United States District Court, D. Massachusetts
STEVEN THARP, individually and on behalf of all others similarly situated, Plaintiff,
ACACIA COMMUNICATIONS, INC.; MURUGESAN SHANMUGARAJ; and JOHN F. GAVIN, Defendants.
MEMORANDUM & ORDER
WILLIAM G. YOUNG WILLIAM G. YOUNG DISTRICT JUDGE
a securities class action on behalf of persons and entities
who purchased Acacia Communications, Inc. common stock. Lead
plaintiffs WKW Partners Fund I, L.P. (“WKW
Partners”), Hui Zhang (“Zhang”), and Chris
Kebler (“Kebler”), together with plaintiff Rina
Rollhaus (“Rollhaus” and collectively with WKW
Partners, Zhang, and Kebler, “Plaintiffs”)
purchased the stock between August 11, 2016 and July 13, 2017
(“Class Period”). The Plaintiffs bring this class
action against Acacia Communications, Inc.
(“Acacia”); individual defendants Murugesan
“Raj” Shanmugaraj (“Shanmugaraj”),
John F. Gavin (“Gavin”), Francis J. Murphy
(“Murphy”), Benny P. Mikkelsen
(“Mikkelsen”), Eric A. Swanson
(“Swanson”), Peter Y. Chung
(“Chung”), Stan J. Reiss (“Reiss”),
John Ritchie (“Ritchie”), Vincent T. Roche
(“Roche” and collectively with Shanmugaraj,
Gavin, Murphy, Mikkelsen, Swanson, Chung, Reiss, and Ritchie,
the “Individual Defendants”); the selling
defendants Matrix Partners VIII, L.P. (“Matrix”),
Summit Partners Venture Capital Fund III-A (“Summit
III-A”), Summit Partners Venture Capital Fund III-B
(“Summit III-B”), Summit Investors I, LLC
(“Summit Investors”), and Summit Investors I
(UK), L.P. (“Summit UK” and collectively with
Summit III-A, Summit III-B and Summit Investors,
“Summit”), Commonwealth Capital Ventures IV L.P.
(“Commonwealth”), the Malini Shanmugaraj 2016
QTIP Trust (“Shanmugaraj Trust”), Mehrdad
Givehchi (“Givehchi”), Givehchi LLC, John
LoMedico (“LoMedico”), Bhupendra C. Shah
(“Shah”), Bhupendra Shah 1999 Trust U/A DTD
10/06/1999 (“Shah Trust”), Christian Rasmussen
(“Rasmussen”), OFS Fitel, LLC
(“OFS”), Egan Managed Capital III, L.P.
(“Egan”), Weston & Co. VIII, LLC
(“Weston” and collectively with Matrix, Summit,
Commonwealth, Shanmugaraj Trust, Givehchi, Givehchi LLC,
LoMedico, Shah, Shah Trust, Rasmussen, OFS, Egan,
Shanmugaraj, Gavin, Swanson, Mikkelsen, Reiss, and Ritchie,
the “Selling Defendants”); and the underwriter
defendants Goldman Sachs & Co. (“Goldman
Sachs”), Merrill Lynch, Pierce, Fenner & Smith Inc.
(“Merrill Lynch”), Deutsche Bank Securities Inc.
(“Deutsche Bank”), Morgan Stanley & Co. LLC
(“Morgan Stanley”), Needham & Company, LLC
(“Needham”), Cowen and Company, LLC
(“Cowen”), William Blair & Company, LLC
(“William Blair”) and Northland Securities, Inc.
(“Northland” and collectively with Goldman Sachs,
Merrill Lynch, Deutsche Bank, Morgan Stanley, Needham, Cowen,
and William Blair, the “Underwriter
Defendants”). The Plaintiffs allege violations of
Section 11 of the Securities Act of 1933 (“Securities
Act”) against all of the Defendants, violations of
Section 12(a)(2) of the Securities Act against Acacia,
Shanmugaraj, Gavin, and the Underwriter Defendants,
violations of Section 15 of the Securities Act against the
Selling Defendants, violations of Section 10(b) and Rule
10b-5 of the Securities Exchange Act of 1934
(“Securities Exchange Act”) against Acacia,
Shanmugaraj, and Gavin, and violations of Section 20(a) of
the Securities Exchange Act against the Selling Defendants.
Prop. Am. Compl., Ex. 1 (“Prop. Am. Compl.”), ECF
Defendants moved to dismiss all claims against them with
Plaintiffs Steven Tharp (“Tharp”) and Zhang,
individually and on behalf of all other similarly situated,
each filed a class action complaint against Acacia,
Shanmugaraj, and Gavin on August 14, 2017 and August 16,
2017, respectively, alleging violations of the Securities Act
and the Securities Exchange Act. Class Action Compl.,
17-cv-11504, ECF No. 1; Class Action Compl., 17-cv-11518, ECF
No. 1. Other Plaintiffs filed similar actions against Acacia
soon after. See Docket Nos. 17-cv-11695;
17-cv-11988; 17-cv-12350; 17-cv-12550; 17-cv-12571;
18-cv-10465. On October 13, 2017, class member Ronald Sobala
(“Sobala”) filed a motion to consolidate any
related actions filed pursuant to Rule 42(a) of the Federal
Rules of Civil Procedure and appoint Sobala as lead counsel.
Sobala Mot. Cons., ECF Nos. 21, 22. That same day, WKW
Partners, Zhang, and class member David A. Klopfenstein filed
similar motions to consolidated related cases. Mot. Cons.,
ECF Nos. 27, 31, 32, 35. On November 1, 2017, the Court
ordered that the related cases be consolidated under the
oldest case number, 17-cv-11504. Electronic Clerk's
Notes, ECF No. 50; Order, ECF No. 51. The Plaintiffs then
filed a consolidated amended complaint on January 8, 2018,
alleging violations by all the Defendants of Section 11 of
the Securities Act (count I) and Section 12(a)(2) of the
Securities Act (count II); violations of Section 15 of the
Securities Act by the Individual Defendants and the Selling
Defendants (count III); violations of Section 10(b) and Rule
10b-5 of the Securities Exchange Act by Acacia and the
Individual Defendants (count IV); and violations of Section
20(a) of the Securities Exchange Act by the Individual
Defendants (count V). Am. Compl. ¶¶ 325-56, ECF No.
subset of the Selling Defendants -- Commonwealth, Egan,
Matrix, Summit, and Weston (collectively, the
“Shareholder Defendants”) -- moved to dismiss
counts I, II, and III of the amended complaint on February 9,
2018. Shareholder Defs.' Mot. Dismiss (“Shareholder
Defs.' Mot.”), ECF No. 98; Shareholder Defs.'
Mem. Law Supp. Mot. Dismiss (“Shareholder Defs.'
Mem.”), ECF No. 99. The same day, the Underwriter
Defendants moved to dismiss counts I and II of the amended
complaint. Underwriter Defs.' Mot. Dismiss
(“Underwriter Defs.' Mot.”), ECF No. 101;
Underwriter Defs.' Mem. Law Supp. Mot. Dismiss
(“Underwriter Defs.' Mem.”), ECF No. 102. OFS
also moved to dismiss all claims asserted against it. Def.
OFS Mot. Dismiss (“OFS's Mot.”), ECF No. 103;
Def. OFS Mem. Law Supp. Mot. Dismiss (“OFS's
Mem.”), ECF No. 104. Finally, Acacia, the Individual
Defendants, Shah Trust, Givehchi, Givehchi LLC, Lomedico,
Rasmussen, Shah, and Shanmugaraj Trust (collectively, with
Acacia and the Individual Defendants, the “Acacia
Defendants”) moved to dismiss all counts of the amended
complaint. Acacia Defs.' Mot. Dismiss (“Acacia
Defs.' Mot.”), ECF No. 105; Acacia Defs.' Mem.
Law Supp. Mot. Dismiss (“Acacia Defs.'
Mem.”), ECF No. 106. The Plaintiffs filed their
opposition to the above motions on March 9, 2018. Pls.'
Opp'n Defs.' Mot. Dismiss (“Pls.'
Opp'n”), ECF Nos. 109, 110, 111, 112. The
Shareholder Defendants, OFS, the Underwriter Defendants, and
the Acacia Defendants filed replies to the Plaintiffs'
opposition briefs on March 23, 2018. Defs.' Reply
Pls.' Opp'n (“Defs.' Reply”), ECF
Nos. 126, 127, 128, 129.
March 29, 2018, the Court heard oral argument on the motions.
Electronic Clerk's Notes, ECF No. 145. The Court took the
matter under advisement but granted the Plaintiffs 30 days to
file a motion for leave to amend the complaint. Id.
The Court informed the Defendants that they could file a
response to the motion for leave to amend within 14 days.
Id. The Court cautioned the parties that were it to
decide to dismiss the complaint on what it
“understand[s] is the factual record, ” it would
dismiss with prejudice because it gave the Plaintiffs
“every chance” to file a proper complaint. Tr.
3/29/18, 7:18-8:3, ECF No. 147.
April 30, 2018, the Plaintiffs filed a motion to amend the
consolidated amended class action complaint along with their
Proposed Amended Complaint (“Prop. Am. Compl.”).
Pls.' Mot. Am., ECF Nos. 160, 161. On May 14, 2018, the
Defendants opposed the motion. Defs.' Opp'n Am.
Compl., ECF No. 165.
Factual Background as Alleged in the Proposed Amended
is a company that designs, produces, and sells highspeed
coherent optical interconnect products for cloud
infrastructure operators and content and communication
service providers. Prop. Am. Compl. ¶ 18. These products
are designed to improve a customer's communications
network. Id. Acacia is headquartered in Maynard,
Massachusetts. Id. On July 28, 2017, Acacia had more
than 39, 200, 000 shares issued and outstanding. Id.
at ¶ 19.
is Acacia's President, CEO, and a member of its Board of
Directors (the “Board”). Id. at ¶
21. Gavin is the CFO of Acacia. Id. at ¶ 22.
Murphy is Acacia's Corporate Controller and Principal
Accounting Officer. Id. at ¶ 23. Mikkelsen is
Acacia's Chief Technology Officer (“CTO”) and
a member of the Board. Id. at ¶ 24. Swanson is
Acacia's Chairman of the Board, a position he has held
since August 2009. Id. at ¶ 25. Chung is a
member of the Board, a position he has held since April 2013,
and a managing director and CEO of Summit Partners, L.P.
(“Summit Partners”), a venture capital firm.
Id. at ¶ 26. Reiss is a member of the Board, a
position he has held since August 2009, and a general partner
at Matrix Partners, a venture capital firm. Id. at
¶ 27. Ritchie is a member of the Board, a position he
has held since April 2015. Id. at ¶ 28. Roche
is a member of the Board, a position he has held since June
2016. Id. at ¶ 29. The Plaintiffs allege that
each of these individual defendants either signed or
authorized the signing or issuance of the registration
statement in connection with Acacia's secondary public
offering of common stock (the “Secondary
Offering”). Id. at ¶¶ 21-29.
following defendants sold Acacia common stock in connection
with the Secondary Offering: (a) Matrix, an entity affiliated
with Matrix Partners and Reiss; (b) Summit, a collection of
entities affiliated with Summit Partners and Chung; (c)
Weston, an entity affiliated with Matrix Partners and which
shares the same address as Reiss and Matrix in Massachusetts,
owned common stock in Acacia directly, and held stock as a
nominee for Matrix and others; (d) Shanmugaraj; (e) Gavin;
(f) Swanson; (g) Mikkelsen; (h) Reiss; and (i) Ritchie.
Id. at ¶¶ 31-37. The Plaintiffs allege
that the Selling Defendants sold common stock and solicited
purchasers of common stock in connection with the Secondary
Offering, as well as causing Acacia to effectuate the Initial
Public Offering (“IPO”) and the Secondary
Offering. Id. at ¶ 37.
Sachs, Merrill Lynch, Deutsche Bank, Morgan Stanley, Needham,
Cowen, William Blair, and Northland served as underwriters
for the Secondary Offering and did business in connection
with the Secondary Offering. Id. at ¶ 38.
products are designed to assist with high-speed networking.
Id. at ¶ 40. Acacia sells the products to
communications and content service providers, and data center
and cloud infrastructure operators. Id. at ¶
41. A couple of Acacia's biggest customers, who account
for a majority of its revenues, include ZTE, a subsidiary of
ZTE Corporation based in Shenzhen, China; ADVA, a subsidiary
of Germany-based ADVA Optical Networking SE (“ADVA
SE”); and Coriant, Inc. (“Coriant”), a
company based in Munich, Germany. Id. at ¶ 45.
of Acacia's contracts with these customers, Acacia is
given access to non-public information from the customers
regarding the customers' forecasts and demand for the
products by the public. Id. at ¶¶ 52-54.
This information, the Plaintiffs allege, aids Acacia in
determining the demand for its products from customers.
Id. Customers are also required to advise Acacia of
any event that could have a significant impact on the
contracts, and vice-versa. Id. at ¶ 56.
Acacia's Initial Public Offering
18, 2016, Acacia completed its IPO. Id. at ¶
71. As part of the IPO, Acacia issued and sold 4, 570, 184
shares of common stock at $23 per share. Id. Certain
stockholders sold an additional 604, 816 shares to the public
at the same price. Id. Acacia received more than
$105, 000, 000 in gross proceeds. Id. All of the
Underwriter Defendants, except for William Blair, were
involved in underwriting the IPO, with Goldman Sachs, Merrill
Lynch, and Deutsche Bank serving as joint bookrunners and
Needham, Cowen, and Northland acting as co-managers.
Id. The “selling stockholders” in the
IPO included Shanmugaraj, who sold 50, 000 shares, receiving
$1, 150, 000 in gross proceeds; Gavin, who sold 7, 500 shares
and received $172, 500 in gross proceeds; and three other
Acacia executives, who together sold another 413, 816 shares
of their personally-held Acacia common stock, receiving more
than $9, 500, 000 in gross proceeds. Id. at ¶
China's Market and its Connection to Acacia
2015, China announced a plan to upgrade its wireless and
telecommunications infrastructure, hereinafter referred to as
the “China Buildout.” Id. at ¶ 84.
There were two phases to the China Buildout: first, the
national backbone expansion phaseand second, the provincial
buildout phase. Id. at ¶¶ 94, 103. As
part of the China Buildout, China's main wireless
carriers were tasked with choosing vendors who would provide
the necessary services and equipment. Id. at ¶
92. These vendors included ZTE and Huawei Technologies, Inc.
(“Huawei”), which would then place orders from
component part manufacturers such as Acacia. Id. at
¶ 93. During the first phase of the China Buildout, ZTE
had large and valuable orders that it needed to fulfill.
Id. at ¶ 95. By August 11, 2016, Acacia was
supplying products to ZTE to fulfill those orders.
Id. at ¶ 94. The Plaintiffs allege that this
led to Acacia's “receiv[ing] extensive business and
experience[ing] explosive growth” during this phase of
the China Buildout. Id. at ¶ 95.
the demand for products in connection with the China
Buildout, the Plaintiffs allege that China had been
experiencing a decline in its wireless market. Id.
at ¶ 96. The Plaintiffs claim the “warning signs
of a slowdown in China were known to industry participants
long before the Secondary Offering closed.”
Id. at ¶ 97. Starting in April 20, 2015,
research reports and articles warned of a slowdown in demand
for wireless equipment. Id. at ¶¶ 97-99,
101. The Plaintiffs allege that Acacia knew of the market
decline before the close of the Secondary Offering in October
of 2016. Id. at ¶¶ 96-97.
Plaintiffs allege that at the same time, ZTE was shifting its
focus from a 4G network infrastructure to a 5G network
infrastructure. Id. at ¶ 100. According to the
Plaintiffs, a ZTE spokesperson had commented in an article
published on July 18, 2016, entitled “China nears full
mobile broadband coverage on back of increased 4G adoption,
” that China would be accelerating its 5G network
infrastructure, decreasing demand for 4G equipment.
Id. at ¶ 101.
Plaintiffs claim that Acacia knew of the decline in demand in
China because on August 12, 2016, Shanmugaraj stated that
“ZTE . . . in Q1 was pretty large, 46% revenue. And
that was because of the backbone build-outs. And then in Q2
they've dropped down to 31%.” Id. at
¶ 108. Despite the decrease in revenue, Shanmugaraj went
on to say that Acacia sees a “continual strong backlog
as well from ZTE going into the rest of the year. [It
doesn't] see a whole lot of slowdown . . . in terms of
backlog coming from ZTE, or growth prospects for them in
terms of expansion.” Id. Shanmugaraj continued
to predict strong demand in China on January 10, 2017.
Id. at ¶ 109.
May 2017, the second phase of the China Buildout had not yet
been approved. Id. at ¶ 110. On June 7, 2017,
at the Bank of America Merrill Lynch Global Technology
Conference, Shanmugaraj stated that there was a current delay
in the provincial networks and that some of the deployments
had been delayed, and that the timing of the purchase orders
would be hard to predict. Id. at ¶ 111. On June
13, 2017, Shanmugaraj stated again that the timing of the
provincial phase of the China Buildout was unclear and that
business orders could occur “in July or in September or
in November, it's hard to tell.” Id.
Plaintiffs allege that ADVA was also experiencing delays with
its CloudConnect product, which decreased demand for
Acacia's products sometime around October 27, 2016.
Id. at ¶¶ 115-16. ADVA had fallen three
months behind in shipping its product due to “yields,
scaling output, software and hardware challenges, ” but
it “[had] them all under control and [was] moving
forward.” Id. The Plaintiffs claim that these
difficulties must have started “no later than the end
of July 2016 (three months before late-October 2016), and
possibly earlier.” Id. at ¶ 116. On
October 26, 2017 ADVA issued a press release in which it
reported that “[q]uarterly revenues decreased to EUR
111.2 million from EUR 144.2 in Q2 2017, ” which
“marks a decrease of 30.3% year-on-year . . . .”
Id. at ¶ 122.
Acacia's Secondary Public Offering
beginning of the class period, August 11, 2016, Acacia
announced that for its second quarter, ending June 30, 2016,
it had a net income of $17, 600, 000 under Generally Accepted
Accounting Principles (“GAAP”) on revenue of
$116, 190, 000. Id. at ¶ 153. Compared to the
prior year, Acacia had an increase of 101% in revenue and
274% in net income. Id. Acacia predicted that it
would continue to see a strong growth and demand for its
product in the future. Id. at ¶¶ 154-71.
about October 7, 2016, after having filed an initial
registration statement for the Secondary Offering with the
SEC, Acacia priced the Secondary Offering at $100 per share
and filed its final prospectus (collectively with the
registration statement, the “Offering Documents”)
with the SEC. Id. at ¶ 133. The Secondary
Offering closed on October 13, 2016 and Acacia issued and
sold 1, 210, 302 shares of common stock, receiving more than
$121, 000, 000 in gross proceeds; the Selling Defendants sold
approximately 3, 289, 698 of their personally held shares,
receiving approximately $328, 900, 000 in gross proceeds.
Id. The Plaintiffs purchased their common stock in
the Secondary Offering. Id. at ¶ 17.
Offering Documents stated in part that Acacia had
“experienced rapid revenue growth over the last several
years, ” noting that its “revenue for 2015 was
$239.1 million, a 63.5% increase from $146.2 million of
revenue in 2014, ” and that its “revenue for the
six months end[ing] June 30, 2016 was $200.7 million, a 91.0%
increase from $105.1 million of revenue in the six months
ended June 30, 2015.” Id. at ¶ 136. For
the quarter ending September 30, 2016, the Offering Documents
stated that Acacia expected “revenue of $130 million to
$133 million, ” an increase of more than 100% over the
$65.4 million reported in the third quarter of 2015.
Id. The Offering Documents also stated that
Acacia's “revenue ha[d] generally increased . . .
due to increased demand for products in [its] 100 Gbps
product family, as well as the introduction of new products
in [its] 400 Gbps product family.” Id. at
¶ 137. The Offering Documents further stated that
Acacia's “Competitive Strengths” included
“[c]ustomer collaboration provid[ing a] deep
understanding of market needs.” Id. Acacia
further explained that it “continue[d] to enhance and
expand [its] product families, and as [its] existing
customers [sought] to expand and improve their network
equipment technology, [Acacia] expect[ed] to generate
additional revenue through sales to these customers.”
Id. ¶ 138. The Offering Documents also
addressed the design and manufacture of the products, stating
that “engineers and supply chain personnel work closely
with third-party contract manufacturers and fab foundries to
increase yield, reduce manufacturing costs, improve product
quality and ensure that component sourcing strategies are in
place to support our manufacturing needs.” Id.
at ¶¶ 139-40.
Alleged Misstatements and Omissions
Plaintiffs allege that the Offering Documents were misleading
because they failed to disclose the uncertainties in
China's market and uncertainties with the second phase of
the China Buildout. Id. at ¶¶ 141-43. They
allege that the Offering Documents failed to “disclose
the fundamental shift in the broadband expansion in China,
which was transitioning from the national backbone expansion
-- for which business was awarded in a handful of large
orders -- to individual provincial buildouts -- which would
involve a series of smaller business awards.”
Id. at ¶ 146. The Plaintiffs claim that because
most of Acacia's revenue is generated from the
Asia-Pacific region, and because of “the importance of
the broadband expansion in China to [Acacia's] business,
the omission of this key information rendered the Offering
Documents incomplete and, therefore, materially misleading
and negligently prepared.” Id. at ¶¶
145-46. The Offering Documents also failed to disclose that
Acacia's manufacturing, quality control, and oversight
processes were insufficient to prevent basic quality issues
from occurring. Id. at ¶¶ 141-52.
Plaintiffs acknowledge that the Offering Documents provided a
disclosure under the heading “The industry in which we
operate is subject to significant cyclicality, ” which
stated in part:
Capital expenditures can be highly cyclical due to the
importance and focus of local initiatives, such as the
ongoing telecommunications build out and upgrade in China,
government funding and other factors, thus resulting in wide
fluctuations in product supply and demand. From time to time,
these factors, together with changes in general economic
conditions, have caused significant industry upturns and
downturns that have had a direct impact on the financial
stability of our customers, their customers and our
Id. at ¶ 147. They also acknowledge that the
Offering Documents mentioned certain risks associated with
the ownership of Acacia stock “that may cause the
market price” of said stock to fluctuate, including:
announcements by our customers regarding significant
increases or decreases in capital expenditures; [and] changes
in general economic, industry and market conditions and
trends, including the economic slowdown in China that began
in 2015 and the uncertainty arising from the June 2016
referendum vote in the United Kingdom in favor of exiting
from the European Union.
Id. at ¶ 150 (emphasis in original).