MILBERG WEISS BERSHAD
HYNES & LERACH LLP
ALAN SCHULMAN (128661)
JAMES A. CAPUTO (120485)
TRAVIS E. DOWNS, III (148274)
TOR GRONBORG (179109)
600 West Broadway, Suite 1800
San Diego, CA 92101
Telephone: 619/231-1058
Attorneys for Plaintiff and the Class
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF CALIFORNIA
SAN JOSE DIVISION
|
JOSEPH MOLINARI, JR., On Behalf of |
) |
No. CLASS ACTION COMPLAINT FOR VIOLATION OF Plaintiff Demands A |
1. This is a class action on behalf of purchasers of the stock of NetManage, Inc. ("NetManage" or the "Company"), between April 18, 1996 and July 18, 1996, inclusive (the "Class Period"), seeking to remedy violations of the federal securities laws by the Company and certain of its insiders. These violations involve the issuance of false and misleading statements combined with massive insider trading by the Company's directors and senior officers, Zvi Alon, Walter Amaral, Uzia Galil, Darrell Miller and Dan Geisler. During the Class Period, certain of the Individual Defendants sold 198,672 shares of their NetManage stock at artificially inflated prices as high as $18.25 per share, pocketing $2.8 million in illegal insider trading proceeds. In addition, defendants registered 1,243,292 NetManage shares for sale by insiders of certain companies NetManage acquired to allow those persons to sell their stock in the open market and cash out of NetManage at an attractive price. These sales were undertaken while defendants possessed adverse non-public information and before the truth concerning NetManage's business and finances was revealed and NetManage's stock price, which had traded as high as $18-7/8 per share during the Class Period, collapsed to as low as $7-5/8. NetManage could not overcome this profound downturn, and its stock currently trades for less than $3.50 per share.
2. NetManage develops, markets and supports an integrated set of TCP/IP (transmission control protocol/internet protocol) based intranet applications, internet connectivity software, servers and development tools for Microsoft Windows, Windows 95, Windows NT and Macintosh OS. The Company's software allows corporations to facilitate communication and the sharing of information between work groups using internet technology. TCP/IP enables a standard Windows PC, or a network of Windows systems, to communicate effortlessly with non-Windows systems, including mainframe, mini-computers and workstations. Protocols such as TCP/IP are the rules that govern the interconnectivity of networks. In short, TCP/IP is the intercommunications "plumbing" or "translator" that enables one type of machine to communicate with a different type of machine that is also equipped with TCP/IP.
3. During 1993 and 1994, NetManage's growth skyrocketed. The slowest rate of year-over-year revenue growth occurred in the September 1994 quarter, when revenues climbed 137%. As a result, NetManage's stock traded at a price-earnings multiple reserved for premier growth companies with track records of meeting the investment community's expectations for high profit growth. NetManage's strong stock performance enabled its corporate executives to exercise stock options and to sell stock at large profits. It also enabled NetManage to grow by using its stock to acquire other companies. For these reasons, maintaining NetManage's image of strong growth and its high stock price was extremely important to NetManage's top executives, who closely monitored the trading in NetManage stock on a daily basis.
4. During 1995, however, NetManage's growth rate began to slow due to several factors. First, Microsoft was set to release Windows 95, which would contain an embedded TCP/IP, thus eliminating the need for customers to buy the protocol from NetManage. In addition, as the need for interconnectivity products increased within large corporations, competition to provide such products intensified. NetManage undertook to conceal these factors and falsely reported strong quarterly results for revenue and income during 1995. NetManage repeatedly represented that demand for its most important product, Chameleon, was very strong, a new version of which was to be released in June 1996. NetManage also introduced new versions of its other applications products and announced the introduction of additional applications products. NetManage also announced significant expansions of the Company's international sales offices and the initiation of sales through retail distributors, including Ingram Micro, Merisel, Inc., and Tech Data. NetManage proclaimed itself "the fastest growing public software company in the United States." As a result of NetManage's report of increasingly strong results and its positive statements about the strength of its sales and business, NetManage's stock price steadily rose from $19-1/8 on July 25, 1995 to as high as $34 per share on December 5, 1995.
5. As a result of NetManage's strong stock price, NetManage was able to acquire Syzygy Communications, Inc. ("Syzygy") for approximately 440,000 shares of NetManage stock, and AGE Logic, Inc. ("AGE") for 1 million shares of NetManage stock, in October and November 1995, respectively.
6. However, defendants' positive statements about NetManage's business were materially false and misleading when made, and failed to disclose significant adverse information about NetManage's business and finances, causing NetManage's stock to trade at artificially inflated prices.
7. By early January 1996, having completed the acquisitions and having sold more than $14 million of their personal stock holdings in NetManage at inflated prices, defendants realized that NetManage's deteriorating business condition and finances could not be concealed much longer. They thus began to "manage" NetManage's stock price gradually lower. Defendants began to suggest to securities analysts that demand for NetManage's products had unexpectedly weakened and that the results for the fourth quarter would be less than earlier forecasted, causing those analysts to reduce slightly their forecasts for the quarter.
8. Finally, before the market opened on January 12, 1996, NetManage shocked the market by revealing that it expected its revenues for the fourth quarter ended December 31, 1995 to be only approximately $30 to $32 million. Defendant Zvi Alon conceded that the decline was due to the fact that certain of the sales booked were not properly recognized as revenue because they had not yet been earned due to contingencies affecting the sales that precluded the revenue from being realized. The Company conceded to at least one securities analyst that such contingency items had been included in customer orders in prior periods. Thus, NetManage effectively admitted that revenue had been improperly recognized in prior quarters.
9. As a result of these revelations, the market reacted harshly. NetManage's stock price -- which was already significantly lower than its previous highs -- plunged from $14-9/16 on January 11, 1996 to as low as $10 per share on January 12, 1996. Securities analysts hinted that they had been misled. One analyst stated: "Our confidence in the quality of information flow from management has been significantly reduced."
10. Needless to say, the prior owners and stockholders of AGE and Syzygy were upset, as the NetManage stock they had only recently obtained in the sale of their companies plummeted to a fraction of its price at the time of the acquisitions. To placate these large shareholders, defendants filed a Registration Statement for their shares on April 8, 1996 and again undertook to inflate the stock price of NetManage stock so the shares could be sold at an attractive price. At least by April 18, 1996, defendants began to issue or cause to be issued false and misleading statements into the public market concerning NetManage's business and prospects, so that the former AGE and Syzygy owners' shares could be sold and defendants could sell their own shares at inflated prices. On April 18, 1996, the Boston Group LP issued a very positive research report, based on false information defendants had given to them during early April 1996, representing that NetManage's stock price should reach $18-$20 per share within 4-6 months as a result of NetManage increasing its intranet market share on the strength of its new products. As a result of these positive statements, NetManage's stock price jumped from a close on April 17, 1996 of $9-29/32 per share, to close at $11-1/4 on April 18 and at $13-11/16 per share on April 19, 1996. On May 20, 1996, despite the pending stock registration, defendant Alon represented in an interview on the cable television station CNBC: "We are now expecting to see a major expansion in sales." NetManage's stock price rose $1-3/4 per share on that day to close at $16-7/16 on huge volume of 3,857,000 shares traded, and continued to rise to a high of $18-7/8 on May 28, 1996. The very next day, NetManage finalized and made effective its Registration Statement. As the stock price increased during late April and May, defendants also unloaded significant amounts of their own stockholdings.
11. In fact, each of the defendants' positive statements about NetManage's business and prospects during the Class Period was materially false and misleading when issued, and failed to disclose, inter alia, the following adverse information which was then known only to defendants through their access to internal NetManage data:
(a) NetManage was not increasing its share of the intranet market as a result of its recently introduced products;
(b) There was no reasonable basis for an expectation by defendants that NetManage would see a major expansion in sales, because competition from larger, more recognizable and better financed competitors was increasing and because sales growth was slowing as a result of the market's expectation of a new version of Microsoft's Windows NT Operating System, which was expected to be introduced shortly;
(c) There was no reasonable basis for NetManage to expect its sales to expand because other larger and better financed companies were introducing new products and either offering them for free or bundling them with other products and solutions that NetManage did not sell;
(d) NetManage had received indications from several of its major customers, including distributors, that they would not be ordering any substantial amounts of NetManage products until later in the year; and
(e) NetManage was hampered in competing with its larger competitors such as Microsoft and Netscape because NetManage was only beginning to develop a direct sales force that could go out and see customers face-to-face as did Microsoft's and Netscape's direct sales forces.
12. The chart below shows the performance of NetManage's stock during the Class Period, while defendants were issuing their false and misleading statements:
13. Taking advantage of NetManage's inflated stock price, the following Individual Defendants sold substantial amounts of their NetManage stock at inflated prices, willfully participating in the issuance of the misrepresentations and omissions, and thereby inducing Class members to purchase NetManage stock at inflated prices:
% Of
Date Shares Holdings
Name Sold Sold Price Proceeds Sold
---- -------- ------ ----- -------- --------
Alon 05/15/96 40,000 $14.50 $ 580,000
Amaral 05/28/96 1,523 $18.25 $ 27,795 50%
Galil 05/09/96 5,000 $13.75 $ 68,750
05/10/96 5,000 $13.75 68,750
05/13/96 3,000 $14.50 43,500
05/14/96 5,000 $14.25 71,250
05/16/96 5,000 $14.50 72,500
05/30/96 20,000 $16.38 327,600
------ -------
43,000 $ 652,350
Geisler 04/26/96 5,750 $12.75 $ 73,313
04/26/96 2,500 $13.00 32,500
04/26/96 5,000 $12.88 64,400
04/29/96 6,250 $13.38 83,625
05/01/96 3,625 $14.75 53,469
05/01/96 3,000 $14.50 43,500
05/08/96 2,200 $13.13 28,886
05/08/96 2,200 $13.25 29,150
05/10/96 3,125 $13.75 42,969
------ -------
33,650 $ 451,812 65%
Miller 04/26/96 46,246 $12.75 $ 589,637
04/26/96 7,920 $11.75 93,060
05/23/96 3,833 $17.70 67,844
05/23/96 22,500 $17.70 398,250
------ -------
80,499 $1,148,791 100%
------ ---------
Grand Totals 198,672 $2,860,748
14. In mid-June 1996, contradicting their prior representations, defendants began a whisper campaign to securities analysts that NetManage would not meet the revenue expectations it had set, but would have negative revenue growth in the second and third quarters of 1996. NetManage's stock price dropped from $13-9/64 per share on June 19, 1996, to as low as $10-3/8 per share on June 20, 1996, before closing at $11-5/16. Finally, before the market opened on July 19, 1996, defendants revealed in a press release that revenues and earnings for the second fiscal quarter, ended June 30, were $26.8 million and $1.6 million, respectively, compared with $32 million and $6.1 million, respectively, for the prior year's second quarter. NetManage's stock price plummeted from a closing price of $10-3/8 on July 18, 1996 to as low as $8-5/8 on July 19, 1996, before closing at $9-5/8.
15. NetManage's business has since continued to worsen, and its stock price has continued to decline. In January 1997, NetManage reported a $5.7 million operating loss for fiscal year 1996. As of June 18, 1997, NetManage's stock ended trading at $3.31 per share.
16. Jurisdiction exists pursuant to §27 of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. §78aa, and 28 U.S.C. §1331. The claims asserted arise under §§10(b) and 20(a) of the Exchange Act, 15 U.S.C. §§78j(b) and 78t(a), and Rule 10b-5.
17. Venue is proper in this District pursuant to §27 of the Exchange Act and 28 U.S.C. §1391(b). Many of the acts giving rise to the violations complained of occurred in this District.
18. In connection with the wrongs complained of, defendants used the instrumentalities of interstate commerce including the U.S. mails and the facilities of the national securities markets.
19. Assignment of this action to the San Jose Division is appropriate as a substantial part of the events or omissions identified herein occurred in Santa Clara County.
20. Plaintiff Joseph Molinari, Jr. purchased 5,000 shares of NetManage stock on June 7, 1996 at $15-3/8 per share, 500 shares on June 10, 1996 at $16-1/8 per share, 500 shares on June 10, 1996 at $16-3/8 per share, and 4,000 shares on July 2, 1996 at $11-1/2 per share and was damaged thereby.
21. Defendant NetManage is headquartered in Cupertino, California, and develops, markets and supports an integrated set of TCP/IP-based intranet applications, internet connectivity software, servers and development tools for Microsoft Windows, Windows 95, Windows NT and Macintosh OS. NetManage stock trades in an efficient market on the NASDAQ National Market System.
22. (a) Defendant Zvi Alon ("Alon") is the founder of the Company and has served as its Chairman of the Board, President and Chief Executive Officer since the Company's formation. From 1986 to 1989, Alon was the President of Halley Systems, a manufacturer of networking equipment including bridges and routers. He also has served as Manager, Standard Product Line at Sytek, Inc., a networking company, and Manager of the Strategic Business Group for Architecture, Graphics and Data Communications at Intel Corporation ("Intel"). Alon is the son-in-law of Uzia Galil, a director of the Company. Because of defendant Alon's position with NetManage, he knew the adverse non-public information about its business, finances, products, markets and present and future business prospects via access to internal corporate documents (including NetManage's operating plans, budgets and forecasts and reports of actual operations compared thereto), conversations and connections with corporate officers and employees, attendance at management and Board of Directors' meetings and committees thereof and via reports and other information provided to him in connection therewith. During the Class Period, Alon sold 40,000 shares of NetManage stock for proceeds of $580,000.
(b) Defendant Walter Amaral ("Amaral") has been Senior Vice President, Finance and Chief Financial Officer since April 1995 when he joined the Company. Prior to joining the Company, since April 1992, Amaral served as Chief Financial Officer of Maxtor Corporation, a disk drive manufacturer. From 1977 to 1992, Amaral was at Intel, in numerous positions, most recently as Corporate Controller. Because of defendant Amaral's position with NetManage, he knew the adverse non-public information about its business, finances, products, markets and present and future business prospects via access to internal corporate documents (including NetManage's operating plans, budgets and forecasts and reports of actual operations compared thereto), conversations and connections with other corporate officers and employees, attendance at management meetings and via reports and other information provided to him in connection therewith. During the Class Period, defendant Amaral sold 1,523 shares of NetManage stock, or 50% of his holdings, for proceeds of $27,795.
(c) Defendant Uzia Galil ("Galil") has been a director of the Company since December 1991. Galil is the Chairman of the Board of Directors of Elron Electronic Industries, Ltd. ("Elron"), its founder and has also been its President and Chief Executive Officer since its formation. Galil is the father-in-law of Alon, a director of the Company and the Company's President and Chief Executive Officer. Because of defendant Galil's position with NetManage, he knew the adverse non-public information about its business, finances, products, markets and present and future business prospects via access to internal corporate documents (including NetManage's operating plans, budgets and forecasts and reports of actual operations compared thereto), conversations and connections with other corporate officers and employees, attendance at Board of Directors' meetings and committees thereof and via reports and other information provided to him in connection therewith. During the Class Period, Galil sold 43,000 shares of NetManage stock for proceeds of nearly $652,350.
(d) Defendant Robert Williams ("Williams") was Vice President, Marketing and currently holds the position of Vice President, Business Development. Prior to joining NetManage, he was Vice President of Sales and Marketing at BOSS Logic, Inc., a developer of document management software, from 1992 to 1993. Because of defendant Williams' position with NetManage, he knew the adverse non-public information about its business, finances, products, markets and present and future business prospects via access to internal corporate documents (including NetManage's operating plans, budgets and forecasts and reports of actual operations compared thereto), conversations and connections with corporate officers and employees, attendance at management meetings and via reports and other information provided to him in connection therewith.
(e) Defendant Darrell Miller ("Miller") was a director of the Company since February 1994 and served as Executive Vice President, Corporate Strategic Marketing for the Company from December 1994 to February 1996. From 1987 to 1993, Miller was at Novell, Inc., a computer networking company, in numerous positions including Executive Vice President responsible for strategic and marketing operations and Executive Vice President responsible for product development. From 1984 to 1987, Miller acted as the Director of Marketing for Ungermann-Bass, a manufacturer of networking equipment. Since 1994, Miller has served on the Board of Directors of Xpoint Technologies, Inc., a switched ethernet company. Because of defendant Miller's position with NetManage, he knew the adverse non-public information about its business, finances, products markets and present and future business prospects via access to internal corporate documents (including NetManage's operating plans, budgets and forecasts and reports of actual operations compared thereto), conversations and connections with corporate officers and employees, attendance at management and Board of Directors' meetings and committees thereof and via reports and other information provided to him in connection therewith. During the Class Period, Miller sold 80,499 shares of NetManage stock for proceeds of $1.1 million, or 100% of his holdings.
(f) Defendant Dan Geisler ("Geisler") was Vice President, International Marketing since February 1995 and served as Vice President, OEM and International Sales from December 1992 until February 1995. Because of defendant Geisler's position with NetManage, he knew the adverse non-public information about its business, finances, products markets and present and future business prospects via access to internal corporate documents (including NetManage's operating plans, budgets and forecasts and reports of actual operations compared thereto), conversations and connections with corporate officers and employees, attendance at management meetings and via reports and other information provided to him in connection therewith. During the Class Period, Geisler sold 33,650 shares of NetManage stock for proceeds of over $450,000, or 65% of his holdings.
(g) The defendants named in ¶22(a)-(f) are referred to herein as the "Individual Defendants."
23. Defendants Alon and Amaral, by reason of their positions as NetManage's CEO and Chairman of the Board of Directors, and CFO, respectively, were control persons of NetManage and had the power and influence, and exercised the same, to cause NetManage to engage in the conduct complained of herein.
24. The Individual Defendants, because of their positions with the Company, controlled and/or possessed the power and authority to control the contents of NetManage's quarterly and annual reports, press releases and presentations to securities analysts and thereby the investing public. Each defendant was provided with copies of the Company's reports and press releases alleged herein to be misleading prior to or shortly after their issuance and had the ability and opportunity to prevent their issuance or cause them to be corrected. Because of their positions and access to material non-public information available to them but not to the public, each of these defendants knew or recklessly disregarded that the adverse facts specified herein had not been disclosed to and were being concealed from the public and that the positive representations which were being made were then materially false and misleading. Despite their duty not to sell their NetManage stock under such circumstances, defendants did so.
25. Each of the defendants is liable as a primary violator in making false and misleading statements, and for participating in a fraudulent scheme and course of business that operated as a fraud or deceit on purchasers and/or other acquirors of NetManage stock during the Class Period. All of the defendants pursued a fraudulent scheme and course of business in furtherance of their common goal, i.e., inflating the price of NetManage stock by making false and misleading statements and concealing material adverse information. The fraudulent scheme and course of business was designed to and did: (i) deceive the investing public, including plaintiff and other Class members; (ii) artificially inflate the price of NetManage stock during the Class Period; (iii) cause plaintiff and other members of the Class to purchase NetManage stock at inflated prices; and (iv) increase the value of options to purchase NetManage stock owned by certain of the defendants, as well as their own NetManage shareholdings and permit them to sell off their holdings at artificially inflated levels to profit from the scheme.
26. The defendants' motive to engage in this conduct included a desire to inflate the price of NetManage's stock sales and to: (i) permit NetManage insiders to sell off large amounts of their NetManage stock at inflated prices; (ii) cover up and conceal NetManage's deteriorating business and prospects to protect and enhance their executive positions and the substantial compensation and prestige they obtained thereby; and (iii) inflate the value of NetManage stock so NetManage could register for sale NetManage stock owned by the owners of the companies it had recently acquired.
27. A key management tool for NetManage's top executives was NetManage's annual budget or forecast, by which the Company's Board, after input from top executives, set performance goals and then closely monitored the Company's actual performance, compared to those budgeted and/or forecasted. NetManage prepared its fiscal year 1996 forecast and budget by mid-1995 and then updated it thereafter. NetManage's fiscal year 1996 budget and forecast called for substantial revenue growth and was very dependent upon NetManage maintaining large increases of revenue from sales of its Chameleon, ECCO, Swift and other internet and intranet products. Each of the Individual Defendants was aware of NetManage's fiscal year 1996 forecast and budget and of internal reports comparing NetManage's actual results to those budgeted and forecasted. Based on such reports of the Company's actual performance compared to that budgeted and forecasted, the Individual Defendants each knew NetManage's business was not performing as well as publicly represented and that NetManage was encountering very poor sales of its Chameleon, ECCO, Swift and other products due to the introduction of Windows 95 and NetManage's inexperienced and ineffectual sales force, meaning that NetManage could not possibly achieve the revenue and earnings per share growth in fiscal year 1996 forecast by and for it. Thus, defendants each knew or recklessly disregarded that the statements issued during the Class Period were false and misleading when made.
28. Moreover, during the Spring of 1995, NetManage's top executives were extensively involved in negotiating distribution agreements with Ingram Micro, Merisel, Inc. and Tech Data. Thus, the top executives were aware of the expansive right-of-return privileges granted to these distributors, and other contingencies related to the licensing agreements with these and other customers. NetManage's top executives were also familiar with the Company's agreements with customers regarding its obligations associated with licensing agreements including, support, customization and acceptance contingencies.
29. NetManage employed a sales force which worked closely with the Company's distributors and customers and which obtained frequent and extensive information on the success distributors were having in selling the Company's products, as well as the amount of product remaining in the channel. This sales force communicated regularly, both in written and oral form with the top executives regarding failures of certain of the products to sell through to the extent previously anticipated and as to significant contingencies which remained as to certain of the Company's "sales." The fact that significant contingencies remained at June 30, 1995, September 30, 1995 and December 31, 1995, relating to agreements with distributors and other customers was a matter of serious discussion among NetManage's top executives.
30. The statutory safe harbor provided for forward-looking statements under certain circumstances does not apply to any of the false statements pleaded in this Complaint. None of the statements pleaded in ¶¶39-45, 47-48, 50-51 were identified as "forward-looking statements" when made. Nor was it stated that actual results "could differ materially from those projected." Nor were the statements accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from the statements made. Alternatively, to the extent that the statutory safe harbor does apply to any statements pleaded herein, because of their positions and access to inside information, defendants are liable for those statements because at the time each of those statements was made, the speaker knew the statement was false and the statement was authorized or approved by an executive officer of NetManage who knew that those statements were false when made.
31. Analysts employed by securities firms prepare written reports and make recommendations from time to time about public companies such as NetManage. NetManage is followed by securities analysts employed by investment banking firms and brokerage houses, including Smith Barney, Oppenheimer, Robertson Stephens & Co., and Boston Group L.P., which issue reports and make recommendations concerning NetManage's common stock to their clients.
32. In writing their reports about NetManage, these analysts relied in substantial part upon information, statements and reports provided publicly by NetManage, information provided to them privately by NetManage, and assurances by NetManage that information in the anal nowledge of its operations and prospects.
33. NetManage's stock price was sensitive to the Company's and analysts' statements regarding the Company's profits. NetManage used its communications to analysts to ensure them -- and through them, the investing public -- that demand for NetManage's products was strong and growing, that its forecasting procedures were adequate, and that the Company was on track to achieve strong earnings per share growth.
34. As part of defendants' scheme and course of business which operated as a fraud and deceit on the purchasers of NetManage stock during the Class Period, NetManage and defendants Alon and Amaral communicated regularly with securities analysts, including those at the firms whose reports have been identified herein, to discuss, among other things, operating results and anticipated revenues, and to provide detailed "guidance" and direction to these analysts with respect to the Company's business and projected revenues and earnings. These communications included, but were not limited to, conference calls during the Class Period, a number of analysts meetings and briefings, and interviews with defendants, where many aspects of the Company's operations and financial prospects were discussed. NetManage knew that by participating in these regular communications with analysts, the Company could and would disseminate false information to the investment community and investors would rely and act upon such information (i.e., make purchases and sales of the Company's securities). NetManage had those communications with analysts to cause or encourage them to issue favorable reports on NetManage and used these communications to present falsely the successful prospects of NetManage to the marketplace and to inflate artificially the market price of NetManage stock, thereby inducing NetManage stock sales.
35. NetManage directly and indirectly caused these analysts to issue false and misleading reports that contained false and misleading information about the Company and its prospects. In addition to the false statements made directly to the investing public, NetManage also misled investors indirectly by using securities analysts to disseminate incomplete and false information.
36. NetManage thus used the analysts as conduits of misinformation, causing the securities analysts to mislead investors with false statements that NetManage and its executives intentionally or recklessly induced the analysts to make. Acting through or by the means of securities analysts, these defendants thus were able to directly and indirectly manipulate the price of NetManage stock and to deceive investors.
37. The information about NetManage contained in the various securities analysts' reports, quoted herein, was obtained from, or based on information obtained from NetManage, as discussed herein. Defendants knew of these reports and their contents and knew that they were based on information NetManage provided. Defendants further knew the reports would be issued to members of the investing public, be circulated throughout the investment community, and would affect the trading price of NetManage common stock. NetManage endorsed these reports, adopted them as its own, and placed its imprimatur on them as well as the projections, forecasts and statements contained therein by reproducing certain of the reports or parts thereof, and publicly circulating them to existing NetManage stockholders, prospective purchasers of NetManage stock, members of the financial press and others who requested information from NetManage about its stock. Despite its duty to do so, NetManage failed to correct these statements during the Class Period.
38. In mid-January 1996, as it was revealed that NetManage's fourth quarter revenues would be below estimates and that certain of the sales NetManage had previously recognized were not properly recorded as revenue, defendants attempted to reassure the market and particularly the prior owners and stockholders of AGE and Syzygy, whose NetManage stock had plummeted in value. To placate these large shareholders in NetManage, defendants filed a Registration Statement for their shares on April 8, 1996 and undertook to artificially inflate NetManage's stock price so their shares could be sold at an attractive price. Contemporaneous with this registration, NetManage announced the introduction of its IntraNet Server for the Windows NT platform, which purportedly provided a powerful, yet simple and affordable shared communication framework for any size office environment. On April 15, 1996, NetManage announced its new sales strategy for the IntraNet Server product, in which NetManage would concentrate on partnering with value-added resellers to distribute the package. In a press release, the Company stated: "While direct sales have been a successful strategy for the company's wide range of client applications, NetManage believes its aggressive new reseller channel sales group is best suited to market its new line of server products."
39. On April 18, 1996, based on communications with defendants, including defendant Alon, earlier in April, Boston Group L.P. initiated coverage of NetManage stock with a buy rating and stated that NetManage should reach $18-$20 per share in 4-6 months as a result of increases in its intranet market share on the strength of its new products, including its new server product. As a result of these positive statements, NetManage's stock price jumped from a close on April 17, 1996 of $9-29/32 per share to close at $11-1/4 per share on April 18 and $13-11/16 per share on April 19, 1996.
40. On April 24, 1996, NetManage issued a press release announcing its first quarter 1996 operating results, reporting revenues and net income of $33 million and $5 million, respectively, compared with revenues and net income for the same quarter of 1995 of $26.9 million and $5.3 million. The press release reported: "'Our first quarter results are a strong indication of the continued demand for standards-based Intranet solutions in corporations. We are please that we were able to maintain our year to year EPS, in spite of a substantially increased investment in R&D, sales and infrastructure.'"
41. Also on April 24, 1996, Smith Barney issued a research report on NetManage as a result of a conference call and other communications with defendants. The report represented:
We continue to believe that NETM will gain recognition among investors as the leading supplier of intranet application solutions, with the ability to differentiate itself from weaker competitors. . . . With what we view as good 1Q96 results, especially relative to the competition, it should become clear that there is no widespread deterioration of this market. . . . The increase in revenues, improvement in gross margins, and EPS in-line with our estimates give us confidence that the turnaround is occurring. . . . As confidence starts to build, we would expect the share price to more adequately reflect NETM's competitive positioning in this market and the Street's estimates. We are maintaining our 1H rating and 12 month price target of the mid-$20 level and continue to recommend purchase of the stock.
* * * Outlook: We are not changing our estimates at this time. We continue to believe that as the company continues to turn itself around and as the new products begin to generate sales, the growth rates in the second half of this year will be higher than in the first half. Our 2Q96 estimates are revenues of $39.8 million and earnings of $0.18 per share compared with $32 million and $0.14 in 2Q95. For 1996 and 1997, we are estimating revenues of $172 million and $240 million, respectively, with earnings of $0.85 and $1.25 per share.
42. Other analysts were less enthusiastic. Also on April 24, 1996, an Oppenheimer analyst issued a report on NetManage lowering estimates and adjusting upward operating expenses. The report rated the stock a market performer. On April 26, 1996, a Robertson Stephens & Co. analyst issued a research report revising estimates downward as a result of first quarter results that it considered at the low end of analysts' expectations. The report rated NetManage for a long term accumulation.
43. On May 20, 1996, NetManage's stock price rose as much as 13% as defendant Alon appeared and was interviewed on CNBC. In the course of the interview, defendant Alon stated that NetManage was starting to see improved sales as a result of an expansion of its sales force in telemarketing and other direct sales channels. In addition, he noted that NetManage had begun selling to wholesalers and resellers during the past two years, boosting indirect distribution by more than 20%. He represented: "We are now expecting to see a major expansion in sales." On the same day, NetManage made a presentation at the Smith Barney Technology Conference, at which it was represented that NetManage was expecting strong second half revenue growth as a result of the record number of new products that had been released in the first quarter of 1996. NetManage's stock price rose $1-3/4 per share on that date to close at $16-7/16 on huge volume of 3,857,000 shares traded, and continued to rise to a high of $18-7/8 on May 28, 1996. The very next day, NetManage finalized and made effective its Registration Statement. As the stock price increased during late May, defendants sold significant amounts of their NetManage shares, while former shareholders of AGE and Syzygy also unloaded significant amounts of their NetManage stockholdings.
44. On May 21, 1996, Smith Barney issued a summary of the technology conference in which it reported that Smith Barney remained positive on NetManage's turnaround and was looking for good second quarter 1996 results and better second half 1996 comparisons.
45. On May 28, 1996, NetManage issued a press release announcing the shipment of Swift 2.0 and Swift IntraNet Package 2.0, which provided company-wide host access services over multiple protocols for all three major Windows platforms.
46. By mid-June 1996, defendants knew that NetManage would be required to report a significant shortfall in revenues, for the quarter ended June 30, as compared to revenue expectations that defendants had led the market to expect. Defendants became concerned that, as the news became public, NetManage's stock price would decline dramatically raising suspicions concerning the truthfulness of their representations regarding NetManage's business condition. To avoid such a scenario, defendants began to leak information to securities analysts concerning a possible weakness in NetManage's second quarter results, which information the securities analysts communicated to the market in research reports beginning on June 20, 1996.
47. For example, on June 20, 1996, Smith Barney issued a research report downgrading NetManage to a 3H rating from a 1H rating "due to lower revenue and EPS projections." The report stated: "We believe customers are delaying decision making until they can evaluate some of the alternatives" from Microsoft, IBM, Oracle, Netscape and others. "NETM has the ability to demonstrate product differentiation but the market isn't buying yet. The market could remain 'frozen' until 4Q96/1Q97." Smith Barney revised its estimates for 1996 and 1997 significantly downward, and represented that it believed NetManage's results would show negative second and third quarter revenue growth compared with the prior year's quarters. On these lower revenues, Smith Barney estimated earnings per share for 1996 at $0.40, compared with its prior estimate of $0.85. For the second quarter of 1996, Smith Barney estimated $0.07 versus $0.14 in the prior year's quarter, down from Smith Barney's prior estimate of $0.18. Based on its revenue estimates, Smith Barney lowered its price target for NetManage stock from $25 down to $11-$13, although it noted that "it could very well trade lower if second quarter results are as weak as we now believe they could be."
48. Similarly, on June 20, 1996, Robertson Stephens & Co. issued a company update noting that its estimates for the second quarter of 1996 and forward were under review.
49. As a result of these revelations, NetManage's stock price, which had traded as high as $14 per share on June 19, 1996 before closing at $13-9/64, plunged to as low as $10-3/8 per share on June 20, 1996 before closing at $11-5/16 on huge volume of 3,159,000 shares traded.
50. On July 2, 1996, an Oppenheimer research report was issued, based on communications with defendants, in which Oppenheimer lowered its quarterly and yearly estimates for NetManage, stating: "Anecdotal information we have received over the last few weeks indicate that many connectivity software vendors, including NetManage, are likely to report weak June quarter results. . . . For the second quarter (June) we are lowering our estimates from $36.1 million in revenues and $0.14 in EPS to $29 million and $0.04."
51. Finally, on July 19, 1996, NetManage issued a press release announcing second quarter results of revenues and net income of $26.8 million and $1.6 million ($0.04 per share), respectively, compared with $32 million and $6.1 million ($0.14 per share), respectively, in the prior year. Nearly 80% of the income reported was from interest income. The report revealed: "We believe that our second quarter revenues were affected by the delayed release of Windows NT 4.0, the slow adoption of Windows 95 in corporate accounts and the general confusion within the IntraNet market, all of which caused delays in buying decisions."
52. As a result of these revelations before the market opened, NetManage's stock price declined to as low as $8-5/8 per share from a closing price of $10-3/8 on July 18, 1996, before closing at $9-5/8 on July 19, 1996.
53. NetManage's business and finances have only worsened. In January 1997, NetManage revealed that its revenues and net loss for the fourth quarter of 1996 were $19.4 million and $12.6 million, respectively, compared to revenues and net income for the same quarter of the prior year of $31.2 million and $3.3 million, respectively. The Company incurred a $7.2 million operating loss for the fourth quarter excluding a $13.4 million write-off for acquired in-process research and development. NetManage's stock price has declined to below $3.50 per share.
54. Each of the positive statements about NetManage's business during the Class Period was materially false and misleading when issued and failed to disclose, among other things, the following adverse information which was known only to defendants due to their access to internal NetManage data:
(a) That NetManage was not increasing its share of the intranet market as a result of its recently introduced products;
(b) That there was no reasonable basis for an expectation by defendants that NetManage would see a major expansion in sales, because competition from larger, more recognizable and better financed competitors was increasing and because sales growth was slowing as a result of the market's expectation of a new version of Microsoft's Windows NT Operating System, which was expected to be introduced shortly;
(c) That there was no reasonable basis for NetManage to expect its sales to expand because other larger and better financed companies were introducing new products and either offering them for free or bundling them with other products and solutions that NetManage did not sell;
(d) That NetManage had received indications from several of its major customers, including distributors, that they would not be ordering any substantial amounts of NetManage products until later in the year; and
(e) That NetManage was hampered in competing with its larger competitors such as Microsoft and Netscape because NetManage was only beginning to develop a direct sales force that could go out and see customers face-to-face as did Microsoft's and Netscape's direct sales forces.
55. While NetManage's insiders were issuing false and misleading statements about NetManage's business, the defendants sold 198,672 shares of the NetManage stock they owned for proceeds of $2.86 million to profit from the artificial inflation in NetManage's stock price their fraud had created. Notwithstanding their access to non-public information as a result of their positions with the Company, certain of the Individual Defendants sold the following amounts of NetManage shares at artificially inflated prices throughout the Class Period while in possession of material non-public information:
% Of
Date Shares Holdings
Name Sold Sold Price Proceeds Sold
---- -------- ------ ----- -------- --------
Alon 05/15/96 40,000 $14.50 $ 580,000
Amaral 05/28/96 1,523 $18.25 $ 27,795 50%
Galil 05/09/96 5,000 $13.75 $ 68,750
05/10/96 5,000 $13.75 68,750
05/13/96 3,000 $14.50 43,500
05/14/96 5,000 $14.25 71,250
05/16/96 5,000 $14.50 72,500
05/30/96 20,000 $16.38 327,600
------ -------
43,000 $ 652,350
Geisler 04/26/96 5,750 $12.75 $ 73,313
04/26/96 2,500 $13.00 32,500
04/26/96 5,000 $12.88 64,400
04/29/96 6,250 $13.38 83,625
05/01/96 3,625 $14.75 53,469
05/01/96 3,000 $14.50 43,500
05/08/96 2,200 $13.13 28,886
05/08/96 2,200 $13.25 29,150
05/10/96 3,125 $13.75 42,969
------ -------
33,650 $ 451,812 65%
Miller 04/26/96 46,246 $12.75 $ 589,637
04/26/96 7,920 $11.75 93,060
05/23/96 3,833 $17.70 67,844
05/23/96 22,500 $17.70 398,250
------ -------
80,499 $1,148,791 100%
------ ---------
Grand Totals 198,672 $2,860,748
56. Plaintiff incorporates by reference ¶¶1-55.
57. Each of the defendants: (a) knew or had access to material adverse non-public information about NetManage's financial results and then existing business conditions which was not disclosed; and (b) participated in drafting, reviewing and/or approving the misleading statements, releases, reports and other public representations of and about NetManage.
58. During the Class Period, defendants, with knowledge of or reckless disregard for the truth, disseminated or approved the false statements specified above, which were misleading in that they contained misrepresentations and failed to disclose material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading.
59. Defendants have violated §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 statements made, in light of the circumstances under which they were made, not misleading; or (c) engaged in acts, practices and a course of business that operated as a fraud or deceit upon the purchasers of NetManage stock during the Class Period.
60. Plaintiff and the Class have suffered damage in that, in reliance on the integrity of the market, they paid artificially inflated prices for NetManage stock. Plaintiff and the Class would not have purchased NetManage stock at the prices they paid, or at all, if they had been aware that the market prices had been artificially and falsely inflated by defendants' false and misleading statements.
61. Plaintiff incorporates by reference ¶¶1-60.
62. Defendants Alon and Amaral acted as controlling persons of NetManage within the meaning of §20 of the Exchange Act. By reason of their positions as Chief Executive Officer and Chief Financial Officer of NetManage, Alon and Amaral had the power and authority to cause NetManage to engage in the wrongful conduct complained of herein. Also, NetManage controlled each of the Individual Defendants and all of its employees.
63. By reason of such wrongful conduct, NetManage, Alon and Amaral are liable pursuant to §20(a) of the Exchange Act. As a direct and proximate result of these defendants' wrongful conduct, plaintiff and the other members of the Class suffered damages in connection with their purchases of NetManage stock during the Class Period.
64. Plaintiff brings this class action pursuant to Federal Rules of Civil Procedure 23(a) and 23(b)(3) on behalf of all persons who purchased the stock of NetManage during the Class Period (the "Class"), except defendants, members of their families and any entity in which a defendant has a controlling interest.
65. The members of the Class are so numerous that joinder of all members is impracticable. NetManage has more than 43 million shares of stock outstanding. During the Class Period, millions of shares of NetManage stock were purchased by hundreds or thousands of persons who were damaged thereby.
66. Plaintiff's claims are typical of the claims of the Class because plaintiff and the Class members sustained damages from defendants' wrongful conduct.
67. Plaintiff will adequately protect the interests of the Class. Plaintiff has retained counsel who are experienced and competent in class action securities litigation. Plaintiff has no interests which are in conflict with those of the Class.
68. Common questions of law and fact predominate over questions which affect only individual members. Among the questions of law and fact common to the Class are:
(a) Whether the federal securities laws were violated by defendants' acts;
(b) Whether NetManage's statements during the Class Period misrepresented and/or omitted material facts;
(c) Whether defendants pursued the fraudulent scheme and course of business complained of;
(d) Whether defendants acted intentionally or recklessly;
(e) Whether the market price of NetManage stock was artificially inflated due to the activities complained of; and
(f) The extent and measure of damage sustained by the Class.
69. A class action is superior to other available methods for the fair and efficient adjudication of this controversy.
70. Because the PSLRA, §21(c) [15 U.S.C. §78u-4(c)], requires complaints to be pleaded in conformance with Federal Rule of Civil Procedure 11, plaintiff has alleged the foregoing based upon the investigation of his counsel, which included a review of NetManage's SEC filings, securities analysts reports and advisories about the Company, press releases issued by the Company, media reports about the Company and discussions with consultants, and, pursuant to Rule 11(b)(3), believes that substantial evidentiary support will likely exist for the allegations set forth in ¶¶1, 3-15, 22-30, 32-38, 39-48, 50-51, 53-55, 57-60, 62-63 and 65-69 after a reasonable opportunity for discovery.
WHEREFORE, plaintiff prays for judgment as follows:
1. Declaring this action to be a proper class action pursuant to Rules 23(a) and 23(b)(3) of the Federal Rules of Civil Procedure on behalf of the Class defined herein;
2. Awarding plaintiff and the members of the Class compensatory damages;
3. Awarding plaintiff and the members of the Class pre-judgment and post-judgment interest, as well as reasonable attorneys' fees, expert witness fees and other costs;
4. Awarding extraordinary, equitable and/or injunctive relief as permitted by law, equity and the federal statutory provisions sued hereunder, pursuant to Rules 64, 65 and any appropriate state law remedies; and
5. Awarding such other relief as this Court may deem just and proper.
Plaintiff demands a trial by jury.
|
DATED: June 19, 1997 |
MILBERG WEISS BERSHAD |
NETMAN-2\CJN05496.CPT