Panther Partners Inc. v. Ikanos Communications, Inc.

Ikanos Communications Inc. (Ikanos Communications) (defendant) sold very-high-bit-rate digital-subscriber line Version Four chips to Sumitomo Electric and NEC in 2005. Sumitomo Electric and NEC were Ikanos Communications’ two largest customers. In fact, 72 percent of Ikanos Communications’ revenue in 2005 was from sales to Sumitomo Electric and NEC. In January 2006, Ikanos Communications learned that there were problems with the Version Four chips. Ikanos Communications had planned a secondary offering of its stock, but in the weeks leading up to the secondary offering, the problems with the Version Four chips continued to increase. Sumitomo Electric and NEC lodged a large number of complaints, citing that the Version Four chips were failing and that subscribers were losing both internet and telephone connections. Despite these complaints, Ikanos Communications went forward with the secondary offering and sold 5,750,000 shares of stock, some of which was sold to Panther Partners Inc. (Panther Partners) (plaintiff). Three months after the secondary offering, Ikanos Communications agreed at its own expense to replace all Version Four chips sold to Sumitomo Electric and NEC. The next month, Ikanos Communications reported a net loss of $2,200,000, which caused the price of its shares to drop over 25 percent. Panther Partners sued, alleging that Ikanos Communications had failed to disclose the defectiveness of the Version Four chips prior to the secondary offering and that this failure to disclose was a violation of Item 303 of the Securities and Exchange Commission’s Regulation S-K, 17 C.F.R. § 229.303(a)(3)(ii). The district court dismissed for failure to state a claim, and Panther Partners appealed.