Stanford University Law School - Securities Class Action Clearinghouse

 

MILBERG WEISS BERSHAD

HYNES & LERACH LLP

WILLIAM S. LERACH (68581)

600 West Broadway, Suite 1800

San Diego, CA 92101

Telephone: 619/231-1058

- and

REED R. KATHREIN (139304)

JEFFREY W. LAWRENCE (166806)

DAVID R. STICKNEY (188574)

222 Kearny Street, 10th Floor

San Francisco, CA 94108

Telephone: 415/288-4545



SPECTOR & ROSEMAN, P.C.

ELLEN GUSIKOFF STEWART (144892)

600 West Broadway, Suite 1800

San Diego, CA 92101

Telephone: 619/338-4514



BARRACK, RODOS & BACINE

EDWARD M. GERGOSIAN (105679)

600 West Broadway, Suite 1700

San Diego, CA 92101

Telephone: 619/230-0800

Co-Lead Counsel for Plaintiffs




UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORNIA





In re VIVUS INC. SECURITIES LITIGATION

___________________________________

This Document Relates to:

All Actions.

___________________________________

Master File No. C-98-1026-SBA

CLASS ACTION



CONSOLIDATED COMPLAINT FOR VIOLATION OF

THE SECURITIES EXCHANGE ACT OF 1934


Plaintiffs Demand A Trial By Jury


INTRODUCTION AND OVERVIEW OF ACTION

1. This is a class action on behalf of purchasers of the common stock of Vivus, Inc. ("Vivus" or the "Company") and those who purchased common stock call options or who sold common stock put options of Vivus, between May 2, 1997 and December 9, 1997 (the "Class Period"). This action alleges that during the Class Period, defendants artificially inflated Vivus' stock price through the issuance of false and misleading statements about Vivus' business, products, finances and the future prospects of the Company. As Vivus' stock was inflated by defendants' misrepresentations and omissions, from $20-1/2(1) on May 14, 1997 to its Class Period high of $41-7/8 per share in October 1997, Vivus insiders named as defendants sold over 235,000 shares of their own Vivus stock, pocketing over $6.7 million. However, in truth, during the Class Period, Vivus' business was suffering as demand for its only product, Medicated Urethral System for Erection (alprostadil) ("MUSE"), had diminished. Moreover, the Company's prospects were bleak as the efficacy of the product was doubtful at best and competitive products were on the horizon which were more desirable to patients than was the Company's MUSE product.

2. Vivus focuses on the development of products for the treatment of erectile dysfunction. In November 1996 the Company announced it had received U.S. Food and Drug Administration ("FDA") clearance to manufacture and market MUSE in the United States. In 1997 Vivus commenced selling MUSE through its direct sales force, reporting product sales revenue for the first time in the first quarter of 1997. As a result of these developments, the price of Vivus' stock rose to as high as $40 per share in mid-February 1997. However, in late February 1997 doubts about the Company surfaced as competitive products emerged which showed advantages to MUSE (the competitive products could be taken orally, rather than being inserted into the urethra as was MUSE), questions as to the efficacy of MUSE arose, and the prescription rates for MUSE flattened and even began to decrease as renewal prescriptions were diminishing. These doubts about the Company caused its stock to retreat to 1995 levels, dropping to as low as $15-1/8 in early May 1997. This sharp drop limited the amount of money the insiders could generate through exercising their options and selling stock. Moreover, the insiders knew that once the competitive products were available, the outlook for the Company's one and only product, MUSE, would be extremely poor. The insiders therefore wanted to dispose of many more of their shares at much higher prices before this occurred.

3. For all these reasons, beginning at least by May 1997, defendants undertook a scheme intended to inflate Vivus' stock price by issuing statements with respect to the purportedly superior nature of MUSE and the resultant anticipated impact on the Company's future earnings. The Company announced on May 12, 1997, that the Board had declared a 2-for-1 stock split to "reflect the sound future of the Company." In an attempt to reverse the downward trend of the Company's stock price, defendants communicated with analysts and told them demand was strong, in fact stronger than the Company's capacity to provide product, and that the Company had received extremely positive feedback from managed care organizations who were willing to pay for MUSE. The defendants also told analysts that concerns over the levels of prescriptions were misplaced as such data was meaningless due to the high level of distribution sales through "alternative channels," and that demand was very strong, forecasting 1997 and 1998 earnings per share ("EPS") of $.60 and $1.23, respectively.

4. Throughout the summer and fall of 1997, defendants continued to misrepresent the Company's results of operations, the demand for MUSE, and the Company's future prospects by falsely representing that MUSE was a safer and more effective therapy for a majority of men afflicted with erectile dysfunction, reporting inflated revenues of $100 million for the first three quarters of 1997, representing that MUSE would still have a profitable niche in the market despite the introduction of oral treatments, and raising the Company's 1997 and 1998 earnings forecasts to $0.94-$1.08 and $1.65-$1.72 per share, respectively, without any reasonable basis and, indeed, knowing that such forecasts could not be met.

5. Finally, before the market opened on December 10, 1997, the Company revealed in a press release that it would not meet fourth quarter revenue goals, missing them by as much as 25%. It blamed the shortfall on problems in moving to its new 90,000 square foot plant. This announcement sent Vivus' stock price down more than 34% to as low as $12-1/2 per share. The stock closed at $13-13/16, down more than 65% from the Class Period high of $41-7/8, and later dropped to less than $10 per share.

6. Since then, Vivus has announced that fourth quarter revenues will be 25% lower than the third quarter, blaming the shortfall on production problems, despite reporting increases in production capabilities in July 1997. The true story is that the fourth quarter results will be worse than anticipated due in large part to Vivus' improper revenue recognition in prior quarters. In a conference call with analysts after the December 10, 1997 press release, Vivus' management admitted that distributors' inventory had increased from 30 days in the September-October time frame to 45 days in December. This had occurred despite a reduction in monthly production from 800,000 to 600,000 units in November. The increase in distributor inventory and decrease in production were inconsistent with the Company's claims that it was capacity constrained. In fact, distributor inventory increased because Vivus was parking inventory at distributors in order to mask a deterioration in demand for its product.

7. Taking advantage of the artificial inflation in Vivus' stock price during the Class Period, the individual defendants sold 235,073 shares of their Vivus stock at prices as high as $36.08 per share, pocketing over $6.7 million and, in many instances, selling large portions of the shares they owned (or had acquired via the exercise of options during the Class Period):

8. Each of defendants' positive statements about Vivus' products and business during the Class Period was materially false and misleading when issued, and failed to disclose, inter alia, the following adverse information, which was then known to defendants due to their access to internal Vivus information:

(a) That defendants had no reasonable basis for a belief that Vivus' sales of MUSE would continue to increase during and after 1997 because defendants knew that users of the product were not and would not repeat their use;

(b) That demand for MUSE had actually diminished since early 1997 as users found MUSE much less effective than Vivus had represented it would be and because new users awaited oral treatment as a much more desirable alternative to MUSE;

(c) That Vivus was not capacity constrained but was actually warehousing excess product with distributors, including Cord Logistics, Alternate Site Distributors ("ASD") (a division of Bergen Brunswig Corporation) and Janssen International, in order to overstate its revenues by recording product shipped to these distributors as revenue and conceal the decrease in demand for MUSE; and that, as a result, Vivus' revenues in the second and third quarters of 1997 were each overstated by at least 15%, and net income was overstated by at least 30% (as described in ¶¶78-82);

(d) That Vivus' gross margins were not representative of the margins Vivus would achieve on future sales due to the exclusion of raw material costs purchased prior to November 1996 from the Company's reported results;

(e) That Vivus would have to curtail its production to move to its new facility and to do maintenance on its old facility;

(f) That the IMS (a provider of pharmaceutical industry research) data which showed a flattening in prescriptions was indeed meaningful as it reflected the flattening of demand for MUSE since the beginning of 1997, and that the additional demand for MUSE which the defendants asserted was illusory;

(g) That future supplies of MUSE would be constrained as a result of the irregularities the FDA found during a post-approval inspection; and

(h) That there was no reasonable basis for making positive representations about Vivus' projected revenues and future growth, as defendants knew that the market for repeat users was not as large as represented, and that once an oral pill was approved, the market for MUSE would be greatly diminished.

9. The charts below show Vivus' stock price while defendants were issuing their false and misleading statements, defendants' stock sales at inflated prices and the stock's collapse as the true facts became publicly known, and that, when compared to similar companies, the price action of Vivus' stock was due to company-specific events and not due to industry trends.

 

 

JURISDICTION AND VENUE

10. Jurisdiction exists pursuant to §27 of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. §78aa, and 28 U.S.C. §1331. The claims asserted arise under §§10(b) and 20(a) of the Exchange Act, 15 U.S.C. §§78j(b) and 78t(a), and Rule 10b-5.

11. (a) Venue is proper in this District pursuant to §27 of the Exchange Act and 28 U.S.C. §1391(b). Many of the acts giving rise to the violations complained of occurred in this District; and

(b) Assignment of this action to the San Francisco Division is appropriate as a substantial part of the events or omissions identified herein occurred in San Mateo County.

12. Defendants used the instrumentalities of interstate commerce, the U.S. mails and the facilities of the national securities markets.

THE PARTIES

13. Plaintiff Jay L. Cramblit purchased 100 shares of Vivus common stock through his Individual Retirement Account on July 7, 1997 at $24 7/8.

14. Plaintiff Joseph G. Fabick purchased 6,000 shares of Vivus common stock on October 9, 1997 at $37 1/2, 2,000 shares on October 27, 1997 at $27 5/8 and 4,000 shares on November 2, 1997 at $23 3/8. Further, plaintiff Joseph G. Fabick purchased, through his Individual Retirement Account, 3,000 shares of Vivus common stock on October 9, 1997 at $37 and 500 shares on October 21, 1997 at $32 3/4.

15. Plaintiff Paul A. Steiner purchased the common stock and sold put options of Vivus stock during the Class Period and was damaged thereby.

16. Plaintiff Frank DeCarlo purchased 700 shares of Vivus common stock on January 27, 1998 at $15 5/16.

17. Plaintiff Dominick F. Imprescia purchased 1,000 shares of Vivus common stock on October 9, 1997 at $36 7/8; 1,000 shares on October 13, 1997 at $34 1/4; 1,000 shares on October 14, 1997 at $32; 1,000 shares on October 22, 1997 at $28 3/8; 1,000 shares on October 22, 1997 at $28 3/4; and 1,000 shares on November 13, 1997 at $34 1/2.

18. Plaintiff Paul Knasin purchased 70 shares of Vivus common stock on October 14, 1997 at $33; 500 shares on October 17, 1997 at $30; and 500 shares on November 22, 1997 at $27 7/8.

19. Plaintiff Lynne A. Ippolito purchased 288 shares of Vivus common stock through her Individual Retirement Account on August 11, 1997 at $28 1/4.

20. Plaintiff Irwin J. Anger purchased 1,000 shares of Vivus common stock on October 9, 1997 at $35 15/16 and 500 shares on October 13, 1997 at 33 15/16.

21. Plaintiff Benjamin D. Cooper purchased 50 shares of Vivus common stock on September 26, 1997 at 37.625.

22. Plaintiff Barbara Wilson purchased 200 shares of Vivus common stock on June 20, 1997 at $60 and 200 shares on June 20, 1997 at $70.

23. Plaintiff John Kosor purchased 1,000 shares of Vivus common stock on October 16, 1997 at $32 1/4 per share and has been damaged thereby.(2)

24. Defendant Vivus was a California corporation until it reincorporated in the State of Delaware in May 1996. It is headquartered in Menlo Park, California and is a developer of advanced therapeutic systems for the treatment of erectile dysfunction. The Company was founded in 1991, went public in 1994 with a 2.5 million share initial public offering, and did additional secondary public offerings in 1995 and 1996. In November 1996, the Company received FDA approval of its primary product, MUSE, a non-invasive system that delivers pharmacologic agents topically to the urethral mucosa.

25. (a) Defendant Virgil A. Place ("Place") is the founder of the Company and has been the Company's Chairman of the Board and Chief Scientific Officer at all relevant times. Because of defendant Place's position with the Company, he knew the adverse non-public information about Vivus' business, finances, products, markets, and present 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 and connections with other corporate officers and employees, attendance at management and Board of Directors' meetings and committees thereof and via reports and other information provided to him in connection therewith. Based on inside information, defendant Place sold 20,000 shares of his Vivus stock during the Class Period for proceeds of $596,950.

(b) Defendant Leland F. Wilson ("Wilson") has been President, Chief Executive Officer and a director of the Company at all relevant times. Because of defendant Wilson's position with the Company, he knew the adverse non-public information about Vivus' business, finances, products, markets, and present 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 and connections with other corporate officers and employees, attendance at management and Board of Directors' meetings and committees thereof and via reports and other information provided to him in connection therewith. Based on inside information, defendant Wilson sold 30,000 shares of his Vivus stock during the Class Period for proceeds of $904,595.

(c) Defendant David C. Yntema ("Yntema") was Vice President, Finance and Chief Financial Officer of the Company at all relevant times. Because of defendant Yntema's position with the Company, he knew the adverse non-public information about Vivus' business, finances, products, markets, and present 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 and connections with other corporate officers and employees, attendance at management and Board of Directors' meetings and committees thereof and via reports and other information provided to him in connection therewith. Based on inside information, defendant Yntema sold 60,000 shares of his Vivus stock during the Class Period for proceeds of $1,836,600 -- 61% of his stock holdings.

(d) Defendant Julian S. Gangolli ("Gangolli") was Vice President, Marketing of the Company at all relevant times. Because of defendant Gangolli's position with the Company, he knew the adverse non-public information about Vivus' business, finances, products, markets, and present 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 and connections with other corporate officers and employees, attendance at management meetings and via reports and other information provided to him in connection therewith. Based on inside information, defendant Gangolli sold 50,240 shares of his Vivus stock during the Class Period for proceeds of $1,307,398 -- 100% of his holdings.

(e) Defendant Neil Gesundheit ("Gesundheit") was Vice President, Clinical and Regulatory Affairs of the Company at all relevant times. Because of defendant Gesundheit's position with the Company, he knew the adverse non-public information about Vivus' business, finances, products, markets, and present 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 and connections with other corporate officers and employees, attendance at management meetings and via reports and other information provided to him in connection therewith. Based on inside information, defendant Gesundheit sold 8,000 shares of his Vivus stock during the Class Period for proceeds of $214,000.

(f) Defendant William L. Smith ("Smith") was Vice President, Research and Development of the Company at all relevant times. Because of defendant Smith's position with the Company, he knew the adverse non-public information about Vivus' business, finances, products, markets, and present 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 and connections with other corporate officers and employees, attendance at management meetings and via reports and other information provided to him in connection therewith. Based on inside information, defendant Smith sold 10,000 shares of his Vivus stock during the Class Period for proceeds of $250,000 -- 93% of his holdings.

(g) Defendant Samuel D. Colella ("Colella") was a director of the Company until his resignation in July 1997. Because of defendant Colella's position with the Company, he knew the adverse non-public information about Vivus' business, finances, products, markets, and present 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 and connections with other corporate officers and employees, attendance at Board of Directors' meetings and committees thereof and via reports and other information provided to him in connection therewith. Based on inside information, defendant Colella sold 36,833 shares of his Vivus stock during the Class Period for proceeds of $1,092,570.

(h) Defendant Peter Barton Hutt ("Hutt") was a director of the Company during the Class Period. Because of defendant Hutt's position with the Company, he knew the adverse non-public information about Vivus' business, finances, products, markets, and present 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 and connections with other corporate officers and employees, attendance at Board of Directors' meetings and committees thereof and via reports and other information provided to him in connection therewith. Based on inside information, defendant Hutt sold 10,000 shares of his Vivus stock during the Class Period for proceeds of $294,400.

(i) Defendant Richard L. Casey ("Casey") was a director of the Company during the Class Period. Because of defendant Casey's position with the Company, he knew the adverse non-public information about Vivus' business, finances, products, markets, and present 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 and connections with other corporate officers and employees, attendance at Board of Directors' meetings and committees thereof and via reports and other information provided to him in connection therewith. Based on inside information, defendant Casey sold 10,000 shares of his Vivus stock during the Class Period for proceeds of $297,500.

(j) The individuals named as defendants in ¶15(a)-(i) are referred to herein as the "Individual Defendants."

26. Defendants Place and Wilson by reason of their positions as Chairman of the Board and President/CEO, respectively, were controlling persons of Vivus and had the power and influence, and exercised the same, to cause Vivus to engage in the wrongful conduct complained of herein. Vivus, in turn, controlled each of the Individual Defendants.

27. Each of the defendants is liable for making false and misleading statements, and for directly or indirectly participating in a fraudulent scheme or course of business in violation of the federal securities laws that damaged Class members. All of the defendants pursued a common goal, i.e., inflating the price of Vivus stock by making false and misleading statements and concealing material adverse information. The scheme and course of business was designed to and did: (1) deceive the investing public, including plaintiff and the other members of the Class, (ii) artificially inflate the price of Vivus stock during the Class Period; (iii) cause plaintiff and the other members of the Class to purchase Vivus stock at inflated prices; and (iv) increase the value of defendants' Vivus shareholdings and permit them to sell off their holdings at artificially inflated levels to profit from the scheme.

KNOWLEDGE; GROUP PUBLISHED DOCUMENTS; DUTY

TO DISCLOSE OR ABSTAIN FROM TRADING

28. During the Class Period, each Individual Defendant occupied a position that made him/her privy to non-public information concerning Vivus. Because of this access, each of these defendants actually knew the adverse facts specified herein and that they were being concealed. Notwithstanding their duty to refrain from selling Vivus stock while in possession of material non-public information concerning Vivus, the defendants sold over 235,000 shares of the Company's stock, pocketing over $6.7 million and thus profiting from their scheme. Vivus' press releases, corporate reports to shareholders and filings with the SEC were each group-published documents for which each defendant is equally responsible.

MOTIVE AND OPPORTUNITY

29. Each defendant had the opportunity to commit and participate in the violations of law described herein. The Individual Defendants were the top officers and directors of Vivus and they controlled its press releases, corporate reports, SEC filings and its communications with analysts. Thus, the defendants controlled the dissemination of, and could falsify, the information about Vivus' business, products, financial results and future prospects that reached the public and impacted the price of Vivus' stock.

30. Each of the Individual Defendants also had the motive to commit and participate in the violations of law described herein. During the past couple of years, Vivus stock traded at a price/earnings multiple reserved for premier growth companies with track records of meeting the investment community's expectations for high profit growth. This stock performance enabled the Individual Defendants to exercise stock options and to sell stock at large profits. The executives wanted to maintain their positions with Vivus which would have been threatened had the truth come out about the decrease in demand and the diminished future revenue stream the Company would derive from the sales of MUSE. For all these reasons, maintaining Vivus' image as a company poised for strong future growth as a result of the purported wide acceptance of MUSE and the expanding market for it was extremely important to Vivus' top executives.

31. The Individual Defendants were intimately familiar with Vivus' business and the industry in which it operated and thus knew the nature and extent of the problems that were afflicting Vivus' business by the spring of 1997, and what they portended for the future of Vivus' business. Defendants wanted to and did make it appear that Vivus' MUSE was a superior product which would produce significant future revenues without any real threat from competing products or procedures and that, as a result, the Company was succeeding and could achieve sustained revenue and profit growth. Defendants engaged in their wrongful conduct so that Vivus' stock price would trade at artificially inflated levels, enabling them to sell large amounts of their Vivus stock at artificially inflated prices, pocketing large sums for themselves before the truth about the decline in Vivus' business became known.

VIVUS' AND ITS INSIDERS' ACTUAL

KNOWLEDGE OR RECKLESS DISREGARD OF

THE UNDISCLOSED ADVERSE

CONDITIONS IMPACTING VIVUS' BUSINESS

32. As part of Vivus' corporate planning and management process, it prepares a corporate business plan and budget for each fiscal year, typically referred to as the Fiscal Year Corporate Plan/Budget. The Fiscal Year Corporate Plan/Budget ("Plan/Budget") for a given fiscal year is prepared and revised during the last half of the preceding fiscal year and approved near the end of that year. Thus, work began on Vivus' 1997 Plan/Budget in the last half of 1996, and the 1997 Plan/Budget was completed by top management for Board review and approval by October or November of 1996. Vivus' Plan/Budgets were very detailed presentations of the corporation's operations and included forecasted revenues, expenses, net income and EPS for the fiscal year on an overall corporate basis. In addition, Vivus' Plan/Budget also included detailed forecasted revenue for MUSE, which was based on internal studies of acceptance and use by patients and ongoing demand. Vivus' Plan/Budget presented these forecasted or budgeted results on a monthly, quarterly and annual basis and contained narrative explanations as to the plan's key assumptions and how management proposed to achieve those results. Each Individual Defendant was aware of and received copies of Vivus' 1997 Plan/Budget and each played a significant role in preparing, revising and/or approving the Plan/Budget.

33. In order to monitor Vivus' corporate performance throughout the fiscal year, including the sales and future sales of its main product, MUSE, Vivus' top managers received monthly financial reports prepared by its financial department, headed by defendant Yntema as Chief Financial Officer, sales data reports from its sales department, and technical medical reports from its medical department, as well as other written and oral reports from members of management, including divisional managers. In order to effectively manage its business and control its cash flow, Vivus' management information system was capable of generating reports on a daily basis showing orders received (by product), shipments (by product), product development, as well as overall corporate revenues, cash balances, receivables, etc. As a result of this system, Vivus' top managers were aware of the corporation's performance on a daily basis and thus were aware, virtually immediately, of any significant problems with orders, demand for MUSE or shipment delays.

34. In addition to this daily monitoring system, Vivus' finance and sales departments generated monthly financial and sales reports, respectively, providing detailed data with respect to overall corporate revenue, net income, EPS, as well as sales of MUSE -- all presented so as to compare performance for that month, quarter and the year-to-date to the Plan/Budget. These financial and sales reports included a so-called "Flash" report prepared after the end of each month (and also throughout each month) and distributed immediately to top management, which provided summary product shipment, sales and income data. These monthly financial reports also included a so-called "Monthly Financial Statement/Package," which provided even more detailed information, including graphic comparisons of actual performance to forecasted performance and a narrative explanation of any material variance of actual results compared to forecasted or budgeted results, which was completed within 10 days after the end of the month and immediately provided to members of top management.

35. When Vivus encountered a slowdown in orders, especially from current users of MUSE, and became aware of the effect on sales of competing products and new more efficient products, Vivus' internal corporate procedures required that the sales and finance managers immediately advise top management of these problems via oral and written reports. Such reports were issued and included the following: (1) notification to top management of the impact on volume shipments and revenues; (2) production of MUSE based on demand and future demand (or lack thereof) for the product; and (3) request for action to be taken given the decline in the demand for MUSE.

36. Because Vivus had only one product, MUSE, the Company's top executives monitored the demand for and success of that product on a weekly basis, as well as the status of competitive products. Thus, when it was discovered that there was a slowdown in demand as a result of patients not purchasing new doses in late 1996 and early 1997, the Individual Defendants were immediately advised of the situation by the sales and finance personnel. Vivus closely monitored the amount of unsold products held by its distributors. The Individual Defendants also closely monitored the production of MUSE and were immediately apprised as soon as problems arose as to volumes produced. Because of the problems which the Company began to experience, it was readily apparent to defendants that the earnings and future revenue growth they had predicted would not be achieved and it was immediately a matter of major concern and discussion among Vivus' top corporate managers, including the Individual Defendants.

37. Because of the foregoing, each of the Individual Defendants was aware of Vivus' 1997 forecasts and budgets, the internal reports detailing the distribution problems, and the financial reports comparing Vivus' actual results to those budgeted and/or forecasted. Based on the negative internal reports specified earlier and reports of the Company's actual performance compared to that budgeted and forecasted, the Individual Defendants each knew Vivus' business was not performing as well as publicly represented. Thus defendants each actually knew that the forward-looking public statements issued during the Class Period about Vivus were false and misleading when made and they actually knew or recklessly disregarded that the non-forward-looking statements issued during the Class Period about Vivus were false and misleading when made.

STATUTORY SAFE HARBOR

38. The statutory safe harbor provided for forward-looking statements under certain circumstances does not apply to any of the allegedly false statements pleaded in this Complaint. None of the statements pleaded herein were identified as "forward-looking statements" when made. Nor was it stated that actual results "could differ materially from those projected." Nor were the statements accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from the statements made. Alternatively, to the extent that the statutory safe harbor does apply to any statements pleaded herein, because they are "forward-looking," the defendants are liable for those statements because at the time each of those statements was made, the speaker knew the statement was false and the statement was authorized and/or approved by an executive officer of Vivus who knew that those statements were false when made.

BACKGROUND TO THE CLASS PERIOD

39. Vivus never recorded any revenue from its founding in 1991 through 1995, as it sought to develop a treatment for erectile dysfunction. During this time the Company financed its operations primarily through the sale of preferred and common stock. As its development and deployment of MUSE got closer, its stock price began to climb as well.

40. On March 28, 1996, the Company announced in a press release that it had submitted a New Drug Application to the FDA for the use of MUSE (alprostadil) in treating erectile dysfunction. The press release noted that approximately 30% of men between the ages of 40 and 70 in the U.S. suffer from moderate to complete impotence. According to the release the product's "potential world market is estimated at 47 million men by the year 2000."

41. On May 6, 1996, the Company announced in a press release the results of the Company's pivotal studies in erectile dysfunction, which demonstrated beneficial effects on the quality of life of patients and their partners with the use of MUSE.

42. On May 31, 1996, the Company announced that it expected to receive $54.4 million in net proceeds from its common share offering which it believed would be sufficient to support the Company's operations through the introduction of its first product. The Company also disclosed that it expected spending levels to continue to increase during 1996 as it developed its commercial manufacturing, marketing and sales capabilities.

43. In a press release dated July 18, 1996, the Company announced its second quarter results (ended June 30, 1996) and that it had entered into a distribution agreement with ASD, a subsidiary of Bergen Brunswig, to provide direct distribution, telemarketing and customer service efforts in support of the U.S. marketing and sales effort. This agreement, according to the Company, was a component of its marketing and distribution strategy for the Company's primary product, MUSE.

44. On September 4, 1996, the Company announced European findings which confirmed the safety, efficacy and quality-of-life results seen in the trials the Company had conducted in the U.S. The press release also stated that the Company had signed a major marketing pact with Astra AB in May 1996 under which Astra would market and sell MUSE throughout Europe as well as Australia, New Zealand, South America and Central America. The Company would market MUSE in the U.S. by itself. In addition to up-front payments and commitments for certain milestone payments, Vivus retained all manufacturing and proprietary rights under the agreement.

45. On October 7, 1996, the Company disclosed in a press release that it had received an approval letter from the FDA for the use of MUSE. The Company noted that it expected to begin marketing the product in the U.S. following final FDA marketing clearance, which was subject to standard final labeling requirements and agreement that the Vivus manufacturing facility, methods and controls complied with FDA requirements. The single-use, prescription-only drug-and-applicator system was expected to sell for about $20-$25.

46. On November 20, 1996, the Company announced that it had received FDA clearance to market the MUSE urethral suppository for the treatment of impotence. Defendant Wilson said that he anticipated the Company would begin to ship its product in early 1997. According to the press release, approximately 30% of men between the ages of 40 and 70 in the U.S. suffer from moderate to complete erectile dysfunction. The world market for such sufferers is expected to be 47 million men by the year 2000. The press release cited authority that "MUSE is clearly a very effective, desirable treatment choice," according to J. Francois Eid, M.D., professor of urology, Cornell University School of Medicine. "It should be considered first-line therapy for all causes of erectile dysfunction. MUSE offers men and their partners a convenient, discreet treatment that can easily integrate into a patient's sex life."

47. The Company's stock had climbed during this eighteen-month period, rising from $15 per share in July 1995 to $38 per share in October 1996.

48. On January 2, 1997, the Company issued a press release, quoting an article in the New England Journal of Medicine ("NEJM") that MUSE was "well-tolerated and effectively restored the capacity for erection and sexual intercourse in a substantial proportion of men with chronic erectile dysfunction." According to Harin Padma-Nathan, M.D., assistant professor of urology at the University of Southern California School of Medicine and the lead author of the Vivus clinical study, "MUSE is a significant advancement in the treatment of erectile dysfunction." The NEJM article reported the results of the largest study ever published of men with impotence, which were from the Vivus-sponsored multi-centered study of MUSE. The results were also reported in the Boston Globe.

49. On January 23, 1997, the Company announced that it had signed an international marketing agreement with Janssen Pharmaceutical International, a subsidiary of Johnson & Johnson. Vivus would receive a $5 million payment as a result of the execution of the agreement and additional payments would be made in the event that certain milestones were reached.

50. On January 30, 1997, Vivus announced its 1996 year-end and fourth quarter financial results, which included net losses for the fourth quarter due to higher administrative expenses associated with hiring additional sales and other personnel to support the growth of the Company's operations, as well as higher marketing and marketing research expenses. The Company noted:

51. By February 19, 1997, Vivus' stock price reached $40 per share based on the perception that MUSE had achieved widespread market acceptance.

52. However, in late February, Vivus' stock decreased after doubts arose over the efficacy and future of MUSE. On February 24, 1997, Barron's published an article questioning the future prospects of MUSE and the Company. The article quoted at length Dr. Harin Padma-Nathan, the lead author of the MUSE study that "helped inflame Vivus's shares when [his study] was published in the New England Journal of Medicine." Dr. Padma-Nathan stated that he was "watching this from afar with great amazement and some confusion" because, while "investors seem convinced that Muse will become the dominant therapy for impotence," he noted that only 5%-10% of the patients at his Santa Monica practice area were opting for it. "That's because he informs them Muse is less effective than injection therapy and may even result in more pain." After this article, more negative information emerged, including a flattening in the number of prescriptions for MUSE, information about an oral alternative offered by competitor Pfizer, and disclosures that the FDA had found deficiencies in Vivus's manufacture of MUSE. As a result, the stock began to drop and by May 12, 1997, Vivus stock had closed below $16 for the first time since 1996.

53. In order to artificially inflate the price of Vivus stock to prior levels and reap the benefits of selling their stock at inflated prices, the defendants made the false and misleading statements alleged herein, falsely asserting that demand for MUSE was strong and growing, that competitors' products would not significantly impact the Company, that the FDA problems were resolved and that Vivus' growth prospects were outstanding.

FALSE AND MISLEADING

STATEMENTS DURING THE CLASS PERIOD

54. On May 2, 1997, the San Francisco Business Times, relying on false and misleading information provided by the defendants, reported that MUSE's sales were exceeding expectations and that "Vivus's biggest short-term problem has been a continuing inability to meet demand for its sole product. Vivus . . . still needs to boost capacity another 20 percent by June." The article quoted CEO Leland Wilson: "[MUSE] is now one of the most prescribed treatments for erectile dysfunction" and further represented that the product was successfully competing with penile implants, vacuum-constriction devices and injectable drugs.

55. The same article quoted analyst Olsziewski as saying, "'Demand has been outstanding'" and further, "By 2000 profits could approach $89 million, (Olsziewski) predicts. Analyst Wole Fayemi of San Francisco's Genesis Merchant Group Securities, meanwhile, expects the stock to rebound to as much as $150 a share by next year as 'misinformed short sellers' disinformation is diffused.'"

56. Vivus stock closed at $20 per share on May 2, 1997, up $2-3/4 from the previous day's closing price in response to the positive news released by the Company. The stock resumed its decline, however, on May 5, 1997, closing at $18-7/16 and once again fell below its May 1, 1997 price on May 8, 1997.

57. On May 15, 1997, Vivus issued a press release announcing that its Board of Directors approved a stock repurchase program to purchase up to 1,000,000 shares of its common stock. Vivus sought to show through this announcement that its shares, trading at $15-$16, were undervalued. The press release quoted Wilson as stating:

58. Vivus also discussed the Company's prospects with analysts in an effort to disseminate positive statements and inflate the price of its stock. On May 22, 1997, PaineWebber issued a report on Vivus, written by Charles Olsziewski, based on conversations with Vivus management (Wilson and Yntema) in which it reiterated its Buy rating on Vivus, forecasting EPS of $.60 and $1.23 in 1997 and 1998, respectively. The report also stated:

* * *

* * *

59. On June 12, 1997, PaineWebber issued another report on Vivus written by Olsziewski, based on discussions with Vivus management (Wilson and Yntema), reporting that Vivus had satisfied the FDA with respect to deficiencies in its manufacture of MUSE. The report also stated:

60. On June 24, 1997, Vivus announced in a press release that MUSE had been shown to restore erections and the capacity for sexual intercourse in diabetic men regardless of the duration of their diabetes.

61. On June 26, 1997, a story on Vivus appeared in the Select Federal Filings Newswires repeating the Company's assertion that it had resolved the FDA concerns over its manufacture of MUSE. The article stated:

62. On July 7, 1997, Vivus announced the resignation of Samuel Colella as a director of Vivus. Within the next 24 days, Colella disposed of 36,833 shares, 35% of his actual stock holdings.

63. On July 9, 1997, Vivus announced in a press release net income of $10 million or $0.28 per share for the second quarter, ended June 30, 1997, on product sales of $33.5 million. Wilson was quoted:

64. After releasing its results, Vivus (Wilson and Yntema) held a conference call with analysts in which it told them:

Analysts repeated this information to the marketplace where it became part of the total mix of information affecting the price of Vivus stock.

65. On July 10, 1997, Credit Suisse First Boston ("First Boston") issued a report on Vivus based on statements made by the defendants, written by Rebecca Yarchover, rating the Company a Buy and stating:

* * *

* * *

66. On July 10, 1997, PaineWebber issued a report on Vivus written by Olsziewski rating the Company a Buy and stating:

* * *

67. On July 28, 1997, Vivus issued a press release announcing the U.S. commercial launch of ACTIS(R) (Venous Flow Controller), a new innovative treatment for erectile dysfunction, more commonly known as impotence. ACTIS is a fully adjustable penile band which is placed around the base of the penis to impede blood flow out of the penis. ACTIS was cleared by the FDA in December of 1996.

68. On September 3, 1997, after speaking with Vivus management, PaineWebber's Olsziewski issued a report on Vivus rating the Company a Buy and stating:

69. On October 3, 1997, First Boston issued a report on Vivus based on its conversations with management. The report stated:

70. On October 8, 1997, Vivus announced net income of $11.3 million or $0.31 per share for the third quarter ended September 30, 1997, based on product sales of $39.1 million.

71. After releasing the Company's third quarter results, management (Wilson and Yntema) spoke with analysts telling them that:

Analysts repeated this information to the market where it became part of the total mix of information affecting the price of Vivus' stock.

72. On October 9, 1997, PaineWebber issued a report written by Olsziewski rating Vivus a Buy and estimating 1997 and 1998 EPS of $0.94 and $1.65, respectively. The report also stated:

73. On October 9, 1997, First Boston issued a report on Vivus written by Kelly James rating the Company a Buy and forecasting 1997 and 1998 EPS of $1.20 and $1.72, respectively. The report also stated:

74. On October 13, 1997, First Boston issued an additional report based on conversations with Vivus management which stated:

75. On December 1, 1997, PaineWebber issued a report authored by Olsziewski, based on communications with Vivus' management (Yntema and Wilson), which stated:

76. As a result of defendants' false statements, the price of Vivus' stock increased to $41-7/8 during the Class Period and the defendants were able to sell 235,073 shares for proceeds of more than $6.7 million, at prices as high as $36.08.

77. However, before the market opened on December 10, 1997, Vivus stunned the market when it announced that it would not meet its revenue goals for the fourth quarter because of efforts to expand production capacity into its new 90,000-square foot plant, stating:

78. Also on December 10, 1997, Asensio & Company issued the following release:

79. As a result of these announcements, the price of Vivus stock dropped 40% on one day volume of 13.3 million, to $13-13/16, later falling to $9-15/16.

80. Analysts immediately cut their earnings estimates for 1997 and 1998. First Boston decreased its 1997 and 1998 EPS estimates from $1.20 to $1.05 and from $1.42 (First Boston's 1998 EPS had been $1.72, as recently as October) to $0.72, respectively.

81. In a conference call with analysts, the Company later admitted that demand had "plateaued and may have even decreased a little bit over the last, you know, several months," and that production had dropped to 600,000 units in November versus 800,000 in prior months. The defendants failed to disclose the November problems until December 10, 1997, even as the insiders sold an additional 70,240 shares for $1.7 million during November 1997.

82. Each of the positive statements about Vivus' products and business during the Class Period was materially false and misleading when issued, and failed to disclose, inter alia, the following adverse information which was then known only to defendants due to their access to internal Vivus information:

(a) That defendants had no reasonable basis for a belief that Vivus' sales of MUSE would continue to rapidly increase during and after 1997 because defendants knew that users were not and would not repeat their purchase of the product;

(b) That demand for MUSE had actually diminished since early 1997 as users found MUSE much less effective than Vivus had earlier represented it to be and new users awaited oral treatment as a much more desirable alternative to MUSE;

(c) That Vivus was not capacity constrained but was actually warehousing product with distributors including Cord Logistics, ASD (a division of Bergen Brunswig) and Janssen International, to overstate its revenues and conceal the decrease in demand for MUSE, and as a result, Vivus' revenues in the second and third quarters of 1997 were each overstated by at least 15%, and net income was overstated by at least 30% (as described in ¶¶78-82);

(d) That Vivus' gross margins were not representative of the margins Vivus could expect to achieve on future sales due to the exclusion of raw material costs purchased prior to November 1996 from the calculations;

(e) That Vivus would have to curtail its production in late 1997 to move to its new facility and to do maintenance on its old facility;

(f) That the IMF data which showed a flattening in prescriptions was indeed meaningful as it reflected the flattening of demand for MUSE since the beginning of 1997, and that the additional demand for MUSE claimed by defendants was illusory;

(g) That future demand for MUSE would be constrained as a result of the irregularities the FDA found during a post-approval inspection; and

(h) That there was no reasonable basis for making positive representations about Vivus' revenues and future growth, as defendants knew that the market for repeat users was not as big as represented and that once an oral pill was approved, the market for MUSE would be greatly diminished.

FALSE FINANCIAL REPORTING

83. In order to overstate its revenues, gross profits, net income and EPS during the Class Period, the defendants caused the Company to violate generally accepted accounting principles ("GAAP") and SEC rules by improperly recognizing revenue on shipments of product into what Vivus termed "alternate distribution channels," which in fact were not bona fide sales due to contingencies such as the right to return unsold product.

84. Vivus reported the following financial results for the first three quarters of 1997:

                    Q1         Q2         Q3
Product Sales     $27.8 M    $33.5 M    $39.1 M
Gross profit      $24.7 M    $23.9 M    $27.8 M
Net Income        $ 9.6 M    $10.0 M    $11.3 M
EPS               $ 0.27     $ 0.28     $ 0.31

85. Vivus later included these results in Form 10-Q's filed with the SEC. The Form 10-Q's, which were signed by Yntema and Wilson, represented the following:

86. This statement was false and misleading as to the financial information reported in the Form 10-Q's during 1997, as such financial information was not prepared in conformity with GAAP, nor was the financial information "a fair presentation" of the Company's operations due to the Company's improper revenue recognition and inadequate disclosures relating to Vivus' gross margins, in violation of GAAP and SEC rules.

87. GAAP are those principles recognized by the accounting profession as the conventions, rules and procedures necessary to define accepted accounting practice at a particular time. Regulation S-X (17 C.F.R. §210.4-01(a)(1)) states that financial statements filed with the SEC which are not prepared in compliance with GAAP are presumed to be misleading and inaccurate. Regulation S-X requires that interim financial statements must also comply with GAAP, with the exception that interim financial statements need not include disclosure which would be duplicative of disclosures accompanying annual financial statements. 17 C.F.R. §210.10-01(a).

Improper Revenue Recognition

88. Vivus engaged in improper revenue recognition to mask the diminishing demand for its principal product (MUSE) by recognizing revenue on shipments to distributors which were not bona fide sales due to return privileges and other contingencies.

89. GAAP, as set forth in FASB Statement of Concepts ("Concepts") No. 5, states that revenue should not be recognized until it has been both earned and is collectible. Concepts No. 5, ¶83 states in part:

(Footnote omitted.) GAAP, as set forth in FASB Statement of Accounting Standard ("SFAS") No. 48, Revenue Recognition When Right of Return Exists, prohibits the recognition of revenue when the right of return exists unless certain conditions are met. SFAS No. 48 applies to transactions "in which a product may be returned, whether as a matter of contract or as a matter of existing practice." SFAS No. 48, ¶3. SFAS No. 48, ¶¶6-7 states:

* * *

90. After the first six weeks of marketing MUSE, Vivus saw prescriptions for the product level-off and even begin a slight decline. Nevertheless, Vivus continued to post strong sequential revenue gains by shipping product to as yet undisclosed outlets which are not monitored by prescription data services. These shipments to "alternate outlets" were not valid sales as the shipments were accompanied by conditions, such as receiving regulatory approval and resale of the products. These conditions made the "sales" incomplete and not recognizable pursuant to GAAP. As a result of Vivus' improper recognition of revenue it was able to show growing revenues in the face of flat to down prescriptions. The following charts illustrate this inconsistency:

 

 

91. Vivus has now announced that fourth quarter revenues will be 25% lower than the third quarter, blaming the shortfall on production problems, despite reporting increases in production capabilities in July 1997. The true story is that the fourth quarter results will be worse than anticipated due in large part to Vivus' improper revenue recognition in prior quarters. In a conference call with analysts after the December 10, 1997 press release, Vivus' management admitted that distributors' inventory had increased from 30 days in the September-October time frame to 45 days in December. This had occurred despite a reduction in monthly production from 800,000 to 600,000 in November. The increase in distributor inventory and decrease in production were inconsistent with the Company's claims that it was capacity constrained. In fact, distributor inventory increased because Vivus was parking inventory at distributors in order to mask a deterioration in demand for its product.

92. As a result of Vivus' improper revenue recognition, the Company's revenues for the second and third quarters of 1997 were each overstated by approximately 15%, and its net income for those quarters was overstated by 30%.

Gross Margin Disclosures

93. Vivus also failed to comply with GAAP and SEC rules requiring meaningful disclosures regarding the financial information presented, with regard to the gross margins Vivus reported during the Class Period.

94. SEC Regulation S-K, Item 303 (17 C.F.R. §229.303(a-b)) requires that issuers include a Management's Discussion and Analysis section ("MD&A") as part of its Form 10-Q's, and that the MD&A provides information about any significant elements of the issuer's income from continuing operations which are not necessarily representative of the issuer's ongoing business.

95. Contrary to this requirement, Vivus failed to inform readers of its financial statements as to the extent that its positive gross margins reported during 1997 were higher than they would otherwise be due to the Company's practice during 1996 of expensing raw material costs as incurred. These raw material costs otherwise would have been included in costs of sales when Vivus ultimately began to report product sales in 1997 (i.e., the costs would have been included in inventory and charged as a cost of goods sold when the product was sold). Contrary to Regulation S-K, Vivus did not disclose the amount by which its gross margins benefitted from its prior accounting practice, nor that this artificial boost would cease once raw materials purchased (and expensed) during 1996 were exhausted. The amount of raw materials expensed pre-1997 was $10 million, or double Vivus' inventory balance during the Class Period, and was clearly material to Vivus' financial results.

96. Vivus' June 30, 1997 and September 30, 1997 Form 10-Q's stated only the following with respect to gross margins:

97. As opposed to describing the true reasons for its high gross margin, Vivus' management represented to analysts that the gross margin was higher than expected due to "economies of scale resulting from higher throughput." This misleading statement in no way informed the market as to the amount by which Vivus' gross margins had received a temporary boost which would soon end.

98. Due to these accounting improprieties, the Company presented its financial results and statements in a manner which violated GAAP, including the following fundamental accounting principles:

(a) The principle that interim financial reporting should be based upon the same accounting principles and practices used to prepare annual financial statements was violated (APB No. 28, ¶10);

(b) The principle that financial reporting should provide information that is useful to present and potential investors and creditors and other users in making rational investment, credit and similar decisions was violated (FASB Statement of Concepts No. 1, ¶34);

(c) The principle that financial reporting should provide information about the economic resources of an enterprise, the claims to those resources, and effects of transactions, events and circumstances that change resources and claims to those resources was violated (FASB Statement of Concepts No. 1, ¶40);

(d) The principle that financial reporting should provide information about how management of an enterprise has discharged its stewardship responsibility to owners (stockholders) for the use of enterprise resources entrusted to it was violated. To the extent that management offers securities of the enterprise to the public, it voluntarily accepts wider responsibilities for accountability to prospective investors and to the public in general (FASB Statement of Concepts No. 1, ¶50);

(e) The principle that financial reporting should provide information about an enterprise's financial performance during a period was violated. Investors and creditors often use information about the past to help in assessing the prospects of an enterprise. Thus, although investment and credit decisions reflect investors' expectations about future enterprise performance, those expectations are commonly based at least partly on evaluations of past enterprise performance (FASB Statement of Concepts No. 1, ¶42);

(f) The principle that financial reporting should be reliable in that it represents what it purports to represent was violated. That financial information should be reliable as well as relevant is a notion that is central to accounting (FASB Statement of Concepts No. 2, ¶¶58-59);

(g) The principle of completeness, which means that nothing is left out of the information that may be necessary to insure that it validly represents underlying events and conditions was violated (FASB Statement of Concepts No. 2, ¶79); and

(h) The principle that conservatism be used as a prudent reaction to uncertainty to try to ensure that uncertainties and risks inherent in business situations are adequately considered was violated. The best way to avoid injury to investors is to try to ensure that what is reported represents what it purports to represent (FASB Statement of Concepts No. 2, ¶¶95, 97).

99. Further, the undisclosed adverse information concealed by defendants during the Class Period is the type of information which, because of SEC regulations, regulations of the national stock exchanges and customary business practice, is expected by investors and securities analysts to be disclosed and is known by corporate officials and their legal and financial advisors to be the type of information which is expected to be and must be disclosed.

DEFENDANTS' INSIDER SELLING

100. While Vivus' insiders were issuing false and misleading statements about Vivus' business and finances, the defendants sold 235,073 shares of their Vivus stock for proceeds of about $6.7 million to profit from the artificial inflation in Vivus' stock price their false statements had created. Notwithstanding their access to non-public information as a result of their positions with the Company, the Individual Defendants sold the following amounts of Vivus shares at artificially inflated prices throughout the Class Period while in possession of material, non-public information:

                                                                 PRICE            PROCEEDS
                              DATE           SHARES               PER               FROM 
NAME                          SOLD            SOLD               SHARE              SALE 
Casey, Richard                7/15/97        10,000             $ 29.75            $297,500
                                        10,000                                $297,500
Colella, Samuel D.            7/16/97         5,000              $30.19            $150,950
                              7/31/97        10,000              $29.58            $295,800
                              7/31/97        20,833              $29.58            $616,240
                              7/31/97         1,000              $29.58            $ 29,580
                                        36,833                              $1,092,570
Gangolli, Julian              10/13/97        5,000              $36.08            $180,400
                              11/10/97          340              $26.88             $ 9,139
                              11/20/97       10,000              $25.00            $250,000
                              11/21/97          500              $24.91            $ 12,455
                              11/21/97        9,500              $24.91            $236,645
                              11/21/97        3,900              $24.91            $ 97,149
                              11/21/97        6,000              $24.91            $149,460
                              11/21/97       15,000              $24.81            $372,150
                                        50,240                              $1,307,398
Gesundheit, Neil               8/29/97        8,000              $26.75            $214,000
                                         8,000                                $214,000
Hutt, Peter Barton             7/14/97       10,000              $29.44            $294,400
                                        10,000                                $294,400
Place, Virgil A.               7/15/97        5,000              $29.26            $146,300
                               7/15/97        5,000              $30.06            $150,300
                               7/17/97        5,000              $30.63            $153,150
                               7/18/97        5,000              $29.44            $147,200
                                        20,000                                $596,950
Smith, William L.             11/20/97       10,000              $25.00            $250,000
                                        10,000                                $250,000
Wilson, Leland F.              7/14/97       18,500              $29.75            $550,375
                               7/15/97        6,000              $30.62            $183,720
                               7/16/97        5,500              $31.00            $170,500
                                        30,000                                $904,595
Yntema, David C.               7/16/97       30,000              $31.00            $930,000
                              10/13/97       15,000              $35.63            $534,450
                              11/21/97       15,000              $24.81            $372,150
                                        60,000                              $1,836,600
                                       235,073                            $6,794,013

101. During the Class Period other top Vivus executives sold many thousands of shares of their Vivus stock based on inside information about the problems with Vivus' business.

FIRST CLAIM FOR RELIEF

For Violation Of §10(b) Of The

Exchange Act And Rule 10b-5 Against All Defendants

102. Plaintiff incorporates ¶¶1-101 by reference.

103. Each of the defendants: (a) knew the material, adverse, non-public information about Vivus' financial results and then-existing business conditions, which was not disclosed; and (b) participated in drafting, reviewing, and/or approving the misleading statements, releases, reports, and other public representations of and about Vivus.

104. During the Class Period, defendants disseminated or approved the false statements specified above, which they knew were misleading in that they contained misrepresentations and failed to disclose material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading.

105. Defendants violated §10(b) of the Exchange Act and Rule 10b-5 in that they:

(a) Employed devices, schemes, and artifices to defraud;

(b) Made untrue statements of material facts or omitted to state material facts necessary in order to make statements made, in light of the circumstances under which they were made, not misleading; or

(c) Engaged in acts, practices, and a course of business that operated as a fraud or deceit upon plaintiff and others similarly situated in connection with their purchases of Vivus common stock during the Class Period.

106. The undisclosed adverse information concealed by defendants during the Class Period is the type of information which, because of SEC regulations, regulations of the national stock exchanges and customary business practice, is expected by investors and securities analysts to be disclosed and is known by corporate officials and their legal and financial advisors to be the type of information which is expected to be and must be disclosed. For example:

(a) Under Item 303 of Regulation S-K, promulgated by the SEC under the Exchange Act, there is a duty to disclose in periodic reports filed with the SEC "known trends or any known demands, commitments, events or uncertainties" that are reasonably likely to have a material impact on a company's sales revenues, income or liquidity, or cause previously reported financial information not to be indicative of future operating results. 17 C.F.R. §229.303(a)(1)-(3) and Instruction 3. In addition to the periodic reports required under the Exchange Act, management of a public company has a duty promptly "to make full and prompt announcements of material facts regarding the company's financial condition." SEC Release No. 34-8995, 3 Fed. Sec. L. Rep. (CCH) ¶23,120A, at 17,095, 17 C.F.R. §241.8995 (10/15/70). The SEC has repeatedly stated that the anti-fraud provisions of the federal securities laws, which are intended to ensure that the investing public is provided with "complete and accurate information about companies whose securities are publicly traded," apply to all public statements by persons speaking on behalf of publicly traded companies "that can reasonably be expected to reach investors and the trading markets, whoever the intended primary audience." SEC Release No. 33-6504, 3 Fed. Sec. L. Rep. (CCH) ¶23,120B, at 17,096, 17 C.F.R. §241.20560 (1/13/84). The SEC has emphasized that "[i]nvestors have legitimate expectations that public companies are making, and will continue to make, prompt disclosure of significant corporate developments." Sharon Steel Corp., SEC Release No. 18271, [1981-1982 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶83,049, at 84,618 (11/19/81); and

(b) Schedule D of the National Association of Securities Dealers ("NASD") Manual, which governs companies whose securities are included in the NASDAQ requires a NASDAQ company to "make prompt disclosure to the public through the press of any material information that may affect the value of its securities or influence investors' decisions." NASD Manual, Schedule D, Part II, §1(c)(13) [¶1803(c)(13)].

107. Plaintiff and the Class have suffered damages in that, in reliance on the integrity of the market, they paid artificially inflated prices for Vivus stock. Plaintiff and the Class would not have purchased Vivus stock at the prices they paid, or at all, if they had been aware that the market prices had been artificially and falsely inflated by defendants' misleading statements.

SECOND CLAIM FOR RELIEF

For Violation Of §20(a) Of The Exchange Act

Against Defendants Place, Wilson and Vivus

108. Plaintiff incorporates ¶¶1-107 by reference.

109. Defendants Place and Wilson acted as controlling persons of Vivus within the meaning of §20(a) of the Exchange Act. By reason of their positions as directors and/or officers of Vivus they had the power and authority to cause Vivus to engage in the wrongful conduct complained of herein. Vivus controlled each of the Individual Defendants and all of its employees.

110. By reason of such wrongful conduct, defendants Place, Wilson and Vivus are liable pursuant to §20(a) of the Exchange Act. As a direct and proximate result of these defendants' wrongful conduct, plaintiff and the other members of the Class suffered damages in connection with their purchases of Vivus common stock during the Class Period.

CLASS ACTION ALLEGATIONS

111. Plaintiff brings this action as a class action pursuant to Federal Rule of Civil Procedure 23(a) and (b)(3) on behalf of all persons who purchased Vivus common stock (the "Class") on the open market during the Class Period. Excluded from the Class are the defendants herein, members of their immediate families, any entity in which a defendant has a controlling interest, and the legal representatives, heirs, successors-in-interest, or assigns of any excluded party.

112. The members of the Class are so numerous that joinder of all members 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, Vivus had more than 33 million shares of stock outstanding, owned by thousands of shareholders.

113. There is a well-defined commonality of interest in the questions of law and fact involved in this case. The questions of law and fact common to the members of the Class which predominate over questions which may affect individual Class members include the following:

(a) Whether the federal securities laws were violated by defendants;

(b) Whether defendants omitted and/or misrepresented material facts;

(c) Whether defendants' statements omitted material facts necessary to make the statements made, in light of the circumstances under which they were made, not misleading;

(d) Whether defendants knew or had reasonable grounds to believe that their statements were false and misleading;

(e) Whether the price of Vivus stock was artificially inflated during the Class Period; and

(f) The extent of damage sustained by Class members and the appropriate measure of damages.

114. Plaintiff's claims are typical of those of the Class because plaintiff and the Class sustained damages from defendants' wrongful conduct.

115. Plaintiff will adequately protect the interests of the Class and has retained counsel who are experienced in class action securities litigation. Plaintiff has no interests which conflict with those of the Class.

116. A class action is superior to other available methods for the fair and efficient adjudication of this controversy.

117. The prosecution of separate actions by individual Class members would create a risk of inconsistent and varying adjudications.

BASIS OF ALLEGATIONS

118. Because the PSLRA, §21D(c) of the Exchange Act [15 U.S.C. §78u-4(c)], requires complaints to be pleaded in conformance with Federal Rule of Civil Procedure 11, plaintiff has alleged the foregoing based upon the investigation of his counsel, which included a review of Vivus' SEC filings, securities analysts' reports and advisories about the Company, press releases issued by the Company, media reports about the Company, private investigations and discussions with consultants, and, pursuant to Rule 11(b)(3), believes that after reasonable opportunity for discovery, substantial evidentiary support will likely exist for the allegations set forth at ¶¶1, 3-4, 8, 27 and 82-93.

PRAYER FOR RELIEF

WHEREFORE, plaintiff prays for judgment as follows:

1. Declaring this action to be a proper class action pursuant to Rule 23(a) and (b)(3) of the Federal Rules of Civil Procedure on behalf of the Class defined herein;

2. Awarding plaintiff and the members of the Class compensatory damages, including rescissory damages, where applicable;

3. Awarding plaintiff and the members of the Class pre-judgment and post-judgment interest, as well as reasonable attorneys' fees, expert witness fees, and other costs;

4. Awarding extraordinary, equitable, and/or injunctive relief as permitted by law, equity, and the federal statutory provisions sued hereunder, including rescission, the imposition of a constructive trust upon the proceeds of the Individual Defendants' insider trading, pursuant to Rules 64, 65, and any appropriate state law remedies; and

5. Awarding such other relief as this Court may deem just and proper.

JURY DEMAND

Plaintiff demands a trial by jury.

DATED: October 12, 1998

MILBERG WEISS BERSHAD

HYNES & LERACH LLP

REED R. KATHREIN

JEFFREY W. LAWRENCE

DAVID R. STICKNEY





______________________________

REED R. KATHREIN



222 Kearny Street, 10th Floor

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Telephone: 415/288-4545



MILBERG WEISS BERSHAD

HYNES & LERACH LLP

WILLIAM S. LERACH

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Telephone: 619/231-1058



SPECTOR & ROSEMAN, P.C.

ELLEN GUSIKOFF STEWART

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SPECTOR & ROSEMAN, P.C.

ROBERT M. ROSEMAN

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BARRACK, RODOS & BACINE

EDWARD M. GERGOSIAN

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San Diego, CA 92101

Telephone: 619/230-0800



Co-Lead Counsel for Plaintiffs





VIVUS\LSN00823.CPT

DECLARATION OF SERVICE BY MAIL

PURSUANT TO NORTHERN DISTRICT LOCAL RULE 23-2(c)(2)


I, the undersigned, declare:

1. That declarant is and was, at all times herein mentioned, a citizen of the United States and a resident of the County of San Francisco, over the age of 18 years, and not a party to or interested in the within action; that declarant's business address is 222 Kearny Street, 10th Floor, San Francisco, California 94108.

2. That on October 13, 1998, declarant served the CONSOLIDATED COMPLAINT FOR VIOLATION OF THE SECURITIES EXCHANGE ACT OF 1934 by depositing a true copy thereof in a United States mailbox at San Francisco, California in a sealed envelope with postage thereon fully prepaid and addressed to the parties listed on the attached Service List and that this document was forwarded to the following designated Internet site at:

http://securities.milberg.com

3. That there is a regular communication by mail between the place of mailing and the places so addressed.

I declare under penalty of perjury that the foregoing is true and correct. Executed this 13th day of October, 1998, at San Francisco, California.



______________________________

LISA NEWELL

1. All amounts are adjusted to reflect a 2-for-1 stock split effective June 1997.

2. On July 2, 1998, the Court appointed the Kosor Plaintiffs Group to serve as Lead Plaintiff pursuant to §21D(a)(3)(B) of the Securities Exchange Act of 1934 (as added by the Private Securities Litigation Act of 1995, Pub. L. 104-67, §101), 15 U.S.C. §78u-4(a)(3)(B). The Kosor Plaintiffs Group is comprised of 458 plaintiffs, who collectively purchased 1,454,956 shares of Vivus stock and suffered losses of over $16,596,000.00.