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RUDEN & CRAMER PROFIT Plaintiff, v. INFORMIX CORPORATION, Defendants. |
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Case No. C-97-2064 VRW CLASS ACTION COMPLAINT FOR VIOLATIONS JURY TRIAL DEMANDED |
For its complaint, plaintiff makes the following allegations.
1. This is a securities class action brought on behalf of purchasers of the common stock of Informix Corporation ("Informix" or the "Company") during the period of July 16, 1996 through April 1, 1997, inclusive (the "Class Period"). Throughout the Class Period, Informix and certain of its officers and directors ("the Individual Defendants"), carried out a fraudulent scheme and course of business the purpose of which was to artificially inflate the market price of Informix common stock and which operated as a fraud on Plaintiff and the members of the plaintiff class. As a result of such actions, Informix and certain of its officers and directors violated the federal securities laws.
2. Informix develops and sells relational database software and related products for use with open computers systems. The Company's products also include applications development tools for creating client/server production applications, decisions-support systems, and software that allows information to be shared from personal computers to mainframes within corporate computing environments. In addition to its software products, the Company offers training, consulting and support to its customers.
3. Throughout the Class Period, defendants made numerous positive statements regarding Informix's sales and business prospects. In particular, defendants made numerous statements regarding the Company's introduction of its next generation database product -- the INFORMIX-Universal Server. Defendants also provided to stock research analysts that followed Informix information that directly supported the analysts' estimates that Informix would earn $0.12 or more per share in the first quarter of fiscal year 1997 on revenues in excess of $240 million. Moreover, at the time defendants' made these statements, they knew of adverse facts including that sales of Informix's core relational database products to Original Equipment Manufacturers ("OEMs") and Value Added Resellers ("VARs") were being negatively impacted by the large amount of Informix product held by these customers for resale to end-users of Informix software.
4. At the time defendants made positive statements about Informix during the Class Period they knew of the following adverse facts:
(a) Oracle, Informix's chief competitor in the licensing of relational database software for the UNIX operating system, had begun during the second quarter of fiscal year 1996 to deeply discount prices on software products comparable to Informix's products;
(b) As a result of Oracle's actions commencing during the second quarter of Informix fiscal year 1996, Informix was having to cut its prices by material amounts to compete against Oracle;
(c) By at least the start of the Class Period, Informix was also facing increased competition from Microsoft as to relational database software designed for the Windows NT market which was resulting in either the loss of licensing revenue to Microsoft products or the cutting of prices on Informix products in order to compete against Microsoft;
(d) the potential market for Informix's Universal Server was limited and would not produce substantial sales in fiscal year 1997;
(e) potential customers for Informix's Universal Server were questioning the immediate need for such a technologically advanced database product and had advised Informix that they were not likely to purchase the product in the near future;
(f) due to potential customers' hesitancy to adopt the technology imbedded in the Universal Server, Informix's touted technological lead over other database developers would have limited impact on Informix's sales of existing products;
(g) as a result of shipments of Informix's core database products to OEMs and VARs for resell to end-users of those products during the third quarter and fourth quarter of fiscal year 1996, as of December 31, 1996 at least half of such shipments had not been sold to end-users of those products;
(h) as a result of rising levels of Informix product held by OEMs and VARs in the third and fourth quarter of 1996 for resell to end-users, defendants knew that achieving the publicly estimated level of sales in the third and fourth quarter of 1996 and first quarter of 1997 was not possible; and
(i) as a result of defendants' knowledge of the adverse facts set forth above, defendants knew by at least the beginning of the Class Period that Informix's public estimates of revenues and earnings for the first quarter of fiscal year 1997 were not achievable.
5. Knowing of these material, undisclosed facts, among others, defendants White, Stonebraker, Hill, Coulter, Saranga and Graham took advantage of the artificial inflation in Informix's stock price caused by these false and misleading statements by selling 594,750 shares of Informix common stock during the Class Period, reaping proceeds of over $13.39 million.
6. On April 1, 1997, defendants shocked the market by revealing that Informix was anticipating for the first quarter of fiscal year 1997 revenues of between $130 and $145 million, approximately $100 million less than previously estimated to the market and that, instead of achieving earnings of at least $.12 per share, Informix would report a substantial loss. On these revelations, securities analysts slashed their forecasts of Informix's fiscal year 1997 earnings and the price of Informix's stock collapsed, declining to a low of $8 3/4 per share on April 1, 1997 from $15 1/8 per share the day before, a decline of 40% in one day on huge volume of 24 million shares and a drop of over 70% from Informix's stock price Class Period high of $31 1/8 per share on September 26, 1996. As the market learned of additional facts regarding Informix's revenue recognition practices, its stock price declined even further, closing at $7 5/16 on April 30, 1997. On May 1, 1997, Informix revealed the full extent of its financial shenanigans when it reported that it had sustained a massive loss of over $140 million in the first quarter of fiscal year 1997 (also on May 1, 1997, the Company announced that its then recently hired Chief Financial Officer, Alan Hendricks, was quitting immediately). While public investors were greatly damaged by these revelations of the Company's true prospects and financial results, defendants White, Graham, Hill, Coulter, Saranga and Stonebraker actually profited as they were able to unload large amounts of their Informix stock -- 594,750 shares for over $13.39 million -- at artificially inflated prices during the Class Period. Along with other Informix officers, Informix insiders sold nearly 750,000 shares of the Company's common stock during the Class Period, reaping proceeds of over $17 million.
7. Jurisdiction exists pursuant to 27 of the Securities Exchange Act of 1934 (the "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.
8. Venue is proper in this District pursuant to 27 of the Exchange Act and 28 U.S.C. 1391(b). The wrongful acts alleged in this action occurred, in substantial part, in this District, including the preparation and dissemination to the investing public of materially false and misleading information. At all relevant times, Informix was a Delaware corporation with its principal executive offices located at 4100 Bohannon Drive, Menlo Park, California 94025. Defendants White, Graham, Hill, Saranga and Stonebraker, reside in and/or are the citizens of the State of California.
9. In connection with the wrongful conduct alleged herein, defendants used the means and instrumentalities of interstate commerce, including the United States mails andthe facilities of the national securities exchanges.
10. This action is properly brought in the Northern District of California, SanFrancisco Division, in that this action arose in San Mateo County, California and because asubstantial part of the events or omissions which give rise to this action occurred or took place inSan Mateo County. Many of the defendants, including the Company, are located in Menlo Park,California where Informix's executive offices are located.
11. Plaintiff Ruden & Cramer Profit Sharing Plan dated 7/1/75 f/b/o Martin R. Cramer, trustee purchased Informix common stock in the following amounts and dates:
12. Defendant Informix is a Delaware corporation with its principal executiveoffices located at 4100 Bohannon Drive, Menlo Park, California. The Company develops, markets and sells database software for use in open computer systems. The Companyclaims to be a multinational supplier of high-performance parallel processing databasetechnology. Informix also develops applications development tools for creating client/server production applications, decision-support systems, ad-hoc query interfaces, and software that allows information to be shared from personal computers to mainframes within thecorporate computing environment. Besides its software products, the Company offers training,consulting, and post-contract support to its customers. The Company markets its productsthroughout the world including North America, Europe, Asia/Pacific, Japan and Latin America. The Company's core database management software runs on UNIX, Windows andWindow/NT operating systems.
13. During the Class Period, defendant Phillip E. White ("White") was chairman of Informix's Board of Directors, President, and Chief Executive Officer("CEO"). Defendant White became CEO of Informix in January 1989 and has been Chairman of its Board of Directors since December 1992. Because of defendant White's positionwith the Company, he knew the adverse non-public information about Informix'sbusiness, finances, products, and markets and present and future business prospects. Defendant White wasa direct participant in the scheme to defraud and knew or was reckless in not knowing that the publicstatements particularized herein were materially false and misleading when made, would affect the trading in Informix common stock and would create a false and misleading appearancewith respect to the market for Informix common stock before the truth about Informix's products and financial and operating condition was publicly revealed. During the Class Period,defendant White sold 70,000 shares of Informix common stock, obtaining gross proceeds of $1,655,150.
14. During the Class Period, defendant Michael R. Stonebraker ("Stonebraker") was an Informix Vice President, and its Chief Technology Officer. DefendantStonebraker joined Informix in February 1996 following the sale of Illustra InformationTechnologies ("Illustra"), a company he co-founded, to Informix. At the timeStonebraker sold his Illustra stock for over 720,000 shares of Informix stock, he directlyrepresented that he would hold his Informix stock for investment purposes and had no present intent to sell that stock. Instead, a few months after the Illustra merger closed Stonebrakerbegan selling massive amounts of Informix stock. Stonebraker was a direct participant in the scheme to defraud and knew or was reckless in not knowing that the statementsparticularized herein were materially false and misleading when made, would affect the public trading in Informixcommon stock and would create a false and misleading appearance with respect to the market for Informix common stock before the truth about Informix's products and financial andoperating condition was publicly revealed. During the Class Period, Stonebraker sold 263,250 shares of Informix common stock, obtaining gross proceeds of approximately $5.754 million. Such sales represented over 36% of the Informix stock Stonebraker received in February 1996 from the merger of Illustra with Informix.
15. Until December 31, 1996, defendant Howard H. Graham ("Graham") was Informix's Senior Vice President of Finance andits Chief Financial Officer. Because of defendant Graham's position with the Company, he knew the adverse non-public information about Informix's business, finances, products andmarkets as well as its present and future business prospects. Defendant Graham was a directparticipant in the scheme to defraud and knew or was reckless in not knowing that the publicstatements particularized herein were materially false and misleading when made, would affect the trading in Informix common stock and would create a false and misleading appearancewith respect to the market for Informix common stock before the truth about Informix's products and financial and operating condition was disclosed. During the Class Period, defendantGraham sold 109,000 shares of Informix common stock, obtaining gross proceeds ofapproximately $2.42 million.
16. During the Class Period, defendant Stephen E. Hill ("Hill") was Informix's vice president of Advance Technology. Defendant Hill had been with thecompany since December 1985 and served in a number of different positions involving strategicplanning, development and marketing positions. Hill was a direct participant in the scheme to defraud and knew or was reckless in not knowing that the statements particularizedherein were materially false and misleadingly made, would affect the public trading in Informix common stock and would create a false and misleading appearance with respect to themarket for Informix common stock before the truth about Informix's products and financial andoperating condition was publicly revealed. During the Class Period, Hill sold 52,500 shares ofInformix common stock, obtaining gross proceeds of approximately $1.16 million.
17. During the Class Period, defendant D. Kenneth Coulter ("Coulter") wasSenior Vice President, International and in November 1996 was promoted to Executive VicePresident, Worldwide Fields Operations. Defendant Coulter has been with the company sinceFebruary 1988. During that time he has served as Managing Director of Informix's UKoperations, Vice President of Europe and Senior Vice President of Europe, Middle East and Africa. Coulter was a direct participant in the scheme to defraud and knew or was reckless in notknowing that the statements particularized herein were materially false and misleading when made, would affect the public trading in Informix common stock and would create a false andmisleading appearance with respect to the market for Informix common stock before the truth about Informix's products and financial and operating condition was publicly revealed. During theClass Period, Coulter sold 35,000 shares of Informix common stock, obtaining gross proceeds of approximately $900,000.
18. During the Class Period, defendant Myron Saranga was Senior Vice President of product management and development, a position he had held at the company since May 1993. Saranga was a direct participant in the scheme to defraud and knew or was reckless in not knowing that the statements particularized herein were materially false and misleading when made, would affect the public trading in Informix common stock and would create a false and misleading appearance with respect to the market for Informix common stock before the truth about Informix products and financial and operating condition was publicly revealed. During the Class Period, Saranga sold 65,000 shares of Informix common stock, obtaining gross proceeds of $1.49 million.
19. Defendants Phillips, Graham, Hill, Coulter, Saranga and Stonebraker (collectively referred to as the "Individual Defendants") had a strong incentive to misrepresent Informix's business prospects and lead the market to believe that during the Class Period Informix continued to be financially successful and profitable since each of these defendants held substantial interests in Informix common stock and the Individual Defendants managed to sell a significant portion of their interests during the Class Period. As a result of defendants' scheme, these defendants sold $13.377 million of Informix common stock to members of the plaintiff class at artificially inflated prices. In 1995 and continuing in 1996, White, Hill, Coulter, Saranga and Graham received options to purchase hundreds of thousands of shares of Informix common stock at a set price. These defendants' ability to profit from such options was dependent on Informix's stock price increasing over the exercise price established for the options. Defendant Stonebraker received 720,383 shares of Informix common stock as a result of the February 1996 merger of Illustra with Informix. As a result of the materially false and misleading statements by the Individual Defendants during the Class Period, defendant Stonebraker was able to sell approximately 36% of his Informix stock holdings at artificially inflated prices and thus profited from defendants' scheme.
20. By virtue of their positions as directors and/or executive officers of Informix, the Individual Defendants, identified above, had access to nonpublic, proprietary information regarding Informix, its business, its operations, its finances, and its prospects, which inside information was not similarly available to Plaintiff and the members of the class.
21. Each defendant is liable as a primary violator in making false and misleading statements and as a participant in a fraudulent scheme and course of business that operated as a fraud or deceit on purchasers of Informix common stock, including concealing material, adverse facts. All defendants pursued a scheme in furtherance of their common goal, i.e., (i) deceiving the investing public regarding Informix's business and its financial and operating condition; (ii) artificially inflating the price of Informix stock; (iii) causing Plaintiff and other members of the class to purchase Informix stock at inflated prices; and (iv) allowing the Individual Defendants to sell their Informix common stock at artificially inflated prices.
22. This action is brought by Plaintiff pursuant to Rules 23(a) and 23(b)(3) of the Federal Rules of Civil Procedure, on behalf of a class (the "Class") consisting of all persons who purchased or otherwise acquired shares of Informix common stock from July 16,1996 through April 1, 1997 (the "Class Period") and who suffered damages as a result thereof. Excluded from the Class are the named defendants, members of the immediate families of each defendant, any entity in which any defendant has or had a controlling interest, and the legal representatives, heirs, successors, predecessors in interest, or assigns of any defendant.
23. The members of the Class are so numerous that joinder of all members is impracticable. As of December 31, 1996, there were approximately 3,400 Informix stockholders of record and class members are located throughout the United States. As of February 28, 1997, there were more than 151 million shares of Informix common stock outstanding. The disposition of these claims within a class action will provide substantial benefits to all interested parties and the Court. It is believed that thousands of persons purchased Informix common stock on the NASDAQ National Market System during the Class Period.
24. Plaintiff's claims are typical of the claims of the members of the Class. Plaintiff purchased Informix common stock during the Class Period at an artificially inflated price and sustained damages as a result of defendants' wrongful conduct.
25. Plaintiff will fairly and adequately protect the interests of the members of the Class. Plaintiff has retained competent counsel, experienced in class and securities litigation. Plaintiff has no interest that is antagonistic to or in conflict with the interests of those they seek to represent.
26. A class action is superior to other available methods for the fair and efficient adjudication of this controversy. It would be impracticable and undesirable for all members of the Class to bring separate actions in various parts of the country. Such actions would put substantial and unnecessary burdens on the judicial system.
27. The prosecution of separate actions by individual Class members also would create a risk of inconsistent and varying adjudications concerning the federal claims which are the subject of this action, which adjudications could establish incompatible standards of conduct for defendants under the federal laws alleged herein. Further, 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 on grounds generally applicable to the entire Class. The common questions of law and fact include, among others:
(a) Whether defendants violated the federal securities laws;
(b) Whether defendants made materially false and misleading statements or omitted to state material facts concerning, inter alia, the Company's business and financial condition and prospects;
(c) Whether defendants knew or recklessly disregarded the fact that the statements made by them were false and misleading;
(d) Whether Informix's common stock price was artificially inflated during the Class Period as a result of defendants' actions;
(e) Whether defendants violated Sections 10(b) and 20(a) of the Exchange Act, and Rule 10b-5 promulgated thereunder; and
(f) The extent of damages sustained by Plaintiff and the Class, and the proper measure of those damages.
28. Plaintiff does not contemplate any significant difficulties in maintaining this action as a class action. The class action method is superior to any other available means for the fair and efficient adjudication of this controversy. The members of the Class can be identified from records maintained by Informix or its transfer agent and may be notified of the pendency of this action by mail, using a form of notice similar to that customarily used in securities class actions.
29. 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 were identified as "forward-looking statements" when made. 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 considered to be "forward-looking," the defendants are liable for those statements because at the time each of those statements was made, the speaker knew that the statement was false and the statement was authorized and/or approved by an executive officer of Informix who knew that those statements were false when made.
30. The market for Informix common stock is efficient for the following reasons, among others:
(a) Informix common stock met the requirements for listing and was listed on the NASDAQ National Market System, a highly efficient market, under the symbol "IFMX";
(b) As a regulated issuer, the Company filed periodic public reports with the Securities and Exchange Commission ("SEC");
(c) Trading in Informix common stock was substantial, averaging over 3.7 million shares per day during the last two months of the Class Period, thereby reflecting numerous trades each day; and
(d) The Company was followed by, at least, 24 equity analysts employed by brokerage firms who wrote reports which were distributed to the sales force and certain customers of their respective brokerage firms and which were made available to the public.
31. Informix is followed by securities analysts employed by investment banking firms and brokerage houses which issue reports and make recommendations concerning Informix common stock to their clients. The trading price of Informix common stock is affected by both the number and quality of analysts following the Company. Thus, defendants had a strong motivation to attract and maintain analyst coverage of Informix. In order to increase such coverage by analysts of the Company, Informix's top officers held regular conferences and private meetings with analysts prior to and throughout the Class Period. Such communications were for the purpose of increasing Informix's visibility with investors and to insure that the officers' statements regarding Informix's business prospects were widely disseminated to the public. During the Class Period Informix was covered by, at least, 24 brokerage or investment firms. These firms participated in conference calls with Informix's officers and issued research reports and estimates of earnings for future fiscal periods.
32. In writing reports about Informix, analysts relied, in substantial part, upon the information provided to them by the Company, upon statements and reports issued by the Company, upon information provided to them privately by the Company through the officers of Informix, and upon assurances by the Company that information in the analysts' reports was not of material variance from the Company's internal knowledge of its operations and prospects.
33. Informix's common stock was considered by the market to be a "growth stock". As a result, the price of Informix common stock was particularly sensitive to the Company's statements regarding its margins, earnings and anticipated profits. Informix used its communications with analysts to assure them -- and through them the investing public -- that Informix's business was strong, and that the Company was on track to achieve strong earnings and revenue growth as a result of sales of its database software and related products and services.
34. As part of their alleged scheme to defraud purchasers of Informix common stock during the Class Period, defendants, including but not limited to White, Graham and Stonebraker, communicated regularly with securities analysts to discuss, among other things, the Company's prospects, operating results and expected revenues, and to provide detailed "guidance" and direction to these analysts with respect to the Company's business and projected revenues and earnings. These communications included, but were not limited to, frequent conference calls, meetings and analysts' briefings. White and Graham, among others, knew that by participating in regular periodic communications with analysts, they could disseminate false information to the investment community and that investors, including the members of the Class, would rely and act upon such information. White and Graham, among others, had such communications with analysts in order to cause or encourage them to issue favorable reports on Informix and used these communications to falsely present Informix's prospects to the marketplace and to artificially inflate the market price of Informix common stock.
35. By intentionally or recklessly misleading securities analysts, defendants, directly or indirectly, caused the analysts to issue false and misleading reports that contained the false and misleading information provided by defendants. In addition, defendants caused the analysts to express misleading opinions and to make misleading recommendations and projections, all of which was misleading because they were based on false and misleading information that defendants provided to the analysts as a basis for those opinions, recommendations and projections.
36. The role of securities analysts who wrote reports on Informix was that of conduits by and through which defendants provided false and misleading information to the market in order to deceive Informix investors and to artificially inflate the price of Informix common stock. Acting through the securities analysts, defendants were able to manipulate the price of Informix common stock and to deceive investors in violation of Section 10(b) of the Exchange Act which makes it unlawful to employ any manipulative or deceptive device or contrivance - without regard to whether the manipulation or the deception is accomplished "directly or indirectly," or without regard to whether a defendant acts personally or "through or by means of any other person." 15 U.S.C. § 78j(b).
37. As alleged above, information about Informix set forth in the securities analysts' reports was obtained from or based upon information received from the named defendants. The Individual Defendants knew of the issuance of such analysts' reports and the contents of such reports and that they were based on information provided by, among others, the Individual Defendants. All defendants knew that such analysts' reports would be issued to members of the investment public, including Plaintiff and the Class, be circulated throughout the investing community and would affect the trading price of Informix common stock. Defendants endorsed the analysts' reports, adopted them as their own, and approved the contents of such reports including the projections, forecasts, and statements contained in them. Despite their duty to do so, defendants failed to correct the materially false and misleading statements made in these reports during the Class Period.
38. Plaintiff, the Class and the market generally relied and acted upon the information communicated in these written reports including the recommendation that investors purchase Informix common stock.
39. In February 1996, Informix completed its acquisition of Illustra Information Technologies, Inc. ("Illustra"). With the acquisition of Illustra, Informix embarked on the process of combining its Informix-Online Dynamic Server with Illustra's relational database software which allowed the manipulation and use of complex data types such as digital images and video. As a result of the combination of Illustra with Informix and the additional work necessary to merge the company's two products into a single product to be released as the Informix Universal Server, defendants knew that Informix's expenses would increase and that margins on sales would decrease. Thus, with the completion of the Illustra merger, Informix and the Individual Defendants knew that Informix's revenues needed to substantially increase in fiscal years 1996 and 1997 if net income was to remain at or above the previous year's level.
40. In addition, starting at least during the second quarter of 1996, Informix Management knew it had a serious problem as to licensing revenue from its core database products. On the high end of its business, Informix faced serious competition from Oracle in the UNIX market. On the lower end, it was competing against Microsoft for database sales to Windows NT users. By at least the second quarter of fiscal year 1996, Informix and the Individual Defendants were aware that Oracle was deeply discounting prices on UNIX based database applications to customers who were considering licensing similar Informix software. Such actions were having a serious impact on Informix's ability to continue to report growth in its database licensing revenue and maintain profitability. With respect to the Windows NT market, Microsoft was introducing products at prices significantly under Informix's current prices.
41. In order to conceal such problems, Informix advised investors through its filings with the SEC that its customer mix was shifting to a higher percentage of OEMs and VARs as opposed to direct sales to end-users. Such sales to OEMs and VARs were represented by Informix to be a significant portion of its claimed increase in database sales in fiscal year 1996. This purported shift of sales to OEMs and VARs accelerated in the second half of Informix's fiscal year 1996. The true facts, as set forth below, were otherwise.
42. On July 16, 1996, Informix announced its financial results for the second quarter of fiscal year 1996. In its announcement, which was reviewed and/or approved prior to its issuance by the Individual Defendants, Informix stated that database licensing revenue had grown by 61% over the comparable 1995 results. Total revenues were reported as $226 million, a 38% increase from the second quarter of 1995. Earnings per share were $0.14, the same as the prior year. On July 16, 1996, Informix's officers, including defendant White, also conducted a conference call with securities analysts to discuss second quarter results and Informix's future prospects. Defendant White blamed Informix's flat earnings on higher expenses particularly as to service revenue. Despite such rising costs, defendant White told analysts that Informix expected continued strong revenue growth during the second half of fiscal year 1996.
43. The above statements regarding Informix business and its future prospects were materially false and misleading at the time they were made because defendants failed to disclose the following materially adverse facts:
(a) Oracle, Informix's chief competitor in the licensing of relational database software for the UNIX operating system, had begun during the second quarter of fiscal year 1996 to deeply discount prices on software products comparable to Informix's products;
(b) As a result of Oracle's actions commencing during the second quarter of Informix fiscal year 1996, Informix was having to cut its own prices to compete against Oracle;
(c) By at least the start of the Class Period, Informix was also facing increased competition from Microsoft as to relational database software designed for the Windows NT market which was resulting in either the loss of licensing revenue to Microsoft products or the cutting of prices on Informix products in order to compete against Microsoft;
44. Beginning in the third quarter of fiscal year 1996 (the three month period ended on September 30, 1996), defendants engaged in a course of conduct which was designed to conceal Informix's declining licensing revenue from its core relational database software products. As part of this scheme on August 16, 1996, Informix filed with the Securities and Exchange Commission ("SEC") and released to the public its Form 10-Q for the second quarter of fiscal year 1996. In the Form 10-Q, the Company asserted that during fiscal year 1996 it was shifting its licensing strategy from sales to end-users to entering into large software licensing agreements with OEMs. This representation, first made in its Form 10-Q for the second quarter of 1996, was materially false and misleading at the time it was made. The true facts were that Informix's licensing of relational database software to end-users was being seriously impacted by Oracle's deep discounting as to high end UNIX users and by Microsoft's introduction of less expensive database software for Windows NT users. As a result of these serious competitive problems, Informix, starting in the second quarter and continuing into the third and fourth quarter of fiscal year 1996, attempted to replace revenues lost to end-users with licensing agreements with OEMs.
45. Within days following the release of second quarter financial results on July 16, 1996, the Individual Defendants and other top officers at Informix started to sell large amounts of their Informix common stock, in aggregate $7.39 million in July and August 1996, in the open market. Such sales were made at a time when the Individual Defendants knew or were reckless in disregarding the adverse facts regarding Informix's business and its competition with Microsoft and Oracle.
46. On September 13, 1996, Montgomery Securities analyst David Readerman, in reliance upon information provided him by Informix officers, raised his rating on Informix stock from a hold to a buy. Readerman based this rating change on his expectation that the Company would earn $0.73 per share in fiscal year 1996 and $1.10 per share in fiscal year 1997.
47. On September 24, 1996, Informix issued a press release announcing that it was celebrating its ten year anniversary as a public company. In this press release, defendant White stated that Informix was a clear technical leader in database software due to "our unwavering focus on technical innovation and best-of-breed database technology, coupled with our strong commitment to working with partners."
48. Both the September 13, 1996 rating increase by Montgomery Securities and the September 24, 1996 press release were materially false and misleading. The Montgomery rating upgrade was based on materially false and misleading information provided to Montgomery Securities by Informix officers. Such communications failed to disclose to Montgomery Securities the adverse facts noted in paragraph 43 above. The September 24, 1996 press release also failed to disclose these adverse facts and their impact they would have on Informix's business going forward. As a results of these materially false and misleading statements, Informix's stock price continued to be artificially inflated in value.
49. On October 16, 1996, Informix, through defendants White and Graham, announced financial results for the third quarter of fiscal year 1996. For the period ended September 29, 1996, Informix announced licensing revenues of $179.6 million and total revenues of $238.2 million. Net income after taxes was stated to be $26.2 million with net income per share of $0.17. In the October 16, 1996 press release, defendant White attempted to downplay the fact that third quarter actual results were below most analysts' expectations for Informix's third quarter by noting that the Company's 50% database revenue growth versus the third quarter of 1995 placed Informix as the fastest growing database company in the United States.
50. On or about October 16, 1996, Informix's officers, including White and Graham, also spoke with analysts and others regarding Informix's third quarter financial results as well as Informix's future business expectations for the fourth quarter of 1996 and for fiscal year 1997. During that conference call, Informix's officers touted Informix's core database revenue growth as being higher than the overall database market growth rate and claimed that this fact established that Informix continued to take market share from other database providers such as Oracle and Sybase.
51. On or about November 13, 1996, Informix filed its Form 10-Q for the third quarter of fiscal year 1996 with the SEC. This report was signed by, among others, defendant Howard Graham, as Senior Vice President and Chief Financial Officer of Informix. In the Form 10-Q for the third quarter of fiscal year 1996, Informix published its financial statements which repeated the information released on October 16, 1996 as to Informix's financial results for the third quarter. Although the Company revealed in its Form 10-Qthat it recognized substantial net revenues from software license agreements with OEMs and VARs, Informix failed to disclose that much of the software purportedly sold pursuant to such licensing agreements had not sold through to end-users and remained as unsold inventory as of the end of the third quarter of 1996.
52. On or about November 14, 1996, in response to certain negative analyst comments regarding Informix and its business and the reduction by some analysts as to revenue and earnings projections for the fourth quarter of fiscal year 1996,defendants, White and Graham conducted a conference call with research analysts following Informix. During that conference call, these defendants advised analysts that Informix's fourth quarter revenues would be between $270-$290 million.
53. The positive statements made by Informix, White and Graham, or under these defendants' direction by others, on October 16, November 13 and 14, 1996, were false and misleading when made and failed to disclose the following material adverse information, among others:
(a) Oracle, Informix's chief competitor in the licensing of relational database software for the UNIX operating system, had begun during the second quarter of fiscal year 1996 to deeply discount prices on software products comparable to Informix's products;
(b) As a result of Oracle's actions commencing during the second quarter of Informix fiscal year 1996, Informix was having to cut its own prices by material amounts to compete against Oracle;
(c) By at least the start of the Class Period, Informix was also facing increased competition from Microsoft as to relational database software for the Windows NT market which was resulting in either the loss of licensing revenue to Microsoft products or the cutting of prices on Informix products in order to compete against Microsoft;
(d) as a result of increased shipments of Informix's core database products to OEMs and VARs for resell to end-users of those products during the third quarter of 1996 and continuing into the fourth quarter, future sales of such products to end-users would be negatively impacted;
(e) as a result of rising levels of Informix software products held as inventory in the third quarter of 1996, Informix's officers knew that achieving the publicly forecasted level of sales in the fourth quarter of 1996 and first quarter of 1997 was not possible; and
(f) as a result of defendants' knowledge of the adverse facts set forth above, defendants knew by, at least, October 16, 1996 that Informix's public expectations of revenues and earnings for the fourth quarter of 1996 and first quarter of fiscal year 1997 were not achievable.
54. On December 2, 1996, as Informix geared up to announce the shipment of its new Universal Server product, defendant White appeared as a guest on the Bloomberg Forum. The Bloomberg Forum is sponsored by Bloomberg L.P. and is recorded and accessible to anyone with a Bloomberg terminal. The Bloomberg terminal is a commonly used device by investors and analysts to obtain information about publicly traded companies.
55. Defendant White was interviewed for ten minutes by Bloomberg reporter Roger Madoff. During that interview White stated that most analysts for database companies estimated that Informix had a year lead on the competition with the introduction of the Universal Server and that "a year is a lifetime." White further stated that the current database market was at least $50 billion and that Universal Server could take 80-85% of that market. Thus White implied that the Universal Server market would generate approximately $40 billion in revenues and Informix would have that market to itself for the time being. White stated that Informix's revenue would continue at $250 million per quarter in 1997, not including revenue from the Universal Server. White further stated that the Universal Server product "will change the way people think about data. We will take a significant lead on Oracle in 1997 and 1998 and potentially be the largest software database company in the world." White stated that the new Universal Server product might relegate Oracle Corp. to a second-place seller of database software. White further stated that Informix's Universal Server will "drive increased revenue for sure in 1997." As a result of these highly positive statements regarding the impact of the Universal Server on Informix's business, Informix common stock price rose by nearly $3 per share on December 2, 1996 closing at $26 3/8 per share.
56. On December 3, 1996, Informix issued a press release announcing the shipment of its next generation database software product, the Universal Server. The Company's release stated in pertinent part:
Informix Software, Inc., (NASDAQ: IFMAX), the leading provider of object-relational database technology, today announced the on-time availability of INFORMIX-Universal Server, the industry's leading open, completely integrated object-relational database management system (ORDBMS).
INFORMIX-Universal Server, based on Informix's proven Dynamic Scalable Architecture (DSA), provides extensibility to handle the broad range of datatypes not managed effectively by traditional relational databases.
"Shipping as scheduled was extremely important, not only because Informix has a tradition of keeping its promises, but also because INFORMIX-Universal Server is exactly what the market needs today," said Phil White, Chairman and CEO of Informix. "For the first time, companies can provide users with access to any type of corporate information, in dynamic new applications that unleash business innovation."
* * *
Today's customers want the benefit of a single database platform that provides transaction integrity, scalability, manageability and other RDBMS functionality across complex data as well as traditional data. INFORMIX-Universal Server is a single-engine solution that provides all the core capabilities as well as enables customers to easily extend the Informix database with datatypes as required.
* * *
"The release of INFORMIX's Universal Server realizes a vision I had when forming Illustra," said Dr. Michael Stonebraker, Chief Technology Officer at Informix.
"Now the market has a scalable, extensible engine that will enable customers to build high-performance applications to manage any kind of data and any kind of complex processing. The availability of INFORMIX-Universal Server, a single server that offers the best functionality of relational and object-oriented databases, is a watershed event in the DBMS industry."
"INFORMIX-Universal Server provides customers with a high-performance, easy-to-use, open improvement solution for managing all types of data," said Steve Sommer, Vice President, World Wide Marketing, Informix. "Competition is focused on middleware-dependent, federated databases which by definition will prove to be unmanageable in real-world production environments."
* * *
Benefits to Informix's Partners
INFORMIX'S Universal Server will provide unique benefits for all of its partners. ISVs, VARs, and systems integrators can quickly and easily customize applications for their customers by leveraging the prepackaged functionality provided by DataBlade modules. Developers can innovate by creating their own DataBlade modules to meet their unique application requirements.
Client/Server tools providers can enable their users to build and manage dynamic applications for such new breed applications as dynamic content management, the Web and electronic commerce. Client/Server packaged application providers such as Baan, PeopleSoft and SAP can add functionality to existing applications without recoding.
Hardware vendors can provide a high-performance, single database engine, ideally suited for a very large OLTP and data warehouse applications as well as new and emerging applications such as World Wide Web on their platforms. In addition to a number of DataBlade partners shipping DataBlade modules, a number of Informix's partners from hardware vendors to tools providers are planning applications based on INFORMIX-Universal Server.
(Emphasis added.)
57. In conjunction with the announcement of the INFORMIX-Universal Server product shipment, Informix coordinated the simultaneous announcement to the public of numerous development deals, release of DataBlade modules and software support for the INFORMIX-Universal Server. Thus, on December 3, 1996, at least thirty (30) separate press releases were made either jointly by Informix and other companies or by other companies with Informix's approval regarding the INFORMIX-Universal Server. The purpose of the December 3, 1996 announcements were to convince the market and investors in Informix to believe that the Company's new database product gave it a significant technological edge over its competitors, in particular Oracle, and that Informix's business would remain strong in fiscal year 1997.
58. On or about December 3, 1996, Informix's management, including defendant White, also met with certain research analysts to discuss Informix's business and the release of the Universal Server product. Among other things, Informix's management told analysts that potential customers were not delaying product purchasers because of the upcoming general availability of the Universal Server. Based upon Informix's management discussions with analysts, Oppenheimer & Company, through its analyst Melissa Eisenstat, maintained its estimate of Informix's earnings per share of $0.15 for the first quarter of fiscal year 1997 on revenues of approximately $240 million. Other analysts, in similar reliance on Informix's representations to them, issued earnings estimates of between $0.12 and $0.16 per share for the first quarter.
59. The positive statements made by Informix, White, Graham and Stonebraker, or under defendants' direction by others, on December 2 and 3, 1996, were false and misleading when made and failed to disclose the following material adverse information, among others:
(a) Oracle, Informix's chief competitor in the licensing of relational database software for the UNIX operating system, had begun during the second quarter and continuing into the third quarter of fiscal year 1996 to deeply discount prices on software products comparable to Informix's products;
(b) As a result of Oracle's actions commencing during the second quarter of Informix fiscal year 1996, Informix was having to cut its own prices by material amounts to compete against Oracle;
(c) In the market for relational database software designed for Windows NT, Informix was also facing increased competition from Microsoft which was resulting in either the loss of licensing revenue to Microsoft products or the cutting of prices on Informix products in order to compete against Microsoft;
(d) the potential market for Informix's Universal Server was limited and would not produce substantial sales in fiscal year 1997;
(e) potential customers for Informix's Universal Server were questioning the immediate need for such a technologically advanced database product and had advised Informix that they were not likely to purchase the product in the near future;
(f) due to potential customers' hesitancy to adopt the technology imbedded in the Universal Server, Informix's touted technological lead over other database developers would have limited impact on Informix's sales of existing products;
(g) as a result of increased shipments of Informix's core database products to OEMs and VARs for resell to end-users of those products during the third quarter of 1996 and continuing into the fourth quarter, sales of such products would be negatively impacted in the first quarter of fiscal year 1997;
(h) as a result of rising levels of Informix product held as inventory in the third quarter of 1996, Informix's officers knew that achieving the publicly forecasted level of sales in the fourth quarter of 1996 and first quarter of 1997 was not possible; and
(i) as a result of defendants' knowledge of the adverse facts set forth above, defendants knew by, at least, the beginning of the Class Period that Informix's public expectations of revenues and earnings for the fourth quarter of 1996 and first quarter of fiscal year 1997 were not achievable.
60. Throughout December 1996, Informix and the Individual Defendants continued to flood the market with positive statements regarding the Universal Server and the status of Informix's business. For example, on December 4, 1996, Informix announced its selection as most influential database company in 1996. On December 12, 1996, it announced its partnership with CAA/Intel Media Lab to create demonstration uses for the Universal Server. In none of these statements did defendants disclose the adverse facts set forth in paragraph 59 above.
61. On February 4, 1997, Informix announced its financial results for the fourth quarter and full fiscal year 1996. In a press release issued on that date, defendant and Informix CEO White stated, "1996 was a good year, with database license revenues growing 48% over 1995. We continue to gain market share on our core database business." White went on to say that "the acquisition of Illustra and the on-schedule integration and shipment of INFORMIX-Universal Server demonstrate that Informix is driving the database market agenda. In order to continue the database growth, we have substantially invested in R&D and service in 1996 and will continue to build our company in sales and marketing in 1997." Informix's earnings release further stated:
Total revenue in the fourth quarter increased by 23%, operating income decreased by 14%, net income decreased by 5%, and net income per share decreased by 4% in comparison with Q4-95 results. The reported revenue increase was unfavorably affected by foreign exchange rate movements, which reduced the reported revenue increase by 2 percentage points.
For the full fiscal year, total revenue increased by 32%, operating income decreased by 6%, net income showed no material increase or decrease, and net income per share decreased by 3% in comparison with 1995 results. The reported revenue increase for the full year was also unfavorable affected by foreign exchange rate movements, which reduced the reported revenue increase for the full year 1996 by 2 percentage points.
For the fourth quarter of fiscal year 1996 Informix reported total revenue of $270.8 million, net income of $34.1 million and net income per share of $0.22 per share. For the full year, Informix reported total revenue of $939.3 million, net income of $97.8 million and net income per share of $0.63 per share.
62. The February 4, 1997 press release by Informix also touted the INFORMIX-Universal Server stating that it: "combines the breakthrough performance and unmatched scalability of Informix's industry-leading Dynamic Scalable Architect (DSA) with the secure, user-defined extensibility of Informix's database + technology. INFORMIX-Universal Server allows companies to manage datatypes which are industry or customer specific, as well as rich data including web pages, time-series data, numbers, images, maps, sound and video. DataBlade technology provides powerful extensions to the INFORMIX-Universal Server. Twenty-nine DataBlade modules are available currently and additional 51 DataBlade modules are expected to be available during the early part of 1997."
63. On or about February 4, 1997, Informix's top management, including defendant White, also met with securities analysts in New York City to discuss Informix's 1996 fiscal year results and expected results for fiscal year 1997. During that meeting with analysts, Informix's top management provided specific guidance to analysts as to expected revenues, expenses and earnings for fiscal year 1997 including the first quarter of the fiscal year. Although Informix's top management advised analysts that expenses would be somewhat higher than previously estimated to the market because of higher sales, marketing and service expenses, Informix maintained its revenue estimates in excess of $240 million for the first quarter of fiscal year 1997. As a result of such guidance provided by Informix's top management to analysts, the analysts either maintained or slightly lowered their estimates of first quarter earnings. On the basis of information received directly from Informix's top management, Smith Barney issued a research report authored by Andrew Roskill on February 20, 1997 which estimated that Informix would earn $0.11 per share in the first quarter of fiscal year 1997. Other analysts, based on the guidance from Informix, and defendant White estimated earnings per share for the first quarter of between $0.12 and $0.14 per share.
64. The statements made in the February 4, 1997 press release and by Informix's top management to analysts on the same day were false and misleading for the following reasons:
(a) Oracle, Informix's chief competitor in the licensing of relational database software for the UNIX operating system, had continued during the fourth quarter of fiscal year 1996 to deeply discount prices on software products comparable to Informix's products;
(b) As a result of Oracle's actions commencing during the second quarter of Informix fiscal year 1996, Informix was having to cut its own prices by material amounts to compete against Oracle;
(c) By at least the start of the Class Period, Informix was also facing increased competition from Microsoft as to relational database software for the Windows NT market which was resulting in either the loss of licensing revenue to Microsoft products or the cutting of prices on Informix products in order to compete against Microsoft;
(d) the potential market for Informix's Universal Server was limited and would not produce substantial sales in fiscal year 1997;
(e) potential customers for Informix's Universal Server were questioning the immediate need for such a technologically advanced database product and had advised Informix that they were not likely to purchase the product in the near future;
(f) due to potential customers' hesitancy to adopt the technology imbedded in the Universal Server, Informix's touted technological lead over other database developers would have limited impact on Informix's sales of existing products;
(g) as a result of increased shipments to OEMs and VARs of Informix's core database products for resell to end-users of those products during the third quarter and fourth quarter of 1996 and the fact that at least $177 million of such product had not been sold to end-users of the products, sales in the first quarter would be negatively impacted;
(h) as a result of rising levels of Informix product held as unsold inventory in the fourth quarter of 1996, Informix's officers knew that achieving the level of publicly estimated sales in the first quarter of 1997 was not possible;
(i) as a result of defendants' knowledge of the adverse facts set forth above, defendants knew on February 4, 1997 that Informix's publicly stated expectations of revenues and earnings for the first quarter of fiscal year 1997 were not achievable.
65. In the March 31, 1997 issue of ComputerWorld, defendant Michael Stonebraker wrote an article attacking Oracle's technology and described the Universal Server as the "only game in town." Stonebraker stated:
(Emphasis added.) The above statements were materially false and misleading at the time they were made because defendant Stonebraker failed to disclose contemporaneously any of the adverse facts set forth in paragraph 64 above.INFORMIX-Universal Server has all the strengths of a relational DBMS parallel processing and data partitioning capabilities, data integrity, comprehensive distributed database management and data replication. INFORMIX-Universal Server gives organizations the ability to manage all their data, including rich, complex datatypes.
Informix is, in short, driving the agenda of the database market.
66. After months of positive statements regarding the Universal Server, Informix's financial results for the third and fourth quarter of fiscal year 1996,and Informix's expected financial results for the first quarter of fiscal year 1997, on April 1, 1997, defendants revealed for the first time that Informix had serious operating problems in its core database business. On that day, Informix announced that it expected to report a substantial loss in the first quarter of fiscal year 1997 on revenues of $130 to $145 million, as compared to its previous estimates of over $240 million in revenue and earnings of at least $0.11 per share. The Company further reported that its expected loss was due to extremely weak sales of its core database software products. In a letter to Informix's shareholders distributed through Informix's Web site on April 1, 1997, defendant White claimed that Informix's performance in the first quarter of 1997 was affected by several factors. Among such factors was the stated failure of the Universal Server to drive sales of existing products and the purported inexperience of Informix's sales force. These statements failed to reveal the true reasons for Informix's poor financial performance, increased competitive pressures and a bloated sales pipeline. As a result of the disclosure of sharply lower revenue and earnings, Informix's stock price fell sharply, from $15 1/8 per share on March 31, 1997 to as low as $8 3/4 per share on April 1, 1997, on huge volume of over 24 million shares in a single trading day.
67. One day prior to Informix's April 1, 1997 announcement, the Company also filed with the SEC its Form 10-K for fiscal year 1996. That Form 10-K revealed for the first time that a significant portion of Informix licensing revenue consisted of purported sales to OEMs and VARs and that the product shipped on such "sales" remained unsold to end-users as of December 31, 1996. Informix disclosed that approximately one-half of its $708 million in licensing revenues represented licenses sold to OEMs and VARs during 1996. Of such sales approximately one-half remained unsold to end-users of Informix's products as of December 31, 1996. Thus, for the first time Informix disclosed to the market that as much as $177 million of licensing revenue recognized by Informix on its financial statements for the year ended December 31, 1996 remained unsold at the end of the year.
68. Informix also disclosed for the first time in its 1996 Form 10-K that of its $708 million in licensing revenue, $55 million of that revenue represented a barter transaction whereby it granted software licenses to certain vendors during 1996 and agreed to accept in return goods or services in that approximate dollar amount.
69. These disclosures shocked analysts and investors causing them to seriously question the quality of Informix's prior reported revenues and earnings. As a result of the disclosures made in Informix's Form 10-K for 1996, analysts concluded that Informix's 1996 revenues had been overstated by as much as $232 million. On April 7, 1997, Oppenheimer & Company analyst Melissa Eisenstat, for example, stated that these disclosures indicated that "[t]he market's adoption of Informix products does not appear to be as strong as the reported numbers show, ..." On April 11, 1997, Gruntal & Co. analyst David Takata stated that the recent Form 10-K disclosure "reveals financial irregularities and investor misinformation significant enough to permanently discredit management." [Emphasis added.] As the market absorbed the impact of these disclosures, the price of Informix common stock fell further. On April 30, 1997, Informix common stock closed at $7 5/16 per share.
70. On May 1, 1997 Informix again shocked the market when it issued its financial results for the first quarter of 1997. Informix announced that revenues were only $133.7 million. The Company further reported an operating loss of $164.4 million, an after tax loss of$140.1 million and a loss per share of $0.93. Informix further revealed that days sales outstanding in its accounts receivable had risen to 130, compared to 84 as of December 31, 1996. In addition, the immediate resignation of Alan Hendricks as CFO was announced. Ms. Hendricks had joined Informix less than six months prior, replacing defendant Graham.
71. The statements made by defendants to the investing public directly, or indirectly through analysts, throughout the Class Period, were false and misleading and failed to disclose certain material adverse facts regarding Informix. Among such facts were the following:
(a) Oracle, Informix's chief competitor in the licensing of relational database software for the UNIX operating system, had begun during the second quarter of fiscal year 1996 and continued throughout the year and into the first quarter of 1997 to deeply discount prices on software products comparable to Informix's products;
(b) As a result of Oracle's actions commencing during the second quarter of Informix fiscal year 1996,Informix was having to cut its own prices by material amounts to compete against Oracle;
(c) By at least the start of the Class Period, Informix was also facing increased competition from Microsoft as to relational database software for the Windows NT market which was resulting in either the loss of licensing revenue to Microsoft developed products or the cutting of prices on Informix products in order to compete against Microsoft;
(d) the potential market for Informix's Universal Server was limited and would not produce substantial sales in fiscal year 1997;
(e) potential customers for Informix's Universal Server were questioning the immediate need for such a technologically advanced database product and had advised Informix that they were not likely to purchase the product in the near future;
(f) due to potential customers hesitancy to adopt the technology imbedded in the Universal Server, Informix's touted technological lead over other database developers would have limited impact on Informix's sales of existing products;
(g) as a result of increased shipments of Informix's core database products to OEMs and VARs for resell to end-users of those products during the third and fourth quarter of 1996, sales of these products in future financial periods would be negatively impacted;
(h) as a result of rising levels of Informix product held as inventory in the third and fourth quarter of 1996, Informix's officers knew that achieving the level of publicly estimated sales in the first quarter of 1997 and beyond was not possible; and
(i) as a result of defendants' knowledge of the adverse facts set forth above, defendants knew by at least the beginning of the Class Period that Informix's public expectations of revenues and earnings for the first quarter of fiscal year 1997 and beyond were not achievable.
72. Financial reporting is a means by which a company's shareholders and others are provided with useful and important information about the business operations and financial health of a company such as Informix. Financial reporting is accomplished primarily from the use of documents referred to as financial statements. Financial statements are reports that describe the financial position of a company as of a particular date, and the financial results of its operations over a particular period of time.
73. One of the key financial statements issued by a company is its income statement which reflects its revenues and expenses during a defined period of time. The information contained in the income statement, including reported net income, is important to investors, shareholders and others in determining whether a company will be able to generate sufficient income and cash flow to repay its debts and determine how the company's business is performing as compared to prior periods.
74. Financial statements, such as the income statement, cannot be prepared haphazardly. To be meaningful, a company's financial statements must be prepared in a manner that is consistent with accepted accounting practices. The rules that dictate how assets, liabilities, income, and expenses are recorded and reported in the company's financial statements are known as GAAP. GAAP is derived from several sources, the most authoritative being the Financial Accounting Standards Board ("FASB"), which issues Statements of Financial Accounting Standards ("SFAS"). Other sources of GAAP includes certain statements of various committees of the American Institute of Certified Public Accountants ("AICPA"), as well as information gathered from prevalent industry practice.
75. At the time that Informix issued reports and disclosures regarding its financial prospects as well as its actual financial results for the third quarter of fiscal year 1996 and for the full fiscal year 1996, defendants knew that Informix was facing a substantial sales downturn in fiscal year 1997 as a result of the revenue recognition practices it engaged in in the third and fourth quarter of fiscal year 1996.
76. Beginning in the second quarter of fiscal year 1996, Informix officers, including the Individual Defendants, knew that because of increased competition from Oracle and Microsoft, Informix revenues from licensing database software to end-users would be materially less than previously expected. Thus, during the second quarter of fiscal year 1996 and continuing through the third and fourth quarter of that fiscal year, Informix attempted for its core database products to increase licensing revenue from OEMs and VARs in order to conceal this shortfall. As a result of this shift in the mix of revenue, approximately half of Informix's revenues recognized from the licensing of such products in fiscal year 1996 ($354 million) was to such OEMs and VARs.
77. Defendants failed to disclose on October 16, 1996, when they released third quarter financial results, and on February 4, 1997, when they released fourth quarter and year end 1996 financial results, that a material amount of such database licensing revenue from OEMs and VARs was recognized in violation of SFAS 48.
78. SFAS No. 48, ¶6 states that when a company sells a product where right of return exists, revenues should only be recognized when certain conditions are met. These conditions include:
(b) The buyer has paid the seller or the buyer is obligated to pay the seller and the obligation is not contingent on resale of the product.
* * *
(e) The seller does not have significant obligations for future performance to directly bring about the resale of product by the buyer.
(f) The amount of future returns can be reasonably estimated.
79. Approximately $177 million of Informix's licensing revenue from OEMs and VARs in the third and fourth quarter of fiscal year 1996 represented revenue that was improperly recognized in violation of SFAS No. 48 since payment on these purported sales by the OEMs and VARs was contingent upon resale of the product to end-users and as of December 31,1996 such resale to end-users of the product had not occurred. Moreover, Informix was unable to make a reasonable estimate of the amount of future returns resulting from such sales since the licensing agreements with the OEMs represented a new type of sales for Informix and the Company had no operating history upon which it could make a reasonable estimate of possible returns from such sales. As a further indication of the contingent nature of these sales to OEMs and VARs, Informix's days sales outstanding ("DSO"), which represented the level of the company's accounts receivable compared to its daily sales rate, increased from 76 at the end of the fourth quarter of fiscal year 1995 to 84 at the end of fiscal year 1996. DSO continued to rise in the first quarter of fiscal year 1997, to 130 as of March 30,1997. The increase in DSO evidences the extended payment term being given by Informix to its OEMs and VARs in order to record sales in the third and fourth quarter of fiscal year 1996. As a further result of Informix improper revenue recognition practices during these fiscal periods, sales that would have been recognized during fiscal year 1997 were improperly pulled into fiscal year 1996. Informix's improper revenue recognition practices resulted in its net income for the third and fourth quarter of fiscal year 1996 being overstated by approximately $17 million. Thus, net income for fiscal year 1996, as announced on February 4, 1997, was overstated by approximately 18%.
80. In its Form 10-K for fiscal year 1996, Informix also reported for the first time that included in its $708 million in software licensing revenue for the fiscal year was $55 million representing a barter transaction (or transactions) whereby Informix traded software licenses for its core relational database products to certain unidentified companies in return for products and services from those companies. The disclosure of that transaction violated Accounting Principles Board ("APB") Opinion No. 29 regarding "Accounting for Non-Monetary Transactions." Pursuant to APB Opinion No. 29, ¶28, a company should disclose when it engages in such non-monetary transactions "in financial statements for the period the nature of the transactions, the basis of accounting for the assets transferred and gains or losses recognized on transfers." Informix's disclosure of this transaction was inadequate because it did not identify the nature of the product transferred or the goods or services it received in return for this transfer. Moreover, the extraordinary nature of this transaction required that Informix report this transaction as an extraordinary, nonrecurring item and not as a regular item of revenue included in its licensing revenue for fiscal year 1996.
81. As a result of the inadequate disclosure by Informix of this transaction and its violation of APB Opinion No. 29, investors in Informix were misled into believing that Informix's actual sales made in the regular course of its business were materially higher than was the case. As a result, the financial statements issued by Informix on October 16, 1996 and February 4, 1996 were materially false and misleading.
82. During the Class Period defendants White, Stonebraker, Hill, Coulter, Saranga and Graham sold over $13.39 million worth of Informix common stock in the open market while in possession of the adverse material facts as set forth above. The dates and amounts of such sales are identified below:
Phillip E. White
Date Shares Price Proceeds
($) ($)
08/02/96 15,000 23.63 354,450
08/02/96 5,000 23.38 116,900
08/05/96 10,000 24.25 242,500
08/09/96 10,000 26.25 262,500
08/14/96 10,000 24.50 245,000
11/06/96 10,000 22.50 225,000
11/19/96 10,000 20.88 208,800
Total: 70,000 1,655,150
Michael R. Stonebraker
Date Shares Price Proceeds
($) ($)
07/31/96 3,000 22.00 66,000
07/31/96 3,000 22.00 66,000
08/01/96 7,000 23.00 161,000
08/01/96 7,500 22.88 171,600
08/02/96 2,500 23.38 58,450
08/02/96 5,000 23.88 119,400
08/05/96 5,000 24.38 121,900
08/05/96 3,000 24.50 73,500
08/06/96 5,000 24.00 120,000
08/06/96 2,000 24.50 49,000
08/06/96 2,000 24.25 48,500
08/06/96 4,000 24.75 99,000
08/06/96 3,000 24.25 72,750
08/06/96 1,000 24.50 24,500
08/07/96 7,500 25.13 188,475
08/07/96 2,000 25.25 50,500
08/07/96 2,000 25.63 51,260
08/08/96 4,000 26.00 104,000
08/09/96 2,500 26.25 65,625
08/09/96 5,000 26.00 130,000
08/13/96 6,250 26.13 163,312
08/14/96 6,250 25.88 161,750
10/21/96 15,000 24.88 373,200
10/23/96 7,500 23.00 172,500
10/24/96 3,000 22.95 68,850
10/25/96 7,500 22.88 171,600
10/31/96 7,500 22.13 165,975
10/31/96 7,500 21.63 162,225
11/05/96 3,000 21.95 65,850
11/06/96 3,000 22.50 67,500
11/07/96 3,000 22.00 66,000
11/14/96 3,000 22.95 68,850
11/14/96 7,500 20.75 155,625
11/15/96 3,500 21.45 75,075
11/15/96 3,000 21.70 65,100
11/15/96 3,000 21.20 63,600
11/18/96 1,250 19.95 24,937
11/18/96 1,500 19.95 29,925
11/18/96 7,500 20.75 155,625
02/10/97 3,750 20.63 77,362
02/10/97 10,000 20.38 203,800
02/11/97 3,750 20.25 75,937
02/11/97 5,000 20.06 100,300
02/12/97 3,000 19.50 58,500
02/13/97 3,000 19.50 58,500
02/14/97 3,000 18.75 56,250
02/14/97 6,000 19.00 114,000
02/20/97 10,000 18.25 182,500
02/27/97 20,000 17.75 355,000
02/28/97 5,000 17.75 88,750
02/28/97 15,000 17.63 264,450
Total: 263,250 5,754,308
Howard H. Graham
Date Shares Price Proceeds
($) ($)
07/23/96 10,000 21.75 217,500
08/02/96 10,000 23.50 235,000
08/05/96 10,000 24.13 241,300
08/08/96 10,000 25.88 258,800
10/21/96 9,000 24.13 217,170
10/28/96 10,000 22.25 222,500
11/01/96 10,000 22.13 221,300
11/18/96 20,000 20.25 405,000
02/06/97 10,000 19.75 197,500
02/07/97 10,000 20.56 205,600
Total: 109,000 2,421,670
Stephen Hill
Date Shares Price Proceeds
($) ($)
07/19/96 5,000 23.31 116,550
08/02/96 2,500 23.38 58,450
08/06/96 2,500 24.00 60,000
08/07/96 5,000 25.00 125,000
08/16/96 2,500 25.38 63,450
10/28/96 5,000 21.88 109,400
11/05/96 5,000 22.19 110,950
11/18/96 2,500 20.13 50,325
11/18/96 7,500 20.13 150,975
11/19/96 5,000 20.88 104,400
02/10/97 10,000 20.75 207,500
Total: 52,500 1,157,000
D. Kenneth Coulter
Date Shares Price Proceeds
($) ($)
08/08/96 15,000 25.88 388,200
08/08/96 5,000 25.75 128,750
08/09/96 5,000 26.25 131,250
08/09/96 5,000 26.50 132,500
08/13/96 5,000 24.00 120,000
Total: 35,000 900,700
Myron Saranga
Date Shares Price Proceeds
($) ($)
07/26/96 10,000 21.00 210,000
07/26/96 5,000 21.50 107,500
07/29/96 10,000 22.00 220,000
08/01/96 10,000 22.50 225,000
08/01/96 10,000 22.75 227,500
08/06/96 20,000 25.00 500,000
Total: 65,000 1,490,000
Each of these sales were made at a time when the price of Informix common stock was artificially inflated as a result of defendants' materially false and misleading statements which are set forth above.
83. Plaintiff incorporates by reference ¶¶1-82 as set forth above.
84. Each of the defendants knew or had access to the material adverse non-public information about Informix's financial results and existing business conditions, which was not disclosed, and participated in drafting, reviewing and/or approving the misleading statements, releases, reports, and other public representations about Informix.
85. During the Class Period, defendants, with knowledge of or reckless disregard for the truth, disseminated or approved the materially false statements specified above, which were misleading in that they contained material misrepresentations and/or 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.
86. Defendants violated 10(b) of the Exchange Act and Rule 10b-5 in that they employed devices, schemes and artifices to defraud; made untrue statements of material facts or omitted to state material facts necessary to make the statements made in light of the circumstances under which they were made not misleading; or engaged in acts, practices and a course of business which operated as a fraud or deceit upon the purchasers of Informix common stock during the Class Period.
87. Plaintiff and the Class have suffered damage in that, in reliance on the integrity of the market, they paid artificially inflated prices for Informix stock as a result of defendants' violations of 10(b) of the Exchange Act and Rule 10b-5. Plaintiff and the Class would not have purchased Informix 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' false and misleading statements. At the time of the purchases by plaintiff and the Class of Informix common stock, the fair and true market value of said common stock was substantially less than the prices paid by them. As a proximate cause of the wrongful conduct of defendants, plaintiff and the Class have been damaged.
88. Plaintiff incorporates by reference ¶¶1-82, as set forth above.
89. Individual Defendants, White, Graham, Hill, Coulter, Saranga and Stonebraker, acted as controlling persons of Informix within the meaning of §20(a) of the Exchange Act. By reason of their positions as officers and directors of Informix and their substantial ownership of Informix common stock, these defendants had the power and authority, and exerted such authority, to cause Informix to engage in the wrongful conduct complained of herein. Informix controlled each of the Individual Defendants and all of its employees.
90. By reason of such wrongful conduct, the Individual Defendants named herein and Informix are liable pursuant to §20(a) of the Exchange Act. As a direct and proximate result of these defendants' wrongful conduct, plaintiff and the Class suffered damages in connection with their purchases of the Company's common stock during the Class Period.
91. Plaintiff has made the foregoing allegations based upon the investigation of its counsel, which included, among other things, a review of Informix's SEC filings, securities analysts' reports and advisories about the Company, press releases issued by the Company and media reports about the Company. Plaintiff believes that substantial evidence exists for the allegations set forth in this Complaint.
WHEREFORE, plaintiff, on behalf of itself and the Class, respectfully requests judgment as follows:
1. Declaring this action to be a proper class action pursuant to Rules 23(a) and 23(b)(3) of the Federal Rules of Civil Procedure on behalf of the Class defined herein, and declaring plaintiff to be a proper class representative and plaintiff's counsel as counsel for the Class;
2. Awarding plaintiff and all members of the Class compensatory damages in an amount to be proven at trial;
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, pursuant to Rules 64 and 65 of the Federal Rules of Civil Procedure;and
5. Awarding such other relief as this Court may deem just and proper.
Plaintiff demands a trial by jury.
| Dated: Jun 2, 1997 | GOLD BENNETT & CERA LLP /s/ By________________________________ George S. Trevor and MESIROV GELMAN JAFFE CRAMER & JAMIESON Mark R. Rosen Gary L. Azorsky Attorneys for Plaintiff and All Others Similarly Situated |
|
Securities Class Action Clearinghouse |
U.S.D.C. N.D. Cal. |
Robert Crown Law Library |
Stanford Law School |