Tellabs lawsuit reinstated

Appeals court ruling favors shareholders.

FROM CHICAGO TRIBUNE

By Jon Van

A shareholder lawsuit alleging that executives at Tellabs Inc. misled investors about the firm's health five years ago was given a green light to proceed Wednesday when a federal appeals court reversed a lower court ruling that favored the company.

The class-action suit, filed in 2001, alleged that Richard Notebaert, then Tellabs chief executive, and Michael Birck, co-founder and chairman of the telecom equipment supplier, painted a rosy picture of the Naperville-based firm's prospects that they knew was false.

Tellabs stock during the period in question fell from above $60 a share to less than $15 as sales of telecom equipment slumped. Notebaert at the time blamed the decline on fallout from the bursting of the Internet bubble, which was disastrous for the telecom industry.

The lawsuit alleges that even before the bubble burst, Notebaert and other Tellabs executives artificially inflated equipment sales. Notebaert repeatedly told analysts and shareholders that demand for Tellabs' traditional product, called the Titan 5500, was strong and growing. He also said that a new product, called the Titan 6500, was shipping and gaining customer acceptance.

In fact, the suit alleged, Tellabs was shipping Titan 5500 products that hadn't been ordered--a practice called 'channel stuffing'--in order to inflate the company's sales revenue. Also, the suit quoted unnamed insiders at Tellabs as saying that the company wasn't yet making the Titan 6500 when Notebaert claimed it was gaining market acceptance.

In addressing these and other allegations, a U.S. District Court in Chicago ruled in 2005 that various disclaimers issued by Tellabs in 2000 and 2001 negated whatever misleading statements its executives may have made. The U.S. Court of Appeals for the 7th Circuit disagreed, ruling Wednesday that the disclaimers were not specific enough.

The appeals court also found there is sufficient likelihood that Notebaert knew his statements would mislead investors, so that the lower court should continue with the case to determine the facts.

In response to Wednesday's ruling, Tellabs issued a statement that said it 'believes this case is without merit. Our counsel is reviewing this decision, which was just issued today, and we cannot elaborate until that review is complete.'

Notebaert took the reins at Tellabs in 2000. He had been CEO of Ameritech, which was sold to SBC Communications Inc. In 2002, Notebaert left Tellabs to become CEO of Qwest Communications International Inc., a Denver-based carrier.

When he took over at Qwest, it was on the verge of bankruptcy following a series of financial and accounting scandals. Notebaert, who was hired in part for his spotless reputation, has been hailed for rejuvenating Qwest and putting it on a more solid financial footing.

Source: Chicago Tribune