Case5:13-cv-05368-LHK Document56 Filed08/06/14 Page1 of 62 BROWER PIVEN 1 A Professional Corporation DAVID A.P. BROWER 2 RICHARD H. WEISS 475 Park Avenue South, 33 rd Floor 3 New York, NY 10016 Telephone: (212) 501-9000 4 Facsimile: (212) 501-0300 5 Lead Counsel for Plaintiffs and the 6 Class 7 BRODSKY & SMITH, LLC EVAN J. SMITH (242352) 8 9595 Wilshire Boulevard, Suite 900 Beverly Hills, CA 90212 9 Telephone: (310) 300-8425 Facsimile: (310) 247-0160 10 Liaison Counsel for Plaintiffs and 11 the Class 12 UNITED STATES DISTRICT COURT 13 NORTHERN DISTRICT OF CALIFORNIA 14 SAN JOSE DIVISION 15 16 IN RE FUSION-IO, INC. SECURITIES No. 5:13-cv-05368-LHK LITIGATION 17 CLASS ACTION 18 CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATIONS OF 19 FEDERAL SECURITIES LAWS 20 21 22 1. Lead Plaintiffs Donald Hunt and Steve Winebrenner and Additional Plainti 23 Nick Micek and Eric Rubenstein (“Plaintiffs”) bring this federal securities class action pur 24 to Rule 23(a) and (b)(3) of the Federal Rules of Civil Procedure, on behalf of all persons 25 26 purchased the publicly-traded common stock of Fusion-io, Inc. (“Fusion” or the “Compa 27 between October 25, 2012 and October 23, 2013, inclusive (the “Class Period”), against 28 and certain of its top executive officers during the Class Period (collectively, “Defendants”) CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATIONS OF FEDERAL SECURITIES LAWS - No. 5:13-cv-05368-LHK - 1- Case5:13-cv-05368-LHK Document56 Filed08/06/14 Page2 of 62 violations of the Securities Exchange Act of 1934 (the “Exchange Act”). The claims 1 2 herein arise from a series of materially false and misleading statements and 3 concerning Fusion, its business, performance, and prospects that Defendants made to the 4 during the Class Period. 5 2. Plaintiffs allege the following based upon the investigation of Plaintiffs’ 6 which has included a review of United States Securities and Exchange Commission 7 8 filings by Fusion, securities analysts’ reports and advisories about the Company, press 9 and other public statements issued by the Company and its executives, media reports about 10 Company and its industry, and interviews with witnesses with knowledge and 11 concerning the matters alleged herein. Plaintiffs believe that substantial additional 12 support will exist for the allegations set forth herein after a reasonable opportunity for discovery. 13 14 OVERVIEW 15 3. Fusion is a computer hardware and software systems company that designs 16 manufactures products that use flash memory technology, also referred to by Fusion as 17 flash memory. According to Fusion’s Fiscal 20131 Form 10-K: 18 19 We provide solutions for enterprises, hyperscale datacenters, and small to medium enterprises, or SMEs, that accelerate databases, virtualization, mission-critical 20 applications, cloud computing, big data, and information systems. These solutions help drive business from small enterprises to Fortune Global 500 companies and 21 the world’s hyperscale leaders. Our integrated hardware and software platforms 22 and solutions enable the acceleration of data and applications in legacy, open, and proprietary architectures. Our core technology leverages flash memory to 23 significantly increase datacenter and computer-based information system efficiency, with enterprise grade performance, reliability, and manageability. We 24 25 1 Fusion’s fiscal year end is June 30 and its fiscal quarters end on September 30, December 31, 26 and March 31, and June 30. Fiscal years ended June 30, 2012; June 30, 2013; and June 30, 2014 are referred to herein as Fiscal 2012, 2013, and 2014, respectively. The quarter of each fiscal 27 year ending September 30 is referred to as the Fiscal First Quarter. The quarter ending 28 December 31 is referred to as the Fiscal Second Quarter, and the quarter ending March 31 is referred to as the Fiscal Third Quarter. CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATIONS OF FEDERAL SECURITIES LAWS - No. 5:13-cv-05368-LHK - 2- Case5:13-cv-05368-LHK Document56 Filed08/06/14 Page3 of 62 sell our solutions through a global direct sales force, original equipment 1 manufacturers, or OEMs, including Cisco, Dell, HP [Hewlett-Packard], and IBM, 2 and other channel partners. 3 4. Flash memory is an electronic non-volatile computer storage medium that can 4 5 electrically erased and reprogrammed. Rather than using magnetic spinning disks, flash 6 stores information electronically on silicon as positive or negative charges, mirroring 7 computers use binary code in zeroes or ones. It makes applications faster than relying on 8 disk drives. It also offers cost savings compared to disk storage because it offers more capacity 9 uses less space, has no mechanical parts, generates less heat than spinning disk storage, 10 11 requires less servicing and maintenance. Flash memory is widely used in smartphones, tablets 12 and laptops. It also is used in datacenter servers to speed up application performance. As 13 capacity of flash chips increases, for example, by shrinking the size of the cells that hold 14 electronic charges or by adding more layers to the chips, software to manage the flash 15 increasingly important to ensure that flash memory will perform as expected in enterpri 16 17 servers. 18 5. Before and during the Class Period, Fusion faced competition from 19 companies that sold flash-based products and products that incorporate flash memory and 20 was significant downward pressure on prices. An autumn 2012 report on semiconductors by 21 22 global management consulting firm McKinsey & Co., Inc. explained: 23 In several product segments, such as flash memory, chips have become commoditized. Memory is a tough segment because the designs for the most 24 successful forms of memory chips are relatively simple and the design for higher 25 capacity and improved speed is relentless. Despite constant innovation, there is also constant downward pressure on prices. Between 2000 and 2008, memory 26 prices declined, on average, by 5 percent a year. 27 28 CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATIONS OF FEDERAL SECURITIES LAWS - No. 5:13-cv-05368-LHK - 3- Case5:13-cv-05368-LHK Document56 Filed08/06/14 Page4 of 62 A December 17, 2012 Computerworld article, with the headline “SSD prices continue 1 2 plunge,” reported: 3 Since 2010, solid state drive (SSD) prices for some models have plummeted from $3 to less than $1 per gigabyte. After dropping 20% in the second quarter of 2012 4 alone, SSD prices fell another 10% in the second half of the year, according to 5 data from IHS iSupply. Oversupply of NAND flash memory is primarily behind the price drops over the past couple of years . 6 An analysis in the fourth quarter of 2012 by Idealo, a price comparison service based in 7 8 Germany, concluded that in 2012 “the average price of the 50 popular SSD models 9 24%, with the average per-GB price having fallen almost €0.30” due at least in part to “the 10 improving technology which has led to the less expensive flash memory . .” According to 11 June 8, 2012 report on the blog The Memory Guy, which covers memory chips, “the 12 market is indeed oversupplied and prices are depressed” and NAND chip prices already 13 14 fallen to 35 cents per gigabyte. 15 6. Further, by 2012, other sellers of flash memory products that competed 16 Fusion were reporting reduced gross margins due to declining prices for flash. Thus, in i 17 annual report on Form 10-K for the fiscal year ended August 30, 2012, Micron Technology, Inc 18 19 (“Micron”) reported that overall gross margin percentage declined to 12% for fiscal 2012 20 20% for fiscal 2011 primarily due to significant declines in average selling prices for flash 21 other products. Micron further reported that, for its NAND Flash products, the average 22 price per gigabit of memory fell 55% in fiscal 2012 compared to fiscal 2011. Likewise, in i 23 Form 10-K for the fiscal year ended December 30, 2012, SanDisk Corporation (“ 24 25 reported that product gross margins decreased in fiscal 2012 compared to fiscal 2011 26 primarily to a decline of 45% in average selling price per gigabyte of memory, which 27 the cost reduction per gigabyte of only 36%. 28 CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATIONS OF FEDERAL SECURITIES LAWS - No. 5:13-cv-05368-LHK - 4- Case5:13-cv-05368-LHK Document56 Filed08/06/14 Page5 of 62 7. Augmenting the competitive pressures Fusion faced, since its initial p 1 2 offering in 2011, and continuing through the Class Period, Fusion’s business depended on 3 and concentrated purchases by a limited number of customers, most particularly Facebook, Inc 4 (“Facebook”) and Apple Inc. (“Apple”), Fusion’s two most important, strategic customers 5 Facebook and Apple, respectively, accounted for 30% and 25% of the Company’s Fiscal 2012 6 revenue and 29% and 15% of Fiscal 2013 revenue. Fusion’s 10 largest customers, including the 7 8 applicable OEM customers, provided an aggregate of 91% and 84% of its revenue in Fiscal 201 9 and Fiscal 2013, respectively. 10 8. Prior to and during the Class Period, Defendants issued a series of 11 regarding the Company’s business, performance, and prospects. Defendants represented 12 13 investors that Fusion was a market leader in large-scale flash memory applications and was 14 facing significant competitive risk from the commoditization of flash memory products and 15 downward pressure on prices. Belying Defendants’ positive public representations, 16 unbeknownst to the public, Fusion was experiencing significant competitive pressure 17 flash memory was becoming increasingly commoditized and the Company’s most 18 19 customers were seeking lower-cost alternatives. Defendants also issued positive 20 guidance for which they had no reasonable basis in light of all they knew about the compe 21 pressures the Company faced, while failing to disclose trends and uncertainties known to 22 that, if they came to fruition, would have a material adverse impact on Fusion’s business 23 operations, and financial results.