Cisco Will Face Trial in Stockholder Suit

Cisco Systems Inc. must stand trial in a class-action lawsuit accusing the company of fraudulently predicting rapid sales growth while insiders were selling hundreds of millions of dollars of stock, a federal judge ruled Thursday.

U.S. District Judge James Ware of San Jose rebuffed Cisco’s motion to dismiss the case, finding that the shareholder allegations were specific and reasonable enough to merit a trial. The shareholders now can begin to gather evidence from inside Cisco.

The alleged knowledge of Cisco executives that the company’s sales would fall, “combined with their suspicious stock sales, is sufficient to support a strong inference” of wrongdoing, Ware wrote.

Insiders at the largest maker of Internet routers and switches sold more than $600 million in stock between August 1999 and February 2001, the period covered in the lawsuit.

“While Cisco is disappointed with today’s ruling, we will vigorously defend ourselves against the false allegations in the complaint,” said Cisco spokeswoman Penny Bruce.

Nationally, about two-thirds of shareholder fraud suits make it past motions to dismiss. But in the Northern District of California the figure is lower, said William Lerach of Milberg Weiss Bershad Hynes & Lerach, one of the firms representing Cisco’s shareholders.

“If a fraud case up there against supposedly premium, blue-chip Cisco can make it, it ought to be a signal to Silicon Valley that times are changing,” Lerach said.

Ware also declined to dismiss as defendants Cisco Chief Executive John Chambers and other insiders, and Cisco’s auditor, PricewaterhouseCoopers, which is accused of failing to stop inaccurate financial reporting. The suit alleges that the Cisco auditor and consultant looked the other way as sales weakened and Cisco built up excess inventory that was later written down by $2.5 billion, a record among all public companies.

The suit is unusually complex. The 198-page complaint draws on information from former employees and customers and essentially contends that Cisco’s financial reporting took on aspects of a pyramid scheme.

By inflating sales and projections, the complaint says, Cisco kept its stock rising to become briefly the most valuable company in the world. It used the inflated stock to buy other firms.

After the insiders sold shares and the inventory charge was announced, Cisco’s stock slumped from more than $80 a share to $14.35 on Thursday, up 2 cents on Nasdaq.

Lerach said damages could total billions of dollars.