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Stanford University Law School
- Securities Class Action Clearinghouse
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MILBERG WEISS BERSHAD
HYNES & LERACH LLP
WILLIAM S. LERACH (68581)
ALAN SCHULMAN (128661)
DARREN J. ROBBINS (168593)
600 West Broadway, Suite 1800
San Diego, CA 92101
Telephone: 619/231-1058
-and-
JOHN E. GRASBERGER (89774)
REED R. KATHREIN (139304
222 Kearny Street, 10th Floor
San Francisco, CA, 94108
Telephone: 415/288-4545
STEVEN E. CAULEY, P.A.
STEVEN E. CAULEY
SCOTT E. POYNTER
JAMES K. HATCHER
Suite 218, Cypress Plaza
2200 Rodney Parham Road
Little Rock, AR 72212
Telephone: 501/312-8500
Attorneys for Plaintiff
SUPERIOR COURT OF THE STATE OF CALIFORNIA
COUNTY OF SANTA CLARA
DAVID T. O'NEAL TRUST, DATED ) Case No. CV767266
4/l/77, On Behalf of Itself and All ) [filed Jul. 3, 1997]
Others Similarly Situated,. ) CLASS ACTION
)
Plaintiff, )
) COMPLAINT FOR DAMAGES
vs. ) BASED UPON:
)
VANSTAR CORPORATION, RICHARD H. ) (1) VIOLATION OF CAL.
BARD, WILLIAM Y. TAUSCHER, JAY S. ) CORP. CODE §§25400 AND
AMATO, ROBERT C. KUNTZENDORF, ) 25500;
JEFFREY S. RUBIN, RICHARD N. ) (2) VIOLATION OF CAL. CIV.
ANDERSON, CHRIS M. LANEY, MICHAEL ) CODE §§1709-1710; AND
J. MOORE, AHMAD MANSHOURI, COLEMAN ) (3) VIOLATION OF CAL. BUS.
D. SISSON, THANOS M. TRIANT, E.M. ) & PROF. CODE §§17200,
WARBURG, PINCUS & CO.; INC., ) ET SEQ.
WARBURG PINCUS & CO., WARBURG )
PINCUS CAPITAL CO., L.P., STEWART )
K. P. GROSS, WILLIAM H. JANEWAY, )
JOHN L. VOGELSTEIN, ROBERTSON )
STEPHENS & CO., ALEX. BROWN & SONS, )
INC. and THE ROBINSON-HUMPHREY CO., )
INC., )
)
Defendants. ) Plaintiff Demands A
____________________________________) Trial By Jury
SUMMARY OF ACTION
1. This is a class action on behalf of all purchasers of the
common stock of VanStar Corporation ("VanStar" or the "Company")
between Mar. 11, 1996 and Jan. 23, 1997 (the "Class Period"). This
action arises out of a fraudulent scheme by VanStar, its
controlling shareholders, insiders and investment bankers to
misrepresent VanStar's business and prospects, enabling defendants
to take VanStar public, at $10 per share, raising $74.7 million for
VanStar, to reduce VanStar's crushing debt burden and
simultaneously create a trading market in VanStar stock so that
when defendants drove VanStar stock toward its Class Period high of
$29-3/4 per share, certain VanStar insiders could sell off over
665,000 shares of their VanStar stock at as high as $25-88 per
share, pocketing about $15 million, to sell securities convertible
into its common stock to raise an additional $200 million to
further reduce its debt burden and to issue (sell) an additional
1.3 million shares of its stock to make three acquisitions -- all
in just nine months. But, then in late Jan. 1997, when defendants
revealed weak demand for VanStar's computer products, VanStar's
impaired competitive position, the slowing growth of its services
business, its failure to complete the development or implementation
of its NOVA system and that its inability to control its rapidly
escalating overhead expenses would result in sharply declining
earnings per share ("EPS") and diminished prospects for future EPS
growth, VanStar's stock collapsed to $6-1/2 per share.
2. VanStar sells computer products and services to corporate
customers. It integrates, services and supports PC network
infrastructures, i.e., desktop PCs, their connections to a local or
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wide area network, and the network themselves. VanStar sells the
management of what it calls the PC/network "Lifecycle" from (1) the
decision to buy the network platforms (Consulting and Design) to
(2) buying and delivering the hardware (Acquisition and Deployment)
to (3) operating and maintaining the desktop PCs and the related
network (Operations and Support) to (4) starting the cycle over by
deciding to upgrade PCs or the network platform (Enhance and
Migrate).
3. VanStar is the successor of ComputerLand, a seller of
computer products and franchiser of retail computer stores which
became virtually insolvent in 1985-1986 due to mismanagement,
executive in-fighting and other problems. In 1987, William
Tauscher ("Tauscher"), Richard Bard ("Bard") and Warburg (as
defined in ¶33 below) received 2.2 million, 1.3 million and 13.8
million shares of ComputerLand stock, respectively, for $81
million. They later sold ComputerLand's franchise and distribution
business, acquired computer service businesses from Nynex and re-
named ComputerLand VanStar. However, VanStar's business continued
to be troubled and lost almost $80 million from operations in 1992-
1994, while accumulating a huge debt resulting in annual interest
costs of $33 million.
4. By Jan. 1996, VanStar's controlling shareholders feared
VanStar was on the verge of a collapse, which would wipe out their
$81 million investment in the Company. As of Oct. 31, 1995,
VanStar had $744 million in total assets and $714 million in total
liabilities, including long-term debt of $361 million. The book
value of Warburg's, Tauscher's and Bard's shares of VanStar stock
was a negative ($0.19) per share. Compounding the difficulties
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presented by VanStar's extreme leverage was the fact that VanStar's
product sales business had tiny gross margins (less than 10%), yet
was very capital intensive, in that VanStar, as a "reseller" of
computer products, had to purchase and maintain a large inventory
of computer products in order to be able to "resell" those products
to its customers. Because VanStar was chronically under-
capitalized, it had to borrow large amounts to finance its working
capital needs. VanStar obtained the majority of its financing
needs through a line of credit agreement with IBM Credit Corp.
("IBMCC"), which carried very expensive variable interest rates.
By early 1996, VanStar had to have its IBMCC credit line expanded
to keep operating but then exhausted $447 million of its expanded
$450 million IBMCC credit line and was in desperate need of cash,
as it was in technical default of its IBMCC facility, had failed to
repay $2.46 million it owed to Nynex, and VanStar's suppliers were
threatening to refuse to ship product to it, as they had in the
past. In short, VanStar was virtually out of cash and could not
obtain any more credit from IBMCC, its suppliers or banks.
5. By Jan. 1996, VanStar's controlling shareholders realized
that if they were to avoid the financial collapse of VanStar and
the loss of their $81 million investment, they needed to raise
large amounts of cash to pay down and/or re-finance VanStar's
oppressive debt and create a trading market in its common stock so
they could then sell more VanStar stock or securities convertible
into VanStar stock to raise more cash to reduce its debt further
and use its freely tradeable stock to acquire other, more
profitable businesses. VanStar's controlling shareholders realized
that an initial public offering ("IPO") of VanStar stock was the
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only hope for them to salvage their investment in VanStar, as only
by way of an IPO could VanStar raise a large amount of cash to
reduce its debt and its huge interest payments, boosting the book
value of the VanStar shares owned by them back into positive
territory. Second, only an IPO would create the trading market in
VanStar's stock they needed to be able to sell more VanStar equity
securities in the near term to raise additional cash to refinance
the Company's remaining debt and reduce its interest payments on
its variable rate IBMCC facility. Third, only the trading market
in VanStar stock which would result from the IPO would permit
certain VanStar insiders to sell off their VanStar stock as the
solution to their dilemma.1
6. For the fiscal year ended Apr. 30, 1995, VanStar managed
to eke out a tiny net income of just $1.2 million or $.04 per share
on sales of $1.3 billion. However, VanStar's apparent reaching of
profitability in 1995 provided the opportunity for VanStar, its
controlling shareholders, insiders and investment bankers to take
advantage of VanStar's achievement of profitability by taking
VanStar public. VanStar's controlling shareholders and insiders
hurried to take VanStar public as soon as they could in 1996, as
they realized that certain adverse facts concerning VanStar's
business could not be concealed indefinitely and if those facts
became known, it would prevent an IPO, leave VanStar's controlling
shareholders locked in their unfavorable and illiquid investment
____________________
1 It is customary in IPOs for the controlling shareholders and
corporate insiders to agree not to sell any of their stock in the
corporation for 180 days after the offering. This is known a
"lock-up" agreement.
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position, result in VanStar's insolvency and the loss of their $81
million investment.
7. To accomplish their scheme, VanStar's insiders and
controlling shareholders sought out investment bankers to help
them. They contacted Robertson Stephens & Co. ("Robertson
Stephens"), Alex. Brown & Sons, Inc. ("Alex. Brown") and The
Robinson-Humphrey Co., Inc. ("Robinson-Humphrey") (collectively the
"Underwriter Defendants"), and determined that they were willing to
participate in the scheme by merchandising VanStar stock in an IPO,
including orchestrating a pre-IPO "Roadshow" to stimulate interest
in the IPO, by issuing favorable research reports on VanStar after
the IPO to boost VanStar's stock price (known as "booster shots")
and by helping to coordinate the insiders' sales of their VanStar
stock in the aftermarket to minimize the impact of those sales on
the stock's price, thus maximizing the insiders' take. In return,
Robertson Stephens, Alex. Brown and Robinson-Humphrey would pocket
millions of the IPO proceeds as the lead underwriters on the IPO
and make millions more later by acting as marketmakers in VanStar
stock, by helping VanStar sell more equity securities, by helping
VanStar acquire other companies and by coordinating the sales of
the VanStar insiders' stock. However, before Robertson Stephens,
Alex. Brown and Robinson-Humphrey would go along with the scheme,
they extracted an agreement that VanStar would indemnify and hold
them harmless from suits for any false statements in connection
with the IPO and also made certain that VanStar had also purchased
millions in directors' and officers' liability insurance. As
VanStar was going to pocket some $75 million from the IPO, these
proceeds, plus the directors' and officers' liability insurance
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coverage, would provide the underwriters with a large financial
buffer to protect them from any adverse consequences of their
illegal conduct, thus permitting them to participate in the scheme
with impunity.
8. In early 1996, the defendants were hard at work to
accomplish the VanStar IPO, which was central to their scheme and
would raise the large amount of cash VanStar desperately needed in
the short term to survive. However, the defendants realized that
VanStar could face great difficulty in marketing an IPO, as VanStar
was barely profitable despite over $1 billion in annual sales, was
very highly leveraged due to its excessive debt, and that, even
after a large and successful IPO, VanStar would still have to
borrow over $200 million in order to finance its huge working-
capital requirements. Moreover, the defendants wanted to raise the
large amounts of cash needed without issuing so many shares that
they would unduly dilute the ownership stake of VanStar's
controlling shareholders and, to do this, they wanted to sell
VanStar stock in the IPO at as high a price possible to minimize
the number of shares sold. However, in order to justify a high
price for VanStar's stock in the IPO, they knew they would have to
persuade investors that VanStar was no longer merely a reseller of
computer products, a very capital-intensive/low-profit-margin
business, but was becoming more of a provider of computer services,
a service business which required less capital and produced
significantly higher profit margins and that, as a result, VanStar
was transforming into a high-profit-margin, less capital-intensive
business, which would be able to achieve consistent revenue and EPS
growth in the future.
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9. In order to create the kind of intense investor interest
in the VanStar IPO necessary to sell the over 14 million shares to
be marketed, the defendants knew that a publicity campaign to
distribute very favorable information about VanStar's business and
prospects was necessary. Thus, the Underwriter Defendants
organized and scheduled a nationwide "roadshow" to take place prior
to the IPO where VanStar's top executives would meet with institu-
tional investors, money and portfolio managers, brokers and poten-
tial investors and make presentations about VanStar's business,
which would include a "slide show" and much information, including
EPS forecasts, that was not to be included in the IPO Prospectus.
The roadshow took place from Feb. 15 through Mar. 1, 1996, and
included presentations in Boston, New York City, Houston, Chicago,
San Francisco and Los Angeles at locations selected by the
Underwriter Defendants. The presentations were made by Tauscher,
Jeffrey Rubin and Jay Amato.
10. During the Roadshow presentations in connection with
VanStar's IPO, in New York, Boston, Chicago, Los Angeles and San
Francisco during Feb. 15, 1996-Mar. 1, 1996, Tauscher, Rubin and
Amato stated:
• VanStar was transforming itself into a higher-profit
service provider that would be able to achieve consistent EPS
growth in the future, and was becoming less and less dependent
upon the sales of product to generate income.
• VanStar was not encountering any difficulty in obtaining
the computer products necessary to meet the very strong demand
it was encountering from its customers.
• VanStar was successfully completing the final development
and implementation of its NOVA system, which would be
installed and operational by Apr. 30, 1996.
• There would be a huge impact on gross margins from NOVA.
NOVA benefitted margins in three ways:
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• One, NOVA allowed VanStar to manage its entire parts
logistics centrally, electronically, and seamlessly with
its vendors. A big part of the gross margins in life
cycle services was the whole costs of goods with parts.
NOVA would lower costs and thereby boost margins.
• Second, because a part of gross margin was the
utilization of the field engineering group which was
fundamentally a scheduling phenomenon, NOVA would, as a
very smart scheduling system, one without any
intermediaries between the field engineer and the central
scheduling, eliminate VanStar's intermediaries, cut costs
and boost margins. There was an army of schedulers and
logistic people in the branches that would be eliminated
as VanStar brought NOVA up, cut costs and boosted
margins.
• Third, the benefits from NOVA would be seen in the
reduction of indirect expense for the schedulers and for
the logistics people. This business had low 30% margins
that would improve into the mid to high 30% range as a
result of a full NOVA implementation.
• VanStar expected to achieve sequential quarterly revenue
and EPS growth throughout Fiscal 1997 ("F97") to end Apr.
1997, with F97 EPS to be at least $.95-$1.00.
11. VanStar's IPO was scheduled for Mar. 8, 1996, when
Defendants planned to sell shares to the public at $12.50 per
share. However, on Mar. 8, 1996, the Dow Jones Industrial Average
fell 171.24 points -- its third largest decline in history -- and
the defendants could not complete VanStar's IPO on that date.
VanStar, however, was in such desperate need of cash, that
defendants proceeded with VanStar's IPO on the next trading day,
Mar. 11, 1996, at only $10 per share, despite these adverse market
conditions.2
12. VanStar's Prospectus represented the following with
regard to its new NOVA system:
____________________
2 In the VanStar IPO, VanStar sold 8 million shares for net
proceeds of $74.7 million. Nynex, Inc., a large VanStar
shareholder, sold 6.7 million shares for net proceeds of $63.2
million. The underwriters took $9.7 million of the IPO proceeds.
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VanStar's NOVA system is a proprietary service delivery
system for the management of the Company's systems
engineering, help desk, dispatch, repair, installation,
moves/adds/changes and asset management service
offerings. The Company expects NOVA to be implemented
during the second half of fiscal 1996 [i.e., by April 30,
1996].
13. During the Class Period, defendants repeatedly made false
and misleading statements about VanStar's NOVA system, its
"proprietary service delivery system." Initially, defendants
represented that VanStar "expect[ed] NOVA to be implemented" during
the "second half of fiscal 1996," i.e., by April 30, 1996, and that
when implemented, NOVA would result in "lower costs," and a "signi-
ficant reduction in personnel costs" for VanStar. According to
defendants, the final development and implementation of NOVA was
going according to plan and they expected VanStar's profit margins
to expand due to the benefits of the NOVA system.
14. When a delay in the implementation of the NOVA system was
first revealed in May 1996, defendants assured investors that the
system "[was] complete," but there would be a "slight[] delay[]" in
implementation and that the system would be "deployed during the
summer." Later in 1996, defendants represented that the rollout of
the NOVA system was in progress and would help VanStar's profit
margins and that VanStar's effective utilization of management
systems and the productivity improvements undertaken in the last
few years were "paying big dividends [and will] reduce the relative
cost of SG&A." As 1996 unfolded, defendants continued to represent
that progress was being made in implementing the NOVA system, that
it would be 50% rolled out by Dec. 1996 and fully implemented by
the end of F97, i.e., April 30, 1997, and that they expected "NOVA
to drive profitability."
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15. During most of the Class Period, defendants represented
that they were obtaining sufficient supplies of computer hardware
products to meet customer demand. Then, even in the latter part of
1996, when they admitted those shortages did impact VanStar, they
repeated that the shortages were not significant and would not
adversely impact VanStar's results from operations. For instance,
they stated "[w]e're not seeing this terrible product problem
people are talking about. . . . Sales are strong." They also
stated, "we are not seeing any real difference in our business
compared to normal practices." In later 1996, when defendants did
disclose that supply of product was not keeping up with demand and
that this would lead to somewhat lower than expected product sales,
they assured investors that this would be "offset by much stronger-
than-expected gross margin." Throughout this period, defendants
assured investors that "demand [was] not an issue," and that late
in the Class Period there had been an improvement in product
availability and supply and that product constraint was starting to
ease, while VanStar's order rates remained strong and thus, VanStar
would achieve strong EPS growth in the 3rdQ and 4thQ of F97.
16. Defendants were also very bullish with respect to
VanStar's network integration and service businesses, representing
that in 1996 they had "begun to fulfill the promises made to
investors during our public offering," that they saw "no problem in
sustaining services rate of growth" and that the "rapidly growing
Professional Services . . . business is providing an increasingly
important contribution to [VanStar's] revenue and margin growth."
The defendants also represented that VanStar was succeeding in
controlling its expenses, which would also contribute to its EPS
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growth. They said that "VanStar is a lean, mean machine when it
comes to product distribution," was successfully controlling its
SG&A costs, that their "sharp focus on expense control" "enabled us
to steadily increase our profitability," and that "[t]his move[s]
VanStar into a position as one of the most profitable companies in
our marketplace." As a result, VanStar should meet its goal of
lowering costs to generate a 4% operating margin in the second half
of fiscal 1997. As the Class Period unfolded, defendants
represented that VanStar "continue[d] to hold the line on [SG&A
expenses] as we reap the benefits of management systems and
operational improvements put into place in the past four years."
17. As a result of these positive representations and
assurances, defendants were able to credibly forecast strong
revenue and EPS growth for VanStar in F97 and F98. They assured
investors that "results in all our key business areas were strong,"
that they were "encouraged by our company's fundamental growth in
revenues and income," and our "basic businesses are all moving
along nicely." They also described VanStar's business as "totally
hot," said that VanStar was "in the sweet spot of the corporate
business market," and that "the current tone of business remains
strong." They also assured investors that they expected VanStar's
"gross margins . . . to remain stable" and "[did] not see a problem
with sustaining the present rate of network services growth."
According to defendants, "[w]e [have] assembled exactly the right
people, systems and processes needed to manage all aspects of PC
network infrastructures across the enterprise." Thus, defendants
said "we expect continued and substantial growth in both revenues
and profitability" for VanStar due, in part, to "explosive growth
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in client demand," which demand they represented remained "robust"
throughout the Class Period. They told investors that "sales [are]
. . . not a concern. 'We continue to outgrow the market place and
gain share.'" And thus, the "future of the company . . . looks
bright, . . . [we] continue to outgrow the market place and gain
share . . . [and we] expect over-all growth rates to remain in the
20 percent to 30 percent range." Based on the foregoing,
defendants represented that VanStar would achieve F97 EPS of $.99-
$1.10 per share, including 3rdQ and 4thQ F97 EPS of $.27-$.32 and
$.31-$.33, respectively, and F98 EPS of over $1.35. And, even late
in the Class Period, when rumors circulated of softness in
VanStar's business, they assured analysts that their 3rdQ EPS would
be at least $.27 per share.
18. Defendants' false and misleading statements after the IPO
caused VanStar's stock price to increase. As the price of VanStar
common stock increased, defendants further implemented their
scheme. Armed with cash from its IPO and freely tradable stock,
VanStar went on an acquisition binge. In May 1996, VanStar
acquired Dataflex Corporation for $37 million in cash. On Sept. 4,
1996, VanStar acquired Mentor Technologies for 300,000 shares of
VanStar stock, a transaction valued at $6 million, or $20 per
share. On Dec. 16, 1996, VanStar acquired National Technology
Group/Contract Data Services for 952,491 shares of stock, a
transaction valued at $21.9 million, or $23 per share. On Jan. 9,
1997, VanStar acquired inventory and equipment from DCT Systems,
Inc. for $4.0 million and up to 180,000 shares of VanStar stock.
19. As VanStar reported strong revenue and EPS growth,
defendants took advantage of VanStar's soaring stock price to sell
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VanStar convertible debentures to private investors to re-finance
VanStar's high cost IBMCC variable rate debt with this much lower
cost, fixed-rate debt on an equity security convertible into
VanStar's common stock. In fact, VanStar's strong results and
soaring stock price enabled defendants to increase the size of
VanStar's convertible bond sale to over $200 million from the $125
million originally planned. Also, as VanStar's stock price climbed
toward all-time high levels upon the expiration of the "lock-up" on
Sept. 11, 1996, certain of the Individual Defendants began to sell
off their VanStar stock. During Sept. 1996, Richard N. Bard sold
420,596 VanStar shares, 58% of the stock he actually owned, at $23-
$24.50 per share, reaping more than $9.8 million; Robert C.
Kuntzendorf sold 69,999 VanStar shares for $20 a share, 94% of the
stock he actually owned, for over $1.3 million; Richard N. Anderson
sold 48,940 VanStar shares at between $18.54-$18.75 per share, 98%
of the stock he actually owned, for over $900,000; Michael J. Moore
sold 38,724 VanStar shares at $18.63-$19 per share, 90% of the
stock he actually owned, for over $720,000; and Chris M. Laney sold
5,000 VanStar shares at $23.25 per share, 100% of the stock he
actually owned, for $116,250. Then in Dec. 1996, Ahmad Manshouri
sold 54,215 VanStar shares at between $23-3/4-$25-7/8 per share,
97% of the stock he actually owned, for over $1.3 million; Coleman
Sisson sold 12,000 VanStar shares at between $24-3/8-$24-3/4 per
share, 100% of the stock he actually owned, for over $290,000; and
Thanos Triant sold 16,000 VanStar shares at between $25-1/2-$25-7/8
per share, 91% of the stock he actually owned, for over $409,000.
All told, in Sept. and Dec. 1996, certain of VanStar's insiders
unloaded over 665,000 shares of their VanStar stock, between 58%
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and 100% of the VanStar stock they actually owned at as high as
$25-7/8 per share, 68% of their collective holdings, pocketing $15
million in illegal insider trading proceeds. VanStar's insiders
coordinated virtually all their stock sales through Alex. Brown and
Robertson Stephens, for, as Alex. Brown and Robertson Stephens had
promised them in connection with the IPO, they would coordinate any
later open-market sales of VanStar stock by them to minimize the
impact of such sales on the market price, thus maximizing the
insiders' profits from their insider sales. Of the 665,474 shares
of VanStar stock these insiders sold, they sold 641,259 shares --
96% -- through Robertson Stephens and Alex. Brown.
20. During the balance of the Class Period, the defendants
continued to represent that product shortages were not materially
impairing VanStar's business performance. As late as Jan. 9, 1997,
Jay Amato, the President and COO of VanStar told securities
analysts that VanStar's Oct. 1996 sales were "solid" and that
VanStar's Nov. and Dec. 1996 sales were "strong." The defendants
continued to represent, as late as Jan. 16, 1997, that VanStar was
well on its way to achieving its forecasted EPS of $0.27-$-0.28 per
share for the 3rdQ of F97, $0.30-$0.31 for the 4thQ of F97 and
$1.06 for F97 as a whole. However, just one week later, on Jan.
23, 1997, VanStar shocked the securities markets by revealing that
its EPS for the 3rdQ F97 would be only $.15-$.16, far below the
prior forecast of $.27 per share, due to weak sales due to product
shortages and poor demand. As a result of this revelation,
VanStar's stock plummeted from $22-1/8 to $14-7/8, a decline of
$7-1/4 per share, a one-day collapse of 32% on volume of 5.7
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million shares, the largest one-day price decline and the largest
one-day trading volume in VanStar's history.
21. On Jan. 23, 1997, Tauscher made several admissions to
analysts, money and portfolio managers and institutional investors
in a conference call. With respect to the NOVA system that was
supposed to have been completely implemented by April 30, 1996, he
stated:
[W]e still are continuing with the process of bringing
our NOVA . . . project[] up . . . [and] that process is
in fact not completed and today is still costing us money
* * *
[A]s I said earlier, . . . we [will] begin to see the
benefits of the first half of the NOVA system, that's our
logistics and part system, in this quarter. However, we
will not get any benefits of the second half which is the
dispatch capability which is coming up in this quarter
. . . .
* * *
Finally, in the life cycle services business, . . . in
the quarter the conversion expenses . . . were running
for NOVA -- as opposed to any benefits . . . .
* * *
[T]here is a huge impact in gross margins for NOVA.
With respect to product shortages he admitted:
[There were] some severe product shortages in November
and . . . December [was] just so-so . . . . November was
very weak . . . .
* * *
Product availability . . . was horrible in November.
* * *
[W]e had a terrible August and September . . . .
With respect to VanStar's service business, he admitted:
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[O]ur professional service business was short in its
volume. . . .
VanStar's horrible results have continued. On Mar. 14, 1997,
VanStar again shocked the markets by announcing that its results
for its 4thQ F97 would be very poor due to weak demand, poor sales
and excessive expenses. Ultimately, VanStar's stock fell to as low
as $6-1/2 per share, far below its Class Period high of $29-3/4 and
VanStar's IPO price of $10 per share. On Mar. 24, 1997,
Information Week reported that VanStar had still not completed its
deployment of NOVA and that benefits from NOVA would not accrue to
VanStar until F98 and that delays in the rollout had resulted in
substantial additional costs.
22. VanStar's poor performance during the 3rdQ and 4thQ of
F97, with declining revenues and EPS compared to the large
increases forecast during the Class Period, is highlighted by the
table below:
VanStar Corporation
Quarterly Results
(In thousands, except EPS)
Fiscal 1995
07/31/94 10/31/94 01/31/95 04/30/95
Revenues $299,809 $338,554 $352,853 $394,176
Net Income $17 $285 $76 $890
EPS $.00 $.01 $.00 $.03
Fiscal 1996
07/31/95 10/31/95 01/31/96* 04/30/96*
Revenues $427,169 $445,128 $446,862 $485,654
Net Income $3,314 $4,951 ($7,537) $16,519
EPS $.10 $.15 ($.24) $.44
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Fiscal 1997
07/31/96 10/31/96** 01/31/97** 04/30/97
Revenues $559,090 $543,733 $527,542 $548,201
Net Income $9,763 $11,078 $7,521 $1,632
EPS $.23 $.26 $.17 $.04
* In the 01/31/96 quarter, VanStar recorded a $31.1 million charge for a
receivable from Merisel. VanStar reversed $15.6 million of this charge in the
04/30/96 quarter.
** During these two quarters, eight VanStar insiders sold off 665,000
shares of their stock, 68% of their collective holdings and between 58% and
100% of their individual holdings, pocketing $15 million.
23. The positive statements made by defendants during the
Class Period about VanStar's business, its operations and its
prospects, were each false and misleading when made. The true
facts, which were then available to the defendants, which
defendants failed to disclose included:
(a) That VanStar's NOVA system was suffering from design
deficiencies, serious software defects and operational problems
which would prevent the effective operation and thus the deployment
of that system for the foreseeable future;
(b) That the design deficiencies, software defects and
operational problems with respect to the NOVA system were so
substantial and serious that VanStar was unable to remedy them and
they would delay the implementation and/or deployment of the NOVA
system until at least mid-1997;
c) That, as a result of the failure to be able to
deploy the NOVA system in a timely fashion, VanStar was continuing
to incur significant personnel costs above and beyond those
budgeted or planned for, which was having an adverse material
impact on VanStar's results from operations;
(d) That due to the serious and persistent problems with
NOVA that prevented its timely deployment and implementation,
- 17 -
VanStar was failing to achieve the expense savings anticipated from
that system, while being forced to spend millions more than planned
on NOVA development, redesign and de-bugging, which was having a
material adverse impact on VanStar's results from operations;
(e) That VanStar was having significant ongoing problems
in obtaining a sufficient supply of computer hardware products to
meet customer demand, which was curtailing its product sales
revenue growth and having an adverse impact on VanStar's results
from operations;
(f) That VanStar's network services part of its business
was not achieving the type of growth in customers or demand for
services as anticipated, which was having an adverse impact on
VanStar's results from operations and yielding no improvement to
VanStar's gross profit margins;
(g) That demand for VanStar's network services was not
sufficiently strong for that part of VanStar's business to generate
revenues and profits sufficient to overcome the adverse impact of
computer hardware shortages on VanStar's business;
(h) That, VanStar was not successfully controlling its
SG&A expenses as claimed and, in fact, due to failure to implement
the NOVA system on a timely basis and the extra expenses being
incurred in attempting to fix that system, as well as revenue
shortfalls from both its product sales and services parts of its
business, VanStar's SG&A expenses were increasing to levels
significantly above those budgeted, which was having an adverse
impact on VanStar's results from operations, particularly its net
profit margins;
- 18 -
(i) That demand for VanStar's computer hardware products
had declined significantly, which was having an adverse impact on
VanStar's revenues from the computer hardware sales part of its
business;
(j) That while price supply constraints for VanStar's
computer hardware products were lessening in Dec. and Jan., at the
same time, demand for those products from its customers was
plummeting, resulting in much lower sales of computer hardware
products than planned or budgeted;
(k) That VanStar had suffered severe computer hardware
product shortages in Aug. and Sept., which had a very adverse
impact on VanStar's results from operations; and
(l) That as a result of the foregoing negative factors,
there was no reasonable basis in fact for defendants' forecasts of
full-year F97, 3rdQ and 4thQ F97 EPS of $.95-$1.10, $.27-$.32 and
$31.-$.33, respectively, for VanStar and defendants knew that those
forecasts were false when made.
24. The graphs below show the price action of VanStar's stock
during the Class Period, as defendants, by false and misleading
statements made in and from California, drove VanStar's stock to an
artificially inflated Class Period high of $29-3/4 per share for
the purpose of selling and facilitating the sale of VanStar
securities, to wit: (i) defendants sold in and from California
about 14.7 million shares of VanStar stock in its IPO at $10 per
share, raising $80 million for the defendants to divide among
themselves; (ii) certain of the Individual Defendants sold in and
from California over 665,000 shares of their VanStar stock,
pocketing over $15 million in illegal insider trading proceeds;
- 19 -
(iii) defendants sold in and from California $200 million in fixed-
rate VanStar convertible debentures; and (iv) VanStar sold in and
from California over 1.3 million shares of VanStar common stock
valued at over $27 million, to complete three acquisitions. The
charts also illustrate the collapse of VanStar's stock as the
previously concealed facts about VanStar's business emerged and the
performance of VanStar's stock compared to an index of similar
companies which shows that the action of VanStar stock was due
largely to company-specific events and not market forces:
VanStar Corp.
March 11, 1996 - April 21, 1997
Daily Stock Prices
- 20 -
VanStar Corp.
vs. S&P High Tech Composite
March 11, 1996 - April 14,1997
25. VanStar and certain of VanStar's insiders personally
profited from their deliberate and dishonest acts of issuing false
and misleading statements to inflate VanStar stock by selling
VanStar stock to the public at artificially inflated prices. The
chart below summarizes these sales:
% of Total
Shares Owned/
Individual Shares Aggregate Sold During
Defendants Sold Proceeds Class Period
---------- ------ --------- ---------------
Bard, R. 420,596 $9,844,331 59%
Kuntzendorf, R. 69,999 $ 1,399,980 94%
Anderson, R. 48,940 $ 910,477 98%
Moore, N. 38,724 $ 728,356 90%
Laney, C. 5,000 $ 116,250 100%
Manshouri, A. 54,215 $ 1,374,829 97%
- 21 -
Sisson, C. 12,000 $ 296,445 100%
Triant, T. 16,000 $ 409,710 91%
--------- ----------- ----
Individual Defs'
Total 665,474 $15,080,378 68%
VanStar 8,000,000 $74,700,000 N/A
--------- -----------
GRAND TOTAL: 8,665,474 $89,780,378 N/A
========= ===========
26. The VanStar insiders' stock sales were unusual in timing
and amount. As the graphs below show the Individual Defendants who
sold VanStar stock had never before sold any VanStar stock, they
began to sell their stock immediately upon the expiration of the
180-day "lock-up" agreement and as VanStar stock was soaring to its
then all-time high due to defendants' false and misleading
statements. And just weeks after the last of these Individual
Defendants' stock sales, VanStar's stock collapsed. These
defendants sold no stock after the stock collapsed.
VanStar Corp.
Defendants' Stock Sales - Share Volume
Insider Stock Sales Mar. 11. 19% to Apr 30. 1997
- 22 -
VanStar Corp.
Defendants' Stock Sales - Dollar Volume
Insider Stock Sales Mar. 11. 19% to Apr 30. 1997
However, in April 1997, after the horrible news about VanStar's
business had finally been fully disclosed and VanStar's stock had
fallen to its all-time low of $6-1/2 per share, 35% below its $10
IPO price and 78% below its Class Period high of $29-3/4, Warburg
purchased 2,604,100 shares of VanStar stock on the open market at
$6-3/4 per share -- just $1/4 per share over the stock's all-time
low price.
JURISDICTION AND VENUE
27. This Court has jurisdiction pursuant to the California
Constitution, Article. VI, 10. 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.
28. VanStar has its principal place of business in
Pleasanton, California. Most of the false and misleading state-
ments made by the defendants and most of defendants, sales of
- 23 -
VanStar stock took place in this state -- California. The
Individual Defendants Bard, Tauscher, Amato, Kuntzendorf, Rubin,
Anderson, Laney, Moore, Manshouri, Sisson and Triant are residents
and citizens of California. The amount in controversy of the named
plaintiff's claim is less than $75,000. This action is not
removable to federal court.
THE PARTIES
29. Plaintiff David T. O'Neal Trust, dated 4/l/77, purchased
1,000 shares of VanStar stock on Nov. 19, 1996 at $27-1/4 per share
and was damaged thereby. David T. O'Neal Trust is located in
California and the purchases of VanStar stock took place in
California.
30. Defendant VanStar sells services and products designed to
build and manage personal computer network infrastructures for
large companies. VanStar's stock is traded in an efficient market
on the New York Stock Exchange.
31. (a) Defendant William Y. Tauscher ("Tauscher") was
Chairman of the Board of the Company and Chief Executive officer of
VanStar and a member of its Executive Committee.
(b) Defendant Richard H. Bard ("Bard") is a Director of
VanStar and a member of its Executive Committee. During the Class
Period, Bard sold 420,596 shares of his VanStar common stock --
more than 58% of the VanStar shares actually owned by him -- for
proceeds of more than $9.8 million.
(c) Defendant Jay S. Amato ("Amato") was President,
Chief Operating Officer and a Director of VanStar.
(d) Defendant Jeffrey S. Rubin ("Rubin") was Vice
Chairman of the Board and Chief Financial Officer of Vanstar.
- 24 -
(e) Defendant Robert C. Kuntzendorf ("Kuntzendorf") was
Senior Vice President of Operations of VanStar. During the Class
Period, Kuntzendorf sold 69,999 shares, or more than 94% of the
VanStar shares owned by him, for proceeds of more than $1.3
million.
(f) Defendant Richard N. Anderson ("Anderson") was
Senior Vice President of Sales for VanStar. During the Class
Period, Anderson sold 48,940 shares, or more than 98% of the
VanStar shares owned by him, for proceeds of more than $900,000.
(g) Defendant Ahmad Manshouri ("Manshouri") was Senior
Vice President and General Manager of Product Operations for
VanStar. During the Class Period, Manshouri sold 54,215 shares, or
more than 97% of the VanStar shares owned by him, for proceeds of
more than $1.3 million.
(h) Defendant Michael J. Moore ("Moore"), was Senior
Vice President of Management Information Services of VanStar.
During the Class Period, Moore sold 38,724 shares, or more than 90%
of the VanStar shares owned by him, for proceeds of more than
$728,000.
(i) Defendant Coleman D. Sisson ("Sisson") was Senior
Vice President and General Manager, Learning Network for VanStar.
During the Class Period, Sisson sold 12,000 shares, or 100% of the
VanStar shares owned by him, for proceeds of more than $290,000.
(j) Defendant Thanos M. Triant ("Triant") was Senior
Vice President and Chief Technology Officer of VanStar. During the
Class Period, Triant sold 16,000 shares, or 91% of the VanStar
shares owned by him, for proceeds of more than $409,000.
- 25 -
(k) Defendant Chris M. Laney ("Laney") was Senior Vice
President of Networking Services for VanStar. During the Class
Period, Laney sold 5,000 shares, or 100% of the VanStar shares
owned by him, for proceeds of $116,250.
(l) Defendant Stewart K.P. Gross ("Gross") is a Director
of VanStar and a member of its Executive and Audit Committees.
Gross is a Managing Director of Warburg.
(m) Defendant William H. Janeway ("Janeway") is a
Director of VanStar. Janeway is a Managing Director of Warburg.
(n) Defendant John L. Vogelstein ("Vogelstein") is a
Director of VanStar. Vogelstein is the President and Vice Chairman
of Warburg.
32. The defendants identified in ¶31(a)-(n) above are
referred to herein as the Individual Defendants. Because of the
Individual Defendant's positions, they each knew the adverse non-
public information about the business of VanStar as well as its
finances and future business prospects via access to internal
corporate documents (including the Company's operating plans,
budgets and forecasts and reports of actual operations compared
thereto), conversations in connection with other corporate officers
and employees, attendance at management and/or full day Board of
Directors' meetings and committees thereof and via reports and
other information provided to them in connection therewith. During
the Class Period, each Individual Defendant willfully participated
in the issuance of statements which were false and/or misleading
for the purposes of offering to sell and selling VanStar
securities. The Individual Defendants' participation included the
preparation and/or review of VanStar's false and/or misleading SEC
- 26 -
filings, its IPO Prospectus and/or the preparation of false or
misleading press releases, and giving false information to
securities analysts, money and portfolio managers and institutional
investors in conference calls and other presentations.
33. Defendants Warburg Pincus & Co. Inc., E.M. Warburg,
Pincus & Co. and Warburg Pincus Capital Company, L.P. (collectively
"Warburg") are controlling shareholders of VanStar, as, at the time
of the IPO, they owned 13.8 million shares of VanStar stock -- 35%
of its stock -- and had three representatives, who were Warburg's
employees, agents and controlled persons, on VanStar's Board of
Directors. Because of Warburg's representation on VanStar's Board,
it knew the adverse non-public information about the business of
VanStar, as well as its finances and future prospects via access to
internal corporate documents (including the Company's operating
plans, budgets and forecasts and reports of actual operations
compared thereto), conversations in connection with other corporate
officers and employees, attendance at management and/or full day
Board of Directors' meetings and committees thereof and via reports
and other information provided to its representatives in connection
therewith. During the Class Period, Warburg willfully participated
in the issuance of statements which were false and/or misleading
for the purposes of offering to sell and selling VanStar
securities. Warburg's participation included its agents'
preparation and/or review of VanStar's SEC filings, its false
and/or misleading IPO Prospectus and/or the preparation of false or
misleading press releases.
34. The defendants identified in ¶¶30-33 are referred to
herein as the VanStar Defendants. VanStar's Board was very much
- 27 -
involved in the details of VanStar's business. On Aug. 5, 1996, an
article ran in PC Week, authored by Steve Hamm, describing the
operations of the VanStar Board. The article stated:
VanStar's board has operated more like the Joint Chiefs
of Staff than the diplomatic corps. The directors are
deeply involved in strategic decision making -- and, on
occasion, day-to-day operations.
* * *
CEO's Quote
Bill Tauscher: "Our board meetings are pretty intense.
A lot of people run meetings that last an hour or two.
Ours last a day."
35. As officers, directors and/or controlling persons of a
publicly-held company and as sellers of VanStar stock, each of the
VanStar Defendants had a duty to disseminate accurate and truthful
information promptly with regard to VanStar and to correct any
previously issued statements that had become untrue and to disclose
any adverse trends known to them that would materially affect the
operating results of VanStar, so that the market price of VanStar's
stock would be based upon truthful and accurate information.
Notwithstanding their duty to refrain from selling VanStar stock
while in the possession of material, adverse, non-public informa-
tion concerning VanStar, certain of the VanStar Defendants sold
665,000 shares of the Company's stock, pocketing over $15 million,
thus personally profiting from their deliberate and dishonest acts.
36. The VanStar Defendants controlled the contents of
VanStar's SEC filings, corporate reports and press releases. Each
of the VanStar Defendants participated in writing or reviewing
VanStar's corporate reports press releases and SEC filings alleged
to be misleading and thus had the ability and opportunity to
prevent their issuance or cause them to be corrected. Because of
- 28 -
their positions and access to material non-public information
available to them, each of these defendants knew that the adverse
facts specified herein had not been disclosed to and were being
concealed from the public and that the positive representations
which were being made were then materially false and misleading.
Thus, each of the VanStar Defendants is legally responsible for the
falsifying of VanStar's public reports, financial statements and
releases detailed herein as "group published" information.
37. Defendants Tauscher, Bard, Gross, Vogelstein, Janeway and
Warburg, by reason of their executive positions with VanStar, Board
membership and their ownership of shares of VanStar's common stock,
were controlling persons of VanStar and had the power and
influence, and exercised the same, to cause VanStar to engage in
the conduct complained of herein. Warburg also controlled its
employees and agents, Gross, Vogelstein and Janeway.
38. Defendants Robertson Stephens, Alex. Brown and Robinson-
Humphrey are investment banking houses which specialize, inter
alia, in underwriting public offerings of securities and making
markets in the stock of public companies. These firms each served
as co-lead underwriters of VanStar's Mar. 11, 1996 IPO in which
they sold millions of shares of VanStar stock to the public at
artificially inflated prices and for which they received a
substantial portion of the money raised in the IPO. Each of these
firms is also a broker-dealer and was a marketmaker in VanStar
stock subsequent to the IPO and purchased and sold VanStar stock on
a daily basis. Each of these firms issued false and misleading
research reports on VanStar during the Class Period as part of the
scheme. To get the underwriting business for VanStar's IPO,
- 29 -
Robertson Stephens, Alex. Brown and Robinson-Humphrey each agreed
to participate in the scheme to inflate VanStar's stock as detailed
in this Complaint, including issuing very positive research reports
on VanStar, known as "booster shots, to artificially inflate
VanStar stock and to help VanStar's insiders sell off their stock
into the market in a manner which would minimize the impact of
these sales on VanStar's stock price and thus maximize the
insiders' profits from their stock sales. Because of their close
association with VanStar, these underwriters had constant access to
VanStar and its top executives and thus had access to VanStar's
internal corporate information, including the adverse information
concealed by defendants.
DEFENDANTS' FRAUDULENT SCHEME
39. Each of the defendants is liable for making false and
misleading statements and failing to disclose material adverse
facts and as a participant in a fraudulent scheme which: (i)
deceived the investing public regarding VanStar; (ii) artificially
inflated the price of VanStar stock; (iii) caused Class members to
purchase VanStar stock at inflated prices; (iv) permitted certain
of the Individual Defendants to sell 665,000 shares of their
VanStar stock at inflated prices, pocketing $15 million;
(v) permitted VanStar and the Underwriter Defendants to sell 14.7
million shares of common stock to the public in VanStar's March
IPO; and (vi) permitted VanStar to sell over $200 million in
convertible debentures and to issue (sell) over 1.3 million shares
of its stock to make three acquisitions during the Class Period.
40. The VanStar Defendants had strong motives to inflate the
price of VanStar stock. By Jan. 1996, VanStar's controlling
- 30 -
shareholders realized that VanStar was on the verge of a financial
collapse. They realized that the only way for VanStar to survive
and to salvage their huge $81 million investment was to take
VanStar public. They knew a VanStar IPO could raise a large amount
of money to pay down part of VanStar's crushing debt and then, once
having established a trading market in VanStar's stock, if
VanStar's stock price could be pushed up higher and VanStar was
made to appear successful, they could sell additional VanStar
equity securities to raise more money to reduce or refinance the
Company's debt burden, and use VanStar's publicly traded stock as
currency to make acquisitions of other, more profitable companies.
This plan to take VanStar public and raise large amounts of cash
from public investors was necessary because VanStar's controlling
stockholders, i.e., Bard, Tauscher and Warburg, were not willing to
make any additional investment in VanStar due to the serious
operating problems it faced and realized the only way to salvage
their huge investment in VanStar was to pursue this plan to raise
hundreds of millions from public investors to bail themselves out
of their ill-fated venture.
41. Prior to VanStar's Mar. 11, 1996 IPO, there was no liquid
trading market into which the VanStar Defendants could sell any of
their shares of VanStar stock. They were "locked-in" an illiquid
investment in a very troubled Company which could barely make a
profit, despite a billion dollars in sales a year. However, after
the VanStar IPO established a liquid trading market in VanStar's
stock, certain of the Individual Defendants intended to unload
their VanStar shares as soon as they could. And they did so with
a vengeance, selling over 665,000 between Sept. 9, 1996 and Dec.
- 31 -
13, 1996, pocketing over $15 million, even though they knew that
VanStar was then experiencing serious, undisclosed problems which
adversely impacted VanStar's EPS prospects.
42. The artificial inflation of the trading price of VanStar
stock was the key to defendants' scheme, as it:
(a) Permitted VanStar to raise $80 million in its IPO
and then use the existence of its publicly traded common stock as
a basis upon which to raise $200+ million from the sale of
convertible bonds, which enabled VanStar to pay down a significant
part of its huge and expensive variable-interest-rate debt and
refinance a large portion of that debt with lower fixed-rate
convertible debt, dramatically reducing VanStar's interest expense;
(b) Permitted VanStar to issue (sell) over 1.3 million
shares of its publicly traded common stock to acquire three
companies, i.e., Mentor Technologies, Contract Data Services and
DCT Systems, on a non-dilutive basis; and
(c) Enabled certain of the Individual Defendants to sell
$15 million of their own VanStar stock in the open market at
artificially inflated prices to profit from their deliberate and
dishonest acts.
43. VanStar's controlling shareholders also personally
profited from this fraudulent scheme. They salvaged their
investment of $81 million in VanStar. VanStar's $10 per share IPO
also raised enough cash to increase the book value of their VanStar
stock from $(.19) to $1.69 -- a $32.9 windfall for Warburg,
Tauscher and Bard, who owned 17.3 million shares.
44. To accomplish their fraudulent scheme, VanStar's insiders
worked closely with the Underwriter Defendants. The VanStar
- 32 -
Defendants learned from discussions with the Underwriter Defendants
that Robertson Stephens, Alex. Brown and Robinson-Humphrey would
help VanStar merchandise its common stock in the IPO by
orchestrating "roadshows" in several cities to stimulate interest
in the offering and assist in artificially inflating the price of
VanStar shares subsequent to the IPO by issuing favorable research
reports on VanStar after the IPO was completed.
45. However, before Robertson Stephens, Alex. Brown and
Robinson-Humphrey would go along with the scheme, they extracted
from VanStar an illegal agreement that it would hold them harmless
from any suits for their participation in the scheme. The
Underwriter Defendants knew that VanStar was going to receive over
$74 million from the IPO and that these funds, together with the
directors' and officers' liability insurance they required VanStar
to have to protect its officers and directors and VanStar's
agreement to indemnify them, would provide the Underwriter
Defendants with a large enough financial buffer to protect them
from any adverse consequences of their illegal conduct, thus
permitting them to directly and actively participate in the scheme
with impunity.
46. The Underwriter Defendants were motivated to act as
direct participants in the scheme by the prospect of earning
millions of dollars in underwriting fees and further profits as
marketmakers, selling VanStar's common stock at artificially
inflated prices. The Underwriter Defendants had the opportunity to
commit the fraud complained of by virtue of their direct and active
participation in the IPO process, including, without limitation,
- 33 -
the drafting and dissemination of false and misleading prospectus
and analyst reports as more fully detailed in this Complaint.
47. The Underwriter Defendants further sponsored the Company
in the market during the IPO by having their securities analysts
issue false favorable research reports on VanStar or make other
public statements about the Company to the financial press to help
push VanStar's stock price higher and the Underwriter Defendants
acted as marketmakers in VanStar stock after the IPO to help
support the stock price. The Underwriter Defendants further
orchestrated a multi-city roadshow prior to the IPO, during which
they and certain of the Individual Defendants (Tauscher, Amato and
Rubin) travelled to, inter alia, New York City, Boston, Chicago,
San Francisco and Los Angeles during Feb. 15-Mar. 1, 1996 to
present highly favorable information about the Company which was
more positive than that contained in the IPO Prospectus, including
forecasts of strong revenue and profit growth through F96-F97.
48. The Underwriter Defendants assisted VanStar in planning
the IPO and purportedly conducted investigations into the business
operations, products and future business prospects of VanStar.
known as a "due diligence" investigation, which was required of
them in order to engage in the offering. During the course of
their "due diligence, the Underwriter Defendants had continual
access to confidential corporate information concerning VanStar's
business, financial condition, products and future business plans
and prospects. In addition to availing themselves of virtually
unbridled access to internal corporate documents, the Underwriter
Defendants also communicated with VanStar management, particularly
Tauscher, Amato and Rubin. As a result of those constant contacts
- 34 -
and communications between the Underwriter Defendants' represen-
tatives and Tauscher, Amato and Rubin, the Underwriter Defendants
learned of VanStar's existing problems.
49. As a consequence of their investigation and communica-
tions with VanStar, the Underwriter Defendants (or their agents or
counsel) met with representatives of VanStar, its accountants and
counsel during the several weeks prior to the issuance of the
Mar. 11, 1996 IPO Prospectus. During such meetings, including
those, known as "drafting sessions," representatives of the
participants met to discuss the timing in terms of the offering and
the contents of the Registration Statement and Prospectus, and
devised, agreed upon and refined the actions necessary for the
consummation of the offering. These parties, in part through their
agents, discussed and reached understandings as to the timing and
strategy to best accomplish the offering, the terms of the
offering, the language to be used in the Mar. 11, 1996 Prospectus,
what disclosures about VanStar would be made in the Prospectus, and
what responses would be made to the SEC in connection with its
review of the Registration Statement containing the Prospectus.
The Underwriter Defendants thereafter caused the Prospectus to be
delivered to potential and actual purchasers of VanStar common
stock in connection with offers and sales thereto.
50. In the course or as a consequence of such investigation
and their active participation in the IPO process, including
discussions with management, review of internal corporate
documents, their active role in the roadshows, and the preparation
of analyst reports, the Underwriter Defendants obtained knowledge
- 35 -
of or recklessly disregarded the adverse facts regarding VanStar's
business, as more fully detailed in this Complaint.
51. After the IPO, the Underwriter Defendants published
highly positive internal advisories and public research reports
concerning VanStar, creating the false impression that VanStar was
proving highly successful and profitable without disclosing the
numerous problems which were then adversely impacting VanStar's
business as more fully detailed in this Complaint. Based on the
negative and adverse internal documents and reports of the
Company's actual business performance, the Underwriter Defendants
knew or recklessly disregarded that those public statements, and
those of their securities analysts for which they are responsible,
were false and misleading when made and were inflating the price of
VanStar's common stock.
52. The Underwriter Defendants' acts, in combination with the
acts of the VanStar Defendants, were intended to and did, in fact,
help to create strong demand for VanStar stock on the IPO and in
the after market, artificially inflating the price of VanStar's
common stock.
BACKGROUND OF THE CLASS PERIOD
53. In July 1995, VanStar had announced it was in the "final
stage" of its NOVA re-engineering project. VanStar had hired Ernst
& Young to overhaul its systems to reduce the number of people and
processes needed to complete tasks. VanStar stated the NOVA
project would result in the elimination of 200 positions:
The NOVA project, which began in May 1994, will be
functional by late September, first at VanStar's Atlanta
National Technical Center. Field locations will be
brought online between this October and March 1996. NOVA
will then be implemented to its overseas locations.
- 36 -
54. In early 1996, the defendants were hard at work to
accomplish the VanStar IPO, which was central to their scheme and
would raise the large amount of cash VanStar desperately needed in
the short term to survive. However, the defendants realized that
VanStar could face great difficulty in marketing an IPO, as VanStar
was barely profitable despite over $1 billion in annual sales, was
very highly leveraged due to its excessive debt, and that, even
after a large and successful IPO, VanStar would still have to
borrow over $200 million in order to finance its huge working-
capital requirements. Moreover, the defendants wanted to raise the
large amounts of cash needed without issuing so many shares that
they would unduly dilute the ownership stake of VanStar's
controlling shareholders and, to do this, they wanted to sell
VanStar stock in the IPO at as high a price as possible to minimize
the number of shares sold. However, in order to justify a high
price for VanStar's stock in the IPO, they knew they would have to
persuade investors that VanStar was no longer merely a reseller of
computer products, a very capital-intensive/low-profit-margin
business, but was becoming more of a provider of computer services,
a service business which required less capital and produce
significantly higher profit margins and that, as a result, VanStar
was transforming into a high-profit-margin, less capital-intensive
business, which would be able to achieve consistent revenue and EPS
growth in the future.
55. In order to create the kind of intense investor interest
in the VanStar IPO necessary to sell the over 14 million shares to
be marketed, the defendants knew that a publicity campaign to
distribute very favorable information about VanStar's business and
- 37 -
prospects was necessary. Thus, the Underwriter Defendants
organized and scheduled a nationwide "roadshow" to take place prior
to the IPO where VanStar's top executives would meet with institu-
tional investors, money and portfolio managers, brokers and poten-
tial investors and make presentations about VanStar's business,
which would include a "slide show" and much information, including
EPS forecasts, that was not to be included in the IPO Prospectus.
The roadshow took place from Feb. 15 through Mar. 1, 1996 and
included presentations in Boston, New York City, Houston, Chicago,
San Francisco and Los Angeles at locations selected by the
Underwriter Defendants. The presentations were made by Tauscher,
Rubin and Amato.
56. During the roadshow presentations and in connection with
VanStar's IPO, Tauscher, Rubin and Amato stated:
• VanStar was transforming itself into a higher-profit
service provider that would be able to achieve consistent EPS
growth in the future, and was becoming less and less dependent
upon the sales of product to generate income.
• VanStar was not encountering any difficulty in obtaining
the computer products necessary to meet the very strong demand
it was encountering from its customers.
• VanStar was successfully completing the final development
and implementation of its NOVA system, which would be
installed and operational by Apr. 30, 1996.
• There would be a huge impact on gross margins from NOVA.
NOVA benefitted margins in three ways:
• One, NOVA allowed VanStar to manage its entire parts
logistics centrally, electronically, and seamlessly with
its vendors. A big part of the gross margins in life
cycle services was the whole costs of goods with parts.
NOVA would lower costs and thereby boost margins.
• Second, because a part of gross margin was the
utilization of the field engineering group which was
fundamentally a scheduling phenomenon, NOVA would, as a
very smart scheduling system, one without any
intermediaries between the field engineer and the central
- 38 -
scheduling, eliminate VanStar's intermediaries, cut costs
and boost margins. There was an army of schedulers and
logistic people in the branches that would be eliminated
as VanStar brought NOVA up, cut costs and boosted
margins.
• Third, the benefits from NOVA would be seen in the
reduction of indirect expense for the schedulers and for
the logistics people. This business had low 30% margins
that would improve into the mid to high 30% range as a
result of a full NOVA implementation.
• VanStar expected to achieve sequential quarterly revenue
and EPS growth throughout F97 to end Apr. 1997, with F97 EPS
to be at least $.95-$1.00.
57. VanStar planned to sell its shares in an IPO priced at
$12.50 per share on Mar. 8, 1996. However, on Mar. 8, 1996, the
Dow Jones Industrial Average fell 171.24 points, the third largest
point drop in history and, as a result, VanStar had to postpone its
IPO. VanStar, however, was in such desperate need of cash that, in
order to complete its IPO and raise the necessary cash, it reduced
the price of its offering from $12.50 per share to $10 per share
and proceeded with the IPO on the next trading day, Mar. 11, 1996.
FALSE STATEMENTS MADE BY DEFENDANTS
DURING THE CLASS PERIOD FOR THE PURPOSE
OF SELLING VANSTAR SECURITIES
58. VanStar's Mar. 11, 1996 IPO Prospectus stated:
The Vanstar Solution
* * *
Vanstar's NOVA system is a proprietary service delivery
system for the management of the Company's systems
engineering help desk, dispatch, repair, installation,
moves/adds/changes and asset management service
offerings. The Company expects NOVA to be implemented
during the second half of fiscal 1996 [i.e., by April 30,
1996]. Vanstar believes that its proprietary automated
systems significantly enhance its ability to satisfy its
customers' needs.
* * *
- 39 -
NOVA. Vanstar has developed NOVA, a proprietary service
delivery system for the management of its systems
engineering, help desk, dispatch, repair, installations,
moves/add/changes and asset management service offerings.
The Company expects NOVA to be implemented during the
second half of fiscal 1996 [i.e., by April 30, 1996].
Nova's resource allocation system is designed to insure
that the appropriate technical personnel are available to
respond to customer service calls. Service calls placed
by customers are received through Vanstar's First Touch
program. NOVA automatically determines which field
engineer is available and sends all relevant customer
information to the field engineer through a field
computing device via radio frequency technology. NOVA is
complemented by more than 40 strategic stocking locations
in the United States, and parts can be delivered the same
day or shipped overnight to either the customer location
or the field service engineer. The Company believes that
NOVA will result in increased customer network uptime,
more accurate matching of part and field service engineer
skills to service needs, more accurate and comprehensive
information management and lower costs.
59. On Apr. 1, 1996, VanStar announced its results for the
3rdQ F96, the quarter ended Jan 31, 1996. In the announcement
Tauscher stated:
"VanStar's operating results in all our key business
areas were strong for the third quarter and first nine
months of fiscal year 1996 and we're very encouraged by
our company's fundamental growth in revenues and income."
60. On Apr. 2, 1996, Amato, Rubin and Tauscher spoke to a
large number of securities analysts, institutional investors, money
and portfolio managers, large VanStar shareholders and brokers in
a nationwide conference call. During the call and in later one-on-
one conversations with the participants, they directly disseminated
important information to the market by stating:
• VanStar's product business continued to be strong,
VanStar was enjoying very strong, demand and VanStar was not
having any difficulties obtaining product to meet customer
demand.
• Implementation of VanStar's NOVA system would reduce
VanStar's personnel costs significantly over the next 12
months and lead to significantly higher profit margins for
VanStar.
- 40 -
• VanStar's progress in completing the final development
and implementation of its NOVA system was going according to
plan and not encountering significant problems or delays.
• VanStar was forecasting the following F97 EPS:
Fiscal 1997
-----------
Q1 $ .16
Q2 $ .23
Q3 $ .30
Q4 $ .31
Year $1.00
Analysts repeated some of this information in reports issued over
the next few days, as pleaded below.
61. On Apr. 8, 1996, Robertson Stephens issued a report on
VanStar, written by Susan V. Lacerra ("Lacerra"), which repeated
the information provided her in the conference call and in
conversations with Tauscher, Rubin and Amato. The report forecast
a three-year secular growth rate of 18% for VanStar and F97 EPS (to
end Apr. 1997) of $.99 and F98 EPS of $1.17. The report also
stated:
INTRODUCING COVERAGE OF VANSTAR WITH A BUY RATING
* Product business continues strong; gross margins are
holding steady, backorders have been strong -- $18M at
the end of February, lower manufacturer pricing spurring
demand.
* * *
Vanstar reported 3Q96 EPS of $0.16 up 2 cents from our 14
cents estimate, with one penny of outperformance coming
from a lower than expected share count and one penny from
better operating performance, especially better than
expected product margins. Revenues grew a health 27%,
with product revenues up a strong 29%, slightly ahead of
expectations and the high-margin network services
business growing 94%.
Internally the big event over the next couple of quarters
is the rollout of the company's NOVA project, a system
that creates efficiencies in dispatch and monitoring of
staff deployment. Support Services margins are expected
to expand from 4% in fiscal 1996 to 8% in fiscal 1997 due
to the implementation of the NOVA Project.
- 41 -
we are expecting a positive news stream regarding new
business.
62. On Apr 8, 1996, Alex. Brown issued a report on VanStar,
written by Edward S. Caso, Jr. ("Caso"), which repeated the
information provided in the conference call and in conversations
with Amato, Rubin and Tauscher. The report forecast the following
F97 EPS for VanStar:
Fiscal 1997
-----------
Q1 $ .16
Q2 $ .23
Q3 $ .30
Q4 $ .31
Year $1.00
The report also stated:
While continuing to strongly grow its hardware resale
business, the Company is targeting an expansion of
service offerings aimed at its large customer base.
Gross margins on service are significantly higher than
those on products, and therefore growth in service income
will have a significantly larger impact on bottom-line
growth. . . . Our initial EPS estimates for FY 996 and
FY 1997 are $0.55 and $1.00, respectively.
* * *
Management has invested heavily in technology to date,
including a project called NOVA, which is a proprietary
automated service delivery system and is expected to
allow for a significant reduction in personnel costs over
the next 12 months.
63. The Apr. 8, 1996, Robertson Stephen and Alex. Brown
reports were "booster shots" issued by them as promised to the
Vanstar Defendants during the IPO process and were issued in
connection with the Vanstar IPO. Vanstar copied and publicly
distributed these Robertson Stephen and Alex. Brown reports after
they were issued, thus endorsing and adopting them as its own.
- 42 -
64. On Apr. 8, 1996, an article ran in Computer Reseller News
which quoted Tauscher as stating: "Our basic businesses are all
moving along nicely, we're hiring 100 people a month now." On Apr.
8, 1996, Tauscher was quoted another article in Computer
Reseller News, as stating:
Our network consulting practice is a business that's
running along today at around $75 million, just in fees.
It's growing at 80 percent, compound.
65 The positive statements made by the defendants in ¶¶58-64
about VanStar's business and earnings prospects were each false and
misleading when made. The true facts which were known to each
defendant, but which defendants failed to disclose, included:
(a) That VanStar's NOVA system was suffering from design
deficiencies, serious software defects and operational problems
which would prevent the effective operation and thus the deployment
of that system for the foreseeable future;
(b) That the design deficiencies, software defects and
operational problems with respect to the NOVA system were so
substantial and serious that VanStar was unable to remedy them and
they would delay the implementation and/or deployment of the NOVA
system until at least mid-1997;
(c) As a result of the failure to be able to deploy the
NOVA system in a timely fashion, VanStar was continuing to incur
significant personnel costs above and beyond those budgeted or
planned for, which was having an adverse material impact on
VanStar's results from operations;
(d) That due to the serious and persistent problems with
NOVA that prevented its timely deployment and implementation,
VanStar was failing to achieve the expense savings anticipated from
- 43 -
that system, while being forced to spend millions more than planned
on NOVA development, redesign and de-bugging, which was having a
material adverse impact on VanStar's results from operations;
(e) That VanStar was not successfully controlling its
SG&A expenses as claimed and, in fact, due to failure to implement
the NOVA system on a timely basis and the extra expenses being
incurred in attempting to fix that system, as well as revenue
shortfalls from both its product sales and services parts of its
business, VanStar's SG&A expenses were increasing to levels
significantly above those budgeted, which was having an adverse
impact on VanStar's results from operations;
(f) That as a result of the foregoing negative factors,
there was no reasonable basis in fact for defendants' forecasts of
full-year F97, 3rdQ and 4thQ F97 EPS of $1.00, $.30 and $.31,
respectively, for VanStar and defendants knew that those forecasts
were false when made.
66. On Apr. 15, 1996, an article ran in the Computer Reseller
News. Although defendant Tauscher stated that VanStar was
experiencing certain "constraints" in obtaining some products, he
reassured investors that:
"We're not seeing this terrible product problem people
are talking about. Sales are strong, and we are at the
biggest backlog we've ever had."
* * *
Inventory levels rose to $337.9 million from $298.7
million at the end of April, but Tauscher said VanStar is
seeing standard inventory rises and drops based on the
time of year.
67. On Apr. 23, 1996, VanStar announced that it had partnered
with United Technologies to deploy VanStar's Asset Management
- 44 -
software. VanStar represented that this Asset Management software
incorporates and builds on VanStar's "soon-to-be-released service-
management system, called VanStar NOVA."
68. On May 13, 1996, an article in Computer Reseller News
disclosed for the first time that the deployment of the NOVA system
was delayed. However, VanStar assured the market that it would be
deployed during the summer. Tauscher stated:
Vanstar Corp's NOVA system, a dispatch system
designed to coordinate service and parts deployment, will
start to be rolled out over the next few months, after a
period of delay and reinvestment.
* * *
NOVA will makes its debut in two parts, said William
Y. Tauscher, chief executive of Pleasanton-based Vanstar.
The logistics piece, which tracks parts, will come
out in June. Tauscher acknowledged it is the less-
intensive piece.
The second part, which will handle dispatching field
technicians and other human aspects of support, will not
be ready for use until September.
"The system is complete, but when we went to stress-
test it, we found we needed to change some things. . . .
We had a choice. We could bring it in and worry about
capacity and growth, or we could redo some things."
Stress tests occurred in the fall of 1995.
69. On June 3, 1996, Robertson Stephens issued another
"booster shot" report on VanStar in connection with VanStar's IPO.
The report was written by Lacerra with the assistance of Tauscher
and Rubin, based on conversations between Lacerra and Tauscher and
Rubin in which a two-way flow of information occurred between them
and they agreed upon the contents of the report. Tauscher or Rubin
reviewed and approved the report before it was issued. The report
forecast the following F97 EPS for VanStar:
- 45 -
Fiscal 1997
Q1 $ .15
Q2 $ .23
Q3 $ .29
Q4 $ .31
Year $ .99
The report also stated:
INVESTMENT THESIS: Vanstar is capitalizing on strong
industry trends . . . . In addition, Vanstar is facing
a large market opportunity . . . . In addition,
Vanstar's business is shifting to its services offerings,
which are much growing [sic] faster and have higher
profitability than its traditional product business.
. . . Margins are more attractive on the services
businesses; we estimate gross product margins at 9%
compared with 40-45% for networking, and 35-40% for
support services. The services businesses are becoming
very important to profitability; we estimate networking
and support services comprise 30% of gross profit dollars
in fiscal 1996.
VanStar copied and publicly distributed this Robertson Stephens
report after it was issued, thus endorsing and adopting it as its
own.
70. On June 11, 1996, VanStar issued a press release
headlined:
VANSTAR ANNOUNCES STRONG EARNINGS INCREASE . . . FOR
FISCAL YEAR ENDING APRIL 30, 1996; COMPANY ACHIEVES RAPID
GROWTH IN HIGH-VALUE SERVICES
The release reported 4thQ F96 net income of $16.5 million or $.44
per share, including a transaction whereby VanStar sold a large
receivable of doubtful collectability to a third party for cash.
The release also stated:
"This was our first quarter out of the blocks after
our Initial Public Offering", said Vanstar Chairman
William Y. Tauscher. "The growth and accomplishments in
this quarter were a result of the commitment of Vanstar's
people and the strengthened market position of the
company. Our Network Integration and Service businesses
have begun to fulfill the promises made to investors
during our public offering. Our product business
continued to gain share on stable margins. Our earnings
performance was achieved at the same time that Vanstar
- 46 -
invested heavily in people and systems to strengthen and
expand our ability to support the needs of our large
customers. In the coming fiscal year, Vanstar will
continue to build on its position as a leader in helping
corporations improve the strategic value and reduce the
costs of ownership of their desktop and network
infrastructures."
* * *
"Our effective utilization of Management Systems and the
productivity improvements undertaken in the last few
years are paying big dividends permitting us to invest in
enhanced services capabilities and overhead efficiencies
while continuing to reduce the relative cost of SG&A,"
said Vanstar Chairman William Y. Tauscher.
71. On June 12, 1996, VanStar held a nationwide conference
call with a large number of money and portfolio managers, insti-
tutional investors, securities analysts, large VanStar stockholders
and brokers to discuss VanStar's business and prospects. During
this call and in subsequent one-on-one conversations with
participants, Tauscher, Rubin and Amato directly disseminated
important information to the market by stating:
• VanStar's product business remained strong, with very
strong demand.
• Although some computer product resellers were reporting
a slowdown in shipments due to product shortages, VanStar was
not experiencing any significant shortages and was obtaining
sufficient product to meet demand. VanStar expected its gross
margins on its products business to remain stable.
• VanStar's service business was very strong. VanStar saw
no problem in sustaining its current rate of growth in its
services business.
• VanStar's operating expenses (SG&A) were under control
and decreasing as a percentage of revenues, which would lead
to strong profit growth throughout F97.
• VanStar's progress in completing the final development
and implementation of its NOVA system was slightly delayed as
during "stress testing" certain bugs were discovered; however,
the problem had been fixed, installation was now going
according to plan, no further significant problems or delays
were anticipated and NOVA would be completely deployed during
the summer of 1996.
- 47 -
• VanStar was comfortable with analysts' F97 EPS of about
$1 per share and was forecasting the following EPS:
Fiscal 97
---------
Q1 $ .15-$.16
Q2 $ .23-$.24
Q3 $ .29-$.30
Q4 $ .31-$.32
FY $ .99-$1.03
Analysts repeated some of the information to the market over the
next several days, as pleaded below.
72. On June 12, 1996, Robertson Stephens issued a report on
VanStar entitled "Conference Call Highlights" written by Lacerra
which repeated information from the conference call and
conversations with Tauscher, Rubin and Amato. The report forecast
the following F97 EPS for VanStar:
Fiscal 97
---------
Q1 $ .15
Q2 $ .23
Q3 $ .29
Q4 $ .31
FY $ .99
The report also stated:
* Training business is turning: Our model assumes the
training business breaks even in F97; however, management
believes the base business (excluding the pending $5.5M
Mentor acquisition) will turn to profitability in 1Q97.
We estimate a moderate turn to profitability on the year
could add 1-2 cents incrementally to our estimates.
* * *
* Product business strong in 4Q: Some resellers are
reporting a slowdown in product due to shortages; Vanstar
is not seeing this; revenue growth continues strong in
May and we believe gross margins remain stable.
* * *
Vanstar is capitalizing on strong industry trends . . . .
In addition, Vanstar is facing a large market opportunity
. . . . In addition, Vanstar's business is shifting to
its services offerings, which are much growing [sic]
faster and have higher profitability than its traditional
product business. . . . Margins are more attractive on
- 48 -
the services businesses; we estimate gross product
margins at 9% compared with 40-45% for networking, and
35-40% for support services. The services businesses are
becoming very important to profitability; we estimate
networking and support services comprise 30% of gross
profit dollars in fiscal 1996.
73. On June 12, 1996, an article ran in the San Francisco
Chronicle regarding VanStar, which quoted Lacerra, the Robertson
Stephens analyst, as stating:
"VanStar is a lean, mean machine when it comes to product
distribution."
The article also quoted Lacerra's characterization of VanStar as
"totally hot" and quoted Tauscher as stating that VanStar "went
through a valley of death" but came out on the other side "stronger
than ever."
74. On June 14, 1996, Alex. Brown issued a report on VanStar
written by Caso which repeated information from the conference call
and conversations with Tauscher, Rubin and Amato. The report
forecast the following F97 EPS for Vanstar:
Fiscal 97
---------
Q1 $ .16
Q2 $ .23
Q3 $ .29
Q4 $ .32
FY $1.00
The report also stated:
-- Reported better-than-expected revenues of $486
million, a 24% Y-Y increase versus our estimate of $467
million, while containing SG&A costs
-- Management Reiterated that the current tone of
business remains strong
-- No change in our FY97 EPS estimate of $1.00 although
comfort is rising; establishing FY98 EPS estimate of $1.20
* * *
- 49 -
Highlights of the Quarter and Management Conference Call
1) Gross Margin on Product Remains Stable. We note
that gross margin on product for the quarter was 9.6%,
which was slightly above the prior year's level of 9.5%,
but more importantly reflects a continuation of stable
product gross margins over the last several quarters
after a period of intense competitive pressure and
industry consolidation. Management noted in its
conference call that it does not foresee significant
fluctuations in product margin.
2) Strong Service Revenue Growth Fueled by High-Margin
Network Services. . . . During its conference call,
management noted that it does not see a problem with
sustaining the present rate of network services growth
. . . .
75. On June 14, 1996, Robinson-Humphrey issued a report on
VanStar, written by Robert Anastasi ("Anastasi"), which repeated
information from the conference call and conversations with
Tauscher, Rubin and Amato. The report forecast the following F97
EPS for Vanstar:
Fiscal 1997
-----------
Q1 $ .16
Q2 $ .24
Q3 $ .30
Q4 $ .32
FY $1.02
The report also stated:
Fourth quarter results ended April exceeded expectations.
* * *
Better than expected EPS were largely the result of
higher product sales with larger margins.
76. The positive statements made by the defendants in ¶¶66-75
about VanStar's business, operations and earnings per share
prospects were each false and misleading when made. The true facts
which were then available to each defendant, but which defendants
failed to disclosed, included:
- 50 -
(a) That VanStar's NOVA system was suffering from design
deficiencies, serious software defects and operational problems
which would prevent the effective operation and thus the deployment
of that system for the foreseeable future;
(b) That the design deficiencies, software defects and
operational problems with respect to the NOVA system were so
substantial and serious that VanStar was unable to remedy them and
they would delay the implementation and/or deployment of the NOVA
system until at least mid-1997;
(c) As a result of the failure to be able to deploy the
NOVA system in a timely fashion, VanStar was continuing to incur
significant personnel costs above and beyond those budgeted or
planned for, which was having an adverse material impact on
VanStar's results from operations;
(d) That due to the serious and persistent problems with
NOVA that prevented its timely deployment and implementation,
VanStar was failing to achieve the expense savings anticipated from
that system, while being forced to spend millions more than planned
on NOVA development, redesign and de-bugging, which was having a
material adverse impact on VanStar's results from operations;
(e) That VanStar was having significant ongoing problems
in obtaining a sufficient supply of computer hardware products to
meet customer demand, which was curtailing its product sales
revenue growth and having an adverse impact on VanStar's results
from operations;
(f) That VanStar's network services part of its business
was not achieving the type of growth in customers or demand for
- 51 -
services as anticipated, which was having an adverse impact on
VanStar's results from operations;
(g) That demand for VanStar's network services was not
sufficiently strong for that part of VanStar's business to generate
revenues and profits sufficient to overcome the adverse impact of
computer hardware shortages on VanStar's business;
(h) That VanStar was not successfully controlling its
SG&A expenses as claimed and, in fact, due to failure to implement
the NOVA system on a timely basis and the extra expenses being
incurred in attempting to fix that system, as well as revenue
shortfalls from both its product sales and services parts of its
business, VanStar's SG&A expenses were increasing to levels
significantly above those budgeted, which was having an adverse
impact on VanStar's results from operations;
(i) That as a result of the foregoing negative factors,
there was no reasonable basis in fact for defendants' forecasts of
full-year F97, 3rdQ and 4thQ F97 EPS of $.99-$1.03, $.29-$.30 and
$.31-$.32, respectively, for VanStar and defendants knew that those
forecasts were false when made.
77. On June 24, 1996, an article regarding VanStar ran in the
Computer Reseller News. In that article, Tauscher was quoted as
stating:
"There has been some talk about availability hampering
sales, but we are not seeing any real difference in our
business compared to normal practices."
78. In late June 1996, VanStar issued its Annual Report to
Shareholders for the fiscal year ended April 1996. The report
identified the following VanStar "Systems":
- 52 -
Systems
Navigator A window into VanStar's implementation process
where customers can track product orders and account
status from their desks
Cockpit VanStar's automated acquisition management
system includes the customer's rules and procedures
DCMS, FLEX, Tracker VanStar automates acquisition from
vendor to desktop using EDI, on-line tracking, and
networked configuration and status data
NOVA VanStar's full range of project management,
billing, and deskside support services is managed from
one integrated system
VanStar's F96 Annual Report also stated:
Vanstar Corporation . . . is a leading provider of
products and services designed to build and manage
personal computer network infrastructures for large
enterprises. The Company provides customized, integrated
solutions that support its customers' network
infrastructures throughout their life cycle, from design
and deployment through enhancement and migration.
Vanstar provides these integrated solutions by combining
four elements: a comprehensive suite of value-added
services, proprietary automated systems, a nationwide
field force of experienced people, and proven processes
for building, managing and enhancing enterprise-wide
personal computer networks.
79. VanStar's F96 Annual Report also contained a letter from
Tauscher that stated:
We grew our business strongly throughout fiscal 1996 and
maintained a sharp focus on expense control, which
enabled us to steadily increase our profitability. . . .
This moved Vanstar into a position as one of the most
profitable companies in our marketplace.
* * *
We [have] assembled exactly the right people, systems and
processes needed to manage all aspects of PC network
infrastructures across the enterprise. . . . Our
information systems and methodologies can track and
account for the entire life cycle of a single PC or an
entire PC network, from purchase to disposal. . . .
We have aligned our service offerings with the two
biggest issues facing our customers. For companies that
need to gain control over the total cost and quality of
- 53 -
their existing PC network infrastructures, we offer
complete Life Cycle Services. From planning and
procurement through removal and disposal, we can take
care of an manage; every phase of the life cycle of
distributed computing networks. For companies seeking to
upgrade their networks -- to take advantage of new
technology or to address new opportunities in their core
business -- we offer Professional Services for enhancing
and migrating their PC network infrastructure. Both
segments of our businesses are growing rapidly, in large
part because we are so service-oriented.
* * *
Our plans for fiscal 1997 include three major growth
thrusts. The first is expanding our field force in the
Network Services and Training areas.
* * *
The second growth thrust is acquiring companies that
complement our own resources.
* * *
Our third major growth initiative is to increase our
investments in information systems, to make sure our
automated internal systems and electronic links to
customers keep pace with our business growth. Given
successful execution of all three initiatives, we expect
continued and substantial growth in both revenues and
profitability.
80. On July 10, 1996, Robertson Stephens issued another
"booster shot" report on VanStar, issued in connection with
VanStar's recently completed IPO. The report was written by
Lacerra, Tauscher and Rubin as a result of communications in which
a two-way flow of information occurred between them and they agreed
upon the contents of the report. Tauscher or Rubin reviewed and
approved the report before it was issued. VanStar copied and
publicly distributed this Robertson Stephens report after it was
issued, thus endorsing and adopting it as its own. The report
forecast the following F97 EPS for VanStar.
- 54 -
Fiscal 1997
-----------
Q1 $ .18
Q2 $ .24
Q3 $ .28
Q4 $ .31
Year $1.01
The report also stated:
* We believe the services business is performing in line or
slightly better than expectations so far.
* * *
* We are expecting a positive news stream regarding new
business.
81. On July 11, 1996, an article about VanStar appeared in
Investor's Business Daily, which stated:
Chairman William Tauscher describes the company as
a "new-age systems integrator that happens to push a lot
of hardware and software across the table."
* * *
"I think Vanstar is in the sweet spot of the
corporate business market," said Robert Anastasi, an
industry analyst with Robinson-Humphrey Co. in Atlanta.
* * *
By switching from retailing to systems integration,
Vanstar cut sales expenses in half. The goal is to
translate lower costs into 4% operating margin. Tauscher
says.
Vanstar should reach that goal in the second half of
this fiscal year given growth of the company's higher
margin service business, said Robinson-Humphrey Inc.'s
Anastasi.
82. On July 12, 1996, Robinson-Humphrey issued another
"booster shot" report on Vanstar, issued in connection with
Vanstar's recently completed IPO. The report was written by
Anastasi, Tauscher and Rubin after communications in which a two-
way flow of information occurred between them and they agreed upon
the contents of the report. Tauscher or Rubin reviewed and
- 55 -
approved the report before it was issued. VanStar copied and
publicly distributed this Robinson-Humphrey report after it was
issued, thus endorsing and adopting it as its own. The report
increased the forecasted F97 EPS for VanStar as follows:
Fiscal 1997
-----------
Q1 $ .20
Q2 $ .24
Q3 $ .29
Q4 $ .31
Year $1.04
The report also stated:
Until FY95, Vanstar's financial record exhibited
high revenue growth but only modest profit from
operations. That changed in FY95 when the company
reached critical mass in its profitable network services
business and as overall operating expenses declined to a
more manageable 13% of revenue. Margins have since been
further enhanced by the addition of other value added
services and expense efficiencies.
* * *
Vanstar has invested approximately $24 million over
the past three years developing proprietary, automated
systems that enhance and optimize service delivery.
These tools/systems include Nova -- an $18 million
project thus far that re-engineers Vanstar's service
delivery process and includes a new call management and
dispatch system.
* * *
Margins on support services should gradually improve in
FY97 as the benefits of automated tools to improve
service delivery (NOVA) begin to kick in . . . leading to
our $1.04 EPS estimate.
83. On July 26, 1996, an article appeared in the San
Francisco Business Times which quoted Amato as stating that VanStar
was enjoying "explosive growth in client demand."
84. By Aug. 1996, the 180-day "lock-up" was only about 30
days from expiration, and the time when certain of the VanStar
insiders planned to sell off their VanStar stock was quickly
- 56 -
approaching. VanStar, with the help of Alex. Brown, was then
orchestrating a convertible debenture offering (private placement)
through which VanStar planned to raise as much money as possible to
refinance its IBMCC variable-rate debt with lower cost subordinated
fixed-rate debt in the form of debentures which were convertible
into VanStar common stock. However, because VanStar stock had only
advanced to $16-3/4 per share between the Mar. 11, 1996 IPO and
Aug. 1, 1996, despite a strong stock market and VanStar's favorable
public statements since the IPO, the defendants embarked on a
massive publicity campaign over the next several weeks to flood the
market with favorable information about VanStar's business and its
future prospects, in efforts to drive VanStar's stock higher during
this crucial time period by convincing the market that VanStar's
business was performing better than expected and its EPS in the
balance of F97 and during F98 would be higher than earlier
forecast. The defendants engaged in these efforts to stimulate the
interest in VanStar common stock, drive its share price higher and
thereby sell convertible bonds on the most favorable terms, i.e.,
the lowest rate of interest.
85. On Aug. 9-10, 1996, Tauscher, Rubin and Amato spoke with
Caso of Alex. Brown to provide him with information to use in a new
report on VanStar he was preparing. During those conversations,
they told Caso:
• VanStar's product business remained strong, with very
strong demand. VanStar's service business was also very
strong. VanStar saw no problem in sustaining its current rate
of services growth.
• VanStar was not experiencing any significant product
shortages and was obtaining sufficient product to meet demand.
- 57 -
• VanStar's NOVA system would be deployed by the summer of
1996, leading to significant cost savings.
• VanStar was enjoying strong product demand beyond its
expectations which was leading to higher-than-anticipated
profit margins on product sales.
• VanStar's new NOVA system was being successfully
implemented, and was partially operational which was leading
to expense savings for VanStar, thus benefitting its results
from operations.
• VanStar was enjoying extraordinarily strong demand for
its professional services such that revenue from this part of
its business was exceeding expectations and, due to the high
profit margins associated with that business, would result in
VanStar achieving higher EPS than earlier forecast.
• VanStar was successfully growing its business rapidly
while nevertheless keeping its expenses of operations under
control in part due to the partial implementation of its NOVA
system which was benefitting VanStar's profit margins.
• VanStar expected the profit margins on its sales of:
products to remain at the levels to which they had recently
increased due to the extremely strong demand for product sales
and the firmer prices being achieved in product sales.
• VanStar expected its revenues from professional services
to continue to grow very rapidly due to its successful
expansion in this business.
• VanStar's business was performing better than had been
internally budgeted or forecasted, meaning that VanStar's
second half F97 EPS and its F97 EPS would both be higher than
earlier forecast and that its F98 EPS would also exceed the
level previously forecast.
• As a result, VanStar would likely exceed its prior
estimated EPS for VanStar's 1stQ F97 of $0.16 and F97 EPS
forecasts of $1.00. and would achieve F98 EPS of over $1.25.
• VanStar was forecasting the following F97 EPS:
Fiscal 97
---------
Q1 $ .21-$.22
Q2 $ .23-$.24
Q3 $ .30-$.31
Q4 $ .31-$.32
FY $ .99-$1.07
86. On Aug. 13, 1996, Alex. Brown issued a report on VanStar,
written by Caso, which repeated the information provided to him
- 58 -
during his Aug. 9-10, 1996 conversations with Tauscher, Rubin and
Amato. The report was written by Caso, but reviewed and approved
by Tauscher, Rubin and Amato before it was issued, based on
conversations between Caso and Tauscher, Amato or Rubin in which a
two-way flow of information occurred between them and they agreed
upon the contents of the report. VanStar copied and publicly
distributed this Alex. Brown report, thus endorsing and adopting it
as its own. The report stated:
-- Based on a recent visit with management . . . we
believe that product revenue during F1Q (July) 1997 will
rise a higher-than-expected 30%.
* * *
-- We are raising our F1Q 1997 EPS estimate from $0.16
to $0.21 and our FY 1997 and FY 1998 EPS estimates by
$0.07 each to $1.07 and $1.27, respectively.
87. On Aug. 27, 1996, Vanstar issued a release announcing its
1stQ F97 results headlined:
VANSTAR ANNOUNCES STRONG EARNINGS AND REVENUE INCREASES
FOR FIRST QUARTER OF ITS FISCAL YEAR; SUBSTANTIAL GROWTH
IN REVENUES FROM PROFESSIONAL SERVICES AND PRODUCT SALES
DRIVE FINANCIAL PERFORMANCE
The release stated:
"During the first quarter, the company benefited
from a growing demand for our network services, as large
corporate customers continued to transition to new higher
performance technologies and client/server networks. We
also experienced continued strong product sales," said
William Y. Tauscher, Chairman of Vanstar.
* * *
Selling, general and administrative expenses were
$56.9 million, or 10.2 percent of revenues for the
quarter ending July 31, 1996. . . . "We continue to hold
the line on this important measurement as we reap the
benefits of management systems and operational improve-
ments put into place in the past four years," Tauscher
said. "One of our major initiatives in this area has
been the development of NOVA, our proprietary service
delivery system. During this period, we began imple-
- 59 -
menting NOVA, which is designed to reduce costs through
improved parts logistics, resource allocations and
billing procedures. We expect this program to be
deployed and operational by April of 1997, culminating a
two-year, $25-million corporate commitment."
88. On Aug. 27, 1996, Amato, Rubin and Tauscher spoke to a
large number of securities analysts, institutional investors, money
and portfolio managers, large VanStar shareholders and brokers in
a nationwide conference call. During the call and in later one-on-
one conversations with the participants, they directly disseminated
important information to the market by stating:
• VanStar's product business continued to be strong,
VanStar was encountering very strong demand and VanStar was
not having any difficulties obtaining product to meet customer
demand.
• Implementation of VanStar's NOVA system would reduce
VanStar's personnel costs significantly over the next 12
months and lead to significantly higher profit margins for
VanStar.
• VanStar was still making progress in completing the final
development and implementation of its NOVA system, which it
now expected would be completely deployed by the end of 1996,
but would still benefit VanStar's margins during F97 as the
system was rolled out.
• VanStar was enjoying strong product demand beyond its
expectations which was leading to higher-than-anticipated
profit margins on product sales.
• VanStar's new NOVA system was being successfully
implemented, and was partially operational which was leading
to expense savings for VanStar, thus benefitting its results
from operations.
• VanStar was enjoying extraordinarily strong demand for
its professional services such that revenue from this part of
its business was exceeding expectations and, due to the high
profit margins associated with that business, would result in
VanStar achieving higher EPS than earlier forecast.
• VanStar was successfully growing its business rapidly
while nevertheless keeping its expense of operations under
control in part due to the partial implementation of its NOVA
system which was benefitting VanStar's profit margins.
- 60 -
• VanStar expected the profit margins on its sales of
products to remain at the levels to which they had recently
increased due to the extremely strong demand for product sales
and the firmer prices being achieved in product sales.
• VanStar expected its revenues from professional services
to continue to grow very rapidly due to its successful
expansion in this business.
• VanStar's business was performing better than had been
internally budgeted or forecasted, meaning that VanStar's
second half F97 EPS and its F97 EPS would both be higher than
earlier forecast and that its F98 EPS would also exceed the
level previously forecast.
• VanStar was forecasting the following EPS:
Fiscal 97
---------
Q1 $ .21-$.22
Q2 $ .23-$.24
Q3 $ .30-$.31
Q4 $ .31-$.32
FY $ .99-$1.07
Analysts also repeated some of this information in reports issued
over the next few days, as pleaded below.
89. On Sept. 4, 1996, VanStar completed its merger with
Mentor Technologies by issuing 300,000 shares of VanStar stock in
a transaction valued at $6 million, or $20 per share.
90. On Sept. 10, 1996, Robinson-Humphrey issued another
report on VanStar, authored by Anastasi, which raised the EPS
forecast for Vanstar for F97 to $1.05 and for F98 to $1.30.
91. On Sept. 12, 1996, Vanstar made a presentation at the
Robinson-Humphrey annual investor conference in New York City
during which Tauscher, Rubin and Amato directly disseminated
important information to the market by telling the assembled
investors, analysts, institutional investors, money and portfolio
managers, brokers and stock traders that:
• VanStar's product business remained strong, with very
strong demand. VanStar also saw no problem in sustaining the
current rate of growth in its services business.
- 61 -
• Although some computer product resellers were reporting
a slowdown in shipments due to product shortages, VanStar was
not experiencing any significant shortages and was obtaining
sufficient product to meet demand.
• VanStar was continuing to make progress in completing the
deployment of its NOVA system and this was now going according
to plan and no further significant problems or delays were
anticipated as NOVA would be deployed by the end of 1996.
• VanStar was enjoying strong product demand beyond its
expectations which was leading to higher than anticipated
profit margins on product sales.
• VanStar's new NOVA system was being successfully
implemented and was partially operational which was leading to
expense savings for VanStar, thus benefitting its results from
operations.
• VanStar was enjoying extraordinarily strong demand for
its professional services such that revenue from this part of
its business was exceeding expectations and, due to the high
profit margins associated with that business, would result in
VanStar achieving higher EPS than earlier forecast.
• VanStar was successfully growing its business rapidly
while nevertheless keeping its expense of operations under
control in part due to the partial implementation of its NOVA
system which was benefitting VanStar's profit margins.
• VanStar expected its profit margins from the sales of
products to remain at the levels to which they had recently
increased due to the extremely strong demand for product sales
and the firmer prices being achieved in product sales.
• VanStar expected its revenues from professional services
to continue to grow very rapidly due to its successful
expansion in this business.
• VanStar's business was performing better than had been
internally budgeted or forecasted, meaning that VanStar's
second half F97 EPS and its F97 EPS would both be higher than
earlier forecast and that its F98 EPS would also exceed the
level previously forecast.
• VanStar was forecasting the following F97 EPS:
Fiscal 97
---------
Q1 $ .21-$.22
Q2 $ .23-$.24
Q3 $ .30-$.31
Q4 $ .31-$.32
FY $ .99-$1.07
- 62 -
92. On Sept. 13, 1996, VanStar held its annual stockholders
meeting at the Waldorf Astoria Hotel in New York City. During the
meeting, Tauscher directly disseminated important information to
the market by stating that:
• VanStar's product business remained strong, with very
strong demand. VanStar also saw no problem in sustaining the
current rate of growth in its services business.
• Although some computer product resellers were reporting
a slowdown in shipments due to product shortages, VanStar was
not experiencing any significant shortages and was obtaining
sufficient product to meet demand.
• VanStar was continuing to make progress in completing the
deployment of its NOVA system and this was now going according
to plan and no further significant problems or delays were
anticipated as NOVA would be deployed by the end of 1996.
• VanStar was enjoying strong product demand beyond its
expectations which was leading to higher than anticipated
profit margins on product sales.
• VanStar's new NOVA system was being successfully
implemented, and was partially operational which was leading
to expense savings for VanStar, thus benefitting its results
from operations.
• VanStar was enjoying extraordinarily strong demand for
its professional services such that revenue from this part of
its business was exceeding expectations and, due to the high
profit margins associated with that business, would result in
VanStar achieving higher EPS than earlier forecast.
• VanStar was successfully growing its business rapidly
while nevertheless keeping its expense of operations under
control in part due to the partial implementation of its NOVA
system which was benefitting VanStar's profit margins.
• VanStar expected its product sales profit margin to
remain at the level to which it had recently increased due to
the extremely strong demand for product sales and the firmer
prices being achieved in product sales.
• VanStar expected its revenues from professional services
to continue to grow very rapidly due to its successful
expansion in this business.
• VanStar's business was performing better than had been
internally budgeted or forecasted, meaning that VanStar's
second half F97 EPS and its F97 EPS would both be higher than
- 63 -
earlier forecast and that its F98 EPS would also exceed the
level previously forecast.
• VanStar was forecasting the following F97 EPS:
Fiscal 97
---------
Q1 $ .21-$.22
Q2 $ .23-$.24
Q3 $ .30-$.31
Q4 $ .31-$.32
FY $ .99-$1.07
93. On Monday, Sept. 16, 1996, VanStar appeared at the
Donaldson Lufkin & Jenrette Securities Conference in New York City.
During their presentation to the assembled institutional investors,
money and portfolio managers, brokers and stockholders, Tauscher
and Rubin directly disseminated important information to the market
by stating that:
• VanStar's product business remained strong, with very
strong demand. VanStar also saw no problem in sustaining the
current rate of growth in its services business.
• Although some computer product resellers were reporting
a slowdown in shipments due to product shortages, VanStar was
not experiencing any significant shortages and was obtaining
sufficient product to meet demand.
• VanStar was continuing to make progress in completing the
deployment of its NOVA system and this was now going according
to plan and no further significant problems or delays were
anticipated as NOVA would be deployed by the end of 1996.
• VanStar was enjoying strong product demand beyond its
expectations which was leading to higher than anticipated
profit margins on product sales.
• VanStar's new NOVA system was being successfully
implemented, and was partially operational which was leading
to expense savings for VanStar, thus benefitting its results
from operations.
• VanStar was enjoying extraordinarily strong demand for
its professional services such that revenue from this part of
its business was exceeding expectations and, due to the high
profit margins associated with that business, would result in
VanStar achieving higher EPS than earlier forecast.
• VanStar was successfully growing its business rapidly
while nevertheless keeping its expense of operations under
- 64 -
control in part due to the partial implementation of its NOVA
system which was benefitting VanStar's profit margins.
• VanStar expected its profit margins on its sales of
products to remain at the levels to which they had recently
increased due to the extremely strong demand for product sales
and the firmer prices being achieved in product sales.
• VanStar expected its revenues from professional services
to continue to grow very rapidly due to its successful
expansion in this business.
• VanStar's business was performing better than had been
internally budgeted or forecasted, meaning that VanStar's
second half F97 EPS and its F97 EPS would both be higher than
earlier forecast and that its F98 EPS would also exceed the
level previously forecast.
• VanStar was forecasting the following F97 EPS:
Fiscal 97
---------
Q1 $ .21-$.22
Q2 $ .23-$.24
Q3 $ .30-$.31
Q4 $ .31-$.32
FY $ .99-$1.07
94. On Sept. 24, 1996, VanStar appeared at the Robertson
Stephens Information Services Conference in San Francisco. During
his presentation for VanStar, Tauscher directly disseminated
important information to the market by stating that:
• VanStar's product business remained strong, with very
strong demand.
• Although some computer product resellers were reporting
a slowdown in shipments due to product shortages, VanStar was
not experiencing any significant shortages and was obtaining
sufficient product to meet demand.
• VanStar saw no problem in sustaining its current rate of
services growth.
• VanStar's progress in completing the final development
and implementation of its NOVA system was slightly delayed as
during "stress testing" certain bugs were discovered; however,
the problem had been fixed, installation was now going
according to plan and no further significant problems or
delays were anticipated as NOVA would be deployed by the end
of 1996.
- 65 -
• VanStar was enjoying strong product demand beyond its
expectations which was leading to higher than anticipated
profit margins on product sales.
• VanStar's new NOVA system was being successfully
implemented, and was partially operational which was leading
to expense savings for VanStar, thus increasing VanStar's
profit margins.
• VanStar was enjoying extraordinarily strong demand for
its professional services such that revenue from this part of
its business was exceeding expectations and, due to the high
profit margins associated with that business, would result in
VanStar achieving higher EPS than earlier forecast.
• VanStar was successfully growing its business rapidly
while nevertheless keeping its expense of operations under
control in part due to the partial implementation of its NOVA
system which was benefitting VanStar's profit margins.
• VanStar expected its profit margins from the sale of
products to remain at the levels to which they had recently
increased due to the extremely strong demand for product sales
and the firmer prices being achieved in product sales.
• VanStar expected its revenues from professional services
to continue to grow very rapidly due to its successful
expansion in this business.
• VanStar's business was performing better than had been
internally budgeted or forecasted, meaning that VanStar's
second half F97 EPS and its F97 EPS would both be higher than
earlier forecast and that its F98 EPS would also exceed the
level previously forecast.
• They were comfortable with analysts' F97 EPS of $1.05-
$1.09 per share.
• VanStar was forecasting the following EPS:
Fiscal 97
---------
Q1 $ .21-$.22
Q2 $ .23-$.24
Q3 $ .30-$.31
Q4 $ .31-$.32
FY $ .99-$1.07
95. The positive statements made by the defendants in ¶¶77-
88, 89-94 about VanStar's business, operations and earnings per
share prospects were each false and misleading when made. The true
- 66 -
facts which were then available to each defendant, but which
defendants failed to disclosed, included:
(a) That VanStar's NOVA system was suffering from design
deficiencies, serious software defects and operational problems
which would prevent the effective operation and thus the deployment
of that system for the foreseeable future;
(b) That the design deficiencies, software defects and
operational problems with respect to the NOVA system were so
substantial and serious that VanStar was unable to remedy them and
they would delay the implementation and/or deployment of the NOVA
system until at least mid-1997;
(c) That, as a result of the failure to be able to
deploy the NOVA system in a timely fashion, VanStar was continuing
to incur significant personnel costs above and beyond those
budgeted or planned for, which was having an adverse material
impact on VanStar's results from operations;
(d That due to the serious and persistent problems with
NOVA that prevented its timely deployment and implementation,
VanStar was failing to achieve the expense savings anticipated from
that system, while being forced to spend millions more than planned
on NOVA development, redesign and de-bugging, which was having a
material adverse impact on VanStar's results from operations;
(e) That VanStar was having significant ongoing problems
in obtaining a sufficient supply of computer hardware products to
meet customer demand, which was curtailing its product sales
revenue growth and having an adverse impact on VanStar's results
from operations;
- 67 -
(f) That VanStar's network services part of its business
was not achieving the type of growth in customers or demand for
services as anticipated, which was having an adverse impact on
VanStar's results from operations;
(g) That demand for VanStar's network services was not
sufficiently strong for that part of VanStar's business to generate
revenues and profits sufficient to overcome the adverse impact of
computer hardware shortages on VanStar's business;
(h) That VanStar was not successfully controlling its
SG&A expenses as claimed and, in fact, due to failure to implement
the NOVA system on a timely basis and the extra expenses being
incurred in attempting to fix that system, as well as revenue
shortfalls from both its product sales and services parts of its
business, VanStar's SG&A expenses were increasing to levels
significantly above those budgeted, which was having an adverse
impact on VanStar's results from operations;
(i) That VanStar had suffered severe computer hardware
product shortages in Aug. and. Sept., which had a very adverse
impact on VanStar's results from operations; and
(j) That as a result of the foregoing negative factors,
there was no reasonable basis in fact for defendants' forecasts of
full-year F97, 3rdQ and 4thQ F97 EPS of $.99-$1.09, $.29-$.31 and
$.31-$.32, respectively, for VanStar and defendants knew that those
forecasts were false when made.
96. Defendants' massive publicity campaign in Aug. 96 and the
first part of Sept. had the desired impact as VanStar's stock
soared from $14-1/8 on July 23, 1996 to $19-1/8 on Sept. 11, 1996
and on to its then all time high of $26 per share.
- 68 -
97. Immediately upon the expiration of the "lock-up," certain
of the Individual Defendants began to sell off their VanStar stock.
Between Sept. 18-20, 1996, Bard sold 420,596 VanStar shares, 58% of
the stock he actually owned, at $23-$24.50 per share, reaping more
than $9.8 million. Kuntzendorf sold 69,999 VanStar shares on
Sept. 13, 1996, for $20 a share, 94% of the stock he actually
owned, for over $1.3 million. Anderson, between Sept. 6-11, 1996,
sold 48,940 VanStar shares at between $18.54-$18.75 per share, 98%
of the stock he actually owned, for over $900,000. Moore sold
38,724 VanStar shares at $18.63-$19 per share between Sept. 9-11,
1996, 90% of the stock he actually owned, for over $720,000.
Laney, on Sept. 19, 1996, sold 5,000 VanStar shares at $23.25 per
share, 100% of the stock he actually owned, for $116,250.
98. As a result of the false statements in the preceding
paragraphs, VanStar's common stock rose from $15-1/8 to $26 while
VanStar's convertible debenture sale was in progress, generating
very strong demand for these convertible debentures, enabling
VanStar, on Sept. 27, 1996, to sell $200 million in debentures,
well in excess of the amount originally intended to be sold. Alex.
Brown acted as VanStar's investment banker and financial advisor in
selling these debentures.
99. On or about Sept. 27, 1996, Tauscher, Rubin and Amato
hosted a nationwide conference call regarding VanStar's just-
completed sale of convertible debentures for several securities
analysts, institutional investors, money and portfolio managers,
and large VanStar shareholders. In that conference call and in
private one-on-one conversations after the call, Tauscher, Rubin
- 69 -
and Amato directly disseminated important information to the market
by stating that:
• VanStar's product business remained strong, with very
strong demand.
• Although some computer product resellers were reporting
a slowdown in shipments due to product shortages, VanStar was
not experiencing any significant shortages and was obtaining
sufficient product to meet demand.
• VanStar saw no problem in sustaining its current rate of
services growth.
• VanStar's progress in completing the final development
and implementation of its NOVA system was slightly delayed as
during "stress testing" certain bugs were discovered; however,
the problem had been fixed, installation was now going
according to plan and no further significant problems or
delays were anticipated as NOVA would be deployed by the end
of 1996.
• VanStar was enjoying extraordinarily strong demand for
its professional services such that revenue from this part of
its business was exceeding expectations and, due to the high
profit margins associated with that business, would result in
VanStar achieving higher EPS than earlier forecast.
• VanStar expected its product sales profit margin to
remain at the level to which it had recently increased due to
the extremely strong demand for product sales and the firmer
prices being achieved in product sales.
• VanStar expected its revenues from professional services
to continue to grow very rapidly due to its successful
expansion in this business.
• Although VanStar was encountering some product shortages,
the shortages were not nearly as serious as rumored in the
marketplace and VanStar had sufficient product supply to meet
the strong product demand its business was encountering and to
meet its revenue and EPS forecast.
• VanStar was forecasting the following EPS:
Fiscal 97
---------
Q1 $ .23A
Q2 $ .24-$.25
Q3 $ .30-$.31
Q4 $ .31-$.32
FY $1.08-$1.11
• VanStar expected F98 EPS of over $1.30.
- 70 -
100. On Oct. 2, 1996, Alex. Brown issued a report on VanStar,
authored by Caso, which repeated information given him by Tauscher,
Rubin and Amato on the Sept. 27, 1996 conference call. The report
forecast F97 and F98 EPS as follows:
F97 F98
--- ---
Q1 $ .23A Q1 $ .27
Q2 $ .25 Q2 $ .31
Q3 $ .29 Q3 $ .36
Q4 $ .32 Q4 $ .37
Year $1.09 Year $1.31
The report also stated:
Based on better-than-expected F1Q (July) 1997 earnings,
we are raising our FY 1997 (April) EPS estimate to $1.09
from $1.07. Based an continued strong execution of its
strategic plan and a strong business outlook, we are
raising our FY 1998 estimate to $1.31 from $1.27. We
believe both estimates remain conservative. We remain
upbeat on the near-term share price outlook given strong
business momentum . . . .
* * *
1) REASONS WHY WE REMAIN POSITIVE ON VANSTAR MARKET
LEADER. The value-added re-seller, or VAR, business has
consolidated to five national players each with
approximately $2 billion in sales that service the
Fortune 1000. VanStar, if not the leader, would be a
close second. With the period of sharp industry
consolidation now essentially over, in our view, gross
margins on reselling products have stabilized to slightly
improved in the last six quarters, with an expectation
that this trend will continue. All the national
participants continue to benefit from current strong
industry growth in product sales, expanding service
revenues and enhanced market share. We see no let up in
the strong pace of business since late August.
* * *
5) BUSINESS IS GOOD AND MANAGEMENT IS EXECUTING.
Vanstar has beaten our estimates three quarters in a row,
and our expectation is that this trend will continue.
101. On Oct. 18, 1996, VanStar announced that it would acquire
National Technology Group/Contract Data Services in exchange for
approximately 950,000 shares of VanStar common stock, a transaction
- 71 -
valued at $21.9 million or $23 per share, with the transaction to
close in late 1996 or early 1997.
102. Also on Oct. 18, 1996, Tauscher, Rubin and Amato
conducted a conference call for several money and portfolio
managers securities analysts institutional investors and large
VanStar stockholders. During that conference call and in
subsequent one-on-one conversations with participants, Tauscher,
Rubin and Amato directly disseminated important information to the
market by stating:
• That VanStar's acquisition of National Technology
Group/Contract Data Services for 950,000 shares of VanStar
stock would be neutral to F97 earnings and additive to F98
earnings.
• That demand for VanStar's products remained robust.
• That although product supply from manufacturers was not
keeping up, they were nevertheless comfortable with analysts'
earnings per share estimates, as they expected the product
constraint to ease throughout the next two quarters and the
higher margins from VanStar's other business lines to offset
any shortfall.
• That product constraints had eased in October and sales
were robust.
• That consensus street estimates of VanStar's F98 earnings
per share may prove to be too conservative.
103. On Oct. 21, 1996, Alex. Brown issued a research report on
VanStar, written by Caso, which repeated information provided him
during the Oct. 18, 1996 conference call. The report raised the
F97 EPS forecast for VanStar to $1.09 and the F98 EPS forecast for
VanStar to $1.31. The report also stated:
INVESTMENT HIGHLIGHTS
- Management, during an analysts' conference call,
endorsed a F2Q (Oct.) 1997 EPS range of $0.23-$0.25,
while indicating FY 1998 Street estimates may prove
conservative.
- 72 -
* * *
INVESTMENT SUMMARY
During a recent business review VanStar management
endorsed the Street's F2Q 1997 EPS estimate range of
$0.23-$0.25, and indicated that the FY 1998 estimates may
prove light. We remain comfortable with our F2Q 1997 EPS
estimate of $0.25. Management also noted that post the
closing of both their convertible offering and account
receivable securitization, the Company's effective
borrowing rate should decline by approximately 85 basis
points (note that this is offset by the additional shares
created by the convertible). Separately, the Company
announced the acquisition of national Technology Group
(NTG), a Southeast-based VAR. NTG has approximately $60
million in product revenues and $35 million in service
revenues. We are increasingly comfortable with both our
FY 1997 and FY 1998 EPS estimates of $1.09 and $1.31,
respectively.
DETAILS OF NATIONAL TECHNOLOGY GROUP ACQUISITION
VanStar will issue approximately 950,000 shares in
exchange for NTG, which based on VanStar's closing price
of 27-3/8 on Friday, the transaction is valued at
approximately $26 million. The acquisition is expected
to close after the second quarter, i.e., sometime in
early November. Management does not believe the deal
will be dilutive in either the third or fourth quarters
of FY 1997 and expects it to be accretive to FY 1998
earnings. . . .
OTHER HIGHLIGHTS:
1) MANAGEMENT INDICATES THAT FY 1998 ANALYSTS'
ESTIMATES MAY PROVE TO BE LOW. Management noted that the
Street's FY 1998 EPS estimates may be a bit conservative
especially in light of the NTG acquisition and the strong
tone of the service business. For now we are leaving our
FY 1998 estimate unchanged.
2) PRODUCT DEMAND REMAINS STRONG; SUPPLY HAS BECOME AN
ISSUE. Management noted that product demand remains
robust, but that the supply from the manufacturers, as
they are all updating their models, is not keeping up.
Management noted that although product revenue will be up
sharply year over year, the sequential qtr comparison
will be flat to slightly down. The somewhat lower-than-
expected product sales; however, will be offset by much
stronger-than-expected gross margin, which managements
believes will exceed the last quarter's impressive 9.9%
(we had been modeling for 9.6%). We note that we have
adjusted our revenue and margin assumptions with the end
result being very little change to product gross profit.
- 73 -
104. On Oct. 30, 1996, Robinson Stephens issued a research
report on VanStar, written by Lacerra, which repeated information
provided during the Oct. 18, 1996 conference call. The report
stated:
* We have increased our fiscal 1997 (April) EPS estimate
from $1.01 to $1.08 versus $0.59. The estimate increase
is primarily due to a strong 1Q report. The company beat
our 1Q EPS estimate by $0.05. During 1Q, strong PC
demand and better than expected results in services drove
revenue and profit gains. We believe 2Q product revenue
growth is tempered somewhat by tightly constrained
product. We expect this situation to improve in the
second half of the fiscal year.
* * *
LifeCycle Services (Support) Business Trends
* * *
Rollout of the delayed NOVA project is in progress. We
believe NOVA will help the LifeCycle Services division
achieve its margins goals of 40-45% with NOVA's full
implementation, which should occur in fiscal 1998. Nova
is a proprietary delivery system that will manage systems
engineers, help desk, dispatch, repair, installation,
move/add/changes and asset management services offerings.
We expect NOVA to drive profitability as greater
efficiency in execution and benefits in the field offset
growth in the number of field engineers (FE's).
105. On Nov. 11, 1996, Alex. Brown issued another research
report on VanStar. The report stated:
INVESTMENT SUMMARY. We have raised our investment rating
for VanStar to "strong buy" from "buy" based on an
improving business outlook, a growing belief our
estimates will prove conservative, particularly in FY
(April) 1998 . . . . We remain comfortable with our FY97
and FY98 estimates of $1.09 and $1.31, respectively.
* * *
. . . VanStar's outlook only improves, our estimates
remain upwardly biased and the business model is
increasingly influenced by more predictable service
revenues. We believe recent (August/September) product
supply constraints (which will dampen product resale
revenue in the October quarter), have come back strongly
beginning in October, and may have been a reason for
- 74 -
recent weakness. Our expectation is that the short-term
weakness in sales volume will be made up for by higher
margins.
The report was written by Caso, Tauscher and Rubin via communi-
cations in which a two-way flow of information occurred between
them and they agreed upon the contents of the report and Tauscher
and Rubin reviewed and approved the report before it was issued.
VanStar copied and publicly distributed this Alex. Brown report
after it was issued, thus endorsing and adopting it as its own.
106. On Nov. 15, 1996, Deutsche Morgan Grenfell issued a
research report on VanStar, written by Steven Fortuna ("Fortuna").
The report was reviewed and approved by Tauscher and Rubin before
it was issued. VanStar copied and publicly distributed this
Deutsche, Morgan Grenfell report after it was issued, thus
endorsing and adopting it as its own. The report stated:
We believe Vanstar is poised to exploit a corporatewide
move to distributed computing architectures, coupled with
a growing trend toward desktop services outsourcing. In
our opinion, Vanstar has a tremendous growth opportunity
ahead of it . . . .
Vanstar's bottom-line growth should benefit from a
rapidly expanding services business which now accounts
for 12% of sales but could rise to 15% by fiscal 1999.
With service margins 250%-350% higher than hardware
margins, this mix shift points to leveraged upside in
Vanstar's operating margins over the next several years,
leading to earnings growth in the 30% range.
Meanwhile, Vanstar's top line growth should remain
robust, driven by strong corporate PC demand for Pentium
and Windows NT-based products. We expect the current
upgrade cycle could continue for two or more years given
the obsolescence of the installed base coupled with 305
annual gains in PC price/performance. We forecast sales
increases of 31% in fiscal 1997 and 26% in fiscal 1998.
107. The statements in ¶¶99-100, 102-106 were false and
misleading when made. The true facts, which were known by the
defendants at the time these statements were made, were:
- 75 -
(a) That VanStar's NOVA system was suffering from design
deficiencies, serious software defects and operational problems
which would prevent the effective operation and thus the deployment
of that system for the foreseeable future;
(b) That the design deficiencies, software defects and
operational problems with respect to the NOVA system were so
substantial and serious that VanStar was unable to remedy them and
they would delay the implementation and/or deployment of the NOVA
system until at least mid-1997;
(c) As a result of the failure to be able to deploy the
NOVA system in a timely fashion, VanStar was continuing to incur
significant personnel costs above and beyond those budgeted or
planned for, which was having an adverse material impact on
VanStar's results from operations;
(d) That due to the serious and persistent problems with
NOVA that prevented its timely deployment and implementation,
VanStar was failing to achieve the expense savings anticipated from
that system, while being forced to spend millions more than planned
on NOVA development, redesign and de-bugging, which was having a
material adverse impact on VanStar's results from operations;
(e) That VanStar was having significant ongoing problems
in obtaining a sufficient supply of computer hardware products to
meet customer demand, which was curtailing its product sales
revenue growth and having an adverse impact on VanStar's results
from operations;
(f) That VanStar's network services part of its business
was not achieving the type of growth in customers or demand for
- 76 -
services as anticipated, which was having an adverse impact on
VanStar's results from operations;
(g) That demand for VanStar's network services was not
sufficiently strong for that part of VanStar's business to generate
revenues and profits sufficient to overcome the adverse impact of
computer hardware shortages on VanStar's business;
(h) That VanStar was not successfully controlling its
SG&A expenses as claimed and, in fact, due to failure to implement
the NOVA system on a timely basis and the extra expenses being
incurred in attempting to fix that system, as well as revenue
shortfalls from both its product sales and services parts of its
business, VanStar's SG&A expenses were increasing to levels
significantly above those budgeted, which was having an adverse
impact on VanStar's results from operations;
(i) That demand for VanStar's computer hardware products
was softening, which was having an adverse impact on VanStar's
revenues from the computer hardware sales part of its business;
(j) That while price supply constraints for VanStar's
computer hardware products were lessening in Dec. and Jan., at the
same time, demand for those products from its customers was
plummeting, resulting in much lower sales of computer hardware
product than planned or budgeted;
(k) That VanStar had suffered severe computer hardware
product shortages in Aug. and Sept., which had a very adverse
impact on VanStar's results from operations; and
(l) That as a result of the foregoing negative factors,
there was no reasonable basis in fact for defendants' forecasts of
full-year F97, 3rdQ and 4thQ F97 EPS of $1.08-$1.11, $.29-$.31 and
- 77 -
$.31-$.32, respectively, and F98 EPS of $1.30-$1.31 for VanStar and
defendants knew that those forecasts were false when made.
108. On Nov. 25, 1996, an article ran in the Computer Reseller
News, which quoted Anastasi, an analyst and Senior Vice President
at Robinson-Humphrey, as stating that "[VanStar is] in the sweet
spot of the market."
109. On Dec. 2, 1996, VanStar issued a release reporting its
2ndQ F97 results which was headlined:
VANSTAR CORPORATION CONTINUES STRONG EARNINGS GROWTH IN
SECOND QUARTER OF FISCAL YEAR: RAPID EXPANSION OF
PROFESSIONAL SERVICES HIGHLIGHTS STRONG FINANCIAL
PERFORMANCE
The release stated:
Vanstar Corporation today announced that net income in
the second quarter ending October 31, 1996 was $11.1
million, an increase of 123.8% from $5.0 million in the
second quarter a year ago. Earnings were 26 cents on a
per share basis, an increase of 72.6% from 15 cents for
the same period last year. The improvement reflects
continuing rapid growth in demand for all of Vanstar's
service offerings, product margin improvements, and a
trend toward longer-term relationships with corporate
customers.
Revenues in the second quarter were $543.7 million,
an increase of 22.2 percent from $445.1 million reported
in the second quarter a year earlier.
"Vanstar's rapidly growing Professional Services and
Life Cycle Services business is providing an increasingly
important contribution to revenue and margin growth,"
said William Y. Tauscher, Chairman of Vanstar.
* * *
"Our product business reflects an increasing trend
by Vanstar's customers to utilize us for outsourcing and
life cycle procurement services where Vanstar becomes the
single source for both products and services," said
Tauscher.
LifeCycle Services revenue reached $42.5 million for
the second quarter, up 25.0 percent from $34.0 million in
the same quarter last year. Gross margin percentage for
- 78 -
this quarter was 34.2 percent, compared with 35.5 percent
in the second quarter last year.
Training and other revenue totaled $10.5 million, an
increase of 24.0 percent from $8.5 million for the same
quarter a year ago. Training revenue alone grew 119.6
percent from the same quarter of the last fiscal year and
represents an increasing percentage of this revenue line.
110. On Dec. 2, 1996, Tauscher, Amato and Rubin hosted a
conference call for numerous money and portfolio managers,
securities analysts, institutional investors and large VanStar
stockholders. During that conference call and in subsequent, one-
on-one conversations with participants, Tauscher, Rubin and Amato
directly disseminated false and misleading information to the
market by stating that:
• VanStar's product business remained strong, with very
strong demand.
• Although some computer product resellers were reporting
a slowdown in shipments due to product shortages, VanStar was
not experiencing any significant shortages and was obtaining
sufficient product to meet demand.
• VanStar saw no problem in sustaining its current rate of
services growth.
• VanStar's progress in completing the final development
and implementation of its NOVA system was slightly delayed as
during "stress testing" certain bugs were discovered; however,
the problem had been fixed, installation was now going
according to plan and no further significant problems or
delays were anticipated as NOVA would be deployed by the
summer of 1996.
• VanStar was enjoying strong product demand beyond its
expectations which was leading to higher than anticipated
profit margins on product sales.
• VanStar was enjoying extraordinarily strong demand for
its professional services such that revenue from this part of
its business was exceeding expectations and, due to the high
profit margins associated with that business, would result in
VanStar achieving higher EPS than earlier forecast.
• VanStar was successfully growing its business rapidly
while nevertheless keeping its expense of operations under
- 79 -
control in part due to the partial implementation of its NOVA
system which was benefitting VanStar's profit margins.
• That VanStar expected its profit margins from sales of
products to remain at the levels to which they had recently
increased due to the extremely strong demand for product sales
and the firmer prices being achieved in product sales.
• VanStar expected its revenues from professional services
to continue to grow very rapidly due to its successful
expansion in this business.
• VanStar's business was performing better than had been
internally budgeted or forecasted, meaning that VanStar's
second half F97 EPS and its F97 EPS would both be higher than
earlier forecast and that its F98 EPS would also exceed the
level previously forecast.
• Although VanStar was encountering some product shortages,
the shortages were not nearly as serious as rumored in the
marketplace and VanStar had sufficient product supply to meet
the strong product demand its business was encountering and to
meet its revenue and EPS forecast.
• Although product shortages had begun to impact VanStar's
business somewhat, the impact was not material and while it
would result in some revenue shortfall for VanStar in the 3rdQ
F97 this would not have any material impact on VanStar's 3rdQ
F97 or 4thQ F97 or F97 EPS because revenues and earnings from
VanStar's services business were growing faster than
anticipated and would more than make up for any shortfall.
• VanStar was forecasting the following EPS:
Fiscal 97
---------
Q1 $ .23A
Q2 $ .26A
Q3 $ .27-$.29
Q4 $ .30-$.32
FY $1.06-$1.10
111. On Dec. 3, 1996, Robertson Stephens issued a report,
authored by Lacerra, which repeated information given her in the
Dec. 2, 1996, conference call and stated:
* VST reported 2Q97 EPS of $0.26 vs. $0.15, up 73% and
2 cents better than our expectation and the Street.
* Despite product constraints, product revenues grew
a strong 19% to $463M vs. $389M last year.
* * *
- 80 -
* We are increasing our fiscal 1997 EPS estimate by 2
pennies from $1.07 to 1.09 . . . . However, we are very
bullish on VanStar's prospects and believe that once
product constraints have eased, significant pent up
demand will be unleased . . . .
* * *
* LifeCycle (Support) Services revenues grew a strong
25% to $42.5M vs. $34.OM last year, much better than our
15% projection. Gross margins were 34.2% versus 35.5%
last year, about a percent lower than expectation. We
expect gross margins at support services to expand as the
NOVA project increased field engineer utilization; we
expect full deployment of NOVA by mid-1997. The company
has already begun deployment of the parts & spares module
and we expect will begin deployment of the field engineer
and dispatch module in 4Q97.
112. On Dec. 3, 1996, Deutsche Morgan Grenfell issued a report
on VanStar, authored by Fortuna, which repeated information given
him by Tauscher, Rubin and Amato in the Dec. 2, 1996 conference
call and stated:
* Based on a higher than expected services mix and
what we believe will be strong product growth in Q3/Q4,
we are raising EPS estimates to $1.06 and $1.40 for
fiscal years 1997 and 1998 from our original estimates of
$1.02 and $1.36. . . .
* Revenue for Q2 came in at $543.7 million vs. $445.1
million last year. Revenue growth was weaker than
expected, largely as a result of product shortages, but
still grew over 22%.
* Product revenue of $463 million was up 19% from last
year but suffered from vendor supply constraints. . . .
We expect the constraint on supply to be alleviated
substantially in the second half of the fiscal year.
* * *
* . . . Gross margins of 34.2% vs. 37.2% in the first
quarter reflect transition costs and other expenses
related to the company's new NOVA resource allocation
tool which should be fully operational by the end of the
fiscal year next April. We expect the benefits of NOVA,
in the form of reduced costs, to have positive impact
beginning in fiscal 1998.
- 81 -
113. On Dec. 4, 1996, Robinson-Humphrey issued a report,
written by Anastasi, which repeated information provided him during
the Dec. 2, 1996 conference call. The report forecasted 3rdQ F97
EPS of $.27, 4thQ F97 EPS of $.30, F97 EPS of $1.06 and F98 EPS of
$1.30 for VanStar.
114. On Dec. 5, 1996, Alex. Brown issued a report on VanStar
authored by Caso. The report repeated information provided Caso in
the Dec. 2, 1996 conference call. The report forecast the
following EPS for VanStar:
FY Apr.: 1997E 1998E
------- ----- -----
1Q $0.23 $0.29
2Q $0.26A $0.30
3Q $0.29 $0.34
4Q $0.32 $0.38
Fiscal Year $1.10 $1.31
The report also stated:
INVESTMENT HIGHLIGHTS
-- VanStar reported F2Q (Oct.) 1997 EPS of $0.26 versus
$0.15, $0.01 better than our and Street expectations
-- Low-margin product resale revenue was modestly below
our outlook, while high-margin services revenue was
significantly above our forecast. . . .
-- We view the quarter very positively given that EPS
surprised despite a shortfall in product resale revenue,
reflecting success in management's efforts to improve
earnings quality through a focus on rapid growth in
higher-margin service income and long-term life cycle
contracts, as well as a dramatic improvement in financing
costs
* * *
1) SUPPLY CONSTRAINTS IMPACT OCTOBER QTR. All four of
Vanstar's major product suppliers (IBM, Compaq, HP and
Toshiba) transitioned to new products in the quarter,
causing a (normal) short-term imbalance in supply.
DEMAND IS NOT AN ISSUE. Much of the supply imbalance has
corrected itself beginning in the month of October, with
strong improvement in activity in both October and
November. Management is cautiously optimistic, noting
the January quarter is traditionally a strong one (due to
- 82 -
cleaning up old IT budgets and others getting new
authorization), but that the activity tends to be biased
to the last six weeks of the quarter.
* * *
3) NOVA MOVING FORWARD. Vanstar's large back-office
automation process is now approximately 50% rolled out,
working successfully and expected to be completed by
fiscal year-end.
115. The statements contained in ¶¶108-114 were false and
misleading. The true facts, which were known by the defendants at
the time the statements were made, were:
(a) That VanStar's NOVA system was suffering from design
deficiencies, serious software defects and operational problems
which would prevent the effective operation and thus the deployment
of that system for the foreseeable future;
(b) That the design deficiencies, software defects and
operational problems with respect to the NOVA system were so
substantial and serious that VanStar was unable to remedy them and
they would delay the implementation and/or deployment of the NOVA
system until at least mid-1997;
(c) That, as a result of the failure to be able to
deploy the NOVA system in a timely fashion, VanStar was continuing
to incur significant personnel costs above and beyond those
budgeted or planned for, which was having an adverse material
impact on VanStar's results from operations;
(d) That due to the serious and persistent problems with
NOVA that prevented its timely deployment and implementation,
VanStar was failing to achieve the expense savings anticipated from
that system, while being forced to spend millions more than planned
- 83 -
on NOVA development, redesign and de-bugging, which was having a
material adverse impact on VanStar's results from operations;
(e) That VanStar was having significant ongoing problems
in obtaining a sufficient supply of computer hardware products to
meet customer demand, which was curtailing its product sales
revenue growth and having an adverse impact on VanStar's results
from operations;
(f) That VanStar's network services part of its business
was not achieving the type of growth in customers or demand for
services as anticipated, which was having an adverse impact on
VanStar's results from operations;
(g) That demand for VanStar's network services was not
sufficiently strong for that part of VanStar's business to generate
revenues and profits sufficient to overcome the adverse impact of
computer hardware shortages on VanStar's business;
(h) That VanStar was not successfully controlling its
SG&A expenses as claimed and, in fact, due to failure to implement
the NOVA system on a timely basis and the extra expenses being
incurred in attempting to fix that system, as well as revenue
shortfalls from both its product sales and services parts of its
business, VanStar's SG&A expenses were increasing to levels
significantly above those budgeted, which was having an adverse
impact on VanStar's results from operations;
(i) That demand for VanStar's computer hardware products
had declined significantly, which was having an adverse impact on
VanStar's revenues from the computer hardware sales part of its
business;
- 84 -
(j) That VanStar had suffered severe computer hardware
product shortages in Aug. and Sept., which had a very adverse
impact on VanStar's results from operations;
(k) That while product supply constraints for VanStar's
computer hardware products were lessening in Dec. at the same time,
demand for those products from its customers was plummeting,
resulting in much lower sales of computer hardware product than
planned or budgeted; and
(l) That as a result of the foregoing negative factors,
there was no reasonable basis in fact for defendants' forecasts of
full-year F97, 3rdQ and 4thQ F97 EPS of $1.06-$1.10, $.27-$.29 and
$.30-$.32, respectively, for VanStar and defendants knew that those
forecasts were false when made.
116. Defendants Manshouri, Sisson and Triant capitalized on
the continuing artificial inflation in the price of VanStar stock
caused by these false statements and sold 82,215 shares of their
VanStar stock between Dec. 6 and Dec. 13, 1996, pocketing over $2
million. Manshouri sold 97% of the VanStar stock he actually
owned. Sisson sold 100% of the VanStar stock he actually owned.
Triant sold 91% of the VanStar stock he actually owned.
117. On Dec. 9, 1996, an article on VanStar appeared in the
Computer Reseller News. The article reported that VanStar earned
$0.26 per share for the 2ndQ F97, beating analysts' estimates.
According to the article, "Tauscher said the sales issue [was] not
a concern. 'We continue to outgrow the marketplace and gain share.
We have focused the company to sell services first and found
product sells right along with it.'"
- 85 -
118. On Dec. 16, 1996, VanStar completed its acquisition of
Contract Data Service by issuing 952,491 shares of VanStar common
stock, in a transaction valued at $21.9 million, or $23 per share.
119. On Dec. 16, 1996, an article on VanStar appeared in the
Computer Reseller News. The article stated:
Chairman Bill Tauscher said the future of the company,
which is more focused on its service business than
products, looks bright. "We continue to outgrow the
marketplace and gain share," [Tauscher] said, adding he
would expect overall growth rates to remain in the 20
percent to 30 percent range.
120. On Dec. 19, 1996, Robertson Stephens issued two reports
on VanStar, written by Lacerra, Tauscher and Rubin via communi-
cations in which a two-way flow of information occurred between
them and they agreed upon the contents of the reports. Tauscher
and Rubin reviewed and approved the reports before they were
issued. The reports forecasted 3rdQ F97, 4thQ F97 and F97 EPS of
$.281 $.32 and $1.10, respectively, and F98 EPS of $1.30 for
VanStar. The reports also stated:
* We believe 3Q (Jan) is shaping up well despite
continued product constraints. We expect total revenues
at $610M versus $447M (+36%).
* We are optimistic about both the networking and support
services business; earlier this month we had increased
both our revenue and gross margin forecasts for both
businesses slightly. We expect networking revenues up
94% TO $32.lM versus $16.5M last year and up 16%
sequentially from $27.6M in the 2Q.
* We expect support services revenues up 19% to $41.4M
versus $34.8M last-year. We believe VanStar is gaining
share in the support services business and believe this
forecast may be conservative.
* We expect product revenues at $525M versus $391M last
year (+34%) and remain comfortable with this forecast
despite continued product constraints.
* * *
- 86 -
* We believe our fiscal 1998 forecast is conservative.
For example, the recent acquisition of NTG group is not
yet in our forecast . . . . In addition, in our opinion
recent contract wins by VanStar add visibility to our
$1.30 forecast.
* A public record of excellent execution. VanStar has
exceeded expectations each [sic] in each of its 4
quarters since coming public. . . . In addition, the
NOVA project is being-implemented and should benefit
profitability in fiscal 1998.
121. On Jan. 8, 1997, Robertson Stephens issued another
analyst report on VanStar, written by Lacerra, Tauscher and Rubin
via communications in which a two-way flow of information occurred
between them and they agreed upon the contents of the report and
Tauscher and Rubin reviewed and approved the report before it was
issued. VanStar copied and publicly distributed this Robertson
Stephens report after it was issued, thus endorsing and adopting it
as its own. The report stated:
* We believe 3Q97 (Jan) is shaping up well, given the
constrained product environment. We are comfortable with
our EPS forecast of $0.28 versus $0.16 (up 75%).
* We forecast revenues at $610M versus $447M (+36.5%).
Our revenue forecast breakout is as follows:
* * *
* We believe our 3Q product revenue forecast of $525M is
high on the Street. We believe Street forecasts are at
about $510 million. We believe the product constraint
situation is starting to ease for VanStar. New order
rate is strong as customers are learning that inventory
is becoming available.
122. On Jan. 9, 1997, VanStar purchased certain assets of DCT
Systems, Inc. and Niloy Inc. for up to 180,000 shares of VanStar
stock, plus $3-$5 million in cash.
123. On Jan. 9, 1997, VanStar participated in a conference
call sponsored by Deutsche Morgan Grenfell for money and portfolio
managers, securities analysts and institutional investors. During
- 87 -
that conference call Amato directly disseminated important
information to the market by stating:
• That VanStar's Oct. sales were "solid."
• That VanStar's Nov. and Dec. sales were "strong."
• That VanStar's Jan. sales were off to a "good start."
• That, as a result, VanStar's F97 revenue and EPS
projections were on track.
• That although product shortages were still an issue,
supplies had gotten better recently, as the product constraint
situation had eased.
• That VanStar was comfortable with EPS estimates for the
3rdQ F97 of $0.27.
124. On Jan. 10, 1997, Deutsche Morgan Grenfell issued a
report on VanStar, authored by Fortuna, which repeated the
information given him by Amato. The report stated:
Headline: Highlights from DMG Channel Conference Call
January 9, 1997
* * *
Conference Call Participants:
Dave Guenthner - CFO, Inacom
Jim Daniel - CFO, MicroAge
Jay Amato - President & COO, VanStar
* * *
* Each company commented specifically on sales levels
over the last three months of 1996. All three agreed
that January sales are off to a good start.
Inacom MicroAge VanStar
------ -------- -------
Oct somewhat soft strong solid
Nov strong somewhat soft strong
Dec strong strong strong
* * *
* Product shortages are still an issue with high-end
desktops and IBM/CPQ notebooks, although supplies have
gotten better over the past couple of quarters.
* Current product shortages are not tighter than expected
and have already been factored into our model. On the
- 88 -
other hand, if supply constraints ease over the coming
weeks, there could be revenue upside to our numbers given
the current level of demand.
125. On Jan. 15, 1997, Alex. Brown issued a report on VanStar,
written by Caso, Tauscher and Rubin via communications in which a
two-way flow of information occurred between them and they agreed
upon the contents of the report and Tauscher and Rubin reviewed and
approved the report before it was issued. VanStar copied and
publicly distributed this Alex. Brown report after it was issued,
thus endorsing and adopting it as its own. The report forecast
3rdQ F97, 4thQ F97 and F97 EPS of $.29, $.32 and $1.10,
respectively, and stated:
Management indicated that sell-through was below
expectation during the November-December time frame,
although indicated it had lost no meaningful accounts and
had actually gained some.
* * *
2) AFTER SLOW START TO JANUARY QTR PRODUCT SALES
ACCELERATING IN MONTH OF JANUARY. In small part due to
product transitions and therefore availability issues
early in the quarter, and the long Christmas holiday,
product sales had been running slightly behind Company
expectations. January, due to both new corporate IT
budgets allocations and the fact that it's the last month
of VanStar's quarter (and therefore salespeople are more
motivated), has historically strong sales. Recent
activity indicates that sales have picked up meaningfully
and field management believe the strong sales should
continue well into the spring.
3) MANAGEMENT ONLY GIVING COMFORT (AT THIS TIME) TO
STREET AVERAGE FOR QUARTER. Given the importance of the
month of January, and the somewhat slower start to the
quarter than planned (although business is up sharply in
the last few weeks), management is only willing to give
comfort to the Street average consensus of $0.27 (versus
$0.16 a year ago).
126. On Jan. 16, 1997, Amato told Fortuna, an analyst with
Deutsche Morgan Grenfell, that:
- 89 -
• The $0.27 consensus analyst estimate for VanStar's EPS in
the 3rdQ of F97 was achievable, although there was likely not
much upside to this estimate due to constrained product
supply.
• The product constraint situation had eased over the past
couple of months.
• The availability of product would improve in the 4thQ of
VanStar's F97.
• As a result, the 4thQ F97 EPS estimate for VanStar of
0.31 was conservative.
127. On Jan. 16, 1997, Deutsche Morgan Grenfell issued a
report on VanStar, authored by Fortuna, which repeated the
information given him by Amato that day. The report stated:
* The following comments are based on conversation we had
with Jay Amato, VanStar's President and Chief Operating
Officer on Thursday, January 16, 1997:
1 We feel that the $0.27 consensus estimate is
achievable, but there likely won't be much upside to this
number due to constrained product supply at the high-end.
We'd like to point out that other channel companies such
as Inacom, MicroAge, and Tech Data are not feeling this
nearly as much due to their lower-end customer base.
Remember that VanStar sells primarily to the Fortune 1000
and focuses on high-end desktop solutions.
2 Product supplies have been getting somewhat better
over the past couple of months as was indicated in last
week's DMG channel conference call. More importantly, we
believe that product supplies will get substantially
better going into VanStar's fourth quarter, which ends in
April. As a result we believe that our Q4 EPS estimate
of $0.31 (vs. consensus of $0.30) may prove to be
conservative.
128. On Jan. 22, 1997, Donaldson Lufkin & Jenrette Securities
issued an analyst report on VanStar, written by Thomas T. Rooney,
Tauscher and Rubin via communications in which a two-way flow of
information occurred between them and they agreed upon the contents
of the report and Tauscher and Rubin reviewed and approved the
report before it was issued. VanStar copied and publicly
distributed this Donaldson Lufkin & Jenrette report after it was
- 90 -
issued, thus endorsing and adopting it as its own. The report
forecast 3rdQ F97 EPS of $.27, 4thQ F97 EPS of $.31 and F97 EPS of
$1.06. The report also stated:
Looking forward, we believe that the company is poised to
gain market share based on the following factors: (1)
Vanstar has the necessary infrastructure investments in
people (more than 3,200 service professionals in the
United States), facilities (highly automated distribution
centers) and productivity tools (Navigator, Cockpit, and
NOVA); (2) the company possesses a broad service offering
to support the PC network infrastructure throughout its
life cycle; and (3) it has the ability to leverage its
already extensive customer base . . . . Based on these
factors, we believe that Vanstar can realize annual
growth that is 25-50% above the blended average for its
target market.
129. On Jan. 22, 1997, Robertson Stephens issued an analyst
report on VanStar, authored by Lacerra. The report was based on
conversations with Tauscher and Rubin during the prior few days and
repeated information provided by them to Lacerra, which stated:
* We are adjusting our 3Q97 product forecast,
primarily due to product constraints, especially of
Pentium Pro high end processors.
* For 3Q97, we have decreased our product revenue
forecast from $525 million to $495 million versus $391
million last year, still a very strong increase of 27%.
* We believe the constraint situation has begun to
ease.
* * *
* We remain comfortable with our forecasts for the
services business. We forecast Professional Services
(Networking) revenuers at $32.1 million versus $16.5
million last year, (+94%) and gross margins at 43.0%
versus 38.5%. We forecast LifeCycle (or Support)
Services at $41.4 million versus $34.8 million last year
(+19%) and gross margins at 35.7% versus 37.6%.
* We have maintained our 3Q97 EPS estimate of $0.28
versus $0.16.
130. Suddenly, in stark contrast to the particularized
assurances it had been giving analysts only seven days earlier,
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VanStar shocked the securities markets when it announced on Jan.
23, 1997 that it expected its 3rdQ F97 EPS to be much lower than
the $.27 it had been forecasting due to "[W]eakness in November
caused by product shortages and somewhat lower demand."
131. In a conference call on Jan. 23, 1997 for securities
analysts, institutional investors and others, Tauscher, Rubin and
Amato admitted:
[W]e still are continuing with the process of bringing
our NOVA . . . project[] up and . . . while we are
finished essentially with half of it and looking for the
benefits in the next quarter from that, and we will
finish in the next quarter with the next half -- that
process is in fact not completed and today is still
costing us money . . . .
* * *
[A]s I said earlier, . . . [w]e [will] begin to see the
benefits of the first half of the NOVA system, that's our
logistics and parts system, in this quarter. However, we
will not get any benefits of the second half which is the
dispatch capability which is coming up in this quarter.
. . .
* * *
Finally, in the life cycle services business . . . in the
quarter the conversion expenses . . . were running for
NOVA -- as opposed to any benefits . . . .
* * *
[T]here is a huge impact in gross margins for NOVA.
[There were] some severe product shortages in November
and . . . December [was] just so-so . . . . November was
very weak . . . .
* * *
Product availability . . . was horrible in November.
* * *
[W]e had a terrible August and September which we
believed -- terrible is a relative term, we were still up
in those months, but relative to our expectations . . . .
- 92 -
With respect to VanStar's service business, he admitted:
[O]ur professional service business was short in its
volume . . . .
132. As a result of these adverse revelations, VanStar stock
fell dramatically on Jan. 23, 1997, from $22-1/8 to $14-3/4 on huge
volume of 5.7 million shares, a one day drop of 32% on the largest
trading volume in the history of VanStar's existence as a public
company.
133. Analysts were furious at having been misled. One said:
Investment Conclusion
Clearly, as when any company misses a quarter, management
credibility is an issue. And with recent guidance
(within the past week) pointing toward the likelihood of
delivering (albeit close) consensus 3Q estimates, we find
it even more disturbing to see such a pronounced miss
announced today.
134. On Mar. 14, 1997, VanStar again shocked the securities
markets when it announced that its 4thQ EPS would be very poor due
to poor demand, excessive expenses and the lack of NOVA being
implemented. Upon the release of this adverse information,
VanStar's stock plunged even further, from $13-3/4 to as low as $9-
5/8, on huge volume of 2 million shares. On Mar. 24, 1997,
Information Week reported that VanStar had still not completed its
deployment of NOVA and that benefits from NOVA would not accrue to
VanStar until F98 and that delays in the rollout had resulted in
substantial additional costs.
135. VanStar's poor performance during the 3rdQ and 4thQ of
F97, with declining revenues and EPS compared to the large
increases forecast during the Class Period, is highlighted by the
table below:
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VanStar Corporation
Quarterly Results
(In thousands, except EPS)
Fiscal 1995
07/31/94 10/31/94 01/31/95 04/30/95 Year
Revenues $299,809 $338,554 $352,853 $394,176 $1,385,392
Net Income $17 $285 $76 $890 $1,268
EPS $.00 $.O1 $.00 $.03 $.04
Fiscal 1996
07/31/95 10/31/95 01/31/96* 04/30/96* Year
Revenues $427,169 $445,128 $446,862 $485,654 $1,804,813
Net Income $3,314 $4,951 ($7,537) $16,519 $17,247
EPS $.10 $.15 ($.24) $.44 $.5O
Fiscal 1997
07/31/96 10/31/96** 01/31/97** 04/30/97 Year
Revenues $559,090 $543,733 $527,542 $548,201 $2,178,566
Net Income $9,763 $11,078 $7,521 $1,632 $29,994
EPS $.23 $.26 $.17 $.04 $.69
* In the 01/31/96 quarter, VanStar recorded a $31.1 million charge for a
receivable from Merisel. VanStar reversed $15.6 million of this charge in the
04/30/96 quarter.
** During these two quarters, eight VanStar insiders sold off 665,000 shares
of their stock, 68% of their collective holdings and between 58% and 100% of
their individual holdings, pocketing $15 million.
DEFENDANTS' INSIDER SELLING
136. VanStar's insiders issued false and misleading statements
about VanStar's business for the purpose of selling their VanStar
securities at inflated price, selling over 665,000 shares for
proceeds of over $15 million, profiting handsomely from the
artificial inflation of VanStar's stock price their fraud and
illegal conduct had created. Notwithstanding their access to non-
public information as a result of their positions with VanStar,
certain of the Individual Defendants sold the following amounts of
VanStar shares at artificially inflated prices throughout the Class
Period while in possession of material non-public information:
- 94 -
% of Total
Shares Owned/
Individual Shares Aggregate Sold During
Defendants Sold Proceeds Class Period
---------- ------ --------- ---------------
Bard, R. 420,596 $9,844,331 59%
Kuntzendorf, R. 69,999 $ 1,399,980 94%
Anderson, R. 48,940 $ 910,477 98%
Moore, N. 38,724 $ 728,356 90%
Laney, C. 5,000 $ 116,250 100%
Manshouri, A. 54,215 $ 1,374,829 97%
Sisson, C. 12,000 $ 296,445 100%
Triant, T. 16,000 $ 409,710 91%
--------- ----------- ----
Individual Defs'
Total 665,474 $15,080,378 68%
VanStar 8,000,000 $74,700,000 N/A
--------- -----------
GRAND TOTAL: 8,665,474 $89,780,378 N/A
========= ===========
137. Defendants' sales of VanStar stock during the Class
Period were unusual in timing and amount and inconsistent with
their prior transactions in VanStar stock.
138. The Individual Defendants sold approximately 665,000
shares during the Class Period. None of these defendants had ever
sold any of their VanStar stock before. All of these stock sales
occurred at suspicious times. Approximately 580,000 of these
shares were sold just days after the expiration of the "lock-up."
Over 80,000 shares were sold in Dec. 1996 alone, immediately upon
the heels of what Tauscher later admitted was VanStar's extremely
poor sales performance in Nov. 1996 and during VanStar's poor sales
performance in Dec. 1996.
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INSIDER SHARES SHARES
NAME DATE SOLD PRICE PROCEEDS ACQUIRED PRICE HOLDING
------- ---- ------ ----- -------- -------- ----- -------
Anderson 09/06/96 34,040 $18.54 $ 631,102 34,040 $3.00
09/11/96 14,900 $6.00
09/11/96 14,900 $18.75 $ 279,375 801
------ ---------- ------
48,940 $ 910,477 48,940
====== ========== ======
% Shares Sold 98%
===
Bard 07/31/96 303,030 $15.14
09/18/96 100,000 $23.00 $2,300,000
09/19/96 98,300 $23.00 2,260,900
09/19/96 1,700 $23.25 39,525
09/19/96 100,000 $23.50 2,350,000
09/20/96 50,000 $24.00 1,200,000
09/20/96 25,000 $24.50 612,500
09/20/96 5,996 $23.50 140,906
09/20/96 39,600 $23.75 $ 940,500 300,094
------- ----------
420,596 $9,844,331
======= ==========
% Shares Sold 58%
===
Kuntzendorf
09/13/96 69,999 $20.00 $1,399,980
03/26/97 2,500 $6.00 4,676
------ ---------- ------
69,999 $l,399,980 2,500
====== ========== ======
% Shares Sold 94%
===
Laney 09/19/96 5,000 $3.00
09/19/96 5,000 $23.25 $ 116,250 0
------ ---------- ------
5,000 $ 116,250 5,000
====== ========== ======
% Shares Sold 100%
====
Manshouri 12/06/96 2,705 $25.50 $ 68,978 30,000 $3.00
12/06/96 12,500 $25.63 320,375
12/06/96 17,500 $25.50 446,250
12/06/96 12,295 $25.50 313,523
12/09/96 500 $25.63 12,815
12/09/96 2,715 $25.88 70,264
12/10/96 5,500 $23.75 130,625
12/10/96 500 $24.00 $ 12,000 1,507
------ ---------- ------
54,215 $1,374,829 30,000
====== ========== ======
% Shares Sold 97%
===
Moore 09/09/96 20,000 $18.63 $ 372,600 20,000 $5.55
09/11/96 7,224 $5.55
09/11/96 11,500 $6.00
09/11/96 18,724 $19.00 $ 355,756
------ ---------- ------
38,724 $ 728,356 38,724 4,115
====== ========== ======
% Shares Sold 90%
===
Sisson 12/13/96 10,500 $24.75 $ 259,875
12/13/96 1,500 $24.38 36,570
12/13/96 12,000 $3.00 0
------ ---------- ------
12,000 $ 296,445 12,000
====== ========== ======
% Share Sold 100%
====
- 96 -
Triant 12/06/96 1,000 $25.63 $ 25,630
12/06/96 1,000 $25.75 25,750
12/06/96 3,500 $25.88 90,580
12/06/96 10,500 $25.50 267,750 16,000 $5.00 1,499
------ ---------- ------
16,000 409,710 16,000
====== ========== ======
% Share Sold 91%
===
INSIDER TOTALS: 665,474 $15,080,378 456,194 68%
======= =========== ======= ===
VanStar 03/11/96 8,000,000 $9.33 $74,700,000
--------- -----------
GRAND TOTAL: 8,665,474 $89,780,378
========= ===========
139. VanStar's insiders coordinated virtually all their stock
sales through Alex. Brown and Robertson Stephens, for as Alex.
Brown and Robertson Stephens had promised them in connection with
the IPO they would coordinate any later open market sales of
VanStar stock by them to minimize the impact of such sales on the
market price, thus maximizing the insiders profits for their
insider sales. Of the 665,474 shares of VanStar stock these
insiders sold, they sold 641,259 shares -- 96% through Robertson
Stephens and Alex. Brown.
140. The VanStar insider stock sales were unusual in timing
and amount as the graphs below indicate:
//
//
//
//
//
//
//
//
//
//
//
- 97 -
VanStar Corp.
Defendants' Stock Sales - Share Volume
Insider Stock Sales Mar. 11. 19% to Apr 30. 1997
VanStar Corp.
Defendants' Stock Sales - Dollar Volume
Insider Stock Sales Mar. 11. 19% to Apr 30. 1997
- 98 -
141. VanStar and its controlling shareholders also benefited
handsomely from the artificial inflation in the price of VanStar's
common stock. On Sept. 27, 1996, VanStar raised $201.25 million by
selling convertible bonds and, by using VanStar's inflated stock as
a currency, acquired Mentor Technology, National Technology
Group/Contract Data Services and DCT Systems during the Class
Period. Bard and Tauscher benefitted dramatically because of the
IPO, as the book value of the shares earned by them increased by
$2.6 million and $4.2 million as a result of the IPO.
142. The timing of the convertible securities sales was
extremely suspicious, for it occurred in late Sept, 1996, which is
precisely the time at which VanStar stock reached a Class Period
high and after the time in which VanStar experienced product
shortages in Aug. and Sept. 1996, and realized that such shortages
would impact its ability to meet analysts' EPS estimates. Although
the sale of these convertible securities occurred on Sept. 27,
1996, VanStar knew as early as mid-Aug. 1996 that product shortages
would impact its ability to fill customers orders, and thereby
generate sales and earnings.
143. The Mar. 11, 1996 IPO generated $74.7 million in needed
cash for VanStar, salvaged the controlling shareholders' $81
million investment in VanStar from being lost and boosted the book
value of the 17.5 million VanStar shares owned by Warburg, Tauscher
and Bard from a negative $(0.19) per share to $1.69 per share a
32.9 million windfall for them.
- 99 -
FIRST CAUSE OF ACTION
Violation of §25400/25500 Of The
California Corporations Code
144. Plaintiff incorporates ¶¶1-143 above.
145. Acting individually and pursuant to a common conspiracy
or aiding and abetting each other, defendants concealed and/or
misrepresented material adverse information and/or willfully
participated in the concealment and misrepresentation of such
information regarding VanStar in order to offer and/or sell VanStar
securities to domestic and foreign investors and allow the
defendants to dump millions of dollars of their own VanStar stock
at inflated prices. Defendants' wrongdoing included the making of
and/or willful participation in the making of, untrue statements of
material facts and the omission to state material facts necessary
in order to make the statements made, in light of the circumstances
under which they were made, not misleading and engaging in the
acts, practices and a wrongful course of conduct in order to induce
the purchase of VanStar stock by plaintiff and the members of the
Class. The false statements alleged in ¶¶56, 58-62, 64, 66-74, 77-
81, 83, 85-88, 94, 99-100, 102-105, 109-110, 114, 117, 119-121,
125-126 and 129 were disseminated from California.
146. Plaintiff and members of the Class have suffered
substantial damages because they paid artificially inflated prices
for VanStar stock which plaintiff and the members of the Class
would not have purchased 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
concealment. At the time of the purchases by plaintiff and the
- 100 -
members of the Class of VanStar stock, the fair market value of
said stock was substantially less than the prices paid by them.
147. By reason of the foregoing, defendants have violated
§25400 of the Cal. Corp. Code, thereby entitling plaintiff and the
members of the Class to recover damages pursuant to §25500.
SECOND CAUSE OF ACTION
Violation of §§1709-1710 Of The
California Civil Code
148. Plaintiff incorporates §§1-143.
149. For the purpose of inducing public investors, including
plaintiff and other members of the Class to purchase or otherwise
acquire VanStar stock, and with intent to deceive such investors,
the defendants engaged in a deceitful course of conduct and/or
conspiracy to defraud as a part of which said defendants made,
participated in the making of, or aided and abetted the making of
the misrepresentations of fact and concealed the true facts and
omitted to state material facts as set forth above. Said
representations and statements were not true and defendants did not
believe them to be true. Said acts by defendants were fraudulent,
oppressive and malicious.
150. Plaintiff and the Class members each relied on one or
more of the false statements alleged herein and were damaged
thereby.
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. Against All Defendants
151. Plaintiff incorporates ¶¶1-143.
- 101 -
152. California Business & Professions Code §17200 prohibits
acts of unfair competition, which includes "any unlawful, unfair or
fraudulent business act or practice . . . ."
153. Defendants' misrepresentations and nondisclosures of
material facts during the Class Period are prohibited by California
Civil Code §§1572, 1709 and 1710, and California Penal Code §395 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.
154. 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. Defendants traded on inside
information enriching themselves at the expense of Class members.
155. 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 in that 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.
- 102 -
156. Defendants' use of various forms of marketing to falsely
advertise, call attention to, or give publicity to the sale of
shares of VanStar common stock by, inter alia, untrue and/or
deceptive representations as to the nature and quality of the
investment and VanStar's business and business prospects consti-
tutes false or misleading advertising within the meaning of
Business & Professions Code §17,500, 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.
157. 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., plaintiff, 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. Plaintiff
additionally requests 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.
Plaintiff, the members of the Class and the general public may be
- 103 -
irreparably harmed and/or denied an effective and complete remedy
if such an order is not granted.
CLASS ACTION ALLEGATIONS
158. Plaintiff brings this action as a Class Action pursuant
to California Code of Civil Procedure §382 on behalf of all persons
who purchased or otherwise acquired VanStar stock (the "Class")
between Mar. 11, 1996 and Jan. 13, 1997, inclusive. Excluded from
the Class are each of the defendants, members of their families and
any entities in which a defendant has an interest.
159. The Class is composed of numerous residents of
California, as well as persons dispersed throughout the United
States, the joiner of whom in one action 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, VanStar had more than 39 million shares of stock
outstanding, owned by thousands of investors.
160. 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, to the members of the Class, which predominate over
questions which may affect individual Class members, include the
following:
(a) Whether defendants misrepresented material facts;
(b) Whether defendants' statements omitted material
facts necessary to make the statements made, in light of the
circumstance under which they were made, not misleading;
(c) Whether defendants knew or should have known that
their statements were false and misleading;
- 104 -
(d) Whether defendants violated Cal. Corp. Code §§25400
and 25500;
(e) Whether defendants violated Cal. Civil Code §§1709-
1710 and Bus. & Prof. Code §17200, et seq.;
(f) Whether the price of VanStar stock was artificially
inflated during the Class Period; and
(g) The extent of damage sustained and the appropriate
measure of damages.
161. Plaintiff's claims are typical of those of the Class
because plaintiff and the Class sustained damages from the
defendants' wrongful conduct.
162. Plaintiff will adequately protect the interest of the
Class. It has retained counsel who are experienced in class action
securities litigation. Plaintiff has no interests which conflict
with those of the Class.
163. The class action is superior to other available methods
for a fair and efficient adjudication of this controversy.
164. The prosecution of separate actions by individual Class
members would create a risk of inconsistent and varying
adjudications.
BASIS OF ALLEGATIONS
165. Plaintiff has alleged the foregoing based upon the
investigation of its counsel, which included a review of VanStar's
SEC filings, securities analysts reports and advisories about the
Company, press releases issued by the Company, media reports about
the Company and discussions with consultants, and believes that
substantial evidentiary support will exist for the allegations set
forth herein after a reasonable opportunity for discovery.
- 105 -
PRAYER FOR RELIEF
WHEREFORE, plaintiff prays for judgment as follows:
1. Declaring this action to be a proper class action on
behalf of the Class as defined herein;
2. Awarding plaintiff and the members of the Class
compensatory and/or punitive damages;
3. Awarding plaintiff and the members of the Class pre-
judgment and post-judgment interest, as well as reasonable
attorneys' fees, expert witness fees and other costs;
4. Awarding extraordinary, equitable and/or injunctive
relief as permitted by law and/or equity; and
5. Awarding such other relief as this Court may deem just
and proper.
JURY DEMAND
Plaintiff demands a trial by jury.
DATED: July 2, 1997
MILBERG WEISS BERSHAD
HYNES & LERACH LLP
WILLIAM S. LERACH
ALAN SCHULMAN
DARREN J. ROBBINS
/s/
_____________________________
WILLIAM S. LERACH
600 West Broadway, Suite 1800
San Diego, CA 92101
Telephone: 619/231-1058
-and-
JOHN E. GRASBERGER
REED R. KATHREIN
222 Kearny Street, 10th Floor
San Francisco, CA 94108
Telephone: 415/288-4545
- 106 -
STEVEN E. CAULEY, P.A.
STEVEN E. CAULEY
SCOTT E. POYNTER
JAMES K. HATCHER
Suite 218, Cypress Plaza
2200 Rodney Parham Road
Little Rock, AR 72212
Telephone: 501/312-8500
Attorneys for Plaintiff
- 107 -