In Re: Tellium, Inc. Securities Litigation 02-CV-5878 ...securities.stanford.edu/filings-documents/1026/... · Nadeem Faruqi Antonio Vozzolo 320 East 39th Street New York, NY 10016

ELECTRONICALLY FILED LITE DEPALMA GREENBERG & RIVAS, LLC Joseph J. DePalma (JD-7697) Katrina Blumenkrants (KB-9620) Two Gateway Center, 12th Floor Newark, NJ 07102 (973) 623-3000

Liaison Counsel for Plaintiffs and the Class

MILBERG WEISS BERSHAD & SCHULMAN LLP Beth A. Kaswan Matthew A. Kupillas One Pennsylvania Plaza, 49th Floor New York, NY 10119-0165 (212) 594-5300 Co-Lead Counsel for Plaintiffs and the Class

FARUQI & FARUQI, LLP Nadeem Faruqi Antonio Vozzolo 320 East 39th Street New York, NY 10016 (212) 983-9330 Co-Lead Counsel for Plaintiffs and the Class

UNITED STATES DISTRICT COURT DISTRICT OF NEW JERSEY

IN RE TELLIUM, INC. SECURITIES LITIGATION

: : : :

Civil Action No.: 02-CV-5878 (FLW)

SECOND CONSOLIDATED AND AMENDED CLASS ACTION COMPLAINT AND DEMAND FOR JURY TRIAL

Lead Plaintiffs, Winslow Management Company and Roberto Vitalini, and Plaintiff Tony

M. Bamer, by their attorneys, for their Second Consolidated and Amended Class Action

Complaint (the “Complaint”) allege the following based upon knowledge with respect to their

own acts, and upon other facts obtained through an investigation made by and through their

counsel. Based upon the substantial facts already uncovered, Plaintiffs believe that substantial

additional evidentiary support will exist for the allegations set forth herein after a reasonable

opportunity for discovery.

Case 1:02-cv-05878-FLW-AMD Document 82-1 Filed 05/14/2004 Page 1 of 91

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NATURE OF THE ACTION

1. This is a securities class action on behalf of all purchasers of the common stock of

Tellium Inc. (“Tellium” or the “Company”) between May 17, 2001, the effective date of

Tellium’s initial public offering (“IPO”), and July 1, 2002 (the “Class Period”), against Tellium,

certain of its officers and directors (the “Individual Defendants”) and its lead underwriters for its

IPO, for violations of the Securities Act of 1933 (the “Securities Act”) and/or the Securities

Exchange Act of 1934 (the “Exchange Act”).

The Section 11 Claims Against Tellium’s Outside Directors And Underwriters

2. On May 17, 2001, Tellium successfully sold 10.35 million shares of its stock at

$15 per share. A week following the IPO, and based upon untrue statements of material facts

and/or omissions of material fact required to make statements not misleading that were included

in its registration statement, or otherwise issued by defendants to the public, Tellium’s stock

price rose to a Class Period high of $29.73 per share. As the truth about its purported contract

commitments, sales expectations and guidances, and customer relationships slowly became

revealed, however, Tellium’s stock dropped to less then $1 per share -- the single worst IPO

conducted in fiscal year 2001.

3. Tellium is an internet start-up company that designs and offers high-speed, high

capacity, intelligent optical switching solutions to major telecommunications companies and

others to enable these network service providers to expand their capacity to quickly and cost

effectively deliver new high-speed telecommunications and internet services. Tellium has never

operated at a profit, and by the time of its IPO, had accumulated an earnings deficit of $206

million. Despite its history of losses, Tellium went public on the basis of purportedly firm

purchase commitments and sales expectations of $1 billion from three key customers: Dynegy

Global Communications (“Dynegy”) ($250 million); Cable & Wireless ($350 million); and


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Qwest Communications International Inc. (“Qwest”) ($300-400 million). In reality, Tellium’s

customers did not “commit,” under their contracts, to make purchases until and unless they

issued purchase orders for specific Tellium products. Nor did Tellium have a basis to “expect”

purchases from any of its three key customers until they provided purchase forecasts or other

information about their particular requirements in planning meetings. The contracts with Cable

& Wireless and Qwest contained provisions and ambiguities under which Tellium’s customers

could avoid their “commitments,” if their circumstances changed and they no longer wished to

purchase products from Tellium; thus, as a legal and practical matter, these supposed contract

“commitments” were unenforceable. The first contract was originally entered in September

1999 with Extant (which was later acquired by Dynegy). The latter two contracts were first

entered in September 2000, the same month that the original registration statement for the IPO

was filed.1

4. After Tellium filed its original IPO registration statement and prospectus in

September 2000, it amended its Registration Statement no less than six times,2 constantly

changing the number and price of the 1P0 shares and replacing two of its five underwriters.

Incorporated within amendments to the registration statement, were redacted copies of the

contracts entered between Tellium and Extant, Cable & Wireless and Qwest.3 The redactions

1 The original registration statement is attached hereto and incorporated herein as Exhibit A.

2 Amended registration statements/prospectuses were filed by Tellium with the SEC on October 10, 2000; November 7, 2000; December 7, 2000; March 7, 2001; April 27, 2001 and May 15, 2001. Collectively these registration statements, prospectuses and associated exhibits are referred to as the “Registration Statement”, which became effective as of May 17, 2001. A true copy of the final registration statement/prospectus is attached hereto and incorporated herein as Exhibit B.

3 Copies of the Extant, Cable & Wireless and Qwest contracts with redactions were first filed with the SEC on or about October 10, 2000 with the first amendment to the IPO’s registration


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were material because they removed the information which would have permitted the investing

public to evaluate whether the purchase “commitments” were firm and enforceable (e.g., whether

the contract specifications depended upon Tellium’s successful development of new products,

and the dates and amounts of the purportedly firm future sales). During the eight-month period

between the original filing and when the IPO was finally consummated, the market for IPOs of

technology start-up companies collapsed and a sharp decline in the telecommunications industry

in general began. The needs of Tellium’s three key customers for the extra capacity provided by

Tellium’s sophisticated switches and “solutions” also significantly changed during this eight-

month period. For example, Dynegy was within five months of completing its United States

“build-out” of its systems by May 2001, having placed orders for and purchased far less than the

$250 million from Tellium that it originally expected in September 1999. Cable & Wireless was

one of the first major telecommunications companies to freeze capital expenditures in the fall of

2000. Qwest’s revenues, profits and needs for additional optical capacity sharply dropped by the

fourth quarter 2000, as recently disclosed by Qwest in restatements of its 2000 and 2001

financial statements that it filed in response to pending SEC investigations.

5. Tellium, however, pressed on with its IPO, publicly distinguishing itself from the

rest of the optical switching market by citing to its purported $1 billion in expected and/or

committed sales to Dynegy, Cable & Wireless and Qwest. For example, the May 15, 2001

amendment to the Registration Statement stated that $250 million dollars of sales continued to be

“expected” from Dynegy, that commercial deliveries to Cable & Wireless were “expected” to

statement, and are attached hereto and incorporated herein as Exhibits C, D and E respectively. An Amendment to the Qwest contract dated April 10, 2001 was filed with the SEC as an exhibit to the fifth amendment to the registration statement. This amendment to the Qwest contract is attached as Exhibit F.


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commence in the second half of 2001 and that commercial deliveries had begun to Qwest in the

first quarter of 2001. The Registration Statement also reported that $100 million had recently

been added to Qwest’s contract commitment. The Registration Statement failed to disclose,

however, that the Qwest contract “commitments,” and Qwest’s acceptance of deliveries of

Tellium products that it did not need, before May 17, 2001, had been obtained in exchange for

friends and family stock and stock options issued to Qwest’s senior executives and directors.

Instead, the Registration Statement contained the untrue statement that stock options had been

issued to unidentified Qwest employees for their services on Tellium’s advisory committee.

6. The assertions in the Registration Statement relating to the nature of the contract

commitments and customer relationships and sales and delivery expectations from these

customers were untrue, or at least misleading without the disclosure of additional facts

demonstrating that the “commitments” were not firm (or in the case of Qwest, legitimate) or

enforceable, and that customers’ expectations of their needs for Tellium products had changed.

These facts were also clearly material -- as noted in BusinessWeek Online on May 21, 2001:

“Tellium was brought out because it boasts a $1 billion backlog of guaranteed contracts, giving it

the precious and rare quality in techdom: visibility on future sales.”

7. Tellium’s disclosures about its contract commitments and expectations from its

three principal customers, Dynegy, Cable & Wireless and Qwest, remained largely identical in

each of its registration statement amendments issued throughout the eight-month period in which

the IPO was delayed (except that expectations for Cable & Wireless deliveries were changed

from the first quarter 2001 to the second half of 2001 when the first quarter passed without

deliveries), despite the massive upheavals in the market generally and at each customer

specifically. Although Tellium had warned in the risk disclosures section of its original filing of

its registration statement dated September 2000 that, “if our current. . . customers decide not to


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purchase products from us for any reason, including if there is a downturn in their businesses,

our ability to sell products and general revenues would be seriously harmed,” this warning was

deleted in later amendments and from the final May 15, 2001 amendment to the Registration

Statement; nor did the final registration statement amendment include required disclosures about

what had, by that point, become historical facts -- that the “risk” identified eight months earlier

had, in fact, materialized. By the time that the Registration Statement became effective, as of

May 17, 2001, there was no longer any basis for the assertion in the Registration Statement that

Tellium expected sales of $1 billion from these customers. Nor was there any basis for the

assertion that commercial deliveries to Cable & Wireless were imminent. And, as described

above, the deliveries to Qwest were not in the nature of legitimate, “commercial” deliveries.

8. Because many of the operative terms of Tellium’s contracts were redacted before

they were filed with the SEC (and the contracts themselves were buried in the lengthy

registration statements’ exhibits) and other material information about the nature of and changes

in Tellium’s business relationships with its customers was also untrue or omitted from the

Registration Statement, the market at the time that the IPO became effective lacked the critical

information needed to assess whether Tellium had sufficient firm business to go forward with its

IPO -- i.e. whether Tellium truly had firm commercial commitments that were legally

enforceable, and reasonable expectations of, a billion dollars in sales.

9. The Defendant outside directors (the “Directors”) and Morgan Stanley and

Thomas Wiesel (the “Underwriters”) had duties of due diligence to investigate the facts asserted

in the Registration Statement, particularly including a review of unredacted versions of the

customer contracts which they could have requested, and the current viability of the purported

sales and delivery “expectations” and purchase “commitments” from Tellium’s three key

customers. These Directors and Underwriters were negligent in performance of these due


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diligence obligations. As to these defendants (except Thomas Wiesel), plaintiffs make no

allegations of scienter, whatsoever, and do not allege that their misconduct was either knowing

or reckless. As to Thomas Wiesel, who is sued under both the Securities Act and Exchange Act,

plaintiffs’ allegations of scienter are limited to allegations of recklessness and/or knowledge with

respect to Thomas Wiesel’s own published statements beginning in June 2001.

The Section 11 And Exchange Act Claims Against The Remaining Defendants

10. Each of the remaining defendants either knew that the Registration Statement

contained untrue facts, or omitted facts necessary to make the assertions in the Registration

Statement not misleading, or was reckless in not knowing these facts.

11. Defendant, Harry J. Carr (“Carr”) Tellium’s Chief Executive Officer (CEO”), and

the others in Tellium’s senior management, including Tellium’s President, Richard Barcus

(“Barcus”) and its Chief Financial Officer (“CFO”), Michael Losch (“Losch”), (collectively

referred to as the “Management Defendants”), knew, or were reckless in not knowing, that the

Qwest contract, as amended was tainted by a kickback scheme, in which bribes had been paid in

the form of friends and family stock and stock options to senior Qwest executives in exchange

for the contract “commitments,” and for limited amounts of issued purchase orders and the

acceptance of delivery of unneeded Tellium products. Scienter exists for this group of

Defendants because Carr and the other members of Tellium’s senior management were either

directly involved in the Qwest contract negotiations (and in insisting that Qwest accept delivery

of unneeded products to facilitate consummation of the IPO), or needed to know the contract

terms and the parameters of the Qwest relationship to perform their jobs. The Management

Defendants also knew that between September 2000 and May 17, 2001 its customers’

requirements for the additional capacity that Tellium’s products enabled had greatly diminished;

because they either negotiated or had ready access to the unredacted versions of the contracts,


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they also knew, or were reckless in not knowing, that the purported contract commitments, as a

legal and practical matter, could not be legally enforced. They similarly would have needed to

know of their three key customers’ sales forecasts, purchase orders and delivery schedules in

order to function as Tellium’s CEO, president and CFO, respectively. Losch, for example, was

the person designated in the Qwest contract to receive Qwest notices on behalf of Tellium, and

needed to know the contracts’ terms to record revenues on Tellium’s financial statements under

Tellium’s revenue recognition policies. Thus, the Management Defendants knew, or were

reckless in not knowing, that the descriptions of Tellium’s customer commitments, relationships,

the purported “commercial” Qwest deliveries and sales and delivery expectations, and adverse

facts falsely described as potential “risks” in the Registration Statement were untrue (because the

risks had materialized into historical facts), or were at least rendered misleading through the

omissions of the true material facts about Tellium’s relationship with its customers, the Qwest

deliveries, and Tellium’s current purchase and delivery expectations.

12. As Carr publicly admitted in an interview in September 2001, he regularly “sat at

the planning table” with each of Tellium’s key customers, so that he personally knew the facts

relating to his customers’ requirements and delivery needs, and of their issuance of purchase

orders, nine months to twelve months in advance of the actual deliveries. Thus, as Carr has

admitted, with respect to the three key customers’ purchase orders (or, more importantly, the

absence of purchase orders) there were “no surprises” for this critical advance nine-to-twelve

month period. Other information elicited during Plaintiffs’ investigation confirmed that Tellium

learned of its customers’ changed circumstances and reduced requirements for Tellium products

before the consummation of the IPO (and the effective date of the Registration Statement) --

Tellium received, as part of its usual business process, and acted upon, new customer

information of sharply reduced sales expectations and orders during the first five months of 2001


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by canceling and returning inventory to suppliers, with the explanation that Tellium’s own

business had been cut back.

13. Thus, by May 17, 2001, Carr and others in Tellium’s senior management knew, or

were reckless in not knowing, that on or about October 2001 -- only five months hence (and one

month after Carr’s “planning table” admission)-- Dynegy would complete its U.S. build-out,

with only minor purchases occurring thereafter. From the inception of the Extant contract

through 2001, Extant/Dynegy purchased less than $112 million of Tellium products. Thus,

although the September 1999 requirements contract with Extant had stated that a total of $250

million of Tellium purchases was “expected,” by May 2001, that was no longer true. Because

Carr had learned by “sitting at the planning table” with Dynegy that it would soon complete its

build-out, Carr, Losch (who kept Tellium’s finances) and Barcus, as president, well knew that

there was no reasonable basis for the repetition in the Registration Statement that a total of $250

million of purchases by Dynegy was, at that time, “expected.” Based upon Carr’s information

learned “at the planning table” with Cable & Wireless, he similarly knew that deliveries to Cable

& Wireless were not “expected” in the following two quarters.

14. Although the plaintiffs were unsuccessful in their efforts during a very substantial

investigation to obtain copies of the Tellium contracts in unredacted form, several interviewed

persons, including from Credit Suisse First Boston who ultimately declined to pursue a

participation in Tellium’s IPO, directed Plaintiffs to the terms of the unredacted contracts to see

that the supposed purchase “commitments” included in the contracts were not, as a practical

matter, firm and enforceable -- e.g. one former Tellium engineer advised that the Qwest contract

was mainly for all-optical switches that Tellium had yet to develop, and a former Tellium

financial analyst explained that the contract contained a “technical superiority clause,” where the

determination of the relative superiority of Tellium’s products was to be made by Qwest. That


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the represented $750 million in purchase commitments in the Qwest and Cable & Wireless

contracts were illusory may also be inferred from the fact that Tellium made no effort to enforce

them, and thereby to collect revenues far in excess of those it had ever earned in the entirety of

its existence. Neither Qwest nor Cable & Wireless made the purchases that even approximated

the purported $750 million in their contract “commitments.” For Qwest, rather than insist on

performance, in December 2001, Tellium amended its contract to provide the “flexibility” for

Qwest to walk away from more than three-quarters of the purported $400 million commitment.

The Cable & Wireless contract was eventually terminated in its entirety, by mutual agreement,

long after the class period.

15. As further described herein, an additional reason for Tellium’s failure to enforce

Qwest’s purported contract commitments was that the contract itself, and the business

relationship between Tellium and Qwest, were not based on legitimate commercial dealings.

Instead, as the facts uncovered during plaintiffs’ investigation and other published statements

indicate, the contract commitments and issued purchase orders were the product of an illicit and

undisclosed kickback scheme, in which senior Qwest officers and directors received interests in

Tellium as a quid pro quo for Qwest’s purchases and the acceptance of deliveries of unneeded

products. Before the consummation of the IPO, four systems were sold to Qwest and delivered

to a Qwest warehouse in Texas so that Carr could point to these sales during IPO roadshows.

Nine systems were thereafter delivered to a warehouse in Edison, New Jersey. Carr and others at

Tellium jokingly referred to these deliveries as sales for installation into Qwest’s “warehouse

network.” As such, the usual commercial and legal expectations ordinarily attaching to an arms-

length commercial contract, including the assumption that the parties will proceed in good faith

in performing their contract obligations and enforcing their contract rights, did not apply. The

illegitimacy of the Qwest/Tellium relationship explains, in part, why Qwest’s $400 million


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“commitment” for future sales was illusory. For this reason, the kickback relationship itself is a

material fact, which was required to be disclosed in public statements issued by Tellium.

16. Although agreements to pay kickbacks are by their nature secretive, and direct

evidence of the illicit agreements are generally in the exclusive control of the participants,

including Carr, and the Qwest executives under investigation by a federal grand jury (and thus

unavailable to engage in informal interviews with plaintiffs in this action), several facts

described below and in later sections of the Complaint, support the inference that Qwest’s

amended contract and its actual purchases were made as a quid pro quo for payments (in the

form of stock, options and other benefits) made to senior Qwest executives and directors.

17. First, the Qwest contract renegotiation was performed directly between Carr and

senior Qwest executives who received Tellium stock and options and Tellium’s usual sales,

engineering and administrative support staff were excluded from the negotiation; second, the

options were paid to those Qwest executives and directors of Qwest at the highest level -- not

engineers or sales or marketing employees providing “advisory” services and technical

assistance to Tellium as part of an “advisory board”; third, the persons receiving Tellium equity

interests and benefits were among the same group of people who regularly demanded and

received equity kickers in making contract awards to Qwest vendors, as described in disclosures

about the pending SEC and grand jury investigations, and confirmed in Qwest’s recently filed

restatement addressing this issue; fourth, when Tellium and Qwest renegotiated their contract to

add $100 million to the purported commitment (and removed the milestone for 2002 deliveries),

Qwest did not need Tellium products, also as demonstrated by a recently filed restatement by

Qwest (this restatement removed billions of dollars of sales and profits reported by Qwest in its

original 2000 and 2001 annual reports); and finally, as described by former Tellium engineers

and other former employees interviewed in the course of plaintiffs’ investigation, Qwest’s $79


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million of purchases from Tellium did not have the earmarks of legitimate commercial

purchases. Tellium shipped out a limited number of bare-bones electrical switches. For a

telecommunications company with the size and complexity of Qwest, the purchases were

inadequate to support the mesh architecture that would lead to the additional capacity savings

and efficiencies that the Tellium “solution” supposedly offered. The purchased products did not

undergo the usual testing and approval process before deliveries occurred and instead were

accepted sight unseen. Finally, the products were shipped to “warehouses,” both before and after

the IPO, rather than being installed in Qwest systems to handle telecommunications traffic.

Several disclosures in public filings with SEC, and news articles relating to pending SEC and

grand jury investigations, reveal that the same pattern of kickbacks were demanded by the same

Qwest executives from other start-up vendors for the purchase of products that then lay dormant

in Qwest warehouses, where they were referred to as “flower pots.” In at least one news

interview with Barcus, he acknowledged that vendors unwilling to provide stock to Qwest

executives “were at a clear disadvantage,” thereby implicitly admitting his knowledge that

Tellium had bowed to these pressures.

18. By this Complaint, plaintiffs also allege that Tellium and the Management

Defendants made knowing and/or reckless false and misleading statements beyond those

contained in the Registration Statement that caused plaintiffs’ losses. Thomas Wiesel also made

its post-IPO false and misleading public statements with scienter. To set a price for the May

2001 IPO, and thereafter, Tellium developed revenue models and “guidances” that were

calculated using wholly baseless assumed growth factors applied to past revenues and then

mathematically extrapolated out through an Excel program. As described by the former Tellium

employee responsible for their creation, the guidances bore no relationship to the three key

customer purported contract commitments and expected purchase orders or to sales information


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furnished by Tellium’s three key customers. Losch and Carr furnished these “guidances” to their

underwriters, and for use at road-shows conducted for the IPO and to analysts following Tellium

stock; Tellium’s senior management, including Carr and Losch, and Thomas Wiesel, through

their public statements, fostered the misleading impression (particularly with respect to the $288

million revenue guidance for 2002) that the guidances had a concrete basis in fact, and that high

valuations of Tellium’s stock prices developed by Thomas Wiesel and other market analysts

performing discounted cash flow analyses on the “guidances” were unusually reliable -- given

the supposed “visibility” into Tellium’s future sales that resulted from its three key customer

contracts and the purportedly $1 billion of “committed” and/or “expected” sales. For example,

Carr’s September 6, 2001 public statements about his having actual knowledge of his key

customers’ purchase orders nine to twelve months in advance, were made in order to buttress the

false impression of reliability of Tellium’s revenue guidances -- that might otherwise have been

discounted by the market as unknowable forward-looking statements. Thus, the public

statements regarding the revenue guidances were false and misleading in two ways. First, the

guidances were presented as having been prepared from information on the three key contracts

(when they were merely baseless mathematical models); also even if they had been based on the

three contracts, there was no “visibility” into future sales because there were neither

“commitments” nor “expectations” for $1 billion of sales.

19. Throughout the class period, untrue statements and misleading omissions about

Tellium’s three key contracts, customer relationships, deliveries and revenue guidances caused

Tellium’s stock price to be artificially inflated, and caused plaintiffs’ losses. Each of the Tellium

Management Defendants either knew the statements he signed or otherwise made about

Tellium’s three key contracts, relationships, deliveries, and the revenue guidances, were false, or

acted recklessly in making the public statements without confirming their truthfulness. Thomas


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Wiesel acted recklessly in reinforcing the false and misleading impression of “visibility” and

reliability of Tellium’s revenue guidances and customer purchase commitments, in order to hawk

inflated valuations of Tellium’s stock.

JURISDICTION AND VENUE

20. The claims asserted herein arise under §§ 11 and 15 of the Securities Act (15

U.S.C. §§ 77k and 77o) and under §§ 10(b) and 20(a) of the 1934 Act (15 U.S.C. §§ 78j(b) and

78t(a)) and Rule 10b-5 promulgated by the SEC (17 C.F.R. § 240.10b-5).

21. This Court has jurisdiction over the subject matter of this action pursuant to

§ 22(a) of the Securities Act (15 U.S.C. § 77v(a)), and § 27 of the 1934 Act (15 U.S.C. § 78aa)

and 28 U.S.C. § 1331.

22. Venue is proper in this District pursuant to § 22 of the Securities Act (15 U.S.C.

§ 77v) and § 27 of the 1934 Act (15 U.S.C. § 78aa). Many of the acts alleged herein, including

the preparation and dissemination of the untrue misleading statements, occurred in substantial

part in this District. The Company’s corporate headquarters are in Oceanport, New Jersey,

where the day-to-day operations of the Company are directed and managed.

23. In connection with the acts alleged in this Complaint, defendants, directly or

indirectly, used the means and instrumentalities of interstate commerce, including, but not

limited to, the mails, interstate telephone communications and the facilities of the national

securities markets.

THE PARTIES

24. As detailed by their certifications previously filed in this litigation, Plaintiffs

Winslow Management Company and Roberto Vitalini (who were appointed Lead Plaintiffs by

Order of the Honorable Mary L. Cooper of the United States District Court, District of New

Jersey, dated March 13, 2003) each purchased or otherwise acquired Tellium common stock at


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artificially inflated prices during the Class Period and were damaged thereby. These purchases

are traceable to the IPO, in the open market or otherwise, during the Class Period.

25. Additional Plaintiff Tony M. Bamer, residing at 94-328 Kaholo Street, Milihani,

Hawaii, purchased or otherwise acquired Tellium common stock pursuant to Tellium’s May 17,

2001 IPO at artificially inflated prices and was damaged thereby, as reflected in his previously

filed certification.

26. Defendant Tellium is a Delaware corporation with its principal place of business

and chief executive offices located at 2 Crescent Place, Oceanport, New Jersey 07757-0901.

Tellium designs and provides high-speed, high-capacity, intelligent optical switching solutions

intended to enable network service providers to quickly and cost effectively deliver new high-

speed services. The Company stock is traded in an efficient market on the NASDAQ national

market system.

27. a. Defendant Harry J. Carr was, during the Class Period, the Company’s

Chief Executive Officer and Chairman of the Board of Directors. Carr signed the untruthful and

inadequate Registration Statement filed for Tellium’s May 17, 2001 IPO. Both before the IPO

and thereafter, Carr made untrue statements about Tellium’s customer agreements with and sales

expectations from Qwest, Cable & Wireless and Dynegy, and omitted material information about

the deterioration of these relationships that was necessary to make other statements not

misleading; Carr also made false and misleading statements about Tellium’s revenue guidances.

b. Defendant Michael J. Losch was, during the Class Period, the Company’s

Chief Financial Officer. Losch signed the untruthful and inadequate Registration Statement filed

for Tellium’s May 17, 2001 IPO. Both before the IPO and thereafter, Losch made untrue

statements about Tellium’s customer agreements with and sales expectations from Qwest, Cable

& Wireless and Dynegy, and omitted material information about the deterioration of these


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relationships that was necessary to make other statements not misleading. He also made false

and misleading statements about Tellium’s revenue guidances.

c. Defendant Richard W. Barcus was, during the Class Period, the

Company’s Chief Operating Officer and President until his resignation in December 2001.

Barcus signed the untruthful and inadequate Registration Statement filed for Tellium’s May 17,

2001 IPO. Both before the IPO and thereafter, Barcus made untrue statements about Tellium’s

customer agreements with Qwest, Cable & Wireless and Dynegy, and omitted material

information about the deterioration of these relationships.

d. Defendant William B. Bunting (“Bunting”) was, during the Class Period, a

director of Tellium. Bunting was also, during the Class Period, a partner in Thomas Wiesel

Partners Group LLC, the parent company of underwriter defendant Thomas Wiesel. Bunting

signed the untruthful and inadequate Registration Statement filed for Tellium’s May 17, 2001

IPO, and unreasonably failed in his duty to diligently investigate the truthfulness of the

Registration Statement.

e. Defendant Michael M. Connors (“Connors”) was, during the Class Period,

a director of Tellium. Connors signed the untruthful and inadequate Registration Statement filed

for Tellium’s May 17, 2001 IPO, and unreasonably failed in his duty to diligently investigate the

truthfulness of the Registration Statement.

f. Defendant Jeffrey A. Feldman (“Feldman”) was, during the Class Period,

a director of Tellium. Feldman signed the untruthful and inadequate Registration Statement filed

for Tellium’s May 17, 2001 IPO, and unreasonably failed in his duty to diligently investigate the


g. Defendant Edward F. Glassmeyer (“Glassmeyer”) was, during the Class

Period, a director of Tellium. Glassmeyer signed the untruthful and inadequate Registration


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Statement filed for Tellium’s May 17, 2001 IPO, and unreasonably failed in his duty to diligently

investigate the truthfulness of the Registration Statement.

h. Defendant William A. Roper, Jr. (“Roper”) was, during the Class Period, a

director of Tellium. Roper signed the untruthful and inadequate Registration Statement filed for

Tellium’s May 17, 2001 IPO, and unreasonably failed in his duty to diligently investigate the


i. Defendant Richard C. Smith, Jr. (“Smith”) was, during the Class Period, a

director of Tellium. Smith signed the untruthful and inadequate Registration Statement filed for

Tellium’s May 17, 2001 IPO, and unreasonably failed in his duty to diligently investigate the


28. The individuals named as defendants in ¶ 27(a)-(i) are referred to herein

collectively as the “Individual Defendants.” Individual Defendants who were not part of

Tellium’s senior management, i.e., the defendants in ¶ 27(d), (e), (f), (g), (h) and (i), are referred

to herein collectively as the “Directors” or “Director Defendants.” The remaining individual

Defendants are referred to herein collectively as the “Management Defendants.” The Individual

Defendants, because of their positions with the Company, possessed the power and authority to

control the contents of Tellium’s Registration Statements and prospectuses. Each individual

defendant was provided with copies of the Company’s registration statements and prospectuses

alleged herein to be untruthful prior to their issuance and had the ability and opportunity to

prevent their issuance or cause them to be corrected. As set forth in detail below, because of

their positions and access to material non-public information available to them but not to the

public, and their responsibilities under the federal securities laws, each of the Director

Defendants had a duty to diligently investigate the truthfulness of the Registration Statement and

were negligent in failing to properly perform these responsibilities.


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29. Underwriter defendant Morgan Stanley (“Morgan Stanley”) (known until June

2002 as Morgan Stanley Dean Witter) replaced Goldman, Sachs & Co. as one of the two co-lead

underwriters of the IPO in early 2001, during the period between Tellium’s third and fourth

amendments to its registration statement. Morgan Stanley was a “qualified independent

underwriter,” pursuant to Rule 2720 of the National Association of Securities Dealers (the

“NASD”), for the Company’s shares sold pursuant to the IPO. Morgan Stanley is sued only

under Section 11 of the Securities Act, for breach of its duty to diligently investigate the


30. Underwriter defendant Thomas Wiesel was, at all relevant times herein, a

registered broker-dealer and member of the National Association of Securities Dealers, Inc.

(“NASD”). Thomas Wiesel was a co-lead underwriter of the IPO. Thomas Wiesel was a

“qualified independent underwriter,” pursuant to Rule 2720 of the NASD for the Company’s

shares sold pursuant to the IPO. Prior to the IPO, Thomas Wiesel and its affiliates owned 8.4%

of Tellium in the form of series D and E preferred stock; immediately after the IPO Thomas

Wiesel and its affiliates owned 7.7% percent of the outstanding common stock of Tellium. Upon

the IPO, Thomas Wiesel’s preferred stock was converted to common stock at the IPO price. For

plaintiffs’ claims under Section 11 of the Securities Act, Thomas Wiesel is sued for its breach of

its duty to diligently investigate the truthfulness of the Registration Statement. Beginning in

June 2001, Thomas Wiesel recklessly issued false and misleading analyst reports heralding the

“visibility” of Tellium’s revenue guidances, falsely asserting that the guidances were reliable and

based on Tellium’s key customer contracts.

31. The Management Defendants possessed the power and authority to control the

contents of Tellium’s annual and quarterly reports filed with the SEC, press releases, and

presentations to securities analysts, money and portfolio managers, and institutional investors --


19

i.e., the market. Each of the Management Defendants was provided with copies of the reports

and press releases alleged herein to be false and/or misleading prior to or shortly after their

issuance and had the ability and opportunity to prevent their issuance or cause them to be

corrected. As set forth in detail below, because of their senior management positions and the

critical nature of the key customer contracts, and key customer relationships, to the performance

of their own job responsibilities, and access to material non-public information available to them

but not the public, each of these defendants knew, or recklessly disregarded, that the adverse

facts specified herein had not been disclosed to, and were being withheld from, the public and

that the positive representations which were being made with respect to the status of each key

customer relationship were then materially false and misleading.

32. The Management Defendants are liable for the false statements pleaded herein, as

those statements were each “group-published” information, and the result of the collective

actions of the Management Defendants.

CLASS ACTION ALLEGATIONS

33. Lead Plaintiffs bring this action as a class action pursuant to Federal Rule of Civil

Procedure 23(a) and (b)(3) on behalf of a class (the “Class”) consisting of all persons who

purchased Tellium common stock between May 17, 2001 and July 1, 2002, inclusive. Excluded

from the Class are defendants, members of the immediate family of each Individual Defendant,

any entity in which any defendant has or had a controlling interest, any person who was an

officer or director of Tellium, or a partner or principal of, Morgan Stanley or Thomas Wiesel (or

any subsidiary or affiliate thereof) during the Class Period, and the legal representatives, heirs,

successors or assigns of any such excluded party.

34. The members of the Class are so numerous that joinder of all members is

impracticable. Throughout the Class Period, subsequent to the IPO, Tellium common shares


20

were actively traded on the NASDAQ. While the exact number of Class members is unknown at

the present time and can only be ascertained through appropriate discovery, Lead Plaintiffs

believe that there are thousands of members in the proposed Class and that they are

geographically dispersed. Record owners and other members of the Class may be identified

from records maintained by Tellium or its transfer agents, and may be notified of the pendency

of this action by mail, using a form of notice similar to that customarily used in securities class

actions.

35. The claims of the plaintiffs bringing this complaint (“Plaintiffs”) are typical of the

claims of the members of the Class, as all members of the Class sustained damages from

defendants’ untrue statements, or material omissions made in the IPO Registration Statement or

later in the Class Period.

36. Plaintiffs will fairly and adequately protect the interests of the Class and have

retained counsel who are experienced in class action securities litigation. Plaintiffs have no

interests which conflict with those of the Class.

37. Common questions of law and fact exist as to all Class members and predominate

over any questions of fact that may affect only individual Class members. Among the questions

of law and fact common to the Class are:

a. Whether the IPO’s Registration Statement signed by the Individual Defendants contained untrue material facts or omitted material facts necessary to make the Registration Statements not misleading;

b. Whether the Securities Act was violated by defendants;

c. Whether Tellium, the Management Defendants or Thomas Wiesel made false or misleading statements or omitted material facts; and whether these defendants knew or recklessly disregarded that their statements and/or omissions were false and misleading;

d. Whether the price of Tellium common stock was artificially inflated as a result of defendants’ untrue Registration Statement;


21

e. Whether the price of Tellium common stock was artificially inflated as a result of statements made during the class period that were false and misleading;

f. Whether the Exchange Act was violated by certain defendants, and;

g. The extent of damages sustained by Class members and the appropriate measure of damages.

38. A class action is superior to all other available methods for the fair and efficient

adjudication of this controversy, since joinder of all members is impracticable. Further, as the

damages suffered by individual Class members may be relatively small, the expense and burden

of individual litigation make it impossible for members of the Class to individually redress the

wrongs done to them. There will be no difficulty in the management of this action as a class

action.

SUBSTANTIVE ALLEGATIONS

Section 11 Claims Against The Outside Directors And The Underwriters Background

39. Tellium was founded in April 1997 by individuals from Bell Communications

Research, Inc. (“Bellcore”), with the significant involvement of Science Applications

International Corporation (“SAIC”), and Ortel Corporation (“Ortel”). Before its IPO, Tellium

raised capital through a series of private financing arrangements. From 1997 to September 19,

2000, Tellium issued over 26 million shares of Series A, B, C, D and E Preferred Stock, as well

as restricted shares of common stock and stock options. Among Tellium’s chief pre-IPO

investors were SAIC, Ortel (later acquired by Lucent Technologies in April 2000), Oak

Investment Partners, Thomas Wiesel, Accel Partners, Worldview Technology Partners, Pequot

Capital, Inc. and Blue Rock Capital Investors. Before its September 1999 contract with Extant,

Tellium had little revenue, and was engaged primarily in research and product development.

40. Tellium was (and is) in the business of designing and manufacturing optical

switches (and related software) which managed the flow of optical signals for voice and data


22

transmitted over fiber optic cables. Tellium’s high-speed optical switches were designed to

manage heavy flows of optical data traffic in the core of large networks in order to enable

telecommunications service providers to efficiently manage their networks.

41. As Tellium explained in its IPO Registration Statement, its products were

intended to be a “solution” to the limitations of then existing “ring” architecture, used by major

communications service providers, by enabling an optical “mesh” network architecture.

According to Tellium, the benefits of this new optical network architecture derived from its

ability to:

• Rapidly provision and restore bandwidth;

• Enable the development of new optical services;

• Reduce operational and maintenance costs;

• Reduce capital costs;

• Provide an upgrade path, and;

• Deploy proven, reliable solutions.

42. Tellium’s first-generation optical switch was called the Aurora 32. The Aurora

32 was a compact optical switch designed to connect optical paths primarily in small central

offices or metropolitan networks. The Aurora 32 was based on optical-electrical-optical (“o-e-

o”) switching technology which took optical signals (from fiber optic cables), converted these

signals into electrical signals for routing using electrical circuitry, and then converted the signals

back into optical signals for transmission through fiber optic cable. The Aurora 32 could switch

32 optical channels and carry data at speeds up to 2.5 gigabytes per second, for a total capacity of

80 gigabits per second. The Aurora 32 switch was first developed by Tellium in 1998.

43. Tellium’s second-generation optical switch was called the Aurora Optical Switch.

The Aurora Optical switch, also known as the Aurora-512, was designed to provide automated


23

service delivery and restoration of optical services primarily in regional and nationwide

networks. The Aurora Optical Switch, based on o-e-o switching technology, switched up to 512

optical channels at 2.5 gigabits per second, or 128 channels at 10 gigabits per second, for a total

capacity of 1.28 terabits per second.

44. Tellium’s planned third-generation optical switch was called the Aurora Full-

Spectrum. The Aurora Full-Spectrum was to be Tellium’s first “all-optical” switch, which

would incorporate the already-developed o-e-o technology for “core grooming” purposes, but

would also employ an optical-optical-optical (“o-o-o”) technology to overcome the speed

limitations of the o-e-o technology. Tellium announced its plans for development of the Aurora

Full-Spectrum in June 2000, stating that the switch would provide a scalable optical switch

“supporting signals at 40 Gb's per wavelength and beyond - without sacrificing network

manageability and control.” In early 2002, Tellium abandoned the development of the Aurora

Full-Spectrum switch. Because of redactions and omissions from Tellium’s contracts with

Qwest and Cable & Wireless, and other omissions from the Registration Statement, the market

was unaware of whether and to what extent, the purported $1 billion in contract commitments

and sales expectations (as described in the Registration Statement and later public statements)

were predicated upon products that Tellium had yet to successfully develop.

45. In order for Tellium’s telecommunications customers who had significant and

complex regional and nationwide networks, e.g., those providers having a “large footprint,” such

as Qwest, to achieve the benefits of the new “mesh” network architecture that Tellium’s switches

enabled, large dollar investments for significant numbers of inter-connecting “fully loaded”

switches were required. The efficiencies of a “mesh” could not be accomplished with switches

that created only a triangle or a square. That was the reason for a common joke at Tellium that

the Qwest deployment must be occurring at the warehouse because Qwest could not be putting


24

them in the network if they bought as little as they did. As one former Qwest employee

explained, for Qwest, 40-50 switches would be required to obtain the efficiencies of a “mesh” in

their United States network -- far more than Qwest purchased from Tellium. And several former

Tellium employees confirmed that, in fact, Qwest’s purchases were not tested and deployed in its

networks to carry telecommunications traffic in the regular course. Instead, four systems sold to

Qwest before the IPO were delivered and kept in a warehouse in Texas, while, after the IPO was

consummated, another nine systems were delivered and kept in a warehouse in Edison, New

Jersey.

Customers’ Planning Information And The Sales Process

46. Each of Tellium’s three key customer contracts required a lengthy evaluation,

testing and product qualification process, which process continued after the contract’s execution;

this process ordinarily required the substantial participation of Tellium’s own sales, marketing,

engineering and training staff. In most instances at Tellium, the sales effort involved a team that

included a sales engineer, network engineer and systems engineer. The negotiations in early

2001 with Qwest were conducted with a minimum number of staff, however, which did not

include the usual engineering or sales support. Nor were the products supposedly constituting

purchases for commercial use by Qwest subjected to the usual testing process, and were, instead

accepted sight unseen.

47. Each of the three contracts also required the customers to provide forecasts of its

anticipated requirements from Tellium. Tellium senior management, including Carr, regularly

met with each customer to learn its requirements, expected purchases, purchase orders and

anticipated delivery schedules nine-to-twelve months in advance of the deliveries. That Tellium

(and Carr personally) had regularly received this information from each of its three customers --

so that the actual amount of future purchases orders (or therefore the absence of purchase orders)


25

was “not a surprise” -- was explained by Carr in a September 6, 2001 interview with Bloomberg

News:

Q: Tell me what you’re seeing now, in terms of order flow and demand, because you seem pretty optimistic.

CARR: Well, sure. If you look at the momentum of our business, starting in the fourth quarter of last year, we’ve basically doubled our business each quarter. And when we announced our June quarter results, we actually raised guidance by about 20 to 30 percent for calendar ‘01 and actually affirmed our guidance for ‘02. And that’s basically because we have three very solid relationships today with the three customers and the $1 billion worth of contracts that we started off our life as a public company with.

Q: So that gives you what kind of visibility, in terms of looking out?

CARR: Well, it actually gives us multiple quarters. Because of the nature of our product, these are very strategic design wins. So we sit at the planning table with these carriers, and we help them plan the implementation of our product and their networks, so we actually see, you know, out multiple quarters from where we are. Purchase orders are not a surprise to us.

Q: So multiple, you’re talking two, three, four quarters? How many?

CARR: Probably three quarters, at least, and maybe into four.

Q: OK. And those three customers are whom?

CARR: Dynegy, Qwest and Cable & Wireless, three very well-funded companies.

(Emphasis added). When asked about customer forecasts, a former Tellium product manager for

the Aurora switch stated that:

We would revisit everything every four months, and it was basically a condensed form of our conversations with customers. So there was no document as such coming from customers directly as to how many [switches] they would need per year or per half-yearly basis, but much of it came from discussion with them.

This former manager also confirmed there was constant interaction between sales and marketing

with the customers.


26

48. The customers’ requirements, forecasts and future sales and delivery information

were then provided by Tellium’s own manufacturing and purchasing staff to Tellium’s “contract

manufacturers and component vendors up to six months in advance.” (Exh. B at p. 14) Thus,

there was, at Tellium, a process and concrete facts and information to evaluate, at different points

in time, “expected” sales and deliveries and the purchase orders that constituted the only true

contract “commitments” for future purchases. Although the precise information provided, by

date, from the three key customers to Carr and others at Tellium is peculiarly in the control of

Carr and others at Tellium, including in actual purchase orders, information plaintiffs have

learned in the course of their investigation demonstrates that Tellium’s forecasts and the absence

of purchase orders from its customers, and other requirement data received “at the planning

table” were inconsistent with the sales and delivery “expectations” reported in its Registration

Statement, as described below.

49. Tellium did not report revenues on its financial statements at the time of the

signing of its contracts with its customers, despite the supposed contract “commitments” for

sales. Under Tellium’s revenue recognition policy, Tellium first recognized revenue (and

reported sales) on its income statement after specific products were ordered, delivered and

accepted by its customers. From 2000 through at least the end of 2002, Tellium reported no

sales or revenue at all on its financial statements from Cable & Wireless. The sales and revenue

reported from 1999 through 2001 (when Dynegy completed its build-out) was less than 50% of

the “expected” sales of $250 million reported in the May 15, 2001 amendment to the

Registration Statement. On its various, publicly filed reports with the SEC, (many filed after the

class period) Tellium disclosed the following sales information:


27 Second Consolidated Complaint.FINAL

In re Tellium, Inc. Sec. Litig. Gross Revenues

PERIOD GROSS REVENUES % - QWEST $ - QWEST % - DYNEGY $ - DYNEGY % - OTHER $ - OTHER

FY99 $5,226,735 63%* $3,292,843 37%* $1,933,892 1Q00 $3,426,200 99%* $3,391,938 1%* $34,262 2Q00 $4,158,960 99%* $4,117,370 1%* $41,590 3Q00 $80,664 99%# $79,857 1%# $807 4Q00 $7,938,910 FY00 $15,604,734 18% $2,808,852 78% $12,171,693 4% $624,189 1Q01 $15,635,401 30%+ $4,690,620 70%+ $10,944,780 2Q01 $30,414,155 3Q01 $40,148,122 4Q01 $50,205,118 FY01 $136,402,796 26% $35,464,727 73% $99,574,041 1% $1,354,028 1Q02 $54,059,575 2Q02 $3,074,433 3Q02 $1,946,874 4Q02 $2,891,732 FY02 $61,972,614 66% $40,901,925 29% $17,972,058 5% $3,098,631 Total $79,175,504 $129,717,792 $5,086,848

* As per the 09/22/00 Registration Statement, p. 43. # As per the 12/07/00 Registration Statement amendment, p. 43. + As per the 04/07/01 Prospectus, p. 43.


28

Thus, as of May 17, 2001, Tellium (and particularly Carr) had learned that Dynegy and Cable &

Wireless were not “expected” to make the represented purchases over the next nine to twelve

months.

The Downturn In The Telecommunications Market And The Shifts In Demand From Tellium’s Customers

50. During the eight-month period between the time of the original filing of Tellium’s

IPO registration statement (September 2000) and the date it became effective (May 17, 2001),

there were massive adverse changes in the technology and communications industries in general,

and in the needs and expected purchases by Tellium’s three key customers for Tellium’s

products. One of the potential underwriters for the IPO at Credit Suisse First Boston, noted that,

by October 2000, massive slowdowns in the industry had begun and “Cable & Wireless at the

time was rumored to be freezing capital expenditures which was at the front end of any of the big

players to do that.” As he noted, the telecommunications market collapsed and there was

obvious excess capacity in the networks. Sharply adverse changes in late 2000 at Cable &

Wireless were confirmed by one of its former network engineers who had been laid off in May

2001; according to this engineer, Cable & Wireless’ business started to slide in “mid-Fall of

2000.”

51. In its Form 10-K filed on March 11, 2004, Qwest reported the drop in its sales and

revenues beginning in its fourth quarter 2000 and affecting 2001. This 10-K included a

restatement of Qwest’s 2000 and 2001 financial statements that reflected that Qwest incurred

losses exceeding a billion dollars for each of 2000 and 2001. (While Qwest did not break out its

restatement by quarters, it reported that the restatement was a result of the SEC’s investigation of

its financial reporting beginning in the fourth quarter of 2000.)

52. A Tellium senior systems engineer who had originally reviewed Qwest’s

technical roadmap and estimated that it had called for 30-40 switches noted that it changed when


29

the “market tanked.” A former Tellium sales vice president that had been involved in Qwest’s

original contract negotiations but was excluded from the early 2001 renegotiation, and left

Tellium’s employ immediately before the IPO’s completion, related that initially Qwest’s

contract was “real,” until the bottom of the market fell out. When asked if that occurred in 2001,

he stated:

“I think it started earlier than that, but that’s when the pieces got so small from the explosion that there just wasn’t much left . . . I think we were definitely anticipating that was going to happen and . . . just with the market conditions, it just didn’t work out.”

53. By May 2001, Dynegy was well on its way to completing its build-out; once

completed, Dynegy’s equipment purchases were limited to cards and other relatively minor

purchases.

54. These shifts in customer demand were communicated beginning in January 2001

by Tellium to its own existing and potential suppliers. As reported in Tellium’s Registration

Statement (Exh. B at p. 48), in August 2000, Tellium sub-contracted with Solectron to

manufacture most of the parts for its switches. Solectron assembled printed circuit boards

(PCB’s) for Tellium’s switches; according to a Solectron manager, the orders Solectron received

from Tellium’s contacts, including Dennis Henderson, fell drastically from the high point in

January 2001:

“What they gave us in January, I remember it very well, what they gave us in January was something and come March it was much lower, and then came May, it was even further cut . . . their reasons were their business was going down.”

55. A former Tellium employee responsible for buying raw materials and services

confirmed that Tellium’s forecasts for its sales were cut back in the first quarter of 2001,

beginning in January 2001; according to this former employee, Tellium did not have excess

inventory and Tellium’s purchases of supplies were based upon its own customers’ forecasted

requirements.


30

56. A former Tellium employee responsible for transitioning products from

development to manufacturing described the “push back” of a great deal of components and

materials upon vendors. He cited, as an example, the return of 1000 to 2000 JDS Uniphase high-

speed interfaces worth about $10,000 each, and described the upheaval that had occurred

immediately before he left Tellium in April 2001:

All of a sudden, the last month I was there, there was a big effort to push back the materials . . . Instead of the vendors beating on our doors to give us and sell us stuff, all of a sudden they’re beating our doors wondering what was going on.

Thus, by May 2001, not only had the market and requirements changed for each of Tellium’s key

customers, but Tellium throughout its business structure, was fully aware of these cutbacks, and

relied upon this information in reducing its own orders from its vendors.

The Extant/Dynegy Agreement And Sales

57. In September 1999, Tellium entered into a three-year contract with Extant, Inc.

(“Extant”) to fulfill Extant’s requirements for optical cross-connects, including hardware and

software products. The contract was subject to a two-year extension at Extant’s sole discretion.

The copy of the contract that was publicly filed with SEC, and which was incorporated as part of

the Registration Statement, Exhibit C hereto, was redacted and excluded the delivery dates and

general targets, and quantities, as well as prices, of the purchased products. The Extant contract,

at p. 1, stated that, “it is expected that Extant will purchase approximately Two Hundred Fifty

Million Dollars ($250,000,000) of Products and Installation services described in the

Schedules. . . during the term of the agreement.” The contract stated that Extant would issue

purchase orders for the deliveries and installations, “which would be based on the Forecasts” as

described in the contract. The contract further provided that Extant would use its best efforts to

provide forecasts twelve months in advance of the delivery dates.


31

58. In October 2001, Dynegy announced the “lighting up” and completion of its

buildup of its newly installed United States communications network. Once done, Dynegy’s

requirements for Tellium’s products greatly diminished. As later disclosed in Tellium’s SEC

filings, through December 31, 2001, Extant/Dynegy had purchased a total of less than $112

million in products; by the end of 2002, Dynegy had purchased a total of less than $130 million

of Tellium products (see the chart in ¶ 40). After October 2001, Dynegy made only minor

purchases including for cards under its contract with Tellium.

The Cable & Wireless Agreement And Sales

59. In September 2000, Cable & Wireless entered into a five-year renewable contract

with Tellium. The contract provided that Cable and Wireless “shall be obligated to purchase in

the aggregate U.S. Three Hundred Fifty Million Dollars ($350,000,000) of Systems at the

Contract Prices,” that were included in the agreement, subject to certain termination rights and

the right to reduce the purchase obligation to $200 million dollars if the “Contractor does not

maintain a technological edge so that there exists in the market superior technology unmatched

by the contractor.” The contract further provided that Tellium “will develop” the systems to be

purchased in accordance with the Exhibit C “Specifications,” part of which the parties

acknowledged had yet to be completed. The redacted version of the contract that was filed with

the SEC and incorporated within the Registration Statement omitted the Specifications and did

not otherwise identify what products Cable & Wireless had agreed to buy; no delivery dates or

prices were contained in the filed version of the contract. The redacted version of the contract

thus omitted the information that would have permitted the investing public to evaluate whether

the contract called for the purchase of products that had yet to be successfully developed. The

agreement, as filed, further provided that Cable & Wireless, on a quarterly basis, would provide

forecasts that “set forth the quantities of and delivery dates for systems to be ordered. . . during


32

the twelve-month period following the date of the forecasts.” Exhibit D at p. 12. Under this

contract, Cable & Wireless’ liability was limited to payment for “those systems that have been

accepted and delivered to the purchaser” and certain portions of “accepted purchase orders.” Id.

at p. 35.

60. The contract thus contained terms that would permit Cable & Wireless to avoid

any minimum purchase commitment, if Tellium and Cable & Wireless did not ultimately reach

agreement on the specifications for the systems to be purchased. Also, because of the term in the

contract limiting Cable & Wireless’ liability in the event of its non-performance, as a practical

matter, Tellium had no recourse if Cable & Wireless simply chose not to issue purchase orders

and accept deliveries from Tellium, for any reason, including a downturn in the market or a

change in Cable & Wireless’ own circumstances. Thus, the material facts needed to evaluate the

viability of the purported Cable & Wireless purchase “commitments,” were the state of the

negotiations over the specifications (and whether they called for products that had already been

developed by Tellium and accepted by Cable & Wireless) and the forecasts and purchase orders

issued by Cable & Wireless for concrete purchases. As a former Tellium employee from

investor relations put it when asked if the Cable & Wireless contract or arrangement had been

amended:

“there were a lot of attempts to get things done to sort of, get them to take some equipment because people had doubts that -- meant anything -- after quarter after quarter had gone by and nothing had been sold to them. So there’s one thing to have a contract. It’s another thing to have a meaningful purchase order.”

61. That the Cable & Wireless relationship never matured into a firm and enforceable

contract “commitment” was confirmed by a former Director of Corporate Development at

Tellium:

There was never any consideration in the Cable & Wireless deal. No orders ever came. It was the first contract I ever saw that never got an order. If the IPO was


33

in May of 2001, I would say that they (Tellium) were talking to Cable & Wireless at least 14 months at that point.

As no sales revenue from Cable & Wireless was recognized by Tellium from the September

2000 contract date through the Class Period, and throughout 2002, and no purchase orders had

issued, it may be fairly inferred that as of May 17, 2001, the agreements on the specifications,

forecasts and purchase orders needed to demonstrate any commitment on the part of Cable &

Wireless to purchase products from Tellium had not materialized. Without these agreements,

forecasts and purchase orders, as of May 17, 2001, Tellium had no reasonable basis to “expect”

commercial deliveries to Cable & Wireless to occur within the next 7 months (as the Registration

Statement represented). That there was no enforceable agreement with Cable & Wireless is

corroborated by the fact that Cable & Wireless never issued purchase orders under this contract,

and that Tellium in December 2002 rather than seeking to legally enforce the purported contract

commitments, consented to its termination.

The Qwest Agreements And Relationship

62. In September 2000, Qwest entered into a three-year contract with Tellium. In

accordance with the redacted version of the contract filed with the SEC (Exh. E), and

incorporated into the Registration Statement, Qwest agreed to make the following purchases:

Subject to the terms and conditions of this Agreement, including its Schedules, during the Initial Term, Qwest will make purchases of Products under this Agreement as follows: (a) during the period from the (***) until (***) Qwest will make purchases under this Agreement in an aggregate amount of not less than (***) (the “First Milestone”), (b) during the period from January 1, 2002 until December 31, 2002, Qwest will make purchases under this Agreement in an aggregate amount of not less than (* * *) (the “Second Milestone”) and (c) during the period from (***) until (***), Qwest will make purchases under this Agreement in an aggregate amount of not less than (***) (the “Third Milestone,” and together with First Milestone and Second Milestone, (the “Commitment”). The above amounts are net of any discounts Qwest receives on the price of the Products.

(Emphasis added).


34

63. As a result of these redactions, the public was denied the dollar amounts and

delivery dates for Qwest’s purported “Commitment.” The “Products” Qwest agreed to purchase

are purported to be described in the schedules to the contract, but the schedules are also too

highly redacted to ascertain what Qwest agreed to purchase. Thus, the only concrete purchase

information provided in the contract, as publicly disclosed, was that Qwest had agreed to make

defined (but redacted) dollar amounts of purchases by certain milestone dates, including by

December 31, 2002 (the Second Milestone). An executive at Credit Suisse First Boston who

considered, but ultimately declined underwriting the IPO, and who was familiar with the

unredacted version of the Qwest contract, concluded that it contained many “out clauses.” A

former Tellium engineer noted that “the contract was mainly for the all-optical switches which

were not developed yet,” and another former Tellium employee in Tellium’s finance area noted

that Qwest could easily “get out of those contracts” because the contracts contained a technical

superiority clause. And finally, a former Director of Corporate Development who had been

intimately involved in the negotiation of the September 2000 contract noted the “wiggle room”

that had been included in the contract; once Nicholas DeVito became involved in the

negotiations he added contract provisions that “allowed them [Qwest] the opportunity to sort of

step out if Tellium didn’t hit its release program for certain programs.” Even though Qwest may

have initially intended to make substantial purchases from Tellium, the redactions denied

Plaintiffs and the investing public the contract information that would have shown that the

purported contract “commitments” were, as a legal and practical matter, unenforceable should

conditions at Qwest change, and Qwest decided to forego purchases from Tellium (as ultimately

happened).

64. On September 20, 2000, in a press release, Tellium described its agreement with

Qwest as follows:


35

Qwest Communications International Inc., the broadband Internet communications company, and Tellium, Inc., the world’s first provider of intelligent optical switching solutions, today announced a multimillion dollar, multiyear strategic agreement that will support Qwest’s deployment of a next generation all optical broadband Internet network. Under the agreement, Qwest has agreed to purchase Tellium’s optical switching equipment.

Tellium’s core optical switches will be deployed as part of Qwest’s all-optical network initiative, which exploits the latest in optical technology to significantly reduce operating costs and to provide customers with unprecedented capacity at a lower cost. This equipment will result in greater capital efficiencies for Qwest and is part of Qwest’s previously announced capital expenditure projections for 2001.

Qwest will be using Tellium’s Aurora Optical Switch™, a high-capacity, scalable optical switch that will deliver 1.28 terabits of capacity with interfaces that scale from Optical Carrier (OC)-48 up to OC-768. Tellium expects to begin shipping the Aurora Optical Switch, coupled with its StarNet Operating System™ and Wavelength Management System™, to Qwest in the first quarter of 2001. Qwest also plans to evaluate additional Tellium equipment, including its third-generation platform, the Aurora Full-Spectrum™ switch, which is currently in development. The Aurora Full-Spectrum switch will provide customers with a migration path from Tellium’s current family of Aurora intelligent optical switches, combining all-optical bypass switching with electronic control and processing to • enable carriers to scale in port count, bit rate per port, and raw capacity.

* * *

“This is a great victory for Tellium. Qwest was in the market for a scalable core optical switching product able to deliver the high-speed, high-reliability and high scalability requirements of its leading edge global optical network,” said Harry Carr, Tellium’s chairman and chief executive officer. “We are gratified that Qwest determined that Tellium is a company able to meet their demanding criteria.”

65. As originally contained in its technical roadmap with Tellium, Qwest planned to

purchase 30-50 switches. In a telecommunications company with the size and complexity of

Qwest, large numbers of switches were needed to create the “mesh architecture” of the “Tellium

Solution” (Exh. B at p. 39) that could enable Qwest to “significantly reduce operating costs and

provide . . . unprecedented capacity,” as described in the September 20, 2000 press release.

When Qwest placed small orders for only a few “bottom-end” or bare bones switches, it raised


36

suspicions to many within Tellium that Qwest had abandoned its original plan. As one former

Tellium employee involved in Tellium’s business development and pricing explained:

“Qwest has a huge network and for Qwest you need, you know, probably a good 40 to 50 switches to make a big difference in their worldwide, or in their U.S. network alone . . . So, if they only bought a handful of switches, maybe five switches, and unless they actually deployed them in a particular region in an X, then they really weren’t running, intending to run a nationwide network . . . If you are really intending to run a nationwide mesh network, you’ve got to buy a lot of switches. To mesh. To get all the efficiency out of it. So the joke was that, well, they must be deploying those in warehouses, because they can’t possibly be putting them in their network if they bought as little as they bought.”

66. Also in September 2000, in order to obtain the purchase agreement with Qwest,

Tellium granted a warrant for two million shares of Tellium common stock exercisable at $30

per share to a Qwest affiliate and sold 333,333 shares of “friends and family” stock to Qwest

insiders at a price of $15 per share.

67. As described in ¶ 51, beginning in the fourth quarter of 2000 and throughout

2001, Qwest experienced a sharp decline in its business and no longer needed the additional

capacity available through a mesh architecture that would be enabled by Tellium’s sophisticated

switches and “solution.” In order to retain Qwest’s business, in early 2001, Carr, and Mark

McCoy, a consultant hired by Tellium in October 2000, and who had past connections with

senior Qwest executives, including Lewis Wilks, a Qwest president for internet and multi-media

markets, conducted renegotiations of Qwest’s contract. Carr was himself a personal friend and

neighbor of Joseph Nacchio, Qwest’s CEO. The contract renegotiations were conducted with

Marc B. Weisberg, Qwest’s Senior Vice President for Corporate Development and Lewis Wilks.

Weisberg later became a member of Tellium’s Board of Directors. Tellium’s vice president of

sales, who had been included in the original sales effort, was specifically excluded from the

renegotiations; nor did the usual Tellium engineering and administrative staff participate in the

renegotiations.


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68. One result of the renegotiation was to change the delivery amounts and milestones

in the September 2000 agreement to remove the obligations to make defined dollar purchases in

calendar year 2002, i.e., the Second Milestone. In the redacted version of the contract

amendment dated April 10, 2001, the purchase agreement was changed to read:

Qwest will make purchases of Products under this Agreement as follows: (a) during the period from the (* * *) until (* * *), Qwest will make purchases under this Agreement in an aggregate amount of not less than (* * *) (the “First Milestone”), (b) during the period from the (* * *) until (* * *), Qwest will make purchases under this Agreement in an aggregate amount of not less than (* * *) (the “Second Milestone”), (c) during the period from the (* * *) until (***), Qwest will make purchases under this Agreement in an aggregate amount of not less than (***) (the “Third Milestone”), and (d) during the period from the (***) until (***), Qwest will make purchases under this Agreement in an aggregate amount of not less than (* * *) (the “Fourth Milestone”), and (e) during the period from the (***) until (***), Qwest will make purchases under this Agreement in an aggregate amount of not less than (***) (the “Fifth Milestone”) (each of the First Milestone, Second Milestone, Third Milestone, Fourth Milestone and Fifth Milestone individually a “Milestone” and collectively, the “Commitment”); provided that if in (***) is (***) for the (***), (***) may (***) of an (***) of the (***) of the (***) and (***), and upon such a (***), the (***) shall (***) a (***) and any such (***) shall be (***) by the parties (***). The above amounts are net of any discounts Qwest receives on the price of the Products.

(Emphasis added.) Again the redactions blocked public access to the dollar amount and delivery

dates for Qwest’s purported “Commitment.” Although not publicly disclosed, a former Tellium

network engineer familiar with the terms of both Qwest contracts has advised that this change

delayed the date for purchases that had previously been required to be made by December 31,

2002. While redacting (and otherwise concealing) this change that would have cast doubt on

Qwest’s intention to make significant purchases in the near future (and on the reliability of

Tellium’s revenue guidance for 2002, that was used to price the IPO), on May 2, 2001, Tellium

and Qwest falsely portrayed the renegotiation as a corroboration of the on-going strength of the

Qwest commitment and customer relationship. As then announced, by adding an additional

$100 million to Qwest’s purchase commitment, “they have agreed to expand their multi-year


38

strategic relationship.” Carr also added, “we are pleased that Qwest is expanding the scope of

the September commitment to use our products in its industry-leading network.”

69. As part of the consideration for the April 2001 renegotiated contract, the exercise

price for the earlier issued 2,000,000 warrants was reduced to $14 per share; and an additional

375,000 warrants at an exercise price of $14 per share were also issued to a Qwest affiliate.

70. Upon information and belief, Philip Anschutz, Joseph Nacchio, Lewis Wilks,

Afshin Mohebbi and Marc Weisberg were also issued stock options with a $3.05 exercise price.

Upon information and belief, Wilks and Weisberg, as well as other senior Qwest executives and

directors, received Tellium stock options and/or stock as a quid pro quo or “kickback” for the

amended Qwest contract and limited purchases of Tellium products that Qwest did not need. In

addition to the facts described above in this section, the facts on which these beliefs are based

include the following:

a. According to a former financial advisor to Qwest’s senior executives, he

was “90% sure” that the following persons received shares and/or other consideration from

Tellium: Philip Anschutz (Chairman); Joseph Nacchio (CEO and a director); Lewis Wilks;

Afshin Mohebbi (another Qwest President); and Marc Weisberg. He also noted that it was

typical “in the vast majority of cases” for these executives to ask for 10,000 to 25,000 shares to

be obtained at a vendor’s IPO, or lower pricing for IPO shares. He further explained that, in the

case of Weisberg:

“There certainly was a side deal. At the time, he was planning on leaving Qwest, and as a sort of back door thing, Tellium said we’re going to put you on our Board in six months or whatever the time period was . . . Even aside from the shares itself, he was certainly promised a benefit.”

b. Investigations by the SEC and grand jury in Denver, Colorado into

potential kickbacks paid by up to eleven Qwest vendors, including Tellium, to senior Qwest


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executives and directors have been reported by Tellium in its SEC filings for and during the last

quarter of 1993:

The Denver, Colorado regional office of the SEC is conducting two investigations titled In the Matter of Qwest Communications International, Inc. and In the Matter of Issuers Related to Qwest. The first of these investigations does not involve any allegation of wrongful conduct on the part of Tellium. In connection with the second investigation, the SEC is examining various transactions and business relations involving Qwest and eleven companies having a vendor relationship with Qwest, including Tellium. This investigation, insofar as it relates to Tellium, appears to focus generally on whether Tellium’s transactions and relationships with Qwest were appropriately disclosed in Tellium’s public filings and other public statements. In addition, the United States Attorney in Denver is conducting an investigation involving Qwest, including Qwest’s relationships with certain of its vendors, including Tellium. In connection with that investigation, the U.S. Attorney has sought documents and information from Tellium and has sought interviews and/or grand jury testimony from persons associated or formerly associated with Tellium, including certain of its officers. The U.S. Attorney has indicated that, while aspects of its investigation are in an early stage, neither Tellium nor any of our current or former officers or employees is a target of the investigation. We are cooperating fully with these investigations. We are not able, at this time, to say when the SEC and/or U.S. Attorney investigations will be completed and resolved, or what the ultimate outcome with respect to Tellium will be. These investigations could result in substantial costs.

(Emphasis added).

c. Numerous articles referring to these investigations have appeared in the

press, with additional factual details added. Often the sources of the information, at least

generically, have been disclosed, and include the Defendants. For example:

(i) An October 10, 2003 Wall St. Journal article reported that the

federal grand jury was investigating “whether telecommunications company Qwest

Communications International improperly made deals with small telecom-gear suppliers,” and

that, according to persons “familiar with the investigation”:

The grand jury is looking into small equipment companies’ practice of awarding so-called friends-and-family shares to Qwest senior executives, some of whom may have had influence over Qwest’s equipment-buying decisions.


40

Prosecutors are asking whether those executives bought equipment from the not-yet-public companies to gain personal access to shares when they first sold shares to the public.

(ii) An October 13, 2003 Denver Post Article reported:

Among the former Qwest execs who received stock from suppliers were Nacchio, Mohebbi, Stephen Jacobsen, Drake Tempest, Lew Wilks, Marc Weisberg, Michael Perussi, Vab Goel, David Boast (who has since died) and director Cannon Harvey and founder Philip Anshutz’s investment firm.

This article further reported that in late 2002 Qwest had initiated an internal probe by the law

firm Wilmer, Cutler & Pickering, who determined that “certain Qwest executives inadvertently

reviewed deals with companies that had provided them stock.”

(iii) On November 10, 2003, Business Week reported that Mike

Deshais, a spokesman for Tellium, “says his company received a letter from the SEC in May,

2003, that detailed eleven companies, including Tellium, whose relationships with Qwest are

part of the probe.” The article further reported that the Defendant, Richard Barcus, admitted that

“the companies that didn’t give out stock were at a clear disadvantage.” The article also reported

statements of executives of other Qwest vendors and former Qwest managers and engineers

about Qwest’s executives’ blatantly improper conduct, and the practice of sending unneeded

purchases to “collect dust in warehouses”:

According to executives who did business with Qwest, the behavior of the company’s brass at the time was downright blatant. A former CEO of a telecom equipment startup who requested anonymity said that while trying to sell the company gear in 1999, the startup offered Qwest shares in its upcoming IPO. But instead of earmarking the stock for the company, a senior Qwest exec gave the vendor a list of 11 Qwest insiders who should receive the shares. “It was a whole bunch of people trying to make millions,” say the former CEO, who was interviewed recently by the federal investigators.

Moreover, gear that Qwest ultimately bought from suppliers playing the stock game often wound up collecting dust in warehouses, according to six former Qwest managers and engineers. Indeed, Qwest engineers say they referred in jest to such gear as “flower pots.” At the time, they questioned whether management’s stock positions had improperly influenced the purchasing decisions.


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(Emphasis Added).

d. In response to the SEC and Grand Jury investigations investigating

potential kickbacks paid to Qwest officials by several vendors, Qwest in March 2004 filed a

restated 2001 Form 10-K, which included the statement:

In addition, several of our directors are directors of or are otherwise associated with or have investments in companies with which Qwest or its directors and employees may do business (including purchase products or services) from time-to-time.

e. In another restatement filed in March 2004, Qwest admitted that it had

inaccurately reported revenues and income in 2000 and 2001, and that by fourth quarter 2000

Qwest was incurring significant losses. Qwest described the accounting techniques it had used

to overstate its revenue including by prematurely recognizing future sales of its excess optical

network capacity.

71. The belief that the Qwest - renegotiated April 2001 contract, and purchases made

pursuant thereto, were part of an illicit kickback scheme is further based upon still additional

information ascertained in plaintiffs’ investigation that Qwest’s purchases did not have the

earmarks of a legitimate purchase.

a. As a former project manager at Tellium who deployed Tellium equipment

(i.e., moved products from location to location) for Qwest, and had deployed products for major

telecommunications companies at an earlier employer, explained:

“Like for example, with Qwest, that network was called the warehouse network. The reason they called it that was – the normal process for a Tier One provider such as Qwest or AT&T or Sprint – when they purchase equipment, before they purchase it, they come out and look at it at your location and then once they okay it, you send some of it to their location where they play with it in a lab. Then, normally, once they’re sure and positive that it can run in their network with their equipment and can interoperate – then they’ll certify you and then – they won’t even purchase it yet – then they make you do a field trial where you put equipment in different geographic locations to make sure it actually works in the field and then finally they buy it. But Qwest didn’t do that, Qwest just bought it – which was a little funny, everybody kinda thought that was strange, a little


42

collusive.”. . . [he] “went to Tellium from AT&T thinking it would be a smaller company and better but the corruption was disgusting. That company was filthy.”

This former employee then provided additional facts that supported his opinion regarding

corruption at Tellium. He recounted statements Carr made in 2002, about the warehoused

Tellium products:

“[P]eople were even coaching us before we went to meetings with Qwest. It was ridiculous. To expect a hostile environment and this is why, and Harry (Carr) made a statement that we had equipment in the Qwest network and we had it open into a floor in a building at Qwest but it was never physically connected, and he (Carr) can get into a lot of trouble if we don’t get that equipment connected up, so we really need to push this forward no matter what they say.”

b. A former Tellium employee in charge of customer deployments for Qwest

and Dynegy advised that Carr had pressed Qwest to accept four systems worth $5-6 million each,

that Qwest did not need, before consummation of the IPO, so that Carr could refer to these sales

during the IPO roadshows. These four systems were delivered to a Qwest warehouse in Texas.

After the IPO, nine additional systems were delivered to a Qwest warehouse in Edison, New

Jersey. This employee confirmed that, by 2002, these systems remained uninstalled, and that he

heard several people at Tellium, including Carr and Mark McCoy jokingly refer to the Qwest

deliveries as purchases for the “warehouse network.” This employee confirmed that Tellium

shipping invoices would identify the details of the deliveries.

72. Several former Tellium employees, including a former Director of Operations and

Marketing Manager, confirmed that Tellium’s products were not deployed in the usual course in

Qwest’s systems to handle telecommunications traffic. One former Tellium project manager

confirmed that Qwest purchases were sent to and kept at a Texas warehouse; another former

employee in Tellium’s finance department confirmed that other Qwest purchases were sent to a

warehouse in Edison, New Jersey. A former Tellium internal quality auditor confirmed that the

Qwest pre-IPO shipments were sent to a holding place “for appearances sake.” Yet another


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former Tellium employee, a former director of product marketing, confirmed that Qwest

products delivered to warehouses were not even taken “out of the boxes.” Although the Tellium

former employees did not identify the precise dates and addresses of the deliveries of Tellium

products to the Qwest Texas and New Jersey warehouses, this information is peculiarly

contained in Tellium’s business records, including in Tellium shipping invoices and other

business records relating to Tellium’s deliveries and installation efforts.

The Tellium Revenue Guidances Prepared For The IPO And Provided To Underwriters And Analysts

73. As the Tellium former employee who developed the financial model used to price

the IPO, and which was then used in later revenue guidances, explained, these models and

guidances were not based upon Tellium’s three key contracts, sales forecasts, purchase orders or

information provided in planning meetings. Instead the numbers were developed using arbitrary

growth assumptions that were then extrapolated out in an Excel spreadsheet:

If you know anything about Excel, how Excel works, you know equals A1 times 1.15 and extrapolate that out. That basically became your $144 million. If you look at the model that they kind of threw out there and just do some basic math, you’ll see it was just like a 15% increase quarter over quarter from the initial model.

74. This employee prepared the financial model for the IPO in December 2000,

reported to Losch and furnished the financial models and guidances to him. After developing the

$144 million revenue estimate for 2001, he used higher percentage growth assumptions for later

years. As he stated:

If you were to ever get in to Tellium and get behind the model that went to Morgan Stanley that supported the IPO and as to how they were made up and how revenue projections were . . . manufactured or whatever you want to say, you would get back to that initial model.


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The Untrue Material Statements And Omitted Material Facts Needed To Make Tellium’s Registration Statement Not Misleading

The Untrue Material Statements And Omissions In The Risk Factor Disclosures

75. The prospectus filed as part of the original registration statement on September

22, 2000, contained the following statement, included in the “Risk Factors” section, under the

heading “Risks Related to Our Business and Financial Results”:

We anticipate that substantially all of our revenues for the foreseeable future will be derived from three customers: Cable & Wireless, Extant and Qwest. As a result, it is critical for us to expand our customer base in order to succeed. We may not be able to obtain additional customers, or customers that are willing to make significant commitments to purchase our products and services. If our customers do not deploy our products in their commercial networks in a timely manner, or at all, we will have less revenues than we expect. In addition, if our current or prospective customers decide not to purchase products from us for any reason, including if there is a downturn in their business, our ability to sell products and generate revenues would be seriously harmed. Our customer base and revenue will not grow if:

• Customers are unwilling or slow to utilize our products; * * *

(Exh. A at p. 7, emphasis added)

76. This risk disclosure was changed in later amendments to the Registration

Statement, starting with the second amendment dated November 7, 2000 (shortly after the

“downturn” in the telecommunications industry had begun) to remove the references to risks that

“current” customers might not purchase products if there is a “downturn in their business.” For

the Registration Statement amendment dated May 15, 2001, the risk disclosure referring to a

potential “downturn” read:

We are currently very dependent on three customers. We must expand our customer base in order to succeed. If we are not able to attract new customers who are willing to make significant commitments to purchase our products and services for any reason, including if there is a downturn in their businesses, our business will not grow and our revenue will not increase. Our customer base and revenue will not grow if:

• Customers are unwilling or slow to utilize our products; * * *


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(Exh. B at p. 7, emphasis added)

77. The risk disclosure, as revised, is either untrue or omits material facts needed to

make it not misleading. The original risk disclosure reported the true critical risk to Tellium’s

sales and revenues. The true risk, as Tellium first acknowledged, was that current (as well as

“new”) customers could “decide not to purchase,” regardless of the purported commitments in

their contracts, “for any reason, including if there is a downturn in their business;” and that

where those changes in business circumstances and decision-making occurred, Tellium’s

revenues “would be seriously harmed.” I.e., the existing customers’ “commitments” were

illusory because these customers could, without sanction imposed by their contracts, choose “not

to purchase products for any reason, including a downturn in their business.” Similarly, if

Tellium’s existing customers did not “deploy Tellium’s products in their commercial networks in

a timely manner, or at all,” then “expected revenues would not be realized” -- i.e., the true risk

that related to Tellium’s revenue projections was that current customers would not make

purchases under their contracts; the risk was not limited to hoped for revenue growth from new

contracts with new customers. The changes in the risk disclosure were highly misleading for its

implicit representation that Tellium’s contract “commitments” were binding, and that the

contracts foreclosed Cable & Wireless and Qwest from ultimately deciding to forego Tellium

purchases, if and when the market dropped and their own business circumstances changed

(which in fact had occurred).

78. As described in ¶¶ 59-61, the purported $350 million “commitment” in the Cable

& Wireless contract did not insulate Tellium’s revenues from being “seriously harmed,” where

because of a “downturn” in Cable & Wireless’ business, or “for any reason,” Cable & Wireless

“decided not to purchase” products from Tellium -- i.e. the $350 million “commitment” in the

Cable & Wireless contract was, as a practical matter, unenforceable and illusory. Under its


46

contract, Cable & Wireless could, without incurring any liability, decide not to deploy Tellium

products “timely” or “at all” -- so long as it did not issue purchase orders for particular purchases

of products. Thus, Tellium’s alteration of its Registration Statement to remove the true risk

warning with respect its to existing customer, Cable & Wireless, was misleading.

79. The purported $400 million “commitment” by Qwest also did not insulate

Tellium’s revenues from being “seriously harmed,” where because of a “downturn” in Qwest’s

business, or otherwise, Qwest “decided not to purchase” products from Tellium -- i.e. the $400

million “commitment” in the Qwest contract was also, as a practical matter, unenforceable and

illusory for the reasons stated in ¶¶ 62 to 72. Thus, Tellium’s alteration of its registration

statement to remove the true risk warning with respect to its existing customer, Qwest, was

misleading.

80. The May 15, 2001 registration statement amendment was also misleading for

failing to disclose that, by the time the Registration Statement became effective, the material

risks Tellium had earlier identified to its revenue expectations had materialized with respect to

Cable & Wireless. As described in ¶ 50, by May 2001, the “downturn” in Cable & Wireless’

business had long since occurred and Cable & Wireless had, through its failure to issue purchase

orders, determined not to “timely deploy” Tellium products, as described in ¶¶ 60-61.

81. The May 15, 2001 registration statement amendment was also misleading for

failing to disclose that the material risks Tellium had earlier identified to Tellium’s revenues had

materialized with respect to Qwest. As described in ¶ 51, by May 2001, the “downturn” in

Qwest’s business that changed Qwest’s decision to make “commercial” purchases of Tellium

products had already occurred.


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82. The “Risk Factors” section of the May 15, 2001 amendment to the Registration

Statement, under the heading “Risks Related To Our Business and Financial Results” contained

the additional statements (Exh. B at pp. 6-7):

We expect that substantially all of our revenue will be generated from a limited numbers of customers, including Cable & Wireless, Dynegy Connect and Qwest. The termination or deterioration of our relationship with these customers will have a significant negative impact on our revenue and cause us to continue to incur substantial operating losses.

For the year ended December 31, 2000 and for the three months ended March 31, 2001, we have derived significant revenue from sales under our contract with Extant, which was transferred to Dynegy Connect in September 2000. We anticipate that substantially all of our revenues for the foreseeable future will be derived from Cable & Wireless, Dynegy Connect and Qwest.

Dynegy is proceeding with Extant’s planned network build-out. Dynegy may, however, change its plans at any time and determine not to proceed with the build-out on a timely basis or at all. If Dynegy Connect were to stop or delay purchasing products or services from us, or reduce the amount of products or services that it obtains from us, our revenue would be reduced.

In addition, although Dynegy Connect has agreed to purchase its full requirements for optical switches from us until November 1, 2003, Dynegy Connect is not contractually obligated to purchase future products or services from us and may discontinue doing so at any time. Dynegy Connect is permitted to terminate the agreement for, among other things, a breach of our material obligations under the contract.

Under our agreement with Cable & Wireless, Cable & Wireless has made a commitment to purchase a minimum of $350 million of our optical switches by August 7, 2005. Our agreement with Cable & Wireless gives Cable & Wireless the right to reduce its minimum purchase commitment from $350 million to $200 million.

If we do not maintain a technological edge so that there exists in the marketplace superior technology that we have not matched. This agreement also permits Cable & Wireless to terminate the agreement upon breach of a variety of our obligations under the contract.

Under our agreement with Qwest, Qwest has made a commitment to purchase a minimum of $300 million of our optical switches over the first three years of the contract and, subject to extensions under a limited circumstance, an additional $100 million over the following two years of the contract. This agreement allows Qwest, through binding arbitration, to terminate the agreement upon breach of a variety of our obligations under its contract.


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If any of these customers elects to terminate its contract with us or if a customer fails to purchase our products for any reason, we would lose significant revenue and incur substantial operating losses, which would seriously harm our ability to build a successful business.

83. The highlighted statements are untrue or omit facts making them misleading

because the purported “risks” had, by May 15, 2001, already materialized and had become

historical facts. The statements also are untrue or misleading with respect to their references to

contract “commitments.”

a. With respect to Dynegy, as may be inferred from the planning and sales

information process described in ¶¶ 46-49 and Dynegy’s own contract and circumstances, ¶¶ 57-

58, Tellium and specifically Carr, had as of May 2001, received information at the “planning

table” that Dynegy was about to complete its United States network, and therefore no longer

intended to purchase the $250 million of product that had been “expected” when the contract was

originally signed in September 1999.

b. With respect to the risk disclosure regarding Cable & Wireless, as

described in ¶¶ 59-61, by May 17, 2001, Tellium’s “relationship” with Cable & Wireless had

already “deteriorated.” Based on the failure, after 14 months of negotiations, of Cable &

Wireless to issue a single purchase order, or otherwise provide forecasts or other information “at

the planning table,” reflecting purchases to be made in the next nine to twelve months (¶ 47),

Tellium’s statement that it had contract commitments of at least $200 million and up to $350

million was untrue, or at least misleading, without disclosure of those facts. The description of

“commitments” contained in the agreement with Cable & Wireless was also misleading without

the disclosure of the contract provisions demonstrating that the purported commitments had not

matured and were not enforceable. These included the product “specifications” (e.g., whether

the contract called for as yet undeveloped products) that had been redacted from the version of

the contract filed with the SEC (Exh. D hereto), and the contract clause limiting Cable &


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Wireless’ liability in the event of its breach to amounts contained in the purchase orders it chose

to issue (Id. at p. 35). Although, this latter contract provision had not been redacted, it was not

mentioned in the May 15, 2001 registration statement amendment, and its affect upon the nature

of Cable & Wireless’ purported purchase “commitment” could not be discerned by the lay

investing public (as distinguished from legal experts), and without a detailed review of the

particular terms of the contract, which itself was buried in exhibits to the first amendment to the

registration statement. In all, the SEC filings in the six amendments to the Registration

Statement and exhibits for the IPO were several feet deep.

c. With respect to the risk disclosures regarding Qwest, by May 15, 2001,

Tellium’s “relationship” with Qwest had already “deteriorated,” first as a result of Qwest’s

changed economic and market circumstances (¶ 51), and second as a result of the early 2001

contract renegotiation and kickback scheme (¶¶ 62-72). The reference to Qwest’s “commitment”

to purchase $300-400 million of products was untrue or at least misleading without disclosure of

the contract provisions demonstrating that the commitments in the contract were not legally

enforceable (even if Tellium had had the will to enforce them). These provisions, redacted from

the versions of the contracts filed with the SEC, included: (i) the contract’s product

specifications that included products that Tellium had yet to develop, and the extent to which the

commitment was dependent on those new development successes; (ii) the technical superiority

clause, and; (iii) the clause tying Qwest’s obligations to Tellium’s timetable for product releases.

The changes in the delivery milestones, particularity with respect to 2002, that had been redacted

from the original and renegotiated Qwest contract, were also material facts omitted from the

Registration Statement, that were needed by investors to evaluate Qwest’s purchasing intentions,

the timetable for purchases (and thus the reliability of Tellium’s annual revenue guidances) and

the viability of Qwest’s purported “commitments.”


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84. The “Risk Factors” section of the Registration Statement, under the heading

“Risks Related To Our Business and Financial Results” also contained the following statement

(Exh. B at p. 8):

Due to the long and variable sales cycles of our products, our revenues and operating results may vary significantly from quarter to quarter. As a result, our quarterly results may be below expectations of market analysts and investors, causing the price of our common stock to decline.

Our sales cycle is lengthy because a customer’s decision to purchase our products involves a significant commitment of its resources and a lengthy evaluation, testing and product qualification process . . . .

For example, customers with significant or complex networks usually expand their networks in large increments on a periodic basis. Accordingly, we may receive purchase orders for significant dollar amounts on an irregular and unpredictable basis. The long sales cycles, as well as the placement of large orders with short lead times on an irregular and unpredictable basis, may cause our revenues and operating results to vary significantly and unexpectedly from quarter to quarter. As a result, it is likely that in some future quarters our operating results may be below the expectations of market analysts and investors, which could cause the trading price of our common stock to decline.

85. This statement was untrue, or at least misleading without the disclosure of the

following facts:

a. That Carr and others at Tellium knew customer requirements nine to

twelve months in advance from forecasts and other information they received at the “planning

table.”

b. That the revenue guidances that Tellium, and particularly Carr and Losch,

provided to market analysts and investors were wholly divorced from purchase orders and other

sales information on customer requirements; the guidances were instead merely mathematical

extrapolations of arbitrarily selected growth factors, as described in ¶¶ 73-74. Thus, it was not

the timing of “large orders with short lead times” that caused variances from Tellium’s

guidances.


51

c. That Qwest was not following this described sales cycle process, because

Qwest was not making purchases based on legitimate commercial considerations, and was

accepting products, sight unseen, for delivery to its warehouses.

86. The “Risk Factors” section of the Registration Statement, under the heading

“Risks Related to this Offering” contained the following statement (Exh. B at p. 16):

The price of the common stock that will prevail in the market after this offering may be higher or lower than the price you pay, depending on many factors, some of which are beyond our control. In particular, the limited amount of our product sales and the limited number of customers and/or the announcement of any significant customer developments, awards or losses or of any significant partnerships or acquisitions by us or our competitors could have a material adverse effect on our trading price. In addition, the market for technology companies, including companies whose business involves some aspect of optical networking, has recently experienced substantial price and volume fluctuations, which often have been unrelated or disproportionate to the operating performance of those companies.

(Emphasis added).

87. The highlighted statement was untrue or misleading without the disclosure of the

true information and changes that had occurred with respect to product sales to each of Dynegy,

Cable & Wireless and Qwest. The statement is misleading for its suggestion that “significant

customer developments” that would likely have a material adverse effect on trading price were

unknown to Tellium on May 17, 2001. The disclosure that the “market for technology

companies” has “recently experienced substantial price and volume fluctuations” significantly,

and to a misleading degree, understated the then known effects of the market downturn on Cable

& Wireless’ and Qwest’s operating performance, and the resulting adverse affects on Tellium’s

sales.

The Untrue Statements And Omissions In Other Sections Of The Registration Statement

88. The Overview section of the Registration Statement contains the following

statement:


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We have three customers: Cable & Wireless, Dynegy Connect, an affiliate of Dynegy Global Communications, and Qwest. In September 2000, we entered into a five-year contract with Cable & Wireless, a multinational provider of voice, data and network services. Under the terms of this contract, Cable & Wireless has a minimum purchase commitment of $350 million for the worldwide deployment of our products, including the Aurora Optical Switch, the StarNet Wavelength management System and the StarNet Operating System. Cable & Wireless is conducting laboratory testing of the Aurora Optical Switch at our facilities. We expect to commence commercial shipment to Cable & Wireless during the second half of 200l. In September 1999, we entered into a five-year contract with Extent. On September 29, 2000, Extant was acquired by Dynegy Global Communications, a wholly-owned subsidiary of Dynegy, a publicly-traded energy company. As part of the acquisition, our contract with Extant was transferred to Dynegy Connect, a limited partnership…. We expect Dynegy Connect will purchase approximately $250 million of products under the contract, although it has no obligation to do so…. We have a five-year contract with Qwest, a multinational provider of voice, data and network services. Under the terms of this contract, Qwest has a minimum purchase commitment of $300 million over the first three years of the contract and, subject to extensions under a limited circumstance, an additional $100 million over the following two years of the contract for the deployment of our products, including the Aurora Optical Switch, the StarNet Wavelength Management System, the Aurora Full-Spectrum and the StarNet Operating System. Qwest began conducting laboratory testing of the Aurora Optical Switch in the fourth quarter of 2000, and we commenced commercial shipment under this contract during the first quarter of 2001.

(Emphasis added).

89. The italicized statements referring to contract “commitments,” “commercial

shipments” and “expect[ed]” deliveries and purchases are either untrue or misleading without the

disclosure of additional facts:

a. For the reasons described in ¶ 83(b), on May 17, 2001, Tellium did not

have a reasonable basis to “expect” to commence commercial shipment to Cable & Wireless

“during the second half of 2001.” At a minimum, it was misleading for Tellium to make this

statement without disclosing that it had yet to receive purchase orders or the other sales

requirement information it had received at the “planning table” that belied these purported

expectations.


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b. As described in ¶ 83(a), on May 17, 2001, Tellium did not have a

reasonable basis to “expect” Dynegy to purchase $250 million of products under its contract. At

a minimum, it was misleading for Tellium to make this statement without disclosing the

purchase orders and other sales requirement information it had received at the “planning table”

that belied these purported expectations.

c. The statement that Qwest had commenced “commercial shipments” was

untrue or at least misleading without further disclosure because, as described in ¶ 83(c), the

shipments were not made for legitimate commercial use but were instead made pursuant to a

kickback scheme and the Tellium products were delivered to warehouses, rather than deployed to

handle telecommunications traffic in Qwest systems.

90. The Registration Statement contained the following statement under the section

marked “Customers” (Exh. B at pp. 43-44):

In August 2000, we entered into a five-year contract with Cable & Wireless, a multinational provider of voice, data and network services. Under the terms of this contract, Cable & Wireless has a minimum purchase commitment of $350 million for the worldwide deployment of our products, including the Aurora Optical Switch, the StarNet Wavelength Management System and the StarNet Operating System. Cable & Wireless is conducting laboratory testing of our Aurora Optical Switch at our facilities. We expect to commence commercial shipment under this contract during the second half of 2001. Our agreement with Cable & Wireless gives it the right to reduce its minimum purchase commitment from $350 million to $200 million if we do not maintain a technological edge so that there exists in the marketplace superior technology that we have not matched. However, if the minimum purchase commitment under our agreement is reduced, then, at the end of the contract term, all purchases made by Cable & Wireless, including prior purchases, will be repriced at a higher rate. Cable & Wireless has the right to terminate the agreement if we breach our obligations under the contract and fail to remedy the breach within 30 days, we are prevented by forces beyond our control from performing our obligations under the contract for more than 60 days or we persistently breach our obligations under the contract, whether or not cured.

In September 1999, we entered into a five-year contract with Dynegy Connect. On September 29, 2000, Extant was acquired by Dynegy Global Communications, a wholly-owned subsidiary of Dynegy, a publicly-traded energy company. As part of the acquisition, our contract with Extant was transferred to


54

Dynegy Connect, a limited partnership owned 80% by subsidiaries of Dynegy and 20% by Telstra Corporation, an Australian telecommunications and information services company. Dynegy is proceeding with Extant’s planned network build-out. We expect Dynegy Connect will purchase approximately $250 million of products under the contract, although it has no obligation to do so. However, under the terms of this contract, Dynegy Connect is required to purchase its full requirements for optical switches from us until November 1, 2003. Dynegy Connect has the right to terminate the agreement if, among other things, we breach a material obligation under the contract and fail to remedy the breach within 30 days or we violate any applicable law and so materially impair Dynegy Connect’s ability to perform its material obligations or receive its material benefits under the contract. Our Aurora 32 optical switch, StarNet Wavelength management System, StarNet Design Tools and StarNet Operating System have been in service in the Dynegy Connect network since April 2000. Dynegy Connect conducted laboratory testing of our Aurora Optical Switch and we commenced commercial shipment under this contract during the first quarter of 2001. We granted to affiliates of Dynegy Connect a warrant to purchase 5,226,000 shares of our common stock at an exercise price of $3.05 per share.

In September 2000, we entered into an agreement with Qwest, a multinational provider of voice, data and network services, relating to the sale of our products. This agreement was amended in April 2001. Under the terms of the agreement, as amended Qwest has a minimum purchase commitment of $300 million over the first three years of the contract and, subject to extensions under a limited circumstance, an additional $100 million over the following two years of the contract for the deployment of our products, including the Aurora Optical Switch, the StarNet Wavelength Management System, the Aurora Full-Spectrum and the StarNet Operating System. This contract expires on December 31, 2005. Qwest began conducting laboratory testing of our Aurora Optical Switch in the fourth quarter of 2000, and we commenced commercial shipment under this contract during the first quarter of 2001. If we breach our obligations under the contract and fail to remedy the breach within 30 days, Qwest, through binding arbitration, may have the right to terminate the agreement. We granted to a wholly-owned subsidiary of Qwest warrants to purchase a 375,000 shares of our common stock at an exercise price of $14.00 per share.

(Emphasis added).

91. The highlighted statements are untrue or misleading for the same reasons set forth

in ¶ 89.

92. The Registration Statement contained the following statement under the section

marked “Advisory Board” (at p. 45);

In the first half of 2000, we established an advisory board with members having various expertise to provide us with advice and to consult with us on our business,


55

including the development of our technology and marketing of our products and services. We believe that this advisory board provides necessary customer and industry guidance and is critical to the success of our business. Individuals who are employees or affiliates of current or potential customers have joined our advisory board, including Qwest in March 2001. All members of our advisory board were granted options to purchase our common stock. In the future, we may add additional individuals who are employees or affiliates of current or potential customers to our advisory board. We reimburse the members of our advisory board for reasonable out-of-pocket expenses they incur in connection with their services. We may in the future grant stock options to our advisory board members.

(Emphasis added).

93. This statement is untrue or misleading without additional material disclosures

relating to the kickback scheme with Qwest as provided in ¶ 62-72. The statement gives the

untrue and misleading impression that advisory board members were receiving options in

exchange for services relating to the members’ technical expertise and commercial advice

provided to Tellium as an advisory board member, rather than as a quid pro quo for the award of

the Qwest renegotiated contract and the purchase and acceptance at Qwest warehouses of

unneeded Tellium products. Despite a lengthy investigation involving discussions with

approximately forty former Tellium employees, no one mentioned the existence of such an

“advisory board,” and, upon information and belief, based upon the facts described in ¶¶ 62-72,

no such “advisory board” existed. The statement also is misleading without the disclosure of the

identities of the senior Qwest executives and directors who received stock options; all of those

executives and directors are unlikely to have provided Tellium with the described technical

services and commercial advice, or to have been compensated with stock options for those

purported services.

The Materiality of the Statements Regarding Contract Commitments, Customer Relationships And Sales Expectations

94. The untrue statements and misleading omissions about Tellium’s contract

commitments, customer relationships and sales expectations were critical and therefore


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“material” to Tellium’s ability to consummate its IPO, and sustain its stock’s inflated sales price.

As one portfolio manager with Metamarket.com Inc. and New Era Fund, who bought shares in

the Tellium IPO, summed it up (in a May 17, 2001 Daily Deal article), he had “put his faith in

Tellium’s three big-name clients;” and as Business Week reported on May 21, 2001, “only the

best companies are making it out the IPO door. Tellium was brought out because it boasts a $1

billion backlog of guaranteed contracts, giving it the precious and rare quality in techdom:

visibility on future sales.”

95. In an interview by the IPO Reporter published on June 18, 2001, Losch

confirmed that only by falsely emphasizing the illusory contract commitments and falsely

described customer “partnerships,” including by fostering the false impression that the Qwest

commitment had been reaffirmed and “expanded,” was Tellium able to consummate its IPO:

Q: Did the signing of new customers affect how you were evaluated by underwriters?

Losch: Absolutely. The marketplace was hot at the time [in September 2000]. But from a delivery perspective of where we think we were going with the company, we talked about real contracts, real customers, real equipment.

Q: What was the spin the underwriters were giving it?

Losch: They understood the notion that $900 million was a big number, but they also understood the partnership arrangement that carriers undertake to make the kind of commit they were making with us. To make the partnership sign up for the duration, three to five years, indicated a new style of customer contracts for optical switches. It’s not so much that we took a different approach. It’s important that we had commitment from both sides. I’m sure other suppliers in our spot would love to try and get commitments, but for whatever reason they weren’t able to.

* * *

Customers in the first quarter 2001 have paid us for business, our business plan is fully funded. So for us going public has been about establishing credibility in our customer base and marketplace…


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As it goes beyond this… not only have both customers paid us but one of them, Qwest extended their contract and extended it from a $300 million three-year commitment to adding another $100 million commitment and added two more years.

(Emphasis added). In July 2001, Carr also confirmed the significance of the false representations

about the $1 billion in contract commitments, and its customer relationships and shipments, to

Tellium’s ability to consummate the IPO. In a press release issued by Tellium on July 18, 2001,

Carr lauded the “expansion” of Tellium’s relationship with Qwest and linked the success of

Tellium’s IPO to “Tellium’s transformation from a small group of engineers with a great idea to

a real company shipping real products to real customers.” A day later, Carr further explained to

CNBC News:

[O]ne of the things we were fortunate about is we, early on, landed three very strong customers: Cable & Wireless, Qwest Dynegy [sic] and we’ve got $1 billion worth of contracts, commitment contracts, with those very well-funded customers. And that’s really the basis for us to feel, you know, confidence that we could go out and go public this year, even in the current market environment.

The Continuing Misuse of Tellium’s False Revenue Guidances And Illusory Commitments To Inflate Tellium Stock Prices

96. Once the IPO was successfully consummated, Tellium distributed its baseless

revenue projections internally and to market analysts and fostered the false impression that the

guidances reflected expected purchases under the three contracts, so that it appeared that there

was “visibility” into Tellium’s future sales to support inflated stock price estimates. Along with

the false representations about “real” commitments and “expected” sales of $1 billion, the false

revenue guidances, including for $288 million of sales in 2002, were used by market analysts,

including by Tellium’s former underwriters, Thomas Wiesel, Morgan Stanley and UBS

Warburg, to develop discounted future cash flow analyses to arrive at a current value for

Tellium’s stock. As described by the person working for Losch who prepared the model for the

Tellium revenue guidances regularly released to the market, however, the guidances continued to


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be based on nothing more than mathematical extrapolations of baseless growth assumptions,

¶¶ 73-74. As such, the guidances were misleading for two reasons. First, the guidances were

presented as having been prepared from information on the three key contracts (when they were

merely baseless mathematical models); also, even if they had been based on the three contracts,

they would still be misleading because there were no commitments or expectations for $1 billion

of sales from these customers.

97. Thomas Wiesel, on June 12, 2001, trumpeted the supposed “visibility” and the

product validation implicit in Tellium’s $1 billion of contracts with its three “top-tier” customers,

in order to support a “buy” recommendation of Tellium stock and Thomas Wiesel’s estimated

price target of $35 per share. This price was calculated from a discounted cash flow analysis

using Tellium’s baseless sales guidances, including its “guidance” for $288 million in sales for

2002. As Thomas Wiesel reported:

With its revenue driven by three customers for the next couple of years, TELM management has strong visibility into its revenue streams, in our view, limiting the risk of a downside surprise to our top-line expectations.

* * *

Top line driven by carriers with spending muscle. With first-money advantage, Tellium has already secured $1 billion in contracts, spanning the next five years from Qwest, Cable & Wireless and Dynegy. Given a relatively small revenue base initially, we estimate spending by these customers can drive triple-digit, top-line growth over the next two years.

This statement was false and misleading because the $1 billion in contracts was illusory for the

reasons described in ¶¶ 77-81 and 83; and because the revenue guidances provided by Tellium

were baseless for the reasons described in ¶¶ 74 and 96. Thomas Wiesel, who had first received

the guidances and information about Tellium’s contracts as an underwriter for Tellium’s IPO,

and who had a representative on Tellium’s Board of Directors, either knew the above-quoted

statements were false or was reckless in failing to check their truthfulness. For almost a year, as


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the market became progressively more skeptical about Tellium’s business prospects, Thomas

Wiesel acted knowingly or recklessly when it continued to falsely represent the significance of

these supposed contract commitments, and the purported “visibility” they provided into

Tellium’s revenue guidances, to justify Thomas Wiesel’s notoriously upbeat assessments of

Tellium’s stock values.

98. On June 13, 2001, UBS Warburg, in its research report, used and published the

Tellium baseless revenue guidances, particularly the $288 million in sales projected for 2002, to

prepare its valuation of Tellium’s stock. UBS Warburg also relied upon the purported (but false)

contract commitments with its customers in recommending and valuing Tellium’s stock:

The strength of Tellium’s optical switching technology is evident through three long-term multi-million dollar contracts with Qwest, Cable and Wireless, and Dynegy. The Dynegy contract is for $250 million to be purchased through November 1 of 2003. The C&W contract was signed in August of 2000 and calls for a minimum purchase agreement of $350 million through August of 2005. The Qwest contract was signed in September of 2000 and calls for a minimum purchase agreement of $300 million over the first three years, with the potential of an additional $100 million over the following two years of the contract. We view these contracts as significant wins from important service providers that show their commitment to deploying Tellium products over the next three to five years.

UBS Warburg first received the baseless revenue guidance, including for the 2002 $288 million

in projected sales, and the false information about Tellium’s contracts, while serving as an

underwriter (but not a lead underwriter) for Tellium’s IPO. The UBS Warburg report was false

for the reasons stated in ¶¶ 74 and 96 (regarding the revenue guidances) and ¶ 83 (regarding the

contract commitments).

99. On June 14, 2001, Morgan Stanley, in its research reports, also used and

published the Tellium baseless revenue guidances, particularly the $288 million in sales

projected for 2002, to perform a discounted cash flow analysis for its inflated valuation for

Tellium’s stock. In recommending Tellium’s stock, and the inflated stock valuation, Morgan


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Stanley also relied upon the purported (but false) $1 billion in contract commitments to give

Tellium’s projections “visibility.”

Bottom line: We like the stock. We believe that Tellium’s valuation should reflect its relatively healthy visibility (roughly $1 billion in contracts with well-funded customers) and early leadership in core optical switching. We used four approaches to value Tellium’s stock: discounted cash flow, price to sales relative to CIENA’s switching business, price-earnings-to-growth relative to the S&P 500, and historical trough valuations. Our valuation work suggests a fair value of $28-34 per share.

Morgan Stanley first received the baseless revenue guidance, including for the 2002 $288 million

in sales, and the false information about Tellium’s contracts, while serving as an underwriter for

Tellium’s IPO. Morgan Stanley’s report was false and misleading for the reasons stated in ¶¶ 74,

83 and 96.

100. On June 28, 2001, Thomas Wiesel Partners LLC reported:

Tellium President Richard Barcus presented yesterday (6/27/01) at our Growth Forum 3.0 and reiterated his bullish outlook on the optical switching market, highlighting Tellium’s first-mover advantage in the express grooming segment. Management stated that in the current environment with carrier focus on ROI, Tellium’s product fit the bill. The company has not seen any significant slowdown in spending on its target market. Shipping for revenue to Dynegy and Qwest and Cable & Wireless deployment is on track . . .

We believe Tellium has a well-managed revenue stream with a limited probability of downside and a high probability of upside. We maintain our BUY rating with a 12-month price target of $35 based on our 10-year DCF [Discounted Cash Flow] model.

(Emphasis added.) By this report, Defendants Tellium, Barcus and Thomas Wiesel made false

representations to the market. For the reasons described in ¶¶ 57-58 and 59-61, respectively,

deployment at Dynegy and Cable & Wireless, was not “on track.” Shipments made to Qwest

were not “on track” because they were sent to warehouses rather than being deployed for

commercial use in its systems. ¶¶ 70-72. By this report, Thomas Wiesel also republished its

false and misleading valuation prepared on the basis of Tellium’s false revenue guidances.


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The Truth Slowly Emerges And Is Denied By Defendants

101. On June 20, 2001, Morgan Stanley issued a research report on Qwest

Communications, titled “Qwest: Listening to the 10-K”, lowering its assessment of value for

Qwest stock, from “Out Perform” to “Neutral.” Based upon its analysis of cryptic information in

Qwest’s 2000 Form 10-K, Morgan Stanley reported concerns about a “lack of visibility” into

Qwest write-offs, earnings and expenses assumptions; Morgan Stanley also cited “industry

weakness” as another basis of its concerns.

102. By July 2001, concerns about the health of the telecommunications industry and

rumors about Tellium’s own prospects were circulating. In a keynote presentation to the

NFOEC entitled “Core Illusions: Time for a Reality Check,” Carr sought to counter the

suggestion that industry problems would affect Tellium. After acknowledging that, “We are in a

very challenging time for the telecommunications industry for carriers and equipment providers

both,” Carr sought to debunk “the reports in the press about the so-called glut in bandwith.”

Citing recent comments of Joe Nacchio at Qwest, Carr argued that “the reality is that there is

strong demand for bandwith.” These statements were false and misleading because Carr knew

from “sitting at the planning table” with Qwest, as well as from his own knowledge of the

kickback scheme, that Qwest did not need the additional capacity provided by Tellium products.

103. On July 18, 2001, Tellium issued a press release reporting the highlights of its

Second Quarter 2001 performance. One of the five announced “highlights” was: “Qwest agrees

to expand multi-year strategic relationship with Tellium.” The release further stated:

“The Tellium team completed a number of significant achievements during the quarter.” Carr said: “We announced and shipped a new product, the Aurora 128, we established a key relationship with a new partner, NEC; and we had one of our existing customers, Qwest, expand their multi-year strategic relationship with us.

In addition, we successfully completed our initial public offering, despite the challenging market environment. This important milestone signified Tellium’s


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transformation from a small group of engineers with a great idea to a real company shipping real products to real customers.

* * *

We are also affirming the current published revenue estimate for 2002 of approximately $288 million.

(Emphasis added). The statements about Qwest and about shipping “real products to real

customers” was false and misleading because of the kickback scheme as described in ¶¶ 62-72.

The $288 million 2002 guidance was false and misleading for the reasons stated in ¶¶ 73-74, and

96.

104. On July 19, 2001, in an interview with Mark Haines of CNBC News, Carr stated:

HAINES: How are you managing in this environment when so many other people are struggling?

CARR: Well, I think one of the -- one of the things that we were fortunate about is we, early on, landed three very strong customers: Cable & Wireless, Qwest Dynegy, and we’ve got $1 billion worth of contracts, commitment contracts with those three very well-funded customers. And that was really the basis for us to feel, you know, confident that we could go out and go public this year even in this current market environment.

* * *

HAINES: And how long would a three bill -- how -- how long would a -- a $1 billion worth of business last you?

CARR: Well, to put it in perspective, in -- on our earnings call last night, we just raised guidance for this year from about $104 million to a range of $125 million to $135 million. So, obviously, even if we do that, there’s still a lot left on that $1 billion.

Carr’s statements about the “commitments contracts” with Cable & Wireless, Qwest and Dynegy

were false for the reasons stated in ¶¶ 77-81, 83. The revenue guidance was false and misleading

for the reason stated in ¶¶ 73-74 and 96.

105. On July 19, 2001, in an interview with Investor’s Business Daily, Carr made the

following statements:

IBD: Do you intend to keep issuing warrants to lure customers?


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CARR: There’s one customer we haven’t mentioned where warrants are potentially part of the deal. But I don’t think it will be part of our strategy going forward. If you look at the warrant deals we’ve done, they’re different than others. They’re completely aboveboard. We’ve gotten our customers to contractual commitments to buy certain amounts. It accelerates the decision to deploy the switches.

Carr’s statements that his warrant deals were “completely aboveboard,” that customers were

contractually committed to buy “certain amounts” and the suggestion that Qwest had deployed

Tellium’s switches were false and misleading because of the kickback scheme, the failure to

deploy the Tellium switches in Qwest systems and the absence of firm contractual purchasing

commitments as described in ¶¶ 62-72, and 83.

106. On July 19, 2001, Thomas Wiesel reported:

“Out of the Block, with a Bang -- Tellium Delivers”

Our FY02 estimates remain at $288 million.

• Business continues to strengthen. With a strong revenue base from Qwest and Dynegy as well as top-line contributions from Cable & Wireless set to kick in 2H01, Tellium’s $1 billion backlog gives it high visibility at least for the next few quarters. The recent $100 million extension of the Qwest contract, the new Aurora 128 and recently inked development and marketing pact with NEC indicate that momentum continues to build, in our view.

Reiterate BUY rating with 12-month target of $35.

These statements were false and misleading for the reasons stated in ¶¶ 73-74, 77-81 and 83.

107. On August 15, 2001, Thomas Wiesel made the following point in recommending

Tellium as a “Buying Opportunity”:

Strong top-line visibility driven by $1 billion in contract backlog. Enjoying traction at customers with spending muscle, backed by $1 billion in contracts from Qwest, Dynegy and Cable & Wireless.

These statements were false and misleading for the reasons stated in ¶¶ 73-74, and 83.

108. SoundView Technology Corp. (“SoundView”) reported the following on

September 5, 2001:


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Since roughly the time of Tellium’s June quarter report, negative rumors have floated suggesting that Qwest was going to walk away from its deal, that Tellium’s three customer contracts were riddled with outs and, in general, that its vendor relationships tended to be more financial than strategic. Investors continue to have reservations about the validity of the company’s business opportunity because its two revenue-generating customers have an equity kicker in their relationships and the third contractual relationship, which has no equity stake, has yet to generate revenue.

109. Carr’s statements in the Bloomberg interview of September 6, 2001 (quoted in

¶ 47) were an attempt to quickly squelch the market’s concerns that Tellium’s revenue guidances

might be unreliable. To assure the market that Tellium’s guidances were credible, Carr

explained that Tellium had hard information, nine-to-twelve months in advance, on future sales

from its three customers. Carr then falsely asserted that Tellium’s revenue guidance was based

on this hard information. As described in ¶¶ 73-74 and 96, Tellium’s published revenue

guidance was wholly divorced from its actual sales information on its existing contracts. Since

the IPO, the baseless 2002 revenue guidance that Tellium had provided to the market for

revenues on its three contracts was $288 million. As Carr received more and more “planning”

information from Tellium’s three customers, the $288 million projection became increasingly

far-fetched.

110. On September 10, 2001, Qwest announced that it was reducing its 2002 capital

expenditure budget from $7.5 billion to $5.5 billion.

111. On October 23, 2001, Ciena, one of Tellium’s principal competitors, announced a

deal with Cable & Wireless, creating further speculation in the market about the viability of

Cable & Wireless’ contract with Tellium.

112. In an October 24, 2001 press release, Tellium reaffirmed that, “we estimate 2001

revenues to be in the range of $130-135 million. . . In addition, based on our current projections,

we continue to believe revenues in 2002 will be approximately $288 million.” The 2002 revenue

guidance was false and misleading as described in ¶¶ 73-74 and 96.


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113. Thomas Wiesel, in a report on Tellium dated October 25, 2001, stated:

Qwest and Dynegy continue deployment, Cable & Wireless not likely until 2002. While Qwest and Dynegy contracts continue to deliver, management reset expectations for the timing of C&W revenue to 2002. We continue to believe that C&W deployment is a question of when rather than if.

It also reported that:

Management reaffirmed FY02 guidance. This is a refreshing development, considering that most, if not all, of Tellium’s peers in the optical networking world have lowered guidance. For Tellium, we continue to. . . maintain our $288 million estimate for FY02.

The 2002 revenue guidance was false and misleading as described in ¶¶ 73-74 and 96.

114. Light Reading on November 2, 2001 in an article entitled “Qwest Slowdown

Spooks Investors” reported “the rumors started flying yesterday after the leaking of a Qwest

memo saying it was shutting down work by all subcontractors. . . the work stoppage was for all

subcontractors working on projects for 2002.”

115. In an article published on LightReading.com on November 2, 2001, discussing

Qwest’s disappointing financial results and looming spending cuts, Carr again denied the impact

of the slowdown:

While some suppliers have taken a “wait and see” approach, Tellium is adamant that it still expects Qwest to contribute significantly to its current quarter.

“I don’t think it will have any impact on us,” says Harry Carr, CEO of Tellium. “Qwest will definitely still be part of our fourth quarter, as it has for the past several quarters.”

He went on to comment about Wall Street’s reaction to the news, “Our stock price has been affected a number of times by things going on at Qwest before, and we’ve continued to outperform. Is Wall Street over-reacting? I’d say yes - in our case I know they are.”

This statement assuring the market of the continuing viability of the Qwest relationship was false

and misleading for the reasons stated in ¶¶ 62-72. It was also false and misleading because, in

October 2001, Qwest had contacted Tellium to begin another renegotiation, to extract itself from

further obligations in its contract.


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116. Thomas Wiesel in a report on Tellium dated November 5, 2001 stated:

Impact of Qwest 4Q01 Spending Freeze

For 2002, management stands by its assertion that Qwest will buy its share of Tellium’s equipment. While we continue to monitor the situation at Qwest carefully, all our checks to date indicate that the current stoppage impacts only 2001 and not 2002. Importantly, management stands by its revenue guidance for CY02.

The 2002 revenue guidance was false and misleading as described in ¶¶ 73-74 and 96.

117. On November 6, 2001, SoundView reported:

We do not believe that Tellium’s original deals with Qwest or Cable & Wireless were conceived in a timeframe where the parties could know what we know about the business today. In the instance of Cable & Wireless, a slow start was no issue because there were no minimum annual commitments. Because of that it was easier for Cable & Wireless to adjust to reality and defer its implementation.

With Qwest there are undisclosed annual commitments that have been made to Tellium. There also are little in the way of technical hurdles in the contract to give Qwest an excuse to avoid its commitments. However, we do not know what these commitments are and no matter what they are, contracts between carriers and system vendors are there to protect the carrier. It is not unheard of, but it would be unusual, for a vendor to do anything but renegotiate the best possible alternative when its carrier customer hit the sort of rough patch that most have this year. We believe that a renegotiation between the two parties is inevitable.

* * *

Tellium management believes the sort of discussions they are having with Qwest do not substantiate our concerns.

(Emphasis added). The statement by Tellium suggesting that Tellium had viable contract

commitments for Qwest purchases was false and misleading for the reasons stated in ¶¶ 62-72.

118. In a Tellium Release dated November 8, 2001, Losch reported, “We are

confirming that our guidance for the fourth quarter, as well as for 2002, remain on track.” On

the same date, Business Wire reported that the 2002 guidance confirmed by Losch for CY02 was

‘approximately $288 million.” The 2002 $288 million guidance was false and misleading as

described in ¶¶ 73-74, and 96.

119. On November 12, 2001, Thomas Wiesel reported:


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Commitment from Qwest and Dynegy continue; timing on Cable & Wireless uncertain. We believe both will be customers in 4Q01 and CY02. (1) Regarding Qwest, we think Tellium revenues from Qwest will not be impacted by that carrier’s temporary network construction halt since Tellium products for the quarter have already been shipped and installed. We continue to believe that Qwest will deploy Tellium switches in 2002.

This statement is false and misleading for the reasons described in ¶ 83.

120. On December 7, 2001 SoundView reported: “We remain uncomfortable with the

promise of the Qwest relationship.”

121. As reported by LightReading.com on December 14, 2001, Carr reiterated

Tellium’s current growth forecast, despite warnings from major competitors such as Ciena Corp.

and Lucent Technologies, Inc. as well as spending cuts from its largest customer Qwest.

According to Carr:

“Optical switching is still growing because it adds savings to the network.”

As for the company’s contract with Qwest, Carr is optimistic that things will continue to run smoothly. “Obviously, our guidance of 10 to 20 percent increase over next quarter makes a pretty clear point that we don’t think this will impact us negatively. We expect that Qwest will live up to its contract commitments. We have no reason to believe otherwise.”

This statement is false and misleading because Carr had plenty of reasons to believe that Qwest

would not live up to its “contract commitments.” As described in ¶¶ 62-72, the Qwest contract

was tainted by a kickback scheme, and accordingly normal commercial expectations of

performance and enforcement did not apply to the contract or purported contract “commitments”

(which were legally unenforceable in any event).

122. On December 17, 2001, RBC Capital Markets reported:

Update from Dynegy: Dynegy has finished building out its core U.S. network. . .

We believe that Dynegy has already purchased in the third quarter most of the switches that Tellium will recognize as revenues in the fourth quarter - the delay in revenue recognition stems from installation and acceptance of equipment. We expect, in accordance with our model, that the amount of dollars that Dynegy expects to spend on Tellium switches in 2002 will be substantially lower compared to 2001.


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As described in ¶ 83(b), Tellium knew of these reduced Dynegy purchases at the time of the IPO.

123. On December 20, 2001 Carr announced a renegotiation of Tellium’s contract with

Qwest:

Tellium also renegotiated an existing $400 million contract with Qwest Communications International, Inc. to the effect that Qwest will purchase more equipment next year in exchange for more flexibility in how much it will buy in the remaining years of the contract. . . . The overall value of the contract won’t be affected.

On this date, Tellium also filed a Form 8-K with the SEC, attaching the new amended contract

with Qwest, in redacted form. The quoted statement was false and misleading because the

renegotiation was simply the pretext for Qwest to exit its relationship with Tellium. Because the

original contracts were tainted by the kickback scheme described in ¶¶ 62-72, neither Tellium

nor Qwest treated the Qwest contract as a legitimate and binding commercial agreement, or

expected Qwest to purchase $400 million of Tellium products.

124. On January 31, 2002, Tellium issued a press release announcing its year-end 2001

results. It also reported a statement by Carr that, “based on our current projections, we continue

to believe revenues in 2002 will be approximately $288 million.” The reaffirmance of the 2002

revenue guidance was false and misleading for the reasons stated in ¶¶ 73-74 and 96. Moreover,

given the recent renegotiation with Qwest, the planning information from Cable & Wireless and

the completion of the Dynegy U.S. build-out, Defendants knew that, by the second quarter 2002,

and thereafter, its revenues would be negligible.

125. In an analyst conference call held with Carr on that same evening, Carr finally

conceded that Tellium needed a new customer in order to achieve its $288 million revenue

guidance. On February 1, 2002, Tellium’s stock dropped 14%, for a then total of 80% from its

Class Period high shortly after the IPO was consummated.

126. On May 1, 2002, Thomas Wiesel reported:


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As expected, revenues in the quarter [First Quarter 2002] came from two customers - Dynegy and Qwest. While Tellium has a $350 mn contract with Cable & Wireless, meaningful revenues are not expected until late 2002 . . . . Expect limited revenues from Dynegy going forward. Dynegy’s U.S. network has already been substantially completed, so we do not expect significant revenues from this customer . . . . Tellium did say that incremental spending by Dynegy would largely be discretionary with the customer having already fulfilled its contractually agreed purchase commitments for the year . . . Top-line contribution from Qwest also tapering off. As laid out in Tellium’s recent contract renegotiation with Qwest (December 2001), the carrier is required to spend approximately one-fourth of its $400 mn commitment, or $100 mn, by early 2002, with the remainder by 2005.

This statement was false and misleading. Because of the kickback scheme, the renegotiation

with Qwest and the planning information from Cable & Wireless, Defendants knew the 2002

revenues would soon end.

127. On June 24, 2002, Tellium announced a “business restructuring” including a lay-

off of 200 of its 530 employees, which it attributed to the “continued deteriorating conditions in

the telecommunications industry.” The following day, June 25, 2002, Tellium’s stock dropped

below $1.00 for the first time, closing at $0.87 on heavy trading.

128. Three days later, on June 28, 2002, Tellium “shocked analysts by pre-announcing

that its second-quarter revenues would be only $3 million.” On July 1, 2002, the last day of the

Class Period and the first trading day following Tellium’s June 28, 2002 announcement,

Tellium’s stock price dropped as low as $0.56, closing at $0.65 on heavy trading. At last,

Tellium had made disclosures indicating to the market that its purported $1 billion in committed

sales was an illusion.

129. On December 17, 2002, Tellium announced that it would be releasing Cable &

Wireless from its supposed $350 million commitment. As Carr explained:

Since we signed the original contract, a lot of things have changed in the telecommunications business, for the industry as a whole and for Cable & Wireless. . . . It became clear in our discussions with Cable & Wireless that the original contract, signed before the industry downturn became evident, had actually become an impediment to moving forward with out relationship.


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The downturn in the telecommunications industry, however, had occurred in the fall of 2000; the

relationship between Cable & Wireless and Tellium (as well as with Qwest and Dynegy) had

changed long before the IPO, a fact that was material and omitted from Tellium’s IPO

Registration Statements and post-IPO press releases and reports, as described in ¶ 83.

Plaintiffs’ Investigation And Information Within Defendants’ Control

130. Plaintiffs by their attorneys and investigative staff, have contacted approximately

fifty persons for interviews in connection with the investigation of the Complaint. Persons

interviewed include former employees of Tellium, including systems engineers, a field engineer,

systems engineering director, customer support engineer network engineers, a training center

manager, a senior technical trainer, product marketing and communications managers, marketing

directors, a project management director, a testing and manufacturing manager, a sales manager,

a vice president of sales, a business development vice president, a corporate communications

director, a media relations director, an industry analyst relations manager, an applications

manager, a materials director, account manager, product manager, program manager, a financial

analysis manager, a quality assurance director, an internal quality auditor, an operations director,

a corporate development director and an investors’ relation director. Plaintiffs also interviewed

employees and/or former employees of three investment banks, including Thomas Wiesel

Partners who were involved in, or considered, the underwriting of Tellium’s IPO, an investment

advisor to Qwest executives, a Solectron manager, a marketing director at a Tellium competitor,

a former Cable & Wireless employee, and Qwest consultant. Because of ethical limitations,

Plaintiffs did not contact present Tellium employees, and because of the pending grand jury

investigation, avoided contacting senior Qwest executives (on the understanding that they would

be represented by counsel).


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131. Plaintiffs did not have subpoena power to demand the production of documents,

and many of the details of transactions alleged in the Complaint are to be found in Tellium

documents, including unredacted copies of the Qwest, Cable & Wireless and Dynegy contracts,

customer purchase orders, meeting agendas, correspondence, planning meeting notes, shipping

invoices, e-mails and in advisory board minutes (or from the absence of such documents).

132. Plaintiffs, by their investigation, asked approximately a dozen persons for

unredacted copies of the contracts with Qwest, Cable & Wireless and Extant. No one with

access to copies was willing to produce them voluntarily. Several of the former employees and

outsiders urged Plaintiffs to obtain copies of the contracts to see that they did not contain firm

purchase commitments.

133. Most former Tellium employees had signed a confidentiality agreement that

included a non-disparagement claim. All persons contacted stated they did not wish their names

disclosed, citing fears of jeopardizing future employment or retribution from Tellium, and/or

perceived violations of their confidentiality agreements.

INAPPLICABILITY OF SAFE HARBOR

134. The statutory safe harbor provided for forward-looking statements under certain

circumstances does not apply to any of the allegedly false or misleading statements pleaded in

this Complaint. The statements alleged to be false and misleading herein all relate to then-

existing facts and conditions or, to the extent that certain of the statements alleged to be false

may be characterized as forward-looking, there were no meaningful cautionary statements

identifying important facts that could cause actual results to differ materially from those in the

purportedly forward-looking statements. Alternatively, to the extent that the statutory safe

harbor does apply to any forward-looking statements pleaded herein, Defendants are liable for

those false forward-looking statements because at the time each of those forward-looking


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statements was made, the particular speaker had actual knowledge that the particular forward-

looking statement was false, and/or the forward-looking statement was authorized and/or

approved by an executive officer of the Company who knew that those statements were false

when made.

APPLICABILITY OF PRESUMPTION OF RELIANCE: FRAUD-ON-THE-MARKET DOCTRINE

135. Plaintiffs rely, in part, on the presumption of reliance established by the fraud-on-

the-market doctrine.

136. At all relevant times, the market for Tellium common stock was an efficient

market for the following reasons, among others:

a. Tellium stock met the requirements for listing, and was listed and actively

traded on the NASDAQ, a highly efficient and automated market;

b. As a regulated issuer, Tellium filed periodic public reports with the SEC

and the NASD which contained material misrepresentations and/or omitted material facts during

the Class Period as alleged herein, causing Tellium stock to trade at artificially inflated prices;

c. Tellium regularly communicated with public investors via established

market communication mechanisms, including through regular dissemination of press releases

on the national circuits of major newswire services and through other wide-ranging public

disclosures, such as communications with the financial press, conference calls with analysts and

other similar reporting services;

d. Tellium was followed by several securities analysts employed by major

brokerage firms who wrote reports which were distributed to the sales forces and certain

customers of their respective brokerage firms. Each of these reports was publicly available and

entered the public marketplace. In writing these reports, analysts reflected information provided

by defendants, and;


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e. The trading volume of Tellium common stock was substantial during the

Class Period, indicating that there was a liquid market for Tellium securities during the Class

Period.

137. As a result of the foregoing, the market for Tellium’s stock promptly digested

current information regarding the Company from all publicly available sources and reflected

such information in Tellium’s stock price. Under these circumstances, all purchasers of the

Company’s common stock during the Class Period are entitled to a presumption of reliance

because they all suffered similar injury through their purchase of the Company’s common stock

at artificially inflated prices.

FIRST CLAIM

Violations Of Section 11 Of The Securities Act Against The Directors And Underwriters

138. Plaintiffs repeat and reallege the allegations contained in ¶¶ 1-9, 20-95 and 101-

137, above as if fully set forth herein. This claim is brought on behalf of a Class of all

purchasers of Tellium common stock issued pursuant to Tellium’s Registration Statement who

were damaged thereby, seeking to pursue remedies under the Securities Act against Connors,

Bunting, Feldman, Glassmeyer, Smith and Roper, who were Tellium’s directors and signatories

of the Registration Statement, and Morgan Stanley and Thomas Wiesel, who were co-lead

underwriters of the 5/17/01 IPO. These defendants signed the Registration Statement (or were

underwriters for the IPO) which contained untrue statements of material fact or omitted to state

material facts required to be stated therein or necessary to make the statements therein not

misleading (“misleading omissions”), and are liable under § 11(a)(1) and (2).

139. Each of the defendants named in this Count is liable under § 11(a) because the

Registration Statement, when it became effective, contained untrue statements of material fact or

omitted to state material facts required to be stated therein or necessary to make the statements


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therein not misleading. The untrue statements and misleading omissions of material fact

included:

• untrue statements (and misleading omissions) regarding the risks associated with the IPO (as described in ¶¶ 75-87);

• untrue statements (and misleading omissions) regarding Tellium’s “overview” of its business (as described in ¶¶ 88-89);

• untrue statements (and misleading omissions) regarding Tellium’s “Customers” (as described in ¶¶ 90-91);

• untrue statements (and misleading omissions) regarding Tellium’s “advisory board” (as described in ¶¶ 92-93), and;

• misleading omissions through the redactions of clauses in its customer contracts (as described in ¶¶ 59-60 and 62-63).

All of this information was material and necessary for the market to assess whether Tellium had

the “committed” and “expected” business necessary to consummate the IPO, and to evaluate the

IPO price, as described in ¶¶ 94-95.

140. Tellium went public on 5/17/01 in an IPO in which Tellium sold 10.35 million

shares at $15 per share, raising over $140 million pursuant to the Registration Statement which

was filed with the SEC and became effective on 5/17/01.

141. Defendants Connors, Bunting, Feldman, Glassmeyer, Smith and Roper each

signed the 5/17/01 Registration Statement. Because the 5/17/01 Registration Statement

contained untrue statements of material facts or omitted to state material facts required to be

stated therein or necessary to make the statements therein not misleading, each of these

defendants is liable as “a person who signed the Registration Statement,” under §11(a)(1), 15

U.S.C. § 77k(a)(1).

142. Defendants Connors, Bunting, Feldman, Glassmeyer, Smith and Roper were

directors of Tellium when the Registration Statement became effective. Because the

Registration Statement contained untrue statements of material fact or omitted to state material


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facts required to be stated therein or necessary to make the statements therein not misleading,

each of these defendants is also liable under § 11(a)(2), 15 U.S.C. § 77k(a)(2). Each of these

persons had a duty to make a reasonable and diligent investigation of the statements contained in

the Registration Statement to assure that those statements, including those relating to Tellium’s

business, contracts and customer relationships, were true at the time the Registration Statement

became effective, and that there was no omission to state material facts required to be stated in

order to make the statements contained therein not misleading. Each of these persons acted

negligently in failing to assure that the statements made in the Registration Statement were true

as of May 17, 2001, and that the Registration Statement did not omit material facts necessary to

make it not misleading and breached their duty of due diligence to Plaintiffs and members of the

Class. None of these persons are alleged to have signed the Registration Statement knowing it to

be false, with recklessness, or as part of a scheme with other defendants to defraud the Plaintiffs.

143. This Count is also asserted against Defendants Morgan Stanley and Thomas

Wiesel for violations of §11 of the Securities Act, on behalf of all persons who purchased shares

of Tellium in connection with or traceable to the IPO on May 17, 2001.

144. Defendants Morgan Stanley and Thomas Wiesel issued, caused to be issued, and

participated in the issuance of the Registration Statement, which made untrue statements or

failed to disclose, inter alia, the material facts concerning the business, contracts and customer

relationships of Tellium as set forth herein.

145. As underwriters of the IPO, Morgan Stanley and Thomas Wiesel are liable under

§ 11 of the Securities Act. Morgan Stanley and Thomas Wiesel owed to the purchasers of

Tellium stock, including Plaintiffs and members of the Class, the duty to make a reasonable and

diligent investigation of the statements contained in the Registration Statement, at the time it

became effective, to assure that those statements were true and that there was no omission to


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state material facts required to be stated in order to make the statements contained therein not

misleading. Morgan Stanley and Thomas Wiesel breached their duty of due diligence and acted

negligently in failing to assure that the statements made in the Registration Statement were true

as of May 17, 2001, and that the Registration Statement did not omit material facts necessary to

make it not misleading. Neither Morgan Stanley nor Thomas Wiesel are alleged to have acted

with fraudulent knowledge or recklessness or to have joined in a scheme to defraud in

connection with the IPO.

146. Plaintiffs and other members of the Class purchased Tellium common stock

pursuant to and traceable to the IPO without knowledge of the untrue material statements and

misleading omissions alleged herein, and sustained damages as a result.

147. In connection with the IPO, Defendants, directly or indirectly, used the means and

instrumentalities of interstate commerce and the U.S. mails.

148. By reason of the foregoing, each of the Directors, Morgan Stanley and Thomas

Wiesel violated § 11 of the Securities Act and are liable to Plaintiffs and other members of the

Class, each of whom has been damaged by reason of such violations.

SECOND CLAIM

Violations Of Section 11 Of The Securities Act Against Defendants Carr, Barcus And Losch

149. Plaintiffs repeat and reallege each and every allegation contained above as if fully

set forth herein. This claim is brought on behalf of a Class of all purchasers of Tellium common

stock issued pursuant to Tellium’s Registration Statement who were damaged thereby, seeking to

pursue remedies under the Securities Act against Tellium, the issuer of the stock, Carr, Losch

and Barcus. These Defendants signed the Registration Statement which contained untrue

statements of material fact or omitted to state material facts required to be stated therein or

necessary to make the statements therein not misleading, and are liable under § 11(a)(1) and (2).


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150. Each of the defendants named in this Count is liable under § 11(a) because the

Registration Statement, when it became effective, contained untrue statements of material fact or

omitted to state material facts required to be stated therein or necessary to make the statements

therein not misleading. The untrue statements and misleading omissions of material fact

included:

• untrue statements (and misleading omissions) regarding the risks associated with the IPO (as described in ¶¶ 75-87);

• untrue statements (and misleading omissions) regarding Tellium’s “overview” of its business (as described in ¶¶ 88-89);

• untrue statements (and misleading omissions) regarding Tellium’s “Customers” (as described in ¶¶ 90-91);

• untrue statements (and misleading omissions) regarding Tellium’s “advisory board” (as described in ¶¶ 92-93), and;

• misleading omissions through the redactions of clauses in its customer contracts (as described in ¶¶ 59-60 and 62-63).

All of this information was material and necessary for the market to assess whether Tellium had

the “committed” and “expected” business and commercial deliveries necessary to consummate

the IPO, and to evaluate the IPO price, as described in ¶¶ 94-95.

151. Tellium went public on May 17, 2001 in an IPO in which Tellium sold 10.35

million shares at $15 per share, raising over $140 million pursuant to the Registration Statement

which was filed with the SEC and became effective on May 17, 2001. Defendants Carr, Barcus

and Losch each signed the May 17, 2001 Registration Statement. Because the Registration

Statement contained untrue statements of material fact or omitted to state material facts required

to be stated therein or necessary to make the statements therein not misleading, each of these

defendants is liable as “a person who signed the Registration Statement,” under § 11(a)(1), 15

U.S.C. § 77k(a)(1).


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152. Defendants Carr, Losch and Barcus were senior managers of Tellium when the

Registration Statement became effective. Because the Registration Statement contained untrue

statements of material fact or omitted to state material facts required to be stated therein or

necessary to make the statements therein not misleading, each of these Defendants is also liable

under § 11(a)(2), 15 U.S.C. § 77K(a)(2).

153. Plaintiffs and other members of the Class purchased Tellium common stock

pursuant to and traceable to the IPO without knowledge of the untrue material statements and

misleading omissions alleged herein, and sustained damages as a result.

154. In connection with the IPO, Defendants, directly or indirectly, used the means and

instrumentalities of interstate commerce and the U.S. mails.

155. By reason of the foregoing, Tellium, Carr, Losch and Barcus each violated § 11 of

the Securities Act and are liable to plaintiffs and other members of the Class, each of whom has

been damaged by reason of such violations.

THIRD CLAIM

Violations Of Section 15 Of The Securities Act Against Defendants Carr, Barcus And Losch


set forth herein. Defendants Carr, Barcus and Losch, by reason of their positions with Tellium

and their stock ownership, were controlling persons of Tellium at the time of the IPO and are

liable under § 15 of the Securities Act.

FOURTH CLAIM

Violations Of Section 10(b) Of The Exchange Act And Rule 10b-5 Promulgated Thereunder

Against Defendants Tellium, Carr, Losch And Barcus


set forth herein.


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158. During the Class Period, these defendants carried out a plan, scheme and course

of conduct which was intended to and did: (i) deceive the investing public, including Plaintiffs

and other Class members, as alleged herein; (ii) artificially inflate and maintain the market price

of Tellium’s common stock, and; (iii) cause Plaintiffs and other members of the Class to

purchase the Company’s common stock at artificially inflated prices. In furtherance of this

unlawful scheme, plan and course of conduct, defendants, and each of them, acted as set forth

herein.

159. These defendants, either individually or as a group: (i) employed devices,

schemes, and artifices to defraud; (ii) made untrue statements of material fact and/or omitted to

state material facts necessary to make the statements made not misleading, and; (iii) engaged in

acts, practices, and a course of business which operated as a fraud and deceit upon the purchasers

of the Company’s securities in an effort to maintain artificially high market prices for Tellium’s

common stock in violation of Section 10(b) of the Exchange Act and Rule 10b-5. The false and

misleading statements and omissions included those contained in or omitted from the

Registration Statement, and described in ¶ 150.

160. Defendants’ false and misleading statements and omissions made after the IPO, as

described in ¶¶ 95-100, 102-107, 109, 112-113, 115-116, 118-119, 121, 123-124 and 126, falsely

reinforced and confirmed these false statements and omissions, and Tellium’s false revenue

guidances. Defendants issued false and misleading revenue guidances without a reasonable basis

and knowing them to be false, as described in ¶¶ 73-74 and 96. This information was material

and necessary for the market to assess whether Tellium had the business necessary to

consummate its IPO, and thereafter to determine Tellium’s business prospects and project its

financial performance for purposes of valuing Tellium’s stock.


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161. Tellium, Carr, Losch and Barcus are sued as primary participants in the wrongful

and illegal conduct charged herein and these Individual Defendants are also sued herein as

controlling persons of Tellium, as alleged below.

162. In addition to the duties of full disclosure imposed on defendants as a result of

their dissemination of affirmative statements, or participation in the making of affirmative

statements to the investing public, they each had a duty to promptly disseminate truthful

information that would be material to investors in compliance with the integrated disclosure

provisions of the SEC as embodied in SEC Regulation S-X (17 C.F.R. Sections 210.01 et seq.)

and Regulation S-K (17 C.F.R. Sections 229.10 et seq.) and other SEC regulations, including

accurate and truthful information with respect to the Company’s operations, financial condition

and performance so that the market price of the Company’s securities would be based on

truthful, complete and accurate information.

163. These defendants, individually and as a group, directly and indirectly, by the use,

means or instrumentalities of interstate commerce and/or of the mails, engaged and participated

in a continuous course of conduct to conceal adverse material information about the business,

operations and future prospects of Tellium as specified herein.

164. These defendants employed devices, schemes and artifices to defraud, while in

possession of material adverse non-public information and engaged in acts, practices, and a

course of conduct as alleged herein in an effort to assure investors of Tellium’s value and

performance and continued substantial growth, which included the making of, or the

participation in the making of, untrue statements of material facts and omitting to state material

facts necessary in order to make the statements made about Tellium and its business operations

and future prospects, in the light of the circumstances under which they were made, not

misleading, as set forth more particularly herein, and engaged in transactions, practices and a


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course of business which operated as a fraud and deceit upon the purchasers of Tellium’s

common stock during the Class Period.

165. Each of these Individual Defendants’ primary liability, and controlling person

liability, arises from the following facts: (i) the Individual Defendants were high-level executives

at the Company during the Class Period, and members of the Company’s management team or

directors with a significant equitable stake in the Company; (ii) each of these defendants, by

virtue of his responsibilities and activities as a senior officer of the Company or as directors, was

privy to and/or participated in the creation, development and reporting of the Company’s internal

budgets, plans, projections and/or reports, and to the contracts between Tellium and each of

Qwest, Cable & Wireless and Dynegy; (iii) each of these defendants enjoyed significant personal

contact and familiarity with the other defendants and was advised of and had access to other

members of the Company’s management team, internal reports and other data and information

about the Company’s business, finances, operations, and sales at all relevant times, and;

(iv) each of these defendants was aware of the Company’s dissemination of information to the

investing public which they knew or recklessly disregarded was materially false and misleading.

166. Carr’s primary liability, and controlling person liability, is further based upon his

personal knowledge with respect to purchase orders and other planning information he received

from each of Qwest, Cable & Wireless and Dynegy, nine-to-twelve months in advance of

product deliveries as described in ¶ 47. Carr also was at the heart of the kickback scheme with

Qwest. He led the renegotiations of the Qwest contract pursuant to which kickbacks were paid

to Qwest officers and directors, knew that Tellium was delivering unwanted products to Qwest

warehouses as a quid pro quo for kickbacks, and coached Tellium employees about how to

respond to the hostility of honest Qwest employees. In his public conference of September 18,

2000 with Fiber Optics news, Carr acknowledged the significance of having developed products


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and firm contracts with customers, what he termed the “‘war of reality’ rather than the ‘war of

spec sheets’” in determining to take Tellium public. As Carr stated: “Extant was an initial

validation; this Cable & Wireless contract is in essence a whole ’nother level of validation.”

Carr, in public statements following the IPO, emphasized the purportedly “real” nature of the

illusory contract commitments, including Qwest’s purported “expansion” of its contract

commitments in the April, 2001 contract negotiation, and publicly vouched for the reliability of

revenue guidances he knew to be arbitrary and false, or for which he was reckless in not

verifying before he spoke.

167. Losch’s primary liability, and controlling person liability, is further based upon

his personal knowledge with respect to Tellium’s customer purchase orders, deliveries and

customer acceptance, that he would need to know, as CFO, in order to prepare sales revenue

figures for Tellium’s financial statements. Losch necessarily knew the terms of the unredacted

Qwest contracts because he was designated as the person to receive notices under this contract

on behalf of Tellium. Losch oversaw the creation of and reviewed the false and misleading

revenue guidances prepared by his direct subordinate, and either knew them to be false, or was

reckless in not verifying them, before they were shared with Tellium’s IPO underwriters and

market analysts. Losch, in public statements following the IPO, emphasized the purportedly

“real” nature of the illusory contract commitments, including Qwest’s purported “expansion” of

its contract commitments in the April 2001 contract renegotiation, and publicly vouched for the

reliability of revenue guidances he knew to be arbitrary and false, or for which he was reckless in

not verifying before he spoke.

168. Barcus’s primary liability, and controlling person liability, is further based upon

his personal knowledge of the kickback scheme with Qwest which he publicly admitted

(¶ 70(c)(iii)), and his knowledge or recklessness in failing to verify that Tellium’s purported


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contract “commitments” and “expectations” were not illusory before signing the Registration

Statement. As Tellium’s president, Barcus would have had ready access to these contracts and

customer purchase orders and information. In August 2000, Barcus made public statements in

which he acknowledged that “real” customers were necessary for Tellium to proceed with its

IPO, and that the use of customer “technical advisory boards” was a potential area of abuse.

E.g., as reported in a August 17, 2000 interview with Staff Reporter Scott Moritz:

Barcus says he’s ready to go public once he’s established some real customers. “We want to have the visibility to future revenues,” says Barcus. “And that means having a customer list and showing a stability of products.”

And in an August 14, 2000 interview with Fiber Optics News, Barcus noted the “dark side” of

start-ups using “technical advisory boards” as a tool to give potential customers stock options as

an incentive to do business with them, agreeing with the interviewer that “if there is a

fundamental breakdown in the underlying purchase agreement that post-dates a big stock

transaction, then you’re certainly right, the suspicion that somebody is up to something would be

very high.” Armed with this knowledge and these concerns, Barcus’ failure to perform a

thorough investigation of the viability and legitimacy of Tellium’s purported contract

“commitments” and “expectations” before signing off on the Registration Statement would, at a

minimum, be reckless.

169. These defendants had actual knowledge of the misrepresentations and omissions

of material facts set forth herein, or acted with reckless disregard for the truth in that they failed

to ascertain and to disclose such facts, even though such facts were readily available to them.

Defendants’ material misrepresentations and/or omissions were made knowingly or recklessly

for the purpose and effect of concealing Tellium’s business relationships and prospects from the

investing public to permit the consummation of the IPO and to support the artificially inflated

price of its securities. If defendants did not have actual knowledge of the misrepresentations and


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omissions alleged, they were at the very least reckless in failing to obtain such knowledge by

deliberately refraining from taking those steps necessary to determine whether those statements

were false or misleading.

170. As a result of the dissemination of the materially false and misleading information

and failure to disclose material facts, the IPO was consummated and the market price of

Tellium’s common stock was artificially inflated during the Class Period. In ignorance of the

fact that the market price of Tellium’s shares was artificially inflated, and relying directly or

indirectly on the false and misleading statements made by defendants or upon the integrity of the

market in which the securities trade, and/or on the absence of material adverse information that

was known to or recklessly disregarded by defendants but not disclosed in public statements by

defendants during the Class Period, Plaintiffs and members of the Class acquired Tellium

common stock during the Class Period at artificially high prices based on their reliance and were

damaged thereby.

171. At the time defendants disseminated the misrepresentations and omissions

complained of herein, Plaintiffs and other members of the Class were unaware of their falsity,

and believed them to be true. Had Plaintiffs and members of the Class and the marketplace

known of the true customer relationships and prospects of Tellium, which were misrepresented

and not disclosed by defendants, Plaintiffs and members of the Class would not have purchased

or otherwise acquired their Tellium shares during the Class Period, or, if they had acquired such

shares during the Class Period, they would not have purchased them at the artificially inflated

prices which they paid.

172. By virtue of the foregoing, these defendants have violated Section 10(b) of the

Exchange Act, and Rule 10b-5 promulgated thereunder.


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173. As a direct and proximate result of defendants’ wrongful conduct, Plaintiffs and

members of the Class suffered damages in connection with their purchases of the Company’s


FIFTH CLAIM

Violations Of Section 10(b) Of The Exchange Act And Rule 10b-5 Promulgated Thereunder

Against Defendant Thomas Wiesel


set forth herein.

175. Thomas Wiesel is sued with respect to untrue statements and misleading

omissions in the Registration Statement, under § 11 only with respect to its breach of its duty of

due diligence, and its own negligence. With respect to its statements made by Thomas Wiesel

after the IPO was consummated, Thomas Wiesel is sued as a primary violator under Section

10(b) of the Exchange Act and Rule 10b-5.

176. Thomas Wiesel’s primary liability for its own statements made in June 2001 and

thereafter arises from the following facts: (i) as an underwriter of Tellium’s IPO, Thomas Wiesel

had access to Tellium’s contracts with its key customers and revenue guidances, and had a duty

of due diligence in verifying this information; (ii) Thomas Wiesel, through its relationship as a

significant investor in Tellium, and through Defendant Bunting’s position as director of Tellium,

was privy to and/or participated in the creation, development, and reporting of the Company’s

internal budgets, plans, projections and/or reports; (iii) Thomas Wiesel, through its relationships

with Tellium and Bunting, enjoyed significant personal contact and familiarity with the other

defendants and was advised of and had access to other members of the Company’s management

team, internal reports and other data and information about the Company’s business, finances,

operations, and sales at all relevant times; (iv) Thomas Wiesel disseminated research reports to


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the investing public during the Class Period which aggressively and repeatedly hawked the

reliability of Tellium’s arbitrary and baseless revenue guidances and vouched for Tellium’s

purported $1 billion in contract commitments which it was aware or recklessly disregarded, were

materially false and misleading, and; (v) Thomas Wiesel, through its relationships with Tellium

and Bunting, was aware of the Company’s dissemination of information to the investing public

which it knew or recklessly disregarded was materially false and misleading, and which Thomas

Wiesel republished in its reports.

177. This defendant had actual knowledge of the misrepresentations and omissions of

material facts set forth herein, or acted with reckless disregard for the truth in that it failed to

ascertain and to disclose such facts, even though such facts were readily available to it.

Defendant’s material misrepresentations and/or misleading omissions were made knowingly or

recklessly for the purpose and effect of concealing Tellium’s business relationships and

prospects from the investing public and supporting the artificially inflated price of its securities.

If this defendant did not have actual knowledge of the misrepresentations and omissions alleged,

it was at the very least reckless in failing to obtain such knowledge by deliberately refraining

from taking those steps necessary to determine whether those statements were false or

misleading, before publishing its reports.

178. As a result of the dissemination of the materially false and misleading information

and failure to disclose material facts, the market price of Tellium’s common stock was

artificially inflated during the Class Period. In ignorance of the fact that the market price of

Tellium’s shares was artificially inflated, and relying directly or indirectly on the false and

misleading statements made by this defendant or upon the integrity of the market in which the

securities trade, and/or on the absence of material adverse information that was known to or

recklessly disregarded by this defendant but not disclosed in public statements by this defendant


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during the Class Period, Plaintiffs and members of the Class acquired Tellium common stock

during the Class Period at artificially high prices based on their reliance and were damaged

thereby.

179. At the time this defendant disseminated the misrepresentations and omissions

complained of herein, Plaintiffs and other members of the Class were unaware of their falsity,

and believed them to be true. Had Plaintiffs and members of the Class and the marketplace

known of the true customer relationships and prospects of Tellium, which were misrepresented

and not disclosed by this defendant, Plaintiffs and members of the Class would not have

purchased or otherwise acquired their Tellium shares during the Class Period, or, if they had

acquired such shares during the Class Period, they would not have purchased them at the

artificially inflated prices which they paid.

180. By virtue of the foregoing, this defendant has violated Section 10(b) of the

Exchange Act, and Rule 10b-5 promulgated thereunder.

181. As a direct and proximate result of defendant’s wrongful conduct, Plaintiffs and

members of the Class suffered damages in connection with their purchases of the Company’s


SIXTH CLAIM

Violations Of Section 20(a) Of The Exchange Act Against Defendants Carr, Barcus And Losch


set forth herein. This claim is asserted against Individual Defendants Carr, Barcus and Losch.

183. Carr, Barcus and Losch were and acted as controlling persons of Tellium within

the meaning of Section 20(a) of the Exchange Act as alleged herein. By virtue of their high-level

positions with Tellium, their ownership and contractual rights, their participation in and/or

awareness of the Company’s operations, and/or their intimate knowledge of the Company’s


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actual performance and undisclosed problems, these Individual Defendants had the power to

influence and control and did influence and control, directly or indirectly, the decision-making of

the Company, including the content and dissemination of the various statements which Lead

Plaintiffs contend are false and misleading. Carr, Barcus and Losch were provided with, or had

unlimited access to, copies of the Company’s reports, press releases, public filings and other

statements alleged by Plaintiffs to be misleading prior to and/or shortly after these statements

were issued and had the ability to prevent the issuance of the statements or cause the statements

to be corrected.

184. In particular, each of these Individual Defendants had direct and supervisory

involvement in the day-to-day operations of the Company and, therefore, is presumed to have

had the power to control or influence the particular transactions giving rise to the securities

violations as alleged herein, and exercised the same.

185. As set forth above, Tellium violated Section 10(b) and Rule 10b-5 by its acts and

omissions as alleged in this Complaint. By virtue of their positions as controlling persons of

Tellium, Carr, Barcus and Losch are liable pursuant to Section 20(a) of the Exchange Act. As a

direct and proximate result of defendants’ wrongful conduct, Plaintiffs and other members of the

Class suffered damages in connection with their purchases of the Company’s common stock

during the Class Period.

PRAYER FOR RELIEF

186. WHEREFORE, Plaintiffs on their own behalf and on behalf of the Class, pray

for judgment, as follows:

a. Determining that the instant action is a proper class action and certifying

Plaintiffs as class representatives under Rule 23 of the Federal Rules of Civil Procedure;


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b. Awarding compensatory damages in favor of Plaintiffs and the other

members of the Class against all defendants for all damages sustained as a result of violations of

Section 11 of the Securities Act, in an amount to be proven at trial, including interest thereon;

c. Awarding compensatory damages in favor of Plaintiffs and the other

members of the class against Tellium and the Management Defendants (and against Thomas

Wiesel for its post-IPO statements) for violations of the Exchange Act and against the

Management Defendants as control persons, in an amount to be proven at trial, including interest

therein;

d. Awarding Plaintiffs and the Class their reasonable costs and expenses

incurred in this action, including counsel fees and expert fees; and

e. Awarding such other and further relief as the Court may deem just and

proper.

JURY TRIAL DEMANDED

Plaintiffs hereby demand a trial by jury.

Dated: May 14, 2004 LITE DEPALMA GREENBERG & RIVAS LLC /s/ Joseph J. DePalma

Joseph J. DePalma (JD-7697) Katrina Blumenkrants (KB-9620) Two Gateway Center, 12th Fl. Newark, New Jersey 07102 (973) 623-3000

Liaison Counsel for Plaintiffs and the Class

MILBERG WEISS BERSHAD & SCHULMAN LLP Beth A. Kaswan Matthew A. Kupillas One Pennsylvania Plaza, 49th Floor New York, NY 10119-0165 (212) 594-5300


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FARUQI & FARUQI, LLP Nadeem Faruqi Antonio Vozzolo 320 East 39th Street New York, NY 10016 (212) 983-9330 Lead Counsel for Plaintiffs and the Class

G:\Lite\L0443\0302\Pleadings\Second Consolidated Complaint.FINAL.DOC


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TABLE OF CONTENTS

Page

NATURE OF THE ACTION ..........................................................................................................2

JURISDICTION AND VENUE ....................................................................................................14

THE PARTIES...............................................................................................................................14

CLASS ACTION ALLEGATIONS ..............................................................................................19

FIRST CLAIM VIOLATIONS OF SECTION 11 OF THE SECURITIES ACT AGAINST THE DIRECTORS AND UNDERWRITERS........................73

SECOND CLAIM VIOLATIONS OF SECTION 11 OF THE SECURITIES ACT AGAINST DEFENDANTS CARR, BARCUS AND LOSCH .................76

THIRD CLAIM VIOLATIONS OF SECTION 15 OF THE SECURITIES ACT AGAINST DEFENDANTS CARR, BARCUS AND LOSCH .................78

FOURTH CLAIM VIOLATIONS OF SECTION 10(B) OF THE EXCHANGE ACT AND RULE 10B-5 PROMULGATED THEREUNDER AGAINST DEFENDANTS TELLIUM, CARR, LOSCH AND BARCUS ................78

FIFTH CLAIM VIOLATIONS OF SECTION 10(B) OF THE EXCHANGE ACT AND RULE 10B-5 PROMULGATED THEREUNDER AGAINST DEFENDANT THOMAS WIESEL..........................................................85

SIXTH CLAIM VIOLATIONS OF SECTION 20(A) OF THE EXCHANGE ACT AGAINST DEFENDANTS CARR, BARCUS AND LOSCH .................87

PRAYER FOR RELIEF ................................................................................................................88

JURY TRIAL DEMANDED.........................................................................................................89


Documents

In Re: Tellium, Inc. Securities Litigation 02-CV-5878 ...securities.stanford.edu/filings-documents/1026/... · Nadeem Faruqi Antonio Vozzolo 320 East 39th Street New York, NY 10016