ROBBINS GELLER RUDMAN & DOWD LLP CHRISTOPHER P....

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ROBBINS GELLER RUDMAN & DOWD LLP

CHRISTOPHER P. SEEFER (201197) Post Montgomery Center One Montgomery Street, Suite 1800 San Francisco, CA 94104 Telephone: 415/288-4545 415/288-4534 (fax) [email protected]

– and – SAMUEL H. RUDMAN 58 South Service Road, Suite 200 Melville, NY 11747 Telephone: 631/367-7100 631/367-1173 (fax) [email protected]

Lead Counsel for Plaintiffs

[Additional counsel appear on signature page.]

UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORNIA

OAKLAND DIVISION

In re CISCO SYSTEMS INC. SECURITIES LITIGATION

) ) ) ) ) ) ) ) )

Lead Case No. C 11-1568-SBA

CLASS ACTION

This Document Relates To:

ALL ACTIONS.

CONSOLIDATED AMENDED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS

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1 TABLE OF CONTENTS

Page

I. INTRODUCTION 1

II. JURISDICTION AND VENUE 11

III. PARTIES 11

IV. SOURCES OF ALLEGATIONS 13

V. SUBSTANTIVE ALLEGATIONS 16

A. Before the Class Period, Analysts and Investors Were Concerned About the Company’s Organizational Structure and that Cisco’s Growth and Diversification Strategy Would Cause the Company to Lose Focus on the Core Switching and Technology Businesses and Enter Less Profitable Businesses in Which the Company Was Inexperienced 16

B. February 3, 2010: Defendants Falsely Represent that Cisco’s Game Plan for Emerging from the Financial Crisis was “Hitting on All Cylinders” that the Company Was Able to “Catch Market Transitions and Move into New Market Adjacencies . . . While Still Maintaining Revenue Growth and Market Share Gains in . . . Traditional Areas” and that the Company’s “New Organization Structure Was Operating Very Effectively” – Chambers Sells $97.2 Million of Cisco Stock Days Later 22

C. May 12, 2010: Chambers and Calderoni Reiterate that the Game Plan Is “Hitting on All Cylinders,” Cisco Is “Gaining Market Share” and the Company’s Expansion into Market Adjacencies Is “Exceeding . . . Expectations” – Less Than a Week Later, Chambers Sells Another $31 Million of Cisco Stock 70

D. August 11, 2010: Defendants Falsely Represent that Cisco’s 4Q10 and FY10 Results Positively Proved the Effectiveness of the Organization Structure and the Growth and Diversification Strategy, that the Company’s Success in New Markets Was Stronger than Anticipated and the Key Take Away Was that the Company’s Strategy and Vision Were Absolutely Working – Chambers Sells $5 Million of Stock a Week Later 77

E. November 10, 2010: Cisco’s Stock Price Declines 16.2% after Defendants Reveal Problems in the Public Sector, Set-Top Box and Consumer Businesses but Falsely Assure Investors the Problems Are Temporary Air Pockets and Continue to Make Misleading Statements 87

F. February 9, 2011: Cisco’s Stock Price Declines 14.2% After Defendants Reveal Additional Problems in the Public Sector, Set-Top Box and Consumer Businesses, Unexpected Declines in Switching Revenues, Disappointing Router Revenues and Declines in Product Gross Margins 98

G. April and May 2011: Defendants Admit Cisco’s Move into Several New Markets Was Not Successful by Revealing that the Company Would Exit Consumer Businesses and Also Admit that the Company’s Organizational

CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS – - i - C 11-1568-SBA

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Page

Structure Was Not Operating Very Effectively and Needed to Be Overhauled and Simplified 99

H. May 11, 2011: Cisco’s Stock Price Declines 4.8% after the Company Reports Additional Problems with the Switching and Consumer Businesses and Plans to Reduce Expenses by $1 Billion; Chambers Reiterates that Cisco Will Streamline the Organization and Overhaul Its Business Model Dramatically 104

I. July 18, 2011: Cisco Announces that 11,500 Employees Will Be Laid Off as Part of Its Continued Implementation of a Comprehensive Action Plan to Simplify the Organization, Refine Operations and Reduce Expenses 108

J. August 10, 2011: Defendants Report that the Switching Business Is Still Under Pressure Due to Increased Competition and Cisco’s Rapid Introduction of New Products and that Cisco Was Still Simplifying the Organization to Accelerate the Speed of Decision Making 110

K. September 13, 2011: Defendants Admit that Cisco’s Organization Structure Was `Fat” During the Class Period and that It `Slowed Decision Making Down” and Caused the Company to `Get Away from the Basics” 112

VI. SUMMARY OF CHAMBERS’ INSIDER SELLING 113

VII. LOSS CAUSATION 115

VIII. CLASS ACTION ALLEGATIONS 117

IX. PRAYER FOR RELIEF 123

X. JURY DEMAND 123

CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS – C 11-1568-SBA

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1 I. INTRODUCTION

1. This is a federal securities fraud class action on behalf of all persons who purchased

or otherwise acquired the common stock of Cisco Systems, Inc. (“Cisco” or the “Company”) between

February 3, 2010 and May 11, 2011 (the “Class Period”). The defendants are Cisco, John T. Chambers

(“Chambers”), Cisco’s Chairman and Chief Executive Officer (“CEO”), and Frank Calderoni (“Calderoni”),

the Company’s Executive Vice President (“EVP”) and Chief Financial Officer (“CFO”).

2. Cisco designs, manufactures and sells internet protocol (“IP”) based networking and

other products related to the communications and information technology (“IT”) industry and provides

services related to their use worldwide. From 2000 to 2008, Cisco pursued a growth by acquisition

strategy; the Company’s net revenues more than doubled from $18.9 billion in 2000 to $39.5 billion

in 2008, and earnings tripled from $2.7 billion to $8.1 billion. 1 A majority of Cisco’s revenues were

generated from sales of switches and routers, markets the Company dominated, selling more than

70% of all products. To continue its growth, Cisco diversified its product offerings and increased

the number of markets from 2 in 2007 to 26 in 2009 and more than 30 during the Class Period.

3. In 2007, Chambers overhauled Cisco’s management structure to support the

Company’s growth and diversification by acquisition strategy, stating that large companies begin to

slow down “because they didn’t move out of their primary markets” fast enough. The new organization

structure included: (a) an operating committee comprised of 15 top executives and Chambers; (b) 12

councils, each comprised of an average of 14 people; (c) 47 boards, each comprised of an average of

14 people; and (d) working groups that were small temporary teams working on individual projects.

4. Analysts expressed concerns about the new management structure and diversification

into new markets. The new organization structure was criticized by many as adding bureaucracy,

stripping away accountability and slowing decision making. Analysts were also concerned that

Cisco was inexperienced in many of the new markets (particularly the consumer market and service

1 Cisco’s fiscal year ends on July 31. August through October is Cisco’s first fiscal quarter; November through January is the second fiscal quarter; February through April is the third fiscal quarter; and May through July is the fourth fiscal quarter.

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CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS – C 11-1568-SBA - 1 -

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provider market), that these new markets were not as profitable as the switching and router markets

and that the diversification strategy could cause Cisco to lose focus on the core switching and router

businesses in which there were an increasing number of competitors. They noted that Cisco’s

expansion into the data center blade server market made the Company a competitor with large-

channel partners like Hewlett-Packard (“HP”), IBM and Dell that generated billions of dollars of

revenue for Cisco. They also noted that HP responded by expanding into the switching market with

its 2009 acquisition of 3Com, which could erode Cisco’s dominant position in that market.

5. As detailed below, during the Class Period defendants misled investors by repeatedly

telling them that Cisco was successfully diversifying into new businesses while increasing revenues

and market share in its traditional switching and router businesses and that the new organizational

structure was operating successfully. For example, on February 3, 2010, Chambers and Calderoni

assured investors that Cisco was able to “catch market transitions and move into new market

adjacencies . . . while still maintaining revenue growth and market share gains in . . . traditional areas”

and emphasized that the Company’s “new organization structure of councils, boards and working

groups . . . [was] operating very effectively.” Defendants made similar statements when Cisco

reported its results in May 2010, August 2010 and November 2010.

6. Information provided by former Cisco employees and other sources, admissions by

defendants and the Company later in the Class Period (and after the Class Period), Chambers’

suspicious sale of most of his Cisco stock, the substantial declines in the price of Cisco’s stock

following the disclosure of previously concealed problems, the reactions of analysts and others to

those disclosures and other facts establish that defendants’ statements during the Class Period were

materially false and misleading and strongly suggest that defendants knew it. The truth was that

there were several undisclosed problems with the Company’s core switching and routing businesses,

several of the consumer businesses, the cable set-top box business and the public sector business that

contradicted defendants’ false positive statements.

7. Defendants knew several factors were causing revenues, gross margins and market

share to decline in the core switching and router businesses, which comprised a majority of Cisco’s

revenues. Existing competitors and new entrants to the market, including new entrant and former

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channel partner HP and existing competitors Juniper Networks, Inc. (“Juniper”) and Huawei

Technologies Co., Ltd. (“Huawei”), offered lower prices and technically superior network equipment.

In addition, customers were increasingly buying network equipment from multiple vendors rather

than Cisco alone after a Gartner, Inc. (“Gartner”) report in May 2009 recommended that companies

invest in multivendor networks because successful integration of a second vendor could be achieved

with little operational risk and could reduce capital expenditures by at least 30%.

8. Defendants also knew, as they revealed in February 2011, that Cisco introduced 85

new products in 2009 and 2010, including five new Nexus switches, that would cause revenues and

gross margins to decline because the new products had lower prices and lower gross margins and

cannibalized sales of the higher-priced and higher-margin products they replaced. Indeed, beginning

in February 2011, Chambers and Calderoni admitted the number of new products was unprecedented

because Cisco “never had more than one or two new switching products in 18 months, much less all

five lines at the same time within a year.” They also admitted that Cisco had to sell two to three times

the number of Nexus switches to generate the same amount of revenue from sales of the Catalyst

switches they replaced because fewer Nexus switches were needed to perform the functions of the

Catalyst switches and because Nexus switches had lower prices. And they admitted that new

products always had dramatically lower gross margins – including Nexus switch gross margins that

were 1,800 basis points lower than the Catalyst switches they replaced – and that it took three to four

years for margins to recover.

9. Defendants knew Cisco’s expansion into the consumer market included many failures

and ultimately resulted in the closing of some businesses (Flip, Eos) and substantial cutbacks in

others (cable set-top boxes). One former employee stated that revenues in the consumer business

were substantially less than internal forecasts in 2010 because: (a) Cisco halted the development of

new Linksys routers – including products that were currently in development; (b) Cisco reduced the

number of existing Linksys products already available for sale by 50%; and (c) sales of the

Company’s new “Valet” router were less than forecast. Indeed, the former employee stated that

Linksys’ share of the consumer home networking market declined from 52% in 2009 to 24% in

February 2011 after these decisions were made. The same former employee reported that the

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revenue targets for the consumer segment were reduced in spring 2010 because they were not

attainable. Sales of the Flip video camcorder, a product Cisco obtained with its $533 million

acquisition of Pure Digital Technologies, Inc. (`Pure Digital”) in 2009, were also less than forecast;

and in April 2011, Cisco announced it was shutting down the business.

10. Defendants also knew there were problems in the service provider business. Orders

for cable set-top boxes, a business Cisco entered when it acquired Scientific Atlanta, Inc. (`Scientific

Atlanta”) in 2006 for $7.1 billion, were artificially inflated in the last three quarters of FY10 and

masked declining demand because, as five former Cisco employees stated, Cisco provided customers

with huge price discounts so the Company could pull in orders from future quarters. The set-top box

business generated $2 billion in annual revenue, and Cisco reported that service provider orders

increased more than 20% in each of the last three quarters in FY10. Cisco then revealed in

November 2010 that total service provider orders increased by just 8% in 1Q11 and that orders for

traditional set-top boxes declined 35%, including a 40% decline in the North American cable

business, which accounted for a majority of the business. Chambers claimed that the 35% decline

was due to reductions in consumer spending and a transition from traditional set-top boxes to IP-

based set top boxes. Chambers admitted that `we saw the transition coming” but said nothing about

the huge price discounts. Skeptical analysts questioned the timing of the disclosure and Chambers’

stated reasons for the decline.

11. By August 2010, defendants also knew there were problems with the public sector

business. Cisco’s public sector business was important to analysts and investors because it generated

22% of Cisco’s revenues and because governments in the United States and abroad faced serious

budget cuts due to substantial declines in tax revenues following the financial crisis. In addition,

one-third of public sector revenues were from sales of switches, which were generating lower

revenues and gross margins because of competition and the Company’s rapid introduction of lower-

priced and lower-margin products. On August 11, 2010, defendants assured investors that the `public

sector in the US is very solid for us, both in the federal and the state and local,” that `Public Sector

Europe actually held up pretty well” and that management felt `very confident, very strong about the

forecast and a pipeline of opportunities.”

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12. But the following quarter, during the November 10, 2010 conference call, Chambers

reported orders in the public sector segment declined 25% year-over-year, 48% quarter-over-quarter

and that the public sector business would continue to be challenging for at least several quarters.

Skeptical analysts were surprised given the previous reassurances; the conference call was

contentious; and some analysts believed defendants knew about the problems earlier. UBS analyst

Nikos Theodosopoulos (“Theodosopoulos”) said the new negative outlook related to the decline in

public sector and set-top box orders was a “pretty significant reset when the rest of the industry isn’t

seeing it,” and Chambers admitted the “challenge [was] fair.” The same day, Bloomberg News host

Betty Liu (“Liu”) questioned Chambers’ contention that the decline in public sector orders was a

surprise because “[w]e’ve been talking all year long about a budget tightening among state

governments.” J.P. Morgan analyst Rod Hall believed defendants did know about the problems

earlier, reporting, “[w]e believe that Cisco had expected a weak start to FQ1[’11] due to aggressive

selling in FQ4’10. In our opinion, this masked developing weakness in government spending.”

13. Defendants knew about the undisclosed problems in all of Cisco’s businesses from

their receipt of internal reports, their participation in meetings and their close relationship with

Cisco’s customers. Chambers, Calderoni and other Cisco executives repeatedly stated that they and

other Cisco employees routinely met with customers; former Cisco employees described reports that

reflected the concealed problems and were discussed in various meetings; and Edward Zabitsky of

ACI Research wrote that Cisco had the most sophisticated customer feedback loop he had ever seen

in any business. But defendants caused Cisco’s stock price to be artificially inflated by concealing

the negative information and falsely assuring investors that Cisco was successfully expanding into

new markets while increasing revenues and market share in the core switching and router markets.

14. As a result, class members purchased Cisco securities at artificially inflated prices and

were damaged when the stock price subsequently declined after defendants began to reveal the

previously concealed adverse information. Chambers, however, unloaded 5.5 million shares of his

Cisco stock – 83% of the stock he owned – for $134 million, which was 12 times the $11.4 million he

received from selling 500,000 Cisco shares before the Class Period. In February and March 2010, he

exercised options that did not expire for months and sold the stock for $97.2 million, which some

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found suspicious even though they did not know about the undisclosed problems that contradicted

Chambers’ false positive statements. Chambers sold another 1.27 million shares for $31.3 million on

May 17-18, 2010, just days after Cisco’s May 12, 2010 earnings release and conference call, during

which he assured investors that Cisco had “emerged from this downturn gaining market share,” that the

Company’s “innovation and operation engine [was] hitting on all cylinders” and “applie[d] to products,

organization structure, business models and movements into 30-plus market adjacencies” and that the

“new innovative, dynamic network organization structure of councils, boards and working groups

[was] operating very effectively.” On August 18, 2010, Chambers sold another 243,178 shares for

$5.4 million, just one week after telling investors that Cisco’s 4Q10 and FY10 results were “extremely

positive proof in terms of the effectiveness of organization structure, business models, innovation

and execution capabilities, while focusing on over 30 major new market adjacencies at the same

time.” While Chambers was selling his stock at artificially inflated prices, Cisco spent $6 billion to

repurchase 249 million shares of its stock, which contributed to the artificial inflation.

15. In November 2010, defendants began to reveal some, but not all, of the problems that

contradicted their false positive statements and concealed Cisco’s true condition. On November 11,

2010, Cisco’s stock price declined 16.2% after the Company disclosed less-than-expected results in

the cable set-top box business, the public sector business and the consumer business. On February

10, 2011, Cisco’s stock price declined another 14.2% after it disclosed additional problems in the set-

top box, public sector and consumer businesses, an unexpected decline in switching sales, less-than-

expected router sales and unexpected declines in gross margins and earnings. On May 12, 2011,

Cisco’s stock price declined 4.8% after the Company disclosed additional problems in the switching,

consumer and public sector businesses and a plan to reduce expenses by $1 billion through a

reduction in force.

16. Investors and analysts were surprised and angry at the revelation of problems that

contradicted defendants’ earlier positive statements. As detailed below, the conference calls in

November 2010 and February 2011 were contentious, and analysts openly questioned defendants’

previous representations, when they knew about the previously concealed adverse information, why

Cisco was repurchasing its stock and why Chambers sold his stock.

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17. After the unexpected adverse disclosures in November 2010, analysts challenged

Chambers about the problems in the public sector business given his reassurances in August 2010.

One analyst asked why Cisco repurchased 110 million shares during 1Q11 when defendants said

during the August 11, 2010 conference call that the Company expected to repurchase 40 million

shares and whether it “indicate[d] anything about when you came to the conclusion that things were

going to be weaker than you maybe thought three months ago.” Michael Shedlock criticized the

insider selling by Chambers and other insiders, writing that the insiders “bailed hand over fist” as

Cisco repurchased billions of shares and failed to pay dividends despite having more than $40 billion

in cash. Indeed, he wrote that it allowed management to “pretend it [was] increasing shareholder

value while corporate insiders [got] to dump massive numbers of shares” and was “nothing more than

shareholder rape.”

18. After the unexpected negative disclosures in February 2011, analysts again

challenged Chambers given his reassurances in November 2010 that the problems disclosed then

were temporary “air pockets” that Cisco would “power through.” The financial press reported that

“Chambers was trying to contain the damage,” that the Q&A session did not start for 50 minutes

because Chambers “wouldn’t shut up” and that his “endless droning worried analysts” because “if you

keep talking about how everything is fine, it usually means everything’s not fine.”

19. In April and May 2011, defendants acknowledged additional problems, and the

financial press noted the contradiction between the disclosures and defendants’ positive statements

during the Class Period. On April 6, 2011, Cisco disclosed a memorandum from Chambers to all

Cisco employees in which he admitted various problems with the Company’s complicated

organizational structure and execution. The same day, it was reported in The Wall Street Journal

that Chambers “confessed the once highflying technology company has lost its focus, lacks discipline

and needs to overhaul its operations” and that Cisco’s problems included “ill-judged acquisitions, a

byzantine management structure and lost market share” that “should have seasick Cisco investors

asking whether their ship needs a new captain.” The next day, Chambers stated that investors should

expect an accelerated exit from some businesses and changes in operational strategy. On April 12,

2011, Cisco announced it was closing the Flip business and reorganizing other consumer businesses.

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On May 5, 2011, the Company announced significant changes to streamline operations and simplify

its organizational structure.

20. Despite low expectations following the unexpected negative news reported during the

1Q11 and 2Q11 conference calls and the revelation of additional problems in April and May 2011,

Cisco revealed more unexpected negative news on May 11, 2011 when it reported 3Q11 results.

Cisco reported substantial declines in switching revenues, consumer product orders, public sector

orders, a plan to reduce expenses by $1 billion and the official abandonment of the Company’s 12%

to 17% annual revenue growth target.

21. The financial press reported that investors heard a different tone from the usually

exuberant Chambers during the May 11, 2011 conference call, one that was more grounded in the

Company’s new reality of losing market share in its core routing and switching business to rivals like

HP and Juniper. MarketWatch reported that Chambers’ admission that Cisco was having some “share

challenges” was his “first official acknowledgement of that new reality,” as was his statement that Cisco

was no longer expecting annual revenue growth of 12% to 17%. Deutsche Bank analyst Brian

Modoff reported that he was “struck by the highly cautious tone” of the call, which focused on the

switching business and the revenue and margin declines caused by competition and cannibalization.

22. Others were more critical and called for Chambers’ ouster. On May 13, 2011, Henry

Blodget (“Blodget”) stated that Chambers had failed and should be fired.

For more than a decade, John Chambers has failed. Chambers’ shareholder-value-creation strategy has failed. His growth strategy has failed. His management structure has failed. And the result is that Cisco’s stock has been dead in the water for more than a decade, even when measured from the bottom of the NASDAQ bust. Ten years is a long time – plenty of time to evaluate a CEO’s performance. And based on Chambers’ performance, as Cisco begins its latest re-organization and rebuilding, it’s time for Cisco’s board to seriously consider giving John Chambers his walking papers.

23. After the Class Period, defendants continued to acknowledge numerous problems

with the business that contradicted their positive statements during the Class Period, analysts

reported that the Company needed to take dramatic steps to turn things around and others criticized

Chambers for damaging shareholders. In June and July 2011, consumer advocate and Cisco

shareholder Ralph Nader (“Nader”) demanded that Cisco disgorge some of the $43 billion in cash to

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shareholders and wrote that a shareholder revolt would focus on “the details of mismanagement; and

executive self-enrichment that fostered this climate of leaving the shareholders behind.”

24. Later in July, during the Company’s annual Cisco Live! convention, Chambers

admitted Cisco was too complex and had lost focus as it expanded into new markets and that he was

overhauling the Company. On July 18, 2011, the Company announced it was slashing its workforce

by 16% by selling its 5,000 employee set-top box manufacturing plant and laying off an additional

6,500 employees. Analysts applauded the move as necessary but also noted more needed to be done,

particularly as it related to the core switching and router technologies, where Cisco’s revenues,

market share and gross margins had declined.

25. When Cisco announced 4Q11 and FY11 results on August 10, 2011, Chambers and

Calderoni revealed additional information contradicting their statements during the Class Period that

Cisco was successfully diversifying into 30+ market adjacencies while maintaining revenue and

market share growth in routing and switching and that the Company’s organization structure was

operating very effectively. They reported that there were declines in switching and router sales and

product gross margins and that the switching business was still under pressure with declines in

average selling prices and gross margins caused by increased competition and the “rapid introduction

by Cisco of new products almost across the board,” including “the largest switching portfolio refresh in

our history.” They told investors Cisco was reorganizing and simplifying its organization structure

and exiting or cutting back on underperforming operations and that the changes made and to be

made were dramatic and would continue for several years.

26. During the Company’s Annual Financial Analyst conference on September 13, 2011,

Chambers and Calderoni unveiled a three-year plan that projected annual revenue growth of just 5%

to 7% from FY12 to FY14 and even lower growth rates for switching revenues. They acknowledged

that the Company’s results had been impacted by competition from HP, Huawei and other companies

and that Cisco was “fat” with “an extra 4 or 5 inches around the waistline” during the Class Period,

which “slowed decision-making down” and caused Cisco to “[get] away from the basics.”

27. The Company’s new Chief Operating Officer (“COO”), Gary Moore, also stated that

Cisco had “gained a few inches around the waist,” had “become fairly complex relative to allowing

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people to actually work with one another – get decisions made quickly; respond to customers” and was

“losing in the marketplace because of that complexity.” He stated that Cisco had exited ten businesses,

reduced its investment in six others and reduced the time it took to approve some deals by 70%.

28. In October 2011, Nader announced plans to ask Cisco shareholders to pledge a penny

per share to pay the costs of assigning a watchdog to monitor the Company’s behavior if it did not

increase dividends; and 24/7 Wall Street named Chambers the most overpaid American CEO based

on his $18.9 million of compensation and the more than 30% decline in the Company’s stock price.

29. The following chart (which is also attached in foldout form) illustrates the primary

events during the Class Period and their impact on Cisco’s stock price.

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II. JURISDICTION AND VENUE

30. The claims asserted herein arise under §§10(b) and 20(a) of the Securities Exchange

Act of 1934 (“Exchange Act”) [15 U.S.C. §§78j(b) and 78t(a)] and Rule 10b-5 promulgated thereunder

by the U.S. Securities and Exchange Commission (“SEC”) [17 C.F.R. §240.10b-5].

31. This Court has jurisdiction over the subject matter of this action pursuant to 28 U.S.C.

§1331 and §27 of the Exchange Act.

32. Venue is proper in this District pursuant to §27 of the Exchange Act and 28 U.S.C.

§1391(b). Many of the acts charged herein, including the preparation and dissemination of

materially false and misleading information, occurred in substantial part in this District.

33. 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.

III. PARTIES

34. New England Teamsters & Trucking Industry Pension Fund (“New England Fund”) and

The Council of the Borough of South Tyneside Acting in Its Capacity as the Administering

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Authority of the Tyne and Wear Pension Fund (“Tyne and Wear Fund”) were appointed lead plaintiffs

on October 17, 2011. Dkt. No. 57. The New England Fund is a multi-employer pension fund

overseeing approximately $3 billion of assets, and has approximately 75,000 participants and 23,000

active members. The Tyne and Wear Fund is an English municipal, multi-employer, pension fund

overseeing more than $7.5 billion in assets, and has approximately 112,000 participants. The New

England Fund and Tyne and Wear Fund each purchased Cisco securities at artificially inflated prices

during the Class Period as a result of defendants’ misconduct and suffered damages when the

artificial inflation was removed from the stock price.

35. Defendant Cisco designs, manufactures and sells IP-based networking and other

products related to the communications and IT industry and provides services related to their use

worldwide. Defendant Cisco maintains its corporate headquarters in San Jose, California.

36. Defendant John T. Chambers is, and was at all relevant times, Chairman of the Board

and Chief Executive Officer of Cisco. According to Cisco’s Amended and Restated Bylaws,

Chambers, as CEO, was the general manager and chief executive officer of Cisco; was responsible

for the general supervision of the affairs of the Company; was required to sign or countersign all

certificates, contracts and other instruments as authorized by the Board of Directors (the “Board”); was

required to make reports to the Board and shareholders; and had the authority to perform other duties

incident to his position. Chambers prepared and approved Cisco’s press releases, was quoted in the

press releases and was the primary spokesperson during the Company’s earnings conference calls.

37. Chambers’ total compensation was $18.9 million in FY10 and $12.9 million in FY11

according to Cisco’s proxy statement. Chambers was named the most overpaid CEO in 2011 by 24/7

Wall Street based on the $18.9 million in overall compensation Chambers received in FY10 and the

31.4% decline in the Company’s stock price in 2011. In addition, during the Class Period, Chambers

sold 5,515,451 shares of Cisco stock for proceeds of $133,996,830 while in possession of material,

adverse, undisclosed information.

38. Defendant Frank Calderoni is, and was at all relevant times, Executive Vice President

and Chief Financial Officer at Cisco. Like Chambers, Calderoni prepared and approved Cisco’s press

releases, was quoted in the press releases and made statements during the Company’s earnings

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conference calls. Calderoni’s total compensation was $10.2 million in FY10 and $7.9 million in

FY11 according to Cisco’s proxy statement.

39. Chambers and Calderoni are collectively referred to as the Individual Defendants.

They knowingly or with deliberate recklessness made materially false and misleading statements

during the Class Period that concealed Cisco’s true condition and caused the Company’s stock to trade

at artificially inflated prices. They are liable for the billions of dollars in damages incurred by

plaintiffs and the class when the stock price declined after Cisco revealed its true condition by

publicly disclosing the previously concealed material adverse information.

IV. SOURCES OF ALLEGATIONS

40. Some of the allegations included herein are based on information provided by several

former Cisco employees referred to as confidential witnesses (“CW”). The information provided by

the former employees is reliable and credible because: (a) the witnesses worked at Cisco during the

Class Period or before the Class Period but described problems that continued during the Class

Period; (b) each of the witnesses stated he or she had personal knowledge of the information

provided; (c) the witnesses’ job titles and responsibilities support their claims of personal knowledge

of the information provided; (d) many of the witnesses’ accounts corroborate one another; and (e) the

witnesses’ accounts are corroborated by other information alleged herein.

41. CW1 was a marketing program manager in Cisco’s Consumer Product division from

August 2006 until February 2011, when CW1 left the Company. CW1 was a marketing liaison

between several groups (engineering, product developers and marketing) within the Linksys (a

consumer router product) division and was involved in several product releases per month. During

the Class Period, CW1 reported to the Director of Marketing, Scott Kabat, who reported to the Vice

President of Marketing for Consumer Products, Simon Fleming, who reported to Jonathan Kaplan,

the former CEO of Pure Digital, who was made the head of the consumer division when Cisco

acquired Pure Digital in March 2009. Kaplan reported to the Chief Strategy Officer, Ned Hooper,

who reported to Chambers. As detailed below, CW1 said there were problems in the consumer

segment including the discontinuation of Linksys router development and the number of Linksys

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products available for sale that caused Cisco’s share of the home router market to decline from 52%

in 2009 to 24% in February 2011 and a reduction to the forecast in the Spring of 2010.

42. CW2 was a business development manager in Cisco’s service provider segment for

five and one-half years until CW2 was laid off in July 2009. CW2’s job responsibilities included

evaluating competitive challenges facing Cisco and how Cisco could respond to those challenges.

CW2 prepared reports every two months that identified the future direction of the market, actions by

Cisco’s competitors and proposals for Cisco to counter its competitors. CW2 stated that the reports

were received by high-level executives in the service provider segment. CW2 presented the reports

at Service Provider Committee meetings attended by Tony Bates (who resigned in October 2010),

who reported directly to Chambers. According to CW2, Tony Bates would brief the members of

Cisco’s executive committee – Chambers, Calderoni, Randy Pond, Rick Justice and Robert Lloyd. As

detailed below, CW2 stated that Cisco was losing switching and router sales to competitors in 2009

that offered better products and lower prices. CW2 also said that the set-top box business was

declining when CW2 left Cisco and that the committee-based organizational structure slowed

decision-making at the Company.

43. CW3 was a contract employee and senior financial analyst in Cisco’s cable set-top box

group from 2007 until July 2011 when CW3 resigned. CW3’s job responsibilities included booking

set-top box orders, providing information needed to determine the amount of revenue to be

recognized on multiple element orders, budgeting expenses to be incurred by the cable set-top box

division, and reviewing and reconciling the financials and forecasts of Scientific Atlanta. As

detailed below, CW3 said that Cisco provided “huge discounts” to cable set-top box customers in 2010

– including a “big push” at the end of FY10 – that pulled in orders from future quarters and gave the

appearance of an optimistic and robust outlook for the division but also reduced margins on those

orders and caused future orders to decline. CW3 also stated that the discounted prices were often

reduced further between the order date and the shipment date, that the set-top box order forecast for

FY11 was $1.2 billion which was substantially less than the $2 billion of annual revenues generated

by the set-top box business in previous years, and that revenues were substantially less because of

order cancellations and price erosion.

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44. CW4 worked at Cisco from February 2007 until May 2011 when CW4 resigned.

CW4 was a manager of worldwide channels finance from May 2010 until CW4 resigned. CW4

provided support to various sales leadership teams throughout the Company. Prior to May 2010,

CW4 worked in different sales finance roles and supported Financial Controllers within various

operating segments by preparing weekly forecasts, managing expenses, and performing various

financial planning and analysis functions. As detailed below, CW4 stated that Cisco provided steep

price discounts on products and that the price would decline further between the order date and the

shipment date. CW4 also said that Cisco had an excessively complex and unwieldy organizational

and management structure that resulted in duplication of work, a lack of clarity on who was

responsible for different matters and greatly slowed down decision making. CW4 also described the

Company’s forecasting process.

45. CW5 was a services portfolio analyst who worked at Cisco from January 2010 to

January 2011 when CW5 was laid off. CW5’s primary job responsibilities were to analyze and

determine growth trends in Cisco’s services portfolio by obtaining data (including contracts with

customers) from personnel in the Company’s finance, operations, marketing and sales groups. CW5

prepared monthly, quarterly and annual reports summarizing the data and believed the reports were

provided to senior executives, including Chambers, Calderoni and the Chief Marketing Officer. As

detailed below, CW5 reviewed data that showed Scientific Atlanta was consistently operating at a

loss and also stated that there were problems with Cisco’s organizational structure, including multiple

layers of management, high turnover, vaguely understood responsibilities and numerous committees

responsible for different functions.

46. CW6 joined Scientific Atlanta as a financial analyst in February 2007 and remained at

Cisco until October 2010 when CW6 resigned. CW6 worked in Atlanta and was responsible for the

financial analysis of Scientific Atlanta’s cable modem business, which generated about $240 million

in annual revenue. CW6 stated that cable customers were reducing capital expenditures by

purchasing products from lower-cost Asian competitors beginning in late 2008 and that, by summer

2010, cable operators were also losing subscribers. CW6 said that throughout 2010, the Scientific

Atlanta division of Cisco provided significant price discounts to cable customers so they would

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increase and accelerate their orders, that the price discounts became more elaborate as the year

progressed and that the price discounts negatively impacted gross margins.

47. CW7 was a contract employee at Cisco’s Commercial Finance Solutions Group in

Lawrenceville, Georgia from October 2007 until October 2010 when CW7 resigned. CW7 was

responsible for reviewing proposed sales transactions of cable products that deviated from defined

pricing and discounting terms and conditions. CW7 worked with sales personnel to write up deals

and was responsible for ensuring all details were included in materials submitted to high-ranking

management personnel at Scientific Atlanta/Cisco, including Vice President of Finance John

Morton, for review and either approval or rejection. As detailed below, CW7 stated that orders from

cable companies were extremely robust through the end of 2008, as cable companies were switching

from analog to digital networks, but that cable set-top box orders declined significantly in 2009 and

2010. CW7 also stated that beginning in 2009, lower-cost Chinese competitors like Huawei became

more prevalent and that Cisco provided significant price discounts to cable operators.

V. SUBSTANTIVE ALLEGATIONS

A. Before the Class Period, Analysts and Investors Were Concerned About the Company’s Organizational Structure and that Cisco’s Growth and Diversification Strategy Would Cause the Company to Lose Focus on the Core Switching and Technology Businesses and Enter Less Profitable Businesses in Which the Company Was Inexperienced

48. Description of the business . Cisco was incorporated in California in December 1984,

and its headquarters are in San Jose, California. Cisco designs, manufactures and sells IP-based

networking and other products related to the communications and IT industry and provides services

associated with these products and their use. It provides a broad line of products for transporting

data, voice and video within buildings, across campuses and around the world. Its products are

designed to transform how people connect, communicate and collaborate and are installed at

enterprise businesses, public institutions, telecommunications companies, commercial businesses

and personal residences.

49. Switches and routers generate a majority of revenues . The Company’s core routing

and switching technologies generated a majority of the Company’s revenues and are commonly

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referred to as the plumbing or pipes of the internet because they direct data over the internet.

Routers have been described as the heart and brains of IP networks that analyze and forward IP

packets from source to destination and as traffic cops that steer packets of information to their

intended destinations across vast and complex networks. In its 2010 Form 10-K, Cisco reports

routing technology is “fundamental to the Internet, and this technology interconnects public and

private IP networks for mobile, data, voice, and video applications” and that its routing products are

“designed to enhance the intelligence, security, reliability, scalability, and level of performance in the

transmission of information and media-rich applications.”

50. Switches perform the function of determining and regulating the flow of data traffic.

Cisco reports that switching technology is “another integral networking technology used in campuses,

branch offices, and data centers” that “are used within buildings in local-area networks (LANs), across

cities in metropolitan-area networks (MANs), and across great distances in wide-area networks

(WANs).” The Company’s switching products, according to Cisco, “offer many forms of connectivity

to end users, workstations, IP phones, access points, and servers, and also function as aggregators on

LANs, MANs, and WANs.” Cisco’s switching systems “employ several widely used technologies,

including Ethernet, Power over Ethernet, Fibre Channel over Ethernet, Packet over Synchronous

Optical Network, and Multiprotocol Label Switching.”

51. Advanced technologies are Cisco’s product groups that are focused on markets

adjacent to switching and routing and have exceeded or have the potential to exceed $1 billion of

annual revenues. These market adjacencies include unified communications, video, security,

wireless, home networks, ANS and storage.

52. In its quarterly earnings releases and conference calls, Cisco emphasized year-over-

year growth in net revenues, gross margin and earnings. The Company reported net revenues and

gross margin in each geographic segment – U.S. & Canada, European Markets, Emerging Markets

and Asia Pacific Markets. It also reported revenues by product type (switches, routers and new

products) and from services, and reported the product gross margin and service gross margin.

Switches and routers were Cisco’s core technology products and made up more than 60% of product

revenues and more than 50% of the Company’s total revenues from 2008 through 2010.

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(in millions) 2008 2009 2010 2011 Switching $13,538 $12,119 $13,568 $13,418 Routing $7,940 $6,311 $6,574 $7,100 New Technology $9,448 $9,903 $9,639 $13,025 Other $2,175 $1,608 $2,639 $983 Total Product Revenues $33,101 $29,131 $32,420 $34,256 Services $6,441 $6,986 $7,620 $8,692 Total Revenues $39,540 $36,117 $40,040 $43,218

53. During the conference calls – but not in reports filed with the U.S. Securities and

Exchange Commission – Cisco also reported revenues and orders by customer segment – enterprise

(companies with more than 1,000 employees), commercial (companies with less than 1,000

employees), consumer, service provider and public sector. During the November 10, 2010

conference call, Chambers stated that 23% of Cisco’s business was generated by the enterprise

segment, 20% by the commercial segment, 22% by the public sector segment and 33% by the

service provider segment. Analysts in turn reported these important metrics.

54. Concerns about growth and diversification by acquisition strategy . From 2000 to

2008, Cisco pursued a growth by acquisition strategy; the Company’s net revenues more than

doubled from $18.9 billion in 2009 to $39.5 billion in 2008; and earnings tripled from $2.7 billion to

$8.1 billion.

(in billions) 2000 2001 2002 2003 2004 2005 2006 2007 2008 Net Revenues $18.9 $22.3 $18.9 $18.9 $22.0 $24.8 $28.5 $34.9 $39.5 Net Income $2.7 ($1.0) $1.9 $3.6 $4.4 $5.7 $5.6 $7.3 $8.1 EPS $0.36 ($0.14) $0.25 $0.50 $0.62 $0.87 $0.89 $1.17 $1.31

55. In 2003, Cisco diversified into the consumer business by acquiring Linksys, a

manufacturer of home networking products, for $480 million in stock (29 million shares). In 2006,

Cisco expanded the home networking business by acquiring Scientific Atlanta for $7.1 billion in

cash. Scientific Atlanta manufactured and sold set-top boxes, end-to-end video distribution

networks and video system integration. Scientific Atlanta’s primary manufacturing facility was in

Juarez, Mexico. In 2009, Cisco acquired Pure Digital for $533 million (27 million shares). Pure

Digital manufactured and sold the “Flip” digital video recorder. In March 2009, Cisco also entered the

enterprise data center blade server market with its Unified Computing System, which made it a

direct competitor with important channel partners like HP, Dell and IBM.

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56. Analysts expressed concerns about Cisco’s growth and diversification by acquisition

strategy. They noted that the Company’s expansion into market adjacencies was key to Cisco’s ability

to grow 12% to 17% because Cisco was already the dominant seller of switches and routers, but

were concerned that Cisco was inexperienced in the new businesses and that it might cause

management to lose focus on the core routing and switching products when those businesses

included an increasing number of competitors.

57. They were also concerned about the expansion into the enterprise data center blade

server market because it threatened the switching and router revenues that channel partners HP, Dell

and IBM previously generated and because those partners became direct competitors in the

switching and routing businesses – HP through its acquisition of 3Com in November 2009 and IBM

and Dell through their OEM deals with Juniper and Brocade. Brigantine Advisors reported that HP

and IBM generated approximately $2 billion in switching revenues for Cisco; and on February 18,

2010, Cisco announced that it had informed HP it would not renew the System Integrator contract

expiring in April, which meant HP would no longer be a certified channel partner or global service

alliance partner.

58. Concerns about new organizational structure . In 2007, Chambers overhauled

Cisco’s management structure to support the Company’s growth and diversification by acquisition

strategy. Cisco increased the number of markets from 2 in 2007 to 26 in 2009 and more than 30

during the Class Period. Chambers said that large companies began to slow down “because they

didn’t move out of their primary markets” fast enough. The new organization structure included:

(a) an operating committee comprised of 15 top executives and Chambers; (b) 12 councils, each

comprised of an average of 14 people; (c) 47 boards, each comprised of an average of 14 people; and

(d) working groups that were small temporary teams working on individual projects.

59. The new organization structure was criticized by many as adding bureaucracy and

stripping away accountability. The Wall Street Journal reported in August 2009 that Cisco had

experienced difficulty executing with its new structure and that it slowed responses to rivals’ moves,

including the failure to match until April 2008 HP’s late-2007 decision to promote a warranty for

switches that provided free upgrades and support, which caused Cisco’s market share to fall.

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Decisions made collaboratively through the new structure increased to 70% in 2009 compared to just

10% in 2007. It also reported that 20% of Cisco’s senior leaders had left the Company since the

changes were made in 2007. Analyst Henry Blodget wondered if Chambers had “gone insane.”

60. Financial results begin to recover after financial crisis . After reporting increasing

revenues and earnings from 2000 to 2008, Cisco’s net sales and earnings declined in FY09 due to the

financial crisis and started to rebound in 4Q09 and 1Q10 but were still substantially less than sales in

4Q08 and 1Q09.

(in billions) 1Q08 2Q08 3Q08 4Q08 FY08 1Q09 2Q09 3Q09 4Q09 FY09 1Q10 Net Revenues $9.5 $9.8 $9.8 $10.4 $39.5 $10.3 $9.1 $8.2 $8.5 $36.1 $9.0 Net Income $2.2 $2.1 $1.8 $2.0 $8.1 $2.2 $1.5 $1.3 $1.1 $6.1 $1.8 EPS $0.36 $0.34 $0.30 $0.33 $1.31 $0.37 $0.26 $0.23 $0.19 $1.05 $0.30 # Shares 6,087 6,010 5,942 5,986 5,986 5,881 5,848 5,805 5,828 5,828 5,767

61. Much of the growth in net income and EPS was attributable to declining tax expenses

and the Company’s repurchase of millions of shares (which reduced the denominator – number of

outstanding shares – used to compute EPS). Cisco’s tax expense fell from 38.6% of pretax income in

2000 to 20.3% of pretax income in FY09 to 17.5% of pretax income in FY10 and 17.1% in FY11.

The Company accumulated $35 billion of cash and investments by the end of FY09 (and $44.5

billion by the end of FY11), most of which could not be repatriated to the U.S. without paying taxes

that were avoided previously. On June 28, 2011 Bloomberg reported that Cisco and Chambers

“gamed the tax system to park $32 billion in profits in low-tax countries” and reduce its income taxes

by $7 billion since 2005 by booking roughly half its worldwide profits at a foreign subsidiary where

the effective tax rate was 5%. Chambers repeatedly stated that the government should permit

repatriation of the cash without requiring Cisco to pay taxes because it would not cost the taxpayer

anything and would create jobs.

62. Reported EPS also increased because of the share repurchases. In 2002, Cisco had

7.44 billion shares outstanding. By the end of 2007, outstanding shares declined to 6.06 billion and

continued to decline to 5.73 billion by the end of 2010. Stock repurchases continued during the

Class Period, including 249 million shares repurchased for $6 billion from 2Q10 to 4Q10 as

Chambers sold 5.5 million of his Cisco shares for $134 million.

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63. Stock price lags NASDAQ . Although Cisco reported increasing revenues and profits

from its growth and diversification by acquisition strategy, parking profits in low-tax countries and

share repurchases, the Company’s stock price lagged the NASDAQ from September 2007 to January

2010. After Chambers was appointed CEO on January 31, 1995, Cisco’s stock price soared more

than 4,000%, from $1.875 in February 1995 to $77.31 in March 2000, compared to a 500% increase

in the NASDAQ (755 to 4,572). The stock then declined to $15.81 by March 2001, $12.18 in

September 2001 and $10.48 in September 2002. By September 2007, the Company’s stock price

increased 216% to $33.13, compared to a 130% increase in the NASDAQ (from 1172 to 2701). But

from September 2007 to January 2010, Cisco’s stock price declined 32% to $22.47. By comparison,

the NASDAQ declined 21% from September 2007 to January 2010.

64. On January 8, 2010, Electronics International reported that Cisco’s stock price had

been flat for about three months despite an increase in the NASDAQ and several positive

announcements, including a MarketWatch report that IT spending had started to recover based on

reports by Deutsche Bank and Wedbush Morgan and announcements by Cisco that it had plans for a

residential telepresence solution and that it was acquiring Rohati, a security technology company.

Electronics International also reported that analysts had recently started to ask more searching

questions of Chambers about his refusal to abandon the long-term 12% to 17% growth target for

Cisco and that other observers and investors were apprehensive about the number of different

markets into which Cisco was moving and wondered if the Company was biting off more than it

could chew.

65. Thus, entering the Class Period, defendants knew that Cisco’s stock price – which had

historically outperformed the NASDAQ – lagged the NASDAQ from September 2007 to January

2010 despite the growth and diversification by acquisition strategy; the new organizational structure;

the tax maneuvers and share repurchases that increased net income; the quarter-over-quarter growth

in net revenues in 4Q09 and 1Q10; and the quarter-over-quarter growth in net income in 1Q10.

They also knew investors were concerned about the new organization structure and expansion into

new markets. As a result, defendants knew that Cisco needed to report positive results in its core

switching and router businesses and in its newer consumer-based businesses to improve revenue and

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earnings growth and increase the Company’s stock price. That would show investors that Cisco was

successfully emerging from the financial crisis, expanding into new markets while maintaining

revenue growth and market share gains in routers and switches, and that the Company’s new

organizational structure was operating effectively.

B. February 3, 2010: Defendants Falsely Represent that Cisco’s Game Plan for Emerging from the Financial Crisis was “Hitting on All Cylinders” that the Company Was Able to “Catch Market Transitions and Move into New Market Adjacencies . . . While Still Maintaining Revenue Growth and Market Share Gains in . . . Traditional Areas” and that the Company’s “New Organization Structure Was Operating Very Effectively” – Chambers Sells $97.2 Million of Cisco Stock Days Later

66. On February 3, 2010, Cisco issued a press release and held a conference call to report

2Q10 results. Chambers and Calderoni told investors that 2Q10 results exceeded the Company’s

previous guidance, revenue growth would be higher in 3Q10 and Cisco was hitting on all cylinders.

In the press release, defendants made the following misleading statements:

“Our outstanding Q2 results exceeded our expectations and we believe they provide a clear indication that we are entering the second phase of the economic recovery. During the quarter we saw dramatic across the board acceleration and sequential improvement in our business in almost all areas ,” said John Chambers, chairman and chief executive officer, Cisco.

“We are confident that our aggressive strategy of investing in the business during the downturn and our focus on innovation, operational excellence, and productivity are driving our momentum and growth in the market. We believe that we are extremely well-positioned – by geography, in our customer segments, and in our key product categories – as economies around the world continue to improve and our customers increase their technology investments.”

* * *

“From a financial standpoint, Q2 was an outstanding quarter. Our performance with an eight percent year-over-year increase in Q2 revenue represents our third sequential quarter of positive growth and was well above the strong guidance we outlined during our first quarter conference call,” said Frank Calderoni, chief financial officer, Cisco. “We delivered strong gross margins and added $2.5 billion in cash from operations during our second quarter, bringing our total of cash and investments to $39.6 billion. We believe that these results demonstrate the strong foundation from which we can continue to focus on growing and capturing market transitions in our industry. ”

67. During the conference call, Chambers assured investors that Cisco was able to “catch

market transitions and move into new market adjacencies . . . while still maintaining revenue growth

and market share gains in our traditional areas,” that the Company’s “new organization structure of

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councils, boards and working groups . . . [was] operating very effectively” and that Cisco was

returning to its “prior financial operating model” of 12% to 17% annual revenue growth:

Given our views of the economy expressed over the last four quarters, with the expanding role of intelligent networks in all forms of communications and IT, combined with our ability to catch market transitions and move into new market adjacencies, we are proud of our ability to return to our prior financial operating model so quickly after the global economic slowdown. Our new organization structure of councils, boards and working groups as discussed in the last few calls is operating very effectively and has been an important part of managing through the recent downturn and then positioning us for the acceleration of results achieved during the last two quarters. These structures allow speed, scale, flexibility and rapid replication. We will continue to move into additional market adjacencies which are currently at about 30. And of perhaps equal importance, many of our leading customers now are beginning to understand how this highly innovative management structure combined with new business models can launch this many product families and movement into new market adjacencies while still maintaining revenue growth and market share gains in our traditional areas.

68. Chambers also told investors that “innovations in our traditional routing and

switching product families have a very high probability of gaining market share .”

69. Chambers assured investors that almost all of the Company’s customers believed that

Cisco was improving “from both a technology and a business partner perspective” and product orders

increased in each customer segment:

The feedback from customers in all major geographies and customer segments is rapidly improving in terms of their view of their own country, economic growth and their own business opportunities. While almost all of these customers indicated Cisco’s improving status in the organizations from both a technology and a business partner perspective, this is especially true in our service provider, enterprise and government accounts .

* * *

Our service provider business on a global basis in terms of product orders in Q2 was up 11% year-over-year . Our commercial was up 10%. Enterprise was up approximately 7%, and consumer, including our Pure Digital acquisition, was up over 80% . To again put this in perspective versus just one quarter ago in Q1 where our enterprise, including public sector, was down slightly year-over-year, consumer was up approximately 20%, and service provider and commercial were down in the low double digits. This is obviously an inflection point in the market in all customer segments .

70. Chambers stated that service provider orders increased in the “low 20s from a year-

over-year perspective” and that it was “one of the most robust positive turnarounds I have seen in

my career .” He stated that revenues from sales of the Flip increased from $50 million in 1Q10 to

$130 million in 2Q10 and that the “Nexus 5000 and 7000 showed extremely strong year-over-year

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improvements as their customer acceptance dramatically increased with revenue growth of

approximately 450% for the Nexus 5000 year-over-year and 140% for the 7000 .”

71. Chambers concluded his remarks by stating that “ our execution is on target in terms

of results measured from our customer partnership perspective, market share and share of our

customers’ total communications and IT expenditures as the network becomes the platform for

delivering these capabilities .” “In summary, for those areas that we control and influence, we

believe our vision, strategy and execution are in great shape and producing results . And for those

areas that we cannot influence or control, at the present time we’re also seeing positive

improvements, solid improvement.”

72. Analysts interpreted Chambers’ remarks as being very positive and asked why.

During the question-and-answer portion of the conference call, the very first question came from

RBC Capital Markets analyst Mark Sue, who asked Chambers why he was so confident and

aggressive on the sustainability of Cisco’s newfound strength. Chambers responded that the reason

for the confidence was the “type of balance across every single market segment, across all of our

major theaters, across all of our key product areas , and you see the products begin to tie together,

that combined with having talked to government leaders.” He emphasized that what Cisco could

control or influence was “really going very well ” and that the Company was “hitting on all cylinders .”

73. Deutche Bank analyst Brian Modoff asked when the strong growth in Nexus switches

would become significant and whether they would generate $1 billion in revenue during the year.

Chambers responded that “the business doubled from last quarter ” and that the Nexus switches would

generate $1 billion of revenue in calendar year 2010: “In terms of the basis for Nexus, in terms of

the $1 billion run rate, I feel very comfortable we will be on that in this calendar year. In fact, we

are rapidly closing on that already .”

74. Morgan Keegan analyst Simon Leopold stated that many of the analysts were worried

about the competitive dynamics and specifically the reactions of Cisco’s data center initiatives by

IBM and HP. He asked Chambers to quantify the exposure to these past partners and help the

analysts understand how it would trend over the next number of quarters. Chambers responded that

the impact “was not major at all” and that Cisco was “doing extremely well.”

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75. Responding to a question about gross margins from Credit Suisse analyst Paul

Silverstein, Chambers stated that “ we are seeing some very good but very tough price competition

from some of our competitors out of China ”; that new product margins “at first . . . are not quite

what we would like, but then they buil[d] up over time ”; and that analysts should “hold us

accountable as a leadership team to say in the 64%, 65% range .”

76. Following defendants’ misleading positive statements, Cisco’s stock price increased

0.4% from $23.07 on February 3, 2010 to $23.16 on February 4, 2010, compared to a 3.1% decline

in the S&P 500 and a 2.9% decline in the S&P Technology index. 2 It increased another 2.3% on

February 5, 2010 to $23.70, compared to a 0.3% increase in the S&P 500 and a 1.1% increase in the

S&P Technology index.

77. Analysts and the financial press reported that Cisco’s stock price increased after

Chambers’ bullish comments during the conference call and Cisco’s reporting of results and guidance

that beat Wall Street estimates. But some analysts also noted that they still had concerns about the

Company’s ability to grow at 12% to 17% given that most of the growth was in switching sales and

not from strategic moves into new markets. Other concerns included less-than-expected growth in

router sales, the 3.5% quarter-over-quarter growth forecast for 3Q10 and competition from HP, IBM

and Dell arising from Cisco’s entry into the blade server market in 2009.

78. On February 8, 2010, Morningstar Equity Research reported that Cisco’s core

franchise in routers and switches could be at risk in the extreme long term from new technologies

and the trend toward more open systems but that there were no material threats on the horizon. It

also reported that the more immediate threat was Cisco’s voracious appetite for growth, which put it

in conflict with channel partners and could result in lower revenues from those partners and drive a

larger portion of Cisco’s revenues to less profitable, more competitive businesses.

2 In its 2010 Annual Report, Cisco compared the performance of its stock price to the S&P 500 and the S&P Information Technology index.

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Reasons Why Defendants’ Knew or Were Deliberately Reckless in Not Knowing Their Statements Were Materially False and Misleading

79. Contrary to defendants’ positive representations, information provided from various

sources establishes that Chambers and Calderoni knew or were deliberately reckless in not knowing

that their statements were materially false and misleading because there were important undisclosed

problems with several of the Company’s businesses.

Defendants Knew Switches and Router Sales, Market Share and Gross Margins Were Declining

80. Information provided by former Cisco employees, admissions by Chambers and the

Company later in the Class Period and other information establish that defendants knew revenues

and gross margins on sales of switches and routers would decline due to increased competition,

Cisco’s introduction of new products (including Nexus switches) with lower prices and lower gross

margins, and customers shifting to multivendor networks from single vendor networks. As a result,

they also knew Cisco’s overall share of the switching and router markets were declining. These

problems in the Company’s core business contradicted defendants’ statements that Cisco was able to

“catch market transitions and move into new market adjacencies . . . while still maintaining revenue

growth and market share gains in . . . traditional areas” and that the Company’s “new organization

structure of councils, boards and working groups . . . [was] operating very effectively.” They also

contradicted defendants’ representations that the impact of competition from HP was not major at all

and that Cisco would report 64% to 65% gross margins despite price competition from Chinese

competitors and lower margins on new products. Further, Chambers’ statements that sales of Nexus

switches would reach $1 billion in calendar year 2010 were misleading because he failed to disclose

that the sales of these lower-margin products would cause revenues from Cisco’s other switching

products and product gross margins to decline.

81. Decline in sales, gross margins and market share . Contrary to Chambers’

representations, Cisco did not maintain revenue growth and market share gains in its traditional

switching and router businesses. As shown in the following chart, after switching revenues returned

to pre-crisis levels in 3Q10, they declined each of the next four quarters along with Cisco’s product

gross margins:

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Date of Earnings Release 11/04/09 02/03/10 05/12/10 08/11/10 11/10/10 02/09/11 05/11/11 08/10/11

Quarter 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 Switching Revenues $2,872 $3,396 $3,658 $3,642 $3,551 $3,151 $3,299 $3,436

QoQ 1.74% 18.25% 7.71% (0.44%) (2.5%) (11.26%) 4.70% 4.1% YoY (20.11%) 12.49% 41.34% 29.01% 23.64% (7.21%) (9.81%) (5.6%) Router Revenues $1,574 $1,606 $1,713 $1,681 $1,804 $1,672 $1,860 $1,733

QoQ 6.42% 2.03% 6.66% (1.87%) 7.32% (7.32%) 11.24% (16.8%) YoY (16.45%) 5.45% 23.68% 13.66% 14.61% 4.11% 8.58% (2%) Non-GAAP Product Gross Margin 66.3% 65.6% 65.3% 63.6% 64.0% 61.1% 63.1% 61.2% GAAP Product Gross Margin 65.4% 64.7% 64.3% 62.4% 62.6% 58.9% 60.4% 59.9%

82. Data compiled by the Dell’Oro Group, IDC Company (“IDC”) and Oppenheimer & Co.

Inc. (“Oppenheimer”) also establishes that Cisco’s share of the switching and router markets declined

from 1Q10 to 2Q11. On July 13, 2011, it was reported that data compiled by the IDC showed that

Cisco’s share of the L2/L3 switching market declined from 74.3% in 1Q10 to 68.5% in 1Q11 and that

Cisco’s share of the router market declined from 60.6% to 54.2%. Data compiled by IDC and

Oppenheimer that was published by Oppenheimer on August 24, 2011 shows that Cisco’s share of

the three Ethernet switching markets declined from 1Q10 to 2Q11. 3 As shown in the following

chart, Cisco’s share of the 1GbE market – by far the largest of the three markets – declined from 71.7%

in 1Q10 to 65.5% in 2Q11. During the same time period, the Company’s share of the 10GbE market

declined from 79.4% to 72.4%, and the Company’s share of the 100Mbps market declined from

78.4% to 66.3%.

3 The data reflected in the charts are based on calendar quarters, so the dollar amounts for Cisco do not match the amounts reported by the Company because Cisco’s fiscal year ended on July 31.

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Cisco Ethernet Switching (L2 & L3) ($ in Millions) Revenue: 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 100Mbps $440 $495 $490 $450 $405 $360 $270 $272 1GbE $1,610 $1,950 $2,225 $2,150 $2,190 $2,210 $1,800 $1,897 10GbE $540 $640 $885 $905 $1,000 $985 $960 $1,048 Total Revenue $2,590 $3,085 $3,600 $3,505 $3,595 $3,555 $3,030 $3,217

Revenue Market Share Snapshot 100Mbps 75.2% 77.3% 78.4% 75.6% 75.0% 71.3% 67.2% 66.3% 1GbE 66.9% 68.7% 71.7% 68.9% 69.1% 69.2% 66.3% 65.5% 10GbE 72.5% 72.3% 79.4% 76.4% 78.4% 73.5% 73.6% 72.4% Source: IDC, Company data, Oppenheimer & Co. Inc.

83. The data also shows that Cisco’s share of the 100Mbps and 10GbE markets, as

measured by ports, declined from 1Q10 to 2Q11; that the Company’s share of the 1GbE market

remained flat; and that the average selling price for ports in each of the three markets declined

substantially.

Cisco Ethernet Switching (L2 & L3) (in thousands) Ports: 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 100Mbps 12,075 11,415 14,005 12,910 12,250 11,655 11,100 11,193 1GbE 12,050 13,000 16,645 17,490 19,385 19,600 18,030 20,018 10GbE 335 395 630 795 845 900 990 1,190 Total Ports 24,460 24,810 31,280 31,195 32,480 32,155 30,120 32,401

Port Market Share Snapshot 100Mbps 52.4% 49.5% 56.4% 53.1% 52.1% 48.5% 49.3% 47.4% 1GbE 37.4% 37.1% 42.8% 41.5% 43.5% 42.8% 41.5% 42.2% 10GbE 57.3% 51.3% 63.3% 63.6% 62.1% 57.3% 59.5% 59.4% Source: IDC, Company data, Oppenheimer & Co. Inc.

Cisco Ethernet Switching (L2 & L3) Port ASP 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 100Mbps $36 $43 $35 $35 $33 $31 $24 $24 1GbE 134 150 134 123 113 113 100 95 10GbE 1,612 1,620 1,405 1,138 1,183 1,094 970 881 Overall Port ASP $106 $124 $115 $112 $111 $111 $101 $99

84. By contrast, the data shows that HP, Juniper and Brocade’s share of the market

increased from 1Q10 to 2Q11 and that their average selling prices per port were often less than the

price of Cisco’s ports despite the substantial decline in Cisco’s port prices. As shown in the following

tables, HP’s share of all three switching markets – measured by revenues and ports – increased

substantially from 1Q10 to 2Q11, and the average selling prices of its ports were a fraction of Cisco’s

average selling prices.

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HP Ethernet Switching (L2 & L3) ($ in Millions) Revenue: 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 100Mbps $21 $23 $24 $49 $51 $52 $47 $45 1GbE $185 $206 $220 $381 $375 $350 $355 $368 10GbE $44 $66 $46 $90 $92 $125 $127 $152 Total Revenue $250 $295 $290 $520 $518 $527 $529 $565

Revenue Market Share Snapshot 100Mbps 3.6% 3.6% 3.8% 8.2% 9.5% 10.3% 11.7% 11.0% 1GbE 7.7% 7.3% 7.1% 12.2% 11.8% 11.0% 13.1% 12.7% 10GbE 6.0% 7.5% 4.1% 7.6% 7.2% 9.3% 9.7% 10.5% Source: IDC, Company data, Oppenheimer & Co. Inc. *HP and 3Com are consolidated starting in 2Q10.

HP Ethernet Switching (L2 & L3) (in thousands) Ports: 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 100Mbps 2,250 2,505 2,515 4,900 5,240 5,460 4,910 4,995 1GbE 3,225 3,535 3,720 8,015 8,160 8,140 8,483 8,827 10GbE 105 200 155 240 255 340 323 382 Total Ports 5,580 6,240 6,390 13,155 13,655 13,940 13,716 14,204

Port Market Share Snapshot 100Mbps 9.8% 10.9% 10.1% 20.2% 22.3% 22.7% 21.8% 21.2% 1GbE 10.0% 10.1% 9.6% 19.0% 18.3% 17.8% 19.5% 18.6% 10GbE 17.9% 26.0% 15.6% 19.2% 18.8% 21.7% 19.4% 19.1% Source: IDC, Company data, Oppenheimer & Co. Inc. *HP and 3Com are consolidated starting in 2Q10.

HP Ethernet Switching (L2 & L3) Port ASP 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 100Mbps $9 $9 $10 $10 $10 $10 $10 $9 1GbE 57 58 59 48 46 43 42 42 10GbE 423 330 297 375 361 368 393 398 Overall Port ASP $45 $47 $45 $40 $38 $38 $39 $40 Source: IDC, Company data, Oppenheimer & Co. Inc. *HP and 3Com are consolidated starting in 2Q10.

85. As shown in the following tables, Juniper’s share of the 1GbE and 10GbE switching

markets also increased from 1Q10 to 2Q11, as measured by revenues and ports, and the average

selling prices of its ports were less than Cisco’s average selling prices.

Juniper Ethernet Switching (L2 & L3) ($ in Millions) Revenue: 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 1GbE $38 $55 $56 $65 $72 $82 $63 $71 10GbE $11 $17 $19 $23 $25 $35 $28 $35 Total Revenue $49 $72 $74 $88 $97 $117 $91 $106

Revenue Market Share Snapshot 1GbE 1.6% 1.9% 1.8% 2.1% 2.3% 2.6% 2.3% 2.5% 10GbE 1.5% 1.9% 1.7% 1.9% 2.0% 2.6% 2.1% 2.4% Source: IDC, Company data, Oppenheimer & Co. Inc.

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Juniper Ethernet Switching (L2 & L3) (in thousands) Ports: 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 1GbE 550 700 615 850 865 1,070 910 1,165 10GbE 6 10 12 18 26 46 40 61 Total Ports 556 710 627 868 891 1,116 950 1,226

Port Market Share Snapshot 1GbE 1.7% 2.0% 1.6% 2.0% 1.9% 2.3% 2.1% 2.5% 10GbE 1.1% 1.3% 1.2% 1.4% 1.9% 2.9% 2.4% 3.0% Source: IDC, Company data, Oppenheimer & Co. Inc.

Juniper Ethernet Switching (L2 & L3) Port ASP 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 1GbE $69 $79 $90 $76 $83 $77 $69 $61 10GbE 1,790 1,680 1,575 1,280 950 770 695 565 Overall Port ASP $88 $101 $118 $101 $109 $105 $96 $86

86. As shown in the following tables, Brocade’s share of the switching markets also

increased from 1Q10 to 2Q11, and the average selling prices of its ports were less than the average

selling prices of Cisco’s ports for many of the quarters.

Brocade Ethernet Switching (L2 & L3) ($ in Millions) Revenue: 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 100Mbps $3 $3 $2 $2 $3 $3 $4 $4 1GbE $60 $55 $50 $60 $55 $50 $45 $52 10GbE $25 $30 $25 $30 $35 $40 $38 $36 Total Revenue $88 $88 $77 $93 $92 $94 $86 $92

Revenue Market Share Snapshot 100Mbps 0.5% 0.5% 0.4% 0.4% 0.5% 0.6% 0.9% 0.9% 1GbE 2.5% 1.9% 1.6% 1.9% 1.7% 1.6% 1.7% 1.8% 10GbE 3.4% 3.4% 2.2% 2.5% 2.7% 3.0% 2.9% 2.5% Source: IDC, Company data, Oppenheimer & Co. Inc.

Brocade Ethernet Switching (L2 & L3) (in thousands) Ports: 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 100Mbps 100 115 95 90 105 130 120 130 1GbE 415 430 450 550 565 560 424 430 10GbE 13 17 22 22 30 40 51 46 Total Ports 528 562 567 662 700 730 595 606

Port Market Share Snapshot 100Mbps 0.4% 0.5% 0.4% 0.4% 0.4% 0.5% 0.5% 0.6% 1GbE 1.3% 1.2% 1.2% 1.3% 1.3% 1.2% 1.0% 0.9% 10GbE 2.1% 2.2% 2.2% 1.8% 2.2% 2.5% 3.1% 2.3% Source: IDC, Company data, Oppenheimer & Co. Inc.

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Port ASP 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 100Mbps $30 $28 $24 $24 $25 $24 $29 $29 1GbE 145 128 111 110 97 89 106 121 10GbE 1,850 1,715 1,200 1,270 1,135 1,010 875 787 Overall Port ASP $167 $157 $136 $140 $132 $128 $145 $152

87. Data compiled by Infonetics Research and Jefferies & Company, Inc. (“Jefferies”) that

was published by Jefferies on June 3, 2011 shows that Cisco’s share of the three router markets – core

routers, edge routers and enterprise routers – declined from 1Q10 to 1Q11. Cisco’s share of the core

router market – which Jefferies estimated comprised $1.6 billion or 3% to 4% of Cisco’s calendar 2010

revenues – declined from 56% in 1Q10 to 51% in 2Q10, increased during the next two quarters but

failed to regain the lost share from 1Q10 to 2Q10, and then declined again in 1Q11 to 54%.


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88. Cisco’s share of the edge router market – which Jefferies estimated comprised $2.75

billion or 7% of Cisco’s calendar 2010 revenues – declined from 43% in 1Q10 to 33.9% in 1Q11.

89. Jefferies reported that Cisco’s share of the edge router market declined as it struggled

to keep pace with competitors on a number of fronts. Cisco did not introduce its ASR 9000 router to

the marketplace until 1Q09, several years later than competing next-generation platforms like

Juniper’s MX960 edge-routing platform, which was introduced in 4Q06, and Alcatel-Lucent’s 7750

edge-routing platform, which was introduced several years earlier. As shown in the following chart,

Juniper, Alcatel-Lucent and Huawei increased their shares of the edge-routing market from 1Q10 to

1Q11 as Cisco’s share of the market declined.

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90. The enterprise router market includes four key segments: high-end routers, mid-range

routers, branch-office routers and low-end routers. Jefferies reported that Cisco’s share of the

enterprise router market - which Jefferies estimated comprised $1.6 billion or 6% of Cisco’s calendar

2010 revenues – remained flat from 1Q10 to 1Q11 with market share declines in the high-end and

low-end segments.


91. The decline in switching and router sales and the gross margins on those sales

reported by Cisco in 2Q11 and 3Q11 was unexpected by investors and the market, as reflected by the

stock price declines following their disclosure. The following facts strongly suggest defendants

knew revenues, gross margins and market share would decline in the Company’s core switching and

router products.

92. Decline in sales of Linksys routers . As alleged below in ¶¶129-138, defendants

knew that router revenues and gross margins would decline as a result of the consumer segment

halting the development of new Linksys routers and reducing the amount of existing Linksys routers

available for sale.

93. Cannibalization reduces sales and margins . Defendants knew that Cisco’s

unprecedented introduction of 85 new products, with lower prices and lower gross margins, was

causing a decline in switching and router revenues and product gross margins. Included in those 85

products was the Nexus 7000 modular data center switch, which Chambers revealed during the May

11, 2011 conference had a gross margin that was 1,800 basis points lower than the Catalyst 6500

switch it was replacing.

94. Reasons defendants knew revenues and gross margins were lower on Cisco’s new

products . The Nexus 7000 switch had lower margins because it lacked certain features of the

Catalyst 6500 switch, which resulted in a lower sales price. In addition, the Nexus 7000 cost more to

produce for several reasons. First, it was built using older ASICs and therefore required more of

them (30-40 pieces per circuit board) to get the performance needed. That, in turn, led to more

power consumption, which required additional cooling and increased costs further. Second, the

Nexus 7000 was designed to be the data center switch of the future, so it was designed for highly

dense 10GbE environments, while the Catalyst 6500 switch was designed for the 1GbE market. As

a result, the Nexus 7000 switch design required a higher investment in the chassis, power and other

features that raised the architectural costs and thus the initial cost of the solution. Third, the Catalyst

6500 switch had been available for more than ten years and had benefited from value engineering

efforts, economies of scale in manufacturing and warranty cost reductions due to quality

improvements and customer familiarity.

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95. Cisco had over 35,000 customers for the Catalyst 6500 switch, which was Cisco’s

highest-gross-margin switch platform, so defendants knew the transition from the Catalyst 6500 to

the Nexus 7000 switch would cause revenues and gross margins to decline. According to

Oppenheimer analyst Ittai Kidron (“Kidron”), component shortages in 2H09 negatively impacted order

fulfillment for the Nexus 7000 switch and pushed the orders out to FY10. Shipments increased

substantially in 1Q10 and remained at that level throughout FY10 as supply constraints slowly

eased. Shipments of the Nexus then increased in 1Q11 and 2Q11 compared to steep declines in sales

of Catalyst 6500 switches. Kidron reported that Nexus 7000 sales topped $330 million in 4Q11,

while Catalyst sales were $685 million, and that the gap was expected to continue narrowing.

96. Defendants also knew that transitions in wiring closet modular switches would cause

revenues to decline. The gradual centralization in the data center of switching intelligence and

features was making room for a simpler aggregation switch to get the job done in most wiring

closets. As a result, customers were buying more of Cisco’s Catalyst 4500 switch as a modular

wiring closet solution instead of the Catalyst 6500 switch. That caused revenue cannibalization

because the Catalyst 4500 switch was 30% cheaper than the Catalyst 6500 switch. According to

Oppenheimer analyst Kidron, by 2Q11, the disparity was even greater – the average selling price of

the Catalyst 6500’s 1GbE port was $229, compared to an average selling price of $116 for the

Catalyst 4500’s 1GbE port.

97. Defendants knew that average selling prices on modular 1GbE ports were declining.

According to Oppenheimer analyst Kidron, they declined steeply from $250 in 4Q09 to $153 in

1Q11 and $146 in 2Q11 due to the transition to the Catalyst 4500 switch and the transition from

1GbE ports to 10GbE ports. As shown in the tables in ¶¶83-86, average selling prices of all port

switches sold by Cisco and others were declining throughout the Class Period.

98. Defendants knew that a transition from Cisco’s higher-end Catalyst 3000 fixed

switches to the lower-end Catalyst 2000 fixed switches was also cannibalizing revenues. According

to Oppenheimer analyst Kidron, the average selling prices declined from approximately $110 in

1Q10 to $86 by 1Q11. In March 2010, Cisco refreshed the Catalyst 2000 and 3000 switching

platforms but narrowed the feature gap between the two platforms. For many customers, the

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refreshed Catalyst 2960-S packed enough performance and features compared to the higher-priced

and higher-margin Catalyst 3560-X/3750-X switches. In fact, Kidron reported in May 2011 that

Cisco was using the refreshed Catalyst 2960-S as a key competitive tool against HP in international

markets, which had caused a substantial drop in average selling prices from just over $40 per port in

1Q10 to just over $30 per port in 1Q11.

99. Defendants admit they knew revenues and gross margins would decline . During the

February 3, 2010 conference call, Chambers stated that sales of Cisco’s new Nexus switch doubled

from 1Q10 to 2Q10 and that he was very comfortable that sales would reach $1 billion by the end of

the calendar year. But Chambers said nothing about how the new Nexus switches would negatively

impact Cisco’s switching revenues and product gross margins, even though he admitted later in the

Class Period that he knew the new Nexus switches would cause them to decline.

100. Indeed, during the February 9, 2011 conference call, defendants admitted that the

decline in switching revenues and product gross margins was caused by the newer Nexus switches.

Chambers stated that Cisco was “in the middle of a major product transition, with dramatically higher

price performance.” He and Calderoni both claimed that the transition was faster than expected, but

other comments indicate the negative impact from the sale of newer Nexus switches was not a

surprise. First, both Chambers and Calderoni acknowledged that they had managed such product

transitions many times in the past.

101. Second, in response to a question from Bank of America/Merrill Lynch analyst Tal

Liani (“Liani”), Chambers admitted that Cisco would need to sell two to three times the number of

Nexus 7000 switches than the Catalyst 6000 switches they were replacing to generate the same

amount of revenue and that the Nexus 7000 switch had lower gross margins. He also stated that the

new 4000 line of switches generated lower revenues than the 6000 switch it was replacing.

102. Third, Chambers admitted that he knew many new products would be introduced at

the same time, which Cisco had not done in the past. Responding to a question from RBC Capital

Markets analyst Mark Sue, Chambers claimed he was surprised at the ramp-up of the switching

product line but then admitted Cisco had never before introduced new products in such a short time

period but had introduced core routers, edge routers, access routers, high-end switches and fixed and

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modular component parts “all at once.” He also admitted that when new products come out, “they

always start at lower gross margins.”

103. Fourth, Chambers changed his story when another analyst asked him to explain why

he was surprised. Apparently recognizing the contradiction between Chambers’ claim of surprise and

his subsequent comments that Cisco had never before introduced so many products in such a short

time, Oppenheimer analyst Kidron asked Chambers, “specifically on the switching side, what is it

about this transition that you didn’t anticipate that is happening?” This time Chambers had a different

answer. Rather than claim surprise by the ramp-up of the switching product line, he stated that the

introduction of ten major switching products at the same time and the time it took to improve price

performance and gross margins were two things that challenged Cisco. He described this process as

a “Texas two-step,” acknowledged that Cisco needed to better manage these product transitions with a

faster “Texas two-step” and revealed that the Company was forming a working group to focus on

expanding gross margins.

104. Fifth, the unexpected decline in switching and router revenues and the product gross

margin reported by Cisco on February 9, 2011 contradicted statements made by Chambers during the

previous conference call on November 10, 2010, when Cisco announced disappointing results in the

set-top box business, public sector business and consumer business. Many analysts questioned

whether those disappointing results were indicative of problems in the switching and router markets.

As the The Wall Street Journal reported on November 12, 2010, Chambers “took pains to refute

suggestions that Cisco [was] losing ground to rivals in the switching and routing hardware that are

key pillars to its business.” Chambers assured investors that market-share momentum positioned

Cisco for growth and flexibility well into the future, that Cisco continued to execute well in its core

markets, that sales of new switches and routers were very strong, that Cisco was very well positioned

and that the challenges in the cable set-top box business, public sector business and consumer

business were just air pockets that Cisco would power through. Skeptical analysts issued reports

after the November conference call in which they questioned those reassurances and wondered if

there were problems in Cisco’s core switching and routing businesses. Thus, analysts were surprised

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when Cisco reported substantial declines in switching and routing revenues and in product gross

margins on February 9, 2011.

105. Sixth, after defendants reported the declines in switching and router revenues on

February 9, 2011 and acknowledged new products were cannibalizing sales of higher-priced and

higher-margin products, analysts issued reports in which they noted that the cannibalization by

Cisco’s new products appeared to reflect a strategy of trading revenues for gross margins. The

financial press reported that the conference call was contentious and that Chambers was trying to

contain the damage. Morgan Stanley analyst Ehud Gelblum (“Gelblum”) reported that the startling

decline in switching revenues resulted from the cannibalization by Cisco’s own higher-performance

low end switches and that Cisco appeared to be trading revenue for margins. Oppenheimer’s analyst

Kidron issued a report titled “Painful Product Transitions,” in which he wrote that the gross margin

pressure was “a reflection of multiple concurrent switching product transitions as well as Cisco

needing to aggressively protect its installed base” and that Oppenheimer was “disappointed with GM

and the slow pace by which it could recover.”

106. Seventh, Chambers and Calderoni admitted in subsequent interviews and

presentations that they knew the product transitions would cause revenues and gross margins to

decline. During an interview with Bloomberg’s Betty Liu on February 10, 2011, Chambers admitted

that it took Cisco a couple of years to get gross margins on new products to levels they wanted.

During the Goldman Sachs Technology & Internet conference on February 15, 2011, Calderoni said

that the transition from older, higher-margin switches to newer, lower-margin switches contributed

to the decline in switching revenues and product gross margins. He admitted Cisco knew that such

transitions caused revenues and gross margins to decline based on past experience and that the

impact would be greater than in the past because the Company completely revamped the switching

portfolio in a short period of time.

[W]hat was going on within switching, which is something that we’ve been through in the last couple of quarters, is a product transition. We have done this and seen this in the past as far as transition of products within switching from, let’s say, older generation to newer generation . The key for our success over a longer period of time is to ensure that we stay ahead from a competitive standpoint. So from a technology perspective, with the new 2K and 3K that we introduced over the past year, and if you look at it from the Nexus product, on the 2K, the 5K and the 7K,

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we’ve had a complete revamp of the switching portfolio in a short period of time. We’ve been through technology transitions in the past, but this is probably a timeframe where we’ve had more of it kind of compressed in a certain timeframe rather than staggered over a couple of years .

When you go through those transitions, and we’ve seen this in the past, a couple of things happen. First of all, you tend to sell more of a lower price entry with some of the newer products. Secondly, from a margin perspective, the value engineering or the engineering that you build into your cost of these new products usually comes in over a period of time, so your cost is going to continue to improve over a number of quarters . Then in turn, you’re also going to sell richer configurations as you add additional features to your base offering.

So while we were going through this transition over the last year across the entire product line, we’ve seen kind of a shift from higher-price, higher-margin to lower-margin initially.

107. Calderoni also acknowledged that Chambers’ comments on February 9, 2011 – that

Cisco would need to sell two to three times more newer products to generate the same amount of

revenue from sales of the older products – indicated that cannibalization could cut Cisco’s internet

business in half.

108. During the Bank of America Merrill Lynch TelePresence Session on February 23,

2011, Chambers admitted that Cisco “brought out a whole new line of products in each [switching]

product area” that were “double the price performance” and that new products were “always

dramatic in those lower gross margins. ” He also admitted that Cisco “never had more than one or

two new switching products in 18 months, much less all five lines at the same time within a year .”

He explained that new switches with double the price performance meant that Cisco would “ have to

sell twice as many switches as you did just a year ago with the same revenue .” Later in the session,

Chambers reiterated that lower revenues and margins following product transitions “always happens”

and that it took more than three years for margins to recover.

109. During a Wells Fargo Securities Tech Transformation Summit on April 7, 2011,

Chambers provided more detail on the number of new products introduced by Cisco and revealed

that the negative impact on revenues and margins from new products was even worse than he

described at the Bank of America Merrill Lynch TelePresence Session on February 23, 2011.

Chambers stated that 85 products came out in the last six months of 2010 and that five different

Nexus switching product lines were introduced at one time . He said, “[i]t usually takes us three to

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four years before [new products] come back up to the level of [gross] margins that the

predecessors were at” and that Cisco needed to sell three times the amount of new products – not

two times, as stated previously – to generate the same revenues of sales of older products .

110. When Cisco reported 3Q11 results on May 11, 2011, Chambers stated that Cisco was

“in the midst of a significant transition” that “placed pressure on our revenue opportunities across

the market” and that “gross margins have come under pressure due to the transition of our own

products.” Indeed, he stated that the gross margin on the Nexus 7000 switch was lower than the

gross margin on the Catalyst 6000 switch “by almost in the high teens.” Later in the conference call,

he said they were 1,800 basis points lower. When Cisco reported 4Q11 and FY11 results on August

10, 2011, Chambers stated that the switching business was still under pressure, with declines in

average selling prices and gross margins caused by increasing competition and the “rapid

introduction by Cisco ofnew products almost across the board,” including “the largest switching

portfolio refresh in our history.” During Cisco’s September 13, 2011 Annual Financial Analyst

conference, Calderoni stated that growth of switching revenues in FY11 was “flat” primarily because

of the switching product transition, “especially earlier in the year.”

111. Competition reduces sales and margins . Defendants also knew that increased

competition was causing declines in revenues, gross margins and market share. CW2, a former

Cisco business development manager who left the Company in July 2009, said Cisco was finding

itself in an increasingly untenable position even before the Class Period because many customers

preferred Avaya, Juniper and Alcatel-Lucent for high end switches and routers and Hewlett-Packard

and Huawei for low-end switches and routers. CW2 stated that Juniper’s routers, particularly the

J-series of routers, offered far superior performance to Cisco’s routers. CW2 stated that Cisco’s

strategy was not to compete against the router alone but to point out to customers that Cisco offered

an “end-to-end” solution for their network by providing a whole array of technology that supported the

entire network.

112. According to CW2, Cisco also told customers it would only repair problems with

parts of a network that were purchased from Cisco but would not repair other elements of the

network that the customer purchased from competitors. Additionally, CW2 said the global recession

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caused spending by IT divisions to decline and caused customers to seek lower-cost products and

that Cisco would also routinely cut its prices significantly to win the business and prevent loss of

market share. The decline in Cisco’s switching port prices corroborates CW2.

113. CW2 also said that Huawei was cutting prices and doing crazy deals to increase its

share of the U.S. market, which the market share figures corroborate. CW2 described how Huawei

basically gave away the hardware to obtain a $200 million deal with Cox Communications where it

planned to make money on services related to the implementation of the equipment. On January 12,

2010, Dow Jones reported that Huawei’s share of the global mobile network equipment market

increased from 11% in 2Q08 to 20% in 2Q09 and that its $21.1 billion in revenues outside North

America exceeded Cisco’s $16.7 billion. It also reported that Huawei had the ability to rapidly

increase market share because it had established genuine credibility in the network equipment

market and because no more than 2% of Huawei’s 2009 sales were in North America. Huawei’s share

of the router market almost doubled, from $120.5 million or 4.5% in 1Q10 to $276.5 million or 8.4%

in 2Q11.

114. Defendants knew about the increasing threat of competition from Huawei because

Cisco sued Huawei in 2003, accusing it of copying Cisco’s software and violating patents.

Defendants also knew Huawei was a formidable competitor because it was a Chinese company that

reported substantial increases in revenues and was reportedly receiving assistance from the Chinese

government, including credit lines from the Chinese Development Bank, which reduced Huawei’s

cost of capital and provided financing to customers at rates lower than Huawei’s competitors.

Huawei’s reported revenues increased from $12.8 billion in 2007 to $18.3 billion in 2008, $21.8

billion in 2009 and $27.1 billion in 2010. Further, Huawei disclosed in its 2010 Annual Report that

revenues from sales outside China increased from $13.2 billion in 2009 to $17.8 billion in 2010. It

also disclosed in the 2010 Annual Report that Huawei received unconditional grants from the

Chinese government related to its research and development contributions to China and additional

grants that were conditioned upon the completion of certain research and development projects.

115. CW2 prepared reports every other month that identified the future direction of the

market, actions by Cisco’s competitors and proposals for Cisco to counter its competitors. CW2 said

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that the reports included projected sales and margins of Cisco’s competitors and showed that, in the

months leading up to CW2’s departure in July 2009, competitors were taking market share away from

Cisco by lowering prices. CW2 said that this was especially the case with HP’s Pro-Curve switches

and that the competitive risk posed by HP was explicitly set forth in the reports CW2 prepared.

CW2 said that Cisco responded by lowering prices.

116. Corroborating CW2’s account, the financial press reported that Cisco’s competitors

offered technically advantaged individual components of a network at lower prices, which resulted

in enterprises purchasing components from different vendors rather than the entire network from

Cisco. For example, in a November 12, 2010 article in The Wall Street Journal, it was reported that

Carl Tidwell, the chief information officer for the American Type Culture Collection, said that he

purchased switching equipment from Extreme Networks because Cisco’s was pricier. In a February

23, 2011 article in The Wall Street Journal, it was reported that Renkim Corporation CEO Kevin

Gaffer (“Gaffer”) purchased his company’s switches from HP in December 2010 after HP launched a

discount program for Cisco customers. Gaffer stated that he paid $361 for a switch that would have

cost $4,987 at Cisco.

117. Defendants also knew that Cisco’s aggressive growth and diversification strategy put

it in conflict with the Company’s channel partners, from which it derived substantial revenue. In

March 2009, Cisco entered the enterprise data center blade server market with its Unified Computing

System, which caused a deterioration in its relationship with partners like HP, Dell and IBM by

turning them into competitors. This adversely impacted Cisco in two ways. First, it threatened the

switching revenues these channel partners generated for Cisco, which were substantial. Indeed,

Brigantine Advisors reported that HP and IBM generated approximately $2 billion in switching

revenues for Cisco. Second, HP expanded into the switching market in November 2009 with its

acquisition of 3Com. The Street’s James Rogers reported in May 2011 that relations between HP and

Cisco “soured rapidly” after Cisco unveiled its UCS server technology and, like a “spurned Silicon

Valley lover, hooked up with switch maker 3Com . . . to get back at Cisco.” On February 18, 2010,

Cisco announced it had informed HP that it would not renew the System Integrator contract expiring

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in April, which meant HP would no longer be a certified channel partner or global service alliance

partner.

118. As shown in the tables in ¶84, HP’s share of the 100Mbps switching market increased

from 3.6% in 4Q09 to 11.7% in 1Q11; its share of the 1GbE switching market increased from 7.1%

in 1Q10 to 13.1% in 1Q11; its share of the 10GbE switching market increased from 4.1% in 1Q10 to

10.5% in 2Q11; and the average selling prices of its switching ports were substantially less than the

average selling prices of Cisco’s ports. In March 2011, HP’s former CEO, Leo Apotheker, stated that

because of its very optimal price-performance ratio, HP had gained substantial market share quarter

after quarter after quarter and that it `beat the crap” out of the competition. In May 2011, Wedbush

Morgan analyst Kaushik Roy stated it was `very obvious that HP is gaining market share in the

switch business” due to aggressive prices and the HP brand and support. He explained that HP was

able to sell switches at gross margins well below Cisco’s 65% gross margins because HP’s overall

corporate gross margin was 24%.

119. Another competitive advantage for HP was that, unlike Cisco, HP released its

networking products with open-source code, which permitted the customer to develop customized

applications at a lower cost. HP noted that Cisco’s single-vendor approach locked in customers while

driving up cost and complexity with different architectures required at each point in the network.

120. Customers switching to multivendor networks . Defendants also knew that many

customers were no longer purchasing all of their network equipment from Cisco but instead were

operating `multivendor” networks because they were less complex to run, were cheaper and avoided

sole reliance on Cisco. In May 2009, Gartner – one of the world’s leading IT research and advisory

companies – reported that its clients were increasingly expressing interest in adding a second vendor

to their enterprise network infrastructures to achieve competitive leverage and avoid vendor lock-in

but were concerned it would multiply the complexity of their network operations. Gartner

recommended that companies should invest in multivendor networks because successful integration

of a second vendor could be achieved with little operational risk and could reduce capital

expenditures by at least 30%.


121. In November 2010, Gartner issued another report after interviewing a diverse group

of organizations that were using a dual-vendor strategy and concluded that most organizations

should consider a dual-vendor or multivendor solution as a viable approach to building their

networks because significant cost savings could be achieved with no increase in network complexity.

122. Although Cisco contended the Gartner reports were “myth-based” because they focused

too much on acquisition costs and not enough on long-term total cost of ownership, in a May 13,

2011 article, Information Week reported that it had surveyed IT professionals and that Cisco was the

one living the myth. It stated that acquisition costs were not the most important consideration by IT

professionals and reported that IT professionals gave Cisco low marks for service innovation,

operation cost and acquisition cost. HP and Brocade topped Cisco on operation and acquisition cost.

123. Defendants admit competition caused declines in revenues, gross margins and

market share . Later in the Class Period, defendants admitted that competition caused declines in

revenues, gross margins and market share. During the February 9, 2011 conference call, Cisco

unexpectedly announced substantial declines in switching and router revenues and product gross

margins. Responding to a question from Bank of America/Merrill Lynch analyst Tal Liani about the

disappointing switching and router results, Chambers said “[t]here is always pricing pressure in every

segment from a number of competitors.” RBC Capital Markets analyst Mark Sue noted that Cisco’s

“pricing actions and extended payment terms [were] a direct response to increased competition,” which

defendants did not dispute.

124. Analysts noted the admissions. In a February 10, 2011 report, Morgan Stanley

analyst Ehud Gelblum wrote that Cisco appeared to be trading revenue for margins as “the core

switching business comes under attack from competitors.” Canaccord Genuity analyst Paul Mansky

reported that there were persisting concerns over competition, and Wedbush Morgan analyst Rohit

Chopra reported the declining sales were due to increased competition.

125. In an April 5, 2011 memorandum to all Cisco employees, Chambers wrote that he

spent “significant time” with customers and had “extremely candid conversations” about why they

purchased or did not purchase Cisco products. He wrote that “in switching we understand that our

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customers are buying across broader segments and specific needs in this market” and that “our

competitors in this area are fierce.”

126. During a Wells Fargo Securities Tech Transformation Summit on April 7, 2011,

Chambers admitted that switching was a “challenge” and was “going to be a tough market.” He

acknowledged that “competitors come at us purely on price” because they were willing to sell switches

at prices that generated 40% gross margins. He also acknowledged that competitors like IBM,

Oracle and HP “will come at us with a vertical stack,” that another group of competitors “will come at

us with merchant silicon” and that yet another group of competitors “will come at it with a software

architecture.” And Chambers admitted that Cisco had been in this position before and “took a little bit

of drop in terms of our market share” and “a little bit of drop in terms of our margins.”

127. During Cisco’s May 11, 2011 conference call, Chambers stated that “a whole bunch of

competitors [were] coming at us” and that “several of those competitors who are coming at us are

making great inroads.” He stated that “we are going to get hit by HP and Huawei on price,” that “we are

going to get hit by some traditional players who do their own ASICs, their own software and

hardware,” that “other players [] will do this in a vertical stack” and that other players were coming at

Cisco with silicon or software.

128. Vendor financing . Defendants’ use of Cisco’s vendor financing program to increase

sales strengthens the inference that they knew competition and cannibalization were causing declines

in revenues, gross margins and market share. During the Company’s February 3, 2010 conference

call, Calderoni admitted that Cisco provided vendor-backed financing through the Cisco Capital

organization. During the February 9, 2011 conference call, he revealed that the amount of financing

receivables and guarantees was $6.8 billion and that the Company provided financing to customers

to enable incremental sales. After that revelation, it was reported in the financial press that Cisco

competed with HP by providing customers with discounts, zero-interest leasing and pay-later

schemes. Stanimira Koleva, the head of Cisco’s Asia-Pacific Partner organization, told the Straits

Times , a Singapore publication, that the Company co-invested with partners to help them achieve a

fast ramp-up of their practices. The investment programs included Big Bets, Collaborative

Professional Services and Business Architecture Specialists.

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Defendants Knew the Consumer Business was Underperforming in 2010 and 2011

129. Information provided by CW1, subsequent statements by Cisco and others, and other

facts establish that defendants knew there were major undisclosed problems in the consumer

segment which contradicted their positive statements that: (a) there was “dramatic across the board

acceleration and sequential improvement” in the consumer segment; (b) Cisco’s expansion in to this

“market adjacency” was a success and the Company was“extremely well-positioned”; (c) Cisco’s“new

organization structure of councils, boards and working groups” was “operating very effectively”;

(d) Cisco’s “vision, strategy and execution” in the consumer segment were “in great shape and producing

results”; and (e) the Company was “hitting on all cylinders.”

130. Decline in Linksys and Valet router sales . According to CW1, the consumer

division generated $1 billion in revenues in 2009 – $800 million from Linksys (wireless routers

intended for home applications) and $200 million from the Pure Digital Flip business – and there was

a five-year plan to aggressively grow consumer division revenues to $5 billion. Confirming CW1’s

statement, as reported by CNET on April 13, 2011, during the Consumer Electronics Conference in

2009, Chambers said he expected the consumer business to generate between $5 billion and $10

billion over the next few years. He said Cisco was “really committed to this market and we’re putting

the whole company behind it.”

131. CW1 said that Jonathan Kaplan (“Kaplan”) was put in charge of the consumer division

and responsible for growing revenues in accordance with the five-year plan because of his success at

Pure Digital growing Flip revenues from nothing to $200 million in just a few years. In fact, CW1

said that Cisco acquired Pure Digital for its management team because of its proven track record in

growing that company’s revenues. However, CW1 said that actions taken by Kaplan made these

aggressive targets unattainable.

132. In August 2009, CW1 learned that within a few months of the March 2009 Pure

Digital acquisition, Kaplan had halted the development of any new Linksys products – including

products that were currently in development – and also reduced the number of existing Linksys

products already available for sale. CW1 explained that one of the criteria for deciding whether to

eliminate products already for sale was the amount of revenue derived from the product. If a product

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did not achieve a certain amount of revenue, then the Company would `kill it.” CW1 said that the

number of existing Linksys products was reduced by more than 50% in 2009 and 2010. CW1

explained that the reduced number of products meant shelf space at retailers previously dedicated to

Linksys products was empty and was almost immediately filled with products from NetGear,

Linksys’ main competitor. According to CW1, these decisions –and the ineffective communication of

these decisions to customers – caused the Linksys business to almost contract.

133. CW1 described another undisclosed problem with Cisco’s `Valet” line of routers, which

was introduced in April 2010. CW1 said the Valet router was an `awful failure” because it was

marketed as a Cisco product instead of a Linksys product. CW1 described that decision as very ill

advised because Cisco was trying to create a brand out of nothing rather than leveraging the existing

name recognition of the Linksys brand. The Valet router did not sell even after Cisco spent $15

million on TV advertising, the first time the consumer division advertised on TV.

134. CW1 said that sales of the Valet router were also poor because it was originally

marketed as a `home wireless hot spot” device instead of a router, which confused consumers and

retailers. Some retailers believed incorrectly that there might be a monthly fee charged to use the

device, and some retailers did not position the product with other routers in their stores. Shortly

before CW1 left Cisco in February 2011, Cisco changed the Valet packaging to correct these errors

and called it a router.

135. In March 2010, just before the Valet was introduced, the financial press reported that

there were bugs with the router and that it was not an improvement over cheaper alternatives. For

example, on March 30, 2010, Katherine Boehret wrote in The Wall Street Journal that, while trying

to install the Valet onto a Mac, she ran into a bug that the Company was unaware of. The same day,

it was reported in the Financial Times that there were problems setting up the Valet router and that

its `performance was unexceptional” with `no noticeable improvement in speeds or range compared to

[a] $30 802.11 b/g previous generation router.”

136. Internal reports show decline in consumer router sales . CW1 stated that 2010 was a

slow train wreck as the consumer division experienced decreasing revenues and market share.

According to CW1, Linksys’ share of the consumer home networking market declined from 52% in

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2009 to 24% in February 2011 and that the reduction in the number of Linksys products available for

sale was the biggest factor contributing to the decline. CW1 stated that Linksys’ revenue goals were

not being hit and even fell short of revenue goals that were reduced in spring 2010. CW1 said that

weekly “sell-in/sell-through” reports showed ongoing erosion of sales throughout calendar 2010,

including particularly poor sales of the Valet router. A sales operation team and new products

introduction team assembled the data needed to produce the reports that showed the weekly sales of

each product, weekly sales by each retailer and weekly sales by region. The report also showed how

many products were sold to retailers but not sold through to consumers. According to CW1, the

reports were accessible to many individuals in the consumer division and were discussed in

meetings, including quarterly business review meetings attended by virtually everyone in the

consumer division.

137. Kaplan admits problems in March 2010 . CW1 said that there was increasing

pessimism during 2010 at Cisco’s Irvine office, where the consumer division was located, based on

the poor sales performance and the growing sense that the Pure Digital management team – and

Kaplan, in particular – did not understand the business. Beginning in early 2010, CW1 spoke with

many individuals who believed Kaplan’s days were numbered because he could not successfully lead

the consumer division. Kaplan himself acknowledged the problems internally. CW1 attended a

March 2010 “skip-level meeting” in Cisco’s Irvine facility, during which Kaplan admitted to consumer

division employees that he was “too arrogant” in pushing through his plans to change the consumer

business and that he anticipated a decline in market share as a result of eliminating Linksys products.

On February 10, 2011, the day after Cisco reported a 15% decline in consumer revenues in 2Q11,

the Company announced that Kaplan was leaving.

138. Consumer revenue targets reduced in spring 2010 . According to CW1, the revenue

targets for the consumer business were reduced in spring 2010 because the existing targets were not

attainable. Chambers and Calderoni knew about the reduced revenue targets because, as CW1

explained, revenue targets could not be adjusted unilaterally but had to be approved by Cisco’s senior

executives. During business review meetings, CW1 learned that the revenue targets for fiscal 2011

were less than the revenue targets for 2010. The timing and defendants’ knowledge of the reduction

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of the consumer revenue targets described by CW1 is corroborated by Calderoni’s statements during

Cisco’s Annual Financial Analyst conference on September 13, 2011. During that conference,

Calderoni stated that Cisco executives engaged in a “planning process in the spring” where the

executives “work through various scenarios at a high level across the Company deep in with the

business leaders that have responsibility for each of the businesses.”

139. Problems with the Flip digital video recorder . When Cisco purchased Pure Digital

in 2009 for $533 million, it told investors that it was “key to Cisco’s strategy to expand our

momentum in the media-enabled home and to capture the consumer market transition to visual

networking” and that it would take the consumer business “to the next level.” Analysts questioned the

acquisition at the time, Miller Tabak & Co., LLC analyst Alex Henderson, said there was not an

analyst on the planet who thought Flip was a good acquisition for Cisco. Thus, defendants were

motivated to conceal the problems with the Flip and did so until Cisco announced on April 12, 2011

that the Flip business would be shut down.

140. CW1 said that the plan was to increase sales of the Flip digital video recorder by

expanding sales outside the United States but that sales did not meet projections. CW1 noted that

Samsung and Kodak introduced competing products; other competitors included Canon, Sony and

Panasonic. The Flip was also unsuccessful because it was expensive, lacked full HD capture and its

still image abilities were inferior to competing products. Smart phones like the iPhone 4, Droid X

and EVO included multiple functions, such as phone, e-mail, text, internet access and built-in

camcorders that produced video with the same quality as the Flip. A single-function device like the

Flip could not compete, which caused sales to decline. When Apple introduced the iPod Nano in

2009, Steve Jobs made it clear that Apple was targeting the Flip, stating that the company wanted to

get in on the budget-camera business while showing a slide of the Flip. Apple had already released

the iPhone 3GS, which offered video. As CNN reported on April 13, 2011, the slew of smart phones

with video capability made the Flip irrelevant.

141. Data from NPD, a market research firm, corroborates CW1 by showing that Flip’s

revenues and share of the mini-camcorder market declined. As reported by CNET on April 13, 2011,

NPD data showed that overall sales of the Flip increased 5% between 2009 and 2010 and then

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declined 19% in 2010. As a result, Flip’s share of the mini-camcorder market declined from 26% in

early 2010 to 17% in early 2011. During the same time period, Kodak’s market share increased from

5% to 12.8%, and Sony held just under 21% of the market.

142. Problems with Ecosystem initiative . Defendants also knew that Cisco’s Eos business,

a platform that enabled media and entertainment companies to engage online audiences with

interactive social experiences without having to develop and maintain a proprietary web platform

internally, was not meeting economic objectives. Cisco obtained Eos in 2007 when it acquired Five

Across and Utah Street Networks.

143. CW1 said that Kaplan was trying to develop an “ecosystem” venture with other vendors

like Sony whereby a Sony Blu-Ray DVD player would include a Cisco RFI V-chip that would

enable the device to connect to a Cisco network. But CW1 said that the development of this

initiative was longer than expected and missed the original deployment date. CW1 stated that

deployment of some “ecosystem” products was scheduled for the 2010 holiday season – which was

typical for all new consumer products – and meant the products needed to ship by September 2010.

CW1 said that by spring 2010, if not sooner, it was recognized that the ecosystem products would

not be deployed as originally projected. CW1 explained that there were various technical and

functionality issues with the development of chips that were more challenging to resolve than

originally anticipated. In addition, CW1 stated that it was difficult to persuade potential partners to

team up with Cisco because of the Company’s shrinking share of the consumer market.

144. Problems with Telepresence . Cisco introduced its Telepresence corporate

videoconferencing product in 2006. Telepresence was not a consumer product, although in

November 2010 the Company introduced UMI, a consumer product that turned HDTV into a big

videophone. According to CW5, Cisco’s Telepresence business was not performing well, and the

Company was giving away millions of dollars’ worth of Telepresence systems for free. CW5 stated

that Chambers decided to give away certain portions of Telepresence systems to different customers

and hoped they would purchase other portions of the system needed to utilize Telepresence

videoconferencing features. CW5 said Cisco gave Telepresence systems to Duke University and

EMC2 but did not believe those customers or other customers were purchasing additional systems.

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CW5 said that inadequate training of Cisco’s sales staff contributed to the problems with

Telepresence because there were so many products and services Cisco offered that the sales staff did

not sell products they did not understand sufficiently.

145. Defendants publicly admit problems with the consumer business . Defendants

gradually revealed that there were significant problems in the consumer business. On November 10,

2010, Cisco revealed that there was no increase in consumer sales in 1Q11. On February 9, 2011,

the Company unexpectedly announced that orders in the consumer segment declined 15% year-over-

year in 2Q11, that Cisco recorded a $155 million impairment charge in the consumer segment and

that the poor results contributed to the overall decline in gross margins, although that negative news

was overshadowed by the unexpected decline in switching sales and product gross margins.

146. Chambers also stated that higher-end consumer products got crushed, Flip sales

increased 15% year-over-year, not 30% as expected, and the consumer segment was 2% of Cisco’s

business, which meant the annual run rate was less than $1 billion, the amount of revenue generated

in FY09. Ned Hooper acknowledged that the consumer business exited some products, but no one

said anything about the ongoing erosion of Linksys and Valet router sales throughout 2010 and 2011

reflected in the weekly sales-in/sales-out reports, the decline in Linksys’ share of the consumer home

networking market from 52% in 2009 to just 24% in February 2011, the reduction of the consumer

businesses’ revenue target or the problems with various other consumer products.

147. On February 10, 2011, the day after Cisco announced disappointing results in the

consumer segment for the second consecutive quarter, the Company announced that Kaplan was

departing Cisco to pursue other opportunities. During a July 29, 2011 interview on NPR about his

new grilled-cheese-sandwich business, Kaplan stated that he understood the reason Cisco was

shutting down the Flip business was that the consumer division was only generating $1 billion in

revenues.

148. Analysts also reported that the 15% year-over-year decline in the consumer segment

was unexpected negative news. Gelblum reported that the 15% year-over-year decline, the 1%

quarter-over-quarter drag on the gross margin and the 15% year-over-year growth in Flip revenues

were significantly less than Cisco’s 30% target. Oppenheimer analyst Kidron reported that the results

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of the consumer business were a negative but noted, incorrectly, that the problems could be

mitigated relatively quickly. RBC Capital Markets analyst Mark Sue also reported that the consumer

business contributed to the gross-margin decline.

149. In an April 5, 2011 memorandum to all Cisco employees, Chambers admitted that

operational execution was unsound, management had been too slow in making decisions and Cisco

lost the accountability that had been the hallmark of its ability to execute consistently for customers

and shareholders. He wrote that Cisco had “lost some of the credibility that is foundational to Cisco’s

success” and that the Company would take bold steps and make tough decisions that would cause

disruption.

150. The financial press noted the startling admissions. On April 6, 2011, The Wall Street

Journal reported that Chambers “confessed the once highflying technology company has lost its

focus, lacks discipline and needs to overhaul its operations.” Jim Duffy reported that the Chambers

memorandum followed Cisco’s announcement of disappointing results in 1Q11 and 2Q11 and a 33%

decline in the Company’s stock price. He and The Wall Street Journal noted that some analysts

attributed the lackluster financial results over the past two quarters to its ambitious agenda of

targeting 30 market adjacencies to stimulate growth while sales of routers and switches grew

modestly and that there were calls for Cisco to divest some of the new product areas and refocus on

its traditional strengths in routing and switching. It was also reported in The Wall Street Journal that

Cisco’s problems included “ill-judged acquisitions, a byzantine management structure and lost market

share,” which “should have seasick Cisco investors asking whether their ship needs a new captain.”

151. On April 7, 2011 at a Wells Fargo Securities Tech Transformation Summit,

Chambers acknowledged that investors should expect an accelerated exit from some businesses and

changes in operational strategy. On April 12, 2011, Cisco belatedly admitted the failure of several

businesses in the consumer segment. It announced that it was discontinuing the Flip business and

laying off 550 employees, which would result in Cisco recording a pretax charge of $300 million –

more than half the price Cisco paid for the Flip business in 2009. On April 13, 2011, Dow Jones

reported that Cisco’s failure to try to sell Flip despite its generating $317 million of sales in FY10

illustrated how irrelevant the Flip product had become.

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152. In the April 12, 2011 press release, Cisco also announced that it was refocusing the

home networking business (the business CW1 said had declined substantially after Kaplan halted

development of new Linksys products and reduced the number of Linksys products available for

sale) for greater profitability and connection to the Company’s core networking infrastructure.

153. Cisco also announced on April 12, 2011 that the Company was assessing the core

video technology integration of the Eos media solutions business or other market opportunities for

Eos – the business that CW1 said was facing problems in spring 2010. The same day, Dan

Scheinman announced that he was resigning as the head of Cisco’s Eos business and wrote that the

“economics weren’t what we wanted” and were “still 2 years off.”

154. On April 12, 2011, it was reported by the Associated Press that Cisco was

discontinuing sales of UMI through retailers and folding it into the Company’s Telepresence

business. UMI was a device that Cisco started selling in November 2010 for $599 that turned

HDTV into a big videophone. Sales were immediately disappointing, and Cisco slashed prices in

March 2011, along with the monthly service fee, which dropped from $24.95 per month to $99 per

year. In fact, on April 6, 2011, it was reported in PC Magazine that UMI was an “over-priced Skype

video competitor” and “probably the grossest miscalculation in Cisco’s history.”

155. Analysts following Cisco applauded the retreat from consumer businesses but noted

that more should be done. Wedbush Morgan analyst Rohit Chopra stated Cisco could have gone

further by selling the entire consumer segment. Gleacher & Co., Inc. analyst Brian Marshall said the

move was a step in the right direction but not enough. Deutsche Bank analyst Brian Modoff

reported the moves were positive but that Cisco still needed to address fundamental and structural

issues and simplify its management structure from boards and councils to a less wieldy and more

responsive operating team/leader model. Sterne Agee analyst Shaw Wu reported that the moves

were a step in the right direction and that it appeared to be the first of many restructurings.

156. On May 5, 2011, Cisco revealed that it was moving away from many of the consumer

businesses when it issued a press release announcing “significant changes to its business structure and

operations” and a focus on five areas driving the growth of networks and internet core. On May 10,

2011, BGC Partners analyst Collin Gillis reported that Cisco’s foray into consumer products was an

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example of overreaching, which destroyed shareholder value by combining an aggressive acquisition

policy with a stifling internal operational structure.

157. On May 11, 2011, Cisco announced that product orders in the consumer segment

declined 49% year-over-year in 3Q11, and Chambers stated that the consumer business was an area

of concern that was under pressure and that the Company was taking comprehensive actions to

divest or exit underperforming businesses. COO Gary Moore stated that a comprehensive portfolio

review had begun, starting with the consumer businesses, and that decisions would be made in the

months and quarters ahead.

158. On May 13, 2011, MarketWatch reported that Cisco’s Linksys routers were

“ridiculously more expensive than the competition” and that the Company’s mid-level video-

conferencing product was extremely expensive, especially when compared with the free service

offered by Skype. On May 23, 2011, Cisco announced it was discontinuing Eos. On July 18, 2011,

the Company announced it was laying off 11,500 employees, including 5,000 who worked in the set-

top box manufacturing facility in Juarez, Mexico. After reporting consumer product orders during

the Class Period, Cisco stopped reporting consumer orders in November 2011, which reflected the

failures and the wholesale retreat from the consumer line of businesses. By the time of Cisco’s

September 13, 2011 Annual Financial Analyst conference, COO Gary Moore stated that the

Company had exited ten businesses and reduced its investment in six others.

Defendants Knew Cisco Was Masking Declines in the Cable Set-Top Box Business by Providing Customers with Huge Price Discounts to Pull in Orders from Future Quarters

159. Information provided by former Cisco employees and statements by defendants and

the Company in November 2010 strongly suggest that defendants knew Cisco was not “extremely

well-positioned” in this “key product categor[y]” and that the reported 20% increase in service provider

orders in 2Q10 was materially misleading and was not “one of the most robust positive turnarounds

[Chambers had] seen in [his] career.” Defendants knew orders for set-top boxes were caused by huge

price discounts that masked problems until November 2010, when Cisco reported a 40% decline in

cable set-top box orders in 1Q11.

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160. As Chambers stated during the November 10, 2010 conference call announcing 1Q11

results, service provider orders increased more than 20% in each of the last three quarters in FY10

and then only increased 8% in 1Q11. That decline, Chambers explained, was caused by a 35%

decline in orders for traditional set-top boxes, including a 40% decline in the North American cable

business, which accounted for a majority of the business. Chambers claimed the 35% decline was

due to reductions in consumer spending and a transition from traditional set-top boxes to IP-based

set top boxes and admitted that `we saw the transition coming.”

161. Information provided by former Cisco employees establishes that another undisclosed

reason for the decline in cable set-top box orders was Cisco’s persuading cable companies to order

more set-top boxes than they needed, which resulted in the channel stuffing and the precipitous drop

in orders in 1Q11 and 2Q11. CW3 was responsible for entering new orders into Cisco’s computer

system and stated that it was a prevailing practice at Cisco to offer customers huge discounts to pull

in orders from future quarters and to compete with Asian companies that were selling set-top boxes

for lower prices. The last month of the quarter was particularly important, according to CW3,

because there was always a major push to recognize as much revenue as possible on existing

bookings and to pull in orders from future quarters. Immediately after the end of the quarter, the

goal was to work with customers to get new orders. CW3 also said there was a `big push” to load up

customers at the end of FY10, the last quarter Cisco reported greater than 20% order growth. CW4,

the former manager of worldwide channels finance, also said Cisco provided steep discounts and

stated that various participants at weekly meetings in 2010 and 2011 expressed frustration that Cisco

had to extend large discounts to win business.

162. CW3 said that the practice of lowering prices to pull in orders from future periods

risked major problems in the future if Cisco was unable to replace the orders and that the `hope” was

that Cisco’s good relationship with its customers would enable the Company to replace future orders

pulled into earlier quarters. But CW3 stated that Cisco was essentially `robbing Peter to pay Paul” by

pulling in orders through price discounts and that there was no way Cisco could continue to hide the

challenges facing the cable set-top box business. CW3 also reported that Cisco’s practice of

extending large discounts had a negative impact on the margins on sales of set-top boxes. CW3 said

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that Cisco offered even more significant price discounts after the Company reported the decline in

1Q11 orders on November 10, 2010, which caused future revenues to be even lower for customers

that placed orders. According to CW3, other customers were not submitting new orders and were

canceling existing orders.

163. The reported increases in cable set-top box orders prior to November 2010 was also

misleading because, as CW3 and CW4 explained, revenues eventually recognized on the discounted

orders were even less than the discounted amount. CW3 said that the full amount of an order was

entered if the set-top boxes would be shipped within 90 days even though the price of the order

would be reduced when the set-top boxes were actually shipped. CW3 said that Cisco tried

unsuccessfully to get customers to increase their orders given the practice of lowering prices

between the order date and the shipment date. As a result, the dollar amount of bookings exceeded

the amount of revenue that would eventually be received.

164. The reported increases in cable set-top box orders prior to November 2010 was also

misleading because, as CW3 stated, forecasted orders for all set-top boxes in FY11 were only $1.2

billion, including $475 million from Scientific Atlanta and $725 million from Classic Cisco.

Moreover, CW3 said the $475 million forecast from Scientific Atlanta was 30% higher than

revenues recognized in FY11 because of the “price erosion” between the date the order was booked

and the shipment date and that the Classic Cisco $725 million forecast was 17% higher than

revenues recognized in FY11 due to a lack of sales and new orders.

165. Information provided by CW5, the services portfolio analyst who prepared reports on

the growth of Cisco’s services portfolio, also indicates that the amount of revenue recognized on

contracts was less than the amount of the order and that there were problems at Scientific Atlanta.

According to CW5, groups within Cisco that were responsible for different elements of multi-

element contracts were individually claiming credit for an amount of revenue that collectively

exceeded the contract amount and the amount of service revenue Cisco reported. As a result, CW5

explained, the reports based on the information received from the various groups reflected growth

that was greater than actual growth. CW5 also reviewed Scientific Atlanta information obtained

from Cisco’s finance organization that CW5 said was consistently poor, did not show growth and was

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getting worse. CW5 stated that Scientific Atlanta had reported losses since Cisco acquired it in 2006

and that Cisco employees often asked why the Company purchased Scientific Atlanta when it was

consistently operating at a loss.

166. CW3 said that Cisco was lowering prices to pull in orders from future quarters when

demand for cable set-top boxes was declining as a result of consumers abandoning cable television

service in favor of alternative forms of connectivity. According to CW3, Cisco’s major set-top box

customers – AT&T, Verizon, Comcast, Time Warner, Cox Communications and Cablevision – were

all facing huge challenges due to this market transition. CW3’s customers included Comcast, Time

Warner, Cox Communications and Cablevision and CW3 said that Time Warner was having the

biggest problems followed by Comcast.

167. CW2 said that the set-top box business was declining before CW2 left Cisco in July

2009 because new competitors like Samsung, Huawei and others were entering the field that was

previously dominated by Scientific Atlanta and Motorola. Additional factors contributing to the

decline, according to CW2, were threats from new kinds of electronic entertainment media services -

including Netflix, Hulu and Apple TV – and threats from new kinds of media devices like iPhones

and other mobile devices that included video and other entertainment applications. According to

CW2 the increased competition and new kinds of media devices and services caused consumers to

cancel their cable TV subscriptions. These trends were included in the reports CW2 prepared

including one report in which CW2 wrote that the iPhone was “disrupting the entire landscape” for set-

top boxes and non-mobile technologies.

168. CW6, the Scientific Atlanta financial analyst from February 2007 to October 2010,

said that in late 2008 cable companies were reducing their capital expenditures by purchasing

products from lower-cost Asian competitors like Samsung. CW6 also said that before and during

summer 2010, cable operators were losing subscribers and discussed the decline with sales and

marketing personnel at Scientific Atlanta. According to CW6, these two trends did not improve

before CW6 resigned in October 2010. Further, CW6 confirmed that, during 2010, the Scientific

Atlanta division of Cisco provided significant incentives, such as price discounts, so customers

would accelerate and increase the quantity of their purchases. CW6 said the incentives became more

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elaborate as the year progressed, including significantly lower prices that had a negative impact on

gross margins.

169. CW7, the Commercial Finance Solutions Group employee responsible for reviewing

proposed sales transactions with cable operators, stated that cable set-top box orders declined in

2009 and 2010, in part due to lower-cost Chinese competitors like Huawei. CW7 also helped with

the management of ongoing contract negotiations and stated that several customers did not renew

their set-top box contracts, including Time Warner and Comcast, which did not renew their contracts

in 2009, and Cox Communications, which informed Cisco it would not renew its set-top box

contract in 2008. CW7 said that large orders began to decline in 2009 and that large deals that did

get done in 2009 and 2010 were very steeply discounted. According to CW7, one deal with

Cablevision that should have been priced at $500,000 was still being negotiated when CW7 left the

Company in October 2010; at that time, the Cisco salesperson was quoting a price of $75,000.

170. The steep decline in the number of deals CW7 processed over time also reflected the

decline in demand from cable operators. CW7 said that the number of deals CW7 processed

declined from about 12-15 deals per day in 2007 and 2008 to just about eight deals per week in

2010. CW7 noted that another sign of the decline in set-top box orders was the decline of personnel

at the Lawrenceville, Georgia facility, which CW7 said was nearly empty when CW7 left the

Company in October 2010.

171. Declines in cable subscribers . Reductions in cable subscriptions corroborate CW3-

CW7 and strengthen the inference that defendants knew the reported 20% increase in service

provider orders was misleading. On August 23, 2010, GigaOm reported that cable companies lost

711,000 subscribers in 2Q10, which represented the biggest quarterly loss in cable television history.

In a November 4, 2010 article titled “Big Cable Is Bleeding,” GigaOm reported that subscriptions

declined another 518,300 in 3Q10 at four of the five largest cable companies. Comcast reported a

decline of 275,000 subscribers, Time Warner a 155,000 decline, Charter a 63,800 decline and

Cablevision a 24,500 decline. The actual decline was probably higher because Cox

Communications, the third largest cable company, did not publicly disclose the change in

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subscriptions. GigaOm also reported that the trend was expected to continue because cable

companies were increasing bills at an incredible rate.

172. Analysts’ reactions to the unexpected decline in set-top box orders . Analysts’

reactions to the unexpected decline in cable set-top box orders announced by Cisco on November 10,

2010 strengthen the inference that defendants knew about the problems earlier. As Morningstar

Equity Research analyst Joseph Beaulieu wrote in a November 11, 2010 report, the question-and-

answer session between management and analysts was “fairly contentious.” The first question during

the November 10, 2010 conference call was from Sanford C. Bernstein analyst Jeff Evenson, who

noted that Cisco repurchased 110 million shares during the quarter versus the 40 million shares

defendants stated Cisco would repurchase during the May 2010 conference call, and he asked if it

indicated anything about when defendants realized the quarter was going to be weaker than they

thought three months ago.

173. The next question came from RBC Capital Markets analyst Mark Sue, who asked

Chambers how Cisco missed the cable MSO transition that caused the decline. Chambers admitted

that he and Calderoni “saw the transition coming” and had made changes in management at Scientific

Atlanta. Morgan Stanley analyst Ehud Gelblum noted that Chambers said the quarter unfolded as

expected but also said that orders were $500 million less than projected and asked if management

knew about the shortfall before or after Cisco’s September 2010 analyst day. UBS analyst Nikos

Theodosopoulos stated that significant reset related to the decline in cable orders and public sector

orders was surprising because, in the past, at Cisco such resets were typical during big macro

changes and that it was a pretty significant reset when the rest of the industry was not seeing it.

Chambers conceded that the “challenge [was] fair.”

174. After the conference call, Morgan Stanley analyst Gelblum issued a report on

November 11, 2010, in which he wrote that management attributed the set-top box shortfall to the

sluggish housing market, which was “an explanation we [found] difficult to fathom as the housing

glut has been overhanging the entire market for nearly two years now.” He also noted that Motorola

reported during its earnings call two weeks earlier that cable set-top box orders would increase the

following quarter. Oppenheimer analyst Kidron wrote in a November 11, 2010 report that

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management’s contention that the problems reported during the conference call were temporary air

pockets “will undoubtedly raise questions as to the real root cause of the weakness.”

175. In a November 11, 2010 report, Argus Research Company reported that Chambers

made conflicting statements during the conference call by stating that the quarter “proceed[ed] largely

as we anticipated” and also stating that management was surprised by the order shortfall. Jefferies

analyst William Choi wrote in a November 10, 2010 report that the lowered guidance resulting from

the problems in the public sector and service-provider businesses was “puzzling” for a company that

would “typically set guidance and [met].” Raymond James analyst Todd Koffman reported that the

sharp adjustment in cable orders was “very surprising.”

176. Magnitude of the declines in cable set-top box orders . The size of the cable set-top

box business, the magnitude of the order decline and the 20% growth in orders in the previous three

quarters also indicate that defendants knew about the order declines. As Chambers acknowledged

during the November 10, 2010 conference call, defendants knew that the U.S. service provider

business had order growth rates in the last three quarters of FY10 in excess of 20% and that the set-

top box business generated $2 billion of annual revenue.

177. After reporting the substantial declines in set-top box orders during the November 10,

2010 conference call, on February 9, 2011, Cisco reported that the set-top box business continued to

be challenged, as reflected by a 15% decline in orders and a 29% decline in cable set-top box

revenues to an annualized run rate of approximately $1.6 billion. Calderoni stated that Cisco

“provid[ed] financing to customers and channel partners, enabling incremental sales of Cisco

products, services and networking solutions,” but said nothing about the huge price discounts that

caused set-top box orders to plummet 40% in 1Q11 and 15% in 2Q11 after increasing more than

20% in 2Q10, 3Q10 and 4Q10.

178. Morgan Stanley analyst Gelblum reported that cable set-top box orders declined 15%

year-over-year; set-top box revenues declined 11% year-over-year – including a 29% year-over-year

decline in cable set top box revenues; and the annual run rate for set-top box revenues declined from

$2 billion to $1.6 billion, “barely a whisper above the $1.52B in settop box revenue that Scientific

Atlanta generated in CY 2005.” By contrast, Motorola reported a 1% year-over-year increase in set-

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top box revenues. RBC Capital Markets analyst Mark Sue reported that the 15% year-over-year

decline showed that the business continued to be challenged, and Oppenheimer analyst Kidron

reported that the orders remained weak.

Defendants Knew of the Concealed Problems with Cisco’s Businesses from Their Receipt of Internal Reports and Their Admitted Frequent Meetings with the Company’s Customers

179. Defendants also knew that switching and router sales and gross margins would

decline, that demand for cable set-top boxes had declined (but were masked by the price discounts),

and that sales in the consumer segment were substantially less than forecast from their receipt of

internal reports and their close relationship with Cisco’s customers. Chambers repeatedly stated that

he and other Cisco employees routinely met with customers. During the February 3, 2010

conference call, Chambers discussed the World Economic Forum at Davos, where he “interfac[ed]”

with and received feedback about Cisco’s business from over 100 key customers, government

leaders, and industry subject matter experts.

180. At the February 8, 2010 Thomas Weisel conference, Tony Bates, Cisco’s senior vice

president and general manager of enterprise, commercial and small business, stated that Cisco had

the largest set of customers and partners, reaching 210,000 salespeople around the world through its

global partner program, and that Cisco held an annual CIO summit where the Company’s top

executives met with the top 100 CIOs from Fortune 500 companies. At the March 10, 2010

Wedbush Morgan Securities Management Access conference, Soni Jiandani, Cisco’s vice president

of marketing in the Storage Technology Group, stated that Cisco spent an “immense amount of time

with both our medium-sized customers and our large customers.”

181. During Cisco’s May 12, 2010 conference call, Chambers stated that Cisco had

“dramatically improved customer relations as a trusted technology and business partner.” He said that

he traveled around the world to meet with Cisco’s 1800-strong partner community and recently

attended a global technical advisory session with 30 of Cisco’s largest customers, service providers

and enterprise customers and that the goal was to meet with the Company’s top 1000 customers. At

the May 18, 2010 JPMorgan Technology, Media and Telecom conference, Cisco’s Chief Technology

Officer, Bob McIntyre, stated that he spent 60 to 70% of his time with customers. During the June 9,

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2010, RBC Capital Markets North American Technology, Media & Communications conference,

Worldwide Channels senior vice president Keith Goodwin said that Cisco executives talked to

customers“every day.”

182. During the August 11, 2010 conference call, Chambers told investors that Cisco had

more “high-level relationships with CEOs and CIOs develop at a very detailed level in the last year

and a half than we have had in the entire prior decade in terms of their relationship with Cisco,”

which spoke to the “rapidly changing role of Cisco in our customer accounts.” In fact, Chambers

acknowledged he was receiving “mixed signals” from customers. He emphasized that Cisco’s

relationship with its customers was “moving from being a box player or a router or a switcher –

switching to really a key business partner, a trusted technical advisor.”

183. During the Deutsche Bank European Technology, Media and Telecommunications

conference on September 9, 2010, Phil Smith, the CEO of Cisco UK & Ireland, stated that the

Company talked to “all the big customers. We’re inside all those big customers.” According to a

November 1, 2010 article in Treasury & Risk Breaking News , Calderoni stated that Cisco leveraged

technology to “get real-time information across the company, so we can make better and faster

business decisions,” and that Cisco could “close our financials monthly and quarterly in four hours.”

184. As reported in the proxy statement filed with the SEC on November 18, 2010, Cisco

also conducted annual customer satisfaction surveys because executive compensation was based, in

part, on meeting certain customer satisfaction metrics.

185. During a CEO/CFO fireside chat on December 9, 2010, Chambers said that he

received feedback from all of Cisco’s executives and customers: “we shoot our communication to the

employees. We get their feedback. I read every one of the hundreds and hundreds of individual

comment feedbacks . . . . We do that with our executives. . . . We do the same thing with the

customers.”

186. As Calderoni explained during the February 15, 2011 Goldman Sachs Technology &

Internet conference, Chambers also required Cisco’s senior executives to meet with the Company’s

customers and kept a scorecard that tracked those meetings. Calderoni stated that he had numerous

meetings with CIOs and CFOs over the past few weeks.

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187. During the March 15, 2011 Lazard Capital Markets Technology & Media conference,

Charles Carmel, Cisco’s Vice President of Corporate Business Development, stated that “bringing that

customer feedback into the mix and stirring it around and helping inform the strategy is an important

part of what we do.”

188. Cisco’s senior executives, including Calderoni, also interacted with customers through

its “executive briefing centers.” During the April 7, 2011 Wells Fargo conference, Chambers said that

in March 2011, Cisco held a session with the top 45 CEOs in the world which gave him “the best

exposure to customers at the CEO level, at the CIO level, at the partnering level and also at the

technical engineering level that you get during the course of a year.”

189. During Cisco’s Annual Financial Analyst conference on September 13, 2011,

Calderoni disclosed that Cisco executives were “customer executives,” which meant they worked “very

close” with the customers’ executive team, including the CEO, CFO and CIO. He also said that Cisco

executives engaged in a “planning process in the spring” where the executives“work through various

scenarios at a high level across the Company deep in with the business leaders that have

responsibility for each of the businesses.”

190. The financial press also noted Cisco’s close customer relationships and how it allowed

the Company to avoid reporting surprises. In a November 12, 2010 report, Edward Zabitsky of ACI

Research wrote that Cisco “had the most sophisticated customer feedback loop I have ever seen in

any business. Part of that customer feedback loop is the sales pipeline. Another part is their

extensive C-level contacts.” It was reported in Optical Networks Daily that Cisco typically reported

quarterly sales “on the knuckle” and EPS a penny ahead of guidance because the Company had no

greater than 10% customers, a broad product line, a very wide range of customers, a reasonable

geographic distribution and a disciplined market intelligence system via its numerous channel

partners.

191. Former Cisco employees also described various reports that included the concealed

problems and meetings during which the problems were discussed. CW1 described weekly “sell-

in/sell-through” reports prepared by the Sales Operation team and New Products Introduction team

that showed the weekly sales of each type of consumer product by each retailer and region and the

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amount of each type of product that retailers had not sold. CW1 said these reports showed an

ongoing erosion of Linksys and Valet router sales throughout calendar 2010. CW1 stated the reports

were accessible to many employees in the consumer division and were discussed during quarterly

business review meetings attended by virtually everyone in the consumer division and during sales

and marketing department meetings that occurred every two to three months. CW1 also said there

was a forecast prepared for the consumer segment which was lowered in spring 2010 when it

became apparent that forecasted results would not be met.

192. CW2 prepared reports every other month that identified the future direction of the

market, actions by Cisco’s competitors and proposals for Cisco to counter its competitors. CW2 said

that the reports included projected sales and margins of Cisco’s competitors and that other reports

prepared by the Pricing Group included projected sales and margins of Cisco’s products. CW2 said

the reports were submitted to members of the Service Provider committee which was comprised of

senior vice presidents in sales, engineering and marketing and that a member of the Service Provider

committee attended Cisco’s executive committee meetings that were also attended by Chambers. The

reports prepared by CW2 disclosed that competitors, including HP, were taking market share away

from Cisco in 2009 by lowering prices and that the set-top box business was in decline in 2009 due

to increasing competition and new kinds of electronic entertainment media services and devices.

193. CW3 said there was a forecast for the set-top box business that projected $1.2 billion

of orders in FY11 which was less than the forecast for FY10. CW3 also said the forecast could not

be met because demand for set-top boxes had declined as a result of the huge discounts Cisco

provided to pull in sales from future quarters, increasing competition, the availability of new kinds of

electronic entertainment media services and devices and declining cable TV subscriptions. CW3

also said that the Scientific Atlanta division also prepared a forecast and financial reports that CW3

reviewed and that the financial data for Scientific Atlanta was merged into a consolidated set of

financial data for the entire set-top box business.

194. CW4 provided reports and analysis to the controllers for each business segment who

were the key players in developing and managing forecasts for their business segment. CW4 said

the forecasts were discussed during weekly forecast calls run by the controllers and attended by

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various members of their business segment and that the goal of the meetings was to determine how

much revenue could be achieved in the upcoming quarter. CW4 stated that various participants at

the weekly meetings in 2010 and 2011 expressed frustration that Cisco had to extend large discounts

to win business.

Contrary to Chambers’ Statements During the February 3, 2010 Conference Call, Cisco’s Organizational Structure Slowed Decision-Making and Was Ineffective

195. Defendants admit Cisco’s organizational structure is ineffective . Defendants

belatedly admitted that Cisco’s organization structure of councils, boards and working groups was not

operating very effectively, as Chambers represented. In an April 5, 2011 memorandum to all Cisco

employees, Chambers admitted that operational execution was unsound, management had been too

slow in making decisions and Cisco lost the accountability that had been the hallmark of its ability to

execute consistently for customers and shareholders. He wrote that Cisco had “lost some of the

credibility that is foundational to Cisco’s success” and that the Company would take bold steps and

make tough decisions that would cause disruption.

196. As alleged above, the financial press noted that the admissions contradicted

defendants’ statements during the Class Period. On April 6, 2011, The Wall Street Journal reported

that Chambers “confessed the once highflying technology company has lost its focus, lacks discipline

and needs to overhaul its operations.” Jim Duffy (“Duffy”) reported that the Chambers memorandum

followed Cisco’s announcement of disappointing results in 1Q11 and 2Q11 and a 33% decline in the

Company’s stock price. Duffy and The Wall Street Journal noted that some attributed the lackluster

financial results over the past two quarters to its ambitious agenda of targeting 30 market adjacencies

to stimulate growth while sales of routers and switches grew modestly and that there were calls for

Cisco to divest some of the new product areas and refocus on its traditional strengths in routing and

switching. It was also reported in The Wall Street Journal that Cisco’s problems included “ill-judged

acquisitions, a byzantine management structure and lost market share,” which “should have seasick

Cisco investors asking whether their ship needs a new captain.”

197. On April 7, 2011, Chambers stated that investors should expect an accelerated exit

from some businesses and changes in operational strategy. On May 5, 2011, after Cisco had

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reported unexpected negative news in two consecutive quarters, the Company announced “significant

changes to its business structure and operations” that would “streamline” its sales, services and

engineering organizations. Chambers acknowledged that the Company’s existing organization

structure was not operating effectively, stating, “it’s time to simplify the way we execute our strategy.”

198. The financial press applauded the changes and noted they were necessary. On May 5,

2011, it was reported in the Silicon Valley Business Journal that Chambers was “shaking up

management units as the company copes with slumping stock and a recent exodus of top executives.”

The same day, Dow Jones reported that Cisco was switching to a streamlined operating model “as the

struggling networking giant looks to refocus operations and simplify its oft-criticized management

structure” and that the move came “after Chambers conceded in a memorandum last month that the

company had suffered a lapse in operational execution, and had confused customers and

disappointed investors.”

199. On May 7, 2011, Bloomberg reported that Cisco was “overhaul[ing] a management

structure that investors and former employees say slowed decisions, fueled market-share losses and

led to an exodus of senior executives.” Robert Ackerman, founder of Allegis Capital, which sold

three companies to Cisco, said that Cisco had “a culture that frustrates talented people” that “feel[] like

they’re beating their head[s] against the wall.” The Bloomberg News article noted the problems

caused by the old structure that Chambers repeatedly claimed was operating very effectively during

the Class Period.

Chambers set up the councils to support his push into more than 30 new markets, including computer servers, consumer video conferencing gear and corporate social-networking software. Unlike the traditional command-and-control management structure Cisco used to have, a series of interlocking councils would have the authority to tap resources from around the company without having to wait for Chambers’ approval.

* * *

Yet by requiring employees to petition groups of people for department budgets, the councils slowed decision making, said former employees and other people familiar with the matter. It left managers without full control of units, said the people . . . .

200. Bloomberg also reported that numerous executives left the Company due to the

organizational structure, including Debra Chrapaty, Cisco’s former senior vice president of Cisco’s

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collaboration software group; Dan Scheinman, the former mergers and acquisitions chief; Nawaf

Bitar, a vice president in the security division; Mike Volpi, a senior vice president in charge of

Cisco’s router and service provider groups; Charles Giancarlo, Cisco’s development chief; and

Jayshree Ullal, the head of Cisco’s data center business. Others believed the changes did not go far

enough. In a May 6, 2011 report, Deutsche Bank analyst Brian Modoff wrote that Deutsche Bank

“remain[ed] concerned about the company’s management structure” and “should have eliminated the

‘boards and councils’ entirely and further streamlined their organizational structure.”

201. During Cisco’s May 11, 2011 conference call, Chambers again acknowledged that

Cisco was “streamlining our organization and overhauling our business model dramatically” to address

“problematic areas.” He said that Cisco had “aggressively addressed our organization and operating

model . . . by appointing a COO; second, by reorganizing major functions of sales, engineering and

services; third, moving away from a broad Council & Board structure, implementing clear decision-

making responsibilities . . . ; and finally, continuing to streamline operations across the Company.”

202. During the Company’s annual Cisco Live! convention on July 12, 2011, Chambers

said that he was overhauling the Company to make it more agile and responsive to consumers and

admitted that there were areas in which the Company must do better, that Cisco was too complex

and lost focus as it expanded into numerous other tech markets and that the sales and engineering

groups were pretty top heavy.

203. The financial press again noted that Chambers had admitted problems that

contradicted his statements during the Class Period and appeared to be ready to address them.

Seeking Alpha ’s Cameron Kaine, who recently called for Chambers’ resignation, reported on July 13,

2011 that Chambers’ promise to decisively streamline Cisco’s operations and speed up decision

making was an admission of what many had been saying all along – that it was time to cut the fat.

204. On July 18, 2011, Cisco announced that it would reduce its workforce by

approximately 6,500 employees, or 9%, and recognize a restructuring charge of $1.3 billion, as part

of its continued implementation of a comprehensive action plan to simplify the organization, refine

operations and reduce annual operating expenses. It also announced that it was selling the set-top

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box manufacturing facility in Juarez, Mexico, which would reduce the work force by another 5,000

employees.

205. On August 10, 2011, when Cisco reported its 4Q11 and FY11 results, Chambers

stated that, since the last earnings call, Cisco had “moved very rapidly on our plan to simplify

operations and focus on our operating model and align our investments . . . to reinforce our ability to

execute on our strategy.” He stated that Cisco was “simplifying and focusing our organization and

operating model” by “reorganiz[ing] our sales, engineering, services and operations organization,

providing clear line of sight, accountability, accelerating the speed of decisions, driving toward

major improvements in productivity, and driving innovation at a faster pace.” He also said that the

Company had aligned its cost structure given the transitions in the marketplace and was well into the

implementation of reducing operating expenses by $1 billion.

206. Chambers said that Cisco was divesting, cutting back or exiting underperforming

operations and had made changes across engineering to create simplified organizational structures

that allowed for faster innovation and simplicity in the decision process. He stated that Cisco would

continue to accelerate and drive through the simplification process at an even faster pace and that the

changes made and to be made were dramatic and would continue for several years.

207. COO Gary Moore stated that Cisco had taken “swift action designed to simplify the

operating models of the Company within each organization . . . sharply reduced our boards and

counsels and appointed clear and accountable leadership” and “chang[ed] our processes to reduce

duplication and increase our execution speed.”

208. At Cisco’s September 13, 2011 Annual Financial Analyst conference, Chambers said

that Cisco was in the third stage of “development simplification” and that the Company “need[ed] to

have consistency in innovation, consistency in operations.” He admitted that Cisco was “fat” with “an

extra 4 or 5 inches around the waistline” during the Class Period and that it “slowed decision making

down” and caused Cisco to “[get] away from the basics.” Chambers provided examples, stating that

there were “multiple engineering functions, multiple operating system functions, multiple groups

actually competing with each other on switching and routing” that had recently been combined. He

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stated that the 23,000-person sales force had been “realigned completely,” with 90% rather than 70%

now in the field, and that 12,700 people had exited the Company.

209. COO Moore also stated that Cisco had “gained a few inches around the waist,” had

“become fairly complex relative to allowing people to actually work with one another – get decisions

made quickly; respond to customers” and was “losing in the marketplace because of that complexity.”

He stated that Cisco had exited ten businesses, reduced its investment in six others and reduced the

time it took to approve some deals by 70%.

210. Former employees state organizational structure was ineffective . Former Cisco

employees also stated that the new organizational structure that Chambers initiated in 2007 and

touted during the Class Period was a disaster. CW1 said that decision-making in the consumer

segment was extremely slow because there were hundreds of products and virtually every decision

had to be reviewed and approved by Kaplan.

211. CW2 stated that the committee-based organizational structure at Cisco slowed

decision-making. CW2 also said that each of the Company’s main customer segments (enterprise,

commercial, consumer, public sector and service provider) had a business development manager for

sales, engineering and marketing but that it was difficult to collaborate or communicate with them.

CW2 said the lack of communication and collaboration reflected a pervasive attitude among Cisco

employees of not wanting to assist personnel outside their immediate areas of responsibility.

212. CW3 stated that Cisco management was slow in reporting internal challenges because

the Company was organized into numerous silos that often had little interaction with one another.

CW4 said that Cisco had an excessively complex and unwieldy organizational and management

structure that resulted in duplication of work, a lack of clarity about who was responsible for

different matters and slow decision making. CW4 also said that Cisco had numerous committees

responsible for different functions that greatly slowed down decision-making.

213. CW5 stated that there were multiple layers of management, high turnover amongst

vice president level managers, vaguely understood responsibilities and numerous committees

responsible for different functions. CW5 observed managers throughout the Company constantly

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fighting over getting credit and not cooperating or working together to solve problems even when it

was recognized what needed to be done.

Chambers’ Sale of $97 Million of Cisco Stock Days After the February 3, 2010 Conference Call Strengthens the Inference He Knew About the

Concealed Problems with Cisco’s Business and the Falsity of His Statements

214. Shortly after making the false positive statements about Cisco’s business on February

3, 2010, Chambers sold 4 million shares of his Cisco stock for $97 million on February 8, 2010 (2.2

million shares for $52.2 million) and March 5, 2010 (1.8 million shares for $45 million). Prior to

these sales, from January 2009 through January 2010, Chambers only sold 500,000 shares for $11.4

million (400,000 shares in August 2009 and 100,000 shares in November 2009). The dramatic

increase in Chambers’ sales strongly suggest he knew the stock price was artificially inflated by his

(and Calderoni’s) false positive statements. During 2Q10, Cisco spent $1.5 billion to repurchase 63

million shares of the Company’s stock.

215. Some individuals questioned the suspicious timing of the sales. On March 9, 2010,

Brad Reese, who wrote an “On Cisco” blog for Network World , reported that Chambers had sold 4

million shares for $97.2 million pursuant to a Rule 10b5-1 trading plan and that the SEC was trying

to determine if Rule 10b5-1 plans were used to circumvent insider-trading rules because research

showed such sales were more likely to happen before price declines. On May 13, 2010, he again

wrote about the sales and noted they came just days after he reported that Cisco’s receivables had

increased by $1.344 billion from 2Q09 to 2Q10 while sales increased just $726 million and that

Chambers “demonstrated perfect timing executing his insider Cisco stock trades.” On May 17, 2010,

he wrote that Chambers’ insider sales appeared to demonstrate his lack of true conviction that Cisco’s

stock price would appreciate in value.

C. May 12, 2010: Chambers and Calderoni Reiterate that the Game Plan Is “Hitting on All Cylinders,” Cisco Is “Gaining Market Share” and the Company’s Expansion into Market Adjacencies Is “Exceeding . . . Expectations” – Less Than a Week Later, Chambers Sells Another $31 Million of Cisco Stock

216. On May 12, 2010, Cisco issued a press release and held a conference call to report

3Q10 results, and defendants continued to mislead investors by concealing the adverse information

detailed in ¶¶79-213, falsely representing that Cisco was successfully expanding into more than 30

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market adjacencies while gaining market share in the core routing and switching businesses and that

the Company’s organization structure was operating very effectively. Defendants made the following

misleading statements in the press release:

`Our financial results were outstanding, achieving record level revenue and earnings per share results. We witnessed a return to strong balanced growth across geographies, products and customer segments that we haven’t seen since before the global economic challenges began. We emerge from this downturn gaining market share, a larger share of the total wallet spend of our customers, dramatically improved customer relations as a trusted technology and business partner, and having next generation products in almost every product category. It is clear that our game plan for how to handle economic downturns is hitting on all cylinders ,” said John Chambers, chairman and CEO of Cisco.

Chambers continued, `Our innovation and operational engines are exceeding our expectations. This applies to products, organization structures, business models, and movements into 30+ new market adjacencies. From almost every measurement perspective – revenues, earnings per share, new products, successful acquisitions, internal startups – our results in Q3 were the proof points that our strategy is working and was probably the strongest quarter in our history .”

217. During the conference call, Chambers and Calderoni misled investors by reiterating

the false statements included in the press release and making other statements that reinforced the

false impression that Cisco was successfully diversifying into new market adjacencies while still

maintaining revenue growth and market share gains in traditional areas:

There are three key takeaways , in my mind, for the quarter. First, Q3, in my opinion, is the proof point to having achieved our goals and aspirations in terms of how we handled very challenging economic times. We emerged from this downturn gaining market share, a larger share of the total wallet spend of our customers, dramatically improved customer relations as a trusted technology and business partner, and having next generation products in almost every product category .

Second, our innovation and operation engine is hitting on all cylinders. This applies to products, organization structure, business models and movements into 30-plus new market adjacencies .

And third, from almost every measurement perspective , whether revenues, earnings per share, new product introductions, successful acquisitions, leading and economic challenges, internal start-ups and many more, this quarter was probably the strongest we’ve had in our history .

In summary, our game plan for handling economic downturns hit on all cylinders . Q3 results are the proof points and was, in my opinion, the strongest across the board quarter in our history.

218. Chambers further misled investors by stating that `[o]ur new innovative, dynamic

network organization structure of councils, boards and working groups, as discussed in the last

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few calls, is operating very effectively and has been an important part of managing through the

recent downturn and then positioned us for the acceleration of results achieved in Q3. These

structures allow speed, scale, flexibility and rapid replication .”

219. Chambers also highlighted the complete enhancement of Cisco’s product lines and the

rapid growth of new technology sales, which was misleading because it concealed the fact that sales

of these newer products would cause revenues and gross margins to decline because sales of the

lower-priced and lower-margin products were cannibalizing sales of higher-priced and higher-

margin technology products:

During the last year we have completely enhanced our routing, switching, advanced technology and consumer product lines . Growth in terms of orders were all approximately 25% or better year-over-year, and the new products such as our Nexus product family, our ASR product family, new fixed-switching of the 2K[s] and 3Ks are all producing growth results at the high end of our expectations .

The details supporting the new product success is really impressive. The following is a quick summary of year-over-year growth rates for these new products. The Nexus 2000 is up 431%. The Nexus 5000 is up 315%. The Nexus 7000 is up 277%. ASR 9000 is up almost 900% . . . .

In terms of this quarterly sequential growth, . . . the ASR 5000 grew 243%, the ASR 9000 grew 110%, the ISR G2 grew 337%, the ISR 1900 grew 333%, the 2900 ISR grew 335% and the 3900 ISR grew 342%. That’s probably as fast as we’ve ever done with new products in terms of rapid ramp up for the next generation.

Obviously, both our next generation product introduction pace and rapid customer acceptance of these new products across our entire product line is extremely strong, in my opinion, in fact, the best we’ve seen in the history of our country in terms of breadth and depth of the innovation engine with solid operational execution. Again, I would not underestimate the role of the new organization structure and new business models have played in our ability to achieve the above-mentioned results .

220. Chambers also falsely represented that Cisco “ had market share gains in both

switching and routing ” and that revenue growth was “extremely strong,” when in fact market share had

declined and sales of Cisco’s newer switching products were replacing sales of higher-margin legacy

switches:

Our core switching revenue growth was extremely strong with approximately 40% year-over-year growth. Balance was also very strong between modular and fixed switching, growing 45% and 37% year-over-year, respectively. As we mentioned earlier, the new switching products were very strong . In terms of new switching products, the Nexus 7000 from a revenue perspective grew 281% and now has an annualized run rate of $1 billion. The Nexus 5000 continued with very strong revenue growth year-over-year of 425% and at a current run rate of $250

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million a year. The Nexus 2000 revenue run rate is now above $160 million on an annualized basis and achieved year-over-year revenue growth of 486% .

Our core routing products also had a very strong quarter with revenues up 23%. High-end routing, which as we currently have it classified represents about two-thirds of our total routing business, grew an outstanding 37%. In terms of new routing products we again saw very strong year-over-year growth in revenues. The ASR 9000, with an annualized revenue run rate of over $160 million, grew 740% year-over-year and 180% quarter to quarter .

* * *

The key takeaway from these outstanding year-over-year and quarter-over-quarter growth numbers for our newly introduced products is how fast they are ramping up and how fast our customer base is expanding using these new products. And it’s going across all of our new innovative product lines with this type of success. I have never seen this broad a base of new product families with as broad a balance of extremely rapid growth rates in my career of any high-tech company .

221. Chambers concluded his prepared remarks by emphasizing Cisco’s rapid expansion

into 30+ market adjacencies and stated that the Company was in the best position it had ever been to

achieve its long-term goals and aspirations.

So in summary, while there are always challenges in front of us from the economy, job creation, competition, supply chain and regulatory environment and many other factors that could be a surprise to us versus our expectations and guidance, we are, in my opinion, in the best position we have ever been to achieve our long-term goals and aspirations . . . .

The balance of this quarter, as evidenced from a country, theater, product family, customer segment and market adjacencies perspective, was probably the best we’ve seen in recent history and definitely the best, given our rapidly expanding role into 30-plus market adjacencies .

222. Calderoni also made false and misleading statements by reporting that the change in

the 3Q10 gross margin was due to higher discounts and product mix but failing to disclose that Cisco

was pulling in sales by offering huge price discounts and that the complete enhancement of the

Company’s products would cause revenues and gross margins to decline as they cannibalized sales of

higher-priced and higher-margin products.

For product only, non-GAAP gross margin for the third quarter was 65.3%, down 0.3 percentage points quarter over quarter. The decrease was primarily due to higher discounts partially offset by higher volume and cost savings . While we were pleased with our overall performance in gross margins this quarter, we do recognize the variability in product mix and other factors that will impact the gross margin . On a year-over-year basis, non-GAAP product gross margin was up 0.7 percentage points, primarily driven by higher volume, mix and cost savings partially offset by higher discounts .

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223. For the same reasons, Calderoni’s statements that the gross margin in 4Q10 “could” be

negatively impacted by product mix were also misleading:

Let me now give you some additional details on the Q4 financial guidance. As we have said in the past, forecasting gross margin has always been challenging due to various factors such as volume, product mix, variable component costs, customer and channel mix and competitive pricing pressures. That being said, we believe total gross margin in Q4 will be approximately 64% to 65% , reflecting the revenue guidance I just shared with you.

With recent acquisitions and our entry into some lower-margin markets, gross margin could be negatively impacted by product mix .

224. Chambers stated that the “service provider business on a global basis in terms of

product orders in Q3 was up approximately 30% year-over-year ” but concealed that Cisco was

masking the decline in demand for cable set-top boxes by giving customers huge price discounts to

pull in orders from future quarters.

225. Analysts noted the importance of defendants’ statements and asked questions. Bank

of America/Merrill Lynch analyst Tal Liani asked how much of Cisco’s growth was coming from the

refreshing of the core switching and router products. Chambers responded that the “ core one group

of advanced technologies, if I remember right, grew at about 22% ” but failed to disclose that the

sales of these lower-margin products were cannibalizing, and would continue to cannibalize, sales of

higher-priced and higher-margin products.

226. Oppenheimer analyst Ittai Kidron followed up on Liani’s question about margins,

noted that switching and routers were the Company’s higher-margin products and asked why margins

had declined given the change in mix to higher-margin products. Chambers responded that it was

“just normal pressure ,” that there was “nothing unusual going on from competition ,” including “no

more major price competition than we’ve traditionally seen ” and that he encouraged analysts to

“model in that 64% to 65% range.”

227. Morgan Stanley analyst Ehud Gelblum also questioned defendants’ statements about

the gross margin, noting that Calderoni mentioned several times the impact of higher discounts in

various areas on Cisco’s gross margin. He asked if the discounts were higher than normal, why

Calderoni mentioned the “higher discounts,” whether the higher discounts were in certain areas and

how they impacted Cisco. Calderoni downplayed the issue and concealed both the huge price

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discounts provided to customers to pull in orders from future quarters and the fact that the complete

refresh of products was causing a decline in revenue and margins.

So when we look at margins, as we’ve talked about in prior quarters, the factors that drive margin variability have to do with the volume and the mix, the cost and then also the price, which is discounting in rebates. So what I highlighted from a product perspective is really just looking at some of the major drivers, not to identify that it was a significant amount but just the main drivers in the quarter were discounts and rebates with benefits offsetting that, what’s driven by the higher volume and cost savings. So nothing significantly unusual, it’s just some of the drivers of that that comes into play from the product side.

228. Chambers followed up and again misled investors by stating that there was quick

acceptance of Cisco’s next-generation products and that product transitions could not be better, but he

concealed the huge price discounts provided to customers to pull in sales from future quarters and

the fact that sales of Cisco’s next-generation products with lower prices and lower margins would

cause revenues and gross margins to decline by cannibalizing sales of the higher-priced and higher-

margin products.

In terms of the mix on the products, we gave an unusual amount of detail which we won’t repeat in the future calls . . . because the start-ups are tremendously powerful here in terms of how quick acceptance occurs. This is about as good as you can do with a next-generation product in a single category, but to do it across every product category from the 7000 Nexus to the 5000 to the 2000, from the ASR to the 9000 to 5000 to the 1000, to be able to do it with UCS, etc., it was across the board very rapid increases .

So the best way to arrive at the number that you ask is that if you have switching improvement of 40% and its about 35% of our total products – total business and you have routing growing at 23% and it’s about 16%-17% of our total business, you can back into the numbers. But overall, the numbers were very solid, no matter how you get them – market share gains, normal transitions, good mix, etc. It doesn’t get any better on product transitions than what’s going on now, is the answer I would come away with on that .

229. During an interview with Bloomberg TV on May 13, 2010, host Margeret Brennan

stated that a number of analysts were surprised by the discounting mentioned during the conference

call and asked Chambers to explain it. Chambers stated that the 64% to 65% gross margin guidance

was“offthe charts,”included discounting and that while Cisco “face[d] a number of good competitors,”

there was “no unusual price competition.” He also stated that “we are gaining market share

versus all of our key competitors.” Chambers concluded the interview by stating “so again, we’re

on fire in terms of our growth .”

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Reasons Why Defendants Knew or Were Deliberately Reckless in Not Knowing Their Statements Were Materially False and Misleading

230. Chambers and Calderoni knew or were deliberately reckless in not knowing their

statements on May 12, 2010 were materially false and misleading for the reasons set forth in ¶¶79-

213. Specifically:

• Defendants knew that competition, the introduction of new switching and router products and customers switching from single-vendor networks to multi-vendor networks were causing revenues, product gross margins and market share to decline. Throughout the May 12, 2010 conference call, Chambers repeatedly touted the complete refresh of Cisco’s products; but neither he nor Calderoni disclosed–as they did in February 2011 and later – that they knew: (1) Cisco had never before introduced so many new products in such a short time period; (2) Cisco would need to sell two to three times the number of new Nexus switching products to generate the same amount of revenue from sales of the Catalyst switches they were cannibalizing; (3) new products always had lower gross margins; and (4) it usually took three to four years before new product gross margins reached the levels of gross margins on the products they were replacing.

• Defendants concealed the huge price discounts and cannibalization of higher-priced and higher-margin products by newer products with lower prices and lower gross margins even though they knew these issues were important to analysts and investors. Indeed, during the May 12, 2010 conference call, several analysts specifically asked what Calderoni meant when he stated that the decline in the 3Q10 gross margin was primarily due to higher discounts and product mix offset by higher volume and cost savings. Instead of answering truthfully, defendants misled investors by stating the decline in the gross margin was “just normal pressure,” that there was “nothing unusual going on from competition” and that there was “nothing significantly unusual.”

• Defendants knew there were various problems in the consumer segment, including the substantial decline in Linksys router sales, the less-than-projected Valet router sales and less-than-expected results in other businesses like Flip, Eos and Telepresence. Indeed, according to CW1, Kaplan acknowledged the problems during a “skip-level meeting” in March 2010, and the forecast for the consumer segment was reduced in spring.

• Defendants knew the reported 30% increase in service provider orders was the result of Cisco’s pulling in orders from future quarters by offering huge price discounts when consumer demand for cable television service was declining. Five former Cisco employees (CW3-CW7) said that the Company was providing cable customers huge price discounts to increase the number of orders and to pull in orders from future quarters. During the November 10, 2010 conference call, Chambers revealed an unexpected and substantial decline in cable set-top box orders, and skeptical analysts openly questioned Chambers’ stated reason for the decline – a sluggish housing market. Morgan Stanley analyst Ehud Gelblum reported that the reason was “difficult to fathom as the housing glut has been overhanging the entire market for nearly two years now.”

• Defendants knew Cisco’s organizational structure was not operating very effectively. Rather, as defendants repeatedly admitted from April through September 2011, and

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as former Cisco employees described, the organizational structure was not operating effectively, was excessively complex and slowed decision making.

231. Insider Selling . After selling 4 million shares for $97.2 million shortly after Cisco’s

February 3, 2010 earnings release and conference call, Chambers sold another 1.27 million shares

for $31.3 million on May 17 and 18, 2010. He sold the stock just one week after he and Calderoni

made the materially false and misleading statements during the May 12, 2010 conference call and

the May 13, 2010 interview with Bloomberg TV . Chambers sold the stock even though the options

he exercised did not expire for months. Further, he sold the stock at $24.61 and $25 per share

shortly after Cisco repurchased 87 million shares of the Company’s stock during 3Q10 for $2.25

billion or an average price of $25.76 per share.

D. August 11, 2010: Defendants Falsely Represent that Cisco’s 4Q10 and FY10 Results Positively Proved the Effectiveness of the Organization Structure and the Growth and Diversification Strategy, that the Company’s Success in New Markets Was Stronger than Anticipated and the Key Take Away Was that the Company’s Strategy and Vision Were Absolutely Working – Chambers Sells $5 Million of Stock a Week Later

232. On August 11, 2010, Cisco issued a press release and held a conference call to report

4Q10 and FY10 results, and defendants continued to mislead investors and the market by concealing

the adverse information detailed in ¶¶79-213, falsely representing that Cisco was successfully

expanding into more than 30 market adjacencies while gaining market share in the core routing and

switching businesses and that the Company’s organization structure was operating very effectively.

In the earnings release, defendants misled investors by continuing to falsely represent that Cisco was

successfully growing the business through solid execution of its growth strategy to aggressively

move into new areas:

“This was yet another very strong quarter with a number of record financial results for Cisco, closing the fiscal year in a tremendous position of strength – a compelling financial model, a well-tuned innovation engine and solid execution on our growth strategy ,” said John Chambers, chairman and CEO, Cisco.

Chambers continued, “Whether the global economy continues to show mixed signals or not – the strength of our financial model and profit generation serves us well. As we continue to successfully grow our business and share of IT investments, our focus is squarely on helping our customers accelerate productivity and growth. We are very confident in our strategy, and will continue to aggressively move into new areas where the network is becoming the platform, and where our customers want us to invest and innovate.”

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233. Defendants reiterated these positive statements during the conference call and falsely

stated that Cisco’s FY10 results were “extremely positive proof in terms of the effectiveness of

organization structure, business models, innovation and execution capabilities, while focusing on

over 30 major new market adjacencies at the same time”:

[T]here are a number of key takeaways from the results in Q1 FY10 and our momentum going into Q1 FY11. First, this was a very strong quarter for Cisco, and we closed FY10 in a tremendous position of strength. We have a compelling financial position, a well-tuned innovation engine, and have shown solid execution on our growth strategy .

* * *

In my opinion, these results are extremely positive proof in terms of the effectiveness of organization structure, business models, innovation and execution capabilities, while focusing on over 30 major new market adjacencies at the same time .

* * *

As we also discussed in a fair amount of detail on the last conference call, we could not be more pleased with how our new organization structure built around dynamic network organizations, combined with new business models around vision, differentiated strategy and execution, are enabling an extremely competitive structure in terms of speed, scale, flexibility and replication . . . .

Our success in both the individual market adjacencies and the inner dependencies between adjacencies had been even stronger than we anticipated. These large opportunities include key emerging countries, datacenter virtualization, cloud, video, consumer and collaboration, all of which have been an extension of current area focus.

234. Chambers also stated that “in Q4 total product orders grew about 23% year over

year,” including “growth in the high teens in service providers ,” which was false and misleading

and concealed that orders for cable set-top boxes were being pulled in from future quarters as a result

of the huge price discounts provided to cable set-top box customers. Later in the conference call, he

falsely stated that “US service providers . . . have been remarkably solid .” Moreover, in response to a

question from Sanford C. Bernstein analyst Jeff Evenson regarding Cisco’s use of marketing

programs or other incentives to drive the recovery in order rates in mid-July, Chambers falsely stated

that the orders were “just normal orders .”

235. Chambers touted the growth of Nexus switch revenues, stating that “[t]he Nexus

family with an annualized run-rate of over $2 billion grew approximately 325% year over year ,”

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but misled investors by failing to disclose that those sales were causing – and would continue to cause

– overall switching revenues and product gross margins to decline because they were cannibalizing

sales of higher-priced and higher-margin Catalyst switches.

236. Chambers stated that his “strong optimism” was balanced by “some challenges that are

contributing to an unusual amount of conservatism and even caution,” including slowing GDP

growth, job creation, the slowing pace of the recovery, customers seeing a softening of their

businesses in June and July and concerns about Europe. But he said nothing about the problems in

the consumer segment; the declining sales, market share and profitability in the switching and router

segments; or the artificially inflated orders for cable set-top boxes caused by the huge price

discounts. Further, as in previous conference calls, Chambers again stated that Cisco was extremely

well positioned on those areas that it controlled and that it was gaining solid momentum in almost all

product families and market adjacencies:

In summary, on those areas that we can control or influence, from an innovation point of view or an operational execution point of view, we feel we are extremely well-positioned. Almost all of our product families are in the early stages of their lifecycle and gaining solid momentum as we discussed earlier. Balance across geographies and customer segments remains very good. Even after four sequential quarters of growth, our Q4 results versus Q4 a year ago were above our long-term goals of 12% to 17%. . . .

So, as may of you would expect, we’re going to focus on what we can control and influence as we have done in each of the periods of uncertainty, and we’re going to be very aggressive in terms of investing resources in the new market adjacencies where we are also gaining very good momentum both from an innovation thought leadership perspective, as well as a business perspective.

237. Calderoni provided information on Cisco’s gross margins but said nothing about the

huge discounts provided to cable set-top box customers, increasing pressure from competitors and

Cisco’s newer and lower-margin switches and routers causing revenues, market share and gross

margins to decline:

Total non-GAAP gross margin for fiscal year 2010 was 65.2%, up 0.2 percentage point year over year. For product only non-GAAP gross margin of 65.1% was up 0.2 percentage point compared with FY09, primarily due to cost savings and volume, partially offset by pricing and discounts .

* * *

Q4 FY10 total non-GAAP gross margin was 64.1%, down 1.1 points quarter over quarter and down 1.2 points year over year. For product only non-GAAP gross


margin for the fourth quarter was 63.6%, down 1.7 points quarter over quarter. We saw an approximate 1 percentage point impact on margins as a result of higher manufacturing-related costs due primarily to the constraints in our supply chain and its impact on our linearity, which was incremental to our typical variances.

We also saw an unfavorable mix impact driven by numerous recent product introductions . Consistent with historical experience, we expect to see positive benefit from ongoing cost savings from component costs and value engineering over time. The remainder of the decrease in product margins was driven by pricing and higher discounts, partially offset by cost savings and higher volumes .

On a year-over-year basis, non-GAAP product gross margin was down 1.1 percentage points. This was primarily driven by higher manufacturing-related costs associated with supply-chain constraints, unfavorable mix, pricing and higher discounts, partially offset by the cost savings and higher volumes .

238. Bank of America/Merrill Lynch analyst Tal Liani noted that switching and router

revenues were down in the quarter, the gross margin disappointed and the Company’s guidance was

weak and below expectations. Liani asked if these facts were specific to Cisco or more because of

the economy and signs of another dip in IT spending. Chambers disputed that switches and routers

were down, did not address the disappointing gross margin and emphasized that Cisco was doing so

well that his confidence had never been higher:

In terms of routing and switching, I respectfully disagree on the switching numbers. You have watched us both in modular and fixed both this quarter and last quarter. You are talking about growth last quarter of 40% and I think 27% this quarter. Those numbers are really good, and you add up total switching, that is hard for anybody to keep up with, and yet we have the largest position in the market.

In terms of routing, our product line is really solid, really good.

* * *

In terms of the caution that you’re hearing, so in summary, in terms of Cisco-specific, we feel really good. We are competing. We are winning. We are moving into new market adjacencies. Organization structure is working. My confidence has never been higher. And candidly when you talk to customers, you hear the exact same thing .

239. In response to a question from RBC Capital Markets analyst Mark Sue about the

conservative guidance and mixed economic signals, Chambers said that, despite the mixed signals,

he was very comfortable on things Cisco could influence:

We are not making a call on the economy. We are just sharing with you where we see it, and I know you’re asking me and leading that question to get more details out. I feel very comfortable with our ability to compete in every product category . I mean we have the best product lineup we have ever had.

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I think it is real important that the market – and all of us agree, you look at the spot price and you have got to say the market is not buying that we can go 12% to 17% consistently. And yet we are defending growing above that range when you’re comparing two year-over-year comparisons in a tough economic time, which I think is pretty darn good performance.

So in terms of the direction, on things we can totally influence, I’m really comfortable. We will get our market share gains. We have got good balance. We are not seeing any unusual pricing issues. Our gross margin issues were due almost entirely to the problems we had on supply chain and the mix issue . And I do want to repeat, if I’m here for the next several years, each of these quarter calls apologizing that we were at the high end of the 12% to 17% or over 17% growth, then I will do so.

240. Goldman Sachs analyst Simona Jankowski asked for more color on the gross

margins, noted that Chambers said component shortages were the reason for the decline and were

something Cisco had been dealing with for a couple of quarters, and asked if the decline was also

related to mix, including sales of newer switching products with lower margins. Chambers admitted

that it did, but falsely stated that it was fairly normal and that Cisco was doing well versus the

competition –when the tables in ¶¶82-83 show that Cisco’s share of the switching and router markets

had declined:

[W]hen you introduce new products, . . . we always start with lower gross margins on the new products. . . .

This is the fastest, layered and most well-balanced I can remember us being in terms of new product introductions , and that does have an impact as well.

But no, that is going to be with us for a little while until you do your typical Texas two-step in terms of price performance improvement, costing on components, etc. So this has been fairly normal in terms of the direction.

* * *

We are doing well versus our competitors. I’m very comfortable with where we are .

241. In response to a question from Ticonderoga analyst Brian White about what Cisco

was seeing in the government public sector given the big fiscal austerity programs around the world,

Chambers stated that [p]ublic sector in the US is very solid for us, both in the federal and the state

and local ,” that Public Sector Europe actually held up pretty well ,” that it did pretty well ” in emerging

countries and that Bruce Klein, the head of the public sector, was `pretty optimistic about next year .”

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Rob Lloyd, Cisco’s EVP of Worldwide Operations, added that “we feel very confident, very strong

about the forecast and a pipeline of opportunities .”

242. Robert Baird analyst Jayson Noland asked if Chambers saw Cisco “long-term

competing with HP on price, on technology or vision, and how much of a risk is HP to Cisco’s gross

margin long term.” Chambers avoided answering the question and instead misleadingly responded

that HP was a good and tough competitor and that hopefully Cisco could “take a lot of [market share]

from them.” In fact, as the tables in ¶¶82-84 show, HP’s share of the switching market had increased

while Cisco’s declined.

243. At the end of the conference call, Chambers again emphasized that the key takeaways

were that Cisco’s strategy and vision were absolutely working, that things Cisco controlled were in

great shape and that management was very comfortable with a 12% to 17% growth rate:

[I]f there is one key takeaway from this call that I would like for you all to think about, our strategy and vision is absolutely working. We are gaining [market share]. We are gaining product leadership . We are gaining architecture. Our relationships with our customers is moving from being a box player or a router or a switcher – switching to really a key business partner, a trusted technical advisor. We will win more than our fair share of jumpballs in all areas. And it is unusual a company can say that with that type of confidence. We are clearly applying in terms of our growth projections for the future very comfortable and becoming more comfortable with our long-range 12% to 17% .

So I think it is important when you think out, several years out, 12% to 17%, most of the shareholders would be very, very comfortable with. We are saying when you start comparing quarters where we have had very good growth to quarters where we have very good growth, we are very pleased that we are at the high end of that or above that.

So that is perhaps my one key takeaway. Things we control or influence are in great shape. Our growth in terms of our long-term aspirations looks very good, and we are playing actually at the high end or above on that . And our concerns are normal cautious concerns, which you would expect to see . . . .



statements on August 11, 2010 were materially false and misleading for the reasons set forth in

¶¶79-213. Specifically, they knew:

• Competition, the introduction of new switching and router products and customers switching from single-vendor networks to multi-vendor networks were causing revenues, product gross margins and market share to decline. Further, as the tables

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in ¶¶82-90 show, Cisco’s share of the switching and router markets had declined, while its competitors’ share of those markets had increased. During the August 11, 2010 conference call, Chambers stated that new product introductions had never been faster and that Nexus switches grew 325% to an annualized run rate of $2 billion. But he said the decline in product gross margins was primarily due to component shortages and that the impact of new product sales on the gross margin was fairly normal. Neither he nor Calderoni disclosed – as they did in February 2011 and later – that they knew: (1) Cisco had never before introduced so many new products in such a short time period; (2) Cisco would need to sell 2-3 times the number of new Nexus switching products to generate the same amount of revenue from sales of Catalyst switches it was cannibalizing; and (3) it usually took 3-4 years before new product gross margins reached the levels of gross margins on the products they were replacing. Nor did they disclose the impact on gross margins from the huge price discounts provided to cable set-top box customers to pull in orders from future quarters.

• There were various problems in the consumer segment, including the substantial decline in Linksys router sales, the less-than-projected Valet router sales and less-than-expected results in other businesses like Flip, Eos and Telepresence. According to CW1, 2010 was a slow train wreck as the consumer division experienced decreasing revenues and market share that were reflected in the weekly “sell-in/sell-through” reports, and the revenue goals of the consumer division had been reduced back in the spring.

• The reported “high teens” growth in service provider orders was the result of Cisco pulling in orders from future quarters by offering huge price discounts when consumer demand for cable television service was declining. Thus, Chambers and Calderoni knew that Chambers’ additional statements that U.S. service providers had been remarkably solid and that they were just normal orders were also misleading. In fact, during the November 10, 2010 conference call, when Cisco reported a 35% decline in cable set-top box orders – and a 40% decline in the North American cable business – in 1Q11, RBC Capital Markets analyst Mark Sue asked Chambers how Cisco missed the cable MSO transition that caused the decline. Chambers admitted that he and Calderoni “saw the transition coming” and had made changes in management at Scientific Atlanta. Other skeptical analysts also questioned the timing of the disclosure. Morgan Stanley analyst Gelblum reported that defendants’ claim that a sluggish housing market was the reason for the set-top box order decline was “difficult to fathom as the housing glut has been overhanging the entire market for nearly two years now.” He also noted that Motorola reported during its earnings call two weeks earlier that cable set top box orders would increase the following quarter. Jefferies analyst William Choi wrote in a November 10, 2010 report that the lowered guidance resulting from the problems in the public sector and service provider businesses was “puzzling” for a company that “typically set guidance and [met].” Raymond James analyst Todd Koffman reported the sharp adjustment in cable orders was “very surprising.”

• Cisco’s 4Q10 and FY10 results were not, as Chambers stated during the August 11, 2010 conference call, “extremely positive proof in terms of the effectiveness of organization structure, business models, innovation and execution capabilities, while focusing on over 30 major new market adjacencies at the same time.” Rather, as defendants admitted from April 2011 through September 2011, and as the former employees described, the organizational structure was not operating effectively, was excessively complex and slowed decision making.

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245. Problems in the public sector segment . Chambers’ statements during the November

10, 2010 conference call, analysts’ reactions to those statements, defendants’ admitted close

relationship with Cisco’s customers and the importance of the public sector to Cisco’s overall results

strongly suggest that defendants also knew their statements about the public sector–that the“[p]ublic

sector in the US is very solid for us, both in the federal and the state and local”; that “Public Sector

Europe actually held up pretty well”; that Bruce Klein, the head of the public sector, was “pretty

optimistic about next year”; and that management felt “very confident, very strong about the forecast

and a pipeline of opportunities” – were false.

246. Analysts’ reactions to the unexpected negative news . During the November 10,

2010 conference call, Chambers reported that orders in the public sector segment – which was 22% of

Cisco’s business – declined 25% year-over-year and 48% quarter-over-quarter and that the public

sector business would continue to be challenging for at least several quarters. Chambers claimed

management was “surprised” that Cisco missed its public sector forecast. Analysts were skeptical,

and, as Morningstar Equity Research analyst Joseph Beaulieu wrote in a November 11, 2010 report,

the question-and-answer session with analysts was “fairly contentious.” J.P. Morgan analyst Rod Hall

did not believe the decline in public sector spending was a surprise and wrote in a November 11,

2010 report, “[w]e believe that Cisco had expected a weak start to FQ1 due to aggressive selling in

FQ4’10. In our opinion, this masked developing weakness in government spending .”

247. During the conference call, Morgan Stanley analyst Ehud Gelblum noted that

Chambers admitted during the conference call that the quarter unfolded as expected and that sales

orders missed internal projections by $500 million and asked if that was known before the

Company’s September 14, 2010 analyst day. Chambers admitted he and Calderoni knew about the

shortfall throughout the quarter, stating that “the quarter was within our normal seasonality in terms

of mix for each of the three months” and was “pretty much normal.”

248. UBS analyst Nikos Theodosopoulos questioned the reassurances provided by

management during the 4Q10/FY10 earnings call on August 11, 2010 that there were not issues in

the public sector segment. Indeed, Theodosopoulos said it was a “pretty significant reset when the

rest of the industry isn’t seeing it.” Chambers admitted the “challenge [was] fair.” Jefferies analyst

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William Choi reported on November 10, 2010 that the lowered guidance resulting from the problems

in the public sector and service provider businesses was “puzzling” for a company that “typically set

guidance and [met].”

249. During a November 11, 2010 interview with Bloomberg News, host Betty Liu asked

Chambers why the decline in public sector orders was a surprise when “we’ve been talking all year

about a budget tightening among state governments.” Chambers acknowledged the skepticism by

responding, “maybe it shouldn’t,” and then tried to persuade Liu that the decline really was surprising

by noting that the feedback from analysts during the conference call was that other companies were

not seeing a decline in government spending. But the analysts making those comments were

skeptical about when Chambers and Calderoni knew about the decline in public sector orders

because they believed it was caused, in part, by Cisco’s loss of market share to its competitors.

250. Defendants’ admitted close relationship with customers . Defendants’ admitted close

relationships with its customers, and the fact that the public sector comprised 22% of Cisco’s

business also indicates defendants knew about the decline in public sector orders by August 10,

2010. As detailed in ¶¶179-189, defendants and other Cisco executives repeatedly told investors that

Company management frequently met with customers, maintained a scorecard that tracked such

meetings, surveyed customers and received feedback, all of which were utilized to form the

Company’s strategy.

251. As detailed in ¶¶191-194, former Cisco employees also described various internal

reports that tracked sales and orders from the Company’s various businesses. They also said these

reports were discussed during various meetings. Analysts and the financial press reported that Cisco

had “the most sophisticated customer feedback loop . . . in any business” and that the Company

reported results “on the knuckle” due to its “disciplined market intelligence system.”

252. Insider Selling . As alleged above, Chambers sold 5.5 million shares for $134 million

between February 8, 2010 and August 18, 2010, including the sale of 243,178 shares for $5.5 million

on August 18, 2010. The August 18, 2010 sale was just one week after Chambers made the false

statements during the August 11, 2010 conference call and after the Company repurchased 99

million shares for $2.25 billion in 4Q10. After Cisco unexpectedly reported order declines in the

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public sector and service provider businesses on November 10, 2010 that caused some analysts to

question the positive statements made during the August 11, 2010 conference call, Michael Shedlock

from Mish’s Global Economic Trend Analysis, noted the suspicious timing of the sales by Chambers

and other Cisco insiders. On November 11, 2010, he wrote that Chambers’ sales and the sales of 1.1

million shares by other Cisco insiders showed that the insiders “bailed hand over fist” and, unlike

investors, were not surprised by the adverse news reported by Cisco on November 10, 2010. He also

reported that the insider sales, Cisco’s repurchase of 1.6 billion shares for $38 billion in the five years

ending July 2010 and the failure to pay dividends despite $40 billion of cash allowed management to

“pretend it [was] increasing shareholder value while corporate insiders [got] to dump massive

numbers of shares” and was “nothing more than shareholder rape.”

253. Analysts also question share repurchases by Cisco . The first question during Cisco’s

November 10, 2010 conference call was from Sanford C. Bernstein analyst Jeff Evenson, who asked

why Cisco repurchased 110 million shares during 1Q11 when defendants said during the August 11,

2010 conference call that the Company expected to repurchase 40 million shares. He also asked

whether it “indicate[d] anything about when you came to the conclusion that things were going to be

weaker than you maybe thought three months ago.” Chambers responded that the quarter was

“shaping up very much as we anticipated for the vast majority of the quarter ” and that it “had zero to

do with purchasing in the marketplace.” Later during the conference call, he said Cisco “bought stock

because we thought it was a good price in terms of momentum for where it would be not just a

quarter out, but in one year[], and two years and three years out in terms of direction.” Those

responses, if true, contradicted Chambers’ earlier statement that management was surprised by the

reduction in public sector orders and was an admission that Chambers knew of the problems

disclosed on November 10, 2010 when he sold $5.5 million of his stock in August 2010. Indeed, if

Chambers really thought the stock price was good for Cisco to purchase, then why did he sell his

stock?

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E. November 10, 2010: Cisco’s Stock Price Declines 16.2% after Defendants Reveal Problems in the Public Sector, Set-Top Box and Consumer Businesses but Falsely Assure Investors the Problems Are Temporary Air Pockets and Continue to Make Misleading Statements

254. On November 10, 2010, Cisco issued a press release and held a conference call to

report 1Q11 results, during which defendants began to reveal some of the previously concealed

problems with Cisco’s business and acknowledge the falsity of some of their previous statements –

particularly the positive statements made during the August 11, 2010 conference call about the

public sector business and service provider business. Cisco disclosed that year-over-year revenue

growth in the U.S. was only 6% due to challenging trends in global service provider capital

expenditures and a 40% year-over-year decline in traditional set-top box orders from North

American cable operators. Chambers said that slowing consumer spending, lower-cost competitors

and cable operators transitioning from traditional set-top boxes to IP set-top boxes caused the

declines.

255. Chambers also acknowledged the falsity of the positive statements he made during

Cisco’s August 11, 2010 conference about the public sector segment – that the public sector segment

was “very solid” and that management felt “very confident, very strong about the forecast and a pipeline

of opportunities.” He unexpectedly revealed substantial declines in orders in the public sector: a 25%

year-over-year decline in orders (and a 48% quarter-over-quarter decline) from state governments in

the U.S.; a mid single digit year-over-year decline in European public sector orders caused by drastic

government budget cuts; and declines in Japan public sector orders. Chambers also said the public

sector business would continue to be challenging for at least several quarters.

256. Chambers stated that total orders in 1Q11 were $500 million less than forecasted and

that Cisco was not projecting growth as fast as management would like over the next several quarters

because of the reality in public sector spending, challenges in the service provider market and one or

two areas (that he failed to identify) where Cisco needed to improve its execution. He stated that

year-over-year growth in 2Q11 was expected to be just 3% to 5%, year-over-year growth in FY11

was expected to be 9% to 12% and it was realistic to hope for a return to the 12% to 17% growth

goals in the not-too-distant future.

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257. As a result of this unexpected adverse information, Cisco’s stock price declined 16.2%

from $24.49 on November 11, 2010 to $20.52 on November 11, 2010, compared to a 0.4% decline

in the S&P 500 and a 1.8% decline in the peer group. Analysts attributed the decline to the

unexpected disappointing results in the public sector and service provider businesses and the

resulting weak guidance. Reuters reported that investors were stunned by the unexpected bad news.

MarketWatch reported that at least four analysts downgraded Cisco and that the stock price decline

was the worst single-day drop in more than 16 years.

258. But defendants continued to mislead investors and maintain the artificial inflation in

Cisco’s stock by representing that the problems were short-term “air pockets” that Cisco was going to

“power through” and that Cisco’s execution in the areas it did control and influence reflected the

success and relevance of the Company’s strategy. As reported by The Wall Street Journal on

November 12, 2010, Chambers “took pains to refute suggestions that Cisco is losing ground to rivals

in the switching and routing hardware that are key pillars to its business.” In the press release,

Chambers misled investors by stating that the success and relevance of Cisco’s strategy was

demonstrated by management’s execution in the areas it controlled and influenced and that Cisco’s

market-share momentum positioned the Company for growth:

“Cisco delivered solid financial results, during a challenging economic environment. While we have seen capital spending moderate in some areas of our business, our execution in the areas we can control and influence speak to the success and relevance of our company’s strategy ,” said John Chambers, chairman and CEO, Cisco. “Our position in the market, including continued product innovation, market share momentum and operational excellence, positions us for growth and flexibility well into the future as we strengthen our role as a trusted business partner to our customers .”

259. During the conference call, defendants continued to mislead investors by representing

that Cisco was executing well in its core markets and market adjacencies:

From a high-level perspective there are a number of key takeaways from the results in Q1 FY’11 and our momentum going into Q2 FY’11.

First, Q1 was a solid quarter from [] Cisco from a financial, product, customer and geographic perspective. We continue to execute well with a compelling financial position, expanding innovation engines, and executed in both our core markets and market adjacencies . However, what I am most pleased about is how our business architecture and technology architecture is gaining customer acceptance.

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260. As he did in previous conference calls, Chambers touted the growth of new products,

including Nexus switches, but concealed that the sales of those lower-priced and lower-margin

products were causing revenues and gross margins to decline because they were cannibalizing sales

of higher-priced and higher-margin products, including Catalyst switches. Chambers stated that the

Company’s“new next-generation products continue very solid customer acceptance,” including

“ASR edge routers [which] grew approximately 200% year-over-year, with a current annualized

run rate of approximately $1.4 billion, ” the “ASR 9000 [which] was especially strong with over

700% growth year-over-year, with an annualized run rate of $280 million,” and the “Nexus

product family [which] also continued to be very strong, with year-over-year growth in excess of

120%, and an annualized run rate of approximately $1.5 billion. ” He also stated, the “UCS server

product family had another extremely strong quarter, with growth year-over-year of 550% to an

annualized run rate of almost $500 million.”

261. After describing the problems in the service provider and public sector businesses,

Chambers stated that Cisco continued to gain market share, was well positioned and would power

through the short-term challenges:

In summary, we continued to gain [market share] in many of our product areas in the third calendar quarter of this year . In terms of our new intermediate two- to three-year big opportunities, we are well-positioned and getting good results in video, collaboration, data center virtualization, cloud, our emerging countries, Smart+Connected Communities, as well as our new innovative products.

* * *

On the areas we control or influence from an innovation point of view, or an operational execution point of view, we feel we are very well-positioned . Almost all of our product families are in the early stages of their lifecycle and gaining solid momentum as we discussed earlier.

* * *

Our ability to enter new markets from the data center to the cloud to UCS to collaboration to video mobility to the home is gaining speed, scale, flexibility, and is becoming replicable, as we had hoped, as well as tying together from an architectural perspective .

* * *

[O]ur view is that we are going to power through in what we believe to be some short-term challenges in the next several quarters . . . .

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262. Chambers concluded his opening remarks by stating that the “key takeaway from Q1

remains that our vision of the industry’s evolution and our strategic differentiation is playing out

pretty much as we had desired. And Cisco is strongly positioned to win in these traditional

markets and new market adjacencies. . . . [I]n terms of what we can control or influence, we

continue to feel very confident. . . . I could not be more excited about how we are positionedfor

the future .”

263. Calderoni also falsely stated that the reported gross margin reflected higher cost

savings partially offset by discounts and unfavorable mix, but continued to conceal the huge price

discounts provided to cable set-top box customers and the lower gross margins on newer products

that were cannibalizing sales of higher-margin products:

For product-only non-GAAP gross margin for the first quarter was 64%, up 0.4 of a percentage point quarter-over-quarter.

For the quarter-over-quarter comparisons higher cost savings are partially offset by discounts . On a year-over-year basis non-GAAP product gross margin was down 2.3 percentage points. The year-over-year decrease was primarily driven by pricing and discounts, along with higher manufacturing-related costs associated with the carryover effect of our FY’10 supply-chain constraints, and unfavorable mix, partly offset by cost savings and higher volumes .

264. Notably, Calderoni did not provide gross margin guidance, which always had been

provided in previous conference calls. When asked why by RBC Capital Markets analyst Mark Sue,

Calderoni stated that lower sales volume and increased consumer sales in 2Q11 could negatively

impact margins, but nevertheless stated that gross margins would be in the 64% range for the rest of

the year.

265. Bank of America/Merrill Lynch analyst Tal Liani noted that the 9% to 12% increase

in FY11 revenues assumed very strong growth in 3Q11 and 4Q11 and asked what the basis was.

Chambers responded that Cisco would “adjust” to the “couple of air pockets that we hit” and that he and

Calderoni saw “good balance literally in all the segments .” In response to a question from Deutsche

Bank analyst Brian Modoff, he reiterated that Cisco “hit a couple of air pockets” but stated that Cisco

would “go right through them” and was in great shape and gaining market share:

[T]he big picture hasn’t changed. The major transitions that are going on, we are in great shape for. We are taking [market share] in most areas we are moving into.

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There may be a quarter or two where we are not, but as a whole we are really world-class in this .

* * *

We hit a couple of challenges and we will manage through those. But I think we will look back and say that they were just air pockets and good bumps, but we will go right through them .

266. Oppenheimer analyst Ittai Kidron stated that the guidance indicated switching

revenues would be down 15% in 2Q11, which raised questions of where Juniper and HP were taking

business away from Cisco. Kidron also commented that the Company’s biggest router competitor

reported 20% growth compared to Cisco’s 13%. Kidron asked if management was losing sight of its

core markets and if Cisco could still execute in these markets without dropping the ball and losing

focus, especially given all of the investment and focus on new areas. Instead of admitting that Cisco

was losing market share to competitors and that switching revenues and gross margins would decline

again in 2Q11, Chambers continued to falsely state that Cisco’s market share for various products

had actually increased (access routing up 1% to 87% market share, switching up 2% to 70%+

market share, wireless LAN up 3%, enterprise voice up 4%, UCS up 5%, SAN up 6%), that the

Company only lost market share in A&S and Labs and that Cisco was “executing very well” and that

he was “very comfortable with where we need to go .”



statements on November 10, 2010 were materially false and misleading for the reasons set forth in

¶¶79-213 and ¶¶245-253. Specifically, they knew:

• Competition, the introduction of new switching and router products and customers switching from single vendor networks to multivendor networks were causing revenues, product gross margins and market share to decline. Further, as the tables in ¶¶82-90 show, Cisco’s share of the switching and router markets had declined, while its competitors’ share of those markets had increased. In fact, on February 9, 2011, Cisco reported substantial declines in switching revenues and product gross margins in 2Q11 and attributed the decline to competition and sales of newer products with lower prices and lower gross margins that were cannibalizing the sales of legacy products with higher prices and higher gross margins.

• There were various problems in the consumer segment, including the substantial decline in Linksys router sales, the less-than-projected Valet router sales and less-than-expected results in other businesses like Flip, Eos and Telepresence. In fact,


Cisco reported a 15% year-over-year decline in consumer orders in 2Q11, which was the quarter that Cisco usually generated the most consumer orders because it included the holidays.

• Cisco’s organizational structure was not operating very effectively. Rather, as defendants admitted from April 2011 through September 2011, and as the former employees described, the organizational structure was not operating effectively, was excessively complex and slowed decision making.

268. Analysts’ questions during the November 10, 2010 conference call, the unexpected

disappointing switching and router results reported on February 9, 2011 and analysts’ reactions

to those unexpected results are additional facts showing defendants knew their statements about

the switching and router businesses were false and misleading . During the November 10, 2010

conference call, analysts openly questioned Chambers’ positive statements about the strength of the

switching, router and UCS businesses; and, as the The Wall Street Journal reported on November

12, 2010, Chambers “took pains to refute suggestions that Cisco [was] losing ground to rivals in the

switching and routing hardware that are key pillars to its business.” Oppenheimer analyst Ittai

Kidron, who asked Chambers during the conference call if Cisco was losing sight of its core markets

and dropping the ball as it focused on new areas, issued a report following the conference call in

which he wrote that Chambers’ assurances that the problems were temporary air pockets “ will

undoubtedly raise questions as to the real root cause of the weakness” and that the “key issue”

was “determining whether the issues highlighted above are the true root causes of the weakness

or if there are other issues brewing that have yet to surface that Cisco has not fully admitted or

recognized .” Kidron reported Oppenheimer’s opinion was that “the truth lies somewhere in the

middle”; “spending in Europe and the public sector [would continue to] be weak for the foreseeable

future”; Cisco was “gaining traction in the data center and collaboration with UCS and Tandberg

acquisition”; and Cisco was “losing market share in its core markets – namely, routing, switching

and security .” The Wall Street Journal reported that Kidron said he expected to see share losses for

Cisco in 2Q11 in its core markets.

269. William Blair & Company, L.L.C. (“William Blair”) analyst Jason Ader downgraded

Cisco and reported that the Company was in denial about issues that were hampering growth

prospects that went beyond the weak spending by public sector customers and U.S. cable operators.

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He reported the problems disclosed by Cisco “cannot fully explain such a big reset ” and that the

slowdown in business was also due to other factors, including “market share saturation in the core

business of switching and routing .”

270. Morgan Stanley analyst Ehud Gelblum reported, “[w]e believe the order shortfall

could be more than the ‘air pocket’ described by Chambers, and instead could be the first signal

that Cisco is losing share in several of its core markets as its focus on growth has diverted

attention from its core businesses. We can’t find one other company – big or small – that’s seeing

similar weakness .” He wrote that it appeared Cisco lost significant momentum in key growth

products in its core business, including: (a) the ASR9000, which Chambers said hit a $280 million

annualized run rate, just $5 million greater than the $275 million run rate reported in 4Q10; and

(b) the Nexus family of Ethernet switches, which Chambers said hit a $1.5 billion annualized run

rate – $500 million less than the $2 billion run rate announced in 4Q10.

271. The Street.com reported that Chambers “put a positive on the company’s numbers,

pointing to strength in areas such as switching, routing and the UCS server business.” But Goldman

Sachs analyst Simona Jankowski reported that customers’ preference for best-of-breed vendors in the

move to cloud was putting pressure on integrated IT vendors like Cisco that could be highly

disruptive for Cisco’s core switching businesses.

272. Reuters reported on November 11, 2010 that the order declines in the public sector

and service provider businesses and bleak forecast raised concerns that Cisco was neglecting its

main business as it expanded beyond the traditional network equipment into everything from video

cameras to computer servers. UBS analyst Nikos Theodosopoulos reported that Cisco might be

spreading itself too thin by pursuing too many new markets with ongoing gradual networking share

loss.

273. On November 10, 2010, Lazard Capital analyst Ryan Hutchison downgraded Cisco,

questioning whether competition in Cisco’s core switching and router businesses was adversely

impacting the business. Hutchinson wrote that, “[d]espite a rigorous defense of the strength of the

company’s competitive positioning, the weak outlook raises the possibility that it may in fact be

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weakening.” Zacks Equity Research reported that the lowered guidance indicated a slowdown in

several important areas, including routers and switches.

274. Analysts question why Cisco did not initially provide gross margin guidance .

During the November 10, 2010 conference call, Cisco failed to provide gross margin guidance,

which the Company had always provided in the past. Analysts noted the omission and their

concerns about what it meant. During the conference call, RBC Capital Markets analyst Mark Sue

asked why management did not provide gross margin guidance. Calderoni responded that gross

margins would be in the 64% range for the rest of the year and that, in the near term, a reduction in

revenue volume or an increase in lower-margin consumer sales – which were seasonal and higher in

2Q11 due to the holiday season – could negatively impact the gross margin. Morgan Stanley analyst

Gelblum noted that Cisco did not provide gross margin guidance for the first time in five years,

which he suspected meant that Cisco could be preparing to engage in a price war to defend market

share.

275. Analysts question full-year revenue guidance . Analysts were also skeptical of the

full-year revenue guidance of 9% to 12% year-over-year growth. Morgan Stanley analyst Gelblum

reported that Cisco gave annual guidance for the first time in three years, presumably to provide

some level of comfort “post the weak FQ2 guide,” but that the “9-12% growth requires an

unexplainably strong 11% sequential growth in 2H11 over 1H11, which would appear to be patently

unachievable given the unsettled demand environment and the clear lack of visibility that caused

orders to dry up in essentially one month last quarter.” Oppenheimer analyst Kidron reported that the

guidance was “unreasonable,” and William Blair analyst Jason Ader reported the “aggressive guidance

for the second half of the fiscal year leaves us perplexed .”

276. Analyst skepticism was also noted in the financial press. Dow Jones reported on

November 12, 2010 that the magnitude of the weaknesses and bullish comments from other suppliers

stoked concern on Wall Street that Cisco might be under pressure in the routing and switch business.

277. Analysts’ reaction to the decline in switching sales and gross margins revealed by

Cisco on February 9, 2011 . Contrary to the repeated assurances provided by Chambers and

Calderoni during the November 10, 2010 conference call, on February 9, 2011, Cisco reported

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substantial declines in switching revenues, router revenues and product gross margins; and as the

tables in ¶¶82-83 and ¶¶87-90 show, the Company’s share of the switching and router markets

declined further. Chambers and Calderoni also acknowledged during the conference call that

competition and the rapid introduction of lower-priced and lower-margin products contributed to the

decline by cannibalizing sales of the higher-priced and higher-margin products they were replacing.

While I strongly believe we are very well-positioned versus our competition, we are in the middle of a major product transition, with dramatically higher price performance from these new products and architectural advantages versus our prior generation of products and that of our competitors. I’ll go into more detail in a moment, but with this item in mind, we did see our switching revenues decline 7% in Q2.

* * *

We did experience in the quarter an overall mix shift toward the lower-end products in the portfolio. But overall we are growing our footprint and driving an architectural transition. What this means to me is that our new switching products are very strongly positioned with an architectural play, while addressing our competition from a price performance perspective. This allows us to both grow our market and to continue to improve our margins over time with these new products, as you would expect us to do.

* * *

As the transition to switching products with dramatically higher price performance capabilities, we are clearly establishing a differentiated value to our customers. And as you’d expect during this transition, we are seeing pricing pressures on our established Catalyst portfolio.

This is where our competitors are focused. And in simple terms this is where we are going to own our own evolution. And we’re going to own the next generation in this space. To be candid, these product transitions within our own product families are occurring even faster than we expected, especially in terms of the ramp of the new products in terms of growth rates.

278. Analysts were surprised and again questioned Chambers and Calderoni. Like the

conference call on November 10, 2010, the February 9, 2011 conference call was contentious. The

Street.com reported on February 9, 2011 that “Chambers was trying to contain the damage.” The next

day, Eric Jackson, founder of Ironfire Capital, reported that the question-and-answer session did not

start for 50 minutes because Chambers “wouldn’t shut up” and that his “endless droning worried analysts”

because “[i]f you keep talking about how everything is fine, it usually means everything’s not fine.”

279. Morgan Stanley analyst Gelblum’s concern that Cisco’s failure to provide gross margin

guidance on November 10, 2010 could mean that Cisco planned to engage in a price war turned out


to be correct. On February 9, 2011, he issued a report noting that the 62.4% gross margin was the

lowest reported in nine years and indicated Cisco was trading revenue for margins. He also reported

that switching revenues declined a “startling” 11.3% quarter-over-quarter and 7.6% year-over-year and

expected Cisco’s share of the fixed Ethernet switch market to continue to decline as HP and Juniper

gained share and for margins to decline due to competition and cannibalization by Cisco’s newer

lower-end and lower-margin switches. He also reported that Cisco’s routing revenue grew just 1%

year-over-year on an organic basis compared to Juniper’s 30% year-over-year growth and 25%

quarter-over-quarter growth, which indicated that Cisco had lost share to Juniper.

280. The first question during the conference call was by Bank of America/Merrill Lynch

analyst Tal Liani, who asked for an explanation for the 7.5% year-over-year decline in switching

revenues and 5% year-over-year increase in router revenues, noting that those results were “materially

below the competition” and that there should not be pricing pressure in these segments because Cisco

did not have many competitors. Chambers responded that there “is always pricing pressure” and that

sales of Cisco’s newer Catalyst 7000 switch was cannibalizing sales of Catalyst 6000 switches

because Cisco would “have to sell almost two to three times the volume of the 7000 to have the same

revenue scenarios.” In response to a question from RBC Capital Markets analyst Mark Sue, who

asked why gross margins would not decline below 62% to 63% given pricing actions and extended

payment terms to compete and prevent market share declines, Chambers stated that new products

“always start at lower gross margins.”

281. On February 9, 2011, Oppenheimer analyst Kidron also reported the gross margin

decline reflected multiple product transitions and Cisco’s aggressive protection of its installed base.

On February 17, 2011, he reported that Oppenheimer had taken a deeper look at the underlying

transitions impacting Cisco’s switching business and believed that Cisco was facing intensifying

competitive pressures, as well as product-mix issues arising from poorly managed and timed

transitions.

282. On February 17, 2011 Auriga USA analyst Sandeep Shyamsukha reported that

conversations with industry experts suggested that Cisco’s new products like edge routers and

enterprise/data center switches continued to lack key software features and did not provide a

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seamless migration path to the existing customer base and that these product glitches would not be

fixed before 2Q12. On February 22, 2011, thejudagroup, a division of Sanders Morris Harris, Inc.,

reported that the switching product transition was “the broadest upgrade cycle we have seen in Cisco’s

switching business over the last 10 years” with “multiple product introductions across two overlapping

product families and is compounded by rapidly evolving requirements in the datacenter/cloud as well

as increased competition from HP and Juniper.”

283. RBC Capital Markets analyst Mark Sue reported that Cisco resorted to pricing action

to defend market share in key segments and that no meaningful rebound in product gross margins

was expected soon. Canaccord Genuity analyst Paul Mansky reported that material weakness in

product gross margins and the decline in switching revenues were the focus of the call and fueled

preexisting HP competition concerns. Credit Suisse analyst Paul Silverstein highlighted the

“unprecedented” product margin decline, echoing Gelblum by noting that the gross margin had not

been that low for a decade. Silverstein also reported the 4% year-over-year growth was “very

disappointing” and that Juniper’s routing business increased 90%. Wunderlich Securities analyst

Matthew Robison also noted that the product gross margin was a negative surprise and the lowest

reported since 2002. Piper Jaffray & Co. analyst Troy Jensen noted that Cisco was the only

networking company to report sequential revenue declines in a healthy IT spending environment and

was now “clearly losing share in two significant product categories, with switching sales down

sequentially for three consecutive quarters and router sales declining 8.9 percent quarter-over-

quarter.”

284. Channing Smith, managing director of Capital Advisors, reported that the

disappointing revenue and EPS guidance was “a way to cover up that they are facing competition in

their more mature business lines and that they are most likely going to use price as a weapon to hold

market share, and this is going to pressure earnings and margins.”

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F. February 9, 2011: Cisco’s Stock Price Declines 14.2% After Defendants Reveal Additional Problems in the Public Sector, Set-Top Box and Consumer Businesses, Unexpected Declines in Switching Revenues, Disappointing Router Revenues and Declines in Product Gross Margins

285. On February 9, 2011, Cisco issued a press release and held a conference call to report

2Q11 results, during which defendants began to reveal more of the previously concealed problems

with Cisco’s business and acknowledge the falsity of some of their previous statements, particularly

the assurances made during the November 10, 2010 conference call that the problems in the service

provider and public sector businesses were just “air pockets” that Cisco would “power through” and that

Cisco continued to execute well in both core markets and market adjacencies, continued to gain

market share in many products areas and was in great shape for major transitions.

286. Contrary to those assurances, Cisco reported a 7% year-over-year decline (and 11%

sequential decline) in switching revenues, a 1% year-over-year organic increase in routing orders

(i.e. , excluding orders from the Tandberg acquisition), a 7% sequential decline in router revenues,

further declines in cable set-top box orders, a decline in product gross margins and a 15% year-over-

year decline in consumer orders and that the challenges in the public sector business were expected

to worsen. Chambers acknowledged that none of it was a surprise to management, stating that “the

quarter evolved pretty much as we expected.” Calderoni also stated that Cisco’s 2Q11 financial results

“came in as expected.”

287. As alleged above, analysts were surprised and again questioned Chambers and

Calderoni during a contentious conference call. As a result of this unexpected adverse information,

Cisco’s stock price declined 14.2% from $22.04 on February 9, 2011 to $18.92 on February 10, 2011,

compared to a 0.1% increase in the S&P 500 and a 0.5% decline in the peer group. Analysts

attributed the decline to lower switching revenues and gross margins and the expectation that such

declines would continue.

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G. April and May 2011: Defendants Admit Cisco’s Move into Several New Markets Was Not Successful by Revealing that the Company Would Exit Consumer Businesses and Also Admit that the Company’s Organizational Structure Was Not Operating Very Effectively and Needed to Be Overhauled and Simplified

288. Chambers’ admissions of numerous problems to Cisco employees contradicted his

previous positive statements . On April 5, 2011, Cisco released a message Chambers sent to all

Cisco employees the previous day in which Chambers made various statements that contradicted his

previous positive representations. He admitted that: (1) aspects of the Company’s operational

execution were not sound; (2) the Company had been slow to make decisions; (3) employees had

talked to Chambers and made it very clear that Cisco must make it simpler for employees to do their

work; (4) the Company had been surprised where it should not have been; and (5) the Company had

lost the accountability that had been the hallmark of its ability to execute consistently for customers

and shareholders. He stated these problems were unacceptable and that Cisco had disappointed

investors, confused employees and lost credibility. Chambers wrote that Cisco would take bold

steps and make tough decisions to address the problems. He stated that Cisco needed to give

switching customers reasons to buy from Cisco because they were “buying across broader segments”

and because “competitors in this area are fierce.” He also stated that Cisco would “simplify the way we

work and how we focus our attention and resources.”

289. The financial press noted that Chambers’ admissions contradicted his previous

positive representations. Jim Duffy reported that Chambers’ admission that Cisco failed to execute

and had been slow to make decisions was shown by the product transition upheaval in the $15 billion

switching business. He also wrote that some believed the 33% decline in the Company’s stock price

and lackluster financial results over the past two quarters were due to “the ambitious agenda of

targeting 30 or so market adjacencies to stimulate high growth while sales of traditional routers and

switches chugs along at more modest growth due to Cisco’s massive installed base and dominance in

both markets.” Duffy reported that there were calls for Cisco to divest some of the new products it

acquired over the past decade and to refocus on its traditional strengths in routing and switching.

290. The same day, Stacey Higginbotham, a contributing writer for Giga Omni Media,

wrote that Chambers’ memorandum to employees was an admission that Cisco was in trouble, had

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screwed up and had let its eyes stray from the ball. She wrote that Cisco managed to let its market

share come under pressure from incumbent players and upstarts by not staying true to its core

networking focus and letting rivals set the agenda for the next big trend in networking, the idea of

one unified network. She noted that Cisco’s forays over the past few years into the consumer space,

video, telepresence and collaboration areas distracted it from core networking and that telepresence

was not worth the cost and hassle when Skype and Logitech’s LifeSize were cheaper and easier

videoconferencing products.

291. In an article published on April 6, 2011 in The Wall Street Journal discussing

Chambers’ memorandum, it was reported that Chambers “confessed the once highflying technology

company has lost its focus, lacks discipline and needs to overhaul its operations.” It also noted that

Cisco declined to comment beyond the memorandum or make Chambers available. The same day,

PC Magazine provided examples of missteps by Cisco, reporting that no one was buying UMI, the

home videoconferencing product, and that it was probably the grossest miscalculation in Cisco’s

history; that the Flip video recorder was expensive, lacked full HD capture and its still image

abilities did not match the competition; and that Cisco held only a fraction of the data center business

it entered in 2009 and which remained dominated by IBM, HP and Dell.

292. Others in the financial press reported that Chambers should be fired for the problems

he was now belatedly admitting. On April 6, 2011, Dow Jones reported that in a “mea culpa missive

to employees” “perennial cheerleader John Chambers now admits all is not well” and that the

Company’s problems included “[i]ll-judged acquisitions, a byzantine management structure and lost

market share [that] should have seasick Cisco investors asking whether their ship needs a new

captain.” It was also reported in the Dow Jones article that Chambers had “led Cisco so long that he

seems to be repeating mistakes,” including “a chaotic management structure including 59 internal

standing committees” that Chambers devised in 2009; acquisitions of Linksys, Scientific Atlanta and

Pure Digital; and market share declines in the core switching business. The same day, Brad Reese

wrote that Chambers was solely responsible for the problems at Cisco, that his memorandum

“audaciously and shamelessly . . . blames Cisco employees for what ails Cisco” and that Chambers

should be fired.

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293. As alleged above, on April 7, 2011, Chambers spoke at the Wells Fargo Securities

Tech Transformation Summit and admitted that: (1) Cisco introduced 85 new products in the last six

months of 2010; (2) new products “always have lower margins”; (3) it took three to four years before

new product gross margins came back to the levels of the products they replaced; (4) switching was

a challenge and a tough market because competitors with lower overall gross margins could offer

lower prices; (5) Cisco had to “dramatically change [its] speed of decision cycles”; (6) Cisco “did not

execute at the level that [it] needed to transition as a Company”; (7) Cisco would take “very bold steps,”

make “tough decisions on priorities and resources” and “cut back on the number of priorities”; and

(8) investors should expect an accelerated exit from some businesses, changes in operational strategy

and a dramatic reduction in expenses.

294. Cisco’s retreat from consumer businesses demonstrates the falsity of defendants’

previous statements . On April 12, 2011, one week after telling employees there were numerous

problems at Cisco that needed to be fixed, Cisco announced it was closing the Flip video business

and laying off 550 employees, which would result in a restructuring charge of $300 million;

refocusing the home networking business for greater profitability and connection to the Company’s

core networking infrastructure; integrating UMI into the Telepresence product line; and assessing the

core video technology integration of the Eos media solutions business or other market opportunities

for Eos.

295. The financial press again noted that the retreat from the consumer business was an

admission of a mistake but that more needed to be done. Miller Tabak & Co. analyst Alex

Henderson stated that he did not think there was an analyst on the planet who thought Flip was a

good acquisition and that Cisco’s grand vision of being in the consumer’s home network was “not

grounded in reality.” MarketWatch reported the announcement reflected a significant retreat from the

consumer market amid criticism that it had overreached in an expansion bid. CNET reported that it

reflected the view that Cisco needed to do something drastic to show Wall Street it was getting back

on track after it moved into new markets and lost market share in its core businesses. It also reported

that Cisco’s consumer strategy had largely been one failure after another, including the Linksys

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Home Audio system and UMI, which were priced too highly, and Flip, whose share of the video

recorder market had declined from 26% in 2009 to 17%.

296. Deutsche Bank analyst Brian Modoff wrote in an April 12, 2011 report that the moves

were positive but that Cisco still needed to address fundamental and structural issues around

achieving stability in its campus and data center switching businesses and develop a realistic strategy

to defend its low- and mid-range switching products from price competition from HP and

sophisticated data center plays, such as Juniper’s Qfabric, and a simplified management structure.

297. Cisco’s announcement of significant changes to its operations and organizational

structure is another admission that defendants’ previous statements were false . On May 5, 2011,

one month after Chambers admitted to employees that aspects of operational execution were not

sound, that the Company had been slow to make decisions, that employees had told him that Cisco

needed to make it simpler for them to do their work and that Cisco needed to “simplify the way we

work and how we focus our resources,” Cisco announced “significant changes to its business structure

and operations.” It reported that the Company would streamline sales, services and engineering

organizations as it focused on five areas driving the growth of networks and the internet.

298. Chambers stated that Cisco would make “transformational change[s],” including:

(1) organizing worldwide field operations into three geographic regions to drive faster decision

making with greater accountability; (2) organizing Cisco services around key customer segments and

delivery models in alignment with field operations; (3) organizing Cisco engineering functionally to

drive technology innovation, accountability and alignment across all five Company priority areas;

and (4) refining its cross-functional council structure to three councils that reinforce consistent and

globally aligned customer focus and speed to market across major areas of the business.

299. The financial press noted that the announcement contradicted defendants’ previous

representations that the Company’s organization structure was operating very effectively. Dow Jones

reported on May 5, 2011 that Cisco was switching to a “‘streamlined operating model,’ as the

struggling networking giant looks to refocus operations and simplify its oft-criticized management

structure” and after the “company has struggled to expand beyond its core business of routers and

switches, focusing attention in as many as 30 different directions.” In a May 7, 2011 article,

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Bloomberg reported that Cisco was “overhauling a management structure that investors and former

employees say slowed decisions, fuelled market-share losses and led to an exodus of senior

executives.” Robert Ackerman, founder of venture firm Allegis Capital, was quoted in the article as

stating that Cisco’s culture frustrated talented people, who felt like they were beating their heads

against the wall. It was also reported that former employees and others said the organizational

structure of councils and boards slowed decision making and left managers without full control.

300. On May 9, 2011, Dow Jones reported that the admissions of problems and changes

contradicted defendants’ previous positive statements and that the stark contrast was as hard to

explain as a Middle East dictator who overnight opted for democracy.

As we have been learning right across the Middle East these last few months, the core problem for a dictator who overnight opts for democracy is to explain what on earth he was up to during the previous decades when he was apparently castigating anybody who disagreed with him, confiscating their assets and putting them in anonymous Swiss bank accounts, and lying through his teeth about pretty well everything. Most people would accept that it is not inherently illogical for a bank manager to switch to becoming a plumber or a senator to transform himself into a painter and decorator, even though those transitions might appear a little odd.

On the other hand, overnight moral, intellectual and political conversions are quite another matter and rather more difficult to make sense of. John Chambers’ almost overnight translation from someone who talked endlessly about the superiority of his company and its staff and business methods, thought Cisco could grow at 12-17% each year when all statistical evidence was against him, spent over $60 billion of shareholders money seemingly to no purpose, and thought he had invested the greatest decentralised management system of all time, into a modest, practical manager ready to behave like a normal executive, does take some getting used to.

301. In another May 9, 2011 article, Reuters reported that it would take more than a quick

reorganization for Chambers to turn Cisco around and that Chambers had put his job on the line the

previous month when he admitted the Company had lost its way as it spent heavily to expand into

dozens of new markets. Reuters also reported that more changes were in the works and that Wall

Street analysts would grill Chambers during the May 11, 2011 conference call when Cisco reported

3Q11 results. Reuters noted that expectations were low because the Company had disappointed for

the past three quarters and that analysts wanted to hear how Chambers intended to revive the bread-

and-butter business of selling the plumbing of the internet and corporate networks after reporting

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declines in switching revenues and product gross margins. Reuters noted that competition and

customers switching to multivendor networks contributed to the decline.

302. Other reports pointed to Chambers’ admission that Cisco had “lost its way following a

series of disappointing results” and questioned whether the recently announced changes in the

bureaucratic management structure would be enough for the Company to reclaim the market position

it had had just a few years earlier. Wunderlich Securities analyst Matthew Robison reported that he

did not expect Cisco to deliver jarring news. Sterne Agee reported that the quarter appeared to be on

track, and Deutsche Bank reported that it expected results better than many feared.

H. May 11, 2011: Cisco’s Stock Price Declines 4.8% after the Company Reports Additional Problems with the Switching and Consumer Businesses and Plans to Reduce Expenses by $1 Billion; Chambers Reiterates that Cisco Will Streamline the Organization and Overhaul Its Business Model Dramatically

303. Despite the low expectations, on May 11, 2011, Cisco again disclosed unexpected

negative news that revealed more of the Company’s true financial condition. Cisco disclosed a 9%

year-over-year decline in switching revenues, a 49% year-over-year decline in product orders in the

consumer segment and an 8% year-over-year decline in public -sector orders. The Company also

reported that 4Q11 “will continue to show weakness” and that revenues were only expected to grow

2% year-over-year, below Cisco’s previous 8% to 11% forecast. Regarding Cisco’s 12% to 17%

annual growth target, Chambers said, “we clearly are taking 12% to 17% off the table.”

304. Chambers stated that Cisco was a very strong company in a healthy market but

acknowledged “a few problematic areas” Cisco was “taking comprehensive action to address,” including

“simplifying actions” and “focus[ing] on our organization and operating model.” He reiterated the May

5, 2011 announcement that Cisco was “streamlining our organization and overhauling our business

model dramatically.” He announced that Cisco would reduce expenses by $1 billion and divest or

exit underperforming businesses. He assured investors that Cisco was “moving quickly and will

continue to implement our action plan to fix what is broken and solidify our foundation for the

future.” He said that 4Q11 “will continue to show weakness, while we do the hard work behind the

scenes to be able to execute these changes.”

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305. Chambers acknowledged problems, stating, “we have had several areas of our business

come under pressure – consumer, traditional set-top box, switching and our public-sector customer

segment.” Regarding the switching market, Chambers admitted that competition and cannibalization

negatively impacted revenues and gross margins:

The switching market is in the midst of a significant transition. Across the industry, prices at each speed have been driving down price per port, along with significant transitions from 1G to 10G where we are at the forefront of this innovation. This is good for our customers as it will enable faster and more efficient infrastructure long-term and will enable even faster adaptation of cloud-based solutions.

As we have said previously, in the short term, this has placed pressure on our revenue opportunities across the market as customers have begun to adopt these new technologies. Specific to Cisco, our gross margins have come under pressure due to the transition of our own products at the high end of our switching portfolio as customers adopt the Nexus 7K.

306. Chambers also revealed that modular switching orders declined 10% and

acknowledged Cisco had some “share challenges in a few areas.”

307. Chambers also reported continued problems in the public sector segment, stating that:

(a) Cisco was “seeing a broad focus on cost reductions and public spending in almost every developed

market around the world”; (b) Cisco was “in almost every sector of government, every category of

public sector, and with the vast majority of our business being new every quarter, we tend to

experience challenges and opportunities quicker than others”; (c) “routing and switching represent

[the] largest market share in this segment”; and (d) order growth had declined from 30% to 8%.

308. As a result of this unexpected adverse information, Cisco’s stock price declined 4.8%

from $17.78 on May 11, 2011 to $16.93 on May 12, 2011, compared to a 0.5% increase in the S&P

500 and a 0.6% decline in the peer group.

309. MarketWatch reported that investors “heard a different tone from the usually exuberant

Chambers, one that was more grounded in the Company’s new reality” of losing market share in its

core routing and switching business to rivals like HP and Juniper. MarketWatch reported that

Chambers’ admission that Cisco was having some “share challenges” was his “first official

acknowledgement of that new reality,” as was his statement that Cisco was no longer expecting

annual revenue growth of 12% to 17%. MarketWatch also reported that the plan to slash expenses

by $1 billion was Cisco’s “strongest signal yet that the party was over.” Dow Jones reported that

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Chambers acknowledged that the switching business continued to face challenges, with competitors

like HP and Huawei hitting the Company hard on price. Deutsche Bank analyst Brian Modoff

reported that he was “struck by the highly cautious tone” of the call, which focused on the switching

business and the revenue and margin declines caused by competition and cannibalization. He

reported that Cisco highlighted three areas of concern – the consumer business, the public sector

business and the switching business.

310. Evercore Partners analyst Alkesh Shah reported that Chambers stressed Cisco would

lower its cost base to address the competitive challenges in switching, reduce expenses by $1 billion

and move away from the consumer business. William Blair analyst Jason Adler reported that the

focus of the call was on the plan to fix problems in the switching, consumer and public sector

businesses and that management stated gross margins on Nexus 7000 switches were 18% lower than

Catalyst switches. Barclays Capital analyst, Jeff Kvaal, warned that it could take years for Cisco to

reverse recent declines in profit margins that were once the envy of the industry. Gleacher & Co.

reported that Cisco was “a tanker ship that will require multiple quarters to fix its long term financial

model.”

311. The same day that Chambers acknowledged Cisco was losing market share to HP and

Juniper, Dave Donatelli, HP’s EVP and GM for networking products, called Cisco out for its lack of

innovation, echoing the findings in the Gartner report that a single-vendor network was not the best

way to go. He said Cisco’s legacy network was at the breaking point and that its management tools

were a“joke”and“just crap.” Subhodeep Bhattacharya (“Bhattacharya”), HP’s Director of Networking,

said that Cisco’s market share declined 3.8% in 3Q11, while HP’s increased 2.3%. Bhattacharya

explained that Cisco had failed to integrate its acquisitions and HP offered solutions at lower prices.

312. In addition to the critical reports issued by numerous analysts, many others criticized

Chambers after Cisco reported 3Q11 results on May 11, 2011. In a May 13, 2011 article titled “The

Truth About Cisco: John Chambers Has Failed,” Henry Blodget wrote that Chambers’ growth and

diversification by acquisition strategy had failed and that the Company’s decision to abandon the

byzantine and bureaucratic management structure confirmed that structure was also a failure, that

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Chambers had lost his mind, as Blodget had reported two years earlier, and that Chambers should be

fired:

For more than a decade, John Chambers has failed.

Chambers’ shareholder-value-creation strategy has failed. His growth strategy has failed. His management structure has failed. And the result is that Cisco’s stock has been dead in the water for more than a decade, even when measured from the bottom of the NASDAQ bust.

Ten years is a long time – plenty of time to evaluate a CEO’s performance. And based on Chambers’ performance, as Cisco begins its latest re-organization and rebuilding, it’s time for Cisco’s board to seriously consider giving John Chambers his walking papers.

313. After Cisco hosted several webinars on June 7, 2011 to introduce several new edge-

routing platforms, Jefferies analyst George Notter reported that Cisco was still roughly two years

behind Juniper and Alcatel-Lucent in the edge-routing space. One week later, RBC Capital Markets

analyst Mark Sue downgraded the Company and reported that Cisco was preoccupied with

reorganization and restructuring but not on reclaiming lost market share, expanding product

development and improving its financial model. He wrote that the root cause of many of the

challenges facing Cisco were driving towards an unrealistic growth target of 12% to 17%, assuming

a layered bureaucratic structure and moving into the entrenched server market.

314. On June 20, 2011, Sterne Agee analyst Shaw Wu issued a report in which he wrote

that Cisco needed to take more dramatic steps to turn the Company around, that its switch prices

were too high given the competition and that Cisco would therefore likely have to take the bitter

medicine of lower gross margin for the longer-term good. One week later, Auriga USA analyst

Sandeep Shyamsukha issued a report reducing the Company’s stock price target from $19 to $16 per

share because Auriga USA expected additional growth and margin pressures from commoditization

trends in switching and intensifying competition in routing. The same day, a Cowen & Co. analyst

downgraded Cisco for the same reasons and because of uncertainty about how Cisco would

restructure. The thejudagroup reported that Cisco was likely to report a significant restructuring in

July that would include a 5% to 10% headcount reduction and exiting several additional market

adjacencies.


315. On June 27, 2011, TheStreet.com reported that consumer advocate and Cisco

shareholder Ralph Nader had launched an attack on Cisco and Chambers, demanding that the

Company pay a special $1 per share dividend and increase its annual dividend from $0.24 to as

much as $0.50 per share. In a June 13, 2011 letter to Chambers, Nader wrote that Cisco’s

management was oblivious to building or maintaining shareholder value and that the Company could

easily pay the special $1 per share dividend because there were 5.5 billion shares outstanding and the

Company was sitting on $43.5 billion of cash.

316. On July 1, 2011, Nader published an update for upset Cisco shareholders, in which he

wrote that many shareholders had written him and were properly critical of top Cisco management

and often urged that Chambers and the Board be replaced. He noted the e-mails “provided

documentation signifying that a shareholder revolt will focus on the details of mismanagement; and

executive self-enrichment that fostered this climate of leaving the shareholders behind.” He

concluded the update by writing that top management had turned the wide-open business judgment

rule into an anti-shareholder force field and had to realize that that the trove of money was not theirs

but the shareholders’.

I. July 18, 2011: Cisco Announces that 11,500 Employees Will Be Laid Off as Part of Its Continued Implementation of a Comprehensive Action Plan to Simplify the Organization, Refine Operations and Reduce Expenses

317. On July 11, 2011, Bloomberg and other news outlets reported that Cisco was gearing

up to announce layoffs that could eliminate 5,000 employees and that the Company’s 5,000-employee

set-top box manufacturing facility in Juarez, Mexico was for sale. During the Company’s annual

Cisco Live! convention on July 12, 2011, Chambers did not provide any information about layoffs or

divestitures but did admit numerous problems. He said that he was overhauling the Company to

make it more agile and responsive to consumers and admitted that there were areas in which the

Company must do better, that Cisco was too complex and lost focus as it expanded into numerous

other tech markets and that the sales and engineering groups were pretty top-heavy.

318. The financial press again noted that Chambers had admitted problems that

contradicted his statements during the Class Period and appeared to be ready to address them.

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Seeking Alpha ’s Cameron Kaine, who recently called for Chambers’ resignation, reported on July 13,

2011 that Chambers’ promise to decisively streamline Cisco’s operations and speed up decision

making was an admission of what many had been saying all along – that “it was time to cut the fat.”

The next day, Sterne Agee analyst Shaw Wu reported that layoffs were a necessary step for Cisco to

right-size its cost structure to be more competitive with pricing in the market, particularly the

switching market. On July 15, 2011, Network World ’s Jim Duffy reported that “Chambers’ keynote

was almost contrite in tone as he sought to reassure customers that Cisco will come through its

current challenges stronger and more resolute – in every aspect of the company.”

319. On July 18, 2011, Cisco announced that it would reduce its workforce by

approximately 6,500 employees or 9%, and recognize a restructuring charge of $1.3 billion, as part

of its continued implementation of a comprehensive action plan to simplify the organization, refine

operations and reduce annual operating expenses. It also announced that it was selling the set-top

box manufacturing facility in Juarez, Mexico that would reduce the work force by another 5,000

employees.

320. Analysts applauded the move but also noted that more needed to be done, particularly

as it related to the core switching and router technologies, where Cisco revenues, market share and

gross margins had declined while defendants repeatedly and falsely told investors that Cisco was

maintaining revenue and market share growth while expanding into 30+ market adjacencies. In a

July 18, 2011 report, Deutsche Bank analyst Brian Modoff wrote that the layoffs were a step in the

right direction, particularly the large number of managerial jobs that were cut, but contributed little

to Cisco’s larger problems of sustainably growing revenues, exiting underperforming product areas

and surgically refocusing the business. Similarly, J.P. Morgan analyst Rod Hall reported that J.P.

Morgan remained concerned that the larger problems for the Company related to revenue pressure in

enterprise switching driven by competition, as well as share losses in edge routing.

321. Enderle Group analyst Rob Enderle reported that “Cisco won’t pull out of this by laying

off thousands, because getting better requires making better decisions.” He noted that Cisco’s

problems were “go[ing] to war with one of their larger partners, HP, and HP came back at them hard,

taking margin and share in the process,” and making “some horrible mistakes in the consumer market.”

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On July 21, 2011, Stephen D. Simpson, CFA reported that investors should not get too excited about

the layoffs because they did not address the Company’s significant competitive deficiencies, noting

that the once pioneering Cisco was now “the entrenched old warhorse that others target for market

share gains.”

J. August 10, 2011: Defendants Report that the Switching Business Is Still Under Pressure Due to Increased Competition and Cisco’s Rapid Introduction of New Products and that Cisco Was Still Simplifying the Organization to Accelerate the Speed of Decision Making

322. In August 2011, before Cisco reported 4Q11 and FY11 results, analysts reported that

they expected the Company to report results in line with guidance but, as RBC Capital Markets

analyst Mark Sue reported on August 1, 2011, that things were “still under disarray internally as

Cisco works to stem [market share] loss and reorganize, while laying off employees by the

thousands.” Others, like Cowen & Co. analyst John Marchetti, reported that items to watch included

additional information on the restructuring, headcount reductions, outlook for the remaining

consumer businesses and progress on product transitions, especially switching. In fact, Jefferies

analyst George Notter reported on August 8, 2011 that it expected the Company’s restructuring

efforts to be the major focus for investors.

323. The day before Cisco reported 4Q11 and FY11 results, The Business Insider quoted

Gleacher & Co. analyst Brian Marshall, who reported that Cisco “largely has itself to blame for its

current woes” and was “a victim of its own doing [by] focusing on non-core businesses like consumer,

and migrating off the path which made the company a tech bellwether such as innovative switching

and routing products.” The article emphasized the Company’s late recognition of the rapid shift to

lower-cost switches for the Company’s problems, which defendants revealed in February 2011 and

afterward resulted in Cisco’s introduction of 85 new products with lower prices and lower margins

that they knew would cannibalize sales of higher-priced and higher-margin products:

Given the way the market was saturated with its networking gear, it was smart of Cisco to seek out fresh sources of revenue. Less forgivable, however, is Cisco’s apparent blind-siding by the market’s rapid shift towards lower-pricing switches; switching accounts for almost a third of its overall revenue, and Cisco prides itself on exploiting major market transitions. If the company had paid more attention to switching – and less to consumer products – analysts say it would be in a much more favorable position today.

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324. The article also reported that 65% of TheStreet’s readers said that Chambers should

step down from the Company because he was instrumental in Cisco’s expansion into alternative

markets.

325. When Cisco reported 4Q11 and FY11 results on August 10, 2011, Chambers and

Calderoni revealed additional information contradicting their Class Period statements that Cisco was

successfully diversifying into 30+ market adjacencies while maintaining revenue and market share

growth in routing and switching and that the Company’s organizational structure was operating very

effectively. The Company reported a 4% year-over-year decline in switching revenues, a 3% year-

over-year decline in router revenues (and a 7% quarter-over-quarter decline in router revenues) and

another decline in product gross margins to 61.2%. Chambers stated that the switching business was

still under pressure, with declines in average selling prices and gross margins caused by increased

competition and the “rapid introduction by Cisco of new products almost across the board,” including

“the largest switching portfolio refresh in our history.”

326. Chambers reported that, since the last earnings call, Cisco had “moved very rapidly on

our plan to simplify operations and focus on our operating model and align our investments . . . to

reinforce our ability to execute on our strategy.” He stated that Cisco was “simplifying and focusing

our organization and operating model” by “reorganiz[ing] our sales, engineering, services and

operations organization, providing clear line of sight, accountability, accelerating the speed of

decisions, driving toward major improvements in productivity, and driving innovation at a faster

pace.” He also said that the Company had aligned its cost structure given the transitions in the

marketplace and was well into the implementation of reducing operating expenses by $1 billion.

327. Chambers said that Cisco was divesting, cutting back or exiting underperforming

operations and had made changes across engineering to create simplified organizational structures

that allowed for faster innovation and simplicity in the decision process. He stated that Cisco would

continue to accelerate and drive through the simplification process at an even faster pace and that the

changes made and to be made were dramatic and would continue for several years.

328. COO Gary Moore stated that Cisco had taken “swift action designed to simplify the

operating models of the Company within each organization . . . sharply reduced our boards and

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counsels and appointed clear and accountable leadership” and “chang[ed] our processes to reduce

duplication and increase our execution speed.”

K. September 13, 2011: Defendants Admit that Cisco’s Organization Structure Was “Fat” During the Class Period and that It “Slowed Decision Making Down” and Caused the Company to “Get Away from the Basics”

329. A month later, at Cisco’s September 13, 2011 Annual Financial Analyst conference,

Chambers, Calderoni and other Cisco executives made statements that contradicted the positive

statements defendants made during the Class Period. Chambers and Calderoni slashed annual

revenue growth from the 12% to 17% represented for most of the Class Period to 5% to 7% for the

next three years, including just 2% to 4% growth in the switching business and 5% to 7% in the

router business. Chambers acknowledged competition from HP in the switching business and

Huawei in the routing business, stating that Huawei was “a very tough long-term competitor.”

330. Chambers said that Cisco was in the third stage of “development simplification” and

that the Company “need[ed] to have consistency in innovation, consistency in operations.” He

admitted that Cisco was “fat” with “an extra 4 or 5 inches around the waistline” during the Class Period

and that it “slowed decision making down” and caused Cisco to “[get] away from the basics.” Chambers

provided examples, stating that there were “multiple engineering functions, multiple operating system

functions, multiple groups actually competing with each other on switching and routing” that had

recently been combined. He stated that the 23,000-person sales force had been “realigned completely,”

with 90% rather than 70% now in the field, and that 12,700 people had exited the Company.

331. COO Gary Moore also stated that Cisco had “gained a few inches around the waist,”

had “become fairly complex relative to allowing people to actually work with one another – get

decisions made quickly; respond to customers” and was “losing in the marketplace because of that

complexity.” He stated that Cisco had exited ten businesses, reduced its investment in six others and

reduced the time it took to approve some deals by 70%.

332. Calderoni stated that growth of switching revenues was “flat” in FY11 primarily

because of the switching product transition, “especially earlier in the year.” As he and Chambers

admitted previously, Calderoni said that gross margins declined because “pretty much the entire

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portfolio in our switching market was going through a refresh” and because of “more competition,

especially as you look at Asia and the emerging markets” in the router market. He also stated that

gross margins would continue to be in the 60% to 62% range in FY12, further demonstrating the fact

that it took two to three years for gross margins to recover on new products. He stated that the

slashed annual revenue growth guidance of 5% to 7% reflected “realistic goals that we can achieve.”

VI. SUMMARY OF CHAMBERS’ INSIDER SELLING

333. As shown in the following table, at the time defendants misled investors about the

state of Cisco’s business, Chambers sold 5,515,451 shares of Cisco stock for $134 million.

Date Shares

Sold Price Proceeds 2/8/10 2,200,000 $23.73 $52,206,000 3/5/10 1,800,000 $25.00 $45,000,000 5/17/10 1,250,000 $24.61 $30,762,500 5/18/10 22,273 $25.00 $556,825 8/18/10 243,178 $22.50 $5,471,505 Total 5,515,451 $133,996,830

334. Chambers’ sales constituted 83% of the Cisco shares he owned and 35% of his shares

and vested options. The sales were at prices that were substantially higher than the $16.93 price to

which the stock declined on May 12, 2011, the day after the end of the Class Period.

335. Chambers’ sales were also suspiciously and dramatically higher than his sales before

the Class Period. The 5.5 million shares sold during the Class Period was more than 11 times the

500,000 shares he sold before the Class Period, and the $134 million of proceeds was almost 12

times the $11.4 million Chambers received from his pre-Class Period sales.

336. The timing of the sales was particularly suspicious. The 4 million shares sold on

February 8, 2010 and March 5, 2010 occurred shortly after Cisco’s February 3, 2010 2Q10 earnings

release and conference call, during which Chambers made numerous positive – but false – statements

about Cisco’s business, including that Cisco was able to “catch market transitions and move into new

market adjacencies . . . while still maintaining revenue growth and market share gains in . . .

traditional areas” and that the Company’s “new organization structure of councils, boards and working

groups . . . [was] operating very effectively.” Moreover, the earliest expiration dates for the options

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Chambers exercised and sold were May 14, 2010 and August 21, 2010. If Chambers really believed

his statements, then he would not have sold the shares.

337. The sale of 1.27 million shares on May 17, 2010 and May 18, 2010 occurred just days

after Cisco’s May 12, 2010 earnings release and conference call, during which Chambers claimed

that “our game plan for handling the economic downturns hit on all cylinders. Q3 results are the

proof points and was, in my opinion, the strongest across the board quarter in our history.”

338. In March and May 2010, Brad Reese, a market participant who reports on Cisco,

wrote that Chambers’ sales were “curious” and demonstrated “perfect timing” because the options

Chambers exercised did not expire for months, and the sales occurred when it appeared the

Company’s stock price had peaked and as Chambers was boasting that Cisco’s game plan was “hitting

on all cylinders.”

339. On November 11, 2010, Michael Shedlock from Mish’s Global Economic Trend

Analysis wrote that Chambers’ sales, and sales by other insiders, showed that the insiders “bailed hand

over fist” and, unlike investors, were not surprised by the adverse news reported by Cisco on

November 10, 2010. He also reported that the insider sales, Cisco’s repurchase of 1.6 billion shares

for $38 billion in the five years ending July 2010 and the failure to pay dividends despite $40 billion

of cash allowed management to “pretend it [was] increasing shareholder value while corporate

insiders [got] to dump massive numbers of shares” and was “nothing more than shareholder rape.” On

February 9, 2011, after Cisco reported unexpected declines in switching revenues, consumer

revenues and product gross margins, disappointing router revenues and additional problems in the

public sector and set-top box businesses, Shedlock again reported that Chambers sold 5.5 million

shares for $134 million since February 2010 and that “Chambers has not done a damn thing for

shareholders for 10 years, cashing out hundreds of millions of dollars along the way. From the

perspective of a shareholder of a publicly traded company, Chambers is not worth a damn cent.”

340. It was reported in the Forms 4 filed by Chambers with the SEC that the sales were

made pursuant to a 10b5-1 trading plan adopted on June 16, 2008. But the plan did not establish

regular sales of the Cisco stock Chambers owned. Rather, the plan stated that between November

2008 and January 2011, Chambers could sell: (a) up to six million shares acquired via stock options

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granted in 2001 and 2002 and set to expire between May 2010 and January 2011; and (b) up to 1.2

million shares from other shareholdings.

341. Business Week reported that regulators are trying to determine whether 10b5-1 plans

are being used by corporate executives to circumvent insider-trading rules, that research shows

trades by 10b5-1 plans have beaten the market and that they are more likely to happen before, rather

than after, price declines. All of Chambers’ sales happened before, rather than after, Cisco’s stock

price declined.

VII. LOSS CAUSATION

342. As detailed above, defendants’ materially false and misleading statements and

omissions caused Cisco’s stock to trade at artificially inflated prices and operated as a fraud and

deceit on Class Period purchasers of Cisco’s securities. From February 3, 2010 to November 9, 2010,

Cisco’s stock price traded between $20 and $28 per share as defendants made false positive

statements about Cisco’s business and concealed the problems with the consumer business, the

decline in sales, market share and gross margins in the switching and router business, the decline in

demand for cable set-top boxes and huge price discounts that masked the decline and the problems in

the public sector segment. The Company’s stock price closed at $24.35 on November 9, 2010. On

November 10, 2010, Cisco began to reveal some of the previously concealed adverse facts and

revealed additional adverse facts on February 9, 2011 and May 11, 2011. As a result, Cisco’s stock

price declined 39% from its Class Period high of $27.57 to $16.93 as the artificial inflation was

removed from the Company’s stock price. Class members who purchased Cisco stock during the

Class Period suffered economic loss, i.e. , damages, under the federal securities law.

343. After defendants made false positive statements about Cisco on February 3, 2010, the

Company’s stock price increased $0.63 or 2.7% from $23.07 on February 3, 2010 to $23.70 on

February 5, 2010. By comparison, the S&P 500 declined 2.8%, and the S&P Information

Technology index declined 1.8%.

344. After Cisco reported its 3Q10 results on May 12, 2010 and defendants continued to

make false and misleading statements about the Company’s business and concealed the problems

alleged above, the price of Cisco’s stock declined 4.5 % from $26.74 on May 12, 2010 to $25.53 on

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May 13, 2010. By comparison, the S&P 500 declined 1.2% and the S&P Information Technology

index declined 1.4%. Analysts attributed the price decline to cautious guidance that reflected

significant slowing of quarter-over-quarter revenue growth, the second consecutive quarter of

declines in the gross margin and questions about price discounts. Cisco’s stock, however, continued

to trade at artificially inflated prices because of defendants false and misleading statements and

omissions about the Company’s business.

345. After Cisco reported its 4Q10 and FY10 results on August 11, 2010, the Company’s

stock price declined 10% from $23.73 on August 11, 2010 to $21.36 on August 12, 2010. By

comparison, the S&P 500 declined 0.5% and the S&P Information Technology index declined 1.7%.

Analysts attributed the decline to Chambers’ comments that Cisco was receiving mixed signals from

customers who were nervous about the wobbly global economy and the Company’s conservative

forecast for 1Q11. Cisco’s stock continued to trade at artificially inflated levels due to the false and

misleading statements made by defendants during the August 11, 2010 conference call and the

continued concealment of the problems with the Company’s business.

346. On November 10, 2010, Cisco reported its 1Q11 results and revealed some of the

previously concealed information including the decline in cable set-top box orders and public sector

orders. Reuters reported that investors were stunned by this unexpected negative news and the

Company’s stock price declined 16.2% from $24.49 on November 10, 2010 to $20.52 on November

11, 2010. By comparison, the S&P 500 declined 0.4% and the S&P Information Technology index

declined 1.8%. Cisco’s stock price continued to trade at artificially inflated prices because

defendants continued to conceal adverse information about the magnitude of the problems in the

cable set-top box business, problems in the switching and router business, and problems in the

consumer business. Indeed, they assured investors the problems were short term air pockets that

Cisco would power through and that Cisco was not losing ground to rivals in the switching and

router business.

347. On February 9, 2011, however, Cisco reported 2Q11 results and revealed more of the

previously concealed information, including lost ground to rivals in the switching and router

business. Cisco reported sequential declines in switching and router revenues, declines in product

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gross margins to levels not seen in more than ten years, further declines in cable set-top box orders, a

15% year-over-year decline in consumer orders and that the challenges in the public sector business

were expected to worsen. In response to this unexpected negative news, the Company’s stock price

declined 14.2% from $22.04 on February 9, 2011 to $18.92 on February 10, 2011. By comparison,

the S&P 500 increased 0.1% and the S&P Information Technology index declined 0.5%.

348. On May 11, 2011, Cisco reported 3Q11 results and revealed more of the previously

concealed information, including year-over-year declines in switching revenues, the Company’s stock

price declined 4.8% from $17.78 on May 11, 2011 to $16.93 on May 12, 2011. By comparison, the

S&P 500 increased 0.5% and the S&P Information Technology index increased 0.6%.

349. The declines in Cisco’s stock price following the partial disclosures compared to the

changes in the S&P 500 and the S&P Information Technology index negates any inference that the

losses suffered by class members were caused by changed market or industry conditions or

Company-specific facts unrelated to the fraudulent conduct.

VIII. CLASS ACTION ALLEGATIONS

350. Plaintiffs bring this action as a class action pursuant to Rule 23 of the Federal Rules

of Civil Procedure on behalf of all persons who purchased Cisco common stock on the open market

during the Class Period and were damaged thereby (the “Class”). Excluded from the Class are

defendants, directors and officers of Cisco and their families and affiliates.

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

impracticable. During the Class Period, there were an average of 5.6 billion outstanding shares

owned by thousands of persons and institutions. Thus, the disposition of their claims in a class

action will provide substantial benefits to the parties and the Court.

352. There is a well defined community of interest in the questions of law and fact

involved in this case. Questions of law and fact common to the members of the Class that

predominate over questions which may affect individual Class members include:

(a) Whether the federal securities laws were violated by defendants;

(b) Whether defendants engaged in a fraudulent scheme and omitted and/or

misrepresented material facts;

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(c) Whether defendants’ statements omitted material facts necessary to make the

statements made, in light of the circumstances under which they were made, not misleading;

(d) Whether defendants knew or recklessly disregarded that their statements were

materially false and misleading;

(e) Whether the prices of Cisco common stock were artificially inflated;

(f) Whether defendants’ fraudulent scheme, misrepresentations and omissions

caused Class members to suffer economic losses, i.e. , damages; and

(g) The extent of damages sustained by Class members and the appropriate

measure of damages.

353. Plaintiffs’ claims are typical of those of the Class because plaintiffs and the Class

purchased Cisco common stock during the Class Period and sustained damages from defendants’

wrongful conduct. Plaintiffs will adequately protect the interests of the Class and has retained

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

conflict with those of the Class.

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

adjudication of this controversy. A class action will achieve economies of time, effort and expense

and provide uniformity of decision to the similarly situated members of the Class without sacrificing

procedural fairness or bringing about other undesirable results. Class members have not indicated an

interest in prosecuting separate actions as none have been filed. The number of Class members and

the relatively small amounts at stake for individual Class members make separate suits

impracticable. No difficulties are likely to be encountered in the management of this action as a

class action.

355. In addition, a class action is superior to other methods of fairly and efficiently

adjudicating this controversy because the questions of law and fact common to the Class

predominate over any questions affecting only individual Class members. Although individual Class

members have suffered disparate damages, the fraudulent scheme and the misrepresentations and

omissions causing damages are common to all Class members. Further, there are no individual

issues of reliance that could make this action unsuited for treatment as a class action because all

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Class members relied on the integrity of the market and are entitled to the fraud-on-the-market

presumption of reliance.

356. The market for Cisco’s common stock was open, well developed and efficient at all

relevant times. Cisco’s stock met the requirements for listing, and was listed and actively traded, on

the NASDAQ, a highly efficient and automated market. As a regulated issuer, Cisco filed periodic

public reports with the SEC. Cisco regularly communicated with public investors via established

market communication mechanisms, including through regular disseminations 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 and other similar reporting services.

357. The change in the price of Cisco’s stock – compared to the changes in the peer group

and S&P 500 – in response to the release of unexpected material positive and negative information

about the Company shows there was a cause-and-effect relationship between the public release of

the unexpected information about Cisco and the price movement in the Company’s stock. The

average weekly trading volume of Cisco’s stock during the Class Period was approximately 313

million shares, or 5.6% of the average total outstanding shares. Numerous analysts followed Cisco,

attended the Company’s conference calls and issued reports throughout the Class Period. The

Company was eligible to register securities on Form S-3 during the Class Period. The average

market capitalization of Cisco was $122.2 billion. Institutional investors owned between 3.4 billion

and 4.0 billion of Cisco’s shares or between 60% and 71% of the average total outstanding shares.

The “float” or shares not owned by insiders comprised most of the shares as insiders owned about 4

million shares. The bid/ask spread ranged from zero to $0.02.

358. As a result of the foregoing, the market for Cisco common stock promptly digested

current information regarding Cisco from all publicly available sources and reflected such

information in the Company’s stock price. Under these circumstances, all purchasers of Cisco

common stock during the Class Period suffered similar injury through their purchases of Cisco

common stock at artificially inflated prices and the subsequent revelations concerning declines in

price, and a presumption of reliance applies.

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1 FIRST CLAIM FOR RELIEF

For Violation of Section 10(b) of the Exchange Act and Rule 10b-5 (Against Defendants Cisco, Chambers and Calderoni)

359. Plaintiffs repeat and reallege the above paragraphs as though fully set forth herein.

360. During the Class Period, defendants engaged in a scheme and fraudulent course of

conduct to misrepresent Cisco’s true financial condition; approved or furnished false information

underlying the false statements specified above, which they knew or recklessly disregarded were

misleading in that they contained misrepresentations; and failed to disclose material facts necessary

in order to make the statements made, in light of the circumstances under which they were made, not

misleading.

361. By engaging in the acts, practices and omissions previously alleged, each of the

defendants violated §10(b) of the Exchange Act and Rule 10b-5 by:

(a) employing devices, schemes and artifices to defraud;

(b) making untrue statements of material facts or omitting to state material facts

necessary in order to make the statements made, in light of the circumstances under which they were

made, not misleading; or

(c) engaging in acts, practices and a course of business that operated as a fraud or

deceit upon plaintiffs and others similarly situated in connection with their purchases of Cisco’s

publicly traded securities during the Class Period.

362. During the Class Period, defendants made, disseminated and/or approved each of the

statements specified above.

363. Each of the statements specified above were materially false or misleading at the time

they were made because they contained misrepresentations of fact or failed to disclose material facts

necessary to make the statements not misleading in light of the circumstances in which they were

made.

364. The statutory safe harbor conditionally provided by 15 U.S.C. §78u-5 for certain

forward-looking statements does not apply to any of the statements alleged herein to be materially

false or misleading because:

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(a) the statements were not forward-looking or identified as such when made;

(b) the statements were not accompanied by meaningful cautionary language that

sufficiently identified the specific important factors that could cause actual results to differ

materially from those in the statement; or

(c) the statements were made by defendants with actual knowledge that the

statement was false or misleading.

365. Defendants made, disseminated or approved the statements specified above while

knowing or recklessly disregarding that the statements were false or misleading or omitted to

disclose facts necessary to prevent the statements from misleading investors in light of the

circumstances under which they were made.

366. Plaintiffs and the Class purchased Cisco securities in reliance upon the truth and

accuracy of the statements specified above and the other information that was publicly reported by

defendants about Cisco and its operations and without knowledge of the facts, transactions,

circumstances and conditions fraudulently misrepresented to or concealed from the market during

the Class Period, as specified above.

367. Plaintiffs and the Class have suffered damages because they:

(a) paid artificially inflated prices for Cisco’s publicly traded securities;

(b) purchased Cisco securities on an open, developed and efficient public market;

and

(c) incurred economic loss when the prices of the securities declined as the direct

and proximate result of the public dissemination of information that was inconsistent with

defendants’ prior public statements or otherwise alerted the market to facts, transactions,

circumstances and conditions concealed by defendants’ misrepresentations and omissions or the

economic consequences thereof.

368. Plaintiffs and the Class would not have purchased Cisco’s publicly traded securities at

the prices they paid, or at all, if they had been aware that the market prices had been artificially and

falsely inflated by defendants’ fraudulent conduct and misleading statements.

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1 SECOND CLAIM FOR RELIEF

For Violation of Section 20(a) of the Exchange Act (Against All Defendants)

369. Plaintiffs repeat and reallege the above paragraphs as if fully set forth herein.

370. Defendants and/or persons under their control violated §10(b) of the Exchange Act

and Rule 10b-5 by their acts and omissions described above, causing economic injury to plaintiffs

and other members of the Class.

371. By virtue of their positions as controlling persons, defendants are each liable pursuant

to §20(a) of the Exchange Act for the acts and omissions of their co-defendants in violation of the

Exchange Act.

372. Each of the defendants acted as a controlling person of some or all of their co-

defendants, as set forth below, because they each had the capacity to control, or did actually exert

control, over the actions of their co-defendants in violation of the federal securities laws.

373. Chambers controlled Calderoni and Cisco through his position of power and control

and his responsibilities as Cisco’s Chairman and CEO; his power to hire and fire and his supervisory

authority over Calderoni and other members of Cisco’s senior management; his power and

responsibility to manage the day-to-day operations of Cisco, including those relating to growth and

diversification strategy pursued by Cisco; and his ability to control the contents of Cisco’s press

releases, conference calls, SEC filings and other public statements.

374. Calderoni controlled Cisco through his position of power and control and his

responsibilities as Cisco’s CFO; his power to hire and fire and his supervisory authority over other

members of Cisco’s senior management; his power and responsibility to manage the day-to-day

operations of Cisco, including those relating to growth and diversification strategy pursued by Cisco;

and his ability to control the contents of Cisco’s press releases, conference calls, SEC filings and

other public statements.

375. The Company had the power to control and influence Chambers and Calderoni by

virtue of its power to hire, fire, supervise and otherwise control the actions of its employees,

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including Chambers and Calderoni, and the salaries, bonuses, incentive compensation and other

employment consideration and arrangements provided to them.

376. Each of the Individual Defendants had direct and supervisory involvement in the day-

to-day operations of Cisco and, therefore, is presumed to have had the power to, and did , control or

influence the business practices or conditions giving rise to the securities violations alleged herein

and the content of the statements that misled investors about those conditions and practices as

alleged above. By virtue of their high-level executive positions, ownership of and contractual rights

with Cisco, participation in or awareness of the Company’s operations and intimate knowledge of the

matters discussed in the public statements filed by the Company with the SEC and disseminated to

the investing public, 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 false and misleading statements alleged above.

IX. PRAYER FOR RELIEF

WHEREFORE, plaintiffs pray for judgment as follows:

A. Declaring this action to be a proper class action pursuant to Rule 23;

B. Awarding plaintiffs and the members of the Class damages, interest and costs; and

C. Awarding such other relief as the Court may deem just and proper.

X. JURY DEMAND

Plaintiffs demand a trial by jury.

DATED: December 2, 2011 ROBBINS GELLER RUDMAN & DOWD LLP

CHRISTOPHER P. SEEFER

/s/Christopher P. Seefer CHRISTOPHER P. SEEFER

Post Montgomery Center One Montgomery Street, Suite 1800 San Francisco, CA 94104 Telephone: 415/288-4545 415/288-4534 (fax)

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SAMUEL H. RUDMAN 58 South Service Road, Suite 200 Melville, NY 11747 Telephone: 631/367-7100 631/367-1173 (fax)


MAUREEN E. MUELLER 655 West Broadway, Suite 1900 San Diego, CA 92101 Telephone: 619/231-1058 619/231-7423 (fax)

Lead Counsel for Plaintiffs


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1 CERTIFICATE OF SERVICE

I hereby certify that on December 2, 2011, I authorized the electronic filing of the foregoing

with the Clerk of the Court using the CM/ECF system which will send notification of such filing to

the e-mail addresses denoted on the attached Electronic Mail Notice List, and I hereby certify that I

caused to be mailed the foregoing document or paper via the United States Postal Service to the non-

CM/ECF participants indicated on the attached Manual Notice List.

I further certify that I caused this document to be forwarded to the following Designated

Internet Site at: http://securities.stanford.edu .

I certify under penalty of perjury under the laws of the United States of America that the

foregoing is true and correct. Executed on December 2, 2011.

/s/Christopher P. Seefer CHRISTOPHER P. SEEFER


Post Montgomery Center One Montgomery Street, Suite 1800 San Francisco, CA 94104 Telephone: 415/288-4545 415/288-4534 (fax) E-mail: [email protected]

CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS – C 11-1568-SBA

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