2nd Circuit: Failure to Disclose 'Known Uncertainties' States Securities Claim

In a May 25, 2012 decision in a long-running case that, among other things, could have important implications for the lawsuits recently filed against Facebook, the Second Circuit reversed the lower court's dismissal of the securities suit involving Ikanos Communications, holding that the plaintiff's proposed amended complaint "plausibly alleged that the [undisclosed] defects constituted a known trend or uncertainty that the Company reasonably expected would have a material unfavorable impact on revenues." A copy of the Second Circuit's May 25 opinion can be found here.

Background

As discussed at greater length here, the Ikanos lawsuit relates to problems the company was having with defects concerning certain of the company's semiconductor chips at or about the time the company completed a $120 million secondary offering in March 2006. The plaintiffs allege that the company first learned there were quality issues with the chips in January 2006. They allege that the issues became more pronounced in the weeks leading up to the offering, as the company received more complaints. The complaint alleges that the company's board discussed the problems.

The plaintiffs allege that the company's offering documents did not disclose the magnitude of the defects issue. Ultimately, the company determined that the particular chips had an "extremely high" failure rate, and the company agreed to replace all of the units it had sold. The company later reported a net loss, and its share price declined. After the company's CEO resigned, plaintiffs filed suit.

The district court dismissed the plaintiff's initial complaint for failure to state a claim, concluding that the "no plausibly pleaded fact suggests that Ikanos knew of should have known of the scope of the magnitude of the defect problem at the time of the Secondary Offering." The plaintiff moved for reconsideration, offering a proposed amended complaint, which included the specific allegation that the defect problem was becoming more pronounced in the weeks leading up to the offering. The district court denied the motion for reconsideration, reiterating the view that no plausibly pleaded fact suggested that the company knew of should have known of the magnitude of the defect problem at the time of the offering.

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Read other items of interest from the world of directors & officers liability, with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.

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