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Sousa v. Sonus Networks, Inc.

United States District Court, D. Massachusetts

June 6, 2017

RICHARD SOUSA, individually and on behalf of all others similarly situated, Plaintiff,


          George A. O'Toole, Jr. United States District Judge

         This putative class action alleges securities fraud by Sonus Networks, Inc. and two individual executives of the company, Raymond A. Dolan, Sonus's Chief Executive Officer, and Mark T. Greenquist, Sonus's Chief Financial Officer. In Count I of the First Amended Class Action Complaint (dkt. no. 42), the plaintiff[1] alleges violations by all defendants of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (“Exchange Act”), and related Rule 10b-5, 17 C.F.R. § 240.10b-5. Count II alleges violations of Section 20(a) of the Exchange Act, 15 U.S.C. § 78t(a), by the individual defendants. The plaintiff contends that class members were harmed when they purchased Sonus's common stock at prices that were artificially inflated by the defendants' materially false and misleading statements concerning its revenue projection for the first quarter of 2015 (“Q1 2015”).

         The defendants have jointly moved to dismiss the Amended Complaint. For the reasons set forth herein, their motion to dismiss is GRANTED.

         I. Factual Background[2]

         The plaintiff alleges the following:

Sonus is a Massachusetts-headquartered company that provides hardware and software-based tools to help businesses secure their internet and communication infrastructures. As the industry has shifted toward wireless communications, Sonus has focused its business on software-based products.

         Sonus has a sales force that sells its products directly to customers, and it also receives sales support from regional channel partners. Quarterly, Sonus prepares a revenue forecast, which relies on sales force members' projected sales. To formulate those projections, each sales force member forecasts both a “commit number, ” the sales goal expected to be reached for the relevant period, as well as a “stretch number, ” representing a best-case scenario. (First Am. Class Action Compl. ¶ 34 [hereinafter Am. Compl.].) There is no allegation concerning the quantitative distance between the “commit” and “stretch” projections.

         Throughout the year, sales force members track their sales by means of an internal software program called Salesforce. The Amended Complaint alleges that, in general, sales employees have daily contact with customers and are rigorous about submitting updates to Salesforce to track their progress toward their sales targets.

         The Amended Complaint alleges three ways in which defendants Dolan and Greenquist kept abreast of Sonus's progress toward its revenue goal during the class period. First, they had access to Salesforce and in fact accessed it during the class period. Second, sales personnel provided regular progress reports to management, and the content of those reports was communicated to defendants Dolan and Greenquist on a weekly basis. Third, defendant Dolan at times took an active role in driving revenue by accompanying sales personnel to customer meetings, including large customers like AT&T, and by himself conducting contract negotiations.

         In July 2014, Sonus hired a new Vice President of Worldwide Sales, Michael Swade. Swade implemented an “immediate change” to Sonus's revenue forecasting policy: Sonus began including more stretch numbers in the quarterly revenue forecasts.[3] (See Am. Compl. ¶ 36.) The Amended Complaint alleges that employees were pressured to submit their stretch numbers as commit numbers, and those who refused to do so, such as FE6, were fired.

         The Amended Complaint alleges that Sonus made materially false and misleading statements at two points during the class period, first on October 23, 2014, and later on February 18, 2015.

         A. The October 23, 2014 Earnings Call

         On October 23, 2014, the first day of the claimed class period, Sonus disclosed during an earnings call with analysts and investors its revenue forecast for Q1 2015. Defendant Greenquist stated: “[W]e are also comfortable with the current consensus estimates for the first quarter of next year of $74 million in revenue and a penny of non-GAAP EPS.” (Am. Compl. ¶ 40.) The reference to “consensus estimates” can fairly be understood to be to estimates made by investment analysts external to Sonus.

         The Amended Complaint alleges that this disclosure was materially false and misleading because all customer commitments for Q1 2015 had substantially been made at the time of the earnings call, so that the defendants then had “complete visibility into first quarter, 2015, revenues.” (Id. ¶ 38.) Specifically, the Amended Complaint alleges that the defendants knew that large customers in the industry had moved toward longer decision cycles for their purchases, and thus had set their budgets for the coming year by October of the preceding year. Furthermore, it is alleged that the defendants, who were closely monitoring Sonus's sales, knew that Sonus would not be able to meet the stretch numbers included in the Q1 2015 revenue projection.

         B. The February 18, 2015 Press Release and Earnings Call

         On February 18, 2015, Sonus issued a press release, which was also attached as an exhibit to Sonus's SEC Form 8-K, which reiterated the previous Q1 2015 forecast. The same day, in an earnings call discussing the results for the fourth quarter of 2014 (“Q4 2014”), defendant Greenquist stated: “Now, looking at ¶ 1, we expect revenue to be approximately $74 million.” (Am. Compl. ¶ 43.) Greenquist further noted:

[O]ur first quarter is more backend loaded than the past few years but the revenue is also far more diversified. In short, we're not dependent upon a single large deal in the quarter. Instead, we have a number of good sized deals in our funnel that we expect to close over the next few weeks.


         The Amended Complaint alleges that these statements were materially false and misleading because, at various points during Q4 2014 and Q1 2015, sales personnel expressed doubts as to their ability to reach the stretch numbers included in the Q1 2015 revenue forecast. It further alleges that defendants Dolan and Greenquist knew that a big miss was imminent because they accessed Salesforce regularly, received weekly updates from Swade, who passed along the misgivings of sales personnel, and because defendant Dolan was personally involved in closing deals with customers. It is also alleged that the defendants knew of doubts as to whether a large client, AT&T, would conclude a purchase during Q1 2015.

         For substantially the same reasons, the Amended Complaint further alleges that cautionary risk disclosures made during the February call (as during the October call) were themselves materially misleading, and therefore not meaningful so as to preclude liability.[4]

         C. The Announcement of the Shortfall and Post-Class Period Statements

         About five weeks after the February call, on March 24, 2015, the last day of the alleged class period, Sonus issued a press release that revealed a dramatic revenue shortfall for Q1 2015 compared to projections. Rather than the forecasted $74 million in revenue, Sonus actually took in only about $50 million. ...

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