In Re: Cisco Systems, Inc. Securities Litigation 01-CV-20418

67 Pages·2006·2.68 MB·English

LERACH COUGHLIN STOIA GELLER
RUDMAN & ROBBINS LLP
WILLIAM S . LERACH (68581)
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SPENCER A. BURKHOLZ (147029)
DANIEL S. DROSMAN (200643)
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JONAH H. GOLDSTEIN (193777)
MATTHEW P. MONTGOMERY ( 180196)
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JESSICA T. SHINNEFIELD (234432)
655 West Broadway , Suite 1900
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San Diego, CA 92101
Telephone : [phone]
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619/231-7423 (fax)
1 I, Joseph S. Kraemer, Ph .D ., declare as follows :
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INTRODUCTION
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1 . I submit this declaration to set forth the basis for the charges incurred b y
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plaintiffs ' counsel for my work in connection with the action entitled In re Cisco Systems, Inc .
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Securities Litigation , No. C-01-20418 -JW(PVT). I performed all work in connection with th e
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Cisco litigation on an assignment basis .
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2. The purpose of this declaration is to summarize my professional qualification s
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I and the services I rendered in connection with the Cisco litigation .
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QUALIFICATIONS
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11 3 . I am currently a Director at the firm of Law & Economics Consulting Group
12 ("LECG") where I work in the Washington, DC office . I am a member of th e
13 telecommunications industry practice group .
14 4. I have consulted in the telecommunications and high technology industries sinc e
15 1975 . My areas of expertise include business strategy , regulation , market analysis , new product
16 development and rollout , revenue/cost forecasting and operational improvement . I have
17 provided consulting services to a range of telecommunications service providers including :
18 incumbent local exchange carriers, competitive local exchange carriers ("CLECs"),
19 interexchange carriers, wireless carriers and satellite carriers . I have also consulted with network
20 equipment and high technology manufacturers , as well as with television and radio
21 broadcasters/content providers . At various times, financial institutions have engaged me to
22 perform due diligence on potential investments in telecommunications companies /ventures . The
23 range of clients served includes both start -up companies and well established service providers .
24 My clients have included companies in North America, Europe and Asia.
25 5 . I began my consulting career at, and was a partner with, Touche Ross (which later
26 merged with Deloitte, Haskins & Sells to form Deloitte & Touche) where I led the Globa l
27 Telecommunications and Electronic Service practice . In 1994, after retiring from Deloitte &
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DECLARATION OF JOSEPH S . KRAEMER, Ph.D . IN SUPPORT OF MOTION FOR
FINAL APPROVAL OF CLASS ACTION SETTLEMENT - C-01-20418-JW(PVT) - 1 -
1 Touche, I joined EDS where I led a consulting practice focused on the telecommunications, hig h
2 technology and media industries .
3 6. In 1999, I left EDS and joined PHB Hagler Bailley ("PHB"), an economic an d
4 I management consultancy, where I led the firm's telecommunications practice . When PHB was
5 I sold, I left and joined LECG where I continue to provide consulting services t o
6 telecommunications service providers .
7 7 . I am a Certified Public Accountant (Virginia) and a Certified Managemen t
8 Consultant . My education includes a Ph .D. and Masters degree (University of Michigan), a
9 Masters of Business Administration (George Washington University), and a Bachelor's degre e
10 (Georgetown University) . I currently serve as an adjunct professor at both Georgetown
1 1 University's McDonough School of Business and at American University's Kogod Business
12 School where I teach courses related to electronic commerce and Internet-based business strateg y
13 and practice .
14 8 . I have appeared as an expert witness in multiple regulatory proceedings and in
15 disputes involving mediation, arbitration and litigation . I have also testified before state and
16 federal legislative committees on competition and other public policy issues in the
17 telecommunications and television industries .
18 9 . My curriculum vitae is attached hereto as Exhibit A .
19 10 . I was compensated for my work on this case at my usual and customary billin g
20 I rate of $425 per hour . My compensation was not dependent on the outcome of this matter or o n
2 1 the opinions I expressed.
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DESCRIPTION OF WORK PERFORMED
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11 . The law firm of Lerach Coughlin Stoia Geller Rudman & Robbins LLP retaine d
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me in this case as a telecommunications industry expert . In that role I was engaged to express an
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opinion as to : (1) whether reports filed by defendants' experts, James H . Vander Weide ("Vander
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Weide") and Jeffrey P . Williams ("Williams"), accurately described industry conditions ; (2) the
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DECLARATION OF JOSEPH S . KRAEMER , Ph.D. IN SUPPORT OF MOTION FOR
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1 impact of those conditions on Cisco System, Inc .'s ("Cisco") business plans ; and (3) what was
2 known and disclosed by Cisco's management with respect to that impact .
3 12 . If there were defects in reports filed by Vander Weide and Williams, then I was
4 asked to correct such errors, supply additional information and/or provide the necessary industry
5 context on an as required basis so as to correct defects in the expert reports of Vander Weide an d
6 I Williams .
7 13 . In preparing my report, I reviewed the relevant sections of the Vander Weide and
8 Williams Reports, as well as the documents listed in Exhibit B attached hereto . Those
9 documents included :
10 (a) The First Amended Consolidated Complaint for Violation of the Federa l
11 Securities Laws ;
12 (b) The Expert Report of D . Paul Regan;
13 (c) More than a dozen transcripts of depositions taken in the litigation ;
1 4 (d) A book about Cisco ;
15 I (e) Numerous internal documents produced by Cisco in discovery ;
16 I (f) Economic data ; and
17 (g) SEC filings for Cisco and several other companies within the
18 telecommunications or network provider industry .
19 14 . While the Vander Weide report suffered from a multitude of errors and omissions ,
20 I identified the core defects as follows :
21 (a) Vander Weide's "Summary of Opinions" contains five opinions of which
22 the fourth ("[t]he rapid decline in industry revenues in the spring of 2001 was unexpected") and
23 fifth ("Cisco's vendor financing and inventory practices were a rational and necessary response
24 to industry and competitive conditions") were the most relevant and significant to the issues
25 raised in the case .
26 (b) Although the relevant period in this case included the full calendar year
27 I 2000, Vander Weide emphasized industry conditions in the spring of 2001 in his fourth summar y
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DECLARATION OF JOSEPH S . KRAEMER , Ph.D. IN SUPPORT OF MOTION FOR
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1 opinion while largely ignoring conditions during 2000 . After analyzing Cisco's internal
2 documents, deposition testimony from Cisco's management and publicly-available documents
3 such as SEC filings, scholarly articles and books, and economic data, I concluded that by mid-
4 2000, the external market conditions had become adverse and put the successful attainment of
5 Cisco's FY 2001 (beginning August 2000) business plan goals at risk . The record showed that
6 the information necessary to understand the market situation was in the possession of Cisco
7 management . However, Cisco's management chose to ignore information that was contrary to
8 the attainment of the company's FY 2001 plan . Consequently, Cisco's management failed to
9 disclose information in a timely way that would have been of value to investors .
10 (c) I also concluded that Cisco seemed to have viewed vendor financing as a
11 sales channel or as a sales channel complement . Vendor financing was focused primarily on the
1 2 Service Provider ("SP") markets , especially in Cisco 's FY 2001 . The CY 2000 surge in the
1 3 demand for vendor financing should have served as a warning of deteriorating financial
14 conditions among customers and prospects in the SP industry . The information required to
15 update the fin ancial information in the lease/loan files (had Cisco bothered to collect it) would
16 have provided even more confirmation that the new entrants in the SP industry (e .g., CLECs)
17 were at risk of insolvency .
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15. My analysis led me to conclude that Vander Weide missed or failed to describ e
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the basic situation as it existed in the time frame addressed by his report . For example, Cisco's
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FY 2001 (August 2000-July 2001) plan was dependent upon a significant increase both in
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bookings and revenues in the SP line of business . Furthermore, within the SP industry, the plan
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targeted primarily the U .S . SP industry, in particular, Network Service Providers ("NSPs") and
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buyers of optical equipment . Beginning in the first quarter of FY 2001, Cisco failed to execute
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against its FY 2001 U .S. SP plan .
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16 . I discovered that Cisco was positioned ideally to understand its customers and th e
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I markets, including and especially the SP market, in which Cisco competed . The critica l
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components of this information engine included an Executive Information System ("EIS") tha t
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DECLARATION OF JOSEPH S . KRAEMER, Ph.D. IN SUPPORT OF MOTION FOR
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1 facilitated the "virtual close" on any given day or hour, 14,000 sales personnel in daily contact
2 with customers, and a forecasting process that was designed to facilitate the attainment of
3 "stretch" goals . Although Cisco's management chose to disregard the information received
4 about market conditions, such information was available on a near real-time basis . For Cisco to
5 claim ignorance of market conditions until late December 2000 or early January 2001 meant tha t
6 Cisco's management chose recklessly to disregard information that contradicted what
7 management wanted to hear, even when such information was available from systems and
8 processes that management had put in place .
9 17. Accordingly, I concluded that in its communications with investors, Cisco's
10 management recklessly disregarded information and signals received from the SP market -
11 including customers, its own sales people, competitors, industry analysts, and its own forecastin g
1 2 system/EIS .
13 18 . I also concluded that the analysis and conclusions of Williams were flawed .
14 Many of the errors and omissions in the Williams report overlapped with those identified in the
1 5 Vander Weide report, including :
16 (a) Williams disregarded the economic linkages between the dot .coms and the
17 NSP sector ;
18 (b) Williams ignored both the timing and the significance of the closure of th e
19 public capital markets to new entrants, such as CLECs and ISPs ;
20 (c) Williams used revenue as his primary indicator of economic conditio n
21 I rather than other more relevant indicators including, and especially, cash flow ;
22 (d) Williams failed to acknowledge the significant deterioration of ke y
23 inventory metrics, such as inventory turns and growth rates in excess of revenues ; an d
24 (e) Williams failed to identify the undisclosed risks and the implications of
25 the expansion of Cisco' s vendor financing program in early CY 2000 .
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DECLARATION OF JOSEPH S . KRAEMER, Ph.D . IN SUPPORT OF MOTION FOR
FINAL APPROVAL OF CLASS ACTION SETTLEMENT - C-01-20418-JW(PVT) - 5 -
1 19. Finally, both Williams and Vander Weide failed to focus on the core issue of what
2 Cisco's management knew, but failed to disclose and/or recklessly ignored in mid-to-late CY
3 2000.
4 FEES AND EXPENSE S
5 20. Pursuant to a non-contingent agreement with plaintiffs' counsel, I spent 574 .5 hours
6 working on this matter at a rate of $425 per hour . My case associate, Charlotte Brown, spent 65 .5
7 hours assisting me in this matter at a rate of $125 per hour . Another principal at LECG, Richard
8 Levine, spent 8 .5 hours assisting me in this matter at a rate of $350 per hour . The fee for my
9 firm's expert services totaled $244,162 .50. Plaintiffs' counsel has paid my firm's fees and
10 expenses related to this matter .
11 21 . In addition, I incurred $4,949 .12 in expenses directly related to my work as an
12 expert in this matter .
13 22. Attached hereto as Exhibit C is a summary further detailing my fees an d
14 expenses .
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I declare under penalty of perjury under the laws of the United States of America that the
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foregoing is true and correct. Executed this ILeday of November, 2006, at Washington, DC.
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JOSEPH S . KRAEMER, Ph.D.
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II DECLARATION OF JOSEPH S . KRAEMER, Ph .D . IN SUPPORT OF MOTION FO R
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FINAL APPROVAL OF CLASS ACTION SETTLEMENT -C-01-20418-JW(PVT) -6-
CERTIFICATE OF SERVICE
I hereby certify that on November 20, 2006, I electronically filed the foregoing with th e
Clerk of the Court using the CM/ECF system which will send notification of such filing to the e-mai l
addresses denoted on the attached Electronic Mail Notice List, and I hereby certify that I hav e
mailed the foregoing document or paper via the United States Postal Service to the non -CM/EC F
participants indicated on the attached Manual Notice List .
s/Spencer A. Burkholz
SPENCER A . BURKHOL Z
LERACH COUGHLIN STOIA GELLER
RUDMAN & ROBBINS LLP
655 West Broadway, Suite 1900
San Diego, CA 92101
Telephone : [phone]
619/231-7423 (fax)
E-mail : SpenceB(a%lerachlaw . com
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