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MILBERG WEISS BERSHAD HYNES & LERACH LLP WILLIAM S. LERACH (68581) KIRK B. HULETT (110726) 600 West Broadway, Suite 1800 San Diego, CA 92101 Telephone: 619/231-1058 APPEL, CHITWOOD & HARLEY MARTIN D. CHITWOOD KAUFMAN, MALCHMAN, KIRBY Georgia State Bar No. 124950 & SQUIRE, LLP 1400 Resurgens Plaza JEFFREY H. SQUIRE 7945 East Paces Ferry Road PETER LINDEN Atlanta, GA 30326 919 Third Avenue, 11th Floor Telephone: 404/266-1650 New York, NY 10022 Telephone: 212/371-6600 BERNSTEIN LITOWITZ BERGER & GROSSMANN LLP ABBEY, GARDY & SQUITIERI, LLP VINCENT CAPPUCI MARK C. GARDY 1285 Avenue of the Americas STEPHEN J. FEARON, JR. 33rd Floor 212 East 39th Street New York, NY 10019 New York, NY 10016 Telephone: 212/554-1400 Telephone: 212/889-3700 Attorneys for Plaintiffs [Additional counsel appear on signature page.] SUPERIOR COURT OF THE STATE OF CALIFORNIA COUNTY OF SANTA CLARA BERT PERL, ROBERT MISHLOW, GREG ) Case No. CV766119 CONGERO and RAM YARIV, On Behalf of ) [filed May 12, 1997] Themselves and All Others Similarly ) CLASS ACTION Situated, ) ) Plaintiffs, ) ) COMPLAINT FOR DAMAGES BASED vs. ) UPON VIOLATION OF CAL. ) CORP. CODE §§25400 AND DSP COMMUNICATIONS,INC., DAVIDI ) 25500 GILO, LEWIS S. BROAD, GERALD DOGON, ) NATHAN HOD, ARNON KOHAVI and JOSEPH ) PERL, ) ) Defendants. ) Plaintiffs Demand A ___________________________________ ) Trial By Jury
NATURE OF THE CASE 1. This is a securities class action lawsuit on behalf of the purchasers of the common stock of DSP Communications, Inc. ("DSP" or the "Company") , between January 16, 1997 and April 16, 1997, inclusive (the "Class Period"), against DSP and certain of its officers and directors. DSP is engaged in the development and marketing of digital signal processing software, algorithms and VLSI circuit design to develop highly integrated, low power and cost effective chipsets for wireless communications applications. Prior to and during the Class Period, the Company portrayed itself as the largest independent vendor of baseband chipsets to original equipment manufacturers in the Japanese digital cellular telephone market which began initial shipments in the first quarter of 1996. The Company's announced strategy was to maintain its position as a leading supplier of baseband chipsets for digital cellular telephones in Japan, while expanding into other geographic markets and developing new wireless communications systems. 2. Throughout 1996, DSP experienced high growth and strong order rates for its wireless communications software and related products. As a result, DSP's stock increased from below $20 per share to over $60 per share between January 1996 and October 1996. In October 1996, DSP announced a proposed merger with Proxim, Inc. ("Proxim") whereby DSP would acquire Proxim through an exchange of DSP stock. DSP's stock dropped by over $17 per share when the proposed merger was announced. The one-day market losses were over $740 million and the individual defendants saw their personal worth plummet. - 1 -
3. As a result of the furor expressed by DSP shareholders over the collapse of the price of their DSP stock, DSP's officers and directors embarked on a media campaign designed to raise the price of DSP's stock, deceive investors, and sell their personal holdings at artificially inflated prices. Defendants' campaign was a success. 4. The campaign commenced when, on November 22, 1996, DSP announced the termination of its merger with Proxim. This announcement had its desired effect and DSP's stock rose, but only slightly compared to the initial $17 drop when the planned merger was announced. An additional, but more fundamental aspect of defendants' plan, required that during the fourth quarter 1996, defendants offered its customers special incentives to purchase product in that quarter in order to permit DSP to report artificially higher than forecasted revenues and earnings. DSP was successful in its efforts and was able to ship large quantities of product to its Japanese distributors before year end 1996. To accomplish this feat, DSP was forced to substantially deplete its order backlog, which, as later reported, decreased from $26 million at the end of September 1996 to $6.8 million by the end of December 1996. 5. Once defendants had successfully shipped unusually large quantities of products to its distributors, defendants Davidi Gilo, Nathan Hod and others leaked news of DSP's successful fourth quarter to favored securities analysts, including Oppenheimer & Company, Inc. ("Oppenheimer"). These analysts in turn, as the defendants knew they would, published this and other favorable information about DSP in analyst reports in early January 1997. - 2 -
These analyst reports, which included forecasts of future results for 1997 and 1998, caused DSP's stock to rise. 6. Thereafter, on January 16, 1997, defendants officially released DSP's financial results for the quarter ended December 31, 1996. Revenues had increased 77% over the 1995 comparable period and 118% for the entire year. In its January 1997 press release, DSP also cited continued and sustained growth of its wireless market niche in Japan and reported increased sales to seven OEM customers in Japan. Reported revenues and earnings far exceeded earlier forecasts and DSP's stock price rose again. While DSP noted that the time period from orders to shipment had decreased, defendants reiterated in a conference call with analysts after DSP's January 16, 1997 press release, that sales were strong and failed to even hint of any short-term or long-term sales problems. 7. Within days of publicly reporting its fourth quarter results, DSP's insiders, having successfully caused DSP's stock to rebound to nearly $50 per share from the post-merger announcement low price of only $36 per share, started to sell tens of thousands of shares of DSP stock. A two-for-one stock split was also announced in late 1996 which doubled the number of shares outstanding and reduced the price of DSP's stock in half. Between January 21, 1997 and February 19, 1997, the individual defendants sold nearly 400,000 shares of their personal holdings for nearly $8 million. Moreover, in early February 1997, defendants personally contacted several favored shareholders and advised them that they should also sell their DSP stock. 8. Within days after the insiders completed their selling frenzy, DSP stock dropped precipitously, and, from February 19, - 3 -
1997 to March 3, 1997, dropped from over $21 per share to below $10 per share. 9. The following chart reflects the massive insider bail- out. DSP Communications November 1, 1996 - May 6, 1997 Daily Stock Prices
10. Thereafter, in an effort to halt the further slide of DSP's stock price, on March 3, 1997, defendants issued a special press release. In that news release, DSP stated that "no new information has appeared to . . . change its visibility of the business environment." DSP also announced that it had not lost any customers nor had any customers decided to exit the PDC market. - 4 -
The Company also stated that it was not aware of any new competitors. Defendant Hod stated: "We still believe in the viability of the Japanese PDC market over the next several years and believe that our OEM's are well positioned in that market. . . . [W]e believe that in the near future, additional OEMs will adopt our solutions for the PDC, CDMA and TDMA markets." These announcements caused DSP's stock to rebound by over 20%. 11. Finally, on April 16, 1997, after successfully dumping their personal stock holdings, and when it was forced to reveal its fourth quarter 1997 results, DSP acknowledged for the first time that the second quarter of 1997 would be a disaster and sales for the second quarter would be "materially lower than the first quarter of 1997." DSP also announced that it knew in January 1997 of the lack of orders for its products, yet had continued to build product. Sales were announced to be so abysmal that DSP discon- tinued production until a specific order was placed. On this startling news, DSP's stock price collapsed by nearly 40% to a low of just $6 per share. 12. As more particularly alleged herein, the statements made by defendants during the Class Period were each materially false and misleading and each statement was made with the purpose of inducing plaintiffs and the Class to purchase DSP stock in violation of Cal. Corp. Code §25400. JURISDICTION AND VENUE 13. This Court has jurisdiction over the cause of action pursuant to the California Constitution, Article VI, §10, because this case is not given by statute to other trial courts. - 5 -
14. The claims herein arise under §§25400 and 25500 of the California Corporations Code. 15. Venue is properly laid in this state and county as many of the acts giving rise to the violations of law charged herein, including the preparation and dissemination to the investing public of materially false and misleading information, occurred in this county. In addition, the individual defendants are the principal officers of DSP which maintains its principal executive offices in this County at 20300 Stevens Creek Boulevard, Cupertino, California. In addition, each defendant, directly and indirectly, made offers to sell DSP stock within this state. These offers originated from California. The amount in controversy of each of the named plaintiffs' claims is less than $50,000 exclusive of interest and costs. The action is not removable to federal court. THE PARTIES 16. (a) Plaintiff Bert Perl purchased 400 shares of DSP stock during the Class Period and was damaged as a result of defendants' violations of Cal. Corp. Code as alleged herein. (b) Plaintiff Robert Mishlow purchased 500 shares of DSP stock during the Class Period and was damaged as a result of defendants' violations of Cal. Corp. Code as alleged herein. (c) Plaintiff Greg Congero purchased 500 shares of DSP stock during the Class Period and was damaged as a result of defendants' violations of Cal. Corp. Code as alleged herein. (d) Plaintiff Ram Yariv purchased 1,000 shares of DSP stock during the Class Period and was damaged as a result of defendants' violations of Cal. Corp. Code as alleged herein. - 6 -
17. (a) Defendant DSP is a leading developer of chipsets and products for the wireless personal communications services (PCS) market. Headquartered in Cupertino, California, the Company develops, markets, licenses, and supports application-specific integrated circuits (ASICs) and software based on digital signal processing (DSP) technology for a variety of cellular and PCS applications. These applications are supported by well-established standards such as Personal Digital Cellular (PDC); Time Division Multiple Access (TDMA) and Code Division Multiple Access (CDMA). The Company's leading customers include Kenwood, Kyocera, NEC, Sanyo and Sharp. The Company has over 44 million shares of common stock outstanding. During the Class Period, DSP's common stock was actively traded on the NASDAQ National Market System, an efficient market. (b) Defendant Davidi Gilo ("Gilo") has served as Chairman of the Board of Directors since 1987. (c) Defendant Lewis S. Broad ("Broad") has served as a member of the Board of Directors since 1992. During the Class Period, Broad sold 220,000 shares of his DSP stock for $4.5 million while in possession of the material, adverse, non-public information about DSP alleged herein. (d) Defendant Gerald Dogon ("Dogon") has served as Senior Vice President and Chief Financial Officer since 1994. During the Class Period, Dogon sold 43,000 shares of his DSP stock for approximately $1 million while in possession of the material, adverse, non-public information about DSP alleged herein. (e) Defendant Nathan Hod ("Hod") joined the Company in 1994 as President, Chief Executive officer and Director. During - 7 -
the Class Period, Hod sold 45,000 shares of his DSP stock for $975,000 while in possession of the material, adverse, non-public information about DSP alleged herein. (f) Defendant Arnon Kohavi ("Kohavi") has served as Vice President of Business Development since 1995. During the Class Period, Kohavi sold 3,800 shares of his DSP stock for $85,000 while in possession of the material, adverse, non-public information about DSP alleged herein. (g) Defendant Joseph Perl ("Perl") has served as Vice President of Engineering and Chief Technical Officer since 1993. During the Class Period, Perl sold 59,500 shares of his DSP stock for $1.3 million while in possession of the material, adverse, non- public information about DSP alleged herein. CLASS ACTION ALLEGATIONS 18. Plaintiffs bring this action as a class action pursuant to California Code of Civil Procedure §382 on behalf of a class (the "Class") consisting of all persons who purchased the common stock or related securities of DSP during the period from January 16, 1997 to and including April 16, 1997. Excluded from the Class are the defendants herein, members of the immediate family of the individual defendants, any entity in which any defendant has a controlling interest and the legal affiliates, representatives, heirs, controlling persons, successors and predecessors in interest or assigns of any such excluded party. 19. Because over 44 million shares of the Company's common stock were outstanding and because the Company's common stock was actively traded on the NASDAQ National Market System during the Class Period, the members of the Class are so numerous that joinder - 8 -
of all members is impracticable. While the exact number of Class members can only be determined by appropriate discovery, plaintiffs believe that Class members number at least in the thousands and that they are geographically dispersed. 20. Plaintiffs' claims are typical of the claims of the members of the Class because plaintiffs and all of the Class members sustained damages arising out of the defendants' wrongful conduct complained of herein. 21. Plaintiffs will fairly and adequately protect the interests of the Class members and have retained counsel who are experienced and competent in class and securities litigation. Plaintiffs have no interest which is contrary to or in conflict with those of the members of the Class plaintiffs seek to represent. 22. A class action is superior to all other available methods for the fair and efficient adjudication of this controversy since joinder of all members is impracticable. Furthermore, as the damages suffered by individual members of the Class may be relatively small, the expense and burden of individual litigation make it impossible for the members of the Class individually to redress the wrongs done to them. There will be no difficulty in the management of this action as a class action. 23. Questions of law and fact common to the members of the Class predominate over any questions which may affect only individual members in that defendants have acted an grounds generally applicable to the entire Class. Among the questions of law and fact common to the Class are: - 9 -
(a) Whether §25400 was violated by defendants' acts as alleged herein; (b) Whether the Company's publicly disseminated releases and statements during the Class Period omitted and/or misrepresented material facts and whether defendants breached any duty to convey material facts or to correct material facts previously disseminated; (c) Whether defendants participated in and pursued the scheme and course of business complained of; (d) Whether defendants acted willfully, recklessly or negligently in omitting and/or misrepresenting material facts; (e) Whether the market prices of DSP common stock or securities related to its common stock during the Class Period were artificially inflated due to the material nondisclosures and/or misrepresentations complained of herein; and (f) Whether the members of the Class have sustained damages and, if so, what is the appropriate measure of damages. DEFENDANTS' FALSE AND MISLEADING STATEMENTS DURING THE CLASS PERIOD 24. Just prior to DSP's release of its fourth quarter 1996 financial results, defendants contacted numerous securities analysts with internal, confidential information about DSP in furtherance of their plan to raise the price of DSP's stock. Two such analysts used by DSP to leak information were Oppenheimer and Deutsche Morgan Grenfell, Inc. ("Deutsche"). After conferring with executives of DSP, on January 8, 1997 Oppenheimer reported the following: We believe that the company [DSP] is on track to meet our estimates for the quarter. We believe that the - 10 -
company continues to improve operationally which will be demonstrated in both revenue growth and growth in operating income . . . [and] will lead to continuing incremental improvements in gross margin. [W]e look for a strong revenue performance in 1997. * * * We have recently upgraded our rating on the stock following an overdone correction that was triggered by an unsuccessful acquisition attempt. We believe that strong EPS momentum in the near term driven by growth in the Japanese market and the long term upside from the company's move into other markets and technologies . . . are likely to help the stock recover . . . . * * * The Japanese digital cellular market continues to enjoy dramatic growth. DSPC continues to benefit from the explosive growth in the Japanese market. In addition, the lack of competitive chipsets as well as DSPC's strength in algorithms design continues to drive the company's financial results. * * * The move toward digital is creating new upside for the company in Japan (CDMA) and in the U.S. (CDMA & TDMA). DSP . . . is well positioned to benefit not only from the anticipated overall market growth but also from potential market share gains by this emerging group of alternative suppliers. 25. Thereafter, on January 14, 1997, Deutsche reported the following: DSP Communications will report fourth quarter earnings on January 16 after the close. We believe that an upside earnings surprise is likely. We expect management to present an upbeat outlook for the year ahead, with a focus on continued solid growth in Japan as well as the potential of the TDMA and CDMA solutions. We believe that such a development should provide additional confidence into our conservative 1997 EPS estimate of $0.72 and our 1998 estimate of $0.97. * * * - 11 -
We believe that DSP's strong Rf and software expertise and solid established relationships with major Japanese electronics manufacturers, which constitute nearly 35% of the PDC market, should enable DSPC to deliver earnings growth of more than 30% per year for the next three years. * * * DSPC's PDC chip set business should continue to drive the company's robust revenue and earnings growth. Specifically, solid seasonal subscriber growth of more than 80% in the Japanese PDC market and recent tariff reductions should join forces to create a favorable growth environment for the first quarter of 1997. 26. Only days later, on January 16, 1997, the day the Class Period begins, DSP issued a press release which stated: DSP Communications Inc. . . . announced revenues for its fourth quarter ending December 31, 1996 were $27,846,000, an increase of 77% compared to the same period in 1995. Revenues for the twelve month period ended December 31, 1996 were $88,899,000, an increase of 118% compared to the same period in 1995. Net income for the fourth quarter was $4,622,000 or 10 cents per share compared to a loss of $6,721,000 or 19 cents per share in the fourth quarter of 1995. For the year ended December 31, 1996 the Company recorded net income of $21,750,000, or 48 cents per share, compared to a loss of $2,358,000 or 8 cents per share in the same period in 1995. In the fourth quarter of 1996 the Company incurred a charge of approximately $5,000,000 in connection with the proposed acquisition of Proxim Inc. This charge was included in General and Administrative expenses. Excluding this charge, pro forma net income for the quarter was $8,997,000 or 19 cents per share and for the twelve month period ended December 31, 1996, $26,125,000 or 57 cents per share. * * * Revenues throughout 1996 have been driven primarily by the sustained growth of the wireless personal communications market in Japan, and by the related increase in sales by the Company's seven OEM customers in that market. Commercial shipments of CTP's CTPhone Wireless PBX system were initiated in the second half of the year. Initial shipments of the Company's IS-136 chipset to the U.S. market were made during the fourth quarter. - 12 -
27. The statements made in the press release during the conference call and in the analyst reports were materially false and misleading at the times they were made because they omitted the following material facts: (a) DSP's order rate had materially declined, due, in part, to DSP's successful efforts to stuff its distributors and OEMs with product prior to year-end 1996. (b) DSP had learned from its customers that price pressure and product transition concerns were adversely affecting order rates, which DSP and the individual defendants knew or recklessly disregarded was adversely effecting sales and earnings; (c) That competition, especially in Japan, was intensifying and that new entries into that market was adversely affecting DSP's sales and earnings. 28. In conjunction with issuing the press release announcing DSP's fourth quarter results, which were very strong, DSP held a conference call for analysts during which defendants stated that they were very optimistic about DSP's performance in 1997, and were confident that DSP would achieve record earnings per share in 1997. 29. On or about January 16, 1997, DSP filed a Form S-8 Registration Statement. This Registration Statement became effective immediately upon filing with the Securities and Exchange Commission, and reflected the registration for the sale of 3,000,000 shares of Common Stock under the Company's 1996 employee stock option plan. 30. Based on the January 16, 1997 press release and subsequent conference call with DSP executives, on January 17, 1997, Deutsche issued an analyst report which stated: - 13 -
[R]evenue growth . . . [was] driven by robust expansion in the Japanese digital cellular PDC market and higher technology development revenues stemming from DSPC's CDMA-based chip set customers. The company continued to make progress signing up customers for its CDMA-based chip set solution, which will begin commercial shipments in late 1997 with commercial volumes due the first quarter of 1988. In addition, the company is likely to add OEMs using its TDMA chip set. . . . We believe that the company's current valuation does not yet reflect the company's positive growth outlook. . . . We believe the shares offer investors a pure play in the wireless digital cellular market and we rate the shares a BUY. The difference was attributable to stronger-than-expected growth in the company's bread-n-butter Japanese digital cellular chip set business and higher technology development revenues stemming from DSPC's CDMA customers. . . . The improvement was driven by better-than-expected volumes of its PDC solution, more favorable mix, and the dissipation of costs associated with the introduction of its half-rate chip set for PDC. . . . DSP continued to experience robust growth in the Japanese digital cellular market in the fourth quarter as sales of its half-rate PDC chip set soared over year-ago levels. Market growth in the quarter was bolstered by the removal of a one-time initiation fee charged by NTT amounting to several hundred dollars. . . . [M]anagement tempered their comments on the conference call with a note of caution regarding the increasingly competitive nature of the PDC market and the month-to-month market share fluctuations that occur in such an environment. . . . Management indicated that the CDMA solution will begin in the fourth quarter of 1997 with commercial shipments in the first quarter of 1998. The company currently has 5 OEMs lined up for its CDMA-based solution, including a European customer as well as customers from other Asian countries. We view the CDMA opportunity as the next leg of significant growth for DSPC. Management indicated on the conference call that they felt DSPC was better positioned with its CDMA product now than it was back in 1994 when it entered the PDC market in Japan -- we agree wholeheartedly. * * * Moreover, we believe that the Japanese digital cellular market will remain a robust grower and should not be - 14 -
written off, particularly as service costs decline and the market transitions to a more consumer driven nature. 31. Within days after the January 16, 1997 announcements and analyst conference, the individual defendants, as detailed herein, began a massive sell-off of their personal stock holdings and only days after the individual defendants completed their selling spree, DSP's stock began a steady and steep decline. From February 19, 1997, the last day of the complained about insider sales, to March 3, 1997, DSP's stock declined by over 50% on large volume. This drop is attributable, in part, to the fact that certain individual defendants secretly advised favored shareholders to sell their stock. These tips from DSP insiders caused an enormous sell-off and the resulting price slide. 32. Thereafter, on January 27, 1997, based on information provided by defendants, it was reported in a RCR Radio Communications Report that: [DSP's] primary customers are Japanese original equipment phone manufacturers, for which DSPC provides baseband chipsets for Personal Digital Cellular terminals. DSPC began shipping two new products last year. The CTPhone 1900 is a wireless private branch exchange system that operates at the 1900 Mhz unlicensed frequency. DSPC began commercially shipping the CTPhone systems in the second half of 1996. * * * During the fourth quarter, DSPC began shipping chipsets for Interim Standard 136 Time Division Multiple Access products. "During the second half of 1997, we will see growth with IS-136 as it will slowly ramp up," said Arnon Kohavi, DSPC vice president for business development. DSPC and Japanese manufacturer NEC Corp. have jointly developed a 3-volt DSP baseband subsystem - 15 -
integrated circuit for TDMA IS-54B phones, and have also developed a newer chipset version of the IS-136 standard. 33. Thereafter, in furtherance of the plan to artificially inflate DSP's stock, DSP executives again contacted securities analysts in an effort to obtain a favorable report. One such analyst was Deutsche which, on February 26, 1997, reported: RECENT PRICE WEAKNESS CREATES BUYING OPPORTUNITY * * * Recent share price weakness of DSP Communications, in our view, has created an excellent buying opportunity. . . . Formerly leveraged to only Japan's wireless market opportunity, the company is now set to exploit wireless opportunities that are emerging in digital cellular services in the Americas. . . . The company continued to make progress signing up new customers for its CDMA-based chip set solution, which will begin commercial shipments in late 1997 with commercial volumes due the first quarter of 1998. * * * DSPC continues to experience robust growth in the Japanese digital cellular market. Market growth early in 1997 remains in line with expectations. The company and our assumptions for 700, 000 subscriber additions were met as numbers reported from that market suggest that there were 750,000 new subscribers added to networks during that month. Although a large sequential drop from the 1.2 million in December, the seasonality of this business is well documented and similar patterns occur in other markets outside Japan. Traditionally, more than one third of new customer additions occur in the fourth quarter. Additionally, last December's growth in Japan was further bolstered by the removal of a one-time initiation fee charged by NTT amounting to several hundred dollars creating a surge in subs during December. * * * DSPC has already lined up a solid CDMA customer roster, and we expect several additional customers to be added in 1997. Furthermore, the analog-to-digital migration in North America is just getting under way. . . . We believe that as investors begin to focus on CDMA's potential, estimates will likely be upwardly revised for - 16 -
1998 in order to reflect the strong revenue and earnings opportunity inherent in CDMA. 34. On March 3, 1997, in order to stop DSP's stock price from dropping further, DSP issued a special press release, and stated that: [N]o new information has appeared to cause the Company to change its visibility of the business environment. In its public statements following the announcement of the fourth quarter operating results, the Company stated that the lead time for orders for the Japanese PDC cellular telephone handsets and their components. such as the Company's chipsets, had significantly shorten [sic]. This has reduced the Company's ability to forecast demand for its products or the results for the current quarter . . . . [T]he Company has not been advised that it has lost any customers or that any customers have decided to exit the PDC market. Nor is the Company aware of any new competitors for its chipset solution. . . . Nathan Hod, president and chief executive officer of the Company, stated that, "We still believe in the viability of the Japanese PDC market over the next several years and believe that our OEMs are well positioned in that market. Our customers are currently designing new models with our next generation chipsets which has lower pin count, lower component count, higher integration, and lower power consumption." Mr. Hod added "we are also very excited about the Company's prospects over the next 24 months in the CDMA and TDMA markets worldwide. In the last 12 months we doubled our total customer base and we believe that in the near future, additional OEMs will adopt our solutions for the PDC, CDMA and TDMA markets." 35. On or about March 31, 1997, DSP filed its Form 10-K Annual Report for the fiscal year ended December 31, 1996. The Company stated therein, among other things, that: The Company believes that demand for digital subscriber equipment in Japan may continue to increase as a result of (i) the continued transition from analog to digital; (ii) anticipated price reductions in cellular services due to increased competition among wireless communica tions providers and potential incentives for users of new half-rate PDC services; and (iii) the transition from the full-rate to half-rate PDC standard, thereby stimulating - 17 -
subsequent purchases of replacement and next generation subscriber equipment. 36. The February 26 and March 6, 1997 statements and DSP's 1996 Form 10-K were materially false and misleading when made because, given that the decline in order rates DSP had experienced during January, February and March, there was no reasonable basis to forecast the future success DSP did project. Similarly, given the intensifying competition in the Japanese market for the OEM business DSP had traditionally relied upon, DSP's OEMs were not "well positioned." In addition, the statements were materially misleading for failing to disclose the adverse affects DSP expected due to the development of new telephone models and the next generation of DSP's chipsets. 37. Finally, on April 16, 1997, DSP announced in the Business Wire that revenues for its first quarter ending March 31, 1997 were $20,302,000 an increase of 17% compared to the same period in 1996. Net income for the first quarter was $6,126,000 or 13 cents per share compared to $3,575,000 or 9 cents per share in the first quarter of 1996, an increase of 71%. The press release further stated: Nathan Hod, president and chief executive officer of the Company, stated that, "The second quarter of 1997 is a transition quarter for our PDC customers and for our company. At the beginning of the first quarter of 1997, despite decreased visibility of orders for our product, we continued building products for the anticipated orders which we ultimately received. Toward the end of the first quarter, we announced that our customers were designing new cellular telephone models which will use our next generation chip sets with lower pin count, lower component count, higher integration, and lower power consumption. We believe that these new models will be introduced during the third quarter of 1997. With low visibility continuing, our production for the second quarter will be reduced due to the anticipated phase-out of our existing chip sets, as our customers transition to - 18 -
new models. As a result, we believe that the Company's sales in the second quarter of 1997 to our PDC customers will be reduced, and that our revenues and profits in this quarter will be materially lower than the first quarter of 1997." 38. In response to these disclosures and admissions, the market price of DSP stock collapsed. DSP shares plunged as much as 44% after the Company said second-quarter profit would be "materially lower." DEFENDANTS' INSIDER TRADING 39. While in possession of the material, non-public information set forth above, DSP and certain Company insiders sold nearly 371,000 million shares of their own DSP stock at artifi- cially inflated prices, thereby reaping almost $8 million in proceeds, as follows: Number of Price Name Sale Date Shares Sold Per Share Proceeds Broad, Lewis 02/14/97 220,000 $20.75 $4,565,000 220,000 $4,565,000 Dogon, Gerald 01/21/97 5,000 $21.88 $109,400 01/21/97 10,000 $22.00 $220,000 01/23/97 10,000 $23.00 $230,000 01/23/97 5,000 $22.50 $112,500 01/31/97 5,000 $22.00 $110,000 01/31/97 1,000 $22.13 $ 22,130 02/06/97 3,500 $21.13 $ 73,955 02/07/97 1,000 $23.00 $ 23,000 02/07/97 2,500 $22.25 $ 55,625 43,000 $956,610 Hod, Nathan 02/10/97 10,000 $23.38 $233,800 02/12/97 5,000 $21.50 $107,500 02/12/97 1,500 $21.50 $ 32,250 02/13/97 5,000 $21.19 $105,950 02/13/97 5,000 $21.44 $107,200 02/14/97 5,000 $21.25 $106,250 02/14/97 8,500 $20.75 $176,375 02/14/97 5,000 $21.00 $105,000 45,000 $974,325 - 19 -
Kohavi, Arnon 02/07/97 883 $22.75 $20,088 02/07/97 1,117 $22.75 $25,412 02/12/97 1,800 $21.75 $39,150 3,800 $84,650 Perl, Joseph 01/21/97 5,000 $21.88 $ 109,400 01/21/97 10,000 $22.00 $ 220,000 01/23/97 891 $23.00 $ 20,493 01/23/97 9,109 $23.00 $ 209,507 01/23/97 5,000 $22.50 $ 112,500 01/30/97 1,000 $21.50 $ 21,500 01/30/97 4,000 $21.38 $ 85,520 01/31/97 5,000 $22.00 $ 110,000 01/31/97 1,000 $22.13 $ 22,130 02/05/97 5,000 $22.00 $ 110,000 02/07/97 1,000 $23.00 $ 23,000 02/07/97 2,500 $22.25 $ 55,625 02/18/97 5,000 $20.69 $ 103,450 02/19/97 5,000 $20.75 $ 103,750 59,500 $1,306,875 GRAND TOTAL: 371,300 $7,887,460 DEFENDANTS' ROLE AND MOTIVE IN ENGAGING IN THE FRAUDULENT SCHEME 40. Each defendant directly or indirectly made the statements complained of herein. As officers and/or directors of a publicly traded company, these defendants had a duty to disseminate truthful and complete data to the public about DSP. Each also owed a duty to correct those materially false and misleading statements made by other DSP officers and/or directors. Each defendant reviewed, edited, commented upon and participated in the preparation and dissemination of DSP's SEC filings and press releases. Each defendant also had access to and was privy to weekly reports relating to manufacturing, sales and marketing, as well as non- public budgets, order rates, margin analyses, and revenue and earnings projections. Each defendant either knew or recklessly disregarded that the statements complained of herein were materially false and misleading and that they omitted material - 20 -
information as described above, which was necessary to be disclosed to make the statements made not misleading. The defendants participated in and consciously or recklessly pursued the unlawful conduct alleged herein in order to enrich themselves at the public's expense, protect their emoluments and privileges of corporate office, increase and maintain the value of their stock holdings in DSP, and sell some of their personal DSP holdings at inflated prices. 41. Beginning no later than January 1997 and continuing through at least April 1997, the DSP defendants engaged in a common course of conduct designed to manipulate and artificially inflate the price of DSP stock, by the making of the false and misleading statements about DSP's business and prospects for earnings growth complained of herein. Defendants were motivated to inflate and artificially maintain the inflated price of DSP stock to conceal their prior wrongdoing, to enable defendants directly and indirectly to sell their personal DSP stock and to bring DSP's stock price in for a soft, gradual landing which would attract less investor attention. Thus, the defendants were motivated to artificially inflate DSP's stock price by their desire to: (1) sell their own DSP shares at artificially inflated prices; and (2) protect their corporate positions and the emoluments obtained thereby. DSP'S DEALINGS WITH SECURITIES ANALYSTS AND USE OF THEM AS A CONDUIT TO ISSUE FALSE AND MISLEADING STATEMENTS TO THE SECURITIES MARKETS AND DSP'S ADOPTION OF ANALYSTS' REPORTS AS ITS OWN 42. Prior to and during the Class Period, it was the Company's practice to have its top officers and key members of the - 21 -
Company's management team communicate with securities analysts from Oppenheimer, among others, to discuss the Company's products, operating results and anticipated revenues, and to provide detailed "guidance" to these analysts with respect to the Company's business and projected revenues and earnings. These communications included, but were not limited to, conference calls, meetings and analyst briefings where DSP executives discussed many aspects of the Company's operations and financial prospects. The defendants knew that by participating in these periodic communications with analysts, DSP could and would disseminate information to the investment community and that investors would rely and act upon such information (i.e., make purchases and sales of the Company's securities). 43 . The defendants, the market and investors understand that analysts rely substantially on information provided publicly and privately by the Company to them,, and assurances by DSP that information in the analysts' reports was not at material variance from the Company's internal knowledge of its operations and prospects, in formulating their research reports and recommendations to purchase the Company's stock. In fact, many of the analyst reports at issue explicitly attribute information contained therein to the defendants, or were sent to the defendants for comment prior to their issuance. The defendants had these communications with analysts for the purpose of causing them to issue favorable reports on the Company and used these communications to falsely present the prospects of the Company to the marketplace and to artificially inflate or maintain the market price of the Company's common stock. - 22 -
44. The information about the Company contained in the analysts' reports was obtained from or based on information obtained from the Company, as discussed above. Drafts of these reports were on occasion provided to the Company and defendants Hod and Gilo before they were released, and those drafts were reviewed and approved by them. The Company knew of these reports, their contents, that they were based on information provided by the Company and that they would be issued to members of the investment community and impact the trading price of the Company's common stock, and thus used these false reports to defraud the market by and through the analysts. Moreover, the defendants relied on and disseminated analyst's estimates in presentations to investors during the Class Period. 45. The defendants directly and indirectly manipulated and inflated the market price of the Company stock by falsely presenting to analysts the current status and future prospects of the Company and by failing to disclose the true adverse information about the Company that was known to them. 46. The statements made by DSP executives to securities analysts were reported and repeated by those analysts in research reports, internal advisories and otherwise disseminated by them into the securities marketplace. That information thus became part of the "total mix" of information impacting the price of DSP's publicly traded securities and, since that information was materially false and misleading, it inflated the trading price of those securities. - 23 -
FIRST CAUSE OF ACTION Violation of §§25400 and 25500 of the California Corporations Code 47. Plaintiffs incorporate ¶¶1-46. 48. Acting individually and pursuant to a scheme or conspiracy or aiding and abetting each other, defendants, and each of them, concealed and/or misrepresented material, adverse information regarding DSP. Defendants' wrongdoing included the making of and/or 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 acts, practices and a course of conduct knowing or having reasonable ground to believe such statements were misleading or false. The statements made to plaintiffs and members of the Class during the Class Period were each made willfully and were made to induce plaintiffs and members of the Class to purchase DSP stock. 49. Defendants, and each of them, aided and abetted, encouraged and rendered substantial assistance in accomplishing the wrongful conduct and their, wrongful goals and other wrongdoing complained of herein. In taking action, as particularized herein, to aid and abet and substantially assist the commission of these wrongful acts and other wrongful acts and other wrongdoings complained of, each of the defendants acted with an awareness of its primary wrongdoing and realized that its conduct would substantially assist the accomplishment of the wrongful conduct, wrongful goals, and wrongdoing. - 24 -
50. Defendants, and each of them, pursued a conspiracy, common enterprise and common course of conduct to accomplish the wrongs complained of herein. The purpose and effect of the conspiracy, common enterprise and common course of conduct complained of was to artificially inflate the price of DSP's common stock, and to perpetuate the sale of DSP stock. Defendants accomplished their conspiracy, common enterprise and common course of conduct by making the misrepresentations, concealments and nondisclosures specified herein, and by taking steps in furtherance of their wrongdoing. Each defendant was a direct, necessary and substantial participant in the conspiracy, common enterprise and common course of conduct complained of herein, and was aware of the overall contribution to, and furtherance of, the conspiracy, common enterprise and common course of conduct. Other persons and entities not named as defendants herein were also participants in the conspiracy alleged and acted in furtherance of the objectives of the conspiracy as co-conspirators. 51. Other persons and entities not named as defendants herein were also participants in the conspiracy alleged and acted in furtherance of the objectives of the conspiracy as co-conspirators. 52. Plaintiffs and the members of the Class have suffered substantial damages because the acts in violation of Cal. Corp. Code §25400 affected the price of DSP stock and they paid artificially inflated prices for DSP stock. Plaintiffs and the members of the Class would not have purchased DSP stock at the prices they paid, or at all, if they had been aware that the market price had been artificially and falsely inflated by defendants' misleading statements and concealments. At the time of the - 25 -
purchases by plaintiffs and the members of the Class of DSP stock, the fair market value of said stock was substantially less than the prices paid by them. 53. By reason of the foregoing, defendants, and each of them, violated §25400 of the Cal. Corp. Code, thereby entitling the members of the Class to recover damages pursuant to §25500. BASIS OF ALLEGATIONS 54. Plaintiffs have alleged the foregoing based upon the investigation of their counsel, which included a review of DSP's SEC filings, securities analysts' reports and advisories about the Company, press releases issued by the Company, media reports about the Company and discussions with consultants. Substantial eviden- tiary support will exist for the allegations set forth herein after a reasonable opportunity for discovery. PRAYER FOR RELIEF WHEREFORE, plaintiffs, on behalf of themselves and on behalf of the Class, pray for judgment as follows: 1. Declaring this action to be a class action pursuant to §328 of the California Code of Civil Procedure on behalf of the Class defined herein; 2. Awarding plaintiffs and the members of the Class rescissory or compensatory damages in an amount which may be proven at trial, together with interest thereon; 3. Awarding plaintiffs and the members of the Class pre- judgment and post-judgment interest, as well as their reasonable attorneys' and experts' witness fees and other costs; 4. Awarding extraordinary equitable and/or injunctive relief as permitted by law or equity; and - 26 -
5. Awarding such other and further relief as this Court may deem just and proper. JURY DEMAND Plaintiffs demand a trial by jury. DATED: May 8, 1997 MILBERG WEISS BERSHAD HYNES & LERACH LLP WILLIAM S. LERACH KIRK B. HULETT /s/ _________________________ KIRK B. HULETT 600 West Broadway, Suite 1800 San Diego, CA 92101 Telephone: 619/231-1058 APPEL, CHITWOOD & HARLEY MARTIN D. CHITWOOD 1400 Resurgens Plaza 945 East Paces Ferry Road Atlanta, GA 30326 Telephone: 404/266-1650 BERNSTEIN LITOWITZ BERGER & GROSSMANN LLP VINCENT CAPPUCI 1285 Avenue of the Americas 33rd Floor New York, NY 10019 Telephone: 212/554-1400 ABBEY, GARDY & SQUITIERI, LLP MARK C. GARDY STEPHEN J. FEARON, JR. 212 East 39th Street New York, NY 10016 Telephone: 212/889-3700 KAUFMAN, MALCHMAN, KIRBY & SQUIRE, LLP JEFFREY H. SQUIRE PETER LINDEN 919 Third Avenue, 11th Floor New York, NY 10022 Telephone: 212/371-6600 - 27 -
LAW OFFICES OF KENNETH A. ELAN KENNETH A. ELAN 217 Broadway, Suite 404 New York, NY 10007 Telephone: 212/619-0261 Attorneys for Plaintiffs - 28 -
Source: Scanned paper copy of court-stamped document.