MILBERG WEISS BERSHAD,
HYNES & LERACH LLP
WILLIAM S. LERACH (6858l)
ALAN SCHULMAN (128661)
BLAKE M. HARPER (115756)
600 West Broadway, Suite 1800
San Diego, CA 92101
Telephone: 619/231-1058
LAW OFFICES OF ALFRED G.
YATES, JR.
ALFRED G. YATES, JR FARUQI & FARUQI, LLP
519 Allegheny Building NADEEM FARUQI
429 Forbes Avenue 415 Madison Avenue
Pittsburgh, PA 15219 21st Floor
Telephone: 412/391-5164 New York, NY 10017
Telephone: 212/986-1074
SCHIFFRIN & CRAIG, LTD.
RICHARD S. SCHIFFRIN WEISS & YOURMAN
ANDREW L. BARROWAY KEVIN J. YOURMAN (147159)
Three Bala Plaza East 10940 Wilshire Blvd.
Suite 400 24th Floor
Bala Cynwyd, PA 19004 Los Angeles, CA 90024
Telephone: 610/667-7706 Telephone: 310/208-2800
Attorneys for Plaintiffs and the Class
[Additional counsel appear on signature page.]
SUPERIOR COURT OF THE STATE OF CALIFORNIA
COUNTY OF SANTA CLARA
WALTER W. HEAD, III, GREGORY ) Case No. CV763295
SELMANSON, DOMINIC CASTALDO, LEILA ) [filed Jan. 9, 1997]
WALDMAN and JOHN VELONIS, JR., On ) CLASS ACTION
Behalf of Themselves and All Others )
Similarly Situated, ) COMPLAINT FOR DAMAGES BASED
) UPON:
Plaintiffs, ) (1) VIOLATION OF CAL.
) CORP. CODE §§25400
vs. ) AND 25500;
) (2) VIOLATION OF CAL.
NETMANAGE, INC., ZVI ALON, WALTER ) CIV. CODE §§1709-
AMARAL, UZIA GALIL, JOHN BOSCH, ) 1710;
AMATZIA BEN-ARTZI, ROBERT WILLIAMS, ) (3) VIOLATION OF CAL.
RICHARD KORETZ and DAN GEISLER, ) BUS. & PROF. CODE
) §§17200, ET SEQ.
Defendants )
____________________________________) Plaintiffs Demand A
Trial By Jury
SUMMARY OF ACTION
1. This is a class action on behalf of purchasers of the
stock of NetManage, Inc. ("NetManage" or the "Company"), between
July 25, 1995 and January 11, 1996 (the "Class Period") inclusive,
seeking to remedy violations of California state law by the Company
and certain of its insiders, which violations involve the issuance
of false financial statements and other positive statements,
combined with massive insider trading by the individual defendants.
The individual defendants sold 715,999 shares of their NetManage
stock at artificially inflated prices as high as $24-1/8 per share,
pocketing more than $14 million dollars in illegal insider trading
proceeds, before the truth concerning NetManage's business and
finances was revealed and NetManage's stock price, which had traded
as high as $34 per share during the Class Period, collapsed to as
low as $10. In addition, defendants used the inflated share value
of NetManage stock to acquire other inter-networking software
companies.
2. NetManage develops, markets and supports an integrated
set of TCP/IP (transmission control protocol/ internet protocol)
based intra-net 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.
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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 was growing at an
enormously rapid rate. Total revenue growth was nothing short of
amazing since the Company went public in late 1993. The slowest
rate of year-over-year revenue growth occurred in the September
1994 quarter, when revenues climbed 137%. In the June 1995
quarter, the reporting of which results commences the class Period,
revenue growth was reported as 150% year-over-year. 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 their corporate
executives to exercise stock options and to sell stock at large
profits and enabled NetManage to grow by using its stock to make
acquisitions of 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 the Class Period, however, NetManage's growth rate
was beginning 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. Notwithstanding these factors, throughout
the Class Period, NetManage continued to report strong quarterly
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results for revenue and income. NetManage repeatedly represented
that demand for its most important product, Chameleon, was very
strong, a new version of which was released in June. NetManage
also introduced new versions of other of its 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.
reporting 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. However, each of the defendants' positive statements
about NetManage's business 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) That NetManage recognized revenues in the second and
third quarters of 1995 in violation of Generally Accepted
Accounting Principles ("GAAP") on shipments to distributors and
other resellers that were contingent on resale or contained other
contingent terms, such as customization requirements, new version
upgrade provisions, etc.;
(b) That NetManage recognized revenues in the second and
third quarters of 1995 in violation of GAAP on shipments to
distributors and other resellers where NetManage had no reasonable
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basis upon which to reasonably estimate future returns,
particularly with respect to new and newly upgraded products, which
NetManage had only recently begun shipping;
(c) That NetManage recognized revenues in the second and
third quarters of 1995 in violation of GAAP on shipments to
distributors and other resellers without adequately providing a
reserve for returns or price protection that could reasonably be
expected in connection with those sales;
(d) That defendant had no reasonable basis for a belief
that NetManage's sales would continue to rapidly increase after the
second quarter of 1995, because defendants knew that there was
already an excess of products in the reseller and distribution
channels and that sales recorded in the second quarter were
improper and were contingent on resale or other contingencies
occurring;
(e) That future demand for many of NetManage's products
would be constrained by the excess levels of product already held
by distributors, who had accepted shipments of more product than
they expected to sell because NetManage agreed that they could
return the product if it could not be sold;
(f) That there was no basis for defendants' statements
that NetManage's sales were strong or robust, and, in fact, growth
in demand for NetManage's products was slowing dramatically;
(g) That contrary to their express representations to
securities analysts to the effect that nothing had changed to
adversely affect the Company's business, demand for NetManage's
products and its growth rate were slowing dramatically; and
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(h) That there was no basis for defendants'
representation to securities analysts that their forecasts were
reasonable or that NetManage was "comfortable" with the analysts'
projections of revenues and earnings.
6. The chart below shows the performance of NetManage's
stock during the Class Period, while defendants were issuing their
false and misleading statements and selling off their shares:
Netmanage
July 25, 1995 - January 16,1996
Daily Stock Prices
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7. Taking advantage of NetManage's inflated stock price
during the Class Period, the individual defendants sold off
substantial amounts of their NetManage stock at inflated prices
based on their knowledge of NetManage's misrepresentations, thus
profiting from their participation in the fraud, scheme and
conspiracy that operated as a fraud and deceit on purchasers of
NetManage stock:
NAME TOTAL SHARES SOLD TOTAL PROCEEDS
Alon 240,000 $4,727,225
Ben-Artzi 90,000 1,877,500
Bosch 9,667 172,846
Galil 92,500 1,892,100
Geisler 60,250 1,142,088
Koretz 186,182 3,496,959
Williams 37,400 694,350
TOTAL: 715,999 $14,003,067
8. By the beginning of January 1996, defendants realized
that NetManage's deteriorating business condition and finances
could not be concealed much longer so they began to "manage"
NetManage's stock price gradually lower to accomplish a "soft
landing" and thus avoid a sharp stock drop that might expose their
wrongdoing and result in their being sued. Defendants therefore
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. For
example, a Smith Barney analyst trimmed its fourth quarter revenue
estimate to $35.5 million from its prior estimate of $39.5 million
and earnings per share from $.23 to $.19.
9. Finally, before the market opened on January 12, 1996,
NetManage shocked the market by revealing that it expected its
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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 it had not yet been
earned due to contingencies affecting the sales that precluded the
revenue from being realized. In explaining the contingency items
that precluded revenue recognition of numerous large contracts,
defendants referred to specific product/feature customization,
service/maintenance agreements, credit terms, warranty extensions,
compatibility guarantees against the future network modifications,
new version upgrade clauses, rights of return, etc. Most
importantly, 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.
10. 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."
JURISDICTION AND VENUE
11. This Court has jurisdiction over all causes of action
asserted in this Complaint pursuant to the California Constitution,
Article VI, §10, because this case is a cause not given by statute
to other trial courts. The claims asserted herein arise under
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§§25400 and 25500 of the Cal. Corp. Code, §§1709-1710 of the Cal.
Civ. Code. and §§17200, et seq. of the Cal. Bus. & Prof. Code.
12. Each of the individual defendants resides in and is a
citizen of the State of California. NetManage has its principal
place of business in Cupertino, California. The false and
misleading statements issued by the defendants and the sales of the
defendants' NetManage stock all took place in this state --
California. Each individual defendant, except Uzia Galil, is a
resident and citizen of California. The amount in controversy of
each named plaintiff's claim is less than $50,000 exclusive of
interest and costs. This action is not removable to federal court.
THE PARTIES
13. (a) Plaintiff Walter W. Head, III purchased 70 shares of
NetManage stock on October 2, 1995 at $24-1/2 per share and was
damaged thereby.
(b) Plaintiff Gregory Selmanson purchased 300 shares of
NetManage stock on December 28, 1995 at $23-3/4 per share and was
damaged thereby.
(c) Plaintiff Dominic Castaldo purchased 2,000 shares of
NetManage stock on January 5, 1996 at $16-1/4 per share and was
damaged thereby.
(d) Plaintiff Leila Waldman purchased 500 shares of
NetManage stock on December 5, 1995 at $31-3/8 per share and was
damaged thereby.
(e) Plaintiff John Velonis, Jr. purchased 200 shares of
NetManage stock on December 5, 1995 at $32-3/4 per share and 200
shares on December 15, 1995 at $23-1/2 per share and was damaged
thereby.
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14. 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.
15. (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.
Alon sold 240,000 shares of NetManage stock for proceeds of $4.7
million during the Class Period.
(b) Defendant Walter Amaral ("Amaral") has been Senior
Vice President, Finance and Chief Financial Officer since April
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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.
(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
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therewith. Galil sold 92,500 shares of NetManage stock for
proceeds of nearly $1.9 million during the Class Period.
(d) Defendant John Bosch ("Bosch") has been a director
of the Company since December 1991. Since 1981, Bosch has been a
general partner of Bay Partners, a venture capital firm. In 1976,
he co-founded Cronus Precision Products, Inc., a digital timing
company, and he served as its President and Chief Executive Officer
until 1981. In 1970, Bosch co-founded Anixter, Bosch & Russell, a
consulting firm specializing in marketing and sales consulting for
high technology companies and in technical venture analysis for the
venture capital community. Because of defendant Bosch'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
Board of Director's meetings and committees thereof and via reports
and other information provided to him in connection therewith.
Bosch sold 9,667 shares of NetManage stock for proceeds of $172,846
during the Class Period, 100% of his NetManage holdings.
(e) Defendant Amatzia Ben-Artzi ("Ben-Artzi") was Vice
President, Business Development since September 1992 after joining
the Company in 1991 as Vice President of Research and Development.
Prior to joining NetManage, he was Vice President of Technology
Development at SynOptics Communications, a networking company, from
1989 to 1991. Ben-Artzi was Director of Systems Architecture at
3Com, a networking company, from 1988 to 1989. Prior to 1988, he
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served as a Senior Network Architect at Sytek, a Manager of Network
Interfaces at Tadiran, Ltd., a telecommunications company, and held
various engineering and management positions in local area network
and network management at Control Data Corporation. Ben-Artzi
resigned from the Company effective March 8, 1996. Because of
defendant Ben-Artzi'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 forecast 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. Ben-Artzi sold 90,000 shares of NetManage stock for
proceeds of $1.8 million during the Class Period.
(f) 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
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therewith. Williams sold 37,400 shares of NetManage stock for
proceeds of $694,350 during the Class Period, 94% of his holdings.
(g) Defendant Richard Koretz ("Koretz") was Vice
President of North American Sales until he resigned from that
position on August 31, 1995. Koretz remained an employee of
NetManage to assist his replacement until December 1995. Because
of defendant Koretz' 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. Koretz sold 186,182 shares of NetManage stock for
proceeds of nearly $3.5 million during the Class Period, 76% of his
holdings.
(h) 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
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to him in connection therewith. Geisler sold 60,250 shares of
NetManage stock for proceeds of over $1.1 million during the Class
Period, 45% of his holdings.
(i) The defendants named in ¶16(a)-(h) are referred to
herein as the "Individual Defendants."
16. Defendants Alon and Amaral, by reason of Alon's position
as CEO and as a director of NetManage, and by reason of Amaral's
position as CFO of NetManage, were controlling persons of NetManage
and had the power and influence, and exercised the same, to cause
NetManage to engage in the conduct complained of herein.
MOTIVE AND OPPORTUNITY
17. The Individual Defendants, because of their positions
with the Company, controlled and/or possessed the power and
authority to control the contents of its 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 represen-
tations 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.
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18. Each of the defendants is liable as a primary violator,
in making false and misleading statements, and for participating in
a fraudulent scheme and/or conspiracy and/or aiding and abetting
that operated as a fraud or deceit on purchasers of NetManage stock
during the Class Period. All of the defendants pursued a
fraudulent scheme and conspiracy, 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 conspiracy was designed to
and did: (i) deceive the investing public, including plaintiffs
and other Class members; (ii) artificially inflate the price of
NetManage stock during the Class Period; (iii) cause plaintiffs 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.
19. 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 make acquisitions of other
companies more cheaply.
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NETMANAGE AND ITS INSIDERS' ACTUAL KNOWLEDGE
OR RECKLESS DISREGARD OF THE UNDISCLOSED ADVERSE
CONDITIONS IMPACTING NETMANAGE'S BUSINESS
20. As part of NetManage's corporate planning, financial
reporting and management process, NetManage prepares a corporate
business plan and budget for each fiscal year, as well as monthly
and quarterly financial statements included in the financial
reporting package reviewed by NetManage's top executives. This
financial reporting package included NetManage's financial results
for each month, a comparison of those results to budget and to the
prior year, and a forecast of results for the remainder of 1995.
These reporting packages also include information regarding the
sales of Chameleon, ECCO, and other products.
21. 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.
22. 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
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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.
23. Based on the reports they reviewed and communications
with the Company's sales force, NetManage's top executives were
aware that NetManage's products were not as successful as the
Company publicly represented, and that the Company's forecast for
revenue and earnings growth for 1995 and 1996 were unrealistic.
Thus, defendants each actually knew that the forward-looking public
statements issued during the Class Period about NetManage were
false and misleading when made and actually knew or reckle ved the investing public regarding NetManage's business;
(ii) artificially inflated the price of NetManage stock; (iii)
caused plaintiffs and other members of the Class to purchase
NetManage stock at inflated prices; and (iv) permitted the
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Individual Defendants to sell 715,999 shares of NetManage stock at
prices as high as $24-1/8 per share, pocketing some $14 million.
25. In recent years, NetManage reported revenue, net income
and earnings per share growth exceeding 100% on an annual basis.
For instance, during the four quarters preceding the Class Period,
NetManage reported the following results:
FY 1995
6/30/94 9/30/94 12/31/94 3/31/95
Revenue $12.1 million $16.6 million $23.8 million $25.8 million
Net
Income $ 3.6 million $ 3.8 million $ 6.3 million $ 5.7 million
EPS $.09 $.09 $.15 $.14
In fiscal 1994 and 1993, NetManage earned $.41 and $.17 per share,
respectively.1
26. As a result of this track record, NetManage stock traded
at a price earnings multiple reserved for premier growth companies
with track records of meeting market expectations for high profit
growth. For the reasons pleaded elsewhere, maintaining an image of
strong growth and thus a high stock price was extremely important
to NetManage's top executives.
FALSE AND MISLEADING
STATEMENTS DURING THE CLASS PERIOD
27. On July 25, 1995, NetManage issued a press release
announcing record quarterly results for revenue and income for the
1995 second quarter, ended June 30, 1995, with revenue of $30.2
million, compared to $12.1 million for the same quarter of the
prior year, an increase of 150%. Net income for the second quarter
was reported as $6.8 million, or $.16 per share, compared to net
____________________
1 1994 quarterly results are adjusted to reflect the April 1995
2-for-1 stock split.
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income of $3.6 million or $.09 per share in the same period of
1994, an increase in net income of 89%. The release represented
that revenue from single orders with dollar amounts greater than
$100,000 exceeded $3 million. Defendant Alon was quoted in the
release as representing:
"We are pleased with NetManage's financial
performance during this quarter and our continued success
in expanding our sales and support capabilities to
include a new domestic channel program and the opening of
our Toyko based office . . . . We announced and shipped
Swift, a new product addressing the needs of the host
connectivity, market. In addition, version 4.5 of
Internet Chameleon and version 3.0 of ECCO PRO were
released in June."
28. In a conference call and other communications with
analysts following the announcement, defendants represented that
revenue growth continued to be driven primarily by strong sales of
the Company's core Chameleon products. Defendants also noted that
expenses were higher than would normally be expected due to certain
expenses in connection with an acquisition during the quarter and
in connection with opening international sales offices.
29. On August 9, 1995, Elron, an affiliate of NetManage of
which defendant Galil is Chairman of the Board and Chief Executive
Officer, filed a notice under SEC Rule 144 of its intent to sell
75,000 shares of NetManage stock.
30. On August 14, 1995, NetManage filed with the SEC its
report on Form 10-Q for its second quarter ended June 30, 1995,
signed by defendants Amaral and by NetManage's controller. The
report on Form 10-Q reported the same financial results as had been
announced previously. The report also represented:
The interim financial statements for the six months
ended June 30, 1995 and 1994 have been prepared on the
same basis as the year end financial statements and, in
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the opinion of management, include all adjustments
(consisting of only normal recurring adjustments)
necessary to present fairly the financial information set
forth therein, in accordance with generally accepted
accounting principals.
31. The financial statements in the July 25, 1995 press
release and in the report on Form 10-Q were false and misleading
for the reasons described below in ¶¶55-63.
32. On August 17, 1995, a Smith Barney analyst initiated
coverage of NetManage with a buy recommendation. The report was
prepared after extensive communications with NetManage executives,
and contains information obtained directly from NetManage. This
report represented that:
Financially, NetManage is one of the most attractive
software companies on the market. Its growth rate
remains staggering, up 150% in the June 1995 quarter,
driven entirely by market demand, for the Chameleon
product. Pricing remains stable as penetration rates are
extremely low. We believe that NetManage can maintain
annual earnings growth rates of 40%-50% for the next few
years creating excellent long term value for investors.
With the shares trading at only 17.3x our 1996 estimate,
a significant discount to its growth rate, we believe
that the shares offer good long term value.
As a result of these positive representations, NetManage's stock
rose $1-1/8 to $19-1/4 on large volume.
33. On August 21, 1995, Smith Barney issued a lengthy company
report on NetManage, rating the stock a buy, and highlighting that
NetManage was one of the leading suppliers of TCP/IP applications
for the Windows market, that the market for TCP/IP on the desktop
was "expected to explode over the next five years," that revenue
growth in 1995 should exceed 100%, and that Smith Barney expected
the stock price to rise to $26 per share. Repeating information
obtained from the Company, the report represented that, while
Microsoft would include a TCP/IP protocol in Windows 95, NetManage
- 20 -
had long been preparing for this and looked forward to selling
TCP/IP applications to the expanded market created through its
inclusion in Windows 95. The report noted that NetManage had been
investing heavily in expanding its application product line and
that the most recent version of Chameleon contained more than 40
applications. The report also described NetManage's new Internet
Chameleon product, which was being sold through traditional retail
distributors as well as by top independent suppliers of Internet
access services.
34. The report also noted that NetManage had been expanding
its international operations, which had added to expenses in
several prior quarters, but that expenses would begin to decline as
the expansion was completed. The report represented that NetManage
planned to expand its use of distributors in the United States, as
well as add to its direct sales force. Initially, NetManage
intended to use the retail distribution channel for the Internet
Chameleon and ECCO products. The Smith Barney report also
represented that while NetManage generates income from its base
Chameleon family, Internet Chameleon and the ECCO products, the
vast majority, about 95%, comes from the Chameleon and ChameleonNFS
families, with the Internet Chameleon, ECCO, Swift and Israeli
Internet business generating only 5%. The report represented:
Despite the insignificant contribution to the top
line from some of NetManage's newer products, total
revenue growth has been nothing short of amazing since
the company went public in late 1993. The slowest rate
of year-over-year revenue growth occurred in the
September 1994 quarter, when revenue climbed 137%. In
the June 1995 quarter, revenue growth was 150%. . . . We
believe that the investments made over the past year to
open and staff offices outside the U.S. are only
beginning to pay off in revenues and have not really
begun to boost earnings. In addition, the recent move to
- 21 -
expand distribution channels has not materially
influenced results. This should begin to occur in 1996,
especially in light of the recent release of the ECCO 3.0
to the retail channel.
The report further represented that it expected the Company to
report sequential revenue growth exceeding 10% in each of the next
two quarters. Moreover, the report represented that margins should
increase going forward, because expenses in the second quarter were
always the highest due to the timing of new product releases.
NetManage typically shipped upgraded versions of products to
maintenance-paying customers during the second quarter incurring
unusually high expense but not recording commensurate revenue,
which is recorded ratably over the year. In addition, sales and
marketing expenses had been high in each of the prior two quarters
due to upfront costs to open international offices. As a result of
these unusually high expenses, the report noted that operating
margins had fallen from 44.8% to 29.4% over the prior three
quarters. The report stated:
We believe that margins will start to improve primarily
because there are no further plans for international
infrastructure expansion in the form of new offices. As
revenues from these investments start to come in, at the
same time that expense growth is slowing, we should see
margins begin to improve. We expect the turnaround to
occur in the fourth quarter of this year.
35. The report concluded that, in light of the Company's
extremely high level of revenue and earnings growth, it seemed
modestly priced, and that investors would "begin to pay more for
the shares if the margin trends improve; in our opinion, this will
start to happen in late 1995 and throughout 1996."
36. On September 19, 1995, NetManage issued a press release
announcing the introduction of Chameleon Enterprise, a set of three
- 22 -
core technologies that "revolutionizes the way people in corporate
environments utilize their internal network." The press release
described NetManage as "the fastest growing software company in the
United States."
37. On September 15, 1995, several officers and directors of
NetManage reported to the SEC that they had sold substantial
amounts of NetManage shares during the month of August. As a
result, NetManage's stock declined by $1-3/4 on that date. On
September 11, 1995, Laurence Hootnik, an affiliate and a former
director of NetManage, filed a notice under Rule 144 of his intent
to sell 93,333 shares of NetManage stock.
38. On October 6, 1995, a Smith Barney analyst issued a brief
report on NetManage based on information obtained from NetManage's
senior management. The report stated:
We believe that the recent weakness in NetManage's
stock over the past week represents an excellent buying
opportunity. Short and long term growth prospects for
the company remain strong, for both the Windows-based
TCP\IP products as well as for the new ECCO product in
the retail channel. We have spoken with company
management and nothing has changed, from their
perspective, to explain the recent price decline.
39. On October 18, 1995, NetManage announced that it was
acquiring Syzygy Communications, Inc. in exchange for 440,000
shares of NetManage stock. Several securities analysts reiterated
"Buy" recommendations based on communications with the Company.
40. On October 24, 1995, NetManage issued a press release
reporting record quarterly results for revenue and income for the
third quarter, ended September 30, 1995. Revenue was represented
to have been $32.7 million, compared to $16.6 million for the same
quarter of the prior year, an increase of 97%. Net income for the
- 23 -
third quarter was represented to be $7.4 million or $0.18 per share
compared to net income of $3.8 million or $0.09 per share in the
same period of the prior year. These results exceeded analysts'
expectations. In the press release, NetManage represented that
revenues from single orders with dollar amounts greater than
$100,000 were approximately $2 million. The press release quoted
defendant Alon as representing:
"We are very pleased that our investment in expanded
products and services has enabled NetManage to continue
with positive growth . . . . We have continued our
leadership in TCP/IP applications for Windows by shipping
our third generation version for Windows NT. This new
version extends our capabilities to include a commercial
NFS and Web server on Microsoft NT."
In a conference call and other communications with analysts
following the earnings announcement, NetManage's senior management
told analysts that NetManage's business continued to be "robust."
A Smith Barney analyst reported:
Operating margins improved from last quarter's, earlier
and better than we expected. After expanding its
international facilities over the last four quarters,
NetManage has begun to reap its benefits. International
sales grew at more than twice the rate of domestic sales,
and has come to represent 30% of total sales, vs. 21% in
1994. NetManage also has begun to roll out a new
generation of its Chameleon product as part of its new
enterprise strategy. Looking forward, we remain
confident with regard to our fourth quarter estimates and
beyond.
While NetManage's outstanding accounts receivable increased, and
day's sales outstanding climbed to 58 days from 50 days,
NetManage's senior management represented to analysts that these
increases were the result of a "delay in shipping Japanese versions
of Chameleon from August to September because the company ran out
of inventory."
- 24 -
41. On November 8, 1995, Elron filed a notice pursuant to SEC
Rule 144 of its intent to sell 75,000 shares of NetManage.
42. On November 13, 1995, NetManage filed with the SEC its
Report on Form 10-Q for the quarter ended September 30, 1995. This
report contained the same financial results as had been previously
announced. The report represented:
The interim financial statements for the nine months
ended September 30, 1995 and 1994 for NetManage, Inc.
. . . have been prepared on the same basis as the year
end financial statements and, in the opinion of
management, include all adjustments (consisting of only
normal recurring adjustments) necessary to present fairly
the financial information set forth therein, in
accordance with generally accepted accounting principles.
The report was signed by defendant Amaral.
43. The financial statements in the October 24, 1995 press
release and in the report on Form 10-Q were false and misleading
for the reasons described below in ¶¶55-63.
44. On November 20, 1995, NetManage issued a press release
announcing that it had signed an agreement to acquire AGE Logic,
Inc. On December 1, 1995, NetManage issued a press release
announcing that it had completed the acquisition of AGE Logic, Inc.
for 1 million shares of NetManage stock, then valued at about $22
million.
45. On December 4, 1995, NetManage issued a press release
announcing that it had signed a Software Licensing and Joint
Development Agreement with Microsoft Corporation to develop OLE
controls supporting internet protocols, which would be released by
Microsoft in the following year. On the news of this announcement,
NetManage's stock price rose sharply from $22-1/2 to $29-1/2.
- 25 -
46. Following the close of the market on December 14, 1995,
a Federal Filings Newswire announced that Reports on Form 4 had
been filed by defendants Alon, Ben-Artzi and Galil, reporting that
they had sold significant amounts of their stockholdings in
NetManage during the month of November. NetManage's stock price
declined on the following day from $25-1/2 to $23-3/4, on large
volume, and declined even further the following trading day.
47. To stem the decline in NetManage's stock price,
NetManage's senior management communicated with a Smith Barney
analyst who issued a report before the market opened on
December 19, 1995. The report noted that recent weakness in the
shares of NetManage offered a buying opportunity:
We do not see any evidence of any changes in the
corporate market despite the potential competitive
threats that we previously outlined and which we believe
are already factored into the stock. The shares are
trading at a significant discount to its P/E based on
both 1996 and 1997 estimates. We are maintaining our 12-
month price target of $35-$40 per share and our 1H [buy]
rating.
As a result of these representations, NetManage's stock price
rebounded from $21-3/4 on December 18, 1995 to close on
December 19, 1995 at $24-5/8.
48. By early January 1996, defendants knew that NetManage's
business and finances were deteriorating, and that many of its
distributor and reseller customers were refusing to accept
additional product due to the fact that their inventories on hand
were far in excess of anything they could sell in the immediate
future, and in fact, that they wanted to return certain of these
products. Thus, NetManage was going to have to "come clean" and
reveal its true financial condition, especially since NetManage's
- 26 -
auditors were about to audit its books for the year end and would
discover NetManage's illicit practices during fiscal 1995 to boost
its revenues and profits during the interim reporting periods.
However, defendants hoped that by gradually trickling out negative
information about NetManage's finances rather than properly and
fully disclosing the complete truth, they could "manage"
NetManage's stock price downward gradually over several weeks and
thus avoid a sudden catastrophic collapse in NetManage's stock
price that would infuriate investors, attract attention, and likely
lead to their being sued for fraud. Thus, in an attempt to manage
the stock price down slowly, in early January 1996, defendants
began to make partially, but incomplete and misleading, revelations
about NetManage's business through securities analysts.
49. Thus, after communicating with NetManage's senior
management, a Smith Barney analyst issued a brief report on
NetManage before the market opened on January 4, 1996, reducing its
expectations for large order sales in the fourth quarter by $4
million, thus reducing its fourth quarter revenue estimate of $39.5
million to $35.5 million. The report represented that NetManage's
base business remained strong and would constitute revenue growth
of about 80%. This reduction cut the earnings per share estimate
by $0.04 to $0.19 per share for the fourth quarter. This report
was issued as part of an overall scheme by defendants to manage
down the earnings expectations of the market knowing that the
Company would be forced to report a significant decline in earnings
for its fourth quarter. As a result of these revelations by other
companies and the estimate cut by the Smith Barney analysts,
NetManage's stock price declined from a close of $20-3/4 on
- 27 -
January 3, 1996 to close at $15-3/8 on January 4, 1996, on volume
exceeding 8.8 million shares traded.
50. Unable to conceal any longer the weakness in its business
and finances, NetManage issued a press release on January 12, 1996,
revealing that the Company expected its revenues from the fourth
quarter ended December 31, 1995 to be only, approximately $30
million to $32 million, representing an increase of 30% over the
fourth quarter of 1994, rather than the much higher figures
defendants had previously led the market to expect. The release
also revealed that earnings from operations for the quarter were
expected to be lower than in the same quarter of 1994. The release
quoted defendant Alon as stating:
"While we had a record bookings quarter, we were not able
to recognize some of these bookings as revenue due to our
accounting policies. The overall business is very solid.
We do not see any fundamental change in our market. We
have the technology and products to allow our continued
growth and success in this exciting market."
In an interview with Reuters, defendant Amaral represented that
earnings per share for the fourth quarter would be "lower than
$0.15." Amaral was quoted as stating that NetManage's "'order
rates are still very solid -- we just couldn't recognize all the
revenue' because of financial accounting policies. 'Otherwise we
would have been very close to the earnings estimates' of Wall
Street analysts . . . . 'our business is still in relatively good
shape . . . . '"
51. NetManage later reported revenues of $125.4 million for
1995, an increase of only 75% over 1994 on a pooled basis, compared
to the 100% increase projected for the Company. Moveover,
- 28 -
operating margins deteriorated over time, as opposed to improving
as projected:
Netmanage, Inc.
Operating Income as a % of Revenue
Excluding Effects of Special Charges
52. Securities analysts called the revelations a "significant
disappointment." One analyst stated: "Our confidence in the
quality of information flow from management has been significantly
reduced." In discussions with analysts, NetManage's senior
management indicated that the revenue and earnings shortfall was
due to NetManage's inability to convert a handful of large bookings
of over $100,000 into revenue due to contingencies that existed in
- 29 -
connection with the contracts. Management also revealed that not
all of these deals would be converted to revenue in the following
quarter. One analyst concluded that it would be some time before
NetManage could re-establish investor confidence.
53. Most importantly, NetManage's senior management revealed
to at least one analyst that contingency items had existed in
customer orders in earlier financial periods.
54. As a result of these revelations, NetManage's stock price
-- which was already down significantly from its earlier highs --
plunged from a close of $14-9/16 on January 11, 1996 to as low as
$10 per share on January 12, 1996.
FALSE FINANCIAL STATEMENTS
55. In order to overstate its revenues, gross profit, net
income and earnings per share in the second and third quarters of
1995, the defendants caused NetManage to improperly recognize
revenue on sales to distributors (including Ingram Micro, Merisel
and Tech Data), resellers and other customers, where NetManage
granted the distributors or resellers the right to return unsold
merchandise as well as other contingent contract terms, such as
customization, acceptance contingencies and other significant
ongoing vendor obligations, which contingencies were still
unresolved at the time NetManage recognized revenue associated with
these agreements. This caused NetManage's financial statements for
the second and third quarters of 1995 to be presented in violation
of GAAP and SEC rules.
56. GAAP are those principles recognized by the accounting
profession as the conventions, rules and procedures necessary to
define accepted accounting practice at a particular time. SEC
- 30 -
Regulation S-X (17 C.F.R. §210.4-01)(a)(1) states that financial
statements filed with the SEC, which are not prepared in compliance
with GAAP, are presumed to be misleading and inaccurate, despite
footnote or other disclosures.
57. GAAP, as set forth in FASB Statement of Accounting
Standard ("SFAS") No. 48 (Revenue Recognition When the Right of
Return Exists), requires that when an entity grants its customers
the right of return, certain conditions must be met prior to
revenue recognition, including the following:
b. The buyer has paid the seller, or the buyer is
obligated to pay the seller and the obligation is
not contingent on resale of the product.
* * *
e. The seller does not have significant obligations
for future performance to directly bring about
resale of the product by the buyer.
f. The amount of future returns can be reasonably
estimated.
58. GAAP, as set forth in Statement of Position ("SOP") 91-1
(software revenue recognition) imposes additional requirements on
entities that license software, including that prior to revenue
recognition three tests must be met: (i) delivery has occurred;
(ii) other remaining vendor obligations are no longer significant;
and (iii) collectibility is probable. SOP 91-1 requires that where
"other vendor obligations remaining after delivery are significant,
revenue should not be recognized, because the earnings process is
not substantially completed." SOP 91-1, ¶68. Moreover, an
important concept in SOP 91-1 states: "If, after delivery, there
is significant uncertainty about customer acceptance of the
- 31 -
software, license revenue should not be recognized until the
uncertainty becomes insignificant." SOP 91-1, ¶36.
59. In the second quarter ended June 30, 1995, NetManage
reported revenue of $30.2 million, an increase of 17% over the
first quarter of 1995, and net income per share of $.16. In the
third quarter of 1995, NetManage reported revenues of $32.7
million, an 8% increase over the second quarter, and earnings per
share of $.18.
60. The results reported for the second and third quarters of
1995 and the statements accompanying those results in the reports
on Form 10-Q for those quarters were false and misleading as the
Company had materially overstated its revenues associated with
shipments and licenses granted to resellers and distributors, which
included the right of return, significant vendor obligations such
as customization and other acceptance contingencies, and the
financial statements did not fairly present NetManage's financial
information in accordance with GAAP. These (distributors and
resellers, including Ingram Micro, Merisel and Tech Data, required
that NetManage provide them with the right to return unsold
merchandise, customization and other acceptance privileges, and
price protection on their unsold inventories, prior to accepting
any shipments of NetManage products. These distributors' right to
return unsold merchandise and NetManage's other obligations with
respect to these licenses effectively made the sales contingent on
resale or acceptance and necessitated that NetManage defer
recognition of such revenue until the product had been sold through
to end users. If NetManage had not improperly reported this
- 32 -
revenue, its second and third quarter results would have shown very
little growth over the first quarter.
61. Ultimately, at the end of the fourth quarter of 1995,
NetManage could no longer conceal this improper revenue
recognition, as it was in the midst of an audit by its outside
accountants who were analyzing the contract terms NetManage had
granted many of its reseller customers. Due to the return
privileges, acceptance contingencies and significant ongoing
obligations of NetManage, NetManage knew it would not be able to
recognize much of its bookings as revenue and that much of its
revenue recognized in the second and third quarters had been
improper. NetManage thereby reported much lower revenues in the
fourth quarter than in either the second or third quarters of 1995.
NetManage later acknowledged that the shortfall in revenue for the
fourth quarter was the result of being required to defer
recognition of revenue on certain of its sales to large
distributors.
62. NetManage later filed its annual report to shareholders
and changed its description of its revenue recognition policy from
that used in the 1994 annual report. Moreover, the 1994 annual
report stated that NetManage recognized revenue on sales to
distributors where the right of return existed and reserved for
estimated returns. In 1995, the Company changed its policy to
defer revenue where the right of return had not expired. This
change presumably occurred in the fourth quarter since the second
and third quarter reports on Form 10-Q represented that the
quarterly results were prepared on the same basis as in 1994:
- 33 -
The interim financial statements for the six [nine]
months ended June 30, 1995 [September 30, 1995] and 1994
have been prepared on the same basis as the year end
financial statements and, in the opinions of management,
include all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the
financial information set forth therein, in accordance
with generally accepted accounting principles. The
Company believes the results of operations for the
interim periods are subject to fluctuation and may not be
an indicator of future financial performance.
In the 1994 annual report, NetManage had represented that returns
from distributors had been insignificant in the past, whereas in
the 1995 annual report NetManage did not make this statement.
NetManage's lower than expected fourth quarter results were partly
the result of its improper revenue recognition in these prior
quarters.
63. Due to these improprieties, the Company presented its
results for the second and third quarters of fiscal 1995 in a
manner which violated GAAP. Further, the undisclosed adverse
information concealed by defendants during the Class Period is the
type of information which, because of SEC regulations, regulations
of the national stock exchanges and customary business practice, is
expected by investors and securities analysts to be disclosed and
is known by corporate officials and their legal and financial
advisors to be the type of information which is expected to be and
must b HR>
their access to non-public information as a result of their
positions with the Company, 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 Prices Proceeds Sold
Alon 07-31-95 10,000 $19.00 $ 190,000
08-07-95 20,000 18.88 377,600
08-09-95 2,500 18.75 46,875
08-17-95 10,000 19.00 190,000
08-17-95 15,000 19.50 292,500
08-17-95 17,500 19.50 341,250
08-17-95 25,000 19.13 478,250
10-27-95 20,000 19.00 380,000
10-30-95 10,000 20.00 200,000
10-30-95 20,000 19.50 390,000
10-30-95 20,000 20.00 400,000
10-31-95 35,000 20.75 726,250
10-31-95 2,500 20.38 50,950
10-31-95 10,000 20.50 205,000
11-01-95 22,500 20.38 458,550
TOTAL 240,000 $4,727,225 3%
Ben-Artzi 11-09-95 20,000 20.75 $ 415,000
11-09-95 30,000 20.50 615,000
11-09-95 10,000 20.25 202,500
11-10-95 10,000 21.50 215,000
11-10-95 10,000 22.00 220,000
11-10-95 10,000 21.00 210,000
TOTAL 90,000 $1,877,500 10%
Bosch 08-14-95 9,667 17.88 $ 172,846 100%
Galil 08-18-95 20,000 19.50 $ 390,000
08-21-95 2,500 20.00 50,000
08-24-95 10,000 20.00 200,000
10-26-95 10,000 20.00 200,000
10-30-95 20,000 20.00 400,000
10-31-95 10,000 20.38 203,500
11-03-95 10,000 20.70 207,000
11-14-95 10,000 24.13 241,300
TOTAL 92,500 $1,892,100 14%
Geisler 07-31-95 5,000 18.75 $ 93,750
07-31-95 5,000 18.50 92,500
07-31-95 10,000 19.00 190,000
08-01-95 5,000 18.38 91,900
08-02-95 5,000 18.38 91,900
08-07-95 5,000 18.75 93,750
08-07-95 5,000 19.00 95,000
08-07-95 5,000 18.63 93,150
08-17-95 5,250 19.25 101,063
- 35 -
10-30-95 2,500 20.00 50,000
10-30-95 2,500 20.13 50,325
10-30-95 5,000 19.75 98,750
TOTAL 60,250 $1,142,088 45%
Koretz 07-27-95 5,000 19.25 $ 96,250
07-31-95 10,000 19.00 19,000
08-01-95 12,500 18.38 229,750
08-01-95 5,245 18.25 95,721
08-02-95 42,000 18.25 766,500
08-04-95 20,000 17.50 350,000
08-04-95 20,000 17.63 352,600
08-31-95 60,187 19.25 1,158,600
09-01-95 1,250 19.25 24,063
10-02-95 2,500 23.25 58,125
10-02-95 7,500 23.38 175,350
TOTAL 186,182 $3,496,959 76%
Williams 08-15-95 15,000 17.63 $ 264,450
08-16-95 10,000 17.88 178,800
10-31-95 12,400 20.25 251,100
TOTAL 37,400 $ 694,350 94%
GRAND TOTAL: 715,999 $14,003,067
CLASS ACTION ALLEGATIONS
65. Plaintiffs bring this action as a class action pursuant.
to California Code of Civil Procedure §382 on behalf of all persons
who purchased or otherwise acquired NetManage stock (the "Class")
during the Class Period and were damaged thereby. Excluded from
the Class are the defendants, members of their families and any
entity in which a defendant has an interest.
66. The Class is composed of numerous residents of
California, as well as persons dispersed throughout the United
States, the joinder of whom is impracticable. The disposition of
their claims in a class action will provide substantial benefits to
the parties and the Court. During the Class Period, NetManage had
more than 40 million shares of stock outstanding, owned by hundreds
of shareholders.
67. There is a well-defined community of interest in the
questions of law and fact involved in this case. The questions of
law and fact common to the members of the Class which predominate
- 36 -
over questions which may affect individual class members include
the following:
(a) Whether Cal. Corp. Code §§25400 and 25500 were
violated by defendants;
(b) Whether Cal. Civ. Code §§1709-1710 and Bus. & Prof.
Code §§17200, et seq. were violated by defendants;
(c) Whether defendants omitted and/or misrepresented
material facts in or emanating from California which were
disseminated to the general public;
(d) Whether defendants failed to disclose or aided and
abetted or conspired, directly and indirectly, with one another in
not disclosing material facts necessary to make the statements made
not misleading;
(e) Whether defendants knew, had reason to know or reck-
lessly disregarded that their statements were false and misleading
or failed to have a reasonable basis for those statements;
(f) Whether the price of NetManage stock was artifi-
cially inflated during the Class Period; and
(g) The extent of damage sustained by Class members and
the appropriate measure of damages.
68. Plaintiffs' claims are typical of those of the Class
because plaintiffs and the Class sustained damages from defendants'
wrongful conduct.
69. The prosecution of separate actions by individual Class
members would create a risk of inconsistent and varying
adjudications.
70. Plaintiffs will adequately protect the interests of the
Class. Plaintiffs have retained counsel who are experienced in
- 37 -
class action securities litigation. Plaintiffs have no interests
which conflict with those of the Class.
71. A class action is superior to other available methods for
the fair and efficient adjudication of this controversy.
FIRST CAUSE OF ACTION
Violation Of §§25400 And 25500 Of
The California Corporations Code
72. Plaintiffs incorporate ¶¶1-71.
73. Acting individually and pursuant to a scheme and
conspiracy, defendants, directly and indirectly, induced the
purchase of NetManage stock by plaintiffs and members of the Class
by, circulating or disseminating, in or from California, false
information about NetManage which inflated its stock price.
Defendants made, for the purpose of inducing the purchase of
NetManage stock by plaintiffs and other members of the Class,
statements which were, at the time and in light of the circum-
stances under which they were made, false or misleading with
respect to such material facts, or which 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
which defendants knew or had reasonable grounds to believe were
false and misleading.
74. Plaintiffs and the members of the Class purchased
NetManage stock at prices which were affected by defendants' scheme
and sustained substantial damages as a result of defendants' acts,
because, in reliance on the integrity of the market, they paid
artificially inflated prices for NetManage stock. Plaintiffs and
the members of the Class would not have purchased NetManage stock
- 38 -
at the prices they paid, or at all, if they had been aware that the
market price had been artificially and falsely inflated by
defendants' misleading statements and concealments. At the time of
the purchases by plaintiffs and the members of the Class of
NetManage stock, the fair market value of said stock was
substantially less than the prices paid by them.
75. By reason of the foregoing, defendants violated §25400 of
the Cal. Corp. Code, thereby entitling the members of the Class to
recover damages pursuant to §25500.
SECOND CAUSE OF ACTION
Violation Of §§1709-1710 Of
The California Civil Code
76. Plaintiffs incorporate ¶¶1-75.
77. Defendants willfully deceived plaintiffs and other
members of the Class, and intentionally induced them to purchase or
otherwise acquire NetManage stock at artificially inflated prices,
by employing a scheme and conspiracy to defraud plaintiffs and the
Class members in violation of California law. As part of their
scheme, defendants knowingly suppressed true material facts and/or
gave information of other facts which was likely to mislead, for
want of communications of the true facts, as set forth above. Said
representations and statements were not true and defendants either
did not believe them to be true or had no reasonable grounds for
believing them to be true. Said acts by defendants were made
negligently, without any reasonable grounds and/or were fraudulent,
oppressive and malicious.
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78. Plaintiffs and the Class members each relied on one or
more of the false statements alleged herein and were damaged
thereby.
79. By reason of the foregoing, defendants violated §§1709-
1710 of the California Civil Code.
THIRD CAUSE OF ACTION
Unlawful, Unfair Or Fraudulent Business Practices
In Violation Of California Business & Professions
Code §§17200, et seq.; False Or Misleading
Advertising In Violation Of California Business
& Professions Code §§17500, et seq.
80. Plaintiffs incorporate ¶¶1-79.
81. California Business & Professions Code §17200 prohibits
acts of unfair competition, which includes "any unlawful, unfair or
fraudulent business act or practice . . . ."
82. Defendants' misrepresentations and nondisclosures of
material facts, during the Class Period and continuing to this
date, are prohibited by California Corporations Code §25400,
California Civil Code §§1572, 1709 and 1710, as well as principles
of common law. Accordingly, defendants have violated Business &
Professions Code §17200's proscription against engaging in an
unlawful business act or practice.
83. Defendants' misrepresentations and nondisclosures of
material facts during the Class Period also constitute an unfair
business act or practice within the meaning of Business &
Professions Code §17200 because defendants were aware (or should
have been aware) at all relevant times that the Company's
operations, performance and expected EPS were not as represented.
No justification existed for defendants' misrepresentations and
failures to disclose material facts.
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84. Defendants' misrepresentations and nondisclosures of
material facts during the Class Period also constitute a fraudulent
business act or practice within the meaning of Business &
Professions Code §17200. Defendants' conduct had a tendency to
deceive the investing public because defendants:
(a) Misrepresented the quality of the solicited
investment; and
(b) Failed to disclose material facts necessary to make
the statements which were made not misleading.
85. Defendants' use of various forms of marketing to falsely
advertise, call attention to, or give publicity to the sale of
shares of NetManage's common stock by, inter alia, untrue and/or
deceptive representations as to the nature and quality of the
investment and NetManage's business and business prospects consti-
tutes false or misleading advertising within the meaning of
Business & Professions Code §§17500, et seq. because defendants
either knew or reasonably should have known that such advertising
was untrue and/or misleading. Necessarily, defendants violation of
§§17500, et seq. also constitutes a violation of Business &
Professions Code §§17200, et seq.
86. Accordingly, because defendants have committed unlawful,
unfair and/or fraudulent business acts or practices in violation of
Business & Professions Code §17200, and engaged in false and
misleading advertising in violation of Business & Professions Code
§§17500, et seq., plaintiffs, the members of the class and the
general public are entitled to relief under §17203 and §17535 which
may include (1) orders or judgments enjoining defendants from
engaging in further unlawful, unfair or fraudulent acts or
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practices, or (2) orders of disgorgement or restitution to prevent
defendants from retaining any, money or property -- including
profits from insider trading -- obtained by means of their
unlawful, unfair or fraudulent acts or practices. Plaintiffs
additionally request that such money or property be impounded by
this Court, or that an asset freeze or constructive trust be
imposed upon such revenues and profits, to avoid dissipation and/or
fraudulent transfers or concealment of such monies by defendants.
Plaintiffs, the members of the Class and the general public may be
irreparably harmed and/or denied an effective and complete remedy
if such an order is not granted.
BASIS OF ALLEGATIONS
87. Plaintiffs have alleged the foregoing based upon the
investigation of their 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.
Substantial evidentiary support will exist for the allegations set
forth herein after a reasonable opportunity for discovery.
PRAYER FOR RELIEF
WHEREFORE, plaintiffs pray for judgment as follows:
1. Declaring this action to be a proper class action on
behalf of the Class defined herein;
2. Awarding plaintiffs and the members of the Class
compensatory and/or punitive damages;
3. Awarding plaintiffs and the members of the Class
pre-judgment and post-judgment interest, as well as reasonable
attorneys' fees, expert witness fees and other costs;
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4. Awarding extraordinary, equitable and/or injunctive
relief as permitted by law, equity and the appropriate state law
remedies; and
5. Awarding such other relief as this court may deem just
and proper.
JURY DEMAND
Plaintiffs demand a trial by jury.
DATED: January 9, 1997
MILBERG WEISS BERSHAD
HYNES & LERACH LLP
WILLIAM S. LERACH
ALAN SCHULMAN
BLAKE M. HARPER
/s/
_____________________________
BLAKE M. HARPER
600 West Broadway, Suite 1800
San Diego, CA 92101
Telephone: 619/231-1058
LAW OFFICES OF ALFRED G.
YATES, JR.
ALFRED G. YATES, JR.
519 Allegheny Building
429 Forbes Avenue
Pittsburgh, PA 15219
Telephone: 412/391-5164
SCHIFFRIN & CRAIG, LTD.
RICHARD S. SCHIFFRIN
ANDREW L. BARROWAY
Three Bala Plaza East
Suite 400
Bala Cynwyd, PA 19004
Telephone: 610/667-7706
FARUQI & FARUQI, LLP
NADEEM FARUQI
415 Madison Avenue
21st Floor
New York, NY 10017
Telephone: 212/986-1074
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WEISS & YOURMAN
KEVIN J. YOURMAN
10940 Wilshire Blvd.
24th Floor
Los Angeles, CA 90024
Telephone: 310/208-2800
WEISS & YOURMAN
JOSEPH H. WEISS
551 Fifth Avenue
Suite 1600
New York, NY 10176
Telephone: 212/682-3025
Attorneys for Plaintiffs and
the Class
- 44 -
Source: Scanned paper copy of court-stamped document