Here's the recent class action complaint. I have not had a chance to read it:
GIRARD & GREEN, LLP
Robert S. Green, Esq. (CA Bar 136183)
160 Sansome Street, Suite 300
San Francisco, CA 94104
Telephone: (415) 981-4800
GOODKIND LABATON RUDOFF
& SUCHAROW LLP
Jonathan M. Plasse
James M. Strauss
Catherine A. Murphy
100 Park Avenue, 12th Floor
New York, New York 10017-5563
Telephone: (212) 907-0700
Attorneys for Plaintiff
IN THE UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF CALIFORNIA
LILLIAN LEVINE, individually and on
behalf of all others similarly situated,
Plaintiff,
- v. -
NUKO INFORMATION SYSTEMS, INC.
and JOHN H. GORMAN,
Defendants.
____________________________________
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Civil Action No.
Jury Trial Demanded
COMPLAINT
CLASS ACTION
1. Plaintiff, by her attorneys, for her Class Action Complaint (the "Complaint"), alleges the following upon personal knowledge
as to herself and to her own acts, and upon information and belief based upon the investigation of plaintiff's attorneys as to all
other matters. The investigation includes the thorough review and analysis of public statements, publicly-filed documents of
Nuko Information Systems, Inc., ("Nuko" or the "Company"), press releases, news articles and the review and analysis of
accounting rules and related literature.
SUMMARY OF ACTION
2. This is a securities class action on behalf of public investors who purchased the common stock of Nuko during the period
from April 24, 1997 through May 20, 1997 (the "Class Period"). This case involves a classic scheme in which defendants,
among other wrongful acts, disseminated materially false and misleading press releases and public statements reporting
financial results for Nuko's fiscal 1997 first quarter ended March 30 1997.
3. In fact, documents reporting these financial reports, (i.e., Company press releases and newswire reporting agencies quoting
officers and/or directors of the Company), overstated Nuko's revenues and income. On May 20, 1997, the end of the Class
Period, defendants unexpectedly announced that a restatement of the Company's previously announced 1997 fiscal first
quarter results would be required.
4. The financial misrepresentations disseminated by defendants during the Class Period permitted defendants to artificially
inflate and/or maintain the market price of Nuko stock.
5. As a result of this scheme, plaintiff and other unsuspecting members of the investing public paid artificially inflated prices for
Nuko common stock during the Class Period, which stock traded as high as $7.75 per share.
6. The Company was finally forced to disclose the truth on May 21, 1997. Following the May 21, 1997 disclosure, Nuko's
stock immediately fell over 31% and currently trades at approximately $4.25 per share, a price which is well below the
Company's high during the Class Period. Nevertheless, throughout the Class Period, defendants remained glaringly silent and
permitted Nuko's false financial information to remain uncorrected, in order to prolong -- for as long as possible -- the false,
positive appearance they improperly fostered.
JURISDICTION AND VENUE
7. This Court has jurisdiction over this action pursuant Section 27 of the Securities Exchange Act of 1934 (the "1934 Act"),
28 U.S.C. 1331 and 1337. The claims asserted herein arise under Sections 10(b) and 20(a) of the 1934 Act, 15 U.S.C.
78j(b), 78(n), and 78t(a), and Rule 10b-5, 17 C.F.R. 240.10b-5, promulgated thereunder.
8. Venue is proper in this District pursuant to Section 27 of the 1934 Act, 15 U.S.C. 78aa, and 28 U.S.C. 1391(b).
Nuko is headquartered in this District in San Jose, California, and many of the acts giving rise to the violations complained of,
including the dissemination of false and misleading public statements and financial information, occurred in this District.
9. In connection with the wrongs alleged herein, defendants used the instrumentalities of interstate commerce, including the
United States mails, interstate wire and telephone facilities, and the facilities of the national securities markets.
THE PARTIES
10. Plaintiff Lillian Levine purchased shares of Nuko common stock during the Class Period, and was damaged thereby, as
set forth in the accompanying Certification.
11. Defendant Nuko is a Delaware corporation with executive offices at 2391 Qume Drive, San Jose, California 95131.
Nuko designs, markets and sells one-way and two-way video networking products which are instrumental in the development
of broadband (high capacity) video networks. The Company's products permit its customers to compress and decompress
digital video and to transmit signals over many types of networks using different interfaces and protocols. As of April 14,
1997, the Company had approximately 10,694,417 shares of common stock outstanding. These shares are listed and actively
trade on the NASDAQ National Market.
12. Defendant John H. Gorman was at all relevant times a Vice President of Finance, Chief Financial Officer, Secretary and
Treasurer of the Company. As of April 30, 1997, Gorman owned or controlled 166,666 shares of Nuko's approximately
10.7 million issued and outstanding common shares. Part of Gorman's compensation package at Nuko included the granting
of stock options to him, and as of April 30, 1997, Gorman maintained stock options on 250,000 shares of Nuko common
stock. As of May 21, 1997, the close of the Class Period, one-third of Gorman's Nuko stock options had already vested (on
September 9, 1996), one-third of Gorman's stock options had vested during the time the Company was improperly recording
revenues during its 1997 first fiscal quarter (on March 9, 1997), and one-third of Gorman's stock options were scheduled to
vest in the near future (on March 9, 1998).
13. By virtue of his position as chief financial officer of the Company, Gorman had the authority and ability to and, in fact,
controlled the contents of the Company's public press releases and public disclosures relating to the financial operations and
results. Further, the actions of Gorman during the Class Period caused the material misstatement of the Company's financial
condition and results as alleged herein. Gorman was aware of the contents of the Company's publicly disseminated press
releases and public representations alleged herein to be misleading prior to their issuance and had the ability and opportunity
to prevent their issuance or cause them to be corrected, but failed to do so.
CLASS ACTION ALLEGATIONS
14. Plaintiff brings this action as a class action pursuant to Rules 23(a) and 23(b)(3) of the Federal Rules of Civil Procedure,
individually and on behalf of all other persons or entities who purchased or acquired Nuko common stock on the open market
during the period from April 24, 1997 through May 20 1997, inclusive (the "Class Period") and were damaged thereby,
excluding the defendants herein, their affiliates and any officers or directors of Nuko or its affiliates, and any members of
immediate families and their heirs, successors and assigns (the "Class").
15. The Class is so numerous that joinder of all the members of the Class is impracticable. As of April 4, 1996, the Company
had approximately 10.7 million shares of common stock outstanding held by 1,500 stockholders of record. Plaintiff believes
that there are hundreds of beneficial holders of the Company's common stock located throughout the United States.
16. Plaintiff's claims are typical of the claims of absent Class members. Members of the Class have sustained damages arising
out of defendants' wrongful conduct in violation of the federal securities laws in the same way as the plaintiff sustained
damages from the unlawful conduct.
17. Plaintiff will fairly and adequately protect the interests of the Class. She has retained counsel competent and experienced
in class and securities litigation.
18. A class action is superior to other available methods for the fair and efficient adjudication of the controversy. The Class is
numerous and geographically dispersed. It would be impracticable for each member of the Class to bring a separate action.
The individual damages of any member of the Class may be relatively small when measured against the potential costs of
bringing this action, and thus make the expense and burden of this litigation unjustifiable for individual actions. In this class
action, the Court can determine the rights of all members of the Class with judicial economy. Plaintiff does not anticipate any
difficulty in the management of this suit as a class action.
19. Common questions of law and fact exist as to all members of the Class and predominate over any questions affecting
solely individual members of the Class. These questions include, but are not limited to, the following:
(a) whether defendants' conduct as alleged herein violated the federal securities laws;
(b) whether the press releases and statements disseminated to the investing public during the Class Period
misrepresented Nuko's financial condition and results;
(c) whether defendants acted knowingly or recklessly in omitting and/or misrepresenting material facts;
(d) whether the market price of Nuko common stock during the Class Period was artificially inflated; and
(e) whether the members of the Class have been damaged, and if so, what is the proper measure of damages.
20. The statutory safe harbor provided for forward-looking statements under certain circumstances does not apply to any of
the allegedly false statements pleaded in this Complaint.
FACTUAL BACKGROUND
21. Since at least October of 1996, the Company portrayed itself as a financially growing Company with a strong customer
base.
22. In that regard, on October 25, 1996, Nuko released its financial results for its 1996 third fiscal quarter ended September
30, 1996. In that release, in which Gorman was listed as the Company's "contact" person, the Company announced revenues
for its 1996 third fiscal quarter of $4.3 million, compared to $0.1 million for the same period of 1995, which revenues also
represented an increase by 105% over its 1996 fiscal second quarter financial results.
23. In commenting on its 1996 fiscal third quarter financial results, Nuko's Chairman and Chief Executive Officer Pratap
("Bob") Kondamoori ("Kondamoori") noted that the Company was "pleased" with its third quarter financial results, and that
"[t]he increase in revenues reflects increased shipments for both our Highlander and our OEM product line. Importantly, we
also completed several agreements with key strategic partners in the quarter.[.]"
24. On or around December 17, 1996, the Company again released positive news concerning its improving financial
condition. On or around December 17, 1996, the Company announced that it had raised $10,000,000 in a private placement
of Convertible Preferred Stock. The private placement was between the Company and RGC International Investors, LDC
("RGC"), and was funded by an initial $5 million payment on or around December 17, 1997 and a second $5 million payment
due upon the effectiveness of a Registration Statement registering the Convertible Preferred Stock.
25. At the time the private placement was announced, Kondamoori commented about the strategic benefits to the Company
of RGC's $10 million investment and, in particular, the positive impact such an investment would have on Nuko's position in
the video networking market: "This investment will strengthen our ability to establish Nuko as a premier player in the market
for digital video networking equipment." Once again, Gorman, the Company's Chief Financial Officer at the time, was listed as
the contact person in connection with the Company's December 17, 1997 press release.
26. On February, 14, 1996, Nuko announced its financial results for its 1996 fiscal fourth quarter in a press release listing
Gorman as the contact person. Revenue in the quarter was $4.2 million, as compared to $0.2 million for the same period in
1995, but was essentially "flat" as compared to the Company's 1996 fiscal third quarter. Significantly, however, in announcing
the Company's fourth quarter financial results, Nuko stated that the Company had shipped to new customers, "but did not
recognize revenue for," a number of its systems valuing approximately $1 million. In commenting on the Company's 1996
fiscal fourth quarter financial results, Kondamoori again emphasized the Company's anticipated growth: "Although the fourth
quarter was flat over the immediately preceding third quarter, we believe we have positioned ourselves for strong growth in
the coming year . . . . We are focusing our primary efforts and corporate resources on the commercial market . . . because we
believe these markets offer both short term profit potential and long term growth opportunity."
27. On April 24, 1997, the Company issued a press release announcing its financial results for its 1997 first fiscal quarter
ending March 31, 1997. As reported on April 24, 1997, the Company's revenue for the quarter was $6.1 million, compared
to $0.5 for the same period in 1996, its net loss for the quarter was $1,807,000, compared to a net loss of $3,065,000 for
the same period in 1996, and its net loss per share for the 1997 first fiscal quarter was just $.17, compared to a net loss per
share of $.37 for the comparable period in 1996.
28. In commenting on the Company's financial results for its 1997 first fiscal quarter, Kondamoori stated as follows:
We are pleased with our first quarter results . . . . During the quarter a number of new customers . . . were
added to our customer base. . . . I believe that the strengthening of our management team, the addition of new
customers to our customer base, the introduction of new product solutions, combined with our ability to provide
an end-to-end open architecture solution, positions Nuko to play a major role in the deployment of advanced
broadband networks.
Kondamoori's comments were contained in a press release which again listed Gorman, the Company's Chief Financial Officer
and the individual responsible for the Company's reported financial results, as the contact person for the release.
29. Less than one month later, on May 21, 1997, the Company announced that its April 24, 1997 disclosures concerning its
financial results for its 1997 first fiscal quarter were erroneous, and that its results would have to be restated for its 1997 first
fiscal quarter.
30. In particular, on May 21, 1997 the Company announced that its April 24, 1997 press release had, among other things, (i)
overstated the Company's 1997 first fiscal quarter revenue by nearly $4 million, or nearly 67% of the $6.1 originally
announced, and (ii) understated the Company's net loss and net loss per share for its 1997 first fiscal quarter by over 100%.
Specifically, the Company's May 21, 1997 restated results for its 1997 first fiscal quarter revealed as follows:
April 24, 1997
Announced Results
May 21, 1997
Restated Results
Quarterly revenue
$6,100,000
$2,200,000
Quarterly net loss
$1,800,000
$3,900,000
Quarterly net loss
per share
$.17
$.37
31. The Company's May 21, 1997 press release attributed the Company's restated revenue (i.e., its reduction of revenue by
nearly $4 million from that originally reported) to (i) its decision to defer $2.2 million of revenue related to new purchase
orders from first time customers; (ii) its decision not to recognize revenue of $1.8 million "due to issues related to on-time
payment"; and (iii) $165,000 in reserves taken for foreign taxes "related to a one-time licensing fee." In commenting on the
restated results, Kondamoori stated:
While we are disappointed to make these adjustments, as reflected above, to our previously announced first
quarter results, we have decided not to recognize certain revenues and to take appropriate reserves until we can
ensure timely payments from customers. This policy, as recommended by our auditors, is designed to ensure the
Nuko's financial position is clear to our shareholders, strategic alliances, and customers.
None of these factors were disclosed in the Company's April 24, 1997 press release.
32. In addition to restating its 1997 first fiscal quarter results, the Company's May 21, 1997 press release further announced
that Chief Financial Officer John Gorman resigned from Nuko effective immediately.
33. As a result of the Company's May 21, 1997 restatement of financial results, investors were completely astounded. On
May 20, 1997, Nuko's common stock closed at a trading price of $6 3/16. One day later, after Nuko's announcement of its
restated earnings and financial results for its 1997 first fiscal quarter, over 31% of the Company's market capitalization had
been wiped out, with the stock declining $1 15/16, from $6 3/16 per share to a closing price of $4.25 per share on May 21,
1997.
Defendants' False and Misleading Information
34. During the Class Period, defendants materially misled the investing public, thereby inflating the price of Nuko securities, by
publicly issuing false and misleading statements and omitting to disclose material facts necessary to make defendants'
statements, as set forth herein, not false and misleading. Said statements and omissions were materially false and misleading in
that they failed to disclose material adverse information and misrepresented the truth about the Company, its financial
performance, accounting, reporting and condition.
35. During the Class Period, defendants disseminated materially false and misleading information as follows:
(a) Defendants reported revenues for the 1997 first fiscal quarter which was overstated, in the aggregate, by
approximately $4 million. This false information was contained in the Company's April 24 press release and
other publicly disseminated representations setting forth Nuko's 1997 first quarter financial results.
(b) The Company's losses and losses per share were materially understated; and
(c) The Company's financial statements did not present, in all material respects, the Company's true financial
condition, and did not reflect all adjustments which were necessary for a fair statement of the interim period
presented.
36. As a result of its accounting improprieties during the Class Period, the Company's reported financial results (and Gorman)
also violated at least the following provisions of GAAP for which defendants are necessarily responsible:
(a) The principle that financial reporting should provide information that is useful to present and potential
investors and creditors and other users in making rational investment, credit and similar decisions was violated
(FASB Statement of Concepts No. 1, 34);
(b) The principle that financial reporting should be reliable and that it represents what it purports to represent
was violated. That information should be reliable as well as relevant to a notion that is central to accounting
(FASB Statement of Concepts No. 2, 58-59);
(c) The principle that conservatism be used as a prudent reaction to uncertainty to try to ensure that uncertainties
and risks inherent in business situations are adequately considered was violated. The best way to avoid injury to
investors is to try to ensure that what is reported represents what it purports to represent (FASB Statement of
Concepts No. 2, 95, 97);
(d) GAAP's requirement of the disclosure of an existing condition, situation or set of circumstances involving an
uncertainty when there is at least a reasonable possibility that a loss or an additional loss may have been
incurred. (Statement of Financial Accounting Standards No. 5 (Accounting for Contingencies")).
37. GAAP are those principles recognized by the accounting profession as the conventions, rules and procedures necessary
to define accepted accounting practice at a particular time. Regulation S-X (17 C.F.R. 210.4-01(a)(1)) states that financial
statements filed with the SEC which are not prepared in compliance with GAAP are presumed to be misleading and
inaccurate.
38. Nuko materially overstated its revenues and understated its losses that it reported in its publicly disseminated financial
statements for its 1997 first fiscal quarter as described above. Gorman improperly allowed and/or instructed that transactions
not meeting the requirements of GAAP, the SEC rules and regulations, and Nuko revenue recognition policies be recorded on
Nuko's books and records as revenue. As a result of defendants' actions, the financial statements for the 1997 first fiscal
quarter were materially false and misleading and failed to disclose the true financial status of Nuko.
Defendants' Knowledge Or Reckless Disregard Of The False And Misleading Financial
Statements
39. Defendants' false representations and material omissions were made with scienter in that: defendants knew or recklessly
disregarded that the public documents and statements issued or disseminated by Nuko were materially false and misleading as
described above; knew or were reckless in not knowing that the false financial results would be issued or disseminated to the
investing public; and knowingly and substantially participated in the preparation and/or issuance or dissemination of such
statements or documents. The following factors indicate that defendants made the misrepresentations knowingly or with
reckless disregard for the truth:
(a) Throughout the Class Period, Gorman sought to artificially inflate or maintain the price of Nuko common
stock so that he could increase the value of his securities, including stock options, a substantial part of which
vested during the Company's 1997 first fiscal quarter. Thus, by causing the dissemination of false and misleading
information concerning the Company's 1997 first fiscal quarter, Gorman sought to increase the value of his Nuko
securities;
(b) Throughout the Class Period, defendants sought to artificially inflate or maintain the price of Nuko common
stock so that they could continue to entice investors to invest in the Company through, for example, private
placements of the Company's stock (such as December 1996 private placement).
COUNT I
VIOLATIONS OF SECTION 10(b) OF THE EXCHANGE
ACT AND RULE 10b-5 PROMULGATED THEREUNDER
(AGAINST ALL DEFENDANTS)
40. Plaintiff repeats and realleges each and every allegation contained in paragraphs 1 through 39 above as if fully set forth
herein.
41. At all relevant times, defendants Nuko and Gorman, individually and in concert, directly and indirectly, by the use and
means of instrumentalities of interstate commerce and/or of the mails, engaged and participated in a continuous course of
conduct whereby they knowingly and/or recklessly made and/or failed to correct public representations which were or had
become materially false and misleading regarding Nuko's financial results. This continuous course of conduct resulted in the
defendants allowing Nuko to publish public statements which they knew, or were reckless in not knowing, were materially
false and misleading, in order to artificially inflate the market price of Nuko stock and which operated as a fraud and deceit
upon the members of the Class.
42. Defendant Nuko is a direct participant in the wrongs complained of herein. Gorman is liable as a direct participant in and
as a controlling person of the wrongs complained of herein. By virtue of his position of control and authority as chief financial
officer of Nuko, Gorman was able to and did, directly or indirectly, control the content of the aforesaid financial statements
relating to the Company, and/or the failure to correct those statements in timely fashion once he knew or was reckless in not
knowing that those statements were no longer true or accurate. Gorman caused or controlled the preparation and/or issuance
of public statements and the failure to correct such public statements containing misstatements and omissions of material facts
as alleged herein.
43. Gorman had actual knowledge of the facts making the material statements false and misleading, or acted with reckless
disregard for the truth in that he failed to ascertain and to disclose such facts, even though same were available to him.
44. In ignorance of the adverse facts concerning Nuko's business operations and earnings, and in reliance on the integrity of
the market, plaintiff and the members of the Class acquired Nuko common stock at artificially inflated prices and were
damaged thereby.
45. Had plaintiff and the members of the Class known of the materially adverse information not disclosed by the defendants,
they would not have purchased Nuko common stock at all or not at the inflated prices paid.
46. By virtue of the foregoing, defendants have violated Section 10(b) of the 1934 Act and Rule 10b-5 promulgated
thereunder.
COUNT II
VIOLATION OF SECTION 20(a) OF THE EXCHANGE ACT
(AGAINST GORMAN)
47. Plaintiff repeats and realleges each and every allegation contained in paragraphs 1 through 46 above as if fully set forth
herein.
48. This count is asserted against Gorman and is based upon Section 20(a) of the 1934 Act.
49. Gorman, by virtue of his office, stock ownership and specific acts was, at the time of the wrongs alleged herein and as set
forth in Count I, a controlling person of Nuko within the meaning of Section 20(a) of the 1934 Act. Gorman had the power
and influence and exercised the same to cause Nuko to engage in the illegal conduct and practices complained of herein by
causing the Company to disseminate the false and misleading information referred to above. Moreover, Gorman owned or
controlled substantial amounts of the Company's stock.
50. Gorman's position as chief financial officer made him privy to and provided him with actual knowledge of the material
facts concealed from plaintiff and the Class.
51. By virtue of the conduct alleged in Count I, the Gorman is liable for the aforesaid wrongful conduct and are liable to
plaintiff and the Class for damages suffered.
PRAYER FOR RELIEF
WHEREFORE, plaintiff demands judgment:
A. Determining that the instant action is a proper class action maintainable under Rule 23 of the Federal Rules of
Civil Procedure;
B. Awarding compensatory damages and/or rescission as appropriate against defendants, in favor of plaintiff and
all members of the Class for damages sustained as a result of defendants' wrongdoing;
C. Awarding plaintiff and members of the Class the costs and disbursements of this suit, including reasonable
attorneys', accountants' and experts' fees; and
D. Awarding such other and further relief as the Court may deem just and proper.
Dated: May __, 1997.
GIRARD & GREEN, LLP
By: _______________________
Robert S. Green, Esq.
160 Sansome Street, Suite 300
San Francisco, CA 94104
(415) 981-4800
GOODKIND LABATON RUDOFF
& SUCHAROW LLP
Jonathan M. Plasse
James M. Strauss
Catherine A. Murphy
100 Park Avenue
New York, New York 10017
Telephone: (212) 907-0700
Attorneys for Plaintiff
DEMAND FOR JURY TRIAL
Plaintiffs hereby demand a trial by jury.
May ___, 1997
GIRARD & GREEN, LLP
160 Sansome Street, Suite 300
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