Plaintiffs’ Powerwave Pleadings Prevail Over Motion to Dismiss
On October 23, 2013, Judge Cormac J. Carney of the Central District of California denied defendants’ motion to dismiss the class’s second amended consolidated complaint, allowing securities fraud claims against senior officers of the now-bankrupt Powerwave Technologies Inc. to proceed to discovery. The case began when shareholders, represented by Robbins Geller, filed their initial class action complaint in 2012, alleging that defendants made false and misleading statements regarding demand for the company’s products, revenue forecasts, and improper revenue recognition procedures. As a result of the alleged deception, when Powerwave revealed that it would fail to meet projections, its stock plummeted and would eventually become worthless as the scope of Powerwave’s predicament became clear. Judge Carney rejected defendants’ assertions in their motion to dismiss and found that plaintiffs had sufficiently pled “‘enough facts to state a claim to relief that is plausible on its face.’”
During the proposed class period, Powerwave sold its wireless communications products to original equipment manufacturers and wireless network operators. A substantial portion of the sales were made through resellers or “Turf Partners” who bought the products through the resellers, including Team Alliance. Customers such as AT&T would get their product from the Turf Partners. Plaintiffs alleged that Powerwave would ship product (changing the method of delivery from air freight to ship-born so as to delay actual delivery), including obsolete, unwanted or otherwise unsellable product, to Team Alliance. This continued to the extent that “Powerwave’s accounts receivable attributable to Team Alliance spiked to more than 2000% higher than sales in 3Q11 . . . . Prior to 1Q11, Team Alliance had accounted for less than 10% of total accounts receivable.”
As summarized by Judge Carney, the complaint sufficiently alleged that defendants had engaged in an accounting scheme to artificially inflate the company’s revenue and earnings when demand for Powerwave products was actually steeply declining. The complaint details how Powerwave, with the knowledge and approval of defendants, improperly recognized revenue by “(1) shipping ‘bulk orders’ of unsold and/or unsellable inventory to resellers on a contingent basis whereby Powerwave would explicitly waive payment, grant special extended payment terms, and/or grant rights to return the product if it could not be sold; and (2) knowingly and deliberately shipping product that Powerwave knew did not function with the promise to replace the defective products in a later quarter.”
During the same period that plaintiffs alleged defendants were conducting the above scheme, defendants made a number of public statements regarding contemporaneous demand and reported revenue, each of which failed to acknowledge that Powerwave was engaging in a practice of shipping last-minute bulk orders in order to meet its quarterly projections. Judge Carney explained that “the right of return coupled with delayed collection of payment effectively rendered the bulk orders consignment sales,” given that recognizing revenue on products before they are actually resold is improper and a violation of Generally Accepted Accounting Principles. The court ruled that the allegations set forth in the complaint “support the reasonable inference that Powerwave falsely inflated its revenue and created the appearance of demand for its products by arranging end-of-quarter bulk orders to Team Alliance in which Team Alliance had the right to return the products, and by subsequently delaying or failing to collect payment from Team Alliance.” Judge Carney also found that the bulk orders were of sufficient magnitude that the likelihood of the orders (and discounts and incentives on those orders) would require approval from the individual defendants and that “the inference of scienter [was] strong and outweigh[ed] any competing inference.”
As a result of plaintiffs’ successful opposition to defendants’ motion to dismiss, this case will proceed to discovery. According to Robbins Geller partner Robert R. Henssler, Jr., “We concur with Judge Carney’s ruling and look forward to aggressively prosecuting this case on behalf of the proposed class.”
Kmiec v. Powerwave Techs., Inc., No. 8:12-cv-00222, 2013 U.S. Dist. LEXIS 153031 (C.D. Cal. Oct. 23, 2013).