MILBERG WEISS BERSHAD
HYNES & LERACH LLP
WILLIAM S. LERACH (68581)
ALAN SCHULMAN (128661)
BLAKE M. HARPER (115756)
600 West Broadway, Suite 1800
San Diego, CA 92101
Telephone: 619/231-1058
DYER DONNELLY & LILLEY
ROBERT J. DYER III
825 Logan Street
Denver, CO. 80203-3114
Telephone: 303/861-3003
LAW OFFICES OF JAMES V.
BASHIAN, P.C.
JAMES V. BASHIAN
500 Fifth Avenue
Suite 2700
New York, NY 10110
Telephone: 212/921-4110
Attorneys for Plaintiffs
SUPERIOR COURT OF THE STATE OF CALIFORNIA
COUNTY OF SANTA CLARA
INTERACTIVE DATA SYSTEMS, INC., ) Case No. CV764945
JOSEPH MOLINARI and JULIE MARSHALL, ) [filed Mar. 21, 1997]
On Behalf of Themselves and All ) CLASS ACTION
Others Similarly Situated, )
) COMPLAINT FOR DAMAGES BASED
Plaintiffs, ) UPON:
)
vs. ) (1) VIOLATION OF CAL.
) CORP. CODE §§25400 AND
NETMANAGE, INC., ZVI ALON, WALTER ) 25500;
AMARAL, UZIA GALIL, ROBERT ) (2) VIOLATION OF CAL. CIV.
WILLIAMS, DARRELL MILLER and DAN ) CODE §§1709-1710; AND
GEISLER, ) (3) VIOLATION OF CAL. BUS.
) & PROF. CODE §§17200,
Defendants. ) ET SEQ.
___________________________________ )
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
April 18, 1996 and July 18, 1996, inclusive (the "Class Period"),
seeking to remedy violations of California state law by the Company
and certain of its insiders, which violations involve the issuance
of falsely positive statements combined with massive insider
trading by the individual defendants. 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, 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 and has further
declined to as low as $3-7/32. In addition, defendants registered
1,243,292 shares for sale by insiders of certain companies acquired
by NetManage, to permit those persons to sell their stock in the
open market and cash out of NetManage at an attractive price.
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
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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 was growing at an
enormously rapid rate. 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, 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 1995, however, NetManage's growth rate was
beginning to slow due to several factors. First, Microsoft was set
to release Windows 95, which would contain 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
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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. 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
issued, 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 so they began to "manage" NetManage's
stock price gradually lower. Defendants therefore began to suggest
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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 it 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 signifi-
cantly 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 stock in NetManage they had only
recently obtained in the sale of their companies to NetManage
plummeted to a fraction of its price at the time of the
acquisitions. To placate these large shareholders and to avoid
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being sued by them, defendants filed a Registration Statement for
their shares on April 8, 1996 and 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 so
that defendants could sell shares of their own stock at inflated
prices. On April 18, 1996, the Boston Group LP issued a very
positive research report based on false information given to them
by defendants, representing that NetManage's stock price should
reach $18-$20 per share within 4-6 months as a result of NetManage
increasing its shares of the Intranet market 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 17, 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 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
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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 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.
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12. The chart below shows the performance of NetManage's
stock during the Class Period, while defendants were issuing their
false and misleading statements:
NetManage, Inc.
April 18, 1996 - September 10, 1996
Daily Stock Prices and Volumes
13. Taking advantage of NetManage's inflated stock price, the
individual defendants sold substantial amounts of their NetManage
stock at inflated prices, wilfully participating in the issuance of
the misrepresentations and omissions, and thereby inducing Class
members to purchase NetManage stock at inflated prices:
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% 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 on June 19 to as low as $10-3/8 on June 20, 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 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 plunged 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.
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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 March 19, 1997, NetManage's stock ended trading at
$3-11/32 per share.
JURISDICTION AND VENUE
16. 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
§§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.
17. 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 $75,000 exclusive of interest and costs. This
action is not removable to federal court.
THE PARTIES
18. (a) Plaintiff Interactive Data Systems, Inc. purchased
500 shares of NetManage stock on April 29, 1996 at $13-1/4 per
share and was damaged thereby.
(b) Plaintiff Joseph Molinari 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
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$16-3/8 per share, and 4,000 shares on July 2, 1996 at $11-1/2 per
share and was damaged thereby.
(c) Plaintiff Julie Marshall purchased 600 shares of
NetManage stock on May 20, 1996 at $16-5/8 per share and was
damaged thereby.
19. 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.
20. (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
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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 ad verse 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
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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 network company, in numerous positions
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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 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
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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 ¶20(a)-(f) are referred to
herein as the "Individual Defendants."
21. Defendant Alon, by reason of his position as CEO and as
a director of NetManage, was a controlling person 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
22. 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.
23. Each of the defendants is liable as a primary violator in
making false and misleading statements, and for participating in a
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fraudulent scheme and/or conspiracy and/or aiding and abetting in
a scheme 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.
24. 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.
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NETMANAGE AND ITS INSIDERS' ACTUAL KNOWLEDGE
OR RECKLESS DISREGARD OF THE UNDISCLOSED ADVERSE
CONDITIONS IMPACTING NETMANAGE'S BUSINESS
25. 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 1996.
These reporting packages also include information regarding the
sales of Chameleon, ECCO, and other products.
26. 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 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 recklessly
disregarded that the non-forward-looking statements issued during
the Class Period about NetManage were false and misleading when
made.
BACKGROUND TO THE CLASS PERIOD
27. 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
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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 and to avoid being sued by
them, 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 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."
FALSE AND MISLEADING
STATEMENTS DURING THE CLASS PERIOD
28. On April 18, 1996, based on communications with
defendants, Boston Group LP initiated coverage of NetManage stock
with a buy rating and indicated that it should reach $18-$20 per
share in 4-6 months as a result of increasing its share of the
Intranet market 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
- 17 -
$9-29/32 per share to close at $11-1/4 on April 18 and $13-11/16
per share on April 19, 1996.
29. On April 24, 1996, NetManage issued a press release
announcing its first quarter 1996 results of operations, 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 represented: "'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.'"
30. 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
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$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.
31. 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.
32. 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 indicated 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.
33. On May 21, 1996, Smith Barney issued a summary of the
Smith Barney Technology Conference in which it indicated that Smith
Barney remained positive on NetManage's turnaround and was looking
- 19 -
for good second quarter 1996 results and better second half 1996
comparisons.
34. 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.
35. By mid-June 1996, defendants knew that NetManage would be
required to report a significant shortfall in revenues for the
quarter ended June 30, compared to the 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.
36. 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
- 20 -
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."
37. 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.
38. 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 on
June 20, 1996 before closing at $11-5/16 on huge volume of
3,159,000 shares traded.
39. 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."
- 21 -
40. 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."
41. 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.
42. 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 $4 per share.
DEFENDANTS' INSIDER SELLING
43. 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
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NetManage's stock price their fraud had created. Notwithstanding
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 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
======= ==========
CLASS ACTION ALLEGATIONS
44. 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.
- 23 -
45. 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.
46. 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
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 Cal. 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
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(g) The extent of damage sustained by Class members and
the appropriate measure of damages.
47. Plaintiffs' claims are typical of those of the Class
because plaintiffs and the Class sustained damages from defendants
wrongful conduct.
48. The prosecution of separate actions by individual Class
members would create a risk of inconsistent and varying
adjudications.
49. Plaintiffs will adequately protect the interests of the
Class. Plaintiff s have retained counsel who are experienced in
class action securities litigation. Plaintiffs have no interests
which conflict with those of the Class.
50. 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
51. Plaintiffs incorporate ¶¶1-50.
52. 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
- 25 -
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.
53. 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
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.
54. 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
55. Plaintiffs incorporate ¶¶1-50.
56. 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
- 26 -
scheme, defendants knowingly suppressed true material facts and/or
gave information of other facts which was likely to mislead, for
want of communication 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.
57. Plaintiffs and the Class members each relied on one or
more of the false statements alleged herein and were damaged
thereby.
58. 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.
59. Plaintiffs incorporate ¶¶1-50.
60. California Business & Professions Code §17200 prohibits
acts of unfair competition, which includes "any unlawful, unfair or
fraudulent business act or practice . . . ."
61. 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, §10(b) and §20A of the
Securities and Exchange Act of 1934, as well as principles of
common law. Accordingly, defendants have violated Business &
- 27 -
Professions Code §17200's proscription against engaging in an
unlawful business act or practice.
62. 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 earnings per share were not as
represented. No justification existed for defendants' misrepre-
sentations and failures to disclose material facts.
63. 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.
64. 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
- 28 -
of §§17500, et seq. also constitutes a violation of Business &
Professions Code §§17200, et seq.
65. 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
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
66. 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.
- 29 -
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;
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: March 20, 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
- 30 -
DYER DONNELLY & LILLEY
ROBERT J. DYER III
825 Logan Street
Denver, CO 80203-3114
Telephone: 303/861-3003
LAW OFFICES OF JAMES V.
BASHIAN, P.C.
JAMES V. BASHIAN
500 Fifth Avenue
Suite 2700
New York, NY 10110
Telephone: 212/921-4110
Attorneys for Plaintiffs
- 31 -
Source: Scanned paper copy of court-stamped document