On January 21, 2000, an investor-relations firm named Access 1 Financial ("Access 1") issued a report on Max Internet, with a "buy" recommendation on Max Internet and a 12 month target price of $37.50. The report also forecast $253 million in revenue and $63.7 million in income for fiscal 2001, and $380 million in revenue and $87.4 million in income for fiscal 2002. According to Mark Bergman, Access 1's chief executive and author of the report, the figures were based entirely on what Company executives, including defendant McLellan, told him.
The Access 1 report also stated the Company's future growth would be driven by, inter alia, penetration into lucrative foreign markets such as Brazil.
Max Internet reproduced the Access 1 report in its entirety on its website, thereby republishing and endorsing the projections therein.
Access 1 was paid $25,000 and 30,000 shares of stock to write the report.
On January 25, 2000, defendant Max Internet, in a press release issued over PRNewswire, announced that Access 1 had initiated coverage of Max Internet and had issued a "buy" recommendation. Max Internet stock rose from $9-1/4 on January 19, 2000 to $23-15/16 on January 26, 2000.
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UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF TEXAS
JAY PATEL, INDIVIDUALLY AND ON BEHALF OF ALL OTHERS SIMILARLY SITUATED,
Plaintiff,
v.
MAX INTERNET COMMUNICATIONS INC., LAWRENCE R. BIGGS JR., DONALD G. MCLELLAN and LESLIE D. CRONE,
Defendants.
Civil Action No.
CLASS ACTION COMPLAINT
Jury Trial Demanded
Plaintiff, by his attorneys, for his Class Action Complaint alleges:
NATURE OF THE CASE
This is a Class Action brought on behalf of Jay Patel and all other persons or entities, except for Defendants, who bought MAX Internet Communications Inc. ("Max Internet" or the "Company") common stock (the "Class") during the period November 15, 1999 through May 12, 2000, inclusive (the "Class Period").
This action, based on violations of section 10(b) of the Securities Exchange Act of 1934, arises out of a series of false and misleading statements concerning, inter alia, reported financial results during the Class Period which were materially inflated by 98%, because the financial results for its Brazilian subsidiary were materially overstated as a result of fraudulently booked transactions. As a result of this fraud, Max Internet was able to consummate a $7 million sale of stock, and obtain a listing on NASDAQ.
JURISDICTION AND VENUE
This action arises under sections 10(b) and 20(a) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. §§78j(b) and 78t(a); and Rule 10b-5 promulgated pursuant to section 10(b) by the Securities and Exchange Commission ("SEC"), 17 C.F.R. §240.10b-5. The jurisdiction of this Court is based on section 27 of the Exchange Act, 15 U.S.C. §78aa; and on sections 1331 and 1337(a) of the Judicial Code, 28 U.S.C. §§1331, 1337(a).
Venue is proper in this District under section 27 of the Exchange Act, 15 U.S.C. §78(aa), and section 1391(b) of the Judicial Code, 28 U.S.C. §1391(b). The corporate headquarters of Max Internet are located in this district and many of the acts complained of occurred in this district.
In connection with the acts and conduct alleged herein, Defendants, directly and indirectly, used the means and instrumentalities of interstate commerce, including the United States mails and the facilities of the national securities exchanges.
PARTIES
Plaintiff Jay Patel purchased Max Internet common stock during the Class Period as set forth in the accompanying certification and was damaged as a result thereof.
Max Internet is a Nevada corporation with its principal headquarters located at 8115 Preston Road, Eighth Floor - East, Dallas, Texas.
The Company's common stock is, and at all relevant times has been, held and publicly traded on the open market. Its common stock was listed on the OTC Bulletin Board until it moved to the Nasdaq National Market on February 10, 2000. As of March 31, 2000, over 17 million shares of Max Internet common stock were issued and outstanding. The market for Max Internet common stock is efficient and quickly reflects all publicly available information.
Defendant Lawrence R. Biggs Jr. was the founder of Max Internet and has been, at all relevant times, Chief Executive Officer and a director of Max Internet. Biggs served as Chairman of the Board of Max Internet until March 28, 2000. As of September 30, 1999, Biggs was the beneficial owner of 1,470,000 shares, or 9.2%, of the common stock of the Company.
Defendant Donald G. McLellan has been, at all relevant times, President and a director of Max Internet. As of September 30, 1999, McLellan was the beneficial owner of 1,187,000 shares, or 7.4%, of the common stock of the Company.
Defendant Leslie D. Crone has been, at all relevant times Chief Financial Officer of Max Internet. As of September 30, 1999, Crone was the beneficial owner of 80,000 shares, or 0.5%, of the common stock of the Company.
Defendants Biggs, McLellan, and Crone are referred to collectively herein as the "Individual Defendants."
The Individual Defendants, by reason of their management positions and membership on Max Internet's Board of Directors and ownership of over 17% of the Company's stock were at all relevant times controlling persons of Max Internet within the meaning of section 20(a) of the Exchange Act. The Individual Defendants had the power and influence to cause Max Internet to engage in the unlawful acts and conduct alleged herein, and did exercise such power and influence.
PLAINTIFF'S CLASS ACTION ALLEGATIONS
Plaintiff brings this action as a class action pursuant to Federal Rule of Civil Procedure 23(a) and (b)(3) on behalf of the Class, consisting of all persons who purchased or otherwise acquired shares of Max Internet common stock between November 15, 1999 and May 12, 2000, inclusive. Excluded from the Class are defendants; members of the immediate families of the Individual Defendants; any entity in which any defendant has or had a controlling interest; and the legal representatives, heirs, successors, or assigns of any defendant.
Over 17 million shares of common stock of Max Internet are outstanding in an actively-traded and efficient market in which millions of shares were traded during the Class Period. Max Internet common stock is currently traded on the Nasdaq National Market under the symbol "MXIP." The members of the Class are so numerous that joinder of all members is impracticable. While the exact number of Class members is unknown to plaintiff, and can only be ascertained through appropriate discovery, plaintiff believes that there are thousands of members of the Class. Record owners and members of the Class may be identified from records maintained by Max Internet or its transfer agent and may be notified of the pendency of this action by mail, using the form of notice similar to that customarily used in securities class actions.
Plaintiff's claims are typical of the claims of the members of the Class in that plaintiff and each Class member purchased common stock of Max Internet during the Class Period and sustained injury as a result.
Plaintiff will fairly and adequately protect the interests of the members of the Class and has retained counsel competent and experienced in class action and securities litigation.
A class action is superior to other available methods for the fair and efficient adjudication of this controversy since joinder of all Class members is impracticable. Furthermore, as the damages suffered by individual Class members may be relatively small, the expense and burden of individual litigation make it impossible for the Class members to seek redress individually for the wrongs done to them. There will be no difficulty in the management of this action as a class action.
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:
whether the federal securities laws were violated by Defendants' acts as alleged herein;
whether Defendants acted wilfully or recklessly in omitting to state and misrepresenting material facts; and
whether the members of the Class have sustained damages, and if so, what is the proper measure of damages.
FACTS
Max Internet manufactures and markets a personal computer Internet media processor card and an information appliance. Max Internet's main technology delivers the power to conduct true-motion, synchronized video and audio communications, as well as video and audio streaming and browsing over a broadband Internet connection.
On November 12, 1999, the price of Max Internet stock was $4-3/8.
In a Form 10-QSB filed with the SEC on November 12, 1999, Voxcom Holdings, Inc., d.b.a. Max Internet, reported net sales for the three months ended September 30, 1999 of $2,637,154 and a net loss of $357,355 as compared to net sales of $188,432 and a net loss of $557,050 for the same period in the prior year. In addition, the Form 10-QSB reported that Max Internet Communications to Brazil Ltd. ("Max Brazil") had been formed on September 14, 1999 and that the financial results for Max Brazil were included in the Company's financial statements. The Company also reported that Max Brazil would "sell and service the MAX i.c.Live card" along with other products that the Company would develop. The Form 10-QSB was signed by Defendants McLellan and Crone.
On November 15, 1999, Voxcom Holdings, Inc., d.b.a. Max Internet, announced its financial results for its first quarter ended September 30, 1999. It repeated the financial results previously reported for the September 1999 quarter.
The statements made in paragraphs 22 and 23 above were false and misleading because at the time they were made. The products sold by Max Brazil, which accounted for most of Max Internet's revenue for the quarter had already been returned by the customer and thus couldn't be recognized as a sale under Generally Accepted Accounting Principles ("GAAP"). The week after the earnings announcement, Max Internet stock rose from $4-3/8 to $6-1/8 per share.
On November 16, 1999, Voxcom Holdings, Inc., d.b.a. Max Internet, changed its name to Max Internet Communications, Inc.
On January 21, 2000, an investor-relations firm named Access 1 Financial ("Access 1") issued a report on Max Internet, with a "buy" recommendation on Max Internet and a 12 month target price of $37.50. The report also forecast $253 million in revenue and $63.7 million in income for fiscal 2001, and $380 million in revenue and $87.4 million in income for fiscal 2002. According to Mark Bergman, Access 1's chief executive and author of the report, the figures were based entirely on what Company executives, including defendant McLellan, told him.
The Access 1 report also stated the Company's future growth would be driven by, inter alia, penetration into lucrative foreign markets such as Brazil.
Max Internet reproduced the Access 1 report in its entirety on its website, thereby republishing and endorsing the projections therein.
Access 1 was paid $25,000 and 30,000 shares of stock to write the report.
On January 25, 2000, defendant Max Internet, in a press release issued over PRNewswire, announced that Access 1 had initiated coverage of Max Internet and had issued a "buy" recommendation. Max Internet stock rose from $9-1/4 on January 19, 2000 to $23-15/16 on January 26, 2000.
On February 4, 2000, Max Internet announced that a $7,000,000 private equity investment was finalized. The proceeds were to be used by Max Internet for "the purchase of inventory and key components for the MAX i.c.Live 3600 Internet Media Processor card and for future development and advertising of the MAX i.c.Live Video Communication Station (VCS), which is expected to begin shipment in limited quantities by next month." The terms of the final placement consisted of the issuance of 1,102,273 shares of Max Internet stock at an average price of $6.35 per share, with an option to acquire 400,000 shares at $10 per share.
On February 9, 2000, in a press release issued over PRNewswire, Max Internet announced that it had "received approval from the NASDAQ-AMEX Stock Market to begin trading on the NASDAQ SmallCap Market under the same symbol, MXIP effective February 10, 2000."
On February 22, 2000, in a press release issued over Business Wire, the Company announced its results for the second quarter of fiscal 2000, ended December 31, 1999. For the first time, the Company reported a profit for the three months ended December 31, 1999, the Company reported net sales of $8,133,086 and net earnings of $11,072,788, as compared to net sales of $60,127 and net loss of $1,581,264 for the same period the prior year.
In a Form 10-QSB filed with the SEC on February 22, 2000 and signed by defendants McLellan and Crone, Max Internet repeated the financial results previously reported for the December 1999 quarter.
The statements made in paragraphs 34 and 35 above were false and misleading because at the time the statements were made, defendants knew or had reason to believe the sales recorded by results of Max Brazil were non-existent and no revenue would ever be received.
An article in the Wall Street Journal on March 22, 2000 reported that although Max Internet reported revenue of $8.1 million for the December quarter, as of December 31, 1999, Max Internet had receivables of $10.9 million, up from $169,217 at the end of its June 1999 quarter. In addition, the Wall Street Journal article reported that the cash position of Max Internet had declined to $137,765 in December 1999 from $8.1 million at the end of June 1999, even though Max Internet stated that it had raised $7 million in February in two private equity transactions. Defendant McLellan acknowledged in the article that nearly all of Max Internet's revenue for the current fiscal year was uncollected, and that a majority of Max Internet's revenue came from Max Internet's former subsidiary, Max Brazil. The article quoted an analyst as saying "It's all extremely suspicious" and that Max Internet was merely stuffing its sales channels with no paying customers in sight. The week after the Wall Street Journal article, the stock declined from $12-3/4 to $8-11/16.
The March 22, 2000 the Wall Street Journal article also stated that the January 25, 2000 press release issued by Max Internet which detailed the results of the investor relations report prepared by Access 1 on Max Internet did not acknowledge the fact that Max Internet had paid Access 1 to prepare the report. When asked why Max Internet had not stated in the press release that it had paid Access 1 to prepare this report, McLellan stated he had not thought it "relevant."
I have just returned from a week long trip in Brazil where I was working with our distributor and their customers. The distributor and their customers are sound and we look forward to a long, profitable future with them.
On March 28, 2000, in a press release issued over Business Wire, the company announced that Dr. Harold Clark was appointed as Chairman of the Board of Directors, replacing defendant Biggs. The press release reported that Biggs would remain a director and Chief Executive Officer.
On May 12, 2000, in a press release issued over Business Wire, Max Internet announced its results for the third quarter of fiscal 2000, ended March 31, 2000. The Company announced revenue for the quarter of $140,853, and a net loss for the quarter of $2,833,125, or $0.17 per share. The Company announced that it was restating its results for the prior two quarters:
The Company previously reported sales for the six and three months ended December 31, 1999 in the amount of $10,770,240 and $8,133,086 respectively, and net earnings of $715,433 or $.04 per share and $1,072,788 or $.06 per share for the same periods. The majority of these sales were from Brazil and were booked in reliance upon documentation that was later found to be falsified. As a result, the prior financial statements have been restated by $10,513,691 for the six months ended December 31, 1999. For the nine months ended March 31, 2000, adjusted revenues were $397,402 resulting in a loss of $(.46) per share based on 16,248,188 weighted average shares outstanding.
(Emphasis added).
In other words, rather than $10,770,240 in revenue for the six months ended December 31, 2000, the Company had $256,549 in revenue.
On May 15, 2000, the Company filed its Forms 10-QSB/A for the periods ended September 30, 1999 and December 31, 1999. Both documents were signed by defendants McLellan and Crone. In Note D to the Notes to Financial Statements of the Form 10-QSB/A for the period ended September 30, 1999, the Company stated:
The company previously reported sales for the three months ended September 30, 1999 in the amount of $2,637,154. The majority of these reported sales were from the Brazilian subsidiary to a single customer in Brazil that returned the product soon after delivery. The company has recently discovered its management in Brazil misled the company regarding its sales in South America. South American sales in both the first and second quarters are being reversed following this discovery.
For the three months ended September 30, 1999, the Company reported net sales of $137,154 and a net loss of $1,524,902, as compared to net sales of $188,432 and net earnings of $207,838 for the same period in the prior year.
In Note D to the Notes to Financial Statements of the Form 10-QSB/A for the period ended December 31, 1999, the Company stated:
The Company previously reported sales for the six and three months ended December 31, 1999 in the amount of $10,770,240 and $8,133,086, respectively. The majority of these reported sales were from the Brazilian subsidiary to purported customers in South America, and were recorded in reliance upon documentation that was later found to be falsified. South American sales in both the first and second quarters are being reversed following this discovery.
For the three months ended December 31, 1999, the Company's restated results reported net sales of $119,395 and a net loss of $3,060,099, as compared to net sales of $60,127 and a net loss of $1,581,264 for the same period in the prior year.
Defendants' Scienter
The fraudulent revenue booked by Max Brazil constituted 98% of revenue recorded by Max Internet for the six months ended December 31, 2000. Defendant McLellan admitted that during the Class Period he personally traveled to Brazil to meet with both the management of Max Brazil and Max Brazil's customers. Max Brazil had only two purported customers.The Individual Defendants controlled the content of Max's reported financial results and also knew, due to their management positions, the truth concerning Max Internet's accounting practices. Defendants McLellan and Crone signed the filings made with the SEC and therefore had the opportunity to tailor Max Internet's publicly reported financial results to suit their needs.During the Class Period, Max Internet sold 1,102,273 shares of stock in a private placement, at an average price of $6.35 per share. Max Internet received almost $7,000,000 from the sale. Max Internet also sold other shares of its stock for gross proceeds of $2,289,284. In the nine months ended March 31, 2000, Max Internet had only $397,402 in revenue, meaning the sale of sock was 17,500% of cash received for those nine months.The fraudulent scheme also allowed Max internet to receive a listing on the NASDAQ Small Cap and the German exchange.AS AND FOR A
FIRST CLAIM FOR RELIEF
Against All Defendants
(Section 10(b), Securities Act)
Plaintiff incorporates by reference the allegations of paragraphs 1 through 46 as if fully set forth herein.The reported financial results of Max Internet were materially false and misleading, and Defendants knew or were reckless in not knowing they were so, because Defendants knew that they were improperly recording revenues for Max Brazil at the time the filings were made.Defendants employed devices, schemes, and artifices to defraud and engaged in acts, practices, and a course of conduct in an effort to maintain artificially high market prices for Max common stock in violation of section 10(b) of the Exchange Act and SEC Rule 10b-5.As a result of the dissemination of the aforesaid false and misleading reports and releases, the market price of the common stock of Max Internet throughout the Class Period was higher than it would have been had the true facts concerning the Company's financial condition been known by the market.In ignorance of the artificially high market prices of Max Internet's publicly traded common stock, and relying upon the integrity of the market in which that stock was traded--the NASDAQ National Market System--plaintiff and the other members of the Class acquired Max Internet common stock during the Class Period at artificially inflated prices and were damaged thereby.Had the market known of the true financial condition of Max Internet, which was falsely represented by defendants, plaintiff and the other members of the Class would not have purchased or otherwise acquired their Max Internet common stock during the Class Period at artificially inflated prices at which they did. Hence, plaintiff and the other members of the Class were damaged by defendants' violations of Section 10(b) and Rule 10b-5.AS AND FOR A
SECOND CLAIM FOR RELIEF
Against Defendants Biggs, McLellan, and Crone
(Section 20(a), Exchange Act)
Plaintiff incorporates by reference the allegations of paragraphs 1 through 52 as if fully set forth herein.This claim is asserted against Individual Defendants and is based on section 20(a) of the Exchange Act. The Individual Defendants acted as controlling persons of Max Internet within the meaning of section 20(a) of the Exchange Act. By reason of their positions as officers and directors of Max Internet and ownership of Max Internet stock, the Individual Defendants had the power and authority to cause or to prevent the wrongful conduct of herein and did exercise such power and authority.By reason of the foregoing, defendants Biggs, McLellan, and Crone are liable jointly and severally with and to the same extent as Max Internet for Max Internet's violations of section 10(b) of the Exchange Act and Rule 10b-5.PRAYER FOR RELIEF
WHEREFORE, plaintiff, on behalf of himself and the Class, prays for judgment as follows:
declaring this action to be a proper plaintiff class action maintainable pursuant to rules 23(a) and 23(b)(3) of the Federal Rules of Civil Procedure and declaring plaintiff to be a proper representative of the Class;awarding plaintiff and all of the other members of the Class damages in an amount to be proven at trial, together with prejudgment interest thereon;awarding plaintiff the costs and expenses incurred in this action, including reasonable attorneys', accountants', and experts' fees; andgranting plaintiff and the other members of the Class such other and further relief as the Court deems just and proper.DEMAND FOR A JURY TRIAL
Plaintiff hereby demands a trial by jury.
Dated: August __, 2000
WOLF HALDENSTEIN ADLER
FREEMAN & HERZ LLP
FRED TAYLOR ISQUITH
270 Madison Avenue
New York, NY 10016
Telephone: 212/545-4600
THE OFFICES OF CHARLES J. PIVEN, P.A.
CHARLES J. PIVEN
The World Trade Center - Baltimore
401 East Pratt Street, Suite 2525
Baltimore, MD 21202 |
