ALLEGATIONS OF ACCOUNTING FRAUD? FROM THE COMPLAINT:
whafh.com
Related Party Transactions: 1Q00
34. In addition to being Terayon's largest investors and largest customers and having designees on the Company's Board of Directors, both Rogers and Shaw were also active members of CableLabs, each having a designee on the Board of that organization. Thus, Rogers and Shaw were uniquely positioned to know that Terayon's S-CDMA technology had not been adopted as part of the DOCSIS standard and to know of the false statements made by Terayon regarding the inclusion of S-CDMA into the DOCSIS standard. In fact, CableLabs sent copies of its cease and desist letter to both Shaw and Rogers.
35. In addition to knowing of the cease and desist letter, both Rogers and Shaw were also well aware of the fact that if defendants could not convince CableLabs to revise its already adopted TDMA standard and/or to re-standardize the S-CDMA platform, there would be little or no demand for Terayon's products in the United States, by far the world's largest market for cable modems. Both Rogers and Shaw were also aware that investors' perception of Terayon's revenue growth was particularly important throughout the Class Period because it directly reinforced the Company's representations that Terayon's S-CDMA technology was finding world-wide acceptance and would be or was included into the DOCSIS standard.
36. At the time CableLabs delivered the cease and desist letter, because of the difference between the exercise price under the warrant issued to Shaw ($6.50 per share) and the market value of the stock on February 2, 2000 ($113.375 per share), Shaw stood to realize a gain of $320,625,000 on its Terayon holdings. Likewise, by the time the cease and desist letter was sent to Rogers, it stood to realize a gain of $188,750,000 on its Terayon holdings. By March 28, 2000, the date the Company received its third, undisclosed, letter from CableLabs telling them yet again to cease making misrepresentations concerning DOCSIS certification, the market value of Terayon stock, which had almost doubled, closed at $223 per share, and the market value of the Terayon stock held by Shaw and Rogers increased to $677,063,457 and $446,000,000, respectively.
37. During the first quarter of 2000, both Rogers and Shaw uncharacteristically purchased more modems than either had sold during the quarter when, previously, both Shaw and Rogers had purchased only those cable modems that were necessary for customer installations during the quarter, on an as-needed basis. Shaw and Rogers, like the rest of the industry, avoided stockpiling modems because these products undergo almost constant price erosion. Thus, the chart below illustrates Roger's and Shaw's unusual purchasing pattern that developed in the first quarter of 2000, compared to the prior two quarters of 1999:
3Q99 3Q99 4Q99 4Q99 1Q00 1Q00
Company Purchase Installs Purchase Installs Purchase Installs
Shaw 16,000 16,000 53,000 53,000 40,000 24,000
Rogers 9,000 9,000 23,000 23,000 52,000 29,600
38. These additional sales to Rogers and Shaw during the quarter in which Terayon received its cease and desist letter from CableLabs, which letter Rogers and Shaw also received, were critical in helping the Company boost its purported revenues and reinforce the false impression that S-CDMA modems were being widely accepted in the markets. In fact, as set forth in ¶71, below based in significant part on the Company's over-shipments of modems to Rogers and Shaw, on March 6, 2000, defendants issued a press release which stated that Terayon expected to "Exceed First Quarter Analysts' Expectations for Revenue and Earnings" and that the Company expected to achieve revenues of $55-57 million for the first quarter. Later, on the last day of the Class Period, April 11, 2000, the Company reported "record revenues" of $59.3 million for the first quarter 2000. What investors did not know was that the shipments of additional modems to Rogers and Shaw constituted at least $8 million of that revenue, an amount wholly responsible for achieving these purported record results. |
