Ontario Public Service Employees Union Pension Trust Fund v. Nortel Networks Corp.

Nortel Networks Corp. (Nortel) (defendant) was a supplier of telecommunications equipment. Nortel procured fiber-optic equipment from JDS Uniphase Corporation (JDS) and was JDS’s largest customer. On January 16, 2001, public reports emerged that Nortel would acquire JDS’s laser business in exchange for Nortel stock. On February 6, Nortel and JDS announced that Nortel would acquire JDS’s laser business for $2.5 billion in Nortel stock and Nortel’s promise to increase its purchases of fiber-optics equipment from JDS. The price of JDS stock increased after this announcement. The acquisition closed on February 12. Meanwhile, between January 18 and February 15, Nortel made optimistic public statements about its fiber-optics business for 2001. However, on February 15, Nortel announced a significant decrease in its 2001 revenue and revenue-growth projections for its fiber-optics business, after which the Nortel and JDS stock prices declined sharply. JDS shareholders (plaintiffs) sued Nortel for violating § 10(b) of the Securities Exchange Act of 1934 and Securities and Exchange Commission (SEC) Rule 10b-5, alleging they purchased JDS shares in reliance on Nortel’s false and misleading optimistic projections. The JDS shareholders conceded they did not purchase or sell Nortel stock. However, they argued that their JDS stock purchases gave them standing under § 10(b) and Rule 10b-5—which apply to fraud “in connection” with the purchase or sale of “any security”—because Congress and the SEC intended to shield all market participants and Congress intended § 10(b) to be interpreted flexibly to protect against all forms of securities fraud. The district court dismissed the complaint on the grounds that the JDS shareholders did not (1) have standing because they did not purchase or sell Nortel stock or (2) satisfy the “in connection with” requirement of § 10(b) and Rule 10b-5 because the allegedly false and misleading statements related to Nortel, not to JDS. The JDS shareholders appealed.