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Tharp v. Acacia Communications, Inc.

United States District Court, D. Massachusetts

June 15, 2018

STEVEN THARP, individually and on behalf of all others similarly situated, Plaintiff,
v.
ACACIA COMMUNICATIONS, INC.; MURUGESAN SHANMUGARAJ; and JOHN F. GAVIN, Defendants.

          MEMORANDUM & ORDER

          WILLIAM G. YOUNG WILLIAM G. YOUNG DISTRICT JUDGE

         I. INTRODUCTION

         This is 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”).[1] 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 No. 160-1.

         The Defendants moved to dismiss all claims against them with prejudice.[2]

         A. Procedural History

         The 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. 79.

         A 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.

         On 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.

         On 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.

         B. Factual Background as Alleged in the Proposed Amended Complaint

         1. Acacia

         Acacia 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.

         2. Individual Defendants

         Shanmugaraj 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.

         3. Selling Defendants

         The 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.

         4. Underwriter Defendants

         Goldman 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.

         5. Acacia's Business

         Acacia's 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.

         As part 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.

         6. Acacia's Initial Public Offering

         On May 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 ¶ 72.

         7. China's Market and its Connection to Acacia

         In 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 phase[3]and second, the provincial buildout phase.[4] 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.

         Despite 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.

         The 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.

         The 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.

         As of 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.

         The 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.

         8. Acacia's Secondary Public Offering

         At the 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.

         On or 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.

         The 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.

         9. Alleged Misstatements and Omissions

         The 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.

         The 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 suppliers.

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).

         10. Demand ...


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