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February 24, 2004.


The opinion of the court was delivered by: JOEL PISANO, District Judge Page 2


This is a consolidated securities class action brought on behalf of all persons or entities who purchased Lucent common stock between October 26, 1999 and December 20, 2000 (the "Class Period") and suffered damages as a result (the "Class" or "Plaintiffs"). Before the Court is the Class's motion to approve a settlement of this matter and the plan of allocation. Defendant Lucent Technologies, Inc. ("Lucent") does not oppose this motion. The parties have resolved this action as part of a global settlement of what were originally fifty-three separate lawsuits against Lucent and various current and former Lucent directors, officers, and employees. A Stipulation and Agreement of Settlement dated September 22, 2003 (the "Stipulation" or "Settlement") is the outcome of that global settlement and the painstaking efforts made in negotiating it. The Settlement requires Lucent, among other things, to pay or cause to be paid to the Class cash, stock, and warrants valued at approximately $517 million when the shareholders were sent notice of the Settlement.*fn1 Today, given that the value of the warrants increases as the share price increases, the Settlement is worth approximately $610 million. Page 3

On December 12, 2003, this Court held a fairness hearing on the settlements reached in five Lucent actions pending before this Court: In re Lucent Technologies, Inc. Securities Litigation, 00-cv-621 (JAP), Laufer, et. al. v. Lucent Technologies, et. al., 01-cv-5229 (JAP), Pallas v. Schact, et. al., 02-cv-2460 (JAP), Cooper v. Schact, et. al., 02-cv-4260 (JAP), and Reinhart & Smith v. Lucent Technologies, Inc., et. al., 01-cv-3491 (JAP). In an Order and Final Judgment entered December 15, 2003, the Court approved the Settlement. Though the Court executed a Final Judgment and Order, the Court informed the parties that it would subsequently enter this Opinion on the motion to approve the settlement and plan of allocation.*fn2 Accordingly, for the reasons explained below, the Court approves the Settlement for the Class under Rule 23(e) of the Federal Rules of Civil Procedure, consistent with this Court's Order and Final Judgment entered December 15, 2003.

  I. Background

  A. The Parties

  The Lead Plaintiffs are Teamsters Locals 175 & 505 D & P Pension Trust Fund (the "Pension Trust Fund") and The Parnassus Fund and Parnassus Income Trust/Equity Income Fund ("Parnassus"). The Pension Trust Fund is a multi-employer pension trust organized in West Virginia and created under collective bargaining agreements between a number of employers and Teamsters Local Nos. 175 and 505. Co-Lead Plaintiff Parnassus, which was founded in 1984 and is located in San Francisco, has a principal investment objective of long-term growth of capital. It invests solely in companies that practice corporate social responsibility. Page 4

  The Court appointed the Lead Plaintiffs under the Private Securities Litigation Reform Act of 1995 (the "PSLRA"), and the Court appointed the law firms Milberg Weiss Bershad Hynes and Lerach LLP and Bernstein Litowitz Berger and Grossmann LLP as Co-Lead Counsel for Plaintiffs and the Class (collectively referred to as "Co-Lead Counsel".)

  The Defendants are Lucent, Richard A. McGinn, Donald K. Peterson, and Deborah C. Hopkins. Defendant Lucent is a Delaware corporation with its principal place of business and chief executive offices located at 600 Mountain Avenue, Murray Hill, New Jersey. Lucent designs, builds, and installs a wide range of public and private networks, communications systems, date networking systems, business telephone systems and microelectronics components, and manufactures integrated circuits and optoelectronic components for the computer and telecommunications industries.

  At all relevant times, Defendants Richard A. McGinn ("McGinn"), Donald K. Peterson ("Peterson"), and Deborah C. Hopkins ("Hopkins") served in the following capacities.

  McGinn was Lucent's President, Chief Executive Officer and Chairman of its Board of Directors from February 1996 until October 22, 2000. Relevant to this action, McGinn signed Lucent's 1999 Annual Report on Form 10-K and frequently made statements reported in press releases and other publicly disseminated materials.

  Peterson was Lucent's Chief Financial Officer and Executive Vice President until March 1, 2000. Peterson signed the 1999 Form 10-K.

  Hopkins joined Lucent on April 24, 2000, as Chief Financial Officer. Hopkins was responsible for executive management and oversight of all financial operations for the Company. Hopkins issued many of the allegedly misleading statements. Page 5

  B. The Litigation

  1. The Allegations Against the Defendants

  The Plaintiffs's allegations are pleaded in a Fifth Amended Complaint. Plaintiffs allege that by mid-1999, Lucent misrepresented that it was at the "`forefront'" of the competition within the telecommunications industry and that it anticipated continued growth. (Fifth Compl. ¶ 3.) At the beginning of the Class Period, Lucent allegedly had fallen behind in developing its optical networking products capable of running at "OC-192" speed, experiencing loss of sales and revenues. (Id. ¶ 4.) Lucent's problems with product design, reliability, and timeliness of deliveries throughout its product lines caused customer dissatisfaction and order cancellations. (Id.) Additionally, Lucent developed problems with AT & T, its largest and most important customer, because it was unwilling to manufacture to AT & T's specifications and unable to adequately develop products that met AT & T's changing requirements. (Id.)

  At this time, Lucent's management acknowledged internally that its optical networking group was in "`serious disrepair'" and that Lucent, as a result, was "`up against a revenue wall.'" (Id.) Externally, the public learned the same. An October 24, 2000 Wall Street Journal article, Lucent Ousts McGinn as CEO and Chairman, reported that Lucent senior executives had informed McGinn that Lucent needed to reduce public projections of revenue and earnings because new products were not yet ready for sale and sales of older products had declined. (Id. ¶ 6.) Plaintiffs allege that McGinn failed to heed this instruction, and Lucent, consequently, failed to advise investors of its declining business. (Id.) Page 6

  Moreover, Plaintiffs allege that Lucent and the Individual Defendants took various steps to conceal from the investing public the Company's true financial situation. (Id. ¶ 7.) They claim that Lucent, among other things, misrepresented actual demand for its optical networking products. (Id.) According to Plaintiffs, Lucent failed to disclose that customer demand for optical networking products had decreased even when it was producing at a rate slower than its competitors and discovering persistent technological problems with its products. (Id.) As a result, Defendants allegedly knew that potential customers were deserting Lucent, preferring instead competitor companies that were successfully deploying newer OC-192 capable products. (Id.)

  Faced with a declining product demand, Lucent allegedly inflated its reported sales by shipping unready products. (Id. ¶ 8.) Specifically, in September 1999, Lucent's optical networking head, Harry Bosco, told the Company's directors at a meeting in Germany that Lucent had a strategy to ship faulty optical networking products before solving their design and technical problems. (Id.) Though this decision was intended to increase reported sales, it exacerbated Lucent's existing problem regarding poor product quality and further diminished product acceptance and sales. (Id.)

  According to Plaintiffs, Lucent's accounting improprieties began during the first quarter of fiscal year 2000 (ended December 31, 1999) and continued throughout the class period. (Id. ¶ 9.) Plaintiffs allege that Lucent's most senior officers knew throughout the class period that: (1) Lucent's accounting practices violated generally accepted accounting principles ("GAAP"); (2) Lucent had improperly booked hundreds of millions of dollars of revenue on sales to customers when customers had not ordered products; (3) Lucent had improperly booked hundreds of millions of dollars of revenue on shipments to distributors even though Lucent's senior officers had specifically granted these distributors the right to ultimately return unsold products; (4) Lucent sales people were routinely entering into "`side Page 7 deals'" with distributors to allow them to return the product while improperly reporting these deals as current sales; and (5) Lucent was "`stuffing'" its distributors with products they did not want, did not need, and had not ordered. (Id. ¶ 9.)

  On January 6, 2000, Lucent announced that the Company would miss analysts's earnings estimates for the first quarter of fiscal year 2000. (Id. ¶ 10.) At that time, McGinn allegedly made false assurances regarding the strong demand for the Company's optical networking products, attributing the principal causes of the shortfall to manufacturing constraints that limited the Company's ability to fulfill customer orders. (Id.)

  Throughout the Spring and Summer of 2000, McGinn and Lucent allegedly continued to reassure the investing public of a strong demand for the Company's products. (Id. ¶ 11.) However, by this time Lucent lost all business for its newest optical networking products with its largest customer, AT & T, and had internally declared a "`sales crisis.'" (Id.) By no later than the end of Lucent's fiscal year 2000 second quarter, which ended March 31, 1999, Lucent's most senior officers had explicitly recognized that "`[a]s the first half of 2000 comes to a close, it is clear that we cannot continue with the current operational model — it just doesn't work.'" (Id.) Still, Lucent's reported results for the March quarter met expectations, and its share price was $62.39 on July 17, 2000. (Id.)

  Yet Lucent's results for the third fiscal quarter of 2000 failed to meet expectations. (Id. ¶ 12.) In a July 20, 2000 press release announcing those results, McGinn informed investors that Lucent's business remained strong, that Lucent's pro forma revenues from continuing operations would grow about 15% for the fourth fiscal quarter of 2000, and that pro forma earnings per share would be roughly in line with revenue growth. (Id.) In fact, Plaintiffs claim that McGinn's information was knowingly misleading. (Id.) A complaint filed against Lucent in December 2000 by Nina M. Aversano, Lucent's Page 8 former President, North America — Service Provider Networks, allegedly reveals that McGinn knew then that fourth quarter revenue and earnings projections were unattainable. (Id.)

  On October 10, 2000, Lucent disclosed information allowing analysts to determine that its optical networking business had actually declined 15% for the quarter and that it was increasing its reserve for uncollectible accounts receivable. (Id.) On October 11, 2000, Lucent's share price fell more than $10 per share, closing at $21.19 (Id.)

  On October 23, 2000, Lucent announced to analysts that fourth quarter revenues of $9.4 billion and pro forma earnings of $0.18 per share would meet expectations. (Id. ¶ 14.) By November 11, 2000, Lucent's share price increased to approximately $24 per share, leaving analysts to conclude that Lucent had begun to take a "`step in the right direction.'" (Id.)

  On November 21, 2000, however, Lucent revealed that 2000 fourth quarter results reported on October 23, 2000, materially overstated the Company's results and, thus, that Lucent had missed analysts's expectations for that quarter. (Id. ¶ 15.) Specifically, Lucent stated that an unspecified "`revenue recognition problem'" had affected approximately $125 million of reported quarterly revenue. (Id.) As a result, the Company announced that it would restate its fiscal quarter revenues and that both quarterly and yearly earnings would drop approximately two cents per share. (Id.) Lucent share value then fell to $17.63. (Id.)

  Finally, on December 21, 2000, Lucent disclosed that its November 21, 2000 announcement regarding its revenue recognition problem was inaccurate. (Id. ¶ 16.) In a December 21, 2000 announcement and conference call with analysts, Lucent indicated that it, again, would restate its fiscal fourth quarter revenues by reducing revenue for the quarter by $679 million to $8.7 billion — a figure $700 million less than the quarterly revenues initially reported and more than $400 million greater than Page 9 the restatement amount announced on November 21. (Id.) The Company also revised its earnings per share for the quarter from $0.18 per share to $0.10 per share. (Id.) Additionally, the Company revealed that it would take a $1 billion restructuring charge in late January 2001. (Id.)

  The December 21, 2000 announcement revealed that Lucent's sales practices were responsible for, among other things, inappropriate recognition of substantial revenues for sales of products later returned because of either a prior agreement or the product's incompleteness. (Id. ¶ 17.) Following this announcement, Moody's Investor Services downgraded ...

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