|
|
|||
[Web note: Page formatting approximates, but does not match exactly, that of filed paper document.]
UNITED STATES DISTRICT COURT
DISTRICT OF MINNESOTA
FOURTH DIVISION
--------------------------------x
:
DENNIS D'HONDT, individually : Civil Action No. 0-97.5(JRT/CLE)
and on behalf of all persons :
similarly situated, :
:
Plaintiff, : CLASS ACTION COMPLAINT
:
vs. :
: PLAINTIFF DEMANDS
DIGI INTERNATIONAL, INC., : A TRIAL BY JURY
ERVIN F. KAMM, JR., GERALD A. :
WALL, and GARY L. DEANER, :
:
Defendants. :
:
--------------------------------x
Plaintiff, individually and on behalf of all others similarly
situated, by his attorneys, alleges the following, upon information
and belief (except for those allegations pertaining to plaintiff,
which are based on personal knowledge):
NATURE OF THE ACTION
1. Plaintiff brings this action as a class action on behalf
of a class (the "Class") consisting of himself and all other persons
or entities who purchased publicly-traded securities of defendant
Digi International Inc. ("Digi" or the "Company") during the period
January 25, 1996 through December 23, 1996, inclusive (the "Class
Period"), to recover damages caused to the Class by defendants'
violations of the federal securities laws.
2. Plaintiff alleges, among other things, that defendants
committed a securities fraud during the Class Period by issuing
materially misleading public statements concerning Digi's operating
condition and financial results.
JURISDICTION AND VENUE
3. This action arises under Sections 10(b) and 20 of the
Securities Exchange Act of 1934 (the "1934 Act"), 15 U.S.C. §§
78j(b) and 78t, and the rules and regulations promulgated
thereunder, including Securities Exchange Commission ("SEC") Rule
10b-5, 17 C.F.R. 240.10b-5 and the common law. Jurisdiction is
based upon Section 27 of the 1934 Act, 15 U.S.C. § 78aa, and
28 U.S.C. §§ 1331 and 1367.
4. Venue is proper in this District because certain of the
defendants are residents of this District and many of the acts
complained of occurred, at least in part, in this District.
5. In connection with the acts and conduct complained of,
defendants, directly or indirectly, used the means and
instrumentalities of interstate commerce, including the mails,
interstate telephone communications, and the facilities of the
national securities exchanges.
THE PARTIES
6. Plaintiff Dennis D'Hondt purchased 1000 shares of the
common stock of Digi on each of July 8, 1996 at $17.00 per share
and on July 25, 1996 at $12.75 per share.
7. Defendant Digi is incorporated under the laws of Delaware
and its principal administrative offices are located in Minnetonka,
Minnesota. According to Digi's Form 10-K for fiscal year ended
September 30, 1995, Digi was formed in 1985 and is a leading
producer of data communications hardware and software products that
deliver solutions for multiuser environments, remote access markets
both LAN and WAN, and the LAN connect market.
8. Defendant Ervin F. Kamm, Jr. was at all relevant times a
member of the Board of Directors and President and Chief Executive
Officer of Digi. For Digi's fiscal year ended September 30, 1995,
Kamm was paid a base salary of $190,257 and received a cash bonus
of $186,000. Kamm was also awarded during fiscal 1995 230,000
options to acquire Digi common stock at $15.25 per share (60,000
options) and $17.50 per share (170,000 options). According to
2
Digi's Proxy Statement dated December 27, 1995, as of September 28,
1995, those options were valued at $2,607,500, and had a potential
realizable value of $6.2 million assuming a 10% annual increase in
the value of Digi stock. In November 1995, Kamm was awarded an
additional 30,000 stock options at an exercise price of $27.50 per
share, vesting over a five-year period. For fiscal 1996, Kamm was
paid a base salary of $215,000, and was entitled to a cash bonus
equal to 120% of his base salary provided that the net sales and
after-tax earnings targets for the year had been met. Kamm was
also entitled to a commission for fiscal 1996 equal to 1% of net
sales in excess of the net sales target for the year, provided
that the after-tax profit margin equaled or exceeded the targeted
after-tax profit margin.
9. Defendant Gerald A. Wall was at all relevant times, until
October 1, 1996, the Vice President, Chief Financial Officer, and
Treasurer of Digi. For Digi's fiscal year ended September 30, 1995,
Wall was paid a base salary of $127,500 and a cash bonus of $93,500.
Wall was also awarded, during fiscal 1995, 10,000 stock options
exercisable at $17.50 per share. Wall held, as of September 30,
1995, a total of 63,000 options to acquire Digi common stock which,
according to the Proxy Statement, were valued at $819,750 as of
September 28, 1995. For fiscal 1996, Wall was entitled to a base
salary of $135,000, and to a cash bonus equal to 100% of his base
salary, provided that the net sales and after-tax targets for such
year were met.
10. Defendant Gary L. Deaner was at all relevant times, until
September 1, 1996, the Vice President, Marketing, for Digi. For
fiscal 1995, Deaner was paid a base salary of $144,570 and cash
compensation of $108,000. Deaner was also awarded, during fiscal
1995, 30,000 stock options exercisable at $17.50 per share. Deaner
held, as of September 30, 1995, a total of 98,000 options to
acquire Digi common stock which, according to the Proxy Statement,
had a value of $1,220,600 as of September 28, 1995.
3
11. Defendants Kamm, Wall, and Deaner are sometimes
hereinafter referred to as the "Individual Defendants."
12. The Individual Defendants' securities ownership and
incentive compensation plans provided a substantial financial
motive for them to cause Digi to report inflated operating results.
13. By reason of their positions as officers and/or directors
of Digi, the Individual Defendants were, at all relevant times,
controlling persons of Digi within the meaning of Section 20 of the
1934 Act. Because of their executive, managerial, and (with regard
to Kamm) directorial positions with Digi, the Individual Defendants
had access to adverse, non-public information about the financial
condition, operations, and future business prospects of Digi as
particularized herein and acted to conceal the same. Any acts
attributed to Digi were caused and/or influenced by the Individual
Defendants by virtue of their domination and control thereof.
CLASS ACTION ALLEGATIONS
14. Plaintiff brings this action as a class action under
Rules 23(a) and 23(b)(3) of the Federal Rules of Civil Procedure on
behalf of a class (the "Class") consisting of plaintiff and all
other persons or entities who purchased the securities of defendant
Digi during the period January 25, 1996 through December 23, 1996,
inclusive. Excluded from the Class are the defendants herein,
members of the immediate families of the Individual Defendants, and
any subsidiary, affiliate, or controlled person of any such person
or entity.
15. The Class is so numerous that joinder of all members is
impracticable. As of July 31, 1995, 13,308,297 shares of Digi
common stock were outstanding. There are believed to be thousands
of persons who purchased Digi common stock during the Class Period.
Digi stock is listed and traded on the NASDAQ national stock
exchange.
4
16. Plaintiff's claims are typical of the claims of the other
members of the Class, as plaintiff and all members of the Class
sustained damages arising out of defendants' conduct in violation
of federal law as complained of herein.
17. 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.
18. A class action is superior to 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 members of the Class may be
relatively small, the expense and burden of individual litigation
make it impossible for the members of the Class individually to
redress the wrongs done to them. There will be no difficulty in
the management of this action as a class action.
19. 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 statements disseminated by defendants to
the investing public and to the shareholders of Digi during the
Class Period omitted and/or misrepresented material facts about the
business, operations, prospects and financial condition of the
Company;
(c) whether defendants acted willfully, knowingly, or
recklessly in omitting and/or misrepresenting material facts;
5
(d) whether defendants' non-disclosures and/or
misrepresentations constituted a fraud on the market by
artificially inflating the market prices of Digi securities during
the Class Period; and
(e) whether the members of the Class have sustained
damages and, if so, what is the proper measure of such damages.
FACTUAL ALLEGATIONS
A. Digi's Undisclosed Investment in AetherWorks
20. During the first quarter of fiscal 1996 (period ending
December 31, 1995) Digi made a substantial investment in AetherWorks
Corporation, a development stage company engaged in the development
of wireless and remote access technology. That investment took the
form of a purchase of secured convertible notes. Through September
30, 1996, Digi purchased approximately $6.3 million in secured
convertible notes from AetherWorks and became obligated to purchase
up to an additional $7.5 million of secured convertible notes from
time to time at the request of AetherWorks, based on certain
conditions. The secured convertible notes held by Digi as of
September 30, 1996 were convertible into approximately 54 percent of
AetherWorks' common stock and the purchase of $7.5 million
additional principal amount of secured convertible notes would
increase the Company's ownership position upon conversation to 62.7
percent. Digi also guaranteed a lease obligation for AetherWorks of
$1.1 million as of September 30, 1996. Digi provided AetherWorks
with 100% of its financial support during Digi's fiscal year ended
September 30, 1996.
21. APB No. 18 requires that companies, pursuant to generally
accepted accounting principles ("GAAP"), account for investments by
the equity method when the investor has the ability to exercise
significant influence over operating and financial policies of an
6
investee. Digi had significant influence over operating and
financial policies of AetherWorks, and was required by GAAP to
account for its investment in AetherWorks under the equity method.
22. GAAP further requires that under the equity method, the
investor accrue on its financial statements its proportionate share
of the investee's net operating losses or gains. However, it was
anticipated at the time of Digi's investment in AetherWorks, that
Aetherworks would report a net operating loss for approximately two
years that would dilute Digi's operating results. Accordingly,
rather than properly account for its investment on the equity
method, Digi, throughout the Class Period, accounted for its
investment on the cost method, and failed to accrue, in violation of
GAAP, its proportionate share of AetherWorks' losses.
B. Digi's Failure to Accrue Adequate Reserves for Returns
in the First Two Quarters of Fiscal 1996
23. FAS No. 48 requires that companies, in accordance with
GAAP, accrue a reasonable return for potential returns. For the
first three quarters of fiscal 1996, Digi knowingly failed to accrue
a reasonable reserve for potential returns and accordingly
disseminated financial statements which defendants knew were not in
compliance with GAAP.
24. Historically, Digi had experienced 8% sales returns and
had accrued an 8% reserve against sales for potential returns.
However, beginning in the first quarter of fiscal 1996, Digi began a
practice of extending distributors extended payment terms to
encourage distributors to delay returns of products. Accordingly,
in the first and second quarters of fiscal 1996, Digi accrued
reserves for potential returns at a rate materially below historical
experience.
25. During the quarter ended June 30, 1996, Digi's returns
were in line with historical trends of 8% of prior sales.
Accordingly, Digi was required to increase its reserves, which
should have been taken in the previous two quarters, in the quarter
ended June 30, 1996. Moreover, on December 23, 1996, Digi
acknowledged that its previously reported operating results for the
7
quarter ended June 30, 1996 had been overstated by $860,000 related
principally to $716,000 in returned goods, as well as other
inventory adjustments.
C. Digi Common Stock Traded At Inflated Prices
26. Digi common stock traded at inflated prices as a result
of defendants' failure to report Digi's financial results in
compliance with GAAP. From January 25, 1996 until July 2, 1996,
when defendants made a partial disclosure of the true facts by
increasing its reserve for potential returns, Digi traded at prices
ranging from $22.50 to $30.00 per share. From July 2, 1996 until
December 23, 1996, when Digi announced the restatement of its
previously filed financial statements, Digi traded at prices ranging
from $11.875 to $18.50 per share. When the true facts were
eventually disclosed on December 24, 1996, Digi common stock
plummeted to a 52-week low of $8.875.
D. Digi's First Quarter Operating Results
27. On January 24, 1996, Digi announced financial results for
its fiscal first quarter 1996, ended December 31, 1995. Sales for
the first quarter were $43.9 million, up 16 percent over $37.9
million for the same quarter in 1995. Earnings rose 7 percent to
$4.8 million from $4.5 million and earnings per share were $.35 per
share, up from $.32 per share reported in the first quarter of the
previous year, an increase of 9 percent.
28. Digi's earnings announcement was in line with
expectations. The average estimate of analysts had been reduced in
mid-December 1995, after Digi told analysts that sales to original
equipment manufacturers, or OEMs, would not meet expectations.
According to David Rothschild, an analyst at Piper Jaffray, Digi
advised analysts on a conference call after the release of first
quarter results that it was comfortable with analysts' estimates of
per-share earnings of $1.65 for the full fiscal year. Rothschild
was quoted over Bloomberg as stating that "People were worried that
8
the not-so-solid first quarter would be the trend for the year, but
the company said it wouldn't be."
29. Digi closed up $3.00 at $22.75 on January 25, 1996, in
reaction to the company's positive statements.
30. Digi filed its Form 10-Q for the quarter ended December
31, 1995 with the SEC on March 1, 1996. The first quarter Form 10-
Q, reporting first quarter operating results, was signed by
defendant Wall. The Form 10-Q misrepresented that Digi's financial
statements were compiled in accordance with GAAP.
31. Defendants' financial disclosures concerning Digi's first
quarter operating results were materially false and misleading
because (i) Digi failed to account for its investment in AetherWorks
in accordance with GAAP and to accrue its proportionate share of
AetherWorks' net losses, and (ii) Digi failed to accrued a
reasonable reserve for potential returns. Digi accrued a reserve
materially below its historical experience of returns equal to 8% of
shipments. Defendants further failed to disclose that Digi was
reducing its reserves for returns below historical levels.
Defendants acted intentionally, knowingly, or recklessly in
reporting financial results that were not in compliance with GAAP.
E. Second Quarter Fiscal 1996 Operating Results
32. On April 24, 1996, Digi announced record financial results
for its fiscal second quarter ended March 31, 1996. Sales for the
second quarter were $48.5 million, up 21 percent over $40.1 million
for the same quarter in 1995. Earnings rose 15 percent to $5.3
million from $4.6 million, and earnings per share increased to $.39
per share from $.33 per share reported in the second quarter of the
previous year, up 18 percent. Sales for the six months ended March
31, 1996 totaled $92.4 million, up 18 percent from $78.0 million for
the year-ago period. Earnings rose 11 percent to $10.1 million from
9
$9.1 million, and earnings per share increased 12 percent to $.73
per share for the first half of the fiscal year from $.65 per share
for the year-ago period.
33. Again, Digi common stock reacted positively to the
earnings announcement, rising $2.75 per share to close at $30.00 per
share on April 24, 1996 -- its high during the class period.
34. From May 6 to May 8, 1996, defendant Gary L. Deaner, while
in possession of material non-public information concerning the
accounting improprieties in Digi's publicly-stated first and second
quarter operating results, sold 15,000 shares of Digi common stock,
at prices ranging from $27.75 to $28.50 per share.
35. Digi filed its Form 10-Q for the second quarter of fiscal
1996 with the SEC on May 10, 1996. The second quarter Form 10-Q,
reporting Digi's second quarter operating results, was signed by
defendant Wall. The Form 10-Q misrepresented that Digi's financial
statements were compiled in accordance with GAAP.
36. Defendants' financial disclosures concerning Digi's second
quarter operating results were materially false and misleading
because (i) Digi failed to account for its investment in AetherWorks
in accordance with GAAP and to accrue its proportionate share of
AetherWorks' net losses, and (ii) Digi failed to accrue a reasonable
reserve for potential returns. Defendants further failed to
disclose that Digi had reduced its reserve for potential returns
below historical levels. Defendants acted intentionally, knowingly,
or recklessly in reporting financial results that were not in
compliance with GAAP.
F. Digi's Third Quarter Fiscal 1996 Financial Disclosures
37. On July 2, 1996, Digi made an initial partial disclosure
of the true facts. Digi announced that while it expected to
announce record revenues for the third fiscal quarter, ended June
30, 1996, softness in international sales and higher than
anticipated returns would cause earnings to be below analysts'
10
estimates. Defendant Kamm acknowledged in a press release that "an
increase in product returns to historical levels from lower levels
in the first two quarters, will impact our earnings." Kamm added
that Digi "expect[ed] an earnings shortfall relative to street
expectations. Although at this time we do not know what the full
impact will be, earnings per share for the quarter will be somewhat
below the third quarter of fiscal 1995." Digi reported earnings of
$.35 per share on revenues of $41.2 million in the third quarter of
fiscal 1995. Analysts had been predicting that Digi would earn 42
cents a share in the third quarter of fiscal 1996.
38. Prior to the opening of the market, Digi held a conference
call with analysts to expand on its July 2 press release. According
to a William Blair & Company analyst report, Digi stated on the
conference call that
In the first half of this fiscal year, Digi worked
successfully with distributors to halve their return
percentage under the company's stock rotation program
from the historical level of roughly 8%. Returns held at
this lower 4% rate throughout the third quarter, until
increasing dramatically in the last two weeks of June.
Thus, many expected distributor sales in the last week
were only product exchanges for which Digi received no
revenue. The company indicated the return percentage for
the entire quarter approximated the historical 8% level.
39. Although defendants sought to portray the returns received
late in the third quarter as a surprise, defendants had been in
regular contact with those distributors since the initial shipment
of products on extended payment terms in the first quarter of fiscal
1996, and had encouraged them to delay returns. Defendants knew, or
were reckless in failing to know, that ultimately its returns would
be in line with historical trends.
40. Digi common stock fell $9.25 per share to $16.75 per share
on July 3, 1996, in reaction to the company's announcement of
increased returns. Reported volume was approximately 3 million
shares, or approximately 20 times normal trading volume.
11
41. On July 24, 1996, Digi announced that sales for the third
quarter were $50.3 million, up 22 percent over $41.2 million for
the same quarter in 1995. Earnings declined to $1.8 million from
$4.8 million, and earnings per share decreased to $.13 per share
from $.35 per share reported in the third quarter of the previous
year.
42. In response to Digi's third qu tment in AetherWorks
in accordance with GAAP and to accrue its proportionate share of
AetherWorks' net losses, and (ii) Digi failed to accrue a reasonable
reserve for potential returns. Although Digi did increase its
reserve for returns during the third quarter, returns, as it
subsequently acknowledged, were still under-accrued by approximately
$716,000. Defendants acted intentionally, knowingly, or recklessly
in reporting financial results that were not in compliance with
GAAP.
45. On August 22, 1996, Digi announced that defendant Deaner
was resigning as Digi's Vice President of Marketing, effective
September 1, 1996, to pursue other interests.
46. On September 19, 1996, Digi announced that, effective
October 1, 1996, defendant Wall would be replaced as Digi's Chief
Financial Officer, who was leaving, purportedly to pursue other
interests.
12
G. Defendants' Disclosure of Preliminary Fourth Quarter
Results
47. On November 14, 1996, Digi made a further partial
disclosure of material adverse facts. The company announced
preliminary, unaudited sales results for the fourth quarter ended
September 30, 1996. Sales for the fourth quarter were a record
$53.1 million, up 15.9 percent over $45.8 million for the same
quarter in 1995. Preliminary, unaudited earnings for the fourth
quarter were $2.9 million compared to $5.4 million and preliminary,
unaudited earnings per share of $.22 per share compared to $.38 per
share reported in the fourth quarter of the previous year.
48. Digi released only preliminary, unaudited results,
because, according to the press release, it had not, at that time,
resolved the appropriate accounting treatment of its investment in
AetherWorks Corporation, a development stage company engaged in the
development of wireless and remote access technology. Through
November 1996, Digi had purchased secured convertible notes for
approximately $6.3 million from AetherWorks, and according to the
press release was obligated to purchase up to an additional $7.5
million of secured convertible notes from time to time at the
request of AetherWorks, based on certain conditions. According to
the press release, the secured convertible notes held by Digi were
convertible into approximately 54 percent of AetherWorks' common
stock and the purchase of $7.5 million additional principal amount
of secured convertible notes would increase the company's ownership
position upon conversion to 62.7 percent, based on AetherWorks'
present capitalization.
49. Digi also disclosed on November 14, 1996 that its publicly
disseminated financial statements for the first three quarters of
fiscal 1996, and its preliminary fourth quarter operating results,
reflected Digi's investment in AetherWorks as a long-term receivable
and did not record any operating results relating to AetherWorks.
Digi had not previously disclosed its investment in AetherWorks or
the accounting treatment for that investment. Digi acknowledged
13
that, if it consolidated AetherWorks' operating results, or utilized
the equity method of accounting, its share of the operating losses
of AetherWorks for the year ended September 30, 1996, would be in
the range of $.15 to $.20 per Digi share.
H. Defendants' Admit Their Misstated Financial Statements
50. On December 23, 1996, Digi dropped a further bombshell on
the market. Digi announced that it had adjusted its previously
reported earnings for its fiscal year ended September 30, 1996 to
$9,300,220, or $.69 per share, from $14.8 million or $1.10 per
share. Adjusted earnings for the three months ended September 30,
1996 were $209,915, or $.02 per share. The preliminary, unaudited
earnings for the three months ended September 30, 1996 had been $2.9
million, or $.22 per share.
51. Digi admitted that its previous reporting of its
AetherWorks' investment had been in violation of generally accepted
accounting principles ("GAAP") and that GAAP required that Digi
report the investment on the equity method. Accordingly, Digi
disclosed that it was recording a $3.6 million loss, which
represented 100 percent of the AetherWorks' net loss for the year
ended September 30, 1996. As part of that decision, Digi also
eliminated $424,000 of accrued interest income on the notes
receivable, which had been previously recorded in the fourth
quarter. The Company acknowledged that the percentage of
AetherWorks' losses included in the Company's results of operations
was based upon the percentage of financial support provided by the
Company (versus other investors) to AetherWorks Corporation during
the year. The total effect of the AetherWorks adjustment, including
the impact of the elimination of the accrued interest, was $.30 for
the fiscal year ended September 30, 1996 and $.14 per share for the
fiscal fourth quarter.
52. Digi further acknowledged that it had expensed certain
software development costs in accordance with the provisions of
Statement of Accounting Standards No. 86 (SFAS No. 86) which it had
14
initially capitalized in its previously reported fourth quarter and
year-end results. Such costs approximated $1.1 million or $.06 per
share, after tax, for both periods.
53. Digi also reported other miscellaneous audit adjustments
in the fourth quarter and increased its annual effective income tax
rate to 36.7 percent (from the previously reported 34.9 percent).
These adjustments reduced the previously reported preliminary and
unaudited year-end and fourth quarter results by $.05 and $.04 per
share, respectively.
54. Digi also announced that it had restated each of its Form
10-Q filings to reflect the recording of the AetherWorks losses.
The first quarter Form 10-Q was amended to reclassify assets of
$3,363,235 from a note receivable to a $3,083,928 investment in
AetherWorks, and to accrue a net loss of $279,307 from the
investment in AetherWorks. The second quarter Form 10-Q was amended
to reclassify $3,363,235 from a note receivable to a $2,391,183
investment in AetherWorks, and to accrue a further net loss of
$655,990 from the investment in Aetherworks. The third quarter Form
10-Q was amended to reclassify $4,873,525 from a note receivable to
a $2,657,602 investment in AetherWorks, and to accrue a further net
loss of $1,203,625 from the investment in AetherWorks.
55. In addition to the restatement for AetherWorks, results
for the three months ended June 30, 1996, were restated to reflect
additional third quarter costs related principally to returned goods
and inventory adjustments of approximately $860,000 ($.05 per
share), which were not included in previously reported results for
the quarter. These adjustments had the effect of increasing
previously reported fourth quarter results by $716,000 ($.04) per
share.
56. In restating its previously filed financial statements,
Digi admitted that its prior financial statements had not been
compiled in accordance with GAAP.
57. Digi also admitted that as of September 30, 1996, it had
guaranteed $1.1 million in lease obligations incurred by
AetherWorks, and that it anticipated that AetherWorks losses will be
15
greater in fiscal 1997 that those reported in fiscal 1996, and that
all, or a major portion, of those losses would be included in the
Company's results of operations for 1997.
58. On December 24, 1996, Digi common stock fell $3.875 per
share, to close at $8.875 per share. Reported trading volume was
1,840,600 shares.
COUNT I
AGAINST ALL DEFENDANTS FOR VIOLATION OF
SECTION 10(b) OF THE 1934 ACT AND RULE 10b-5
OF THE SECURITIES AND EXCHANGE COMMISSION
59. Plaintiff repeats and realleges the foregoing allegations
as if set forth in full herein.
60. This Count is asserted against all defendants and is based
upon Section 10(b) of the 1934 Act, 15 U.S.C. § 78j(b), and Rule
10b-5 promulgated thereunder by the Securities and Exchange
Commission.
61. During the Class Period, defendants, singly and in
concert, directly or indirectly engaged in a common plan, scheme,
and unlawful course of conduct pursuant to which they knowingly or
recklessly engaged in acts, transactions, practices, and courses of
business which operated as a fraud and deceit upon plaintiff and the
other members of the Class. Defendants made the following deceptive
and untrue statements of material facts and omitted to state
material facts necessary in order to make the statements made, in
light of the circumstances under which they were made, not
misleading to plaintiff and the other members of the Class:
a. Defendants issued materially false and misleading
financial statements throughout the Class Period that knowingly
failed to account for the AetherWorks' investment using the equity
method.
b. Defendants issued materially false and misleading
financial statements throughout the Class Period that knowingly
understated the reserve for potential returns.
16
62. The purpose and effect of said scheme, plan, and unlawful
course of conduct was to (i) enable defendant Deaner to profit from
selling thousands of shares at inflated prices, and (ii) enable the
Individual Defendants to earn substantial incentive bonuses equal to
hundreds of thousands of dollars.
63. During the Class Period, defendants, pursuant to said
scheme, plan, conspiracy, and unlawful course of conduct, knowingly
and recklessly issued, caused to be issued, participated in the
preparation and issuance of deceptive and materially false and
misleading statements to the investing public which were contained
in or omitted from various documents and other statements, as
particularized above.
64. Defendants each knew and intended to deceive plaintiff and
the other members of the Class, or in the alternative, acted with
reckless disregard for the truth when they failed to disclose or
cause the disclosure of the true facts to plaintiff and the other
members of the Class.
65. Each of the defendants participated in and joined the
alleged scheme and course of conduct detailed above and each is
liable primarily for the wrongful acts and statements.
66. As a result of the dissemination of the false and
misleading statements set forth above, the market price of Digi
securities was artificially inflated during the Class Period. In
ignorance of the false and misleading nature of the representations
described above and the deceptive and manipulative devices and
contrivances employed by said defendants, plaintiff and the other
members of the Class relied to their detriment on the integrity of
the market price of the stock in purchasing Digi securities. Had
plaintiff and the other members of the Class known of the materially
adverse information misrepresented or not disclosed by defendants,
they would not have purchased Digi securities at the artificially
inflated prices that they did.
17
67. As a result of the inflation of the price of Digi
securities during the Class Period caused by defendants' material
misrepresentations and omissions, plaintiff and the other members of
the Class have suffered substantial damages as a result of the
wrongs alleged.
68. By reason of the foregoing, defendants, directly or
indirectly, violated the 1934 Act and Rule 10b-5 promulgated
thereunder in that they:
(a) employed devices, schemes, and artifices to defraud;
(b) made untrue statements of material facts or omitted
to state material facts necessary in order to make the statements
made, in light of the circumstances under which they were made, not
misleading; and/or
(c) engaged in acts, practices, and a course of business
which operated as a fraud and deceit and a scheme to defraud upon
plaintiff and the other members of the Class in connection with
their purchases of Digi securities during the Class Period.
COUNT II
AGAINST ALL INDIVIDUAL DEFENDANTS FOR
VIOLATION OF SECTION 20(a) OF THE 1934 ACT
69. Plaintiff repeats and realleges the foregoing allegations
as if set forth in full herein.
70. The Individual Defendants, by virtue of their offices,
directorships, stockholdings, and specific acts described above,
were, at the time of the wrongs alleged herein, controlling persons
of Digi within the meaning of Section 20(a) of the 1934 Act.
71. The Individual Defendants had the power and influence and
exercised the same to cause Digi to engage in the illegal conduct
and practices complained of herein.
72. By reason of the conduct alleged in Count I of the
Complaint, the Individual Defendants are liable for the aforesaid
wrongful conduct, and are liable to plaintiff and to the other
18
members of the Class for the substantial damages which they suffered
in connection with their purchases of Digi's securities during the
Class Period.
JURY DEMAND
73. Plaintiff demands a trial by jury on all issues.
WHEREFORE, plaintiff, on behalf of himself and the members
of the Class, pray for judgment as follows:
(a) declaring this action to be a proper class action and
certifying plaintiff as the representative of the Class under Rule
23 of the Federal Rules of Civil Procedure;
(b) awarding compensatory damages in favor of plain-tiff and
the other members of the Class against all defendants, jointly and
severally, for the damages sustained as a result of the wrongdoings
of defendants, together with interest thereon;
(c) awarding plaintiff and the Class their costs and expenses
incurred in this action, including reasonable allowance of fees for
plaintiff's attorneys, accountants, and experts, and reimbursement
of plaintiff's expenses; and
(d) granting such other and further relief as the Court may
deem just and proper.
Dated: January 3, 1997.
LOCKRIDGE GRINDAL
NAUEN & HOLSTEIN P.L.L.P.
/s/
By______________________________
Richard W. Lockridge (#64117)
Gregg M. Fishbein (#202009)
Karen M. Hanson (#219770)
Suite 2200
100 Washington Avenue South
Minneapolis, MN 55401
Telephone: (612) 339-6900
Telecopier: (612) 339-0981
19
WOLF POPPER ROSS WOLF & JONES, L.L.P.
Lester L. Levy
Robert C. Finkel
845 Third Avenue
New York, NY 10022-6689
Telephone: (212) 759-4600
Telecopier: (212) 486-2093
ATTORNEYS FOR PLAINTIFF
20
CERTIFICATION OF PLAINTIFF
Dennis D'Hondt
Dennis D'Hondt ("Plaintiff") hereby states that:
1. Plaintiff has reviewed the attached complaint and
has authorized its filing;
2. Plaintiff did not purchase any shares of Digi
International Inc., at the direction of his counsel or in order
to participate in this private action;
3. Plaintiff is willing to serve as a representative
party on behalf of a class, including providing testimony at
deposition and trial, if necessary;
4. The following includes all of Plaintiff's
transactions in Digi common stock during the class period
specified in the complaint:
TRANSACTION TRADE DATE PRICE PER SHARE QUANTITY
----------- ---------- --------------- --------
Purchase 07/08/96 $17.00 1,000 shares
Purchase 07/25/96 $12.75 1,000 shares
5. Plaintiff has not served or sought to serve as a
representative party on behalf of a class under the federal
securities laws during the last three years.
6. Plaintiff will not accept any payment for serving
as a representative party on behalf of a class except to receive
his pro rata share of any recovery, or as ordered or approved by
the court including the award to a representative party of
reasonable costs and expenses including lost wages relating to
the representation of the class. Plaintiff declares under
penalty of perjury that the foregoing is true and correct.
Executed this 2 day of January 1997, in Fraser, Michigan.
/s/
_______________________________
Dennis D'Hondt
2