"(b) Defendant Roger D. Friedberger ("Friedberger") was, until March 1996, the Chief Financial Officer and Senior Vice President-Finance and Operations of Insignia and Secretary of Insignia. Because of defendant Friedberger's position, he knew or recklessly disregarded the adverse non-public information about Insignia's business, finances, products, markets and present and future business prospects via access to internal corporate documents (including the Company's operating plans, budgets and forecasts and reports of actual operations compared thereto), conversations and connections with other corporate officers and employees, attendance at management and Board of Directors' meetings and committees thereof and via reports and other information provided to him in connection therewith. Friedberger signed Insignia's 10-K for the fiscal year ended December 31, 1995."
Stanford University Law School - Securities Class Action Clearinghouse
MILBERG WEISS BERSHAD
HYNES & LERACH LLP
ALAN SCHULMAN (128661)
MARK SOLOMON (151949)
JOY ANN BULL (138009)
600 West Broadway, Suite 1800
San Diego, CA 92101
Telephone: 619/231-1058
- and -
KIMBERLY C. EPSTEIN (169012)
222 Kearny Street, 10th Floor
San Francisco, CA 94108
Telephone: 415/288-4545
WEISS & YOURMAN BERNSTEIN LIEBHARD & LIFSHITZ
JOSEPH H. WEISS MEL E. LIFSHITZ
JACK I. ZWICK 274 Madison Avenue
551 Fifth Avenue New York, NY 10016
Suite 1600 Telephone: 212/779-1414
New York, NY 10176
Telephone: 212/682-3025
Attorneys for Plaintiffs
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF CALIFORNIA
SAN JOSE DIVISION
BROOKE GRAUBART, BRUCE LIEB,
DAVID R. FRIED, MORRIS RUBIN,
SOLOMON EISENBERG and KAVITA
SHARMA, On Behalf of Themselves and
All Others Similarly Situated,
Plaintiffs,
vs.
INSIGNIA SOLUTIONS PLC, INSIGNIA
SOLUTIONS INC., ROBERT P. LEE,
ROGER D. FRIEDBERGER, PAUL R.
GRIFFITHS, JOHN R. JOHNSTON,
RICHARD M. NOLING, NICHOLAS A.
SAMUEL, DAVID L. GIBBS, GEORGE
BUCHAN and PAULINE LO ALKER,
Defendants.
____________________________________
No. C-97-20265-JW(EAI)
[filed Feb. 10, 1998]
CLASS ACTION
FIRST AMENDED COMPLAINT FOR
VIOLATIONS OF:
(1) SECTIONS 11 AND 15 OF THE
SECURITIES ACT OF 1933;
(2) SECTION 10(b) OF THE
SECURITIES EXCHANGE ACT OF 1934
AND RULE 10b-5 PROMULGATED
THEREUNDER;
(3) SECTION 20(a) OF THE
SECURITIES EXCHANGE ACT OF 1934;
(4)SECTIONS 25400-25402 AND
25500-25502 OF THE CALIFORNIA
CORPORATIONS CODE; AND
(5) SECTIONS 1709-1710 OF THE
CALIFORNIA CIVIL CODE
Plaintiffs Demand
A Trial By Jury
INTRODUCTION AND OVERVIEW
1. This is a securities class action on behalf of all purchasers of the American Depository Shares ("ADS") of Insignia Solutions plc ("Insignia" or the "Company") between November 14, 1995 and February 26, 1997 (the "Class Period"), seeking to remedy violations of the federal securities laws committed by the Company and certain of its insiders.
2. In November 1995, as part of the scheme complained of herein, the defendants collectively sold 3.6 million ADSs to the public ("IPO" or the "Offering") at an artificially inflated price of $12 per share, including some $20 million of ADSs sold by Insignia insiders. Thereafter, defendants artificially inflated the price of Insignia's ADSs by making false and misleading statements to securities analysts and others and by falsifying the Company's financial statements for the first three fiscal quarters of 1996. During that time, the defendants made it their practice to improperly recognize revenue from contingent sales in order to meet their misleading forecasts.
3. Defendants misleadingly represented in the Registration Statement and Prospectus disseminated in November 1995 in connection with the Offering and via additional statements directed at the investing public thereafter that Insignia: (i) competed favorably in the cross-platform compatibility software market; (ii) had an effective direct sales force; (iii) had successfully introduced new computer software products (SoftWindows 2.0) for both the UNIX and Apple/Macintosh operating systems; (iv) had a very strong third quarter of 1995 with revenues jumping to $16.3 million; (v) anticipated strong growth in the fourth quarter of 1995 with revenues increasing to $18 million; (vi) projected revenues of $80-$81 million for 1996; and (vii) projected 1996 earnings per share of $0.80.
4. In truth, however, defendants knew that the Company was unable to make the sales necessary to meet their forecasts. In early January 1996 they experienced, first-hand, the market's reaction to the news that their forecasts for Insignia's first quarter as a public company were woefully inaccurate. On January 2, 1996, barely six weeks after the Offering, the Company stunned the market by revealing that revenues had shrunk rather than grown in the quarter ended December 31, 1995 because of disappointing sales. The disclosure caused Insignia's ADS price to collapse to $5-3/4 per share from $13-1/4 per share; a 56% one-day drop and a 74% drop from its December high of $22 per share.
5. After the disastrous announcement of January 2, 1996, defendants knew that the price of Insignia's ADSs had to be supported by the issuance of even more positive projections and the concomitant reporting of revenues meeting those projections. Unable to do so if Insignia's revenues were accurately projected and reported, defendants continued their deceitful course of conduct by misrepresenting the true status of the Company's sales, earnings and assets. Accordingly, through the use of securities analysts, Insignia told the market to expect 1996 revenues of $14.5 million, $16.6 million, $17.7 million and $19.3 million for the first, second, third and fourth quarters of 1996, respectively, and earnings per share of $0.06, $0.12, $0.14 and $0.23 for the first, second, third and fourth quarters of 1996, respectively. During these periods, Insignia continued to offer incentives and absolute rights of return to its customers including Merisel, TechData and Ingram Micro. Insignia's improper revenue recognition caused the Company to materially misstate its earnings for the first three fiscal quarters of 1996 and record them in violation of Generally Accepted Accounting Principles ("GAAP"). Defendants' false financial statements were contained in the 1996 quarterly Form 10-Q's filed by Insignia with the Securities Exchange Commission ("SEC"). By improperly recognizing revenue for Insignia's contingent sales, defendants materially inflated its revenue, earnings and assets -- resulting in the continued artificial inflation of the Company's share price.
6. Finally, on February 27, 1997, the Company announced that, due to accounting "irregularities" involving certain sales contracts and reseller inventories that resulted in improper recognition of revenue in violation of GAAP, the first and second quarter 1996 revenues and net income must be restated. The Company expressly admitted to "irregularities in the reporting of sales contracts and reseller inventories." As a result, Insignia's reported profit of $749,000 for the first quarter of 1996 was restated as a loss of $225,000. The previous reported earnings per share of $0.06 was revised to a loss of $0.02 per share. Insignia's reported profit of $1.5 million for the second quarter of 1996 was slashed to a mere $569,000. The previous reported earnings per share of $0.11 was revised to just $0.04. Insignia's previous reported revenues of $39.5 million for the nine months ended September 30, 1996, was reduced to $37.1 million. As reported by UBS Securities, "[a]side from weak fundamentals, the company must now deal with additional operational problems and another blow to management's credibility." Upon these revelations, the price of Insignia's ADSs dropped from $3-7/8 to $2-1/2 per share.
7. Defendants' conduct represents a flagrant abuse of the federal securities laws which were designed to protect investors and is an example of how sophisticated corporate insiders and financiers can mislead the investing public. Utilizing the Offering, the defendants (other than Richard M. Noling who joined the Company subsequently) sold over $43 million of Insignia securities to the public at grossly inflated prices when they knew Insignia's business was in trouble, performing poorly, and declining instead of growing and prospering as the defendants represented in connection with the Offering. As a result, and to stave off the disclosure of the truth, all of the defendants then continued the fraudulent scheme throughout the Class Period, the truth being revealed. Only after a former employee sued the Company for being unfairly singled out as a "scapegoat" blamed for the defendants' unlawful revenue recognition practices and, thereafter, the Company's ultimate admission that, owing to improper sales reporting, it was forced to restate its revenues for the first and second quarters of 1996.
8. As set forth more fully below, defendants' positive statements during the Class Period about Insignia's business, products, competitive position and prospects as well as the Company's financial statements for the first and second quarters of 1996 were false and misleading when made and failed to disclose material adverse information known to or recklessly disregarded by defendants.
9. The charts below demonstrate the price action of Insignia's ADSs during the Class Period and the collapse of Insignia's ADS price as the previously concealed facts about Insignia's business emerged, and the performance of Insignia's ADSs compared to indices of similar companies, which shows that the action of Insignia's ADSs was due largely to company-specific events and not market forces:
JURISDICTION AND VENUE
10. Jurisdiction exists pursuant to §27 of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. §78aa, 28 U.S.C. §1331, §22 of the Securities Act of 1933 (the "1933 Act"), 15 U.S.C. §77v, and 28 U.S.C. §1367. The claims asserted arise under: §§11 and 15 of the 1933 Act, 15 U.S.C. §§77k and 77o; §§10(b) and 20(a) of the Exchange Act, 15 U.S.C. §§78j(b) and 78t(a), and Rule 10b-5, promulgated thereunder; §§25400-25402 and 25500-25502 of the California Corporations Code; and §§1709-1710 of the California Civil Code.
11. (a) Venue is proper in this District pursuant to §27 of the Exchange Act; 28 U.S.C. §1391(b); and principles of supplemental jurisdiction under 28 U.S.C. §1367. Many of the acts giving rise to the violations complained of occurred in this District; and
(b) Assignment of this action to the San Jose Division is appropriate as a substantial part of the events or omissions identified herein occurred in Santa Clara County.
12. Defendants used the instrumentalities of interstate commerce, the U.S. mails and the facilities of the national securities markets.
CLASS ACTION ALLEGATIONS
13. Plaintiffs bring this action as a class action pursuant to Federal Rule of Civil Procedure 23(a) and (b)(3) on behalf of all persons who purchased or otherwise acquired Insignia ADSs from November 14, 1995 through February 26, 1997 (the "Class"), excluding the defendants, members of their families and any entity in which a defendant has an interest.
14. The members of the Class are so numerous that joinder of all members is impracticable. The disposition of their claims in a class action will provide substantial benefits to the parties and the Court. During the Class Period, Insignia had more than 11 million ADSs outstanding, owned by at least hundreds of shareholders.
15. The questions of law and fact are common to the members of the Class and predominate over questions which may affect individual Class members, including the following:
(a) Whether §§11 and 15 of the 1933 Act were violated by defendants;
(b) Whether §§10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder were violated by defendants;
(c) Whether Cal. Corp. Code §§25400-25402 and 25500-25502 were violated by defendants;
(d) Whether Cal. Civ. Code §§1709-1710 were violated by defendants;
(e) Whether defendants omitted and/or misrepresented material facts;
(f) Whether defendants knew or recklessly disregarded the fact that the statements made by them were false and misleading;
(g) Whether the price of Insignia ADSs was artificially inflated during the Class Period;
(h) The extent of damage sustained by Class members and the appropriate measure of damages; and
(i) Whether the federal securities laws were violated by defendants.
16. Plaintiffs' claims are typical of those of the Class because plaintiffs and the Class sustained damages from defendants' wrongful conduct uniformly directed at the Class.
17. Plaintiffs will adequately protect the interests of the Class. They have retained counsel who are experienced in class action securities litigation. Plaintiffs have no interests which conflict with those of the Class.
18. A class action is superior to other available methods for the fair and efficient adjudication of this controversy.
19. The prosecution of separate actions by individual Class members would create a risk of inconsistent and varying adjudications.
THE PARTIES
20. (a) Plaintiff Brooke Graubart purchased 1,000 Insignia ADSs on May 10, 1996, 1,000 Insignia ADSs on May 14, 1996, 2,000 Insignia ADSs on May 29, 1996, 1,000 Insignia ADSs on June 11, 1996, and 3,000 Insignia ADSs on June 17, 1996, and was damaged thereby.
(b) Plaintiff Bruce Lieb purchased 1,000 Insignia ADSs on May 15, 1996, at $9-1/8 per ADS, 1,000 Insignia ADSs on May 16, 1996, at $8-5/8 per ADS, 1,000 Insignia ADSs on May 17, 1996, at $8-5/8 per ADS, 1,000 Insignia ADSs on June 20, 1996, at $8-3/4 per ADS, 300 Insignia ADSs on July 16, 1996, at $5-5/8 per ADS, 200 Insignia ADSs on July 24, 1996, at $5-5/8 per ADS, 2,800 Insignia ADSs on July 24, 1996, at $5-1/2 per ADS, 6,000 Insirgnia ADSs on September 11, 1996, at $6 per ADS, 100 Insignia ADSs on October 14, 1996, at $5-1/2 per ADS 10,900 Insignia ADSs on October 16, 1996, at $5 per ADS, and 1,000 Insignia ADSs on January 9, 1997, at $3-3/4 per ADS, and was damaged thereby.
(c) Plaintiff David R. Fried purchased 20,000 Insignia ADSs on April 3, 1996, at $6-1/8 per ADS, 1,000 (IRA) Insignia ADSs on June 3, 1996, at $10-3/8 per ADS, 12,600 Insignia ADSs on June 3, 1996, at $10-3/8 per ADS, 7,400 Insignia ADSs on June 3, 1996, at $10-1/2 per ADS, 1,000 (IRA) Insignia ADSs on July 29, 1996, at $5-3/8 per ADS, 3,000 Insignia ADSs on July 29, 1996, at $5-3/8 per ADS, 12,000 Insignia ADSs on July 29, 1996, at $5-3/4 per ADS, and 20,000 Insignia ADSs on October 9, 1996, at $5-3/4 per ADS, and was damaged thereby.
(d) Plaintiff Morris Rubin purchased 1,000 Insignia ADSs on May 30, 1996, and was damaged thereby.
(e) Plaintiff Solomon Eisenberg purchased 3,600 Insignia ADSs on January 3, 1996, and 2,000 Insignia ADSs on May 28, 1996, and was damaged thereby.
(f) Plaintiff Kavita Sharma purchased 900 Insignia ADSs on December 18, 1995, at $12-1/2 per share and was damaged thereby. The ADSs purchased by Kavita Sharma were issued pursuant to Insignia's November 14, 1995 Registration Statement. Kapil Sharma, the brother of Kavita Sharma, had discretionary authority over Kavita Sharma's account and made the actual investment decision to buy Insignia's ADSs.
21. (a) Defendant Insignia Solutions plc, is an English public limited corporation, which operates through its subsidiary, defendant Insignia Solutions Inc., a Delaware Corporation, both of which have their principal executive offices and place of business in Mountain View, California (collectively "Insignia"). Insignia's ADSs are traded in an efficient market on the NASDAQ National Market System.
(b) Insignia develops, markets and supports cross-platform compatibility software solutions. SoftWindows, Insignia's principal product line, supposedly enables Macintosh and UNIX platforms to run substantially all MicroSoft Windows ("Windows") and MS-DOS ("DOS") applications by emulating the underlying hardware. Insignia began shipping SoftWindows 2.0, the latest version of its principal product line, for Apple's Power Macintosh in August 1995 and for UNIX in October 1995.
(c) According to Insignia, although MicroSoft's Windows had emerged as the leading computer operating system, Macintosh and UNIX platforms continued to succeed in various markets, such as desktop publishing and engineering applications, and many computer users working in a Macintosh or UNIX environment chose to use some of the thousands of applications available for the Windows operating system, some of which did not have Macintosh or UNIX versions available. Also, according to Insignia, incompatibility among various platforms often makes it difficult for users to run their applications of choice, creates workflow inefficiencies among users and complicates the roles of corporate MIS managers responsible for integrating and supporting organizations' computing resources across multiple platforms. Insignia claimed to solve these incompatibility problems by providing cross-platform compatibility software with high levels of performance.
22. (a) Defendant Robert P. Lee ("Lee") is President, Chief Executive Officer and Chairman of the Board of Directors of Insignia. Because of defendant Lee's position, he knew or recklessly disregarded the adverse non-public information about Insignia's business, finances, products, markets and present and future business prospects via access to internal corporate documents (including the Company's operating plans, budgets and forecasts and reports of actual operations compared thereto), conversations and connections with other corporate officers and employees, attendance at management and Board of Directors' meetings and committees thereof and via reports and other information provided to him in connection therewith. Lee signed Insignia's 10-K for the fiscal year ended December 31, 1995.
(b) Defendant Roger D. Friedberger ("Friedberger") was, until March 1996, the Chief Financial Officer and Senior Vice President-Finance and Operations of Insignia and Secretary of Insignia. Because of defendant Friedberger's position, he knew or recklessly disregarded the adverse non-public information about Insignia's business, finances, products, markets and present and future business prospects via access to internal corporate documents (including the Company's operating plans, budgets and forecasts and reports of actual operations compared thereto), conversations and connections with other corporate officers and employees, attendance at management and Board of Directors' meetings and committees thereof and via reports and other information provided to him in connection therewith. Friedberger signed Insignia's 10-K for the fiscal year ended December 31, 1995.
(c) Defendant Richard M. Noling ("Noling") replaced Friedberger as Senior Vice President and Chief Financial Officer in March 1996. Noling also was appointed head of the accounting, finance, MIS, legal, human resources, facilities and manufacturing departments. Because of defendant Noling's position, he knew or recklessly disregarded the adverse non-public information about Insignia's business, finances, products, markets and present and future business prospects via access to internal corporate documents (including the Company's operating plans, budgets and forecasts and reports of actual operations compared thereto), conversations and connections with other corporate officers and employees, attendance at management and Board of Directors' meetings and committees thereof and via reports and other information provided to him in connection therewith. Noling signed Insignia's 10-Qs for the quarters ended March 31, 1996, June 30, 1996 and September 30, 1996. Noling is a recidivist stock manipulator and violator of the securities laws. Immediately before joining Insignia, as Chief Financial Officer of Gupta Corporation, he had participated in a scheme to defraud the investors of Gupta by engaging in a multitude of improper revenue recognition practices, thereby artificially inflating the stock price of that company. The Gupta securities litigation, In re Gupta Corporation Sec. Litig., Master File No. 94-1517-FMS(EAI) (N.D. Cal.), in which Noling was a named defendant, settled in 1996, after Noling had joined Insignia, for $14.75 million. Insignia's shareholders were never informed of these facts.
(d) Defendant Paul R. Griffiths ("Griffiths") is a director of Insignia. Because of defendant Griffiths' position with Insignia, he knew or recklessly disregarded the adverse non-public information about Insignia's business, finances, products, markets and present and future business prospects via access to internal corporate documents (including the Company's operating plans, budgets and forecasts and reports of actual operations compared thereto), conversations and connections with other corporate officers and employees, attendance at management and Board of Directors' meetings and committees thereof and via reports and other information provided to him in connection therewith. Griffiths is a member of the Board of Directors of RIT Capital Partners plc ("RITCP"), a principal shareholder in Insignia. RITCP with Griffiths sold 753,484 shares in the Offering for $12 per ADS or $9 million. Griffiths signed Insignia's 10-K for the fiscal year ended December 31, 1995.
(e) Defendant John R. Johnston ("Johnston") is a director of Insignia. Because of defendant Johnston's position with Insignia, he knew or recklessly disregarded the adverse non-public information about Insignia's business, finances, products, markets and present and future business prospects via access to internal corporate documents (including the Company's operating plans, budgets and forecasts and reports of actual operations compared thereto), conversations and connections with other corporate officers and employees, attendance at management and Board of Directors' meetings and committees thereof and via reports and other information provided to him in connection therewith. A venture capital firm headed by Johnston sold 144,525 shares in the Offering for $12 per ADS or $1.7 million. Johnston signed Insignia's 10-K for the fiscal year ended December 31, 1995.
(f) Defendant Nicholas A. Samuel ("Samuel") is a director of Insignia. Because of defendant Samuel's position with Insignia, he knew or recklessly disregarded the adverse non-public information about Insignia's business, finances, products, markets and present and future business prospects via access to internal corporate documents (including the Company's operating plans, budgets and forecasts and reports of actual operations compared thereto), conversations and connections with other corporate officers and employees, attendance at management and Board of Directors' meetings and committees thereof and via reports and other information provided to him in connection therewith. A venture capital firm headed by Samuel sold 67,994 shares in the Offering for $12 per ADS or $815,928. Samuel signed Insignia's 10-K for the fiscal year ended December 31, 1995.
(g) Defendant David L. Gibbs ("Gibbs") was Insignia's Vice President of North American Macintosh Product Sales. In early 1996, Gibbs was promoted to Vice President Channel Sales. Because of defendant Gibbs' position with the Company, he knew or recklessly disregarded the adverse non-public information about Insignia's business, finances, products, markets and present and future business prospects via access to internal corporate documents (including the Company's operating plans, budgets and forecasts and reports of actual operations compared thereto), conversations and connections with other corporate officers and employees, attendance at management meetings and via reports and other information provided to him in connection therewith.
(h) Defendant George Buchan ("Buchan") is Senior Vice President of Engineering and General Manager of Insignia. Because of defendant Buchan's position, he knew or recklessly disregarded the adverse non-public information about Insignia's business, finances, products, markets and present and future business prospects via access to internal corporate documents (including the Company's operating plans, budgets and forecasts and reports of actual operations compared thereto), conversations and connections with other corporate officers and employees, attendance at management and Board of Directors' meetings and committees thereof and via reports and other information provided to him in connection therewith.
(i) Defendant Pauline Lo Alker ("Alker") is a director of Insignia. Because of defendant Alker's position with Insignia, she knew or recklessly disregarded the adverse non-public information about Insignia's business, finances, products, markets and present and future business prospects via access to internal corporate documents (including the Company's operating plans, budgets and forecasts and reports of actual operations compared thereto), conversations and connections with other corporate officers and employees, attendance at management and Board of Directors' meetings and committees thereof and via reports and other information provided to her in connection therewith.
(j) The defendants identified in ¶22(a)-(i) are referred to herein as the Individual Defendants. Each of the Individual Defendants, other than Noling, Gibbs, Buchan and Alker, participated in the preparation of and/or signed the November 14, 1995 Registration Statement pursuant to which the Insignia ADSs were sold to the public and which contained the false and misleading statements listed in ¶¶30-35. Each of the Individual Defendants participated in the continuing scheme throughout the Class Period to issue false projections and false financial statements and drafting and/or reviewing the Company's press releases and public filings and by concealing the truth about Insignia's true prospects and its improper accounting practices.
MOTIVE AND OPPORTUNITY
23. Each Individual Defendant had the opportunity to commit and participate in the fraud described herein. The Individual Defendants were officers and/or directors of Insignia and they controlled its press releases, corporate reports, SEC filings, preparation of its financial statements and its communications with analysts. Thus, they controlled the public dissemination of, and could and did falsify, the information about Insignia's business and products that reached the public and impacted the price of its ADSs.
24. Each of the Individual Defendants also had the motive to commit and participate in the fraud described herein. Defendants wanted to and did cover up the problems with and deterioration in Insignia's business to make it appear that Insignia's business was succeeding and would achieve the earnings per share they had forecasted during the Class Period, so that its ADS price would trade at artificially inflated levels, high enough so that insiders could sell off significant amounts of their Insignia ADSs.
25. Defendants, other than defendants Noling, Gibbs, Buchan and Alker, were motivated to take Insignia public so that they could recover a portion of their investment in Insignia, escalate the book value of the shares they retained and create a market in which to sell their ADSs. Those defendants were aware by at least mid-1995 that they were in a difficult and threatened position. They were "locked in" to Insignia, then a private corporation, without any way to realize on their investment because there was no trading market in which to sell their ADSs. They knew also that Insignia's growth prospects were severely diminished, especially due to the introduction of Windows 95 and the growing popularity of the Windows 95 operating system which, in essence, made Insignia a "dead end" company, limited to selling software products to the shrinking Apple/Macintosh and UNIX markets.
26. To make the Offering a success, it was necessary to make it look as though Insignia would continue to grow and be profitable and that Insignia had new and successful products and would achieve strong revenue and profit growth, even though it was selling only to the Apple/Macintosh and UNIX markets. Consequently, defendants were motivated to take and, in fact, took the opportunity presented by virtue of the power of their positions with the Company to arrange for the dissemination of false statements and false financial statements, portraying the Company as successful and growing in revenues and profits. The trend in Insignia's reported revenues is shown by the following graph:
[GRAPH UNAVAILABLE]
27. Aware that Insignia's business prospects actually were declining by late 1995, defendants took full advantage of the third quarter "growth." Insignia embarked on the Offering, portraying the Company as being in a "growth" mode even though it had no need to raise capital for any business reason, such as expansion or new product development. The true purpose of the Offering was to raise tens of millions of dollars from the investing public to benefit Insignia's controlling shareholders and also enable them to dump their Insignia ADSs.
28. In the Offering, several defendants took that opportunity to sell significant amounts of their ADS holdings. Griffiths sold over 750,000 shares for over $9 million in proceeds. Johnston sold nearly 150,000 shares for $1.7 million in proceeds. Samuel sold nearly 70,000 shares for proceeds of over $815,000.
29. After Insignia disclosed that its fourth quarter 1995 results would not meet the expectations defendants had fostered (but that revenues would decline) and after the price of Insignia's ADSs collapsed in response to the disclosure, defendants were motivated to avoid the complete collapse of Insignia's ADSs. Accordingly, defendants knowingly misrepresented Insignia's true deteriorating conditions and rendered false forecasts to the investing public. At the same time, Insignia recognized revenue derived from transactions with customers who were granted secret discount and liberal return privileges for which the Company deliberately failed to reserve. As a result, defendants issued false financial statements for the first three fiscal quarters of 1996 by overstating the revenue that could properly be recognized while, at the same time, the defendants issued forecasts that depended upon their improper "channel-stuffing" practices.
DEFENDANTS' FALSE AND MISLEADING STATEMENTS
30. In the few weeks prior to the Offering, the underwriters and Insignia's top executives, including defendant Lee, conducted Roadshow meetings and individual investor presentations in several U.S. cities, including San Francisco, Boston and New York. At the Roadshow meetings, very favorable information about Insignia was distributed, with the purpose and effect of overcoming and neutralizing the "risks" supposedly disclosed in the Prospectus and thereby further stimulating demand for Insignia ADSs to be sold in the Offering. During the Roadshow meetings, the participants told potential investors:
(a) That Insignia successfully operated in a niche market which provided it tremendous opportunities for growth in selling cross-platform software to users of the Apple/Macintosh and UNIX computer operating systems, which growth would be achieved notwithstanding MicroSoft's 1995 successful introduction of the Windows 95 operating system and MicroSoft's growing dominance of computer operating systems;
(b) That Insignia's SoftWindows 2.0 for the Apple/Macintosh introduced in August 1995 had been a tremendous success with strong distributor acceptance and retail sell-through;
(c) That while Insignia's third quarter 1995 results reflected revenues from initial "channel-fill" of SoftWindows 2.0 for Apple/Macintosh, the amounts of this product shipped were normal and customary for new product introduction and Insignia had not engaged in "channel stuffing" to inflate its revenues for the third quarter;
(d) That Insignia's SoftWindows 2.0 for UNIX had been successfully introduced in October 1995 and had received an enthusiastic response from customers;
(e) That Insignia's strong third quarter 1995 results indicated a trend of revenue growth which would continue in the fourth quarter of 1995, resulting in fourth quarter 1995 revenues of approximately $18 million, yielding fourth quarter 1995 earnings per share of $0.17-$0.18; and
(f) That Insignia forecasted strong revenue and profit growth throughout 1996, with revenues of approximately $80-$82 million and earnings per share of $0.81-$0.82.
31. The information disseminated during the Roadshow meetings was part of the total mix of information affecting Insignia's ADS Offering on November 14, 1995 and the price of its ADSs on November 14, 1995, when they started trading.
32. Insignia's November 14, 1995 Prospectus reported its third quarter revenues and earnings per share had increased very substantially and thus reinforced the impression that Insignia's revenues and profitability were growing. The Prospectus stated:
The Company's total revenues have grown every year since inception, except in 1993 when the market and the Company's products were in transition from DOS to Windows. Also in 1993, the market was in transition to RISC-based platforms sufficiently powerful to support the Company's Windows products. The Company's revenue growth has resulted from the increasing number of platforms available to run the Company's products, the improving performance of the underlying hardware and the additional functionality offered in new versions of the Company's products.
The Prospectus also showed that Insignia's revenues and earnings per share had jumped substantially in the third quarter of 1995, indicating that Insignia's revenue growth had resumed after three flat quarters:
QUARTER ENDED
3/31
1994 6/30
1994 9/30
1994 12/31
1994 3/23
1995 6/30
1995 9/30
1995
Revenues:
License revenue
Service revenue
$6,411
$ 715
$7,866
$ 905
$9,305
$ 922
$12,211
$ 1,026
$11,096
$ 1,347
$10,834
$ 1,509
$15,308
$ 1,000
Total Revenue $7,126 $8,771 $10,227 $13,237 $12,443 $12,343 $16,308
Net Income $ 490 $1,069 $1,271 $1,925 $1,484 $1,161 $1,982
Net income per share $ 0.04 $ 0.09 $ 0.11 $ 0.17 $ 0.13 $ 0.10 $ 0.17
33. The large increase in Insignia's revenues during the third quarter, based on the introduction of SoftWindows 2.0 for the Apple/Macintosh market combined with defendants' representations made in connection with the Offering, made it appear that Insignia's fourth quarter results would also show a large increase due to the introduction in October 1995 of SoftWindows 2.0 for UNIX. The Prospectus reaffirmed this impression by stating:
Generally, sales volumes of new products increase in the first few months following introduction of a new product due to the purchase of upgrades by existing users and the purchase of initial inventory by distribution channels.
Moreover, Insignia represented during the Roadshow that sales of its UNIX-related products were normally higher in its fourth quarter, reinforcing this message in the Prospectus, which stated:
Although historically the Company's business has not been subject to seasonal variations, the Company's sales of products for UNIX workstations have been higher in the fourth quarter as a result of customer purchase cycles related to expiration of budgetary authorizations.
These statements, indicating that sales of Insignia's SoftWindows 2.0 UNIX product would be strong in Insignia's fourth quarter of 1995, were extremely important to investors. Insignia's investors knew that Insignia had clearer foresight into future sales of UNIX-related products as compared to Apple/Macintosh-related product sales because a majority of the Company's direct sales were for UNIX products, whereas Apple/Macintosh product sales were fulfilled through the distributor/retail sales channel.
34. With respect to the sales and marketing of Insignia's products, the Prospectus stated:
Sales and Marketing
Insignia has built a complementary multiple channel distribution system. . . . Insignia's multiple channels in the United States include OEM bundling arrangements, distributors, retailers, direct sales and telesales.
* * *
Distributor and Retail Sales
Insignia has established a worldwide two-tier distribution channel. Its distributor relationships include Ingram Micro and Merisel in North America, Hewlett-Packard Germany in Europe and Mitsubishi in Japan. . . .
. . . Currently, substantially all of the Company's sales through the distributor channel are Macintosh products. . . . [A] portion of the Company's net revenues in the third quarter of 1995 comprised initial stocking orders of SoftWindows 2.0 for Power Macintosh.
* * *
Direct Sales
The Company employs a sales force that sells directly to organizations. The Company's complementary sales channel model integrates direct sales through OEMs and distributors. . . . Currently, a majority of the Company's total revenues from direct sales are UNIX products.
The Registration Statement and Prospectus warned of no significant risks concerning Insignia's sales and marketing organization, when defendants knew that Insignia's direct sales force was ineffective and ill-trained and was having serious problems in selling the new SoftWindows 2.0 UNIX product and could not sell Insignia's SoftWindows 2.0 Apple/Macintosh product effectively either.
35. The Registration Statement and Prospectus were drafted so that they contained certain generic warnings of possible risks which concealed the fact that Insignia's business was already encountering the negative factors the Prospectus warned were only possible or contingent, including:
Potential Fluctuations In Operating Results
* * *
Due to all of the foregoing factors, it is possible that in some future quarters the Company's operating results will be below the expectations of stock market analysts and investors.
Dependence upon UNIX Workstation Manufacturers and Continued Demand for UNIX Platforms
. . . The Company's future success will depend on market acceptance of SoftWindows 2.0 for UNIX, which the Company began shipping in October 1995.
* * *
The future success of the Company depends in part upon the demand for the Company's products among users of UNIX workstations . . . . Any decline in sales of UNIX workstations would decrease the demand for the Company's UNIX products and have a material adverse effect on the Company's business, financial condition and results of operations.
By the time the Prospectus was disseminated to investors and the Registration Statement became effective, defendants already knew that Insignia's SoftWindows 2.0 UNIX product was meeting with poor success which would hurt Insignia's results in the short term.
36. On December 11-12, 1995, almost immediately after the expiration of the SEC-mandated quiet period, analysts working for the underwriters circulated what are known in the underwriting community as "booster shots" (i.e., "shots" designed to "boost" the price of a stock) containing identical fourth quarter and full year 1995 revenue projections of $18 million and $59 million, respectively, and fourth quarter 1995 earnings per share of $0.17, on behalf of the defendants. Defendants supplied these forecasts to analysts, knowing they were false, in order to maintain and further inflate the price at which Insignia's ADSs were then trading.
37. On December 11, 1995, based on information supplied by Insignia executives, including defendant Lee, Andrew Brousseau of Cowen & Co. ("Cowen") forecast earnings per share of $0.17 for the fourth quarter of 1995, year-end revenues of $59 million and earnings per share of $0.59 for 1995 and 1996 earnings per share of $0.81 on revenues of $80 million; John F. Powers of Robertson Stephens & Co. forecast 1995 fourth quarter earnings per share of $0.17 and 1995 year-end revenues of $59.1 million and 1996 earnings per share of $0.82 on revenues of $80 million. On December 12, 1995, based on information supplied by Insignia's executives, including defendant Lee, Michael P. Wallace of UBS Securities forecast earnings per share of $0.17 for the fourth quarter of 1995, 1995 year-end revenues of $59 million and 1996 earnings per share of $0.82 on revenues of $81 million.
38. Defendants' forecasts had the desired effect, pushing the Company's stock to a high of $22 per share on December 4, 1995. However, defendants knew that sales of its SoftWindows 2.0 product would likely not meet their forecasts for the fourth quarter of 1995 and beyond. SoftWindows 2.0 UNIX sales were primarily direct sales as opposed to sales through distributors. Insignia had begun shipping its new SoftWindows 2.0 UNIX in October 1995 and knew by mid-November 1995 that sales of this product were underperforming the defendants' projections. Thus, Insignia did not have to estimate the "sell-through" and Insignia knew how unsuccessful the introduction of SoftWindows 2.0 UNIX actually was at the time of the Offering and on December 11, 1995, when analysts employed by the underwriters reiterated the glowing representations made by defendants Lee and Friedberger. As for shipments of SoftWindows 2.0 Apple/Macintosh, Insignia had shipped product into the distribution channel in amounts so well above that normally shipped to "fill" the channel with inventory of a new product that defendants knew it would start seeing returns of such product and sharply reduced sales.
39. Initially, defendants' scheme was entirely successful. While the Offering price of Insignia ADSs was $12 per share, Insignia's ADS price advanced sharply, jumping to $14-3/4 per ADS on the day of the Offering, $20-1/2 per ADS by November 30, 1995 (a 71% increase in just 12 trading days) and later climbing to its Class Period high of $22 per ADS in early December 1995. In addition to the $20+ million pocketed by Insignia insiders, including the defendants, the infusion of $20+ million of new capital into Insignia benefitted its controlling shareholders, instantly increasing the book value of the Insignia ADSs they owned by over 100% to $2.67 per share -- a $7.5 million windfall for these controlling shareholders.
40. After the close of the market on January 2, 1996 -- just 33 trading days after the Offering and without any prior warning or indication -- Insignia suddenly revealed that its fourth quarter 1995 revenues would decline from third quarter levels of $16.3 million "due primarily to lower North American sales of its SoftWindows for UNIX products and, to a lesser extent, lower North American retail sales of its SoftWindows for Power Macintosh products," and, as a result, instead of earnings per share of $0.17 for the fourth quarter, it would report "approximately break-even results" for the December quarter. This incredible revelation -- contrary to everything that defendants had earlier represented to investors to pull off the $43 million Offering on November 14, 1995 -- resulted in an instant collapse of Insignia ADSs -- tumbling to as low as $5-1/4 per ADS on January 3 & 4, 1996 on 5.6 million shares volume, a 56% two-day collapse, and a 74% drop from Insignia's $22 per ADS high just 20 trading days earlier.
41. From the beginning of the Class Period through January 2, 1996, defendants (other than Noling who had yet to join Insignia), knew or should have known a host of adverse facts about Insignia's business and prospects. These facts were concealed by defendants and they contradicted the statements and forecasts that had been disseminated. These known, concealed facts included:
(a) That Insignia's new SoftWindows 2.0 product for the Apple/Macintosh operating system introduced in August 1995 was not selling well through Insignia's distribution channel and that sales of this product were at such low levels that Insignia's revenues would decline, rather than increase, in the fourth quarter of 1995;
(b) That Insignia knew that its customers for its SoftWindows 2.0 UNIX product would not be purchasing that product in sufficient quantities during the fourth quarter of 1995 to meet its forecasts and projections and that, therefore, it was likely that there would be a decline in Insignia's revenues in the fourth quarter;
(c) That Insignia's new SoftWindows 2.0 product for the UNIX operating system introduced in October 1995 was not selling well and that sales of this product were at such low levels that Insignia's revenues would decline, rather than increase, in the fourth quarter of 1995;
(d) That the introduction of MicroSoft's Windows 95 in August 1995 had badly damaged Insignia's business because Windows 95 contained a number of new and improved features which provided functions which operators formerly needed the Apple/Macintosh or UNIX systems to perform and which had created demand in the past for Insignia's software emulation program products and thus there was not any reasonable basis for defendants' forecasts of strong growth for Insignia;
(e) That Insignia had not created a complementary sales and marketing product distribution system as it had represented and, in fact, Insignia's direct sales marketing force was suffering from significant training deficiencies which interfered with their ability to sell Insignia's products, especially those designed for the Apple/Macintosh operating system;
(f) That Insignia's direct sales force was disorganized and ineffective, suffering from inadequate training, such that Insignia was having difficulty selling its SoftWindows 2.0 products, and which would prevent Insignia from achieving the revenues and earnings per share forecast by and for it for the fourth quarter of 1995, as well as throughout 1996;
(g) That Insignia was having difficulty selling its products for the UNIX operating system and was encountering difficulty in closing several large OEM deals for this product (including a large transaction with Silicon Graphics, Inc.) which made it virtually certain that Insignia's revenues and earnings per share would decline sharply in the fourth quarter of 1995 and be well below the level forecast by and for Insignia during 1996;
(h) That Insignia's new SoftWindows 2.0 product for the UNIX market was not being well received by customers and, as a result, sales of that product would be much lower than internally budgeted or forecasted by Insignia for the fourth quarter of 1995 and during 1996 as well;
(i) That Insignia's direct sales and marketing force was not adequately trained or informed as to how to sell Insignia's new SoftWindows 2.0 UNIX product or its SoftWindows 2.0 Apple/Macintosh product and, as a result, sales of those products were very slow which would result in Insignia not obtaining the levels of revenues and earnings per share forecast by and for it during the fourth quarter of 1995 and during 1996 as well;
(j) That Insignia did not compete favorably with respect to the important competitive factors identified in the Prospectus;
(k) That Insignia's IPO had been planned and undertaken to permit Insignia's venture capital investors to bail out of a poor and losing investment and not for any bona fide or legitimate business reasons;
(l) That Insignia's Offering price did not fairly reflect the Company's growth rate, the business potential of the Company or its present state of development but, rather, was fixed at an arbitrary and unfairly high level to benefit Insignia and the selling shareholders;
(m) That as a result of the foregoing, Insignia's forecasts of strong revenue growth were false, as such growth was impossible to achieve in light of these undisclosed problems;
(n) That defendants had no basis for their positive forecasts and projections regarding Insignia's revenues or earnings growth during 1995 and 1996, which statements were, in fact, false as they were inconsistent with the above negative factors;
(o) That the forecasts of increased earnings per share for Insignia in its fourth quarter of 1995 to $0.17-$0.18 were false, as they were contradicted by the adverse facts as set forth above and were not genuinely believed by defendants; and
(p) That defendants did not genuinely believe their forecasts of $0.17-$0.18 earnings per share for the fourth quarter of 1995 or $0.81-$0.82 earnings per share for 1996, as they were aware of adverse information which contradicted these forecasts.
42. In connection with their January 2, 1996 disclosures, and to conceal the full impact of their fraudulent scheme, defendants again utilized securities analysts to disseminate false and misleading information about Insignia's condition and prospects. Based on information supplied by Insignia's executives, including defendant Lee, on January 3, 1996 Andrew Brousseau of Cowen reported the shocking news released the previous day by the Company, but stated:
Management remains comfortable with existing Street estimates for 1996, but we are cutting our estimates . . . by $9MM to $71MM (+27%) [and] . . . we are cutting our EPS estimate by 26 to 55 (+38%).
On January 29, 1996, based on information provided by Insignia's executives, including defendant Lee, Andrew Brousseau of Cowen forecast 1996 revenues of $65 million, with earnings per share for 1996 of $0.55 comprised of $0.06 for the first quarter, $0.12 for the second, $0.14 for the third and $0.23 for the fourth.
43. However, defendants knew that even these revised forecasts could not be attained honestly and that to prevent an immediate and total collapse of Insignia's ADS price they would have to continue to "stuff the channel," issue false projections and disseminate false financial statements. Therefore, continuing the practice that had begun at least by the time of the Offering, through the fiscal third quarter of 1996, Insignia's North American Macintosh sales groups stuffed the Company's distribution channels with more product than could be absorbed by its customers by offering special incentives and secret, liberal rights of return. In a sweeping reorganization, Gibbs, Insignia's head of the Macintosh sales group who spearheaded the Company's channel-stuffing efforts, was elevated to the position of Vice President of Channel Sales for Macintosh and UNIX. On January 22, 1996, it was reported via PR Newswire:
The company has integrated its former Macintosh(R) and UNIX(R) sales groups into one sales organization, jointly headed by David Gibbs, vice president of channel sales and Bill McCarthy, vice president of corporate sales.
* * *
"Our newly-combined forces will allow us to make our UNIX product line more accessible to the reseller and distributor channels, and introduce our Macintosh product line to previously untapped corporate opportunities. The combined sales organization is well situated to grow business across the company's product lines by meeting the company's objectives for 1996 and beyond."
44. On March 21, 1996, after discussions with defendant Lee, Andrew Brousseau of Cowen reported:
Q1 Still Tight -- Discussions with management suggest that the March quarter is on track but still tight. The Macintosh business is progressing on target and the UNIX business is recovering somewhat from the Q4 shortfall, but the new NTrigue product is ramping up more slowly than expected. The company claims that NTrigue interest and site growth is strong, but that user deployment is lower than anticipated. We estimate total revenues of $14.7MM on $9.9MM in SoftWindows for Macintosh, $2.0MM in SoftWindows UNIX and $1.5MM in NTrigue and EPS of 6*. Although still hoping to meet expectations, management claims that any shortfall against these estimates would be small.
45. Also on March 21, 1996, Insignia announced the appointment of defendant Noling as Senior Vice President of Finance and Operations and Chief Financial Officer. Noling was also given responsibility for the Company's accounting, finance, MIS, legal, human resources, facilities and manufacturing departments.
46. On April 23, 1996, Insignia announced its first quarter 1996 financial results:
Quarter Ended March 31,
1996 1995
Total Revenues $14,724 $12,443
Net income per share $ 0.06 $ 0.13
47. Following discussions with the Company on April 24, 1996, Michael P. Wallace of UBS Securities reported:
* Insignia Solutions reported Q1 (March) EPS of $0.06 (versus $0.13), in line with our expectations. Revenues were $14.7 million, up 5% sequentially and up 18% year-to-year.
* Growth in the UNIX channel returned to historical levels, with UNIX sales reaching 31% of revenues versus only 22% in the December quarter. Concerns about softness in the U.S. UNIX market have dissipated somewhat.
* The company continued to see good acceptance of its new products SoftWindows 3.0, SoftWindows 95, and NTrigue for WinFrame throughout the quarter, with NTrigue products accounting for 7% of total sales in their first revenue quarter.
* * *
Q1 EPS in line. Insignia reported first quarter EPS of $0.06 (versus $0.13), in line with our estimate. Revenues were also in line, coming in at $14.7 million (versus $12.4 million). International revenues accounted for 27% of revenues, compared to 19% in 1Q95. Revenue growth was boosted mainly by good market acceptance of new product releases, SoftWindows 3.0, SoftWindows 95, and NTrigue for WinFrame.
48. On or around May 15, 1996, Insignia filed its Form 10-Q with the SEC for the quarter ended March 31, 1996. In the 10-Q, which is signed by defendant Noling, defendants reported that Insignia's first quarter revenues were $14.7 million, that net income was $749,000 and that earnings per share were $0.06. The 10-Q further reported that "in the opinion of management, all adjustments . . . which are necessary for a fair presentation of the financial position and results for the interim period have been included."
49. However, as defendants knew would be the case when they issued their misleading forecast for the first quarter of 1996, and when they filed Insignia's Form 10-Q for that quarter, Insignia's reported revenues and earnings for the first quarter were materially artificially inflated as a result of Insignia's improper recognition of revenue on contingent sales as described in ¶¶70-80.
50. On July 23, 1996, the Company issued a press release which reported revenues of $15.7 million for the second quarter ended June 30, 1996, an increase of 27% compared to $12.3 million in the June 1995 quarter. According to the press release, earnings per share for the June 1996 quarter were $0.11 on 13 million shares, compared to $0.10 on 11.4 million shares in the June 1995 quarter. The Company reported revenues of $30.4 million for the six months ended June 30, 1996, an increase of 23% compared to $24.8 million in the prior year. Earnings per share for the six-month period were $0.17 on 12.9 million shares, compared to $0.23 on 11.4 million ADSs in the prior year.
51. Based on information provided by and at the direction of defendants, and by Lee and Noling in particular, on July 24, 1996, John F. Powers of Robertson Stephens reported that revenue from sales related to Apple/Macintosh were down only 16% from the prior quarter.
Revenue Mix
% of rev.
Q1 Q2
Apple related 57 41
Unix related 31 31
NTrigue 7 12
NT 5 15
Other 1 1
However, Insignia was stuffing the channel with Apple/Macintosh and UNIX SoftWindows products and recognizing as revenue sales which were contingent in violation of GAAP. Thus, defendants knew that the actual percentage of revenue derived from Apple/Macintosh and UNIX emulation products was much lower than publicly reported.
52. Based on information provided by and at the direction of the Company, and by Lee and Noling in particular, on July 24, 1996, Michael P. Wallace of UBS Securities reported:
Offsetting this revenue growth were higher than expected above- and below-the-line expenses. Gross margins of 70% were nearly 2% below our expectations. This was mostly due to higher royalty payments associated with the company's NTrigue products, which grew faster than we anticipated. S&M expenses came in at 37.4% of revenues; we were looking for 33%. Finally, G&A outpaced our expectations, coming in at 9.7%; we were looking for 8.5%. Most of this increase was due to a $250,000 charge taken against the uninsured portion of shareholder litigation costs related to the class action law suit filed against the company last Spring. . . .
2H96 Outlook
Looking ahead to the second half of the year, we expect to see good revenue growth, especially as NT becomes more widely accepted in the corporate environment. Mac-related sales should be flat sequentially, and NTrigue should continue to grow as a percent of revenues. While this helps revenue growth, it puts pressure on margins because of the higher royalty payments associated with the product. As a result, we are lowering our 1996 EPS estimate to $0.45 from $0.60 and our 1997 EPS to $0.75 from $0.80. We retain our Hold in INSGY.
53. Based on information provided by and at the direction of defendants, and by Lee and Noling in particular, on July 26, 1996, Andrew Brosseau of Cowen reported:
Annual EPS Quarterly EPS
FY Q1 Q2 Q3 Q4
(Dec)
1995 $0.42 $0.37 $0.13 $0.10 $0.18 $0.05
1996E 0.45 0.45 0.06A 0.11A 0.12 0.18
1996E 0.60 0.60 0.10 0.13 0.15 0.22
Q2 revenues of $15.7MM (+27%) finished just above our estimate, but EPS of 11c needed a good boost from taxes to finish in the midrange of Street expectations. . . . Revenues were mixed. On the one hand, SoftWindows for Unix (+42%) is recovering from the Q4:95 shortfall and NTrigue is finally beginning to gain momentum, with sales jumping sharply from last quarter to 11% of revenues in Q2. This, along with healthy growth in Windows NT royalties were key to revenues. On the other hand, SoftWindows for Macintosh (-5% and 38% of total) is doing poorly, with sales slowing sharply following the new product sell-in in Q1. Gross margins of 70% were in line, but operating expenses (+37%) were somewhat higher than expected, due partly to one-time legal fees stemming from the shareholder lawsuit.
* * *
We are maintaining our 1996-97 EPS estimates on finetuned revenue and expense assumptions. For 1996, we look for revenues to reach $65MM (+18%) on license sales of $60MM (+19%) and services fees of $5MM (+13%). Among the major product lines, we expect SoftWindows for Mac revenues $26MM (-19%), SoftWindows for Unix of $20MM (+52%), NTrigue sales of $9MM, and NT royalties of $5MM. Gross margins should stay around 70% and operating expenses should flatten over coming quarters, bringing operating margins to 10% and EPS to 45c. For 1997, we project revenues of $77MM (+18%) and EPS of 60c (+33%) on 12.5% operating margins.
54. On or around August 14, 1996, Insignia filed its Form 10-Q with the SEC for the quarter ended June 30, 1996. In the 10-Q, which is signed by defendant Noling, defendants represented that Insignia's second quarter revenues were $15.7 million, that net income was $1.45 million and that earnings per share were $0.11. In the 10-Q, defendants also report that "in the opinion of management, all adjustments . . . which are necessary for a fair presentation of the financial position and results for the interim period have been included."
55. However, as defendants knew would be the case when they issued their misleading forecast for the second quarter of 1996 and when they filed Insignia's Form 10-Q for that quarter, Insignia's reported revenues and earnings for the second quarter were materially artificially inflated as a result of Insignia's improper recognition of revenue on contingent sales as described in ¶¶70-80. Lee attributed Insignia's false financial results to the success of Insignia's products claiming:
"The revenues for the second quarter reflected a healthy growth of our Windows(R) NT(R)-based NTRIGUE(TM) product line." . . . "In fact, NTRIGUE was awarded Analyst's Choice in this week's issue of PC Week (July 22, 1996), which summarized NTRIGUE 2.0 as 'an excellent choice for companies that want to standardize on Windows applications but still let networked users work on the platform of their choice -- ranging from x86 PCs to Mac and UNIX workstations.'"
56. Based on information provided by and at the direction of defendants, and by Lee and Noling in particular, on September 11, 1996, Michael P. Wallace of UBS Securities reported:
We met with management yesterday and got a brief update on the current quarter and business in general. . . . The two key issues to focus on here are the ramp-up of NTrigue, the company's most recent product, and the effect of weak Macintosh sales on Insignia's business.
* * *
Q3 Outlook. For the September quarter we are looking for revenues of $16.8 million (vs. $15.7 last quarter and $16.3 million a year ago) and EPS of $0.13 (vs. $0.11 last quarter and $0.17 last year). There is a chance that revenues come in light, given the big question mark for Mac-related sales. If revenues come in $1 million short, using the above scenario, EPS would likely be around $0.11 or $0.12. Cost cutting may recover some of this, but the company is approaching the limits of how much it can trim back operating expenses.
57. Based on information provided by and at the direction of defendants, and by Lee and Noling in particular, on October 10, 1996, John F. Powers of Robertson Stephens issued a report which reiterated prior projected revenue and earnings estimates of $65.4 million for fiscal year 1996 with earnings per share of $0.35, and $16.8 million for the third quarter with earnings per share of $0.12.
58. However, on October 15, 1996, the Company issued a press release announcing financial results for the third quarter ended September 30, 1996. The Company reported revenues of $9.1 million, for a loss of $0.44 per share. The Company reported revenues of $39.5 million for the nine months ended September 30, 1996, a decrease of 4% compared to $41 million in the prior year. This represented a loss per share of $0.22 on 12.5 million ADSs for the nine-month period, compared to earnings of $0.41 on 11.4 million ADSs for the same period in the prior year.
59. On October 17, 1996, based on information provided by Insignia's executives, including Lee and Noling, Andrew Brosseau of Cowen reported that Insignia's management blamed the "huge operating loss" on "poor reordering by the channel" and "[d]eferral of SoftWindows for Unix revenues from a multi-million [dollar] deal with SGI."
60. On or around November 14, 1996, Insignia filed its Form 10-Q with the SEC for the period ended September 30, 1996. In the 10-Q, which is signed by defendant Noling, defendants represent that Insignia's third quarter revenues were $9.1 million, that the net loss for the quarter was $5 million and that net losses per share were $0.44. In the 10-Q, defendants represent that "in the opinion of management, all adjustments . . . which are necessary for a fair statement of the financial position and results for the interim period have been included."
61. These third quarter financial results, disappointing as they were, still were materially inflated due to the channel stuffing and improper revenue-recognition practices described herein. In reaction to the Company's abject failure to meet its forecasts, Insignia ADSs collapsed from $6 to $4 per share.
62. After the third quarter results had been announced, defendants were aware that the truth about Insignia's condition and prospects would become more and more difficult to conceal. In an effort to blame solely lower level employees and not the Board of Directors and senior executives, defendants fired Stuart McIntosh accusing him of improper channel-stuffing and other related improprieties.
63. However, on February 3, 1997, McIntosh responded by filing a complaint in the Orange County Superior Court against Insignia, Gibbs and unnamed Does for breach of contract and tortious conduct in association with his dismissal. McIntosh alleges, inter alia, that:
Defendants, and each of them, in discharging plaintiff accused plaintiff of formulating a distribution process known as "stuffing the channel" and the numerous business ramifications involved in said distribution process. At the time of discharge, defendants, and each of them, knew or should have known that the plaintiff was not responsible for Insignia's distribution policies involved in "stuffing the channel."
McIntosh v. Insignia Solutions, Inc., et al., Case No. 774906, Complaint (Orange County Sup. Ct. Feb. 3, 1997).
64. Finally, on February 27, 1997, while Price Waterhouse was performing its audit of Insignia's 1996 financial results, the Company admitted that its channel-stuffing practices had led to Insignia's improperly recognizing revenue in the first two quarters of 1996, necessitating the restatement of earnings and revenues for each period. Thereafter, Insignia's ADS price collapsed to $2-1/2 per ADS.
MANAGEMENT'S RESPONSIBILITY FOR INTERNAL
ACCOUNTING CONTROL AND FOR FINANCIAL REPORTING
65. Insignia had a responsibility to maintain sufficient accounting controls to accurately report its financial results. It is well-settled that the representations made by a company in its financial statements and in other financial disclosures to the public are the representations of that company's management. Indeed, even, as in Insignia's case, when a company issues audited financial statements together with the report of that company's independent auditors, that report always expressly provides that "the financial statements are the responsibility of the company's management."
66. To accomplish the objectives of accurately recording, processing, summarizing and reporting financial data, a company must establish an internal control structure. In that structure, according to Appendix D to Statement on Auditing Standards No. 55, Consideration of the Internal Control Structure in a Financial Statement Audit ("SAS 55"), management should consider, among other things, such objectives as (i) making certain that "[t]ransactions are recorded as necessary . . . to permit preparation of financial statements in conformity with generally accepted accounting principles . . . and to maintain accountability for assets," and (ii) making certain that "[t]he recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences."
67. As described in SAS 55, the applicability and importance of specific control environment factors, accounting system methods and records and control procedures that an entity should establish should be considered within the context of such criteria as an entity's size, its organization and ownership characteristics, the nature of its business, the diversity and complexity of its operations, the entity's method of processing data, and its applicable legal and regulatory requirements. In short, the larger the entity, the more the nature of the entity's business is complex, diverse and sophisticated, and the public ownership of the entity customarily requires a sophisticated internal control structure to ensure that transactions are accurately recorded and that, prior to the public disclosure of any financial information, such transactions are compared to the existing assets (e.g., comparing inventory as recorded on a company's books to those amounts actually "on hand") to eliminate any discrepancies between the recorded and actual amounts.
68. According to SAS 55:
Establishing and maintaining an internal control structure is an important management responsibility. To provide reasonable assurance that an entity's objectives will be achieved, the internal control structure should be under ongoing supervision by management to determine that it is operating as intended and that it is modified as appropriate for changes in conditions.
69. When management permits a condition to exist in the company's internal control structure such that
the design or operation of one or more of the internal control structure elements does not reduce to a relatively low level the risk that errors or irregularities in amounts that would be material in relation to the financial statements . . . may occur and not be detected within a timely period by employees in the normal course of performing their assigned functions,
that condition is defined by Statement on Auditing Standards No. 60, Communications of Internal Control Structure Related Matters Noted in an Audit ("SAS 60"), as a "material weakness" in the company's internal control structure.
FALSE FINANCIAL STATEMENTS
70. 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.
71. On or around March 26, 1996, Insignia represented in its Annual Report for the year ended December 31, 1995, the following with regard to its revenue recognition practices:
The Company recognizes revenue in accordance with the American Institute of Certified Public Accountants' Statement of Position 91-1 on Software Revenue Recognition.
* * *
Product licensing fees are recognized upon shipment if no significant vendor obligations remain and if collection of the resulting receivable is deemed probable. The Company grants distributors and resellers certain rights of return and price protection on unsold merchandise held by those distributors and resellers. Accordingly, reserves for estimated future returns, exchanges and credits for price protection are accrued upon product shipment.
72. In its interim reports for 1996, filed with the SEC on May 15, 1996, August 13, 1996, and November 14, 1996, respectively, Insignia represented the following with regard to the accompanying financial information:
The condensed consolidated financial statements are unaudited. However, in the opinion of management, all adjustments (consisting only of normal recurring adjustments) which are necessary for a fair presentation of the financial position and results for the interim period have been included.
73. These representations with regard to Insignia's financial statements and revenue recognition practices were false and misleading due the Company's violation of GAAP, as set forth in Statement of Position ("SOP") 91-1 and other pronouncements.
74. GAAP, as set forth in the FASB Statement of Concepts ("Concepts") No. 5, provides the basic requirements for the recognition of revenue. Concepts No. 5, ¶83 requires that revenue be realizable (or collectible) prior to recognition and also that revenue be "earned," prior to recognition, meaning that an entity has "substantially accomplished what it must do to be entitled to the benefits represented by the revenues."
75. SOP 91-1 requires that revenue not be recognized on software licenses unless: (a) delivery has occurred; (b) other remaining vendor obligations are no longer significant; and (c) collectibility is probable. SOP 91-1.34. Revenue from cancelable licenses should not be recognized until cancellation privileges lapse. SOP 91-1.53. Transactions in which companies are granted the right to exchange software products for different software products or for similar software products with more than minimal differences in price, functionality, or features are considered returns that should be accounted for in conformity with FASB Statement No. 48.(1) SOP 91-1.54.
76. During the Class Period, Insignia entered into agreements with certain of its distributors and resellers which granted those distributors and resellers the right to cancel certain software license agreements and the right to exchange software products for refunds or for different types of software. In violation of GAAP, Insignia reported these transactions as revenue and failed to adequately reserve for estimated returns and/or cancellation. The impact of these misstatements was to materially misstate the Company's revenues, earnings and assets during the Class Period.
77. As a result of the Company's improper revenue recognition, the Company materially inflated its earnings during the Class Period. The Company's improper revenue recognition caused its collection of accounts receivable to decrease dramatically. Whereas Insignia's average collection time as measured by days' sales outstanding ("dso," a calculation of the average time it takes Insignia to collect on its receivables based on current quarter sales) was only 28 days at September 30, 1995, by March 31, 1996 it had grown to 86 days, and by September 30, 1996 it had grown to 140 days. Insignia's customers stopped paying at the same rate they had in earlier periods due to the fact they did not believe they owed the money based on the agreements they had with Insignia that certain of the sales with these customers were contingent on acceptance or were subject to cancellation.
78. Ultimately in the fourth quarter of 1996, when the Company was in the midst of its year-end audit, the improper revenue recognition was discovered by the Company's external auditors. On February 27, 1997, Insignia for the first time revealed that its results were misstated. Insignia reported that it would restate its results for the first and second quarters of 1996.
79. In fact, the Company's restated amounts are dramatically different than those reported for the first two quarters of 1996:
80. In its financial statements for the nine months ended September 30, 1996, Insignia reported revenues of $39.5 million and net accounts receivable of $11.7 million. When Insignia released its fourth quarter and year-end 1996 results, it reported net accounts receivable of only $6.9 million and, from the amount of revenue Insignia reported for the fourth quarter and year ended December 31, 1996, it is now apparent that Insignia's revenues for the nine months ended September 30, 1996 were actually only $37.1 million. Whereas Insignia originally reported a net loss of $2.8 million for the nine months ended September 30, 1996, it is now apparent Insignia incurred a loss of $4.6 million for the nine months ended September 30, 1996.
DEFENDANTS' INSIDER TRADING
81. As part of defendants' scheme, Insignia's insiders sold $20+ million of Insignia ADSs in the Offering, to profit from the artificial inflation in Insignia's ADS price their fraud had created before the truth became known and Insignia's ADS price crashed. Notwithstanding their access to material non-public information obtained in connection with the Offering and prior thereto, and as a result of their positions with the Company, Insignia's insiders sold the following amounts of Insignia ADSs, at artificially inflated prices while in possession of material non-public information:
NUMBER OF SHARES PRICE
INSIDER OFFERED PER ADS PROCEEDS
Griffiths, Paul R. 753,484 $12 $9,041,808
Johnston, John R. 144,525 $12 $1,734,300
Gilde Venture Fund B.V. 267,623 $12 $3,211,476
Samuel, Nicholas A. 67,994 $12 $815,928
Euroventures Benelux B.V. 175,416 $12 $2,104,992
Hancock International 79,476 $12 $953,712
Private Equity Partners L.P.
Euroventures (UK) B.V. 101,313 $12 $1,215,756
Others 158,586 $12 $1,903,032
TOTAL: 1,748,417 $20,981,004
82. On May 13, 1996, after he had left the Company, but while he was aware of the continuing fraudulent scheme, defendant Friedberger sold 10,000 ADSs at $9 per ADS, realizing proceeds of $90,000.
STATUTORY SAFE HARBOR
83. 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. The safe harbor has no application to conduct that predated its enactment, nor does it apply to statements associated with the Offering. None of the statements pleaded herein were sufficiently identified as "forward-looking statements" when made. Nor were any of the statements accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from the statements made. Alternatively, to the extent that the statutory safe harbor does apply to any statements pleaded herein, because they are deemed to be "forward-looking," defendants are liable for those statements because at the time each of those statements was made, the speaker knew the statement was false and the statement was authorized and/or approved by an executive officer of Insignia who knew that the statement was false.
COUNT I
For Violation of Section 11 of the 1933 Act
Against Insignia and the Individual
Defendants Who Signed Insignia's
Registration Statement
84. Plaintiffs incorporate ¶¶1-83 above, except allegations of fraud, aiding and abetting and conspiracy. This Count is asserted against Insignia and the Individual Defendants who signed Insignia's Registration Statement.
85. Insignia's ADSs were sold via the Registration Statement and Prospectus. The Individual Defendants other than Buchan were signatories of the Registration Statement and/or controlling persons of Insignia. The defendants other than Insignia owed purchasers of the ADSs the duty to make a reasonable investigation of the statements contained in the Registration Statement and Prospectus to ensure that said statements were true and that there was no omission to state any material fact required to be stated in order to make the statements contained therein not misleading. Defendants knew or, in the exercise of reasonable care, should have known of the material misstatements and omissions contained in the Registration Statement and Prospectus as set forth herein. None of those defendants made a reasonable investigation or possessed reasonable grounds for the belief that statements contained in the Prospectus were true or that there was not any omission of material fact necessary to make the statements made therein not misleading.
86. As signatories of the Registration Statement, directors and/or officers of Insignia and controlling persons of the issuer, the defendants named in this Count owed the purchasers of the ADSs of Insignia, the duty to make a reasonable and diligent investigation of the statements contained in the Prospectus to ensure that said statements were true and that there was no omission to state a material fact required to be stated in order to make the statements contained therein not misleading. Defendants knew or, in the exercise of reasonable care, should have known of the material misstatements and omissions contained in the Prospectus as set forth herein.
87. None of the defendants made a reasonable investigation or possessed reasonable grounds for the belief that the statements contained in the Prospectus were true or that there was not any omission of material facts necessary to make the statements made therein not misleading.
88. Defendants issued or caused to be issued a materially false and misleading Prospectus, which misrepresented or failed to disclose, interalia, the facts set forth above. As a direct and proximate result of defendants' wrongful conduct, the price of Insignia's ADSs was artificially inflated in the Offering, and plaintiffs and the Class suffered substantial damages in connection with the purchase of Insignia ADSs during the Class Period.
89. Plaintiffs and other members of the Class purchased or otherwise acquired their Insignia ADSs without knowledge of the untruths or omissions alleged herein. Plaintiffs and the other members of the Class were thus damaged by defendants' misconduct and by the material misstatements and omissions in the Prospectus.
90. This action was brought within one year after the revelations of January 2, 1996, which led to the discovery of the untrue statements and omissions and within three years after Insignia ADSs were offered to the public.
COUNT II
For Violation Of Section 15 Of The 1933
Act Against Defendants Insignia, Griffiths,
Johnston, Samuel and Lee
91. Plaintiffs incorporate by reference ¶¶1-83 above, except allegations of fraud. This Count is asserted against defendants Insignia, Griffiths, Johnston, Samuel and Lee.
92. The defendants named in this Count acted as controlling persons of the Company within the meaning of §15 of the 1933 Act. Insignia controlled each of its officers named as defendants. By reason of their senior management positions and/or directorships or ownership of Insignia ADSs, as alleged above, the Individual Defendants named in this Count had the power to influence and exercised the same to cause Insignia to engage in the unlawful acts and conduct complained of herein.
93. By reason of such wrongful conduct, the defendants named in this Count are liable pursuant to §15 of the 1933 Act. As a direct and proximate result of their wrongful conduct, plaintiffs and the other members of the Class suffered damages in connection with their purchases of Insignia's ADSs during the Class Period.
COUNT III
For Violations of Section 10(b) Of The Exchange
Act And Rule 10b-5 Against All Defendants
94. Plaintiffs incorporate by reference ¶¶1-83, above, as if set forth fully herein.
95. The defendants knew, or were reckless in failing to know, of the material omissions from and misrepresentations contained in the statements as set forth above. Each of the defendants: (a) knew or had access to the material adverse non-public information about Insignia's financial results and then existing business conditions, which was not disclosed; and (b) participated in drafting, reviewing and/or approving the misleading statements, releases, reports and other public representations including SEC filings of and about Insignia.
96. Throughout the Class Period, defendants, with knowledge of or reckless disregard for the truth, disseminated or approved releases, statements and reports, referred to above, which 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.
97. During the Class Period, defendants, individually and via a scheme, directly and indirectly, participated in a common course of business to conceal material adverse information regarding the financial performance of the Company and the then existing business conditions as specified herein. Defendants employed devices, schemes and artifices to defraud and engaged in acts, practices and a course of business as herein alleged to commit a fraud on the integrity of the market for the Company's ADSs and to maintain artificially high market prices for the ADSs of Insignia. This included the formulation, making of and/or participation in the making of untrue statements of material facts and the omission to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading, and engaging in the acts, practices and a course of business which operated as a fraud and deceit upon plaintiffs and the Class, all of the above in connection with the IPO of Insignia ADSs to plaintiffs and members of the Class.
98. By reason of the conduct alleged herein, defendants knowingly or recklessly, directly or indirectly, have violated §10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder in that they: (a) employed devices, schemes and artifices to defraud; (b) made untrue statements of material facts or omitted 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) engaged 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 Insignia ADSs during the Class Period.
99. Plaintiffs and the Class have suffered substantial damages in that, in reliance on the integrity of the market, they paid artificially inflated prices for Insignia ADSs as a result of defendants' violations of §10(b) of the Exchange Act and SEC Rule 10b-5. Plaintiffs and the Class would not have purchased Insignia ADSs 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' misleading statements and concealment. At the time of the purchases by plaintiffs and the Class of Insignia ADSs, the fair and true market value of said ADSs was substantially less than the prices paid by them.
COUNT IV
For Violation Of Section 20(a)
Of The Exchange Act Against All Defendants
100. Plaintiffs incorporate by reference ¶¶1-83, above, as if set forth fully herein.
101. The Individual Defendants each acted as controlling persons of Insignia within the meaning of §20(a) of the Exchange Act. By reason of their positions as officers and/or directors of Insignia and also because of their interest in Insignia ADSs, they had the power and authority to cause Insignia to engage in the wrongful conduct complained of herein. Insignia controlled each of the Individual Defendants and all of its employees.
102. By reason of such wrongful conduct, the defendants named in this Count are liable pursuant to §20(a) of the Exchange Act. As a direct and proximate result of these defendants' wrongful conduct, plaintiffs and the other members of the Class suffered damages in connection with their purchases of the Company's ADSs during the Class Period.
COUNT V
For Violation of Sections 25400-29402 and
25500-25502 of the California Corporations Code
103. Plaintiffs incorporate ¶¶1-83 above as if fully set forth herein.
104. Acting individually and pursuant to a scheme or conspiracy or aiding and abetting each other, defendants concealed and/or misrepresented material adverse information regarding Insignia. Defendants' wrongdoing included the making of and/or participation in the making of, untrue statements of material facts and the omission to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading, and engaging in acts, practices and a course of conduct which operated as a fraud and deceit upon plaintiffs and members of the Class in order to induce the purchase of Insignia ADSs by plaintiffs and the members of the Class.
105. Each of the defendants sold or offered for sale Insignia ADSs during the Class Period or willfully participated in such sales or offerings for sale.
106. Defendants offered to sell or sold Insignia ADSs by means of written or oral communications which included untrue statements of a material fact or omitted to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading.
107. The underwriters, as broker-dealers or persons selling or offering for sale Insignia's ADSs made, on behalf of Insignia, for the purpose of inducing the purchase of Insignia's ADSs, statements which were at the time and in light of the circumstances under which they were made, false or misleading with respect to any material fact, or which omitted to state any material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading, and which defendants knew or had reasonable grounds to believe were false and misleading.
108. Defendants were officers, directors or controlling persons of Insignia, whose relationship to Insignia gave them access, directly or indirectly, to material information about Insignia not generally available to the public, and who sold Insignia's ADSs at a time when they knew material information about Insignia gained from such relationship which would have significantly affected the market price of Insignia ADSs and which was not generally available to the public, and which they knew was not intended to be so available, having no reason to believe that the persons buying the Insignia ADSs were also in possession of the information.
109. Plaintiffs and the members of the Class have suffered substantial damages because, in reliance on the integrity of the market, they paid artificially inflated prices for Insignia ADSs. Plaintiffs and the members of the Class would not have purchased Insignia ADSs at the prices they paid, or at all, if they had been aware that the market price had been artificially and falsely inflated by defendants' misleading statements and concealments. At the time of the purchases by plaintiffs and the members of the Class of Insignia ADSs, the fair market value of said ADSs was substantially less than the prices paid by them.
110. By reason of the foregoing, defendants violated §§25400-25402 of the Cal. Corp. Code, thereby entitling the members of the Class to recover damages pursuant to §§25500-25502.
COUNT VI
For Violation of Sections 1709-1710 of the
California Civil Code
111. Plaintiffs incorporate ¶¶1-83 as if fully set forth herein.
112. For the purpose of inducing public investors, including plaintiffs and other members of the Class, to purchase or otherwise acquire Insignia ADSs, and with intent to deceive such investors, the defendants employed a scheme and conspiracy to defraud as a part of which said defendants made, participated in the making of, or aided and abetted the making of, the misrepresentations of fact and concealed the true facts and omitted to state material facts as set forth above. Said representations and statements were not true and defendants did not believe them to be true. Said acts by defendants were fraudulent, oppressive and malicious.
113. Plaintiffs and the Class members each relied on one or more of the false statements alleged herein and were damaged thereby.
BASIS OF ALLEGATIONS
114. Plaintiffs have alleged the foregoing based upon the investigation of their counsel, which included a review of Insignia's SEC filings, securities analysts' reports and advisories about the Company, press releases issued by the Company, media reports about the Company and discussions with consultants, and believe that substantial evidentiary support will exist for the allegations set forth in ¶¶2-9, 24-44, 47, 49, 51-53, 55-57, 59 61-62 and 64-83 after a reasonable opportunity for discovery.
PRAYER FOR RELIEF
WHEREFORE, plaintiffs pray for judgment as follows:
1. Declaring this action to be a proper class action pursuant to Rule 23(a) and (b)(3) of the Federal Rules of Civil Procedure on behalf of the Class defined herein;
2. Awarding plaintiffs and the members of the Class compensatory damages;
3. Awarding plaintiffs and the members of the Class pre-judgment and post-judgment interest, as well as reasonable attorneys' fees, expert witness fees and other costs;
4. Awarding extraordinary, equitable and/or injunctive relief as permitted by law, equity and the federal statutory provisions sued hereunder, including the imposition of a constructive trust upon the proceeds of defendants' insider trading, pursuant to Rules 64, 65 and any appropriate state law remedies; and
5. Awarding such other relief as this Court may deem just and proper.
JURY DEMAND
Plaintiffs demand a trial by jury.
DATED: February 9, 1998 MILBERG WEISS BERSHAD
HYNES & LERACH LLP
ALAN SCHULMAN
MARK SOLOMON
JOY ANN BULL
______________________________
JOY ANN BULL
600 West Broadway, Suite 1800
San Diego, CA 92101
Telephone: 619/231-1058
MILBERG WEISS BERSHAD
HYNES & LERACH LLP
KIMBERLY C. EPSTEIN
222 Kearny Street, 10th Floor
San Francisco, CA 94108
Telephone: 415/288-4545
WEISS & YOURMAN
JOSEPH H. WEISS
JACK I. ZWICK
551 Fifth Avenue
Suite 1600
New York, NY 10176
Telephone: 212/682-3025
WEISS & YOURMAN
KEVIN J. YOURMAN
10940 Wilshire Blvd.
24th Floor
Los Angeles, CA 90024
Telephone: 310/208-2800
BERNSTEIN LIEBHARD & LIFSHITZ
MEL E. LIFSHITZ
274 Madison Avenue
New York, NY 10016
Telephone: 212/779-1414
Attorneys for Plaintiffs
INSIGN-2\DRD01615.CPT
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1. FASB Statement No. 48 requires that where the right of return exists, certain conditions must all be met prior to revenue being recognized on those transactions. The conditions include the following: (i) the obligation of the buyer to pay the seller is not contingent on resale of the product; (ii) the seller does not have significant obligations to bring about the resale of the product by the buyer; and (iii) the amount of future returns can be reasonably estimated. SFAS No. 48, ¶6. Where revenue is recognized because these conditions are met, any costs or losses that may be expected in connection with any returns shall be accrued. SFAS No. 48,¶7.
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DECLARATION OF SERVICE BY MAIL
PURSUANT TO NORTHERN DISTRICT
LOCAL RULE 23-3(c)(2)
I, the undersigned, declare:
1. That declarant is and was, at all times herein mentioned, a citizen of the United States and a resident of the County of San Diego, over the age of 18 years, and not a party to or interested in the within action; that declarant's business address is 600 West Broadway, Suite 1800, San Diego, California 92101.
2. That on February 9, 1998, declarant served the FIRST AMENDED COMPLAINT FOR VIOLATIONS OF: (1) SECTIONS 11 AND 15 OF THE SECURITIES ACT OF 1933; (2) SECTION 10(b) OF THE SECURITIES EXCHANGE ACT OF 1934 AND RULE 10b-5 PROMULGATED THEREUNDER; (3) SECTION 20(a) OF THE SECURITIES EXCHANGE ACT OF 1934; (4) SECTIONS 25400-25402 AND 25500-25502 OF THE CALIFORNIA CORPORATIONS CODE; AND (5) SECTIONS 1709-1710 OF THE CALIFORNIA CIVIL CODE by depositing a true copy thereof in a United States mailbox at San Diego, California in a sealed envelope with postage thereon fully prepaid and addressed to the parties listed on the attached Service List and that this document was forwarded to the following designated Internet site at:
securities.milberg.com
3. That there is a regular communication by mail between the place of mailing and the places so addressed.
I declare under penalty of perjury that the foregoing is true and correct. Executed this 9th day of February, 1998, at San Diego, California.
______________________________
Kathryn Cortes
Source: Milberg Weiss website
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