Tellabs Must Face Securities Fraud Suit

CHICAGO (CN) - Makor Issues & Rights Ltd. has succeeded in convincing the 7th Circuit that Tellabs and CEO Richard Notebaert probably knew that company sales were not "still going strong" months before its stock tanked.

Tellabs makes equipment used in fiber-optic cable networks, principally a switching system called the TITAN 5500, which it sells to telephone companies.

In December 2000, Notebaert announced that TITAN 5500's successor, the TITAN 6500, was "available now" and that Sprint had signed a multi-year, $100 million contract to buy the 6500, though no sales had closed at the time. The defendant also announced that "customers are buying more and more Tellabs equipment," and told its stockholders that its growth was "robust" and that "customers are embracing" the TITAN 6500.

But Tellabs wasn't doing so well, the ruling states, and had resorted to flooding its customers with "tens of millions of dollars worth" of unordered 5500s in order to create an illusion of demand.

"Is it conceivable that (Notebaert) was unaware of the problems of his company's two major products and merely repeating lies fed to him by other executives of the company?" Judge Posner asked. "It is conceivable, yes, but it is exceedingly unlikely." The court reversed dismissal and remanded. See ruling.

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