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July 23, 2002


The opinion of the court was delivered by: Dalzell, District Judge.


Plaintiffs in this putative class action assert a claim of securities fraud under § 10(b) of the Securities and Exchange Act of 1934 ("Exchange Act") against ATI Technologies, Inc. ("ATI"), and under § 20(a) of the Exchange Act against senior officers and directors of ATI, based on controlling persons liability. Plaintiffs allege the defendants made various materially false or misleading statements or omissions which artificially inflated the price of ATI stock, which sharply fell when the true condition of the company emerged.

Before us is defendants' motion to dismiss, pursuant to Fed.R.Civ.P. 12(b)(6) and 9(b) as well as the Private Securities Litigation Reform Act of 1995, 15 U.S.C. ¶¶ 78u-4 and 78u-5. Also before us is a motion of plaintiffs to strike documents presented as exhibits to the defendants' motion to dismiss.


We here recite the allegedly false or misleading statements set forth in the complaint, and the reasons they are alleged to be misleading.*fn1

Plaintiffs allege that ATI, through its officers and agents, including the individual defendants, made materially false and misleading statements prior to that announcement, specifically between January 13, 2000 and May 24, 2000, that artificially inflated the value of ATI stock. We now canvass these allegedly false and misleading statements.

Allegedly Misleading Statements and Omissions

1. January 2000 Press Release & Announcements

ATI issued a press release on January 13, 2000 announcing its financial results for the first quarter of the fiscal year 2000, in which it touted its "`record in revenues' and financial results for the first quarter." Am. Compl. at ¶ 21; Mot. Dismiss, Ex. A (Press Release). The company announced that its earnings met analysts' expectations. Net income for the quarter was said to be $53.6 million, or $0.25 per share, an increase in 26% from net income for the same quarter a year earlier. Inventory reportedly increased to $212 million. Id.

The press release heralded that "Sales in the first quarter reflected solid demand for ATI's RAGE 128 and RAGE MOBILITY products, which comprised a greater percentage of corporate revenues than in prior quarters." Id. A statement was attributed to President and CEO Kwok Yuen Ho, "`Once again we have delivered a strong start to the new year. . . . ATI approaches a bright future with growth prospects not only in our traditional PC business, but in new and burgeoning markets like consumer electronics appliances. We look forward to the year 2000 as these new markets continue to emerge.'" Id. at ¶ 22.

ATI hosted a conference call the same day it issued the press release. Defendants Chwartacky and Ho, and other officers of ATI, discussed with analysts, money managers, and large stockholders the performance of ATI during the first quarter and the company's prospects for future earnings. Id. at ¶ 23. Defendants projected that gross margins would remain in the low 30% range, which is above industry norms. Id. According to the complaint, defendants stated that sales increased 26% over the year-earlier quarter, remained strong, and were on track to increase 25% for the rest of the year. Id. Defendants opined that revenue growth of 25% for the fiscal year 2000 could be reached, noted that average selling prices increased in both board and chip categories, and declared that the market's acceptance of ATI's products was "overwhelming" and that, with increased shipments, ATI's market share would increase. Id. Finally, defendants reported that inventory had increased to $212 million and was comprised mainly of works in progress and raw materials. Id.

In response to a question about ATI's competitors, Ho declared, "We are taking market share from all of [them]." Id. at ¶ 24. On January 14, 2000, Ho commented, "[E]verything is under control." Id. at ¶ 37.

2. February 2000 Press Release & Annual Report

As will be seen later, plaintiffs cite a number of statements from February of 2000 as the predicate for their claim that defendants artificially pumped up ATI's price.

In the Form 40-F Annual Report ATI filed with the SEC on February 2, 2000, "Defendants emphasized the increase in sales in Europe and stated that its RAGE 128 PRO `allows ATI to maintain gross margins and improve average selling prices over those which would otherwise prevail.'" Am. Compl. at ¶ 50. ATI opined that consolidation in the industry would benefit it because "the merger of [our competitors] supports the long-standing integrated chip and board business model employed by ATI" and that "ATI's technology portfolio is well positioned to target [] new market opportunities." Id.

In a press release issued the same day, ATI announced that Toshiba had chosen it to supply mobile graphics for Toshiba's new line of mobile personal computers. Id. at ¶ 52. In this press announcement, Ho stated, "ATI has become a leading supplier of mobile graphics in a very short time based on the strength of our product." Id.

Two press releases soon followed, on February 8 and 14. In the February 8 press release, ATI claimed that it "is now the world's highest volume supplier of mobile graphics," and added,

"ATI's market leadership of the mobile graphics field has achieved in a very short time by doing what the company does best: building on our computer excellence, focusing on added value for a new market segment, and excelling at execution," said KY Ho, President and CEO, ATI Technologies, Inc. "We will continue to exploit our unique set of strengths as we move progressively into new market beyond our PC."

Id. at ¶ 53. The February 14 press release announced that Sony had chosen ATI to supply graphic chips for Sony's new digital set-top box, stating in part,

"The Sony/ATI collaboration joins the premier brand in home electronics with the leading manufacturer of graphics and video components," said Vincent Win, vice president of OEM Sales, ATI. "ATI is proud that Sony has chosen ATI's graphics for its new set top box. This design win further positions ATI as a key player in the future development of consumer electronics devices, an important emerging market for us in the years ahead."

Id. at ¶ 54.

ATI also announced that it planned to acquire ArtX, Inc., a corporation engaged in computer appliance graphics. Compl. at ¶¶ 57-61. ATI acquired ArtX for $453 million payable in ATI stock and stock options, on or about April 5, 2000. Id. at ¶ 64. In the February 16 press release announcing the expected ArtX acquisition, ATI stated:

"This acquisition accelerates the implementation of our long-term strategic plan to be a key supplier to both the PC and consumer electronics industries," said Ky Ho, Chairman and CEO of ATI, "Our reach now encompasses all major types of e-appliances including set-top boxes, game consoles and video playback devices."

Id. at ¶ 57. The press release was attached to a Form 6-K filed on February 29 with the SEC and signed by James Chwartacky. Id. at ¶ 58. In a conference call publicizing the ArtX acquisition, Vice-President of Corporate Marketing Henry Quan stated in the presence of defendant Ho,

The e-appliance opportunity rates strong growth. We're banking on the fact that this will be half of ATI's business by the end of the decade. . . . Without accounting for synergies, the deal will add over $600 million of revenues over the next five years . . . There are additional design wins coming. I know we keep saying this, trust me, you'll see more announcements coming in the next couple of weeks.

Id. at ¶ 59. In a press release published on February 25th, ATI reported that by means of the acquisition of ArtX it was able to introduce its integrated S1-370 TL chipset ahead of schedule, and stated, "This is the strongest product in the integrated market and with ATI's sales and distribution strength behind it, we expect to capture a significant share of the value PC market." Id. at ¶ 61.

3. April, 2000 Second Quarter Announcements

Plaintiffs lastly allege misrepresentations in connection with defendants' April, 2000 announcement regarding ATI's second quarter financials for the period ending February 28, 2000.

On April 6, defendants issued a press release and hosted a conference call. They announced that financial results had again met analysts' expectations. For example, second quarter profit had more than doubled from the year before to $51.1 million, or $0.24 per share, as compared with $21.7 million, or $0.10 per share, the year before. Sales were 28% greater than they were the same quarter the previous year. In the conference call, defendants also gave optimistic forecasts. They predicted that gross margins would be in the low 30% range the rest of the year; sales would increase 20 to 25% for the year; the remainder of the year would progress as expected with solid sales and earnings; and system integrator business, a key ATI market, would continue to grow. Defendants reported that ATI had reached 50% market share in the sale of mobile graphics, and inventory had increased to $213 million. When asked by an analyst whether a component shortage existed that would affect ATI's performance over the year, defendant Ho allegedly responded, "Based on long term business and personal and private relationships, we feel very comfortable we can manage very well." Am. Compl. at ¶¶ 65-67.

The April 6 press release said that "Sales in the quarter was [sic] illustrative of good demand for the entire breadth of ATI's product line: both on the desktop and in the mobile segments. In particular, RAGE 128 PRO and RAGE MOBILITY chips and boards comprised a greater proportion of the Company's sales this quarter." Id. at ¶ 65. In this press release, Ho also commented, "`Our second quarter places ATI solidly on track with corporate plans, with strong sales of our newer products including the RAGE 128 PRO and RAGE MOBILITY families. [] With such healthy results and our initial successes in e-appliances we are well on the way to becoming the leading semiconductor supplier of both PCs and consumer electronic devices.'" Id. at ¶ 66.

Reasons Offered for Why the Statements are Misleading

The complaint asserts that these statements hid the true condition of ATI. The reasons the complaint offers for why the statements were misleading fall into four general classes, which we will discuss in turn: (1) problems in marketing and design of the "Rage 4/Rage 128" and "Rage 5/Rage 128 Pro" chips; (2) an impending decline in profits and sales; (3) overvalued inventory; and (4) a global shortage in components.

The cumulative impact of these claimed misstatements may be seen from what happened on May 24, 2000, when ATI announced that it would report lower than expected revenue and a third quarter loss: the price of ATI stock dropped by fifty percent in two days, closing at $16.75 per share on May 23rd and at $8.44 per share at the close on May 25. Am. Compl. at ¶¶ 74, 80.

1. "Rage" Graphics Cards

Plaintiffs allege that ATI concealed information about performance problems with Rage graphic cards and portrayed the graphic cards in a misleading light. The complaint states that the graphic cards, Rage 4/Rage 128 and Rage 5/Rage 128 Pro, were major ATI products. Am. Compl. at ¶ 42.

According to a former Hardware and Software Design Manager, sales of Rage 4/Rage 128 were a "disaster." Id. at ¶ 43. In April 1999, a memorandum distributed internally and written by Adrian Hartog, former Senior Vice-President of Engineering and current Chief Technology Officer, allegedly discussed Rage 4's poor sales. Id.

By the fall of 1999, plaintiffs claim it also became clear that "there was a fairly major issue" with the Rage 5/Rage 128 Pro chip, according to the former Design Manager. ATI made several production runs of the chip. Each successive run generated thousands of unsaleable chips. Although engineering, design, marketing and management employees collaborated to improve the chip, by late fall it became evident that the chip suffered from defects in its physical design and could not compete in the market. After repeated fruitless refabrication, an executive decision was made to halt design and production of Rage 5 pending reevaluation. CEO Ho was, plaintiffs alleged, personally involved in the decision to stay production. Information about cessation of development of Rage 5 is said to come from the former Hardware and Software Design Manager and a former employee who performed research and design in ATI's Pennsylvania's office. Id. at ¶¶ 44-45.

In addition to the mid-1999 memo addressing the inability to sell the Rage 4/Rage 128 chip, id. at ¶¶ 43, 94, and the halting of production of Rage 5/Rage 128 Pro because the chip was not competitive, id. at ¶ 45, plaintiffs claim that ATI had other indications that the Rage chips were not actually enjoying strong sales. The former ATI Design Manager allegedly reports that ATI's revenue on Rage chips during the second quarter 2000 was allocable to shipment to European distributors. The European market is considered inferior to the American market because it generates lower profit margins and sales prices. Not only was the sale of Rage chips disappointing in the United States, according to the former Design Manager, but shortly after ATI targeted European markets, emails came to be circulated suggesting that Rage 4/Rage 128 chips would need to be written off. Id. at ¶ 95.

2. Projected Profit and Sales

Plaintiffs also maintain that defendants gave false forecasts about profit margins and sales. It should first be noted that "chips are designed to meet customers' forecasted needs." Am. Compl. at ¶ 24. Computer customers "book," or order, chips from manufacturers like ATI six to twelve months ahead of sales. Current bookings are therefore indications of future sales. Id. Customers buy chips in bulk, committing to use a chip as the standard component in a computer model line. A computer manufacturer's decision to use a chip is a "design win." Id. at ¶ 26. As the complaint explains, "A `design win' is a decision by a computer manufacturer such as Apple, Dell, Compaq, etc. to use a certain chip in a model line. It ensures a set number of sales for that chip, which could increase exponentially if the model is popular with the market as the manufacturer will likely contract with the same chip supplier for additional `builds' of that model as well as for the following year's model." Id.

In January of 2000, Apple Computer unveiled at its annual Mac World trade show that it planned to place the video graphic chip of one of ATI's competitors, 3DFX, in its high end computers. Id. at ¶ 30. "ATI's loss of this business was a severe blow because it was in the high end segment of the market that a company could achieve high margins. From January 1997 to January 2000, ATI had been the sole graphic card producer for Apple." Id.

Hewlett Packard (according to a former ATI Software Engineer), after repeatedly complaining about ATI's defective software design used in video support system drivers, allegedly told an ATI salesperson in the second half of 1999 that it would switch to another vendor. Id. at ¶¶ 31-32.

Not only did ATI experience a decline of bookings for the future, problems plaguing production of Rage 4 and Rage 5 increased costs. There were also delays in the delivery of products which threatened relationships with existing customers. Id. at ΒΆΒΆ 46-47. The complaint describes a component shortage and a spiraling supply of worthless inventory. Plaintiffs state, "because of the problems at the Company with marketing, engineering and design, the Company's margin was falling. Even when sales goals were reduced or met, or came close to being met, the margin the ...

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