IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF CALIFORNIA
SAN FRANCISCO DIVISION
FRED KESSLER, on behalf of himself and all others similarly situated,
Plaintiff,
v.
CRITICAL PATH, INC.; DAVID THATCHER; WILLIAM RINEHART,
Defendants.
Case No.
CLASS ACTION COMPLAINT FOR VIOLATIONS OF SECURITIES EXCHANGE ACT OF 1934
JURY TRIAL DEMANDED
Plaintiff makes the following allegations upon information and belief, except as to allegations specifically pertaining to Plaintiff and his counsel, based on the facts alleged below, predicated upon the investigation undertaken by and under the supervision of Plaintiff's counsel, and Plaintiff believes that further substantial evidentiary support will exist for the allegations set forth below after a reasonable opportunity for discovery.
JURISDICTION AND VENUE
1. The claims asserted herein arise under and pursuant to Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. 78j(b) and 78t(a), and Rule 10b-5 promulgated thereunder by the Securities and Exchange Commission ("SEC"), 17 C.F.R. 240.10b-5.
2. This Court has jurisdiction of this action pursuant to Section 27 of the Exchange Act, as amended, 15 U.S.C. 78aa, and 28 U.S.C. 1331 and 1337.
3. Venue is properly laid in this District pursuant to Section 27 of the Exchange Act and 28 U.S.C. 1391(b) and (c). The acts, conduct, combination and conspiracy complained of, including the preparation, issuance and dissemination of materially false and misleading information to the investing public, occurred in substantial part in the Northern District of California. Critical Path, Inc. ("CPI" or the "Company") maintained its principal place of business in this District at all relevant times.
4. In connection with the acts, conduct, combination and conspiracy alleged in this Complaint, Defendants, directly or indirectly, used the means and instrumentalities of interstate commerce, including the mails and telephonic communications and the facilities of the NASDAQ National Market System, a national securities exchange.
INTRADISTRICT ASSIGNMENT
5. This action is properly assigned to the San Francisco Division, as CPI maintained its principal place of business in the City and County of San Francisco at all relevant times, and a substantial part of the events or omissions giving rise to the asserted claims occurred in the City and County of San Francisco.
PARTIES
6. Plaintiff Fred Kessler, as set forth in the accompanying certification, purchased CPI common stock at artificially inflated prices during the Class Period, and has been damaged thereby.
7. CPI is a California corporation with its principal executive offices located at 320 First Street, San Francisco, California 94105. CPI is a provider of complete end-to-end Internet messaging and collaboration solutions for Internet service providers, telecommunications providers, Web hosting companies, web portals, and corporations.
8. The individual defendants identified below served, at times material to the claims set forth herein as senior officers of CPI in the positions set forth opposite their names (the "Individual Defendants"):
Name Position
David Thatcher ("Thatcher") President
William Rinehart ("Rinehart") Vice President, Worldwide Sales
9. As officers and/or controlling persons of a company which is registered with the SEC under the federal securities laws, whose common stock is registered with the SEC, traded on the NASDAQ National Market System, and governed by the provisions of the federal securities laws, the Individual Defendants had a duty to disseminate promptly accurate and truthful information with respect to the Company's operations, business, products, markets, management, earnings and present and future business prospects, to correct any previously issued statements from any source that have become materially misleading or untrue, and to disclose any trends that would materially affect earnings and the present and future operating results of CPI, so that the market price of the Company's publicly traded securities is based upon truthful and accurate information. The Defendants' representations during the Class Period violated these specific requirements and obligations.
10. The Individual Defendants participated in the drafting, preparation, and/or approval of the various public and shareholder reports and other communications complained of herein and were aware of or recklessly disregarded the misstatements contained therein and omissions therefrom, and were aware of their materially misleading nature. Because of their executive and managerial positions with CPI, each of the Individual Defendants had access to the adverse non-public information about CPI's business prospects and financial condition as particularized herein and knew that those adverse facts rendered the positive statements made by and about CPI and its business and future sales, materially false and misleading.
11. The Individual Defendants, because of their positions of control and authority as officers of the Company, were able to and did control the contents of the various quarterly and annual financial reports, prospectuses, SEC filings, press releases and presentations to securities analysts pertaining to the Company. Each Individual Defendant was provided with copies of CPI's stockholder reports, press releases and SEC filings alleged herein to be misleading prior to or shortly after their issuance and had the ability and opportunity to prevent their issuance or cause them to be corrected. As a result, each of the Individual Defendants is responsible for the accuracy of the public reports and releases detailed herein and is therefore primarily liable for the representations contained therein.
12. By reason of their management positions, the Individual Defendants were "controlling persons" within the meaning of 20(a) of the Exchange Act and had the power and influence to direct the management and activities of CPI and its employees, and to cause CPI to engage in the unlawful conduct complained of herein. Because of their executive or managerial positions within CPI, the Individual Defendants each had access to adverse non-public information about the business and finances of CPI and acted to conceal the same, or knowingly or recklessly authorized and approved the concealment of the same.
CLASS ACTION ALLEGATIONS
13. Plaintiff brings this action as a class action pursuant to Federal Rules of Civil Procedure 23(a) and 23(b)(3) on behalf of himself and a class (the "Class") of persons who purchased or otherwise acquired CPI common stock during the period from November 30, 2000 through and including February 1, 2001 (the "Class Period") and were damaged thereby. Excluded from the Class are Defendants herein; members of the immediate family of each of the Individual Defendants; any person, firm, trust, corporation, officer, director or other individual or entity in which any Defendant has a controlling interest or which is related to or affiliated with any of the Defendants; and the legal representatives, agents, affiliates, heirs, successors-in-interest or assigns of any such excluded party.
14. The members of the Class are so numerous that joinder of all members is impracticable. As of year end 2000, the Company had more than 73 million shares of common stock outstanding, and throughout the Class Period, the common stock of CPI was actively traded on the NASDAQ National Market System, an efficient market. The precise number of Class members is unknown to Plaintiff at this time, but Class members are believed to number in the thousands. In addition, the names and addresses of the Class members can be ascertained from the books and records of CPI or its agents.
15. Plaintiff will fairly and adequately represent and protect the interests of the members of the Class. Plaintiff has retained competent counsel experienced in class action litigation under the federal securities laws to further ensure such protection and intends to prosecute this action vigorously.
16. Plaintiff's claims are typical of the claims of the other members of the Class, because the damages of Plaintiff and all other Class members arise from and were caused by the same false and misleading representations and omissions made by or chargeable to Defendants. Plaintiff does not have interests antagonistic to, or in conflict with, the Class.
17. A class action is superior to other available methods for the fair and efficient adjudication of this controversy. As the damages suffered by individual Class members may be relatively small, the expense and burden of individual litigation make it virtually impossible for the Class members to seek redress for the wrongful conduct alleged. Plaintiff knows of no difficulty that will be encountered in the management of this litigation which would preclude its maintenance as a class action.
18. Common questions of law and fact exist as to all members of the Class and predominate over any questions affecting solely individual members of the Class. Among the questions of law and fact common to the Class are:
(a) Whether the federal securities laws were violated by Defendants' acts as alleged herein;
(b) Whether Defendants participated directly or indirectly in the concerted action or common course of conduct complained of herein;
(c) Whether the documents, filings, releases and statements disseminated to the investing public omitted and/or misrepresented material facts about the business and financial condition of CPI;
(d) Whether Defendants acted willfully, knowingly, or recklessly in directly or indirectly omitting to state and/or misrepresenting material facts;
(e) Whether the market price of the Company's common stock during the Class Period was artificially inflated due to the non-disclosures and/or misrepresentations complained of herein; and
(f) The extent of injuries sustained by members of the Class and the appropriate measure of damages.
19. The names and addresses of the record owners of the shares of CPI's common stock purchased during the Class Period are available from the Company's transfer agent. Notice can be provided to such record owners by a combination of published notice and first-class mail using techniques and a form of notice similar to those customarily used in class actions arising under the federal securities laws.
FRAUD-ON-THE-MARKET DOCTRINE
20. Plaintiff will rely, in part, upon the presumption of reliance established by the fraud-on-the-market doctrine in that, among other things:
(a) CPI common stock met the requirements for listing, and was listed, on the NASDAQ National market System, a highly efficient and automated market;
(b) As a regulated issuer, the Company filed periodic public reports with the SEC;
(c) The trading volume of the Company's stock was substantial, reflecting numerous trades each day;
(d) CPI was followed by securities analysts employed by several major brokerage firms who wrote reports that were distributed to the sales force and certain customers of such firms and that were available to various automated data retrieval services;
(e) Defendants made public statements that failed to disclose material facts during the Class Period;
(f) The omissions and misrepresentations were material;
(g) The misrepresentations alleged would tend to induce a reasonable investor to misjudge the value of the Company's securities; and
(h) Plaintiff and the other members of the Class purchased CPI common stock without knowledge of the omitted and misrepresented facts.
21. Based upon the foregoing, Plaintiff and the other members of the Class are entitled to a presumption of reliance upon the integrity of the market for the purpose of class certification as well as for ultimate proof of the claims on their merits. Plaintiff will also rely, in part, upon the presumption of reliance established by material omission and upon the actual reliance of the Class members.
FACTUAL ALLEGATIONS
22. On February 2, 2001, shortly after the market opened, CPI issued a press release stating that the Company had suspended two of its principal officers and had engaged a Special Committee to conduct an investigation into certain misleading revenue recognition practices that rendered certain of the Company's prior financial disclosures materially false an misleading. Although the press release vaguely suggests that only the Company's financial disclosures pertaining to the Company's fourth quarter of fiscal year 2000 were false and misleading, the extraordinary nature of the disclosure, combined with the summary suspension of two of the Company's principal officers, strongly suggests that the Company's financial disclosures, including the endorsement of prior earnings guidance to analysts, was false and misleading at least for the past several months.
Class Period Events
23. The Class Period commences on November 29, 2000, the date on which CPI first disclosed that its then-Chief Financial Officer was leaving the Company. At the time, the Company attempted to minimize this mid-quarter departure, suggesting that the departure was for "personal reasons" and specifically urging to analysts and the investment community that the Company's prior earnings guidance and fiscal fourth quarter earnings performance expectations were completely unrelated to the departure, and that the Company's fourth quarter was on track.
24. For example, the next day, analyst Robert W. Baird & Co. issued a report strongly urging investors to "Buy" the Company's stock and declaring that the Company's "fundamentals" were strong, and that the Company was on track to perform well in the fourth quarter of 2000. The report, expressly based on Company guidance, stated that the Company was on track to earn $0.01 per share in the quarter.
25. Likewise, on December 7, 2000, Chase H&Q issued a report on the Company entitled "Critical Path Makes Management Change, Maintain Strong BUY Recommendation." This report similarly included a Company-endorsed estimate that the Company would earn $0.01 per share. This opinion was reiterated by Chase H&Q on January 4, 2001. Many other analysts followed the Company and regularly communicated with the Company and issued similar reports that downplayed management changes in the Company's financial control positions, while simultaneously endorsing estimates that the Company was anticipated to achieve substantial revenue growth and quarterly profitability as described above.
26. Critical Path stock traded at over $28.00 per share on November 28, 2000. It closed at $25.00 per share on November 29, 2000, and slipped further in the ensuing days. By late-December, however, amid the repeated assurances that the Company was on track, the stock rose to over $30.00 per share.
27. On January 18, 2001, after the market closed, Critical Path issued an earnings announcement that stated in pertinent part:
Revenue for the quarter reached $52.0 million, a 16 percent sequential increase over revenue of $45.0 million in the third quarter of 2000, and a 534 percent increase over revenue of $8.2 million in the fourth quarter of 1999. The net loss for the quarter, excluding special charges, was $11.5 million, or $0.16 per share, compared with a net loss, excluding special charges, of $8.7 million, or $0.14 per share, in the third quarter of 2000, and a net loss of $11.0 million, or $0.26 per share, in the fourth quarter of 1999. The Company also reported gross profit, excluding special charges, of $29.1 million, a 15 percent increase over gross profit of $25.3 million in the third quarter of 2000.
The reported revenues for the quarter do not include $7.0 million related to a large enterprise license agreement that was executed during the quarter. Due to complex and evolving rules governing revenue recognition for software license arrangements, the Company, in consultation with its outside auditors, determined that the revenue from this transaction required deferral as of December 31, 2000. The Company anticipates recognizing the revenue from this transaction on a "sell-through" basis in the future rather than as an up-front license fee in the fourth quarter of 2000, as anticipated.
"Despite a difficult economic environment, Critical Path achieved solid revenue growth and improved gross margins, while adding over 200 new customers and further solidifying our category leadership position," said Doug Hickey, Critical Path's CEO.
According to Chief Financial Officer Larry Reinhold, other factors in addition to the deferred revenue mentioned previously had an impact on results in the fourth quarter of 2000. These factors included a non-operating foreign exchange loss due primarily to currency fluctuations in U.S. dollar-denominated European revenues, higher than expected operating expenses in the recently acquired PeerLogic business as full synergies have not yet been achieved, and the provision of a significant allowance for doubtful accounts.
"While we are disappointed with the bottom-line impact of these charges, we are evaluating and will be taking concrete steps to control the underlying factors impacting these areas," said Reinhold.
28. Finally, on February 2, 2001, the Company issued the announcement described above, disclosing that the Company's prior financial disclosures, at least as to its fourth quarter of fiscal 2000, were materially false and misleading. The Company stated, among other things:
On January 18, 2001, the Company announced Fourth Quarter revenue of $52 million in revenue and net loss, excluding charges, of $11.5 million. The Company now believes that these results may be materially misstated.
29. Upon these revelations, NASDAQ trading of CPI stock was halted, and trading of CPI on the Island ECN reduced its shares to approximately $5.00 per share. Market losses in the stock are devastating.
Defendants Misrepresented And Failed To Disclose Material Facts
30. In knowing or reckless disregard of the truth and/or as part of their ongoing efforts to continue the illusion of CPI's business success, and market leadership, Defendants issued and/or participated in the issuance of materially false and misleading statements to the investing public as particularized above. These representations were materially false and misleading when made for the reasons set forth above and in that they falsely stated and/or failed to disclose the following material, adverse facts about CPI's business operations and financial condition, which facts were known to or recklessly disregarded by Defendants that:
(a) They falsely overstated the Company's financial condition, and materially overstated sales and revenues, gross profit, income and earnings per share.
(b) They falsely stated or implied that CPI's financial statements were prepared in accordance with generally accepted accounting principles and in accordance with the federal securities laws and SEC regulations concerning fair reporting.
31. During the Class Period, Defendants materially misled the investing public, thereby inflating the price of CPI securities, by publicly issuing false and misleading statements and omitting to disclose material facts necessary to make Defendants' statements, as set forth herein, not false and misleading. Said statements and omissions were materially false and misleading in that they failed to disclose material adverse information and misrepresented the truth about the Company, its financial performance, accounting, reporting and condition, including, among other things:
(a) During the Class Period, the Company's income was overstated; and
(b) The Company's financial statements did not present, in all material respects, the Company's true financial condition, and did not reflect all adjustments that were necessary for a fair statement of the interim and full year periods presented.
32. The February 2, 2001 announcement revealed problems related to CPI's business and financial operations that by their nature were ongoing and severe. These problems were operative throughout the relevant time period and contrary to and/or discredited by Defendants' statements disseminated to the investing public.
SCIENTER ALLEGATIONS
33. As alleged herein, Defendants acted with scienter in that they knew or recklessly disregarded that the public documents and statements issued or disseminated in the name of the Company were materially false and misleading; knew or recklessly disregarded that such statements or documents would be issued or disseminated to the investing public; and knowingly or recklessly and substantially participated or acquiesced in the issuance or dissemination of such statements or documents as primary violations of the federal securities laws. As set forth elsewhere herein in detail, Defendants, by virtue of their receipt or reckless disregard of information reflecting the true facts regarding CPI, their control over, and/or receipt and/or modification of CPI's allegedly materially misleading misstatements and/or their associations with the Company that made them privy to confidential proprietary information concerning CPI, participated in the fraudulent scheme alleged herein. In particular, among other things, by acknowledging that the Company's previously issued financial statements were "materially misstated," Defendants admitted that they recklessly disregarded or misused facts that were available at the time the financial statements were prepared.
34. Defendants engaged in such a scheme to artificially inflate the price of CPI securities in order to facilitate transactions involving the use of Company stock as currency.
35. Moreover, the Individual Defendants engaged in such a scheme to inflate the price of CPI securities in order to (i) protect and enhance their executive positions and the substantial compensation and prestige they obtained thereby; (ii) enhance the value of their personal holdings of CPI securities; and (iii) facilitate substantial and extremely profitable insider sales of CPI stock.
36. The market for CPI's common stock was open, well-developed and efficient at all relevant times. As a result of the above-described false and misleading statements and failures to disclose the full truth about CPI and its business and future prospects, the Company's common stock traded at artificially inflated prices during the entire Class Period until the time the adverse information described above was finally provided to and digested by the securities market. Plaintiff and other members of the Class purchased or otherwise acquired CPI common stock relying upon the integrity of the market price of CPI stock and market information related to the Company, or in the alternative, upon Defendants' false and misleading statements, and in ignorance of the adverse, undisclosed information and false financial statements know to Defendants, and have been damaged thereby. Upon disclosure of the true facts regarding the Company, trading was halted in the sale of the common stock. Had Plaintiff and other members of the Class known of the materially adverse information not disclosed by Defendants, they would not have purchased or acquired CPI's common stock at the artificially inflated prices that they did.
37. At all relevant times, the misrepresentations and omissions particularized in this complaint directly or proximately caused or were a substantial contributing cause of the damages sustained by Plaintiff and other members of the Class. As described herein, during the Class Period, Defendants made or caused to be made a series of false statements about CPI's revenues and earnings. These misstatements and omissions had the cause and effect of creating in the market an unrealistically positive assessment of CPI, its profitability and its future business prospects, thus causing the Company's common stock to be overvalued and artificially inflated at all relevant times. Defendants' false portrayal of CPI, its business operations, and future prospects during the Class Period resulted in Plaintiff's and other Class members' purchasing shares of the Company's common stock at a disparity between their market price and their actual value, thus causing the damage complained of herein.
COUNT I
(Against All Defendants For Violations Of Section 10(b) Of The Exchange Act)
38. Plaintiff repeats and realleges each and every allegation set forth above, and further alleges as follows.
39. This claim is brought against Defendants with respect to the entire Class Period and on behalf of the Class.
40. Defendants, individually and in concert, directly and indirectly, by the use of means or instrumentalities of interstate commerce and/or of the mails, engaged and participated in a continuous course of conduct to conceal adverse material information about the business, operations, and prospects of CPI as specified herein. Defendants employed devices, schemes, and artifices to defraud, while in possession of material adverse non-public information and engaged in acts, practices, and a course of conduct as alleged herein in an effort to assure investors of CPI's value and performance and continued substantial growth, which included the making of, or the participation in the making of, untrue statements of material facts and omitting to state material facts necessary in order to make the statements made about CPI and its business operations and prospects in the light of the circumstances under which they were made, not misleading, at least to the extent set forth more particularly herein, and engaged in transactions, practices and course of business which operated as a fraud and deceit upon the purchasers of CPI securities during the Class Period.
41. Defendants had actual knowledge of the misrepresentations and omissions of material facts set forth herein, or acted with reckless disregard for the truth in that they failed to ascertain and to disclose such facts, even though such facts were available to them. Such Defendants' material misrepresentations and/or omissions were done knowingly or recklessly and for the purpose and effect of concealing CPI's operating condition and business prospects from the investing public and supporting the artificially inflated price of its stock. As demonstrated by Defendants' misstatements of the Company's business, operations, and financial condition throughout the Class Period, Defendants, if they did not have actual knowledge of the misrepresentations and omissions alleged, were reckless in failing to obtain such knowledge by deliberately refraining from taking those steps necessary to discover whether those statements were false or misleading.
42. As a result of the dissemination of the materially false and misleading information and failure to disclose material facts, as set forth above, the market prices of CPI securities were artificially inflated during the Class Period. In ignorance of the materially false and misleading nature of the reports and statements described above, Plaintiff and other members of the Class relied, to their damage, on the reports and statements described above and/or on the integrity of the market prices of CPI securities and the completeness and accuracy of the information disseminated to CPI investors in connection with their purchases of the Company's securities.
43. At the times of said misrepresentations and omissions, Plaintiff and other members of the Class were ignorant of their falsity, and believed them to be true. Plaintiff and other Class members could not in the exercise of reasonable diligence have known the actual facts. In reliance on said misrepresentations and in reliance upon the superior knowledge and expertise of Defendants and on the integrity of the market, Plaintiff and other members of the Class were induced to and did purchase CPI securities at artificially inflated prices. Had Plaintiff and other members of the Class known the truth, they would not have taken such action.
44. By virtue of the foregoing, Defendants have violated Section 10(b) of the Exchange Act, and Rule 10b-5 promulgated thereunder by the SEC.
45. Plaintiff and other members of the Class have been damaged by Defendants' violations as described in this Count and seek recovery for the damages caused thereby.
COUNT II
(Against The Individual Defendants For Violations Of Section 20(a) Of The Exchange Act)
46. Plaintiff repeats and realleges each and every allegation made above and further alleges as follows.
47. This Count is brought by Plaintiff against the Individual Defendants with respect to the entire Class Period and on behalf of the Class.
48. By reason of their control over the operations of CPI, the Individual Defendants are "controlling persons" of the Company within the meaning of Section 20(a) of the Exchange Act and had the power and influence (which they exercised) to cause CPI to engage in the unlawful conduct complained of herein, and could have prevented such violations from taking place but failed to do so.
49. Because each of the Individual Defendants is a "controlling person," as that term is defined in Section 20(a) of the Exchange Act, of other persons primarily liable to Plaintiff and the Class pursuant to the claims arising under Section 10(b) of the Exchange Act alleged above, each of the Individual Defendants is secondarily liable for those primary violations pursuant to Section 20(a) of the Exchange Act.
PRAYER FOR RELIEF
WHEREFORE, Plaintiff, on his own behalf and on behalf of the Class, prays for judgment as follows:
A. Declaring this action to be a plaintiff class action properly maintained pursuant to Rule 23(a) and (b)(3) of the Federal Rules of Civil Procedure;
B. Awarding Plaintiff and other members of the Class damages together with interest thereon;
C. Awarding Plaintiff and other members of the Class their costs and expenses of this litigation, including reasonable attorneys' fees, accountants' fees and experts' fees, and other costs and disbursements; and
D. Awarding Plaintiff and other members of the Class such other and further relief as may be just and proper under the circumstances.
DATED: February 2, 2001 Respectfully submitted,
GIRARD & GREEN, LLP
By:
Daniel C. Girard
Daniel C. Girard
Anthony K. Lee
Robert A. Jigarjian
160 Sansome Street, Suite 300
San Francisco, California 94104
Telephone: (415) 981-4800
Facsimile: (415) 981-4846
Ralph M. Stone
SHALOV STONE & BONNER
276 Fifth Avenue, Suite 704
New York, New York 10001
Telephone: (212) 686-8004
Facsimile: (212) 686-8005
Attorneys for Individual and Representative
Plaintiff Fred Kessler DEMAND FOR JURY TRIAL
Plaintiff hereby demands a trial by jury on all claims so triable.
DATED: February 2, 2001 Respectfully submitted,
Ralph M. Stone
SHALOV STONE & BONNER
276 Fifth Avenue, Suite 704
New York, New York 10001
Telephone: (212) 686-8004
Facsimile: (212) 686-8005
Attorneys for Individual and Representative
Plaintiff Fred Kessler |
