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DEAN S . KRISTY (State Bar No . 157646)KEVIN P. MUCK (State Bar No . 120918)FELIX S. LEE (State Bar No . 197084)CHRISTOPHER GARCIA (State Bar No . 215184)JENNIFER C. BRETAN (State Bar No . 233475)FENWICK & WEST LLP275 Battery Stree tSan Francisco , California 94111Telephone : (415) 875-2300Facsimile : (415) 281-1350e-mail address: kmuck(a,fenwick .com
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DAN K. WEBB (Pro Hac Vice 2116105)ROBERT Y. SPERLING (Pro Hac Vice 2116105)ROBERT L. MICHELS (Pro Hac Vice 2116105)RONALD S. BETMAN (Pro Hac Vice 2116105)WINSTON & STRAWN LLP35 West Wacker DriveChicago, Illinois 60601-9703Telephone : (312) 558-5600Facsimile : (312) 558-5700e-mail address: [email protected]
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Attorneys for Defendants Cisco Systems, Inc ., JohnT. Chambers, Larry R. Carter, Steven M . West,Edward R. Kozel, Donald T . Valentine, Judith L .Estrin, Gary J . Daichendt, Donald J. Listwin, CarlRedfield and Michelangelo Volpi
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UNITED STATES DISTRICT COURT16
NORTHERN DISTRICT OF CALIFORNIA
SAN JOSE DIVISION
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In re CISCO SYSTEMS, INC .SECURITIES LITIGATION
This Document Relates To :
ALL ACTIONS .
Case No . C-01-20418-JW
CLASS ACTION
REPLY MEMORANDUM IN SUPPORT OFDEFENDANTS CISCO SYSTEMS, INC.,JOHN T. CHAMBERS AND LARRY R .CARTER'S MOTION FOR SUMMARYJUDGMENT
Date: June 13, 2006Time : 9:00 a.m.Place: Courtroom of The Honorable James War e
REPLY IN SUPPORT OF CISCO, CHAMBERS, AND CARTER'S MOTION FOR SUMMARY JUDGMENT Case No . C-O1-20418-JW
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TABLE OF CONTENTS
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1. INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
II . PLAINTIFFS ABANDON MANY OF THEIR CLAIMS AND ALLEGATIONS . . . . . . . . . . . 2
III . PLAINTIFFS CANNOT DISPUTE THAT THE RECORD NEGATES ANYSUGGESTION THAT DEFENDANTS ACTED WITH SCIENTER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
A. Plaintiffs Are Unable to Explain Away Cisco's Business Decisions . . . . . . . . . . . . . . . . . . . . . 3
B. The Opposition Confirms There Is No Plausible Motive For Mr. Carter orMr. Chambers To Engage In Fraud . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
C. The Opposi tion Does Not Dispute That the Conduct of Mr . Morg ridge andMr. Valentine Negates the Element of Scienter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
IV. PLAINTIFFS FAIL TO SHOW THAT THERE IS A GENUINE ISSUE O FMATERIAL FACT WITH RESPECT TO ANY ALLEGED STATEMENTREGARDING CISCO'S BUSINESS OR PROSPECTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
A. The Opposition Concedes That Statements Allegedly Made In Fiscal 200 0Regarding Cisco 's Business or Prospects Are No Longer Part of this Case . . . . . . . . . . 8
1 . Forward-Looking Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2. Statements Regarding Historical or Existing Business Conditions . . . . . . . . . . . . 9
B. Plaintiffs Point to No Evidence Establishing That Any Statement in th eFirst Quarter of FY 2001 (August-October 2000) Was False or Made WithS cienter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
1 . Plaintiffs Abandon Any Claim Based on Forward -LookingStatements Allegedly Made in August 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2. Plaintiffs Also Fail to Show That Any Defendant Misstated theStrength of Cisco's Existing Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
C. Plaintiffs Also Fail to Raise a Genuine Issue of Fact as to Any StatementMade in the Second Quarter of Fiscal 2001 (November 2000 - January2001 ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
1 . The Alleged Forward-Looking Statements . ... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
a. Plaintiffs Cannot Overcome the Statutory Safe Harbor . . . . . . . . . . . . . . . . 12
b. No Evidence of Actual Knowledge of Falsity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 3
i. November 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 3
ii. December 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 5
iii . January 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 7
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TABLE OF CONTENTS(continued)
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2. Statements Regarding Strength of Business and Demand . . . . . . . . . . . . . . . . . . . . . . . . 17
V . PLAINTIFFS' OPPOSITION FAILS TO OFFER EVIDENCE THAT CISCO' SFINANCIAL RESULTS WERE DELIBERATELY MISSTATED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 9
A. Plaintiffs Have Not Even Tried To Address The Absence Of Scienter Fo rTheir Accounting Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
B. Plaintiffs Have No Evidence Of Scienter Concerning Inventory Reserves . . . . . . . . . . 21
1 . Plaintiffs' Opposition Essentially Abandons The Argument ThatInventory Reserves Were Deliberately Misstated In Q3 Of Fiscal2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
2. The Argument That Cisco Knew It Was Procuring More InventoryThan It Could Use In Q4 Of Fiscal 2000 Is Unsupported B yEvidence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
3 . Plaintiffs' Argument Concerning the First Quarter Of Fiscal 2001 IsEqually Illogical And Fails For Lack Of Scienter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
C. Plaintiffs Have Failed To Offer Evidence Of Scienter On Their RevenueRecognition And Reserve Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
1 . No Scienter For Plaintiffs' Unpleaded Future Returns ReserveClaim . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
2. No Scienter For Plaintiffs ' Third-Party Guarantee Claim . . . . . . . . . . . . . . . . . . . . . . . . 28
3 . No Scienter For Plaintiffs' Unpleaded Lease Reserve Claim . . . . . . . . . . . . . . . . . . . 28
4. No Scienter For Plaintiffs' Non-Equipment Loan Reserve Claim . . . . . . . . . . . 30
5 . No Scienter For Plaintiffs ' Unpleaded PFI Claim . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
6 . Plaintiffs Do Not Even Address, And Therefore Concede, TheAbsence Of Scienter For Their Miscellaneous Other AccountingClaims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
VI. THE OPPOSITION CONFIRMS THERE IS NO GENUINE ISSUE OF FACT ASTO CLAIMS BASED ON CISCO'S ACQUISITIONS OR PRODUCTS . . . . . . . . . . . . . . . . . . . . . . . 34
VII. PLAINTIFFS CONCEDE THEY HAVE NO INSIDER TRADING CLAIM . . . . . . . . . . . . . . . . 36
VIII . CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
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TABLE OF AUTHORITIES
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CASES
ACT, Inc. v. Sylvan Learning Sys ., Inc. ,296 F.3d 657 (8th Cir. 2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Alaska Elec . Pen. Fund v. Adecco, S.A. ,371 F. Supp. 2d 1203 (S .D. Cal . 2005 ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Barrie v. Intervoice-Brite , Inc. ,409 F .3d 653 (5th Cir . 2005) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 0
Buban v. O'Brien,1994 WL 324093 (N.D. Cal . Jan. 22 , 1994) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Cambridge Elec. Corp. v. MGA Elec., Inc . ,227 F .R.D. 313 (C .D. Cal . 2004) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim
Cable v. Broadvision, Inc. ,2002 WL 31093589 (N.D. Cal . Sept. 11, 2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
DiLeo v. Ernst & Young,901 F.2d 624 (7th Cir . 1994) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Employers Teamsters Local Nos . 175 & 505 Pension Trust Fund v. The CloroxCo. ,353 F . 3d 1125 (9th Cir . 2004) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8, 11, 12, 1 3
Far Out Prods ., Inc. v. Oskar ,247 F.3d 986 (9th Cir. 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10, 33
Gear, Inc. v. L.A. Gear Cal., Inc. ,670 F. Supp. 508 (S .D.N.Y. 1987 ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
In re Acceptance Ins. Co. Sec . Litig. ,423 F.3d 899 (8th Cir . 2005) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
In re Adobe Sys., Inc. Sec. Litig. ,787 F . Supp . 912 (N.D . Cal. 1992), aff'd, 5 F.3d 535 (9th Cir. 1993) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15, 22
In re Andrx Corp., Inc. Sec. Litig. ,296 F . Supp . 2d 1356 (S.D. Fla. 2003 ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10, 1 7
In re Apple Computer, Inc. Sec. Litig. ,886 F .2d 1109 (9th Cir. 1989) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,4,11,1 6
In re Bio-Tech. Gen. Corp. Sec. Litig. ,380 F . Supp. 2d 574 (D.N.J. 2005 ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
In re Cirrus Logic Sec . Litig. ,946 F. Supp . 1446 (N.D. Cal . 1996) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
In re Clorox Co. Sec . Litig. ,238 F. Supp . 2d 1139 (N.D. Cal . 2002), aff'd, 353 F.3d 1125 (9th Cir . 2004)- . . . . . . . . . . . . . . . . . . . . . 1 2
In re Cypress Semiconductor , Inc. Sec. Litig. ,891 F. Supp . 1369 (N .D. Cal . 1995), aff'd, 113 F .3d 1240 (9th Cir. 1997) . . . . . . . . . . . . . . . . . . . . . passim
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REPLY IN SUPPORT OF CISCO, CHAMBERS, AND CARTER'S MOTION FOR SUMMARY JUDGMENT Case No . C-O1-20418-JW
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TABLE OF AUTHORITIES(continued)
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In re Duane Reade Inc. Sec. Litig. ,2003 WL 22801416 (S .D.N.Y. Nov. 25, 2003), aff'd, 107 Fed . Appx. 250(2d Cir. 2004) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 6
In re ESS Tech ., Inc. Sec. Litig. ,2004 WL 3030058 (N .D. Cal . Dec. 1, 2004) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 4
In re FVC.com, Inc. Sec. Litig. ,136 F . Supp. 2d 1031 (N .D. Cal . 2000), affd, 32 Fed. Appx. 338 (9th Cir.2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
In re Interactive Network Inc. Sec. Litig. ,948 F. Supp. 971 (N.D. Cal . 1996) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10, 1 8
In re John Alden Fin. Corp. Sec. Litig. ,249 F. Supp. 2d 1273 (S.D. Fla. 2003) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,28
In re Lexar Media, Inc. Sec. Litig. ,2005 WL 1566534 (N .D. Cal . Jul. 5, 2005) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21
In re Miller Indus ., Inc. Sec. Litig. ,120 F . Supp. 2d 1371 (N.D. Ga. 2000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
In re Nokia Corp. Sec. Litig. ,2006 WL 851155 (S .D .N.Y. Mar. 31, 2006) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1
In re Portal Software, Inc. Sec. Litig. ,2005 WL 1910923 (N .D. Cal . Aug. 10, 2005) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
In re Reliance Sec. Litig. ,135 F . Supp. 2d 480 (D. Del. 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
In re Software Toolwork , Inc. Sec. Litig. ,50 F.3d 615 (9th Cir . 1994) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20, 28, 34
In re Software Toolworks, Inc . Sec. Litig. ,789 F. Supp. 1489 (N.D. Cal . 1992), aff'd in part, rev'd in part on othergrounds, 50 F.3d 615 (9th Cir. 1994) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
In re Splash Tech. Holdings, Inc. Sec. Litig. ,160 F. Supp. 2d 1059 (N.D. Cal . 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim
In re Syncor Intl Corp. Sec. Litig. ,327 F. Supp. 2d 1149 (C.D. Cal . 2004) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 5
In re Vantive Corp. Sec. Litig. ,283 F .3d 1079 (9th Cir . 2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
In re VeriFone Sec. Litig. ,11 F.3d 865 (9th Cir . 1993) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
In re Wells Fargo Sec. Litig. ,12 F.3d 922 (9th Cir . 1993) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
In re Worlds of Wonder Sec . Litig. ,35 F.3d 1407 (9th Cir . 1994) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim
Kane v. Madge Networks N V. ,2000 WL 33208116 (N .D. Cal . May 26, 2000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
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TABLE OF AUTHORITIES(continued)
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Lipton v. PathoGenesis Corp . ,284 F.3d 1027 (9th Cir . 2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Malone v . Microdyne Corp. ,26 F.3d 471 (4th Cir . 1994) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Maslow v. Evans,2003 U.S. Dist . LEXIS 20316 (E.D. Pa. Nov. 7, 2003) . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Mathews v. Centex Telemanagement, Inc. ,1994 WL 269734 (N .D. Cal . Jun. 8, 1994) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim
Matsushita Elec. Indus. Co . v. Zenith Radio Corp. ,475 U.S. 574 (1986) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Miller v. Champion Enters. Inc. ,346 F.3d 660 (6th Cir. 2003) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
Nelson v. Pima Community College ,83 F.3d 1075 (9th Cir. 1996) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Panduit v. Band-It-Idex, Inc. ,2000 U.S. Dist . LEXIS 9839 (N.D. 111 . July 12, 2000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Paracor Fin. Corp. v. General Elec. Cap. Corp. ,96 F . 3d 1151 (9th Cir. 1996) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Provenz v. Mi ller,102 F.3d 1478 (9th Cir. 1996) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Resolution Trust Corp. v. Dunmar Corp. ,43 F.3d 587 (11th Cir. 1995) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Ronconi v . Larkin ,253 F.3d 423 (9th Cir. 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim
Schuster v. Symmetricon, Inc. ,2000 WL 33115909 (N .D. Cal . Aug. 1, 2000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim
Shanahan v. City of Chicago ,82 F.3d 776 (7th Cir. 1996) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Shurkin v. Golden State Vintners ,2005 WL 1926620 (N .D. Cal. Aug 10, 2005) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36, 37
Weiland v . El Kram, Inc. ,233 F. Supp. 2d 1142 (N .D. Iowa 2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Winston v. American Fain. Mut. Ins. Co. ,2006 WL 334852 (D . Ariz. Feb. 8, 2006) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Yourish v. California Amplifier ,191 F .3d 983 (9th Cir. 1999) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1
CT A'7'TTTP Q
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15 U.S .C. § 78u-5(c)(1)(A)(i) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
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REPLY INSUPPORT OF CISCO, CHAMBERS, AND CARTIER'S MOTION FOR SUMMARY JUDGMENT Case No. C-01-2(Wi8-JW
I. INTRODUCTION
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Plaintiffs oppose the Cisco Defendants' summary judgment motions with two briefs '
which, despite totaling 115 pages, largely avoid the most critical issues in this case . The result is
that many allegations are conceded, while others are addressed in only the most cursory fashion ---
often by mischaracterizing facts, sometimes with nothing more than the bare allegations o r
speculation of counsel, but never with competent evidence establishing a genuine issue of fact.
For instance, although the class period begins in November 1999, plaintiffs abandon an y
claim that defendants misrepresented the strength of Cisco's business or prospects during fiscal
2000. Indeed, plaintiffs make no real attempt to show that a business slowdown was apparent
until the fall of 2000 - and, even then, they completely ignore that Cisco's internal forecasts
remained more optimistic than its public statements . As for accounting, plaintiffs gloss over
undisputed evidence that decisions regarding revenue recognition and reserves were made by
teams of highly qualified finance personnel, and no defendant ever interfered with that process,
changed numbers, or otherwise tried to misstate Cisco's financial results . Plaintiffs also give up
on the effort to show that Cisco misrepresented any of its acquisitions .
But even more significant is plaintiffs' inability to address the fundamental irrationality o f
their case . They never even try to explain why Cisco would spend billions of dollars on new hires,
real estate, manufacturing, or other infrastructure unless defendants honestly believed business
would continue to grow - nor do plaintiffs mention the cases in the Ninth Circuit or this District
holding that such facts negate an inference of scienter and mandate summary judgment .
The same elemental flaw plagues plaintiffs' inventory claims , which are premised on the
notion that Cisco was deliberately ordering more components - and building more products - than
it thought it could sell . Nowhere in their papers do plaintiffs ever purport to explain why Cisco ,
its board and management would engage in behavior so antithetical to their own interests .
The Court will recall that, when this case began, plaintiffs peddled the theory that Cisco
' Plaintiffs' main brief jointly opposes the motions filed by all of the Cisco Defendants, and isreferred to as the "Opp." In addition to this reply by Cisco , Mr. Chambers and Mr. Carter (whichall of the other Cisco Defendants join), separate briefs are being filed and served on behalf of: (1)Messrs . Valentine , West and Kozel ; and (2 ) Ms. Estrin and Messrs. Daichendt, Redfield, Listwinand Volpi . Because plaintiffs filed an additional opposition limited solely to loss causation (the"L/C Opp ."), the Cisco Defendants are accordingly submitting a separate reply brief on that issue .
REPLY IN SUPPORT OF CISCO, CHAMBERS, AND CARTER'S MOTION FOR SUMMARY JUDGMENT Case No . C- 1-20418-JW
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insiders were motivated to dump their holdings at inflated prices . However, plaintiffs are now
silent in the face of undisputed evidence that : (1) Cisco's Chairman held more than 83 million
shares but did not sell one of them during the class period ; and (2) the Vice Chairman not only
sold no shares, but he actually acquired 180,000 shares in November 2000 . Furthermore, they
ignore that Mr. Chambers (the CEO) made only one sale, in February 2000 - long before plaintiffs
contend there was any sign of a slowdown in the Company's business, and at a time when their
expert concedes there was barely any "inflation" in the stock price . They also avoid any mention
of their expert's concession that the modest sales made by Mr . Carter (the CFO) were not unusual .
Unable to contest - or even address -- these devastating facts, plaintiffs resort to diversion .
They rely on a hodgepodge of inconsequential issues (viewed with the benefit of hindsight) in the
hopes of creating the illusion of a factual issue . But that tactic fails, not only because many of
their assertions are contrary to the record, but also because there is no coherent theory or rational
motive - which means that plaintiffs' assortment of miscellaneous details never adds up to a claim
for fraud. The fact that, for example, an employee within one area might express concerns in the
fall of 2000 about a subsegment of the business is irrelevant when those concerns were fully
considered, and ensuing internal forecasts (factoring in those concerns) were still more optimistic
than Cisco's public statements - especially when defendants' conduct confirms that optimism .
In other words, when viewed in context and in conjunction with governing law, none o f
the purported issues raised by plaintiffs comes close to establishing that any statement wa s
materially false, much less that specific defendants acted with the intent to defraud or with
deliberate recklessness . Defendants are therefore entitled to summary judgment on all claims .
II. PLAINTIFFS ABANDON MANY OF THEIR CLAIMS AND ALLEGATIONS
In the course of discovery, plaintiffs conceded they have no evidence to support a numbe r
of the allegations in their AC. Additionally, as discussed below , the Opposition fails to mention
(let alone cite evidence to support) a host of other allegations, and it is axiomatic that "grounds
alleged in the complaint but not relied upon in summary judgment are deemed abandoned."
Cambridge Elec . Corp. v. MGA Elec ., Inc., 227 F.R.D . 313, 336 n.67 (C.D. Cal . 2004), quoting
Resolution Trust Corp . v. Dunmar Corp., 43 F .3d 587, 599 (11th Cir . 1995). As a result, the
2REPLY IN SUPPORT OF CISCO, CHAMBERS, AND CARTER 'S MOTION FOR SUMMARY JUDGMENT Case No . C-01-20418-JW
following allegations have been abandoned by plaintiffs :
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• All statements made prior to November 9, 1999 (AC ¶¶ 60-63, 89, 90, 102-106), basedon plaintiffs' prior admission that Cisco's stock price was not inflated during this time(and their stipulation to shorten the class period accordingly) ;
• Allegations that Cisco's quarterly financial results were misstated due to shipping"empty shells," moving products across a "yellow line," closing quarters "early,"recognizing revenue on transactions where loans were extended to uncreditworthycustomers, and booking large deals with certain partners and resellers without requiredterms completed (AC ¶¶ 60(d)(i)-(v), (viii), incorporated by reference into AC IT64(d), 67(d), 71(d), 77(d), 83(d)) ;
• All statements regarding Cisco's business or prospects during fiscal 2000 (AC 1165,68, 70, 73-76, 91-95, 107-109, 111, 113, 114, 116-118) ;
• Certain statements regarding Cisco's business or prospects during fiscal 2001 (AC ¶¶79, 85, 96, 141, 119-122, 124, 125, 127, 128) ;
• Cisco's announcement of the Pirelli acquisition (AC ¶ 66), and press releases regardingcustomer orders for the Summa Four switch (AC 11110, 115) .
Thus, at the outset, defendants are entitled to partial summary judgment with respect to
each of these allegations . See In re Apple Computer, Inc . Sec. Litig., 886 F .2d 1109, 1119 (9th
Cir. 1989) (affirming summary judgment as to particular statements). Moreover, even as to the
remaining allegations - dealing primarily with guidance in the second quarter of fiscal 2001 and
accounting - the Opposition fails to identify evidence sufficient to raise a genuine issue of fact .
III. PLAINTIFFS CANNOT DISPUTE THAT THE RECORD NEGATES AN YSUGGESTION THAT DEFENDANTS ACTED WITH SCIENTER
A. Plaintiffs Are Unable to Explain Away Cisco"s Business Decision s
Plaintiffs do not deny that a plausible motive is critical at the summary judgment stage ,
and that - without facts establishing such a motive - they bear an especially heavy evidentiary
burden . See Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 596 (1986) ;
Schuster v. Symmetricon, Inc., 2000 WL 33115909, *7 (N .D. Cal . Aug. 1, 2000) . Yet not only
does the Opposition fail to identify facts demonstrating any motive for Cisco or its insiders to
engage in fraud, but it makes no meaningful effort to address the overwhelming evidence attesting
to defendants' good faith belief in the Company and its prospects . It is undisputed that Cisco
spent billions of dollars throughout the class period to expand its workforce, facilities, real
estate, product development, inventories, manufacturing capacity and other infrastructure to
support a business expected to generate $50 billion in revenues within 2-3 years . See Def. Mem .
at 27-29; Carter Decl ., ¶ 8. Each of these decisions would be entirely irrational unless defendants
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honestly believed the business would continue to grow - and plaintiffs do not contest that, under
Ninth Circuit law, that conclusion is sufficient to negate scienter at the summary judgment stage .
See, e.g., In re Worlds of Wonder Sec. Litig., 35 F.3d 1407, 1412 (9th Cir . 1994) ; Apple , 886 F.2d
at 1118 ; Schuster, 2000 WL 33115909, *6-7 . Z
Unable to controvert these business decisions or their signi ficance, plaintiffs largely ignore
them. Even as to the few they acknowledge (Opp . at 81-82), plaintiffs offer only a few baseless
(and irrelevant) quibbles, and are never able to reconcile Cisco's massive investments with their
theory of fraud. For instance, they try to downplay the decision to increase inventory b y
suggesting that Cisco was "locked into long-term supply contracts ." Opp. at 82. Putting aside the
lack of supporting evidence, this purported explanation begs the obvious question: why would
Cisco have entered into such long-term commitments unless defendants honestly believed that
business was growing, and that Cisco would be able to sell all of the products being built? See
Worlds of Wonder, 35 F.3d at 1420 ("commenc[ing] a production schedule implementing [an]
optimistic business plan" negates scienter) ; Schuster, 2000 WL 33115909, *6-7 (management's
good faith demonstrated by decision to order "additional component materials . . . during the class
period") . Needless to say, plaintiffs never answer that question .
Nor do plaintiffs explain away the undisputed evidence (see Carter Decl ., 1 8) showing
that: (a) Cisco more than doubled its headcount (from about 20,600 to more than 43,000) during
the class period ; (b) it continued to add employees through January 2001; and (c) such growth is
thoroughly inconsistent with the theory that defendants secretly believed business was
"declining." Apple, 886 F.2d at 1118. The most plaintiffs do is argue that hiring slowed in the
last two months of the class period (Opp . at 81), a contention that (even if true) would do nothing
to undercut the significance of Cisco's activities up to that point. In any event, contrary to
plaintiffs' suggestion, the Company actually continued to increase headcount by more than
1,200 in December 2000, and another 1,800 in January 2001 (Exs. 121 at 076167 ; 122 at 078701) .
Plaintiffs' entire effort to address Cisco's multi-billion dollar real estate development is
limited to a non sequitur : they argue that the massive 6.6 million sq . ft . Coyote Valley project i s
2 Indeed , these cases were discussed extensively in the moving papers , yet plaintiffs do not evenmention Worlds of Wonder or Schuster , and make just one passing reference to Apple.
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"irrelevant" because it was not cancelled until after the business downturn in 2001 . Opp. at 82 .
Yet that is precisely the point : the decision to undertake the project was necessarily premised on
the belief that business would continue to boom (Carter Deel ., ¶ 8(c)), and was only dropped after
it became evident that economic conditions had changed dramatically . Moreover, plaintiffs ignore
the board's decision in September 2000 to authorize more than $2 .5 billion for other real estate
projects (id. ¶ 8(b)). Because plaintiffs cannot square their theory of fraud with these undisputed
facts, the Court must enter judgment in favor of defendants . Worlds of Wonder, 35 F.3d at 1420 . 3
B. The Opposition Confirms There Is No Plausible Motive For Mr. Carter orMr. Chambers To Engage In Fraud
Plaintiffs concede that only unusual or suspicious stock sales are evidence of sciente r
(Opp. at 77), and their own expert admits that Mr . Carter's modest sales during the class period -
which were far less than his previous sales - were not unusual . Bartov Rpt . (Ex. 82) at 16 .
Because plaintiffs offer no other explanation for why Mr . Carter would knowingly engage in
misconduct, they are left with nothing more than the notion that Cisco's CFO must have made
"false statements simply out of spite or to impress others" -- a theory that, as Judge Whyte has
noted, courts properly reject at this stage . Schuster, 2000 WL 33115909, *7 .
The undisputed evidence similarly establishes that Mr. Chambers' trading is inconsistent
with scienter. Plaintiffs completely ignore that his only sale (less than 10% of his holdings) took
place in February 2000, well before the Opposition identifies any allegedly false statement he
made, and long before they even claim management became aware of a slowdown (Opp. at 5) .
See Ronconi v. Larkin, 253 F.3d 423, 436 (9th Cir. 2001) ; Coble v. Broadvision, Inc., 2002 WL
31093589, *4 . (N.D. Cal . Sept. 11, 2002) . Nor do plaintiffs address that he sold far more stock in
the months prior to the class period (Chambers Deci ., 1 42) than during the alleged period of
inflation . In re Vantive Corp. Sec. Litig., 283 F.3d 1079, 1092 (9th Cir . 2002). But perhaps most
significant is plaintiffs' concession that Mr . Chambers received no material benefit from his sale .
3 Plaintiffs argue in the abstract that acquisitions may provide a "motive to inflate a company'sstock price" (Opp. at 76), but they point to no evidence to establish such a motive in this case . Infact, the evidence is to the contrary . Plaintiffs admit that Cisco announced its largest acquisition,Cerent, in August 1999 (AC ¶ 62) - before the stock price was allegedly inflated. Moreover, theMonterey deal was announced at the same time . Id. The fact that these acquisitions occurredbefore any alleged inflation is "at odds with any inference of nefarious motive ." In re Bio-Tech .Gen. Corp. Sec. Litig., 380 F. Supp. 2d 574, 582 (D .N.J. 2005) .
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According to their expert, the "true" value of the shares he sold was about $ 149 million, compared
with the "inflated" value of about $ 151 million . Def. Mem. at 30 . Plaintiffs do not contest that it
would be utterly irrational for Mr . Chambers - who had worked at Cisco for nearly a decade - to
orchestrate a far-flung fraud for a pre-tax gain of just 1 .6%. Id. Once again , the absence of a
plausible motive mandates judgment for defendants . Schuster, 2000 WL 33115909, *7-8 .
Furthermore, plaintiffs cannot controvert that Messrs . Carter and Chambers were actually
harmed by the alleged fraud . In addition to watching the value of their existing Cisco holdings
diminish, they received substantial options in November 2000 with exercise prices that were -
according to plaintiffs - artificially inflated. See Def. Mem. at 28 . Unable to offer a cogent
response, plaintiffs hypothesize that there was no real harm because Cisco could issue additional
options later, at lower exercise prices . Opp. at 81 . Such rank speculation, unsupported by any
evidence, is insufficient to raise a genuine issue of fact . Nelson v. Pima Community College, 83
F.3d 1075, 1081-82 (9th Cir. 1996) . In any event, whether or not additional options might
potentially be granted at some unknown date in the future,4 the value of options actually granted
to Messrs . Chambers and Carter in November 2000 would necessarily be "impaired by the alleged
fraud," and it is patently illogical to assert that defendants would knowingly injure themselves .
Schuster, 2000 WL 33115909, *8 . Plaintiffs fail to address this point, or Judge Whyte's holding
that it "negates any reasonable inference of scienter ." Id. 5
C. The Opposition Does Not Dispute That the Conduct of Mr . Morgridge andMr. Valentine Negates the Element of Sciente r
Plaintiffs assiduously avoid any mention of the fact that Cisco's Chairman, John
Morgridge - who beneficially held about 83 million shares, was privy to the same "inside"
information as the other directors, and saw the value of his holdings decline by $4 billion -sold
no stock during the class period. Def. Mem. at 31 ; Morgridge Decl .,13 . Nor do they make any
4 Plaintiffs ignore that the decision whether to grant such options is left to the members of Cisco'sCompensation Committee, who are not parties to this case . See Bartz Decl .,18 .5 The perfunctory assertion that defendants had "access to Cisco's Executive Information System"(Opp. at 79-80) does nothing to show scienter . Plaintiffs fail to provide evidence showing whatspecific information was actually conveyed at particular times to specific individuals, and why itshows that a given statement was known to be false . See In re Cypress Semiconductor, Inc . Sec.Litig., 891 F. Supp. 1369, 1376 (N .D. Cal. 1995), aff'd, 113 F.3d 1240 (9th Cir . 1997), See alsoLipton v. PathoGenesis Corp ., 284 F.3d 1027, 1035-36 (9th Cir . 2002) .
6
REPLY IN SUPPORT OF CISCO, CHAMBERS, AND CARTIER'S MOTION FOR SUMMARY JUDGMENT Case No . C-01-20418-JW
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effort to address those cases holding that such a decision by a knowledgeable insider "negates "
I scienter . See Schuster, 2000 WL 33115909, *8; In re FVC.com, Inc . Sec. Litig., 136 F. Supp. 2d
1031, 1039 (N.D. Cal . 2000), aff'd, 32 Fed . Appx. 338 (9th Cir . 2002) .
Likewise, plaintiffs utterly ignore that Mr. Valentine (Cisco's Vice Chairman) sold n o
stock . Valentine Decl ., ¶ 7 . Even more telling, plaintiffs have nothing to say in response to the
devastating fact that Mr. Valentine acquired 180,000 shares in November 2000 (virtually at the
height of the alleged fraud) and held those shares for the remainder ofthe class period . Id. ¶ 8 .
Given that plaintiffs have already admitted such a decision is antithetical to the notion that Cisco
insiders were trying to artificially inflate the stock price (AC ¶ 244 ) -- the very linchpin of their
case - it is not surprising that they avoid any discussion of Mr . Valentine's holdings . Nonetheless,
their silence is effectively a concession that plaintiffs ' entire case - as to all defendants - is
nonsensical and devoid of the requisite evidentiary basis . See Schuster, 2000 WL 33115909, *8 .
IV. PLAINTIFFS FAIL TO SHOW THAT THERE IS A GENUINE ISSUE OFMATERIAL FACT WITH RESPECT TO ANY ALLEGED STATEMENTREGARDING CISCO 'S BUSINESS OR PROSPECT S
As discussed in the moving papers (Def. Mem. at 32-44), none of the statements alleged in
the AC regarding the strength of Cisco's business or its prospects is actionable . Significantly, the
Opposition ignores the majority of those alleged representations (including each one allegedl y
made in fiscal 2000), and thus concedes summary judgment is proper on those statements .
As to the handful of statements that plaintiffs do purport to address, their efforts to aver t
summary judgment are fruitless . In a number of instances, plaintiffs mischaracterize documents
or testimony, apparently hoping that the Court will not sift through the evidentiary submissions .
Ultimately, though, even if one were to take plaintiffs' characterizations at face value, the most
they do is show that, late in the alleged class period, certain issues affecting portions of Cisco's
business were being identified and considered . But such facts do not establish that any statement
was actually false, let alone that any defendant knew of such falsity or acted with deliberate
recklessness . See, e.g., Ronconi, 253 F.3d at 432 .
To the contrary, plaintiffs cannot dispute that, even when all relevant factors were bein g
vetted, Cisco 's public statements were more conservative than its internalforecasts during the
7REPLY IN SUPPORT OF CISCO, CHAMBERS, AND CARTER'S MOTION FOR SUMMARY JUDGMENT Case No . C-O1 -20418-JW
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entire class period. As Judge Whyte said in granting summary judgment in a similar action,
"This is not a case where internal sales forecasts said one thing while the company's executives
said another." Schuster, 2000 WL 33115909, *4 . Nor can plaintiffs dispute that those internal
projections were used to make investments and plan for the future -- a future that, throughout the
class period, was expected to be bright. See Worlds of Wonder, 35 F.3d at 1420. Furthermore,
plaintiffs ignore that, during the period on which they now focus (October 2000 - January 2001),
there is no evidence that the key speakers (Messrs . Chambers, Carter and Kennedy) sold any
stock or otherwise benefited from some purported scheme to inflate the stock price . In fact, they
maintained their substantial holdings and received options at allegedly inflated prices, which
"negates any reasonable inference of scienter, and requires entry of summary judgment in favor of
defendants." Schuster, 2000 WL 33115909, *8 .
Thus, there is not (as plaintiffs disingenuously suggest) any need to "weigh conflictin g
evidence ." Opp. at 43. Rather, when the Court reviews the actual record in light of plaints'
burden to adduce contemporaneous evidence showing that specific individuals deliberately made
false and misleading statements - not whether defendants made mistakes, not whether certain
facts may be viewed as "red flags" with the benefit of hindsight, and not whether Cisco's
optimism proved to be misplaced -- it is clear that "no reasonable jury in this case could find" that
defendants engaged in securities fraud . Schuster, 2000 WL 33115909, *8 .
A. The Opposition Concedes That Statements Allegedly Made In Fiscal 2000Regarding Cisco' s Business or Prospects Are No Longer Part of this Case
1. Forward-Looking Statements
The AC challenges projections allegedly made during conference calls and at conference s
between November 1999 and June 2000 . AC IN 91-95. The evidence establishes not only that the
purported statements were protected by the safe harbor , but they were accurate and believed to be
true . Def. Mem. at 33-36 . See Employers Teamsters Local Nos. 175 & 505 Pension Trust Fund v.
The Clorox Co., 353 F .3d 1125, 1133 (9th Cir . 2004); Ronconi, 253 F .3d at 430 .
Plaintiffs do not address those arguments or cite contrary evidence ; in fact, the Oppositio n
ignores the statements entirely . As a result, defendants are entitled to judgment with respect t o
the statements alleged in paragraphs 91-95 of the AC. Cambridge, 227 F.R.D. at 336 n.67.
8REPLY W SUPPORT OF CISCO, CHAMBERS, AND CARTER'S MOTION FOR SUMMARY JUDGMENT Case No. C-01-20418-J V
2. Statements Regarding Historical or Existing Business Conditions
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Plaintiffs similarly make no attempt to justify their allegations that defendants misstate d
the strength of Cisco's business between November 1999 and June 2000 . The evidence before th
Court (including internal reports, testimony an d actual results) is unequivocal : demand for the
Company's products, both within the SP business and overall, was extraordinarily strong
throughout fiscal 2000. Def. Mem. at 36-37. Unable to point to any contrary evidence, plaintiffs
avoid the issue entirely . Thus, defendants are entitled to summary judgment on the statements
alleged in paragraphs 65, 68, 73-76, 107-109, 111, 113, 114, and 116-118 of the AC . 6
B. Plaintiffs Point to No Evidence Establishing That Any Statement in the FirstQuarter of FY 2001 (August-October 2000) Was False or Made With Scienter
1 . Plaintiffs Abandon Any Claim Based on Forward-Looking StatementsAllegedly Made in August 2000
Plaintiffs previously alleged that, during Cisco's August 2000 quarterly conference call ,
Mr. Chambers made revenue and earnings projections . AC ¶ 96. The evidence demonstrates
conclusively that: (i) no such statements were made ; (ii) even if they had been made, they would
be immunized by the safe harbor ; and (iii) plaintiffs are unable to show actual knowledge of
falsity, inasmuch as Cisco's internal projections were uniformly more optimistic . See Def. Mem .
at 38-39 . Once again, the Opposition concedes these points by making no mention of the
forward-looking statements allegedly made in August 2000 . Cambridge, 227 F.R.D. at 336 n .67 .
2. Plaintiffs Also Fail to Show That Any Defendant Misstated theStrength of Cisco's Existing Busines s
Plaintiffs also abandon their allegations that defendants misrepresented Cisco's strong
demand and the balance of its business in August 2000. AC ¶J 79, 119, 120 . That tactical retreat
is hardly surprising, given that Cisco had just ended an extraordinarily successful year, and ever y
internal forecast projected even greater growth in the quarters ahead (see Def. Mem. at 39) .
Instead, plaintiffs seize upon new, unpleaded statements by Mr. Chambers on the August
2000 conference call that Cisco was "pleased with. Service Provider performance" and "progres s
in Optical ." Opp. at 35 . At the outset, plaintiffs' last-minute attempt to assert claims not allege d
6 Plaintiffs discuss only two specific statements in fisc al 2000 : one relating to Cisco Capital andone relating to Monterey . Opp. at 33-34. For the reasons discussed below (in Sections V.C.3 andVI, respectively), plaintiffs fail to adduce evidence of falsity or scienter as to those statements .
9REPLY IN SUPPORT OF CISCO, CHAMBERS, AND CARTER'S MOTION FOR SUMMARY JUDGMENT Case No . C-0I-2041 8-JW
in the AC is improper, and should not be considered.? Moreover, the cited statements are nothing
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more than non-actionable expressions of optimism. Calpine, 288 F. Supp. 2d at 1088 .
Apart from those defects, plaintiffs fail to show that the comments were false or made wit h
scienter.8 Their entire argument is premised on the notion that Mr . Chambers "omitted material
information about [Cisco's] slowing SP business" (Opp . at 35), yet they cite no supporting
evidence . See Far Out Prods., Inc. v. Oskar, 247 F.3d 986, 997 (9th Cir. 2001) (a non-movant's
"mere assertion . . . is not in itself sufficient to prevent summary judgment") . In fact, the record
reveals that plaintiffs' argument is pure fiction : Cisco's actual- results and internal projections
demonstrate that, as of August 2000, the SP and Optical businesses were booming .
As noted in the moving papers, in August 2000 Cisco had just completed two consecutiv e
years in which the SP business had doubled In fiscal 2000, product bookings grew from about
$4 billion to slightly more than $8 billion . Ex. 13 at 10 . Bookings for the fourth quarter of fiscal
2000 (May-July 2000) were even more impressive, showing 119% growth over the same period in
the prior year . See Ex. 4 at 9; Ex. 13 at 10 . The Optical group finished fiscal 2000 with even more
dramatic growth (more than 2500%) . Ex: 13 at 12 . Tellingly, plaintiffs simply ignore these facts .
Plaintiffs also disregard the undisputed fact that the Sales organization and the business
units (BUs) - which had consistently been too conservative in their forecasts - increased their
projections for both Optical and the overall SP business in August 2000. Ex. 13 at 7 . In light of
these data, plaintiffs cannot assail the accuracy of Mr . Chambers' comments, or dispute that he
was "extremely optimistic" about Cisco's position in the SP and Optical markets in August 2000
(Chambers Decl ., 1 28) . See, e.g., Cypress, 891 F. Supp. at 1375-76 .
In addition, plaintiffs concede that - in the summer of 2000 - much of Cisco's increase d
7In re Andrx Corp., Inc. Sec. Litig., 296 F. Supp. 2d 1356, 1367 (S .D. Fla. 2003) ("A plaintiffmay not amend his complaint through arguments in his brief in opposition to a motion forsummary judgment"), quoting Shanahan v. City of Chicago, 82 F.3d 776, 781 (7th Cir. 1996) .$ Plaintiffs argue the statements were made by "defendants" (Opp . at 35), but the document theycite shows that the speaker was Mr. Chambers. Ex. 2575 at 0091532. Hence, other defendants -even those who participated in the call - have no possible liability. In re Interactive Network; Inc.Sec. Litig., 948 F. Supp. 971, 972-73 (N .D . Cal . 1996) . The citation to Barrie v. Intervoice-Brite,Inc., 409 F.3d 653 (5th Cir . 2005), is inapposite . That case merely noted that, as a pleadin gmatter, a claim may be stated against a defendant who knows that another speaker has"knowingly uttered a false statement" but failed to correct it . Id. at 655-56 . Here, plaintiffs offerno evidence of a false statement, let alone another defendant's knowledge of such a statement .
10
REPLY IN SUPPORT OF CISCO, CHAMBERS, AND CARTER'S MOTION FOR SUMMARY JUDGMENT Case No. C-O1-20418 TW
investment in infrastructure (including the decision to ramp manufacturing capacity and procur e
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more inventory) wasfocused on the SP business . Opp. at 8, 11 . That fact confirms Cisco' s
"good faith" belief in the business and disposes of scienter . Apple, 886 F.2d at 1117 .
Plaintiffs' assertion that a dune 2000 Operations Review (P1. Ex. 1170) undermines Mr.
Chambers' statements regarding the strength of the SP business cannot withstand scrutiny. Opp.
at 35 . To begin, they cite no evidence that Mr. Chambers saw the document or was aware of its
contents, so it cannot be used to establish his scienter . See In re Splash Tech. Holdings, Inc. Sec .
Litig., 160 F. Supp. 2d 1059, 1080 (N.D. Cal . 2001) . 9
In any event, the Court will note that nothing in P1 . Ex. 1170 is even remotely inconsistent
I with Mr . Chambers ' comments . To the contrary, the document confirms that the SP and Optica l
businesses were performing spectacularly, the Sales organization expected that growth t o
continue unabated, and Cisco was devoting enormous resources to capitalize on the growth .' ° A
passing reference to the potential for a future "investment" slowdown in one subsegment (Pl . Ex.
1170 at 546668), buried in a 124-page document, does not contradict statements that Cisco was
"pleased" with its "Service Provider performance" or its "progress in Optical ." See Ronconi, 253
F.3d at 434 (existence of "problems" or "difficulties" is not inconsistent with positive statements
or expectation of revenue growth) ; Clorox, 353 F.3d at 1134-35 (management's knowledge of
"unbelievably high" level of trade promotions did not show they knew earnings would decline) ;
In re Nokia Corp . Sec. Litig., 2006 WL 851155, *35 (S .D.N.Y. Mar. 31, 2006) (concerns about
one product area do not undermine positive statements about "overall product portfolio") .
The document also illustrates that Cisco was constantly monitoring a myriad of factors
potentially affecting its business, and confirms the reasonableness of its analyses and projection s
9 Nor do plaintiffs claim that Mr. Chambers was aware of concerns supposedly raised by acontract manufacturer, Solectron. Opp. at 35. Indeed, they cite a document that post-dates hiscomments, so by definition it cannot establish falsity or scienter . Yourish v. California Amplifier,191 F.3d 983, 997 (9th Cir. 1999) . Furthermore, plaintiffs misstate the Solectron document (Ex .2013), which discusses a single product and in no way indicates SP demand was declining .
10 Plaintiffs cite Ex. 2576, but those are just a few pages of the document ; the entire presentation isEx. 1170. The document shows, inter alia, that. overall SP business would continue experiencing"tornado" - i.e., explosive growth - conditions (Ex . 1170 at 546665) ; the market was expected toimprove or remain strong in each geographic theater (id. at 546662); enormous opportunities wereavailable in the Optical space (id. at 546669, 546687); and, after considering all relevant data,Sales expected SP bookings to double again in fiscal 2001 (id. at 546685, 546691-93) .
11REPLY IN SUPPORT OF CISCO, CHAMBERS , AND CARTER'S MOTION FOR SUMMARY JUDGMENT Case No . C-O1-20418-JW
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(which took those factors into account) . Cypress, 891 F . Supp . at 1380-81 (in granting summary
judgment, cou rt held that alleged `pull-ins" did not undermine positive statements where the
company considered those transactions and assessed their impact) ." Accordingly, defendants are
entitled to summary judgment with respect to the statements chal lenged in the pleadings (AC IN
79, 96, 119, 120), and with respect to those challenged for the first time in the Opposition .
C. Plaintiffs Also Fail to Raise a Genuine Issue of Fact as to Any StatementMade in the Second Quarter of Fiscal 2001 (November 2000 - January 2001)
1. The Alleged Forward-Looking Statement s
a. Plaintiffs Cannot Overcome the Statutory Safe Harbor
Defendants have demonstrated that projections made on the November 6, 2000 conference
call and the December 4, 2000 analyst conference (AC IT 97, 98), are protected by the Reform
Act's safe harbor . Def. Mem. at 40-41. Plaintiffs do not dispute that listeners were properly
advised the statements were forward-looking and were told to review Cisco's most recent 10-K
and 10-Q for a discussion of pertinent risk factors (Ex. 26 at 2 ; Ex. 68 at 2 ; Chambers Decl ., ¶ 35) .
Nor do plaintiffs contest that those detailed risk factors (Ex . 71 at 14-23, Ex. 72 at 27-40)
constitute "meaningful cautionary language ." These undisputed facts mandate judgment in
defendants' favor with respect to forward-looking statements made on November 6 or December
4. 15 U.S .C . § 78u-5(c)(1)(A)(i) ; Clorox, 353 F.3d at 1132-33 .1 2
Plaintiffs' suggestion that defendants' projections were not forward-looking (Opp . at 45)
is frivolous . A statement regarding anticipated revenues , earnings or other future results "is self-
evidently a forward- looking statement." In re Clorox Co. Sec. Litig., 238 F . Supp . 2d 1139, 1145
(N.D. Cal . 2002), aff'd, 353 F.3d 1125 (9th Cir. 2004). Moreover, the relevant allegations are
contained within a section of plaintiffs ' pleading entitled `Allegedly Untrue Forward-Looking
1' Similarly, reference to purported concerns regarding the "traction' of two Optical products(Opp. at 35) is unavailing, since plaintiffs cannot dispute that : (1) the Optical group still grew bymore than 2500% in fiscal 2000, which more than justifies Mr. Chambers' alleged statements ;and (2) even after considering those issues, Cisco still expected its Optical business to grow bymore than 300% in 2001. Ex. 13 at 12 . See Cypress, 891 F. Supp. at 1380-81 .12 Because it is undisputed that the safe harbor was properly invoked, unpleaded challenges toother statements supposedly made on November 6 and December 4 - i. e ., regarding growth in theSP market or arding inventory turns (Opp . at 40) - are also barred . Clorox, 353 F.3d at 1134 .Such statements are forward-looking because the ultimate "truth or falsity . . . cannot be discerneduntil some point in time after the statement is made ." Splash, 160 F. Supp. 2d at 1067-68 .
12REPLY IN SUPPORT OF CISCO, CHA MBERS, AND CARTER'S MOT ION FOR SUMMARY JUDGMENT Case No . C-01-20418-JW
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Statements Unaccompanied by Meaningful Cautionary Statements." See AC IT 97, 98 .
Plaintiffs fare no better with the argument that the safe harbor is inapplicable because th e
statements were "made with actual knowledge that they were false or misleading ." Opp. at 46 .
Setting aside for the moment that plaintiffs adduce no evidence of such "actual knowledge," their
argument is based on a fundamental misunderstanding of the statute . Congress made clear that a
forward-looking . statement is not actionable if either (a) the safe harbor applies, or (b) "plaintiff
fails to prove" actual knowledge . 15 U.S.C. § 78u-5(c)(1) . Thus , if (as here) the safe harbor
applies , then the Court 's inquiry is complete - judgment must be entered in defendants' favor
regardless of any claims about defendants ' alleged state of mind . Clorox, 353 F.3d at 1134 ;
Miller v. Champion Enters. Inc., 346 F .3d 660 , 672 (6th Cir. 2003) . Only ifit is determined that
the safe harbor is inapplicable does the Court proceed to determine whether plaintiffs have
established that the statement was made with "actual knowledge" of falsity . Id. See also Splash,
160 F . Supp. 2d at 1069 n.4 (rejecting the very argument made by plaintiffs, on grounds that it is
inconsistent with the statutory language and legislative history) . Because plaintiffs cannot clear
that hurdle , defendants are entitled to judgment in their favor on the forward-looking statements .
b. No Evidence of Actual Knowledge of Falsity
i. November 200 0
Even if plaintiffs could overcome the safe harbor, the Opposition fails to identify evidence
showing that any defendant made a forward-looking statement knowing it was actually
unattainable . Ronconi, 253 F.3d at 429 . With respect to earnings and revenue projections on the
November 6, 2000 conference call - i.e., revenue growth of 50-60% in fiscal 2001, with EPS in
the range of $0 .74-0.80 (AC 197 ; Ex. 26 at 32) - Mr . Carter (the speaker) has testified he
believed those statements were accurate . Carter Dep . at 355-59. It is also undisputed that the
statements came on the heels of a record quarter (in which overall bookings were 112% of plan),
the guidance was more conservative than contemporaneous internal forecasts (see, e .g., Ex. 15 at
7; Ex. 16 at 7 ; Ex. 60 at *8), and, at the time of the statements, Cisco was continuing to spend
money building its infrastructure to accommodate that expected growth. See Def. Mem. at 41 .
In light of these facts, plaintiffs simply cannot carry their burden of showing that there is a
13REPLY IN SUPPORT OF CISCO , CHAMBERS, AND CARTER'S MOTION FOR SUMMARY JUDGMENT Case No . C-0 1 -20418-JW
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genuine issue as to whether the November 6 forecasts were actually known to be false . See
Ronconi, 253 F.3d at 430 . Indeed, they do not even make a real effort. The Court will note that
plaintiffs identify no internal forecast at odds with Cisco's guidance, or other document indicating
that the guidance was doubted internally - because there is none . Instead, the Opposition focuses
on a handful of isolated facts (i.e., U.S. Service Provider bookings being 17% below budget,
financing issues applicable to a subset of customers within that business, potential for "double
bookings") that plaintiffs now claim, with the benefit of hindsight, supposedly should have
indicated a slowdown in Cisco's business . See Opp. at 36-37, 42-43 . But, as a matter of law,
such issues do not come close to demonstrating actual knowledge of falsity . See, e.g., Ronconi,
253 F.3d at 434-35 (alleged "serious operational problems" not enough to show that projections
of increased revenues . could not be achieved) ; In re ESS Tech ., Inc. Sec. Litig., 2004 WL 3030058,
*10 (N.D. Cal . Dec. 1, 2004) (fact that company "faced competitive pressures" not enough to
show estimates were known to be false or could not be met) . To the contrary, where (as here)
defendants' guidance is consistent with internal projections, there is no genuine issue of fact .
Cypress, 891 F. Supp. at-1376, 1380-81 (granting summary judgment where guidance was
supported by internal forecasts, despite existence of adverse market conditions, pricing pressures,
increased competition, and reduced shipments resulting from "pull-ins"') . 1 3
Plaintiffs also apparently assail Mr. Chambers' November 6 statement that he expected the
overall SP business to "reaccelerate" and post "double-digit booking growth" in the second
quarter. Opp. at 36-37. Not only is this theory absent from the AC, but plaintiffs do not even
purport to show that Mr. Chambers knew this projection was unachievable . Indeed, given the
undisputed facts - e.g., that overall sequential SP bookings growth in the first quarter was 8%
(with 14% growth outside the U .S .), a huge sequential increase was projected in the U .S . market,
and the SPLOB was forecasting an overall 18% sequential increasefor the following quarter
(Ex. 17 at 7) - a prediction of "double-digit booking growth" in SP was extremely conservative .
Also fruitless is plaintiffs' newly concocted effort to transform a cautionary statement b y
13 It is telling that plaintiffs argue merely that, due to SP issues, "2Q01 was at risk." Opp. at 37.Even if they were correct, the existence of a "risk" does not begin to show that Mr . Chambers,Mr. Carter or anyone else knew that Cisco's forecasts could not be achieved . See Ronconi, 253F.3d at 437 ("[c]alling executives bad managers, or bad forecasters, does not plead fraud") .
14REPLY IN SUPPORT OF CISCO, CHAMBERS , AND CARTER'S MOTION FOR SUMMARY JUDGMENT Case No. C-01-20418,IW
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Mr. Carter on November 6, 2000 - that inventory "turns would not improve in the short term"
(Opp. at 40) - into a false projection. Plaintiffs want the Court to pretend that saying "turns will
not improve" can be construed to mean that "turns will stay the same." Id. However, because the
actual statement - on its face - indisputably proved to be accurate, plaintiffs have no possible
claim. In re Syncor Int'l Corp . Sec. Litig., 327 F. Supp. 2d 1149, 1170 n.10 (C.D . Cal . 2004) .
Even under plaintiffs' tortured construction, the assertion that Mr . Carter "knew" turns
would drop from 6.0 to 4 .7 in the next quarter (Opp . at 40) is pure fiction . In reality, estimates
were in a state of flux ; for instance, the key document cited by plaintiffs (Pl . Ex. 592) discusses a
number of potential turns calculations , ranging from 4.7 to 5 .5, and what needed to be done to
reach 6.0 (i.e . , to stay flat) . Plaintiffs also ignore a Manufacturing Business Review, dated
November 13 (one week after Mr. Carter's comments), forecasting turns of 5 .3 and again
identifying steps to be undertaken to achieve turns of 6 .0 . P1. Ex. 2592 at 0755086.14 The
November 14 board presentation also projected turns of 5 .3 in the second quarter, and 6 .0 in the
third quarter . Ex. 60 at *46 . In light of these analyses, plaintiffs cannot show that Mr . Carter had
actual knowledge that turns in the range of 6.0 were unattainable . Ronconi, 253 F .3d at 434-35 .
See also In re Adobe Sys ., Inc. Sec . Litig., 787 F . Supp. 912, 917 - 18 (N.D . Cal. 1992 ), aj'd, 5
F.3d 535 (9th Cir. 1993) (granting summary judgment and holding that "uncertain" or confl icting
internal projections did not render forward-looking statements actionable) .1 5
ii. December 2000
Likewise, plaintiffs fail to show that, as of the December 4 analyst conference (AC ¶ 98) ,
Mr. Chambers (or anyone else) knew Cisco would not meet previously-stated guidance for fisca l
2001 . Once again, plaintiffs merely point to a few purported areas of concern (Opp . at 41-43) ,
without establishing that those issues actually led Mr. Chambers to conclude that prior forecast s
14 A turns calculation of 6 .0 means that inventory is turning over (on average) 6 times per year, oronce every 2 .0 months . Turns of 5.3 means that inventory is turning over every 2 .26 months - ora difference of about 8 days . Plaintiffs fail to proffer evidence showing that such a mino rdifference would have been material . See Schuster, 2000 WL 33115909, *7 .15 For the same reasons, there is no genuine issue as to Mr . Carter's purported affirmation of thatguidance several weeks later . Opp. at 40. In addition, plaintiffs do not even provide competentevidence of what he actually said in that later conference, relying on a document (which counselapparently prepared) for which no evidentiary basis is provided. See Cypress, 891 F. Supp. at1374 ("the existence of a statement has to be established before it can be proved fraudulent") .
15
REPLY IN SUPPORT OF CISCO , CHAMBERS , AND CARTER 'S MOTION FOR SUMMARY JUDGMENT Case No . C-01 -20418-JW
were unattainable . Schuster, 2000 WL 33115909, *7; In re Duane Reade Inc. Sec. Litig., 2003
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WL 22801416, *10 (S .D .N.Y. Nov. 25, 2003), a ''d, 107 Fed . Appx. 250 (2d Car. 2004) (three
weeks of disappointing sales data did not show projections for the quarter were known to be false) .
In fact, the evidence is uncontroverted that the supposed concerns - including the fact that
bookings in November 2000 were about 8% below budget and that U .S . SP bookings forecasts
were coming down (Opp. at 42) -- were fully vetted by management and taken into account, See,
e.g., Chambers Decl.,136; Ex. 15 at 7 ; Ex. 16 at 7 .16 Plaintiffs cannot dispute that, even with
those factors, internal analyses universally showed that the Company's overall business was still
strong, and that Cisco remained on track to meet or exceed its revenue and earnings forecasts .
See Cypress, 891 F. Supp. at 1376 . As of December 8 (four days after the challenged statements),
growth for the full year was still projected to be in the range of 68-79%, after current market
conditions were assessed and bookings forecasts were reduced. Ex. 17 at 7 .1 7
Plaintiffs' throwaway contention that there is an " issue" as to whether such forecasts wer e
"reliable" (Opp. at 43) is not only unsupported by evidence, but is legally irrelevant . See Cypress,
891 F. Supp. at 1375-76 (granting summary judgment and rejecting argument that company's
"forecasting process had broken down") . The question is not whether Cisco could have done a
better job of forecasting; instead, plaintiffs must offer evidence establishing that its forecasts were
known to be wrong . Id. ; Ronconi, 253 F.3d at 431-32 . Plaintiffs cannot show that Mr. Chambers
(or anyone else) believed that to be the case -- much less offer a rational explanation for why Cisco
would prepare and disseminate internally bogus projections, or make business decisions based
upon data known to be false . See Apple, 886 F.2d at 1117.18 Indeed, plaintiffs ignore that, even a
16 Moreover, plaintiffs admitted in discovery (Ex . 123 at 7-8) they have no evidence that "doublebookings" actually inflated Cisco's projections . See Cypress, 891 F. Supp. at 1379 (grantingsummary judgment despite allegation that backlog was inflated by "double bookings," whereplaintiffs presented no evidence showing "double bookings" were included in backlog numbers) .17 In light of the undisputed fact that Cisco's public statements were more conservative than itsinternal analyses, it could meet or exceed 50-60% growth for fiscal 2001 even if business fellshort of Sales or BUtargets See Chambers Decl ., ¶J 35, 36 . Plaintiffs do not address this point .For this reason, plaintiffs' assertion that one mid-level executive (Rick Timmins) indicated that inearly December he became "concerned" that Cisco might miss its internal bookings forecasts(Opp. at 43), is immaterial . The December 8 forecast demonstrates that Cisco could fall short ofinternal projections and still meet or exceed guidance . See Cypress, 891 F. Supp, at 1384-81 .18 Plaintiffs admit that Cisco' s sales in November and December 2000 were er than the yearbefore, but argue that - since Cisco was projecting 50-60% year-to-year growth "[i]t was therate of growth that was at issue ." Opp. at 44 (emphasis in original) . For once, plaintiffs are right .
16REPLY IN SUPPORT OF CISCO, CHAMBERS, AND CARTER'S MOTION FOR SUMMARY JUDGMENT Case No . C-01-20418-JW
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month later, Cisco was still projecting results in line with analysts' expectations . Ex. 61 at *49 .
iii. January 2001
Finally, plaintiffs argue that, on January 10, 2001, Mr. Chambers misstated Cisco' s
expected acquisition activity over the following twelve months (Opp. at 44), even though the A C
makes no reference to any such alleged misstatement . See Andrx, 296 F. Supp. 2d at 1367. Even
if the Court were to consider this new theory, it gets plaintiffs nowhere .
Mr. Chambers said he would "be surprised" if Cisco did not acquire at least 20 companies
(the same number as in the prior year) in 2001 but, in light of economic conditions, acquisitions
were likely to be "smaller" and Cisco would be "more selective ." Pl. Ex. 1834 at 91870-71 . The
comment was clearly forward-looking (Splash, 160 F. Supp. 2d at 1067-68), and the evidence is
uncontroverted that Mr. Chambers believed it to be true . Chambers Dep . 372-73 .
Plaintiffs' assertion that the statement was inconsistent with a presentation made b y
another executive to the board of directors (Opp . at 44) is disingenuous . On January 9 (the same
day the board was told Cisco would meet analysts' estimates), the Finance group recommended
that Cisco slow its acquisitions "to immediately accretive transactions" (Pl . Ex. 711 at 64282) - in
other words, to be "more selective," precisely as Mr . Chambers said the next day . See Chambers
Dep. 376-77 . Indeed, plaintiffs conveniently omit that, at the same time, the board was advised
there were a number of "[a]ttractive optical acquisition targets available ." Pl. Ex. 711 at 64250.
There is no incongruity between Cisco being more selective and still expecting to complete 20
acquisitions - let alone evidence that Mr . Chambers knew such a goal was unattainable . In re
Portal Software, Inc. Sec. Litig., 2005 WL 1910923, * 14 (N .D. Cal . Aug. 10, 2005) .
2. Statements Regarding Strength of Business and Demand
Plaintiffs fare no better when it comes to alleged misstatements of existing or historica l
fact during the second quarter of fiscal 2001 . In fact, the Opposition is silent as to virtually all of
the relevant allegations (AC ¶¶ 84, 85, 87 , 122-128), identifies no evidence showing that any
statement regarding the strength of the business was false or made with scienter, and concede s
November 2000 bookings were up 97% over the prior year (Chambers Decl ., ¶ 36), and December2000 bookings were up 74% (Exs.120 at 017025 ; 121 at 078156) - meaning that, even using themetric plaintiffs want to stress, Cisco was on track to meet or exceed its guidance .
17REPLY IN SUPPORT OF CISCO, CHAMBERS, AND CARTER'S MOTION FOR SUMMARY JUDGMENT Case No. C- O1-20418-JW
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that there is no t riable issue as to such purported statements . Cambridge, 227 F.R.D. at 336 .
Plaintiffs do make reference to Mr . Volpi's November 3, 2000 statement that he had not
"seen any signs of a slowdown" (AC ¶ 82), but bury it in a footnote . Opp. at 41 n .42. They are
unable to controvert Mr. Volpi's testimony that he was familiar with the entirety of the
Company's business and believed the statement to be entirely accurate . Volpi Dep. at 62-63 . Nor
do plaintiffs address the fact that Mr . Volpi's November 14 presentation to the board of directors
confirms that view, by showing first quarter bookings to be 112% ofbudget and projecting
further growth in the quarters ahead. Ex. 60 at *6 . As a result, there is no issue of fact as to the
falsity of Mr. Volpi's statement or his scienter . See Schuster, 2000 WL 33115909, *8 .'9
Equally ineffectual is the challenge to Mr . Chambers' statement that "overall linearity o f
orders . . . was good" in the first quarter . Opp. at 38-39. Not only is this allegation improperly
made for the first time in the Opposition, but the statement is too generic to be actionable . Splash,
160 F. Supp. 2d at 1077 . In any event, plaintiffs fail to identify evidence showing that the
statement was false or made with scienter . In fact, it is undisputed that 42% of Cisco's quarterly
orders were booked in August, 27% in September, and 31 % in October (Ex . 50 at 2) - in other
words, "overall linearity of orders . . . was good,"just as Mr . Chambers said .
Finally, plaintiffs cannot base a claim on the unpleaded allegation that a non -defendant ,
Kevin Kennedy, falsely stated in November 2000 that cable and DSL "have become strong
businesses." Opp. at 3S.20 First, such a statement is too generic to support a claim. Splash, 160
F. Supp. 2d at 1077 (description of business as "strong," "solid," "improved" or "well positioned"
not actionable) . Second, plaintiffs fail to show that the statement was false . It is undisputed that
the DSL business had grown 89% in fiscal 2000, and the cable business had grown 307% . Ex. 16
at 12, 13 . The fact that bookings in those businesses showed declines in the first quarter (and that
Mr. Kennedy exhorted his team in colorful emails to focus on improving sales) does not detract
from the progress that had been made or show that they were not, in fact, strong - especially sinc e
19 Plaintiffs ' claim that Mr. Volpi "admitted he knew of the downturn by September 2000" (Opp .at 41 n.42) is pure fabrication . The cited portion of his deposition actually says that he becameaware of financing issues affecting a small sub -segment of the SP market in the latter part of2000 , but did not conclude it had a negative impact on Cisco 's business . Volpi Dep . at 86-88 .20 Even if Mr . Kennedy's statement were actionable (which it is not), it would not be att ributableto any of the individual defendants . Interactive Network, 948 F. Supp . at 972-73 .
18REPLY IN SUPPORT OF CISCO, CHAMBERS, AND CARTER'S MOTION FOR SUMMARY JUDGMENT Case No . C-01-201418-JW
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Mr. Kennedy's group was continuing to forecast substantial growth in both businesses for the
second quarter and the fiscal year (id.) . Cypress, . 891 F. Supp. at 1375-76 (negative memoranda
did not show statements were false or made with scienter, especially where internal forecasts were
still strong) . Third, plaintiffs fail to show that Mr. Kennedy made the statement with scienter .
Indeed, their scienter argument is based on the theory that his email demonstrates he "knew" that
"weakness in DSL and cable" would "contribute to the 2Q01 revenue miss" (Opp . at 38), which is
contrary to the undisputed evidence . Just one week after his statements, Mr . Kennedy's group
was projecting substantial second quarter growth in both DSL and cable bookings . Ex. 16 at 12,
13 . Moreover, plaintiffs do not allege that Mr . Kennedy sold stock or otherwise benefited from
any alleged misstatement; as noted above, "courts do not presume that corporate officers make
false statements simply out of spite or to impress others ." Schuster, 2000 WL 33115909, *7 .
V. PLAINTIFFS' OPPOSITION FAILS TO OFFER EVIDENCE THAT CISCO'SFINANCIAL RESULTS WERE DELIBERATELY MISSTATED
A. Plaintiffs Have Not Even Tried To Address The Absence Of Scienter ForTheir Accounting Claims
Plaintiffs avoid any meaningful discussion of scienter with respect to their accountin g
claims because they have nothing meaningful to say. They do not dispute that, given the fraud
alleged - involving different aspects of accounting at different times, and separate teams of people
with segregated duties - plaintiffs must show that dozens of employees were actively engaged in
intentional wrongdoing and knew when and by how much to manipulate various entries to arrive
at the supposedly desired result each quarter . See Def. Mem. at 48. With no evidence to support
such an implausible scenario, plaintiffs just ignore it. See Schuster, 2000 WL 33115909, *4 .
Nor do plaintiffs address, much less dispute, the evidence that the process used by Cisco to
determine its financial results - involving experienced personnel, many of whom were CPAs,
supervising teams of over 100 accountants -- belies the proposition that the Company did anything
except try to perform its accounting correctly . See Mathews v. Centex Teleinanagement, Inc.,
1994 WL 269734, *4-6 (N .D. Cal . Jun. 8, 1994) (granting summary judgment where finance
organization performed a detailed review of accounting and reserves). The evidence is also
uncontroverted that the recommendations made by Cisco's accounting staff at quarterly clos e
19REPLY IN SUPPORT OF CISCO , CHAMBERS, AND CARTER'S MOTION FOR SUMMARY JUDGMENT Case No. C-131-20418-JW
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meetings were accepted and not changed by any defendant or any other senior executive of Cisco .
Def. Mem. at 49 (citing evidence) . Put simply, there is no evidence that any defendant dictated
Cisco's accounting determinations, changed numbers, or manipulated the results in any fashion .
Equally revealing is the Opposition's failure to deal with the fact that, following Cisco's post-class
period announcement of an inventory writedown and other charges, the SEC specifically looked at
the adequacy of Cisco's accounting and elected to take no action . Ex. 69.
Because they lack evidence that anyone deliberately misstated Cisco's results, plaintiff s
engage in misdirection by arguing that various aspects of Cisco's accounting were incorrect . See
Opp. at 46-69. Plaintiffs even assert - entirely incorrectly - that the "only dispute" is whether
Cisco's recognition of revenue was proper (e.g., Opp. at 49) or whether its reserve methodology
was the "best" one (e.g., Opp. at 62) . While Cisco believes its accounting was correct (and the
SEC apparently agreed), these are not the questions raised on this motion and plaintiffs' lengthy
discussion misses the point . The reason this motion should be granted is that plaintiffs do not
have evidence suggesting that defendants deliberately misstated Cisco's financial results .
Indeed, rather than offering evidence of scienter, the Opposition contains a generi c
discussion of pleading cases suggesting that allegations of "numerous and significant" GAAP
violations may avert a motion to dismiss . See Opp. at 74-75 . But this case has undergone five
years of discovery . Now is the time for evidence , yet not a single document or testimony of a
single witness is cited in plaintiffs' scienter section . See id. Thus, the cases that are on point -
but which plaintiffs do not address- are those granting summary judgment on accounting claims
due to the absence of evidence of scienter . See Worlds of Wonder, 35 F.3d at 1418 (emphasizing
that "plaintiffs cannot defeat summary judgment merely by accusing WOW of trying to post
favorable financial figures") ; In re Software Toolworks, Inc . Sec. Litig., 50 F.3d 615, 628 (9th Car.
1994) (summary judgment on revenue recognition claims for lack of scienter) ; Mathews, 1994
WL 269734, *4-6 (summary judgment granted on accounting claims for lack of scienter) .z '
21 Plaintiffs also gloss over the fact that none of their accounting claims are material unless theyare aggregated . See Def. Mem. at 46. Because plaintiffs' case depends on such aggregation, italso necessarily depends on citing evidence that a defendant somehow masterminded a scheme tomanipulate small items to reach a desired result. Plaintiffs have no evidence to support this .Indeed, their claim is a series of inherently contradictory theories : inventory reserves wereallegedly understated in three quarters of the class period (Q300, Q400 and Q 101) but not thre e
20
REPLY IN SUPPORT OF CISCO, CHAMBERS , AND CARTER 'S MOTION FOR SUMMARY JUDGMENT Case No . C-01-204184W
B. Plaintiffs Have No Evidence Of Scienter Concerning Inventory Reserve s
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Plaintiffs fail to address the fundamentally illogical nature of their inventory claim, whic h
is premised on the notion that defendants procured billions of dollars of inventory on materials
that they knew Cisco would be unable to use . Plaintiffs' voluminous Opposition never provides
any rational reason why defendants would do so . To the contrary, plaintiffs' expert has conceded
that Cisco was forecasting increased demand for its products throughout the class period. Regan
Dep. at 268. As Judge Conti recently observed, "[i]ncreased inventory levels would be exactly
what one would expect if executives forecast strong demand." In re Lexar Media, Inc. Sec. Litig.,
2005 WL 1566534, *5 (N .D. Cal . Jul . 5, 2005) . See also Worlds of Wonder, 35 F.3d at 1420 ("If
demand actually had dried up, the plaintiffs cannot explain why [company's] entire senior and
middle management would have lied to themselves about the company's business outlook") .
Nor is there any disagreement that the reserve was set by the same accounting personnel
utilizing the same consistent procedures employed for many years, and all of them testified they
believed Cisco's net inventory was a reasonable estimate of what it would consume over the next
twelve months. See Def. Mem. at 52-60 The SEC apparently agreed - it looked specifically at
Cisco's inventory and inventory reserves following the post-class period downturn it experienced,
and was satisfied that Cisco's accounting was timely and correct . Id. at 45. So was PwC. Id.
Indeed, plaintiffs do not contend the reserve was misstated during the first two quarters o f
the class period (Q100 and Q200), or in the last quarter (Q201) . Instead, for the intervening
quarters, they argue that it would have been "best" if Cisco had used an alternative method to
estimate future demand and inventory consumption, citing the "build plan" rather than the MDS .
Opp. at 62. But even plaintiffs' expert concedes that reserves in other periods - which used the
MDS, not the build plan -- were correctly stated. Regan Rpt. (Ex. 87) at 27 . And he testified the
build plan was not a reflection of future demand or inventory needs : "it's my understanding that
[the build plan] represents what Cisco knew it could build and ship, but didn't necessaril y
others (Q100, Q200 and Q201) ; third party guarantees were allegedly accounted for improperlyfor a while (fiscal 2000), but not after ; sales-lease reserves were underestimated (fiscal 2000),then overestimated (Q1 0 1) and then right (Q201); non-equipment loans were properly reservedthrough the first four quarters of the class period, then under-reserved (Q101), then correct . Asnoted in defendants' opening brief, there is no evidence that any defendant was directing thesekinds of stops and starts, a point the Opposition does not contest . See Def. Mem. at 49 .
21REPLY IN SUPPORT OF CISCO, CHAMBERS, AND CARTER 'S MOTION FOR SUMMARY JUDGMENT Case No . C-01-20418-JW
represent what was going to be the demand of the clients, customers ." Regan Dep. at 390 22
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In any event, summary judgment is proper because, at most, "[t]he issues raised by
plaintiffs are claims about what defendants should have done . They do not establish anything
more than differences in judgment and criticism by hindsight ." Mathews, 1994 WL 269734, *2 .
Reserves "are essentially predictions about the future" - the fact that such a prediction "turns out
to be wrong does not mean it was fraudulent when made." Id. at *6. They are fraudulent only "if,
when they were established, the responsible parties" knew or recklessly disregarded that "they
were derived in a manner inconsistent with reasonable accounting practices ." Id. Where a
defendant's method fell within a range of reasonableness, "summary judgment is appropriate
[because] the jury need not be given the task of deciding whose proffered method is more
reasonable ." Id., citing Adobe, 787 F. Supp. at 920. Because the Opposition fails to identify such
evidence for each of the periods in question, summary judgment is warranted.2 3
1 . Plaintiffs' Opposition Essentially Abandons The Argument ThatInventory Reserves Were Deliberately Misstated In Q3 Of Fiscal 2000
Plaintiffs make no effort to show that any defendant did not genuinely believe that Cisco' s
inventory reserve was a reasonable estimate in Q300 (ending in April 2000) . See Opp. at 61-67 .
Since it was set precisely the same way as in earlier periods - which plaintiffs do not challenge ---
and Cisco had not yet begun to procure higher levels of inventory utilizing "stretch" plans ,
plaintiffs' failure to discuss this period is fatal . See Def. Mem. at 53-54 .
22 Plaintiffs' confusion over this issue stems from an apparent inability to correctly interpret theirown expert's report. Mr. Regan assumed the MDS-based reserves for Q200 were accurate inconducting his calculations for Q300 and beyond - i .e ., he took the Q200 reserve and simplyincreased it by the same percentage that the difference between the build plan and the MDS hadincreased in Q300. Regan Rpt. at 109. This is completely different from using the build plan asan estimate for demand in calculating reserves, and confirms that plaintiffs' "best" methodologyis not supported by a single witness or expert, including their own . Indeed, the MDS has alwaysbeen higher than the build plan because it is a 12-month estimate of inventory needs (bothrevenue and non-revenue generating), whereas the build plan reflects, the amount of shippablerevenue-generating products Cisco must build in the short-term (current quarter and next) toachieve its base plan goals with no upside . See Kelly Dep. at 84 .23 Moreover, plaintiffs are still unable to state what particular inventory was supposedly"excess" each quarter - they do not identify the type of inventory (raw materials, WIP, finishedgoods) or the products to which they relate . Since reserves were individually set by part forspecific products, the absence of such information is itself fatal . See In re Cirrus Logic Sec.Litig., 946 F. Supp. 1446, 1461-63 (N .D. Cal. 1996) (granting summary judgment where plaintiffsfailed to show that reserves for specific products were unreasonable, and denying surrunaryjudgment for products as to which plaintiffs had come forward with specific evidence) .
22
REPLY IN SUPPORT OF CISCO , CHAMBERS, AND CARTER ' S MOTION FOR SUMMARY JUDGMENT Case No . C-01-20418-JW
2. The Argument That Cisco Knew It Was Procuring More InventoryThan It Could Use In Q4 Of Fiscal 2000 Is Unsupported By Evidenc e
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Nor does the Opposition cite evidence that Cisco's accounting group or any defendan t
deliberately misstated inventory or inventory reserves in Q400 (ending in July 2000) . Instead,
plaintiffs note in passing that the inventory reserve percentage declined from 39% in Q300 to 36%
in Q400 (Opp. at 63), despite undisputed testimony that the percentage fluctuates from quarter-to-
quarter by virtue of the normal reserve analysis and the particular inventory on-hand or on-order.
See Def. Mem. at 47 (citing evidence) ; Hartman Dep. at 45 ("reserves aren't calculated based on
what percent of inventory they are . That's just'a statistic that's calculated after - you've built
your reserves up from the bottom") . In fact, the percentage in Q400 was the exact same in Q499
(as to which plaintiffs have completely dropped their claims of fraud), . and it was actually lower in
other periods that plaintiffs do not challenge . See Def. Mem. at 47; Regan Rpt . (Ex. 87) at 102 .
Plaintiffs' observation that Cisco began to procure certain materials to stretch plans (for
certain products) in mid-June 2000 is equally unavailing . There is no evidence that anyone
believed in July 2000 that the additional inventory Cisco had just started to order in June would
become "excess" within a year ; to the contrary, given that Cisco's revenues, bookings and
forecasts were increasing, such a belief would have been irrational. See Def. Mem. at 55-5 6
(citing evidence). Plaintiffs never even try to identify what components Cisco purchased
beginning in mid-June had become excess by July, much less that anyone at Cisco believed that .
The absence of such evidence is fatal to plaintiffs' claim for the fourth quarter of fiscal 2000 .24
3. Plaintiffs' Argument Concerning the First Quarter Of Fiscal 2001 IsEqually Illogical And Fails For Lack Of Scienter
The same evidence is lacking with respect to Q 10 1 . Revenues grew to $6 .52 billion, and
net inventory increased to $1 .956 billion . Def. Mem. at 56 . Plaintiffs' expert contends that thi s
amount was $75 million too high - in other words, even accepting his argument, net inventor y
would have been $1 .881 billion. Regan Rpt. (Ex. 87) at 27 ; Def. Mem. at 56-57 . Needless to say ,
24 Cisco's net revenue in Q400 was $5 .72 billion, while net invento ry was $1 .23 billion . Def.Mem. at 55. In revenue dollars (assuming 75% margin), this means Cisco 's inventory amountedto about $4.92 billion, or less than one quarter's worth of sales . Since all parties agree the netinventory balance need only reflect Cisco ' s estimate of what would be consumed over the next 12months, plaintiffs cannot possibly show that Cisco believed additional invento ry should have beenwri tten off as somehow not likely to be used . See Worlds of Wonder, 35 F.3d at 1417 .
23
REPL Y IN SUPPORT OF CFSCO, CHAMBERS, AND CARTER'S MOTION FOR SUMMARY JUDGMENT Case No. C-O1-20418-JW
plaintiffs proffer no evidence establishing that the accounting personnel responsible for setting th e
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reserve were deliberately reckless in failing to increase the reserve by this tiny amount - indeed ,
plaintiffs do not even try to identify what components or products constitute this small difference .
Recognizing this fatal defect, plaintiffs scour defendants' voluminous production in a n
attempt to characterize a few documents in a way that bears on Cisco's reserve . See Opp. at 64-
65. But tellingly none of these documents comment on Cisco's reserves at all (in fact, most were
written in Q201 or later, when plaintiffs concede the inventory reserve was correctly stated), and
in most cases they were not even shown to the authors during their depositions. See Def. Mem .
at 59. Indeed, when asked the relevant questions about reserves, these witnesses testified that they
firmly believed that they were properly estimated . See id. at 56-60 (citing testimony).2 5
Moreover, no matter how construed, these documents are insufficient to create a genuine
issue of fact concerning an accounting estimate . As the Ninth Circuit has held, the issue is not
whether there is some conflicting information, but instead whether a defendant's resolution of the
accounting issue presented was such "an extreme departure from reasonable accounting practice"
to amount to fraud. Worlds of Wonder, 35 F.3d at 1426 . See also Schuster, 2000 WL 33115909,
*4 (conflicting information does not defeat summary judgment) ; In re Sofware Toolworks, Inc.
Sec. Litig., 789 F. Supp. 1489, 1505 (N.D. Cal. 1992), aff'd in part, rev'd in part on other
grounds, 50 F.3d 615 (9th Cir . 1994) (noting that every accounting case has "some adverse or
inconsistent information that must be evaluated," but dispositive question is whether resolution
represents "such an extreme departure from the standards of ordinary care" as to be fraudulent) .
As Judge Legge observed in granting summary judgment relating to reserves :
25 Plaintiffs also mischaracterize these documents . See Def. Mem. at 58-59. To cite but oneexample, plaintiffs' assertion that Mr . Pond's November 3, 2000 e-mail (Pl . Ex. 591) is a critiqueof Cisco's decision to use stretch forecasts is not supported by the document, a point defendantsmade in their opening brief that plaintiffs just ignore . Def. Mem. at 59-60 n .53 . Mr. Pond'sstatement related to how Cisco was executing on its inventory procurement, referring to unusedcapacity payments and loans to suppliers as a "train wreck waiting to happen." Despite hisfrustration over this execution issue, Mr . Pond had no doubts about Cisco's ability to consume itsnet inventory over the next year . Pond Dep. at 199-200. Plaintiffs do not address that testimonyand never even try to justify their failure to show the document to Mr . Pond. Similarly, plaintiffs'misportray two documents, both written after Q1 01 (one in Q301 and the other in Q201), tosuggest that Cisco's bookings would meet stretch plans only twice per year . Opp. at 64. In fact,the documents - written by manufacturing employees with no responsibility for bookings - reallyindicate that manufacturing may only be able to acquire enough parts to meet stretch goals a fewtimes per year due to component shortages . See, e.g., P1. Ex. 367 at 0603263 ; Def. Mem. at 59 .
24REPLY IN SUPPORT OF CISCO, CHAMBERS, AND CARTER' S MOTION FOR SUMMARY JUDGMENT Case No. C-61-20418-JW
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Plaintiffs point to certain evidence in the record, and to certain discussions within thecompany and with KPMG, which could lead to a conclusion that the reserves mighthave been higher. And plaintiffs point to certain write-off requests that were notacted upon immediately and to changes in the aging of certain receivables . Whileplaintiffs may be correct as a matter of hindsight - that is, that the receivable reservemight have been increased earlier - those differences of opinion do not rise to thelevel of misstatements or material omissions.
Mathews, 1994 WL 269734, *4 . That is precisely the case here.
There is no evidence that anyone purposefully understated the reserve by $75 million, and
Cisco's belief that it would consume its net inventory is entirely consistent with its forecasts and
infrastructure investments made that very quarter (Def. Mem. at 57, citing evidence) . Indeed, the
evidence is uncontroverted that Cisco would have consumed all its net inventory over the next
twelve months had business not unexpectedly declined by over 30% in Q301 . See id. at 60 .
C. Plaintiffs Have Failed To Offer Evidence Of Scienter On Their RevenueRecognition And Reserve Claims
1. No Scienter For Plaintiffs' Unpleaded Future Returns Reserve Clai m
Plaintiffs never address scienter when discussing their unpleaded future returns reserve
claim.26 See Opp. at 50-54. As noted in defendants' moving papers, all fact witnesses have
testified that they believed that Cisco properly estimated its reserves for future returns (see Def.
Mem. at 63-64), and plaintiffs' expert concluded that there was no evidence that they were lying
or had faulty memories . Regan Dep. at 126-28. Instead, he speculated that "they could be wrong
because they have a misunderstanding or somebody told them something and they are believing
what somebody told them ." Id. That sort of conjecture - that Cisco's accounting personnel had a
"misunderstanding" or mistakenly "believed" that an appropriate process was followed - cannot
support a fraud case . See Worlds of Wonder, 35 F.3d at 1426. Plaintiffs do not address the point .
Instead, plaintiffs try to quarrel with the underlying accounting . Despite uncontroverted
testimony to the contrary, plaintiffs assert that Cisco did not estimate future returns at all prior to
26 Plaintiffs try to argue that they did plead the claim (Opp . at 54 n.49), but the cited portion of theAC (¶ 77(d)) concerns returns from two-tier dis tributors - a claim plaintiffs have abandoned. Thefuture returns reserve discussed in their Opposition is completely different and pertains solely toend-user customers . In any event, no matter how broadly it is read, ¶ 77 (d) does not apply to anyperiod other than Q400 . For that period , plaintiffs claim the reserve was understated by $4 6million (Ex. 88), an immaterial amount given Cisco's quarterly revenues of $5 .72 billion and netincome of $ 1 .2 billion . See Worlds of Wonder , 35 F.3 d at 1418 (no liability where accountingerror did not have a material impact on company financial statements taken as a whole ) ; Schuster,2000 WL 33115909, *26 (summary judgment proper where accounting claim was immaterial) .
25REPLY IN SUPPORT OF CISCO , CHAMBERS , AND CARTER'S MOTION FOR SUMMARY JUDGMENT Case No . C-0I-20418-JW
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April 2001 (when it created a separate reserve entitled "future returns reserve") . Opp. at 50-51 .
But this too is fraud by hindsight - particularly since nothing in FAS 48 or GAAP required Cisco
to explicitly name a reserve a "future returns reserve" at an earlier point, and a specific reserve
was created after the class period because the level of returns increased as a result of the economic
downturn . See Def. Mem. at 64 (citing testimony and documents) . That is precisely the type of
activity that should be expected in light of changing business conditions, and is not evidence of a
deliberate misstatement of prior reserves . Mathews, 1994 WL 269734, *6; In re John Alden Fin.
Corp. Sec. Litig., 249 F. Supp. 2d 1273, 1280-81 (S .D . Fla. 2003) .27
Nor can plaintiffs manufacture a claim by taking an e-mail from Jim MacCallurn, a newly-
hired young accountant, completely out of context. While plaintiffs emphasize a post-class period
e-mail he wrote to PwC on March 19, 2001 stating that Cisco had not reserved for future returns,
they fail to acknowledge that, just one hour later , he corrected his mistake and wrote to PwC
stating: "Another addendum to my previous e-mails . We have the 1, 2, 4, 10 Returns and
Allowance reserve which is partly set up to cover return reserves. We are assessing the
sufficiency of our reserves ." Ex. 74. Plaintiffs completely ignore this contemporaneous e-mail in
order to pretend that Mr. MacCallum, who testified that Cisco reserved for future returns and that
his initial e-mail was simply a mistake (MacCallum Dep . at 225-26), had somehow "recanted" a
prior statement. The reality is that Mr . MacCallum made an innocent error which he corrected
immediately (long before there was any litigation), and his testimony is perfectly in line with the
27 The only evidence plaintiffs try to cite - a PwC document from July 2000 - confirms that, atthat time, Cisco did estimate future returns : it states that the AIR reserve was used to cover "anyunknown exposure from any bad debt" and the RMA Reserve "is to record exposure from issuedRMAs and unknown expected bad debt from receivables ." Pl. Ex. 1533 at 017334 . Cisco' Saccounting personnel repeatedly testified these reserves were designed to cover the variousreasons a customer may not pay, including an unexpressed intent to return a product . Def. Mem.at 63. Although PwC wrote "any unknown exposure," plaintiffs want to rewrite the document tomean "any unknown exposure except future returns" - an argument that lacks factual support .Indeed, Cisco followed the same procedure for many years (including, for example, fiscal 1999,as to which plaintiffs have completely dropped any claim of impropriety) . See Weil Rpt. (Ex. 89)at 72 (quoting PwC workpapers for fiscal 1999 stating that A/R Aging Reserve percentages "areconsistent with prior year and are based on historical returns rates") . Nothing in Malone v.Microdyne Corp., 26 F.3d 471 (4th Cir . 1994), helps plaintiffs . That case involved consignmentsales to distributors, . and there was evidence that the company's CEO and CFO intentionallydecided not to establish a reserve for returns in order to make quarterly numbers . Id at 477-78 .There is no such evidence here . In addition, plaintiffs' assertion that Microdyne was based solelyon expert testimony is just plain wrong - the court explicitly cites "former Microdyne employees'testimony" that was critical . Id. at 478. There is no such testimony here .
26REPLY IN SUPPORT OF CISCO , CHAMBERS , AND CARTER 'S MOTION FOR SUMMARY JUDGMENT Case No. C-01-20418-JW
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evidence when viewed in context. See Cypress, 891 F . Supp. at 1376 (summary judgment proper
where plaintiffs rely on snippets of documents taken out of context) ; Schuster, 2000 WL
33115909, * 14 (granting summary judgment where "properly put in sequence ," evidence did not
support plaintiffs ' assertions) ; ACT, Inc. v. Sylvan Learning Sys., Inc., 296 F.3d 657, 666-67 (8th
Cir. 2002 ) (summary judgment appropriate, and not an improper credibility determination, where
putative documentary evidence of "admission" was simply a mistake by a new employee) .2 8
More fundamentally, nothing in Mr . MacCallum's March 19, 2001 e-mail - no matter
how broadly construed - is evidence that others had deliberately misstated results between
November 1999 and October 2000 (the only period pertinent to plaintiffs' claim) . See Mathews,
1994 WL 269734, *6 (later change in accounting not evidence that accounting in prior periods
was deliberately misstated) ; Alaska Elec. Pen. Fund v. Adecco, SA., 371 F. Supp. 2d 1203, 1213
(S.D. Cal . 2005) ("even a delinquent write-down of impaired assets without anything more, does
not state a claim for securities fraud") ; Worlds of Wonder, 35 F.3d at 1416 (memo written after
offering stating company may have cash shortfalls not probative of statements in earlier period) .
Likewise, plaintiffs' alternative argument that the estimate of future returns supposedly
proved to be "inadequate" is fruitless . Even accepting the contention at face value, Cisco cannot
be liable for fraud merely because an estimate turns out to be too low . See Mathews, 1994 WL
269734; *6; Kane v. Madge Networks N. V., 2000 WL 33208116, *5 (N .D. Cal . May 26, 2000) .
Rather, plaintiffs must show that those persons responsible for the reserve - none of whom is a
defendant - knew that returns would increase above reserve levels and deliberately disregarded
that data. Id. Plaintiffs have no such evidence .2 9
28 Plaintiffs' cases (Opp . at 52) are inapposite as they arose in fundamentally different contexts .See Maslow v. Evans, 2003 U.S. Dist. LEXIS 20316, *25 n.16 (E .D. Pa. Nov. 7, 2003) (nocontemporaneous correction of a statement by a police officer to an investigator ; while policemanlater claimed he did not make the statement, the investigator insisted that he did, giving rise to atriable issue) ; Weiland v. El Kram, Inc., 233 F. Supp. 2d 1142, 1157-58 (N.D . Iowa 2002)(witness submitted affidavit attesting to one set of facts, and then submitted a second affidavitaltering facts) ; Panduit v . Band-It-Idex, Inc., 2000 U.S . Dist . LEXIS 9839, *7 D. Ill . July 12,2000) (witness who did not testify at deposition that device fell within patent c aim could not doso for the first time during pendency of summary judgment motion) ; Gear, Inc. v. L.A. Gear Cal.,Inc., 670 F. Supp. 508, 513 (S .D.N.Y. 1987) (witness testified inconsistently to dates under oath) .29 Plaintiffs assert that $296 million of product shipped in Q400 was eventually returned and thisexceeded the reserve in place at the time . Opp. at 52 . The "evidence" they cite, however, doesnot even purport to show those figures . The first document does not deal with returns at all, butinstead calculates "day sales outstanding." Pl. Ex. 2586 at 0018740 . The other document wa s
27REPLY IN SUPPORT OF CISCO, CHAMBERS, AND CARTER'S MOTION FOR SUMMARY JUDG MENT Case No . C-UI-20418-JW
2. No Scienter For Plaintiffs' Third-Party Guarantee Clai m
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Plaintiffs never address the absence of evidence that any defendant knew, believed, or wa s
advised that there was any issue with Cisco's accounting for guarantees during fiscal 2000 (the
only period subject to this aspect of plaintiffs' claim). Def. Mein. at 65-66. Plaintiffs also make
no effort to explain away their accounting expert 's admission that he had "not reached the
conclusion" that Cisco deliberately followed improper accounting (Regan Dep . at 90-91), or his
concession that the matter was "pretty complex" (id. at 93). Nor do plaintiffs discuss the case law
squarely holding that scienter cannot be shown under these circumstances . See Worlds of Wonder,
35 F.3d at 1426 ; Software Toolworks, 50 F.3d at 623 ; Mathews, 1994 WL 269734, *5 .
Instead, plaintiffs try to recast the question presented, incorrectly asserting that the "onl y
dispute" is whether Cisco's revenue recognition was proper. Opp. at 49. As explained above, that
is not the issue - rather, it is the utter lack of evidence that defendants deliberately engaged i n
improper accounting that disposes of plaintiffs' claim . See Def. Mem. at 65-66 .3 0
3. No Scienter For Plaintiffs' Unpleaded Lease Reserve Clai m
The claim that Cisco understated its reserves for 17 sales-type leases during fiscal 200 0
(but not in Q 101, when plaintiffs' expert opines they were larger than required) is pure fraud b y
hindsight. Because Cisco ultimately wrote off these 17 leases (out of hundreds), plaintiffs assum e
that revenue never should have bee recognized in the first place . See Def. Mem. at 67 .
Plaintiffs tacitly concede as much . They point to no customer-specific evidence showin g
generated in April 2001 , after the class period (Pl. Ex. 1108 ) -- whatever the unexplainedrelevance of the calculations on this page, they certainly are not contemporaneous evidence thatanyone at Cisco knew, in July 2000 , that returns would later incre ase. Moreover, nothing in thesedocuments could possibly support the assertion that the reserve was inadequate in Q 100 (October1999) , Q200 (January 2000 ) or Q300 (April 2000) . See Worlds of Wonder, 35 F.3d at 1416 .30 Plaintiffs do not address that issue because the facts belie their allegation . Cisco originallyapplied FAS 5 , which explicitly deals with guarantees, by establishing a reserve to re flect the riskthat it might have to pay on the guarantee. In October 2000 , a Cisco Capital accountant who wastasked with evaluating its policies suggested that Cisco change the treatment for guarantees onoperating leases in excess of 10% . It did so by deferring revenue under FAS 13 (which does notspecifically address guarantees , but instead provides for deferral where the company "retains asubstantial risk of ownership") . Put simply, when this accountant suggested a revised approach,the issue was promptly addressed and - while others did not agree with the applicability of FAS13 (because risk of nonpayment is not "a substantial risk of ownership") - Cisco neverthelesschanged its policy to be more conservative. Def. Mem . at 66. That response negates scienter . SeeMathews , 1994 WL 269734 , *8 (summary judgment entered where company on its own initiativeadjusted its accounting upon learning of an issue); John Alden, 249 F. Supp. 2d at 1281 (same) ;Worlds of Wonder , 35 F.3d at 1417 (no liability on accounting for guaranteed sales) .
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reserves should have been increased sooner, or that this was known within Cisco and deliberately
disregarded. In fact, plaintiffs and their expert offer no opinion on what they think the reserves
should have been at the outset, but simply rely on how Cisco adjusted the reserve later - precisely
the kind of claim courts have routinely rejected . Mathews, 1994 WL 269734, *6 ("Reserves for
bad debts are essentially predictions about the future . The fact that a future prediction turns out to
be wrong does not mean it was fraudulent when made") ; DiLeo v. Ernst & Young, 901 F.2d 624,
627 (7th Cit. 1990) ("If all that is involved is a dispute about the timing of the write off, based on
estimates of the probability that a particular debtor will pay, we do not have fraud") .
Plaintiffs cannot compensate for their lack of evidence concerning these customers by
misportraying the testimony of Dennis Powell, who was Cisco's Controller (and now CFO) . Mr.
Powell did not "admit" that Cisco's accounting for these 17 leases was inappropriate . Rather, he
addressed the mechanism Cisco used to write off sales-type leases, which was to use a downward
sales adjustment rather than increase expenses . He explained, in testimony plaintiffs conveniently
omit, that doing so was the more conservative approach because it kept revenues lower .
Q: And the basis for taking that as a sales adjustment, as opposed to a provision forlosses, when revenue on that transaction had already been recognized, is what?
A: Is because it's an adjustment to revenue . The revenue was recognized, but it's stillan adjustment to that revenue, for whatever reason that was concluded . It was a timingissue, in terms of when that was recognized, but it's still a revenue adjustment thatshould come out of revenue . The thought is, again, we think that's a moreconservative presentation . . . because many companies are looking at increasing theirrevenue at the highest level . If you're grossing that number up, that is, showing ahigher level of revenue, and then showing an expense below, you're still showing atrend of revenue that's higher . From our perspective, a more conservative reviewwould be to take it out of revenue rather than expense .
Q: So is it your testimony that Cisco records the reserve against revenue after thetransaction has already been recorded as a sales lease and revenue recognized ?
A: I would say that that doesn't happen a lot, but if we did have a revenue adjustmentfor something that had been recognized before, as we talked about earlier, we do makeadjustmentsfor things that we find out after the fact. We set up reserves for thosethings that may occur, and we probably have already set that up in our general reservesas an adjustment to revenue, but we would be applying that to a revenue adjustment .
Powell Dep. at 393-94. In other words, while Mr . Powell was not familiar with the customers in
question (Powell Dep . at 406), his testimony is that Cisco made sales adjustments when it later
learned of developments about acustomer, to be more conservative . Dr. Weil, whom plaintiffs
also misquote, testified that this conservative approach is the "preferred treatment." Weil Dep. at
29REPLY IN SUPPORT OF CISCO, CHAMBERS, AND CARTER'S MOTION FOR SUMMARY JUDGMENT Case No . C-UI -2O4IS TW
59-60. Indeed, Cisco consistently utilized this same method in other periods, such as Q101 - a
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period as to which plaintiffs not only make no claim, but during which their expert has conclude d
Cisco reserved more than it needed to . Regan Rpt. (Ex. 87) at 27 1
In any event, whether Cisco should have "expensed" the item (as plaintiffs contend) o r
used a revenue contra account is beside the point, since such disagreements over preferred
methodology are insufficient to show scienter . Mathews, 1994 WL 269734, *6. What plaintiffs
need is evidence that Cisco knew of or recklessly disregarded information about each of these
transactions and deliberately set the reserve for the customer too low at that time . Worlds of
Wonder, 35 F.3d at 1426. Because there is no such evidence, summary judgment is mandated .3 2
4. No Scienter For Plaintiffs' Non-Equipment Loan Reserve Clai m
Plaintiffs cite no evidence suggesting that anyone at Cisco believed that its reserve fo r
non-equipment loans was too low in the single quarter at issue (first quarter of fiscal 2001, ending
in October 2000) . Indeed, most of the customers had obtained such loans in prior periods, durin g
31 Plaintiffs also repeat their allegations about work D&T's consulting group performed for CiscoCapital (Opp. at 47), without attempting to address the points made in the moving papers . SeeDef. Mem. at 68. As a threshold matter, the fact that Cisco Capital hired D&T to assist it withloan and lease documentation refutes any notion that defendants were engaged in fraud . Worldsof Wonder, 35 F.3d at 1426. D&T was not hired to perform an audit or to determine compliancewith GAAP, and its work does not address accounting, as even plaintiffs' expert admitted . Def.Mem. at 68; Regan Dep . at 273 . And certainly nothing in D&T's work related to the accountingfor the small number of leases plaintiffs have put in issue . Indeed, there is no evidence thatanyone at Cisco or PwC believed the back-office issues discussed by D&T impaired their abilityto set reasonable reserves (PwC did not view this as a material weakness) - a point plaintiffsimplicitly concede by not challenging Cisco's accounting for the vast majority of leases . SeeWorlds of Wonder, 35 F.3d at 1417 (even with "significant problems" concerning controls,absence of material weakness letter from auditor supported non-disclosure and showed absence ofscienter) . For the same reasons, statements that Cisco Capital's accounting was conservative(which plaintiffs misquote as a statement about how it was "managed") (Opp . at 22, 34) - wereabsolutely true (as evidenced by, among other things, the establishment of 100% reserves onstructured loans) . See Def. Mem. at 45 .32 Plaintiffs' citation to a March 2000 email from Rory Snyder to suggest that Cisco was just"guessing" at reserve rates is yet another in a pattern of distortions of evidence . See P1. Ex. 808 .What Mr. Snyder actually said, in this preliminary draft, is that he had taken an initial "stab at amatrix of credit reserves" and had several questions about `where to draw the line for revenuedeferral" because he was "not familiar enough with S&P and Moody's ratings to know the rightplace." He emphasized that "Cisco's Rev Rec policy requires that `collectibility is reasonablyassured' in order to recognize revenue, so we need to ensure we conform to that." Mr. Snydercontinued that, in his draft, "the reserve rates are just guesses . I think 0.5% is good for the bestcredits . Some progression up from there makes sense, but I need to understand the inherent risksin the ratings to knowfor sure . . . Please review and get back to me ." Put simply, the documentshows that Cisco was carefully analyzing the issue, and this was an early step in that process . Ithas nothing to do with the 17 leases (out of hundreds) plaintiffs have put in issue . See Worlds ofWonder, 35 F .3d at 1420 (criticizing plaintiffs for taking documents out of context) .
30REPLY IN SUPPORT OF CISCO, CHAMBERS, AND CARTER'S MOTION FOR SUMMARY JUDGMENT Case No . C- O 1 -20418-JW
which Cisco established the same reserve in the same manner , yet plaintiffs do not challenge the
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reserves for those periods. In other words, plaintiffs concede that the reserve rate , typically 25%
at inception, did not lead to any misstatement during the preceding quarters of the class period.
To substantiate their claim for the first quarter of fiscal 2001, therefore, plaintiffs mus t
come forward with evidence showing that (a) the financial condition of the customers who had
received non-equipment loans changed between Q400 (ending in July 2000) and Q101 (ending in
October 2000), and (b) the persons responsible for setting the reserve deliberately understated . it
for these customers, notwithstanding such changed conditions. Plaintiffs do not cite any such
evidence . See Opp. 54-56. The Opposition does not contain any customer-by-customer analysis,
identify any conditions that changed or required an increase in the reserve in Q101, indicate what
plaintiffs contend the reserves "should have been," or identify the contemporaneous information
that Cisco supposedly overlooked . Instead, plaintiffs simply rely on the fact that Cisco later
increased the reserves "by the end of Q201 ." Opp. at 55. This is classic fraud by hindsight .3 3
Rather than proffering evidence on the dispositive point, plaintiffs gloss over their actual
allegations with irrelevant statements about what Cisco supposedly did "throughout the class
period" or at times other than the quarter in question . For instance, they assail the manner in
which Mr. Fukahara, a Cisco Capital credit officer, set the initial 25% reserve (Opp . at 55), even
though that rate was used in other periods and is not challenged. They also miscite his testimony
by quoting only the first line of a longer answer, in which he explains (as he had earlier, in pages
plaintiffs tellingly omit) the rationale used in establishing the initial 25% reserve rate and the fact
that a reasonable range could have been as low as 15% or as high as 40%. Fukahara Dep. at 293-
33 Plaintiffs admit conditions for Cisco's customers declined in Q201 and after . AC ¶ 192 . Thedocuments cited in the Opposition also prove the point. Cisco increased its reserve for non-equipment loans from $121 million in Q 101 to $150 million in Q201 by raising (to 100%) thereserves for 11 customers who were experiencing difficulties . See Pl. Ex. 2572 at 0769704 (Opp .at 55) . Plaintiffs offer no evidence that the reserves should have . been increased earlier. Indeed,the only customer plaintiffs mention is HarvardNet - but even then, they do not point to anychange in its condition between July 2000 and October 2000 that would have required a boost inthe reserve. Instead, they merely complain - based on a February 2000 credit memo (Pl . Ex .2587) - that HarvardNet was initially given a 25% reserve rate because, although it had just raised$70 million from investors, it might run out of operating funds without further investments in thelatter part of 2000 . Opp. at 55. Not only is the initial reserve not at issue, but plaintiffs ignorethat Cisco increased the reserve to 100% in late 2000 when the customer's financial conditionactually deteriorated. Pl. Ex. 2572 at 0769704 ; Weil Rpt . (Ex. 89) at 48 . See Worlds of Wonder,35 F.3d at 1416 (no liability for failing to predict sooner that company would run out of money) .
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95. See also id. at 174 (explaining the rate was conservatively set based on experience and credit
review, as well as the fact that Cisco was a senior creditor and had a lien on all of the borrower's
assets) ; Tran Dep. at 69-70, 110 (noting that Cisco's rate was conservative and substantiall y
higher than that of a commercial bank) . See also Def. Mem. at 69 (citing additional testimony) .3 4
In any event, even if this were somehow pertinent to plaintiffs ' claim , and even if they had
offered some alternative reserve rate (which they do not), it would at most amount to a debate
over a range of reasonable judgments . As a result, plaintiffs cannot establish scienter . Worlds of
Wonder, . 35 F.3d at 1426 (no scienter where "the Court heard diametrically opposing views from
experts as to the reasonableness of accounting and audit judgments") ; Mathews, 1994 WL 269734,
* 5 (summary judgment granted, noting that "adequacy of . . .reserves [is] a subject on which
reasonable business, accounting and legal minds differ constantly") ; In re Miller Indus., Inc. Sec .
Litig., 120 F. Supp. 2d 1371, 1382 (N.D. Ga. 2000) (no scienter where "[p]laintiffs have shown
nothing more than that equally competent and reasonable accountants might disagree" over
accounting treatment) .3 5
5. No Scienter For Plaintiffs ' Unpleaded PFI Claim
Plaintiffs fare no better with an unpleaded argument regarding recognition of revenue o n
transactions involving "pre-funded inventory" or "PFI." Opp. at 58. Even if this belated claim
were considered, it would not survive .
Cisco's PFI account related to sales-type lease transactions where all lease documentation
had not yet been signed , but the product had been delivered pursuant to a customer purch ase
order . That purchase order, like the lease proposals themselves, obligated the customer to pa y
Cisco within 30 days of delivery unless the final lease documents were signed. Powell Dep . at
34 Plaintiffs miscite other evidence as well . For example, they claim that a November 2000 CiscoCapital presentation - in the quarter after the one at issue - concluded that its loan portfolio was"distressed ." Opp. at 56 . But even a cursory examination of that document (Pl . Ex. 409) showsthat many structured loans (not all structured loan customers received non-equipment loans) werecompliant (id. at 0523630), some were non-compliant and virtually fully reserved (0523629) ; anda total of six loans were distressed and fully reserved (0523627-28) .35 Plaintiffs never try to distinguish these cases because they cannot do so . Instead, they cite In reWells Fargo Sec. Litig., 12 F.3d 922 (9th Cir . 1993), a pleading case where specific facts werealleged suggesting that reserves were deliberately misstated . Id. at 926-27 . In In re Reliance Sec.Litig., 135 F. Supp. 2d 480 (D. Del. 2001), the court was not even presented with a summaryjudgment motion on accounting issues, but instead granted in part and denied in part a motion onwhether various defendants were responsible for alleged misstatements . Id. at 501 .
32REPLY IN SUPPORT OF CISCO, CHAMBERS, AND CARTER'S MOTION FOR SUMMARY JUDGMEN T Case No. G01-20418 IW
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140, 143, 154, 162-64 ; Kouchakji Dep . at 126-29; Snyder Dep. at 56-59 ; Weil Dep. at 71, 81, 84-
85,94-96 . 16 While plaintiffs try to characterize that 30-day obligation as "preliminary" for
accounting purposes under SAB 101 (which requires "persuasive evidence" of an agreement),
their own expert, Mr. Regan, disagrees. He testified that the binding nature of the obligation was
a "legal" question, not an accounting question. Regan Dep . at 334-35. He also conceded that
SAB 101, on which plaintiffs base their theory that revenue should not have been recognized until
final lease schedules were signed, did not apply to Cisco until after the class period (id. at 305) .
Needless to say, plaintiffs cite no authority holding that a binding legal obligation could somehow
be rendered ineffective based on an accounting pronouncement that was inapplicable at the time .3 7
Moreover, plaintiffs fail to offer evidence showing the amount of PFI that was supposedly
recognized improperly, the financial statements affected, or even the customers and transactions
involved. In fact, plaintiffs and their expert have disclaimed their ability to do so, and they do not
include PFI on their chart purporting to summarize the "financial statement" impact of the
accounting claims . Regan Rpt . (Ex. 87) at 27 . Instead, plaintiffs offer speculation by counsel that
perhaps "hundreds of millions of dollars" at unspecified times, involving unspecified customers,
was improperly recognized. See Opp. at 58. This is not evidence. See Far Out Prods., 247 F.3d
at 997; Winston v. American Fam. Mut. Ins. Co., 2006 WL 334852, *6 (D . Ariz. Feb. 8, 2006).s8
36 For example, the proposal cited by plaintiffs provides that if financing is not consummated "forany reason," then the buyer "shall be solely responsible for the payment in full of the purchaseprice," and that, "Ju]ll such orders shall be subject to the standard Terms & Conditions of Saleof Cisco . . . . including but not limited to the `net 30' payment terms commencing from thedate of shipment. " Pl. Ex. 313 at 006500 (emphasis added) .37 Plaintiffs also argue that "the customers did not pay within 30 days and Cisco did not attempt tocollect" if the lease documentation were still under discussion . Opp. at 60. However, plaintiffs'expert also admitted at his deposition that there are no provisions of GAAP that require eitherbilling or payment of an obligation before persuasive evidence of an arrangement exists torecognize revenue under SAB 10.1 . Regan Dep. at 320-21, 335. That admission dooms plaintiffs'claim. Indeed, the parties agree that revenue can be recognized up front on sales-type leases .Plaintiffs' expert merely quarrels with the timing on PFI transactions, asserting that final leasedocuments should be furnished first, notwithstanding the terms of the purchase order and leaseproposal . Thus, the fact that the term may be up to three years (Opp . at 58) is of no consequence .3 8 Indeed, the evidence on this issue shows that Cisco's method of accounting for PFI was moreconservative - and resulted in lower class period revenues - than plaintiffs' methodology. SeeEx. 124 at 5-6. This is due to the fact that the dollar value of the sales lease transactions that wereeliminated from PFI in subsequent quarters (when all remaining lease documents were received)exceeded the dollar value of new PFI transactions . Id. In other words, had Cisco delayedrecognizing revenue until the quarter in which all final documents were received (rather than thequarter in which equipment was shipped), class period revenues would actually have been $126million higher - including $23 .5 million more revenue in Q201, when it missed consensus EP S
33REPLY IN SUPPORT OF CISCO, CHAMBERS, AND CARTER'S MOTION FOR SUMMA RY JUDGMENT Case No. C-OI-20418-JW
In any event, the fundamental problem plaintiffs cannot overcome - which they neve r
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specifically address in their discussion of PFI - is their inability to establish scienter . Plaintiffs
offer no evidence that any defendant, or anyone else at Cisco, ever believed, understood or was
told that its accounting for PFI was inappropriate or unreasonable, and that Cisco chose to engage
in improper accounting anyway. Worlds of Wonder, 35 F.3d at 1426 ; Software Toolworks, 50
F.3d at 628 .39 Plaintiffs run from the issue because the evidence is to the contrary - no one at
Cisco or PwC ever indicated that they had concerns with the accounting for PFI . See Powell Dep.
at 173-75 . Summary judgment should therefore be entered . Worlds of Wonder, 35 F.3d at 1425 .4°
6. Plaintiffs Do Not Even Address, And Therefore Concede, The AbsenceOf Scienter For Their Miscellaneous Other Accounting Claim s
Plaintiffs do not try to support their claims that Cisco improperly shipped products early
one quarter (April 2000), or recognized revenue on sales of defective products, or incorrectly
accounted for "future" upgrades or elements . See Del. Mem. at 69-70. Because plaintiffs do not
mention these issues, much less come forward with evidence of scienter, summary judgment is
required . Worlds of Wonder, 35 F.3d at 1426 .
VI. THE OPPOSITION CONFIRMS THERE IS NO GENU INE ISSUE OF FACT ASTO CLAIMS BASED ON CISCO'S ACQUISITIONS OR PRODUCT S
The AC originally alleged that Cisco misrepresented three acquisitions (Cerent, Monterey
and Pirelli) . Given plaintiffs' admission that Cisco's stock price was not even arguably inflate d
estimates by just 10 . See id. This is precisely the opposite of plaintiffs' entire theory, anddestroys the proposition that Cisco's accounting for PFI inflated its results .3 19 Plaintiffs' citation to Provenz v. Miller, 102 F.3d 1478 (9th Cir . 1996), actually supportsCisco's PFI treatment . In Provenz, defendants violated their own policies, and hid informationfrom their outside auditors, so they could "recognize revenue before binding agreements existed ."Id. at 1485, 1490 . Here, in contrast, Cisco's customers were legally obligated to pay for theequipment on a net 30-day basis if a lease agreement was not signed, and there was no deviationfrom Cisco's policies or failure to share information with outside auditors . See id. at 1490 .40 In an act of desperation, plaintiffs attempt to cover-up the absence of evidence concerning PFIby mischaracterizing an e-mail from a Cisco employee, William Sherry, to another employee(Russ Wilson) that does not even deal with PFI and was written before the class period evenbegan . See Opp. at 58 . While misrepresenting its contents, it is telling that plaintiffs did notinclude this document in their evidentiary appendix, and did not ask Mr . Sherry (who worked inCisco's Service Provider business and had no responsibility for PFI accounting) a single questionabout PFI at his deposition. That is because Mr. Sherry's e-mail dealt with a pre-class periodrequest by one customer to swap some equipment it had purchased for other Cisco equipment -an issue that is irrelevant . See, e.g., In re Acceptance Ins. Co. Sec. Litig., 423 F.3d 899, 905 (8thCir. 2005) (affirming summary judgment and excluding e-mail stating that "past problem wasprobably pressure for earnings . . . [s]ounded like we committed a sin in the past" becauseplaintiffs could "only offer conjecture to connect the statement with the present case") .
34REPLY IN SUPPORT OF CISCO, CHAMBERS, AND CARTER'S MOTION FOR SUMMARY JUDGMENT Case No . C-01-20418-JW
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before November 1999, it is undisputed that the Cerent and Monterey announcements are now out
of the case. Del. Mem. at 70 . Furthermore, the Opposition makes no effort to controvert
defendants' showing that statements regarding the Pirelli acquisition (AC ¶ 66) were neither false
nor made with scienter. Def. Mem. at 70-71 . As a result, summary judgment is proper with
respect to those alleged misrepresentations . Cambridge, 227 F.R.D. at 336,n.67 .
The other acquisition -related claim made in the pleadings (AC ¶ 69) is that two regis tration
statements were misleading for failing to disclose that certain officers or directors indirectly
received Cisco shares (via venture capital partnerships) as a result of several acquisitions . See
Def. Mem. at 70 n.65. That claim is also abandoned; plaintiffs concede that the applicable SEC
regulation (17 C.F.R. § 229.404 (a)) does not require disclosure of such interests . Opp. at 70 .
However , plaintiffs now switch gears and argue that GAAP required the information to be
furnished in unspecified financial statements . Opp. at 70. That argument is fruitless for a host of
reasons. First, their accounting expert identifies the relevant SEC regulation - the one plaintiffs
now disavow as inapplicable (id) - as a basis for his conclusion that GA-AP requires disclosure .
PI . Ex. 4100 at 130-31 . Second, even under plaintiffs' theory, they would need to show that
Cisco insiders (as passive, indirect investors with minimal ownership interests) had the ability to
influence the companies being acquired (see app. at 70) - and there is no evidence to establish
that . Third, there is no evidence that the supposed nondisclosure is material ; indeed, plaintiffs'
accounting expert does not claim it affected Cisco's reported financial results in any way (Regan
Rpt. (Ex. 87) at 27), and their damage expert attributes no "inflation" to that supposed omission
(Nye Dep. at 68) . See, e.g., Mathews, 1994 WL 269734, *7 (summary judgment proper absent
evidence that alleged accounting violation was material) . Fourth, even if (contrary to the
evidence) it could be shown that GAAP required disclosure of shares received by officers or
directors, plaintiffs do not identify evidence showing that any defendant was aware of such a
requirement or deliberately disregarded it. Worlds of Wonder, 35 F.3d at 1425-26.
Nor is there a triable issue as to any product-related statement. The Opposition does not
mention the press releases announcing customer orders of Summa switches (AC 11110, 115) ,
28 11 much less dispute defendants' showing (Def. Mem . at 72) that those releases are not actionable .
35RFI' LY IN SUPPORT of CISCO, CHAMBERS, AND CARTER'S MOTION FOR SUMMARY JUDGMENT Case No. C-61-20418-JW
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The only product-related statement discussed in the Opposition is Mr. Listwin' s comment
in February 2000 that Cisco had "accepted the first order from an inter-exchange carrier" for the
Monterey router . Opp. at 25-26 . However, there is no dispute that AT&T had placed an order for
the product (Bass Dep . at 72; Listwin Dep . at 164), and plaintiffs concede the order had not been
canceled. Opp. at 26 n .32. Plaintiffs argue that AT&T was considering whether to cancel (Id.),
but such a possibility does not render Mr . Listwin's statement false or misleading, much less
deliberately so . Schuster, 2000 WL 33115909, *3 .4 (concerns raised by a customer - also AT&T
- about a product did not raise a triable issue as to accuracy of statements regarding expected
deployment by that customer). Indeed, there is no evidence that Mr. Listwin was even aware of
those concerns at the time . The most plaintiffs can show is that two other employees (Messrs .
Kennedy and Russo) might have had such information (Opp . at 26), but - even after plaintiffs
deposed each individual - there is no evidence indicating that it was conveyed to Mr . Listwin .41
Thus, plaintiffs are unable to establish falsity or scienter . Schuster, 2000 WL 33115909, *4 .
VH. PLAINTIFFS CONCEDE THEY HAVE NO INSIDER TRADING CLAIM
Despite 115 pages of briefs, plaintiffs devote just nine lines to their insider trading claims
under Section 20A. Opp . at 86. And not one of those lines is devoted to the most basic element :
identification of the "inside" information upon which each challenged trade was allegedly made .
See, e.g., Shurkin v. Golden State Vintners, 2005 WL 1926620, * 15 (N.D. Cal . Aug 10, 2005) .
Given the record in this case, plaintiffs' effort to run from that issue is unsurprising . Mr.
Chambers' only sale was in February 2000, and even plaintiffs admit there was no suggestion of a
downturn in business at that time . See Opp. at 5 (arguing that management became aware of
slowing growth in "the summer and fall of 2000") . Likewise, at the time of Mr . Carter's sales in
August 2000, it is uncontroverted that Cisco's business was booming, the Company's investments
in headcount and infrastructure were in full swing, and every internal forecast was for even
greater growth in the quarters ahead . Nor do plaintiffs try to show that Mr. Chambers or Mr.
Carter had any knowledge of problems with Cisco's accounting or financial results at the time o f
41 Plaintiffs' contention that Mr . Listwin "vas aware of the information" in February 2000 (Opp .at 26 n.31) is an outright fabrication . The evidence cited (Listwin Dep . at 161-62) shows onlythat he worked with Messrs . Kennedy and Russo in drafting a script ; there is no mention ofAT&T, let alone an indication that concerns about its orders were passed along to Mr . Listwin.
36REPLY IN SUPPORT OF CISCO, CHAMBERS, AND CARTER'S MOTION FOR SUMMARY JUDGMENT Can No. G 0 1 -20418-JW
their respective sales (or, for that matter, at any other time)42 In sum, plaintiffs effectively throw
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in the towel on their Section 20A claims .
That conclusion is underscored by plaintiffs' effort to skirt the "contemporaneous trading "
and damage requirements of Section 20A. Opp. at 86. They literally do nothing more than point
to a price and volume chart attached to their expert's report and argue that, somewhere in the
world, some unknown person necessarily purchased "on each date that defendants sold stock ."
Id. Not one authority is cited for the proposition that Section 20A can be circumvented in this
manner, and for good reason - plaintiffs' argument is completely contrary to the language of the
statute, and would render the "contemporaneous trading" and damage requirements meaningless .
See, e.g., Buban v. O'Brien, 1994 WL 324093, *2-3 (N.D. Cal . Jan. 22, 1994) . Messrs. Chambers
and Carter are accordingly entitled to judgment in their favor on the Section 20A claims 4 3
VIII. CONCLUSIO N
In Worlds of Wonder, the Ninth Circuit affirmed summary judgment in a similar action
and quoted with approval Judge Conti' s "excellent opinion," which concluded that :
Plaintiffs have submitted hundreds of pages to this court in an effort to create a genuineissue of fact . Using tortured reasoning, convolution of the issues, and the benefit ofhindsight, they point to the most innocuous of optimistic language, and the mostimmaterial of omitted facts, and claim that they were somehow misled as to the nature oftheir investment . [That is not sufficient] .
35 F.3d at 1420. Those words apply equally here . Defendants' motions should be granted .
Dated : May 22, 2006 FENWICK & WEST LL P
By Isl Kevin P. MuckKevin P. Muck
Attorneys for Cisco Defendants
42 Furthermore, all of the other relevant facts and circumstances (see Sec . III .B., above) establishthat the challenged sales were not unusual . Shurkin, 2005 WL 1926620, * 15 .43 Plaintiffs do not dispute that the absence of a Section 10(b) violation also mandates judgmenton the Section 20A claims . In re VeriFone Sec. Litig., 11 F.3d 865, 872 (9th Cir. 1993) . Nor dothey dispute that, without Section 10(b) liability, there is no control person claim under Section20(a). Paracor Fin. Corp. v. General Elec. Cap. Corp., 96 F.3d 1151, 1161 (9th Cir . 1996) .
37REPLY IN SUPPORT OF CISCO, CHAMBERS, AND CARTER' S MOTION FOR SUMMARY JUDGMENT Case No. C-01-20418-JW
