LIONEL Z. GLANCY #134180
TRACY L. THROWER #145782
PETER A. BINKOW #173848
MICHAEL GOLDBERG #188669
LAW OFFICES OF LIONEL Z. GLANCY
1801 Ave. of the Stars, Suite 308
Los Angeles, California 90067
ROBERT C. SUSSER
ROBERT C. SUSSER, P.C.
6 East 43rd Street, Suite 1900
New York, New York 10017
Attorneys For Plaintiff
[Additional Counsel Appear on Signature Page]
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF CALIFORNIA
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: Civ. Action No.
ROBERT REE, individually and : C99-0562 MMC
on behalf of all others :
similarly situated, : Hon. Maxine M. Chesney
:
Plaintiff, :
: CLASS ACTION COMPLAINT
v. : [filed Feb. 5, 1999]
: JURY TRIAL DEMANDED
WARREN E. PINCKERT, and :
CHOLESTECH CORPORATION :
:
Defendants. :
:
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Plaintiff, by his attorneys, for his Complaint, alleges
the following upon personal knowledge as to himself and his own
acts, and upon information and belief based upon the
investigation made by his attorneys as to all other matters.
The investigation includes the thorough review and analysis of
public statements, press releases and publicly-filed documents
of Cholestech Corporation, news articles and the review and
analysis of accounting rules and related literature.
SUMMARY OF THE ACTION
1. Plaintiff brings this action as a class action on
behalf of all purchasers of the common stock of Cholestech
Corporation ("Cholestech" or the "Company") between July 30,
1997 and June 26, 1998 (the "Class Period"), to recover damages
caused by defendants' violations of the federal securities
laws.
2. Cholestech was founded in 1989 and has traded
publicly since 1992. The Company's primary product, the LDX
System, is a diagnostic testing method which allows for testing
and measuring multiple analytes simultaneously with a single
drop of blood within five minutes. The LDX System includes the
LDX Analyzer and a variety of single-use cassettes to
physician office laboratories, healthcare promotional settings
and pharmacy markets. In essence, the LDX Analyzer allows
healthcare providers to detect various diseases and disorders,
including cholesterol disorders, with as much accuracy as tests
performed in hospital laboratories. The LDX System, however,
requires only a single drop of blood and delivers results in
five minutes.
3. Of tremendous stated importance to the Company was
the LDX System's waiver of the requirements under the Clinical
Laboratory Improvement Amendments of 1988 ("CLIA"), granted by
the U.S. Government. This waiver allows the LDX System to be
the only point-of-care multi-analyte system legally operable by
a person without special medical training. This attribute
makes the LDX System extremely attractive to potential end-
users, as they can employ any of their office workers to use
the LDX System.
4. Starting in the Fall of 1997, at the latest,
defendants crafted a plan to bolster Cholestech's stock price
in order to: (i) present the Company's finances and prospects
in a false positive light to consummate a secondary stock
offering of at least three million shares, worth tens of
millions of dollars for the Company; (ii) allow Cholestech
insiders to sell tens of thousands of Cholestech shares at
artificially-inflated prices and reap over a million dollars
for themselves; and (iii) further allow Cholestech insiders to
reap the benefits of the 1997 Cholestech Stock Incentive
Program which provided for a total of 900,000 shares to be
allocated to employees of Cholestech. Under this program,
defendant Pinckert received more stock options than any other
employee of the Company (40,000 stock options to Pinckert alone
for the year ended March 27, 1998). The Company implemented
its 1997 Stock Incentive Program just prior to the proposed
secondary offering as part and parcel of defendants' fraudulent
scheme.
5. To effectuate their fraudulent scheme, defendants
undertook to flood the Company's distribution channels with LDX
Systems and book as income 100% of the revenues attributable to
excess product sent out the door -- product which defendants
knew or recklessly disregarded that end-users did not want.
This practice effectively and artificially inflated
Cholestech's revenues and earnings -- and, thereby, the
Company's stock.
6. More importantly, by this practice, the Company
fraudulently created market acceptance of its primary product.
By falsely conveying the impression that "sales" of the
Cholestech LDX System were to end-users -- as opposed to
product simply being shipped to distributors -- defendants led
investors to believe that increased sales of the LDX System
would lead to increased high margin sales of the LDX System
cassettes. The Company's business model was based on the
"razor/razorblade" theory. That is, the Company was willing to
sell its LDX System (i.e., the razor) for a very low price
(approximately $1800) to develop a stream of income selling the
high-margin cassettes (i.e., the razorblades) for each use of
the LDX System (for approximately $4 to $11 per cassette).
Defendants misled the investing public, however, by not
informing them that the Company's reported "sales" of LDX
systems to its distributors would not result in any cassette
sales unless and until the systems were installed by the end-
users.
7. In addition, defendants represented to investors that
the Company's distribution into the pharmacy market was being
executed according to the Company's plan. The pharmacy market
represented a huge market which the Company hoped would embrace
the LDX System, particularly in light of Cholestech's CLIA
waiver. Defendants misled the investing public by not
informing them that the pharmacy distribution plan was not
being realized.
JURISDICTION AND VENUE
8. This Court has jurisdiction of this litigation under
Section 27 of the Securities Exchange Act of 1934 (the
"Exchange Act"). The claims asserted herein arise under
Sections 10(b) and 20(a) of the Exchange Act (15 U.S.C.
Sections 78j(b)) (hereinafter cited only to the Exchange Act)
and Rule 10b-5 promulgated thereunder (17 C.F.R. Section
240.10b-5).
9. Venue is proper in this District pursuant to Section
27 of the Exchange Act and 28 U.S.C. Section 1391(b).
Defendants reside in this District and many of the acts giving
rise to the violations complained of herein occurred in this
District, including the dissemination false and misleading
public statements and financial information.
10. In connection with the conduct complained of herein,
defendants, directly or indirectly, used the means and
instrumentalities of interstate commerce, including the United
States mails, interstate wire and telephone facilities and the
facilities of the national securities markets.
PARTIES
11. Plaintiff, Robert Ree, purchased the common stock of
Cholestech Corporation ("Cholestech" or the "Company") during
the Class Period defined below and as set forth more fully in
the certificate appended hereto.
12. Defendant, Cholestech, is a California corporation
located at 3347 Investment Boulevard, Hayward, California.
Cholestech, together with its subsidiaries, develops,
manufactures and markets the Cholestech LDX system, a
diagnostic analyzer with a selection of disposable test
cassettes which provide immediate feedback of lipid levels and
other medical diagnostic screenings in point-of-care settings.
13. As of March 27, 1998, Cholestech had 11,402,084
shares outstanding. Cholestech's shares trade on the NASDAQ
National Market System under the symbol "CTEC." At all times
relevant to this complaint, Cholestech common stock traded
actively in a well developed and efficient market as that term
is construed under the federal securities laws.
14. Defendant Warren E. Pinckert II ("Pinckert") is, and
at all relevant times was, President, Chief Executive Officer
and a director of Cholestech.
15. As an officer, director and/or controlling person of
a publicly-held company whose common stock is registered with
the SEC under the Exchange Act and traded on the NASDAQ,
defendant Pinckert had a duty to promptly disseminate accurate
and truthful information with respect to the Company's
operations, finances, financial conditions, and present and
future business prospects, to correct any previously issued
statement from any source that had become untrue, and to
disclose any trends that would materially affect earnings and
the present and future operating results of Cholestech, so that
the market price of the Company's publicly traded securities
would be based upon truthful and accurate information.
16. During the Class Period, defendant Pinckert was a
senior executive and director of Cholestech and was privy to
confidential and proprietary information concerning Cholestech,
its operations, finances, financial condition, products, and
present and future business prospects. Because of his
possession of such information, defendant Pinckert knew or
recklessly disregarded the fact that the adverse facts
specified herein had not been disclosed to and were being
concealed from the public. Because of his Board membership and
executive and managerial position with Cholestech, defendant
Pinckert had access to adverse material non-public information
about Cholestech's operations, finances, financial condition,
products, inventories and present and future business
prospects. He had such access via internal corporate
documents, 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 them in connection therewith.
Because of his possession of such information, defendant
Pinckert knew or recklessly disregarded the fact that the
adverse facts specified herein had not been disclosed to and
were being concealed from the public.
17. Defendant Pinckert, because of his position of
control and authority as officer and director of the Company,
was able to and did control the contents of the various
quarterly reports, SEC filings, press releases and
presentations to securities analysts pertaining to the Company.
18. Defendant Pinckert was provided with copies of
Cholestech's management reports, press releases and SEC
filings. Armed with, and in control of such information,
Pinckert granted interviews to newspaper reporters from the San
Jose Mercury News. The newspaper articles based on those
interviews, as well as the Company's other publicly
disseminated information are alleged herein to have been
materially misleading to the investing public. Significantly,
defendant Pinckert had the ability and opportunity to either
prevent their issuance in the first place or to have caused
them to be corrected shortly after their issuance. As a
result, defendant Pinckert was responsible for the accuracy of
the public reports and releases detailed herein as "group
published" information, and is therefore responsible and liable
for the representations contained therein.
19. Each of the defendants is liable as a direct
participant with respect to the wrongs complained of herein.
In addition, defendant Pinckert, by reason of his stock
ownership and his status as an officer and director of
Cholestech was a "controlling person" within the meaning of
Section 20 of the Exchange Act and had the power and influence
to cause Cholestech to engage in the unlawful conduct
complained of herein. Because of his position of control,
defendant Pinckert was able to and did, directly or indirectly,
control the conduct of the Cholestech's business, the
information contained in its filings with the SEC, and the
public statements about its business.
20. During the Class Period, defendants, individually and
in concert, directly and indirectly, engaged and participated
in a continuous course of conduct to misrepresent the results
of Cholestech's operations, and to conceal adverse material
information regarding the finances, financial condition, and
results of operations of Cholestech as specified herein.
Defendants employed devices, schemes, and artifices to defraud,
and engaged in acts, practices, and a course of conduct, as
herein alleged, in an effort to increase and maintain an
artificially high market price for Cholestech common stock.
These activities included the formulating, making, and/or
participating 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: such
activities operated as a fraud or deceit upon plaintiff and the
other members of the Class.
STATEMENTS IN ANALYST REPORTS
21. Cholestech and defendant Pinckert are also
responsible and liable for materially false and misleading
representations made in the various analyst reports
disseminated throughout the Class Period, some of which are
described herein, because those statements were either 1)
directly attributed to them; or 2) adopted or ratified by them.
22. At all times relevant to this action, Cholestech
and/or defendant Pinckert directly met or communicated with
analysts and provided detailed and direct guidance to them
regarding the Company's business condition and future
prospects. In addition, the Company and/or defendant Pinckert
expressed comfort with the estimates contained in those analyst
reports. Defendants reaffirmed the expectations stated by
those analysts, thus entangling themselves in the contents of
the recommendations, opinions, estimates and reports.
CLASS ACTION ALLEGATIONS
23. Plaintiff brings this action as a class action
pursuant to Rules 23(a) and (b)(3) of the Federal Rules of
Civil Procedure on behalf of all persons who purchased
Cholestech common stock during the Class Period and were
damaged thereby. Excluded from the Class are the defendants
herein; members of defendant Pinckert's immediate family; the
directors and officers of Cholestech; any corporation, firm,
partnership, trust or other person affiliated with any of the
foregoing; and the legal representatives, agents, heirs,
successors-in-interest or assigns of any excluded person.
24. The Class is so numerous that joinder of all members
is impracticable. As of March 27, 1998, Cholestech had
11,402,084 shares outstanding and such shares were actively
traded on the NASDAQ National Market System. While the exact
number of Class members is unknown to plaintiff at this time,
and can only be ascertained through appropriate discovery,
plaintiff believes that Class members number in the thousands.
25. Plaintiff's claims are typical of the claims of the
Class and plaintiff and all members of the Class sustained
damages arising out of defendants' wrongful conduct in
violation of the federal laws complained of herein.
26. Plaintiff will fairly and adequately protect the
interests of the Class and has chosen counsel experienced in
class and securities litigation.
27. Common questions of law and fact exist as to all
members of the Class and predominate over any questions
affecting solely individual members of the Class. These
questions include, but are not limited to, the following:
(a) Whether the federal securities laws were
violated by defendants' acts as alleged herein;
(b) Whether documents, releases and/or statements
disseminated to the investing public and Cholestech's
shareholders during the Class Period omitted and/or
misrepresented material facts about the business and finances
and profitability of the Company;
(c) Whether defendants knowingly or recklessly made
materially false statements or omitted material facts about the
financial condition, earnings power, growth potential and
profitability of the Company;
(d) Whether the market price of the Company's common
stock during the Class Period was artificially inflated due to
the nondisclosure and/or misrepresentations complained of
herein; and
(e) Whether the Class suffered damages and, if so,
the proper measure thereof.
28. A class action is superior to all other available
methods for the fair and efficient adjudication of this
controversy since joinder of all 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 Class members to
individually redress their wrongs. Plaintiff anticipates no
difficulty in managing this action as a class action.
29. Plaintiff will rely, in pertinent part, upon the
presumption of reliance established by the fraud-on-the-market
doctrine. The market for Cholestech's common stock was at all
times an efficient market for the following reasons, among
others:
a. As a regulated issuer, Cholestech filed
periodic public reports with the SEC;
b. Cholestech's securities volume was
substantial during the Class Period;
c. Cholestech disseminated information on a
market-wide basis over various electronic media services such
as the Bloomberg newswires and also issued press releases over
BusinessWire; and
d. The market price of Cholestech's securities
reacted efficiently to new information entering the market.
30. The foregoing facts clearly indicated the existence
of an efficient market for trading of Cholestech securities and
make applicable the fraud-on-the-market doctrine. Plaintiff
and the Class are thus entitled to a presumption of reliance
with respect to the misstatements and omissions complained of
herein.
INAPPLICABILITY OF STATUTORY SAFE HARBOR
31. The statutory safe harbor that applies to forward-
looking statements under certain circumstances does not apply
to any of the allegedly false statements pleaded in this
Complaint. The statements alleged to be false and materially
misleading herein relate to then-existing facts and conditions.
In addition, to the extent certain of the statements alleged
to be false may be characterized as forward-looking, they were
not identified as "forward-looking statements" when made, there
was no statement made with respect to any of those
representations forming the basis of this Complaint that actual
results "could differ materially from those projected," and
there were no meaningful cautionary statements identifying
important factors that could cause actual results to differ
materially from those in the purportedly forward-looking
statements. Alternatively, to the extent that the statutory
safe harbor does apply to any forward-looking statements
pleaded herein, defendants are liable for those false forward-
looking statements because at the time each of those forward-
looking statements was made, the particular speaker had actual
knowledge that the particular forward-looking statement was
false, and/or the forward-looking statement was authorized
and/or approved by an executive officer of Cholestech who knew
that those statements were false when made.
FALSE AND MISLEADING STATEMENTS
32. In a press release dated July 30, 1997, the first day
of the Class Period, Cholestech reported its financial results
for its first fiscal quarter of 1998, ended June 27, 1997. The
Company reported that for the first time in its history, the
Company had operating "profitability." The Company reported
operating profit of $4,000 and net profit of $122,000, or $0.01
per share compared to an operating loss of $388,000 and a net
loss of $411,000, or $0.04 per share in the same quarter the
year prior. Revenues purportedly jumped 52% to $4.2 million
from $2.8 million in the same quarter the year prior.
33. In the foregoing press release touting the Company's
first-time profitability, defendant Pinckert stated: "This was
a record quarter for both revenues and profitability. We have
taken another significant step toward our goal of sustainable
profitability. I am proud of Cholestech's execution of our
leverage strategy during the quarter, delivering strong revenue
growth while effectively managing costs to expand profits."
(Emphasis added).
34. The statements contained in the foregoing press
release were false and materially misleading because defendants
knew or recklessly disregarded that the Company's reported
earnings were materially overstated due to defendants' strategy
to "stuff the distribution channel" with excess product and
book all such "deliveries" as revenue and earnings, despite
knowing or recklessly disregarding that end-users did not want
the product. Defendants engaged in this plan in order to
convey Cholestech to the investment community as a growing,
thriving business in order to artificially inflate the price of
Cholestech's stock and effectuate a secondary offering.
35. On October 9, 1997, Cholestech disseminated a press
release which reported that the Company and Parke-Davis, a
division of Warner Lambert Company and Pfizer, Inc., reached an
agreement valued at $1 million, whereby the LDX System was to
be used in a Phase IV clinical trial. Cholestech distributed
the press release to the investing public in order to suggest
that the scientific and clinical testing communities had
adopted the Cholestech technology and that scientific
acceptance of the LDX System was growing.
36. On October 14, 1997, Genesis Merchant Group
Securities ("Genesis") initiated coverage of Cholestech with a
"long-term buy" rating and set an eighteen-month price target
of $23 per share. Genesis analyst Christopher Tihansky stated:
"[w]e believe Cholestech is emerging as one of the clear
leaders in the burgeoning disease management market."
According to Tihansky, several factors would pique investor
interest in Cholestech over the next several quarters,
including that: Cholestech would be able to differentiate its
position in the cholesterol and glucose testing markets and
Cholestech would expand its test menu, broaden its distribution
system, and grow its sales and earnings significantly over the
next several years. At the date of this research report,
Cholestech was trading at approximately $13-1/4 per share.
37. On October 28, 1997, two weeks after initiating
coverage, Genesis raised its rating on Cholestech to "buy" from
"long term buy" and moved the $23 price target on Cholestech's
stock from eighteen months to twelve months.
38. On October 29, 1997, Cholestech issued a press
release over BusinessWire announcing financial results for the
Company's second fiscal quarter of 1998, ended September 28,
1997. The Company reported revenues of $5.4 million, a 77%
increase over the $3.1 million reported in the same quarter a
year earlier. Profits were reported as $437,000, or $0.04 per
share, compared with a net loss of $237,000, or $(0.02) in the
same three month period the previous year.
39. In that same press release, defendant Pinckert
stated: "The ongoing implementation of our business strategy
continues to fuel our growth. In the second quarter we
achieved strong growth in our health promotion and physician
office lab businesses. . . . This quarter's results reflect our
ongoing strategy to leverage our strategic partnerships to
increase market presence, our technical and development
strengths to maintain product leadership, and our financial
model to build a strong, profitable company for our
shareholders."
40. The statements contained in the October 29, 1997
press release were false and materially misleading because
defendants knew or recklessly disregarded that the Company's
reported earnings were materially overstated due to the
defendants' strategy to "stuff the distribution channel" with
excess product and book all such "deliveries" as revenue and
earnings, despite knowing or recklessly disregarding that end-
users did not want the product. Defendants engaged in this
plan in order to convey Cholestech to the investment community
as a growing, thriving business in order to artificially
inflate the price of Cholestech's stock and effectuate a
secondary offering. After Cholestech's shares began to rise,
certain Cholestech insiders dumped tens of thousands of
Cholestech shares, reaping in excess of a million dollars of
ill-gotten gains for themselves.
41. On January 28, 1998, Cholestech issued a press
release over BusinessWire reporting results for the Company's
third fiscal quarter of 1998. For the three month period ended
December 26, 1997, the Company recorded revenues of $5.7
million, a 78% increase over the $3.2 million reported in the
same quarter of the previous year. Net income was reported as
$584,000, or $0.05 per share. This compared to a net loss of
$163,000, or $0.01 per share reported for the same quarter the
year earlier.
42. In the same January 28, 1998 press release, defendant
Pinckert stated: "Our business strategy continues to deliver
strong growth, resulting in this quarter's record 8 percent
operating margin. During the quarter we shipped a record
number of Cholestech LDX Systems, a 200 percent increase over
the same quarter a year ago. These systems will expand our
growing installed base, and will enhance our ability to sell
more disposable cassettes in the future. In addition, we have
continued to improve gross margins despite the challenges we
face as capacity is increased to meet demand." (Emphasis
added).
43. The statements contained in the January 28, 1998
press release were false and materially misleading because
defendants knew or recklessly disregarded that the Company's
reported earnings were materially overstated due to defendants'
strategy to "stuff the distribution channel" with excess
product and book all such "deliveries" as revenue and earnings,
despite knowing or recklessly disregarding that end-users did
not want the product. Defendants engaged in this plan in order
to convey Cholestech to the investment community as a growing,
thriving business in order to artificially inflate the price of
Cholestech's stock and effectuate a secondary offering. In
addition, the Company's reported "200% increase" in sales was
not, in fact, "enhanc[ing the Company's] ability to sell more
disposable cassettes in the future" because a substantial
percentage of sales reported were not "meeting demand," but
consisted of equipment "sales" sitting in distributors'
warehouses which had not been sold to anybody who would
purchase cassettes.
44. Sometime during the first three months of 1998,
defendants indicated to Cholestech's distributors and customers
that in April 1998, the Company would raise the price of its
LDX System and the accompanying cassettes. With defendant's
tacit approval and/or knowledge, Cholestech's customers began
purchasing very large quantities of the LDX Systems and
cassettes in order to avoid the price increase. The purported
price increase for the LDX System was part of defendants'
scheme to artificially stimulate short-term demand for
Cholestech's primary product just in time for the Company's
proposed secondary offering of over three million shares.
45. On March 31, 1998, The Red Chip Review disseminated a
research report on Cholestech touting the Company's sales and
distribution capabilities. Under a heading entitled "Hitting
Another Record," Red Chip analyst Kenneth E. Thomas stated:
"[Cholestech] rang up its 13th consecutive quarter of
sequential growth with a 78% improvement in its top line to
$5.6 million vs. $3.2 million for the corresponding period last
year. The strong performance was again driven by its ongoing
success in penetrating physicians' labs, hospitals, managed
care organizations, public health departments, and other health
care and service organizations. At the end of December, the
Company had shipped approximately 3,000 LDX Systems into the
physician office laboratory market." Information about the
number of LDX Systems shipped into the physician office
laboratory market could only have come from defendants. Such
information was, however, false and/or misleading because
"Shipments" reported by defendants were not to end-users, but
to the distribution channel.
46. In furtherance of the next step in defendants'
scheme, Cholestech announced on April 29, 1998 that it had
filed a registration statement with the SEC for a secondary
stock offering of 3,000,000 shares. In addition, the Company
granted the underwriters, led by Prudential Securities Inc.
("Prudential"), Vector Securities International, Inc.
("Vector") and EVEREN Securities, Inc. ("EVEREN") an option to
purchase up to an additional 450,000 shares to cover over-
allotments.
47. On the same day, Cholestech disseminated its
financial results for the fiscal year ended March 27, 1998,
announcing that "increased demand for the Company's products,
improving gross margin, and continued control of expenses
combined to deliver net income of $2.0 million in the fiscal
year ended March 27, 1998, or $0.17 per share (diluted), up
from an $809,000, or $0.08 per share (diluted) net loss in the
prior fiscal year." (Emphasis added).
48. The April 29, 1998 press release further stated that
revenue for the fiscal year ended March 27, 1998 was $21.7
million, a 68% increase over the $12.9 million reported in
fiscal 1997. According to the Company, gross margin improved
throughout the year, reaching 51% of revenue for the fiscal
year versus 46% of revenue in the prior fiscal year. In
addition, gross profit of $11.2 million increased 89% on the
68% increase in revenue.
49. Expanding on the reported financial results,
defendant Pinckert stated: "Fiscal 1998 was an exciting year
for Cholestech. During the year, the Company broadened its
strategic partnerships to include Parke-Davis and Wal-Mart.
Customer response has been enthusiastic and, coupled with our
internal efforts to maintain our cost structure, has allowed
Cholestech to deliver $2 million of net income to shareholders
in our first year of profitability." (Emphasis added).
50. The statements contained in the April 29, 1998 press
release were false and materially misleading because defendants
knew or recklessly disregarded that the Company's reported
earnings were materially overstated due to the defendants'
strategy to "stuff the distribution channel" with excess
products and book all such "deliveries" as revenue and
earnings, despite knowing or recklessly disregarding that end-
users did not want the product. Defendants engaged in this
plan in order to convey Cholestech to the investment community
as a growing, thriving business in order to artificially
inflate the price of Cholestech's stock and effectuate a
secondary offering. In addition, defendant Pinckert's
statements that "[c]ustomer response has been enthusiastic" and
that "Cholestech . . . deliver[ed] $2 million of net income"
were false and materially misleading because much of the
reported "sales" related to product sitting in distributors'
warehouses had not been sold to end users.
51. On April 30, 1998, the San Jose Mercury News
published a story about Cholestech's past and prospects. In
the article, defendant Pinckert stated that Cholestech's
installed base of LDX Systems was 10,000, up from 5,000 the
year earlier and Pinckert stated that the installed base of LDX
Systems would rise to 13,000 by the end of 1998.
52. The statements attributed to defendant Pinckert in
the April 30, 1998 San Jose Mercury News article regarding the
number of installed LDX Systems were false and materially
misleading because defendants knew or recklessly disregarded
that the sales reported did not represent an "installed base,"
with defendants' use of the term "installed base" being
particularly material under Cholestech's razor/razorblade
business strategy. Defendants also knew or recklessly
disregarded that the Company's reported earnings were
materially overstated due to the defendants' strategy to "stuff
the distribution channel" with excess products and book all
such "deliveries" as revenue and earnings, despite knowing or
recklessly disregarding that end-users did not want the
product. Defendants engaged in this plan in order to convey
Cholestech to the investment community as a growing, thriving
business in order to artificially inflate the price of
Cholestech's stock and effectuate a secondary offering.
53. On June 25, 1998, after trading closed for the day,
and just when the investment community expected Cholestech to
consummate its previously announced secondary offering, the
Company announced:
CHOLESTECH PREVIEWS FIRST QUARTER FISCAL 1999 RESULTS
HAYWARD, Calif.--(BUSINESS WIRE)-- June 25, 1998 --
Cholestech Corp. (NASDAQ:CTEC) today announced that
the delay of certain key distribution relationships,
as well as slower than expected distributor sales in
the United States, will result in a revenue shortfall
from expectations in the current fiscal quarter
ending June 26, 1998.
The company anticipates that current quarter revenues
will be between $4.9 million and $5.0 million, with
revenue growth of 15% to 25% over the previous year,
and down sequentially from the previous quarter ended
March 26, 1998. Revenues in the quarters ended June
27, 1997, and March 26, 1998, were $4.2 million and
$6.4 million respectively.
"Due to the anticipated revenue shortfall, the
company believes that the prudent course of action is
to cancel the proposed stock offering announced April
29, 1998," said Andrea J. Tiller, Chief Financial
Officer.
"The financial impact to Cholestech of the canceled
public offering is a one-time, non-recurring charge
of approximately $500,000, or $(0.04) per share
(diluted), which will be recorded in the quarter
ending June 26, 1998." (Emphasis added).
54. The reaction of the financial markets to the
defendants' revelation of their fraud was swift and decisive.
On June 26, 1998, the next day of trading, and last day of the
Class Period, Cholestech's shares plunged to $6 per share from
$11.75 per share, and a Class Period high of $17.875, on
extremely heavy volume of over two million shares.
55. Also on June 26, 1998, Sutro & Co. downgraded its
recommendation for Cholestech shares to "sell" from "buy" on
Cholestech's announcement of lower than expected revenues.
56. On June 30, 1998, The Red Chip Review issued a
research report on Cholestech, providing detail for the
Company's June 25, 1998 press release. Upon information and
belief, the source of the information reported by The Red Chip
Review was Cholestech insiders. Under the headline, "Current
Status: Growing Pains" analyst Thomas wrote: "Ending a string
of record quarters, [Cholestech] announced that results for
1Q99 would fall below expectations. The softness stems from
slower-than-expected distributor sales in the United States and
the delay of certain key distribution relationships." (Emphasis
added).
57. Red Chip analyst Thomas further wrote with regard to
Cholestech's planned secondary offering, inter alia: "In late
April, [Cholestech] announced an offering of 3 million shares
(not including over-allotment) of common stock with Prudential
Securities Incorporated acting as the lead manager, and Vector
Securities International, Inc. and EVEREN Securities, Inc.
acting as co-managers in the offering. As a result of the
anticipated revenue shortfall, however, the Company has now
postponed the offering." (Emphasis added).
58. Finally, on July 29, 1998 Cholestech announced its
results for the fiscal quarter ended June 29, 1998. The
Company reported revenues of $4.7 million for the first quarter
of 1999, which was down approximately 25% from the prior
quarter in which the Company announced a record $6.4 million in
revenue. According to Pinckert, "Revenue of the first quarter
was affected by customers buying large quantities of Cholestech
[LDX's] in the March quarter in anticipation of an April price
increase, by a delay in the launch of an international
pharmaceutical program, and by delay in obtaining distribution
into the pharmacy market. . . ."
59. On September 29, 1998, The Red Chip Review
disseminated another research report on Cholestech analyzing
the Company's fiscal first quarter 1999 results. Under the
heading "What Happened?", analyst Thomas wrote: "A number of
issues contributed to the shortfall during 1Q98 [sic], but most
had to do with distribution. [Cholestech] raised the price of
its instruments and, as anticipated, experienced strong demand
in advance of the new prices. Typical of many fast-growing
small companies, [Cholestech] lost track of its inventory in
the distribution channel. As the Company rolled into the
second quarter, demand softened for the LDX unit." (Emphasis
added).
60. On December 21, 1998, The Red Chip Review announced
that it was dropping coverage of Cholestech. Describing the
reasons for dropping coverage of Cholestech, analyst Matthew
Desmond stated: "For one, the Company overestimated the
development of the pharmaceutical sector of its market. The
sector hasn't yet become what [Cholestech] had planned for.
Furthermore, [Cholestech] has apparently flooded its
distribution channels with product. If true, upcoming periods
will feel pressure as the distributors draw down their
inventories. Finally, [Cholestech] had to withdraw its
proposed secondary offering when the low distributor sell-
through issue came to light and caused the stock to collapse.
The problem is that [Cholestech] needed the funds to fully
implement its growth strategy which included stepping up
[research and development expenses] for a stronger new-product
pipeline and more aggressive growth." (Emphasis added).
61. On January 27, 1999, six months after the close of
the Class Period, Cholestech admitted that its sales were still
suffering from bloated inventories caused by the Company's
"channel stuffing" and that sales would continue to suffer for
at least the "next few quarters" of 1999. In a press release
reporting Cholestech's financial results, defendant Pinckert
stated, inter alia: "We expect to continue to reduce our
inventory levels over the next few quarters as the programs [to
increase the Company's gross margin] take effect." (Emphasis
added).
62. Cholestech, prior, during and subsequent to
originally reporting its revenues and profits during the Class
Period, knew or recklessly disregarded that the "sales"
reported were materially misstated in that the channel was
bloated with at least a year's worth of unwanted product that
defendants' disclosures did not present fairly the Company's
financial position and that the disclosures made were not
adequate to make the information presented, not materially
misleading.
COUNT I
FOR VIOLATION OF THE SECURITIES EXCHANGE ACT
OF 1934 AND RULE 10b-5 PROMULGATED THEREUNDER
[Against All Defendants]
63. Plaintiff incorporates by reference all of the
preceding paragraphs as if set forth fully herein.
64. This action is based upon the provisions of Section
10(b) of the Exchange Act, and Rule 10b-5 promulgated
thereunder for the materially false and misleading statements
and omissions in the statements and documents referred to
herein.
65. Defendants knew or recklessly disregarded the fact
that the aforesaid acts and practices, materially misleading
statements and omissions would adversely affect the integrity
of the market for Cholestech common stock and would
artificially inflate or maintain the price of such stock.
66. By reason of the foregoing, defendants have violated
violations of Section 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 circumstance under which they
were made, not misleading; or
(c) engaged in acts, practices and a course of
business which operated as a fraud or deceit upon plaintiff and
other members of the Class in connection with their
transactions in Cholestech common stock during the Class
Period.
67. As a result of the foregoing, the market price of
Cholestech common stock was artificially inflated during the
Class Period. In ignorance of the materially false and
misleading nature of the representations and omissions
described above, plaintiff and other members of the Class
relied, to their damage in purchasing Cholestech common stock,
on the aforesaid materially misleading statements described
infra and/or the integrity of the market.
68. The price of Cholestech common stock declined
materially following the public disclosure of the true facts
which had been misrepresented or concealed as alleged in this
Complaint. Plaintiff and other members of the Class have
suffered substantial damages as a result of the wrongs herein
alleged.
COUNT II
FOR VIOLATION OF SECTION 20(a) OF THE EXCHANGE ACT
[Against Defendant Pinckert]
69. Plaintiff incorporates by reference all of the
preceding paragraphs as if set forth fully herein.
70. Defendant Pinckert acted as a controlling person of
the Company within the meaning of Section 20(a) of the Exchange
Act. By reason of his position as a senior officer and/or
director, as alleged above, this defendant had the power and
authority to cause the Company to engage in the wrongful
conduct complained of herein.
71. By reason of such wrongful conduct, defendant
Pinckert is liable pursuant to Section 20(a) of the Exchange
Act. As a direct and proximate result of the defendants'
wrongful conduct, plaintiff and the other members of the Class
suffered damages in connection with their purchases of the
Company's securities during the Class Period.
WHEREFORE, plaintiff on his own behalf, and on behalf
of the other members of the Class, prays for judgment as
follows:
(a) Declaring this action to be a proper class
action, certifying the plaintiff as Lead Plaintiff and Class
representative, and his counsel as Lead Counsel and Class
counsel;
(b) Declaring and determining that the defendants
violated the federal securities laws by reason of their conduct
as alleged herein;
(c) Awarding money damages against the defendants in
favor of the plaintiff and the other members of the Class for
all losses and injuries suffered as a result of the acts and
transactions complained of herein, together with pre-judgment
interest on all of the aforesaid damages which the Court shall
award from the date of said wrongs to the date of judgment
herein at a rate the Court shall fix;
(d) Awarding plaintiff his costs and expenses
incurred in this action, including reasonable attorneys',
accountants' and experts' fees; and
(e) Awarding plaintiff such other relief as may be
just and proper.
Dated: February 5, 1999
LAW OFFICES OF LIONEL Z. GLANCY
_______________________________
Lionel Z. Glancy, Esq.
Tracy L. Thrower, Esq.
Peter A. Binkow, Esq.
Michael Goldberg, Esq.
1801 Avenue of the Stars #308
Los Angeles, California 90067
Phone: (310) 201-9150
Fax: (310) 201-9160
ROBERT C. SUSSER, P.C.
Robert C. Susser, Esq.
6 East 43rd Street
Suite 1900
New York, New York 10017-4609
Phone: (212) 808-0298
Fax: (212) 949-0966
LAW OFFICES OF BRIAN BARRY
Brian Barry, Esq.
8424-A Santa Monica Boulevard
Suite 184
Los Angeles, California 90069
Phone: (323) 954-72101
Fax: (323) 954-7235
Attorneys for Plaintiff
JURY DEMAND
Plaintiff hereby demands a trial by jury.
Dated: February 5, 1999
LAW OFFICES OF LIONEL Z. GLANCY
_______________________________
Lionel Z. Glancy, Esq.
Tracy L. Thrower, Esq.
Peter A. Binkow, Esq.
Michael Goldberg, Esq.
1801 Avenue of the Stars #308
Los Angeles, California 90067
Phone: (310) 201-9150
Fax: (310) 201-9160
ROBERT C. SUSSER, P.C.
Robert C. Susser, Esq.
6 East 43rd Street
Suite 1900
New York, New York 10017-4609
Phone: (212) 808-0298
Fax: (212) 949-0966
LAW OFFICES OF BRIAN BARRY
Brian Barry, Esq.
8424-A Santa Monica Boulevard
Suite 184
Los Angeles, California 90069
Phone: (323) 954-72101
Fax: (323) 954-7235
Attorneys for Plaintiff
Source: File to epost from Law Offices of Lionel Z. Glancy