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Extreme's Failed Integration With Enterasys And Lenovo Securities Suit

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Extreme Networks develops and sells network infrastructure equipment and offers related services contracts for extended warranty and maintenance.  Extreme generates its revenue primarily through the efforts of its salesforce or "field sales organization," which both supports its partners and makes direct sales to end-user customers.  About two thirds of Extreme’s business is done through partners and distributors, and the other third of its business is direct. On February 5, 2014, Extreme announced that going forward the two large partnerships driving revenue would be Ericsson and Lenovo.

Who Is Affected?

This class action is brought on behalf of a class consisting of all persons who purchased Extreme Networks common stock between November 4, 2013 and April 9, 2015, inclusive, seeking to recover damages and pursue remedies under the Securities Exchange Act of 1934.  Extreme is headquartered in Sab Jose, California and was incorporated in Delaware.  Its shares trade on NASDAQ under the ticker symbol “EXTR.” 

Procedural History

This class action was filed on October 23, 2015 and is captioned Jui-Yang Hong, et al. v. Extreme Networks, Inc., et al.  It was filed in the California Northern District Court and its civil docket number is 4:15-cv-04883-DMR.  The class period runs from November 4, 2013 through April 9, 2015, inclusive.

The gist of this class action comes from the merger of Extreme and Enterasys, which was announced in September 2013.  According to Extreme’s CEO, Charles Berger, Extreme planned and committed to attain double-digit revenue after the integration of the two companies.  In a July 21, 2014 press release, Mr. Berger declared the integration would be completed early that month, which is two months ahead of schedule.  One month later, Extreme released its fourth quarter financial results, which stated the sales force integration was complete, with all territories rationalized, and the team aligned and executing.  Mr. Berger announced that all integration issues were behind and that the two companies had been fully integrated.

Throughout the year 2014, Extreme and its top management continued its assurances that the merger between Extreme and Enterasys had been completed successfully.  It was not until January 28, 2015, when the defendants, during a conference call discussing Extreme’s second quarter 2015 financial results, were forced to back off from the 10% growth they had forecast, conceding that the integration of Enterasys had not been completed, as they had previously assured investors.  Defendants nevertheless continued to falsely reassure investors that Extreme remained on track to deliver its fiscal year guidance.

On April 9, 2015, after the close of trading, Extreme preannounced that it would miss its previously issued guidance by more than $20 million, that trading of its shares had been halted, and that Extreme’s Chief Revenue Office and sales leader, Jeff White, was "no longer with the Company" after only six months of engagement.

Following the April 9, 2015 announcement, Extreme’s stock price fell nearly 25%.

On May 6, 2015, Extreme held an earnings call to discuss its third quarter financial results where Extreme’s newly appointed CEO, Ed Meyercord (who replaced Mr. Berger soon after the stock plummeted), admitted that:

  1. The integration of Enterasys and its salesforce had been unsuccessful;
  2. That the problems with sales “slipping” (i.e., being delayed and cancelled) into the next quarter were far more extensive than previously reported; and
  3. That Extreme had no visibility into Lenovo and did not know if or when that relationship would contribute to revenue.
Current Case Status: 

This case is in the notice period.  When a shareholder brings suit under certain federal securities laws, generally that shareholder must give notice via a press release.  This notice starts a sixty-day period of time when any shareholder can investigate the underlying claims of the lawsuit and then elect to bring suit as well.  At the end of this sixty-day period, the court appoints one shareholder (or a group of shareholders) to prosecute the securities litigation.  We will review the docket again in December and update this page as warranted.

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