' Mot. to Dismiss, at 31. "[U]nder the `motive and opportunity' test[,] [m]otive is properly alleged by stating `concrete benefits that could be realized by one or more of the false statements. . . . Opportunity requires demonstrating `the means and likely prospect of achieving' those means through the fraudulent statements." In re Complete Mgmt. Sec. Litig., 153 F. Supp.2d 314, 327 (S.D.N.Y. 2001) (quoting Shields v. Citytrust Bancorp, 25 F.3d 1124, 1125 (2d Cir. 1994)).

Plaintiffs argue that defendants' prospectus, discussed in detail above, and Registration Statement, filed October 19 and November 3, 2000, "falsely stated that due in part to the purported robust demand for Corning's photonics products, defendants expected earnings to grow by 25% in 2001 . . . [and] failed to indicate the tenuous nature of OTUSA's business prospects . . . [and] at no point did [the prospectus] reveal the extent to which Corning's photonics revenues were bound to the Company's relationship with Nortel and Lucent. . . ." Complaint ¶ 67. Plaintiffs fail, however, to allege facts showing that the individual making the statement, or authorized to make it on Corning's behalf, had actual knowledge of its falsity, or was reckless. The opinions contained in the Complaint demonstrate a wide range of expectations for the telecommunications market in 2001. Some anticipated growth, while others expected a pause, followed by a resumption of growth. Paul Sagawa in September 2000 predicted that telecommunications carriers would increase spending by 20% in 2001 (down from a previous prediction of 28% growth). Complaint ¶ 52. Lehman Brothers downgraded Corning's competitor from "outperform" to "neutral." At the other end of the spectrum of opinions, Argus Research predicted in the fall of 2000, "[t]he short-term bubble has burst. Now we will see a sorting-out with more normal growth." Complaint ¶ 61. Plaintiffs do not, therefore, allege facts that constitute strong circumstantial evidence of conscious misbehavior or recklessness.

With regard to allegations showing that defendants had both motive and opportunity to commit fraud, plaintiffs allege the following:

Defendants were motivated to, and did, [commit fraud] in order to artificially inflate the price of [Corning's] securities and maximize the proceeds from the [November 2000] Offering. Complaint ¶ 163.

[D]efendants Ackerman and Flaws were further motivated to artificially inflate the price of Corning common stock throughout the Class period in order to obtain millions of dollars in profits from Class Period sales of their personally held Corning common stock. Complaint ¶ 167-179.

Defendants were able to use [Corning's] artificially inflated common stock as currency for Corning's acquisition of Tropel Corporation ("Tropel"). . . . Complaint ¶ 164-66.

As previously discussed above, maximizing proceeds from the offering is an insufficient motive to show scienter. See Kalnit v. Eichler, 264 F.3d at 139. Further, Ackerman's and Flaws' sales of stock were not "unusual" and fail to provide sufficient evidence of a motive to commit fraud. See Rombach v. Chang, 355 F.3d at 177 (" the complaint identifies no personal interest sufficient to establish motive"). Finally, plaintiffs' allegations regarding the Tropel acquisition are also insufficient to show a motive for defendants to commit fraud.

A generalized motive to maximize profitability of a company is not sufficient to show a motive to commit fraud. As the Second Circuit recently observed,

[a]ction taken to `maintain the appearance of corporate profitability, or of the success of an investment . . . does not entail concrete benefits' sufficient to demonstrate motive. Chill v. GE, 101 F.3d 263, 268 (2d Cir. 1996) (internal quotation marks omitted). Even if the complaint is read to say that defendants artificially inflated Family Golf's stock price to increase their personal compensation (by undertaking the cited transactions or otherwise), the complaint would still fail to allege the requisite motive: "If scienter could be pleaded on that basis alone, virtually every company in the United States that experiences a downturn in stock price could be forced to defend securities fraud actions." Acito v. IMCERA Group, Inc., 47 F.3d 47, 54 (2d Cir. 1995).

Rombach, 355 F.3d at 177. Plaintiffs' allegations concerning Corning's attempt to boost stock prices to maximize the proceeds of their offering falls into the category of a generalized motive to maximize profitability and is, therefore, insufficient to meet the requirements of the PSLRA to raise a strong inference of scienter.

Turning to Ackerman's and Flaws' stock sales, an analysis of plaintiffs' claims fails to show sufficient allegations of scienter. Flaws sold 73,035 shares of Corning stock on October 24, 2000. Complaint ¶ 173. This was, according to the Complaint, the bulk of his sale of stock during the Class Period. Complaint ¶ 175. Corning's 2000 10-K, filed with the SEC, shows that Flaws owned 418,497 shares at the close of the year. Thus, on October 24, 2000, he may have owned 491,532 shares. Therefore, his October 24, 2000 sale of 73,035 shares represented 14.8% of his holdings.

In re Health Mgmt. Sys., Sec. Litig., 97 Civ. 1865 (HB), 1998 U.S. Dist. LEXIS 8061, 19-20 (S.D.N.Y., Jun. 1, 1998), the district court was faced with a similar question. In that case, the stock sales of the individual defendants were specifically listed and amounted, on average, to well above 15% when all insider sales were included:

Defendants['] sales during the Class Period were: Kerz, 3.06%, Holster, 5.62%, Carson, 14.02%, Staffa, 22.94%, Simon 23.53%, Stowe 24.92%, and McIntyre 81.9%. While defendant McIntyre's sales were quite high during the Class Period, this was most likely on account of the fact that he resigned as an HMS director prior to January 1997 and was divesting himself of his shares. I note that absent his sales, the average sales of the individual defendants drops significantly, to about 15%.

In re Health Mgmt. Sys., Sec. Litig., 1998 U.S. Dist. LEXIS 8061, 19-20. Flaws was the only one of the individual defendants who sold stock following the filing of Corning's third quarter results. A sale of less than 15% of one officer's stock holdings in the company does not raise a strong inference of scienter on the part of either the officer or the company to defraud investors. See San Leandro Emergency Medical Group Profit Sharing Plan v. Philip Morris Cos., 75 F.3d 801, 814 (2d Cir. 1996). Furthermore, on October 24, 2000, a Nortel press release announced their expectation that the market would grow in excess of 20%. "Nortel Networks Reports Record Third Quarter Results," News Release (Oct. 24, 2000) (Nussbaum aff. (# 23), Ex. 18), at 2. The closing price of Corning stock on October 24, 2000 was exceed in mid-December 2000. See Graph Summarizing Corning Closing Stock Prices During the Period of August 1, 2000 through August 31, 2001(Nussbaum aff., Ex. 15).

Flaws' sale of stock on January 26, 2001, likewise fails to raise a strong inference of scienter. The January sale represented less than 4% of Flaws' end of 2000 holdings and in 2001 Flaws acquired more shares than he sold, ending the year owning a total of 661,378 shares, or 242,881 shares more than at the end of 2000. Corning Schedule DEF 14A Information¹³ ("Notice of 2002 Annual Meeting of Shareholders and Proxy Statement") (Mar. 7, 2002), at 8. "Inferences of scienter can be undermined when an insiders' sales of stock are offset by even larger stock acquisitions during the relevant time period." Ressler v. Liz Claiborne, Inc., 75 F. Supp.2d 43, 60 (E.D.N.Y. 1998).

13 A portion of this form is referred to in Complaint ¶ 171. The complete form is available on the SEC's public web site athttp://www.sec.gov.

Ackerman's sales of stock are even less suggestive of scienter. Ackerman announced his retirement and resigned as president and chief executive officer of Corning with an effective date of January 1, 2001, though he remained on as chairman until June 21, 2001. Complaint ¶ 13. The next "open window for insider sales"¹⁴ following Ackerman's January resignation was between 25 and 29 January 2001. During that period, he sold a total of 200,000 shares of stock. Complaint ¶ 168. Plaintiffs compare this sales figure during the Class Period with Ackerman's sale of a total of 160,000 shares "during the entire 12 month period before the Class Period began." Complaint ¶ 169. As plaintiffs further point out, Ackerman's January 2001 stock sales amounted to approximately 11% of his holdings as of December 31, 2000. Complaint ¶ 171. Plaintiffs also focus on the timing of Ackerman's sales, just a few days after the January 25, 2001 Form 8-K, which estimated that earnings per share would be between $1.40 and $1.43. Complaint ¶ 170. The Form 8-K also included the following outlook:

14 This phrase appears in defendant's motion papers. Mem. of Law in Supp't of Mot. for an Order Dismiss the Consol. Amend. Compl., at 29. At the request of the Court, counsel clarified this phrase: "That `window' for trading opens after there has been wide dissemination of the quarterly results, such as through a published press release. See New York Stock Exchange Manual at 66, 67." Letter from Carolyn G. Nussbaum, Esq., defense counsel, to Hon. Charles J. Siragusa Mark Pedersen, Esq. (Mar. 26, 2004) (filed as document # 37), at 2. Both counsel concur that, with the exception of the Sarbanes-Oxley Act section 306 (pertaining to insider trades during pension fund blackout periods), there is no statute, rule, or regulation concerning open windows of trading for those possessing insider information. Id.; E-mail from Warren B. Rosenbaum, Esq., plaintiffs' liaison counsel to Mark W. Pedersen, Esq. (Mar. 24, 2004, 2:24 p.m.) (on file in Chambers).

Looking ahead to the first-quarter in 2001, Corning Executive Vice President and Chief Financial Officer, James B. Flaws stated, "We expect the telecommunications market to experience some softness due to ongoing issues with capital availability. Several customers in both our optical fiber and photonic technologies businesses have recently indicated that their order rate may be lower and more uneven than previously expected in the first-half of the year. Also, with the weak retail environment, we expect our customers to adjust their inventory levels of finished LCD monitors in the first quarter. As a result, we are widening our pro forma earnings per share guidance range for the first quarter from $0.29 — $0.30 to $0.28 — $0.31. With this new guidance range, earnings per share would be up 20% to 35% from the prior year. We expect sales in the first quarter to be in the range of $1.9 billion to $2 billion."

Corning Form 8-K (Jan. 25, 2001), at 2 (Nussbaum aff. Ex. 10).

When considered in the context of his announced retirement, the timing of Ackerman's stock sales and the relatively small percentage of his stock sold in January 2001 fail to support a strong inference of scienter. "It is not unusual for individuals leaving a company . . . to sell shares. Indeed, they often have a limited period of time to exercise their company stock options." Greebel v. FTP Software, Inc., 194 F.3d 185, 206 (1st Cir. 1999). Ackerman's sales took place well after the share price of $80 in mid-December 2000, and after the stock price dropped following a mid-January 2001 peak of about $70 per share. See Graph Summarizing Corning Closing Stock Prices During the Period of August 1, 2000 through August 31, 2001(Nussbaum aff., Ex. 15).

Even when considered in respect to the Form 8-K, plaintiffs' allegations do not establish either facts showing that defendants had both motive and opportunity to commit fraud, or facts that constitute strong circumstantial evidence of conscious misbehavior or recklessness. Therefore, the Court concludes that plaintiffs have failed to show scienter based on Flaws' and Ackerman's stock sales.

The next theory upon which plaintiffs rely to show scienter is the allegation that defendants were able to use [Corning's] artificially inflated common stock as currency for Corning's acquisition of Tropel Corporation ("Tropel"). Complaint ¶ 164-66. They allege that if the truth had been known about Corning's photonics business, Corning would have had to pay considerably more in cash for Tropel, or would have had to issue considerably more stock to consummate the purchase. Complaint ¶ 166.

As previously discussed, above, a company's generalized motive to maximize profitability does not constitute sufficient evidence of scienter for securities fraud. Even a company's "desire to consummate a corporate transaction does not constitute a motive for securities fraud." In re Health Mgmt. Sys., Sec. Litig., 1998 U.S. Dist. LEXIS 8061, *19 n. 4 (citations omitted). The Second Circuit has addressed this issue, holding that

We note that this Court has ruled that stock price manipulation in the acquisition context may be sufficient to establish scienter, and has rejected the proposition that "the desire to consummate any corporate transaction cannot ever be a motive for securities fraud." Rothman v. Gregor, 220 F.3d 81, 93-94 (2d Cir. 2000) ( citing [ In re] Time Warner [ Securities Litigation], 9 F.3d [259] at 270). In this situation, however, any intent to defraud Comcast cannot be conflated with an intent to defraud the shareholders. As we noted earlier, achieving a superior merger benefitted all shareholders, including the defendants. Additionally, the desire to achieve the most lucrative acquisition proposal can be attributed to virtually every company seeking to be acquired. Such generalized desires do not establish scienter. See, e.g., San Leandro, 75 F.3d at 814.

Kalnit v. Eichler, 264 F.3d 131, 141 (2d Cir. 2001). Paying a smaller price for the acquisition of Tropel benefitted Corning's common stock shareholders. Defendants' desire to have a high Corning stock price to be used for the purchase of Tropel, is a motive that could be attributed to virtually every company seeking to acquire another through the use of its own stock as part of the purchase price. It is, therefore, not sufficient evidence of scienter to commit securities fraud. Thus, plaintiffs' Complaint fails to plead with particularity facts establishing a strong inference that defendants acted with the required state of mind.

7. Generally Accepted Accounting Principles

In addition to relying on allegations of defendants' violations of GAAP as proof of their Securities Act claim under Section 11, plaintiffs also rely on these allegations in support their burden to plead scienter under their Exchange Act claim. On July 9, 2001, Corning announced that it was taking pre-tax charges of approximately $5.1 billion "to reflect the impairment of goodwill and other intangible assets related to recent Photonic Technologies acquisitions and the write-down of excess and obsolete inventory." Complaint ¶ 139 (emphasis removed). Plaintiffs argue that the magnitude of the charges "gives rise to the implication that defendants knowingly or recklessly deceived investors." Pls.' Mem. in Opp'n to Defs.' Mot. to Dismiss, at 28. Plaintiffs rely on the holding in Rehm v. Eagle Finance Corp. 954 F. Supp. 1246 (N.D. Ill. 1997) in support of this argument. In Rehm, the district court stated,

Allegations of a serious departure from GAAP are not by themselves sufficient to give rise to an inference of scienter. To adequately allege scienter, in addition to bare allegations of GAAP violations, the complaint must show that defendants recklessly disregarded the deviance or acted with gross indifference towards the purported material misrepresentations contained in the financial statements.

Id. at 1255. The district court found that accounting violations and materially false and misleading quarterly press releases and Forms 10-Q supported the strong inference that defendants there acted with scienter. Id. Unlike the situation in Rehm, plaintiffs have failed to plead that Corning's public filings and press releases were false and misleading and have not plead facts showing that defendants committed accounting violations. The violation referred to in Rehm involved "the financial information defendants issued in its press releases and public filings" which the district court found

seriously deviated from the principles articulated in "Accounting for Contingencies," Statement of Financial Accounting Standards No. 5 (1975) (FASB No. 5) and that defendants knew, or should have known, this fact. Specifically, FASB No. 5 requires that all estimated losses must be accrued and reported against current income. FASB No. 5, P 8. Plaintiff contends that defendants' 91% overstatement of Eagle earnings in 1995 reflects an egregious miscalculation of credit losses in violation of the clear terms of FASB No. 5.

Rehm, 954 F. Supp. at 1255. The allegations involved in the present case, however, are that defendants exercised poor judgment in the timing of their write-down of goodwill and inventory. Plaintiffs allege that the goodwill and inventories numbers were overstated, but fail to allege specific facts that the valuations, and the timing of the write-offs, violated GAAP. Plaintiffs quote from the Financial Accounting Standards Board Statement of Financial Accounting Standards ("SFAS") No. 5, which they alleged required defendants to recognize and report a charge to income when (a) information existing at the date of the financial statements indicates that it is probable that an asset had been impaired and (b) the amount of the impairment can be reasonably estimated. Complaint ¶ 152. The essence of plaintiffs' argument on the inventories valuation is contained in the following paragraph from the Complaint:

As the Defendants knew or recklessly disregarded, Corning's representations concerning the value of its photonics inventory were materially overstated during the Class Period. In violation of GAAP principles, Defendants failed to disclose any impairment of Corning's photonics inventories during the Class Period, despite contemporaneous events and changed circumstances that strongly suggested that such assets had been materially impaired, as detailed above. By failing to timely write-down the value of its photonics inventory to its then current replacement cost or net realizable value, Corning's financial statements violated the dictates of GAAP and the Company's own stated accounting policy with respect to inventory.

Complaint ¶ 159 (emphasis added).

As detailed above, the Court has already determined that the Complaint does not provide factual allegations that Corning's management, or the individual defendants, had a basis for believing that Corning was amassing hundreds of millions of dollars of obsolete inventory, which would have to be written off. Plaintiffs rely on In re Ikon Office Solutions, 66 F. Supp.2d 622, 632 (E.D. Pa. 1999) in support of their claim. In that case, however, the plaintiffs identified specific facts strongly supporting an inference of recklessness.

[T]he allegations here do not merely describe fraud in hindsight: they state that EY was aware of serious discrepancies that made it impossible to certify Ikon's financial statements. In arguing that plaintiffs are overly vague, defendant ignores the various internal memoranda and workpapers cited by plaintiffs. While EY again argues that the violations, if they occurred, were only with respect to internal policy, the complaint clearly alleges that the lack of compliance with corporate policy was an indication that Ikon's financial situation was precarious and its practices did not comply with GAAP.

Id. at 633. Plaintiffs' Complaint asks the reader to conclude that defendants unreasonably delayed in writing down inventories and goodwill figures because, as it developed, the downturn in the telecommunications market was more severe than analysts had predicted at the end of 2000. This is clearly not sufficient to meet the requirements of the PSLRA. A Seventh Circuit case is instructive on this issue:

The story in this complaint is familiar in securities litigation. At one time the firm bathes itself in a favorable light. Later the firm discloses that things are less rosy. The plaintiff contends that the difference must be attributable to fraud. `Must be' is the critical phrase, for the complaint offers no information other than the differences between the two statements of the firm's condition.

DiLeo v. Ernst Young, 901 F.2d 624, 627 (7th Cir. 1990). Plaintiffs' allegations do not sufficiently plead facts in support of the requisite scienter in actions under Section 10(b) and Rule 10b-5 of "an intent to deceive, manipulate or defraud." Kalnit v. Eichler, 264 F.3d at 138. (citations omitted). Plaintiffs have established neither facts to show that defendants had both motive and opportunity to commit fraud, Nor facts that constitute strong circumstantial evidence of conscious misbehavior or recklessness. Acito v. Imcera Group, Inc., 47 F.3d at 52.

Under Section 20(a) of the Exchange Act, 15 U.S.C. § 78t, individual corporate officials can be held liable for the fraudulent acts of their respective companies if they were in a controlling position. An implicit prerequisite to individual liability, however, is the potential for primary liability. See Brown v. Hutton Group, 795 F. Supp. 1317, 1324-25 (S.D.N.Y. 1992) ("It is impossible to state a claim for secondary liability under § 20 without first stating a claim for some primary violation of the security laws on the part of the controlled party."); see also Ferber v. Travelers Corp., 785 F. Supp. 1101, 1111 (D. Conn. 1991) ("claims for secondary liability must be dismissed when primary violation claims are dismissed"); Goodman v. Shearson Lehman Bros., Inc., 698 F. Supp. 1078, 1086 (S.D.N.Y. 1988) (holding that the plaintiff could not maintain controlling person liability against individuals after the court had dismissed the claims against the controlled company). Since the Court has found that the complaint fails to state a cause of action against Corning, it follows that the Complaint also does not state a cause of action against the individual defendants.

V. CONCLUSION

For all of the foregoing reasons, defendants' application (# 21) to dismiss the entire Complaint is granted. In light of this ruling, the Court has not addressed defendants' contention that plaintiffs have failed to allege standing to bring claims concerning the sale of debentures.

IT IS SO ORDERED.