MILBERG WEISS BERSHAD
HYNES & LERACH LLP
WILLIAM S. LERACH (68581)
BLAKE M. HARPER (115756)
600 West Broadway, Suite 1800
San Diego, CA 92101
Telephone: 619/231-1058
SPECTOR & ROSEMAN, P.C.
ROBERT M. ROSEMAN
ELLEN GUSIKOFF STEWART (144892)
2000 Market Street
12th Floor
Philadelphia, PA 19103
Telephone: 215/864-2400
WOLF POPPER LLP
ROBERT C. FINKEL
845 Third Avenue
New York, NY 10022
Telephone: 212/759-4600
BERNSTEIN LIEBHARD & LIFSHITZ
MEL E. LIFSHITZ
274 Madison Avenue
New York, NY 10016
Telephone: 212/779-1414
KAUFMAN, MALCHMAN, KIRBY
& SQUIRE, LLP
JEFFREY H. SQUIRE
IRA M. PRESS
919 Third Avenue, 11th Floor
New York, NY 10022
Telephone: 212/371-6600
Attorneys for Plaintiffs
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF CALIFORNIA
SAN JOSE DIVISION
|
EDWARD RUDOLPH, MAURICE KRISEL, |
No. C-97-4066-VRW CLASS ACTION COMPLAINT FOR VIOLATION Plaintiffs Demand |
1. This is a class action on behalf of all persons who purchased or otherwise acquired the common stock of S3 Incorporated ("S3" or the "Company") between July 15, 1996 and November 3, 1997, inclusive (the "Class Period"). S3, whose stock is traded on the NASDAQ National Market System, holds itself out to be a leading supplier of high-performance multimedia acceleration hardware and associated software for the personal computer ("PC") market. During the Class Period, S3 and its senior-most officers and directors named as defendants herein (collectively the "Individual Defendants"), directly, and indirectly through several securities analysts to whom defendants purposefully provided false and misleading information, issued materially false financial statements and a series of materially false and misleading statements about S3's operations, customers and future prospects. These materially false and misleading public statements drove the market price of S3's stock to an all-time high of over $23 per share by October 1996. The defendants made and caused these materially false and misleading statements to be made in order to artificially inflate S3's stock price so that Company insiders and their colleagues could sell off more than 638,000 of their shares at artificially inflated prices for gross proceeds in excess of $10.8 million and so S3 could issue more than $100 million of convertible notes in September 1996.
2. The S3 insiders began their stock selling spree in August of 1996, as the market price of S3's stock began rising toward its all-time high. Then, when the stock price began to decline slightly during early 1997, these insiders acted quickly to stem this decline so that they could sell more of their S3 stock at inflated prices to the unsuspecting investing public. They did so by making, both directly and through securities analysts, additional misrepresentations similar to those made earlier in the Class Period and by falsifying financial information. These assurances had their intended effect of artificially stabilizing the price of S3 stock so as to facilitate yet another multi-million dollar stock-selling spree by Company insiders in February 1997. Ultimately in November 1997, S3 admitted that it had reported false financial information in "prior quarters" (without revealing which quarters) that would have to be restated due to improper revenue recognition of between $40 and $70 million in "sales" to distributors.
3. In early 1996, S3's stock price decreased significantly, reducing the value of defendants' holdings. The defendants wanted to boost S3's stock price to increase the value of their S3 stockholdings to enable certain of the Individual Defendants named herein to sell hundreds of thousands of share of S3 stock at artificially inflated prices and to successfully issue $100 million in subordinated convertible notes in September 1996. To boost S3's stock price substantially, the defendants knew they had to convince the investment community that S3's revenues and EPS would grow at a rapid rate over successive quarters. This trend is referred to in the investment community as "sequential growth." The defendants hoped this would result in investors valuing S3's stock as a "growth stock," creating a high price earnings multiple for the stock, thus dramatically increasing its price. However, the defendants also realized that S3's existing business was weakening and that S3 could not internally generate the rate of growth needed to sustain S3's stock price.
4. After concealing this information and falsifying S3's financial statements, the defendants belatedly revealed that S3's prospects were much worse than earlier represented and that the Company would have to restate previously issued financial statements. Thus, with the S3 insiders' personal bank accounts securely lined with the over $10.8 million in gross proceeds realized from their illicit and peculiarly-timed stock sales, the harsh and previously undisclosed reality of S3's actual prospects for continued earnings growth and its improper accounting emerged.
5. The graph below demonstrates the price action of S3's stock during the Class Period as defendants sold more than 638,000 shares -- $10.8 million worth of their own S3 shares -- and also illustrates the collapse of S3's stock price as the previously concealed facts about S3's businesses emerged:
6. Indeed, contrary to the glowingly positive statements concerning S3's business, finances, customer base and prospects that the defendants issued and caused to be issued as they were dumping S3 stock at artificially inflated prices during the Class Period, the true facts began to emerge beginning in April 1997 and concluding with the revelation on November 3, 1997, that S3 would have to restate the financial results for certain unspecified prior quarters by as much as $70 million in revenues. In April 1997, defendants revealed that the Company's single largest customer, Diamond Multimedia Systems, Inc. (which alone accounted for nearly a quarter of the Company's business), contrary to expectations created by defendants, had been sharply curtailing its rate of orders with the Company. It was further revealed that the Company was facing "severe" pressure with respect to the pricing of its products, and that, as a result, S3's revenues and earnings per share for the second quarter of 1997 would drop substantially. These startling revelations directly contradicted the false image of the Company that the defendants had successfully created during the Class Period. These revelations resulted in the downgrading of S3 stock by securities analysts and sent the market price of the Company's stock into a tailspin. However, defendants continued to conceal from the public that S3's financial results had been falsely reported and that its revenues and earnings had been overstated because defendants had reported revenues to foreign distributors improperly. After these stunning revelations were made after the market close on November 3, 1997, the market price of S3 stock, which had traded as high as $23 per share during the Class Period, plummeted to close at $7-11/32 per share on November 4, 1997.
7. Each of the positive statements about S3's business during the Class Period was materially false and misleading when issued, and failed to disclose, inter alia, the following adverse information which was then known only to defendants due to their access to internal S3 data:
(a) That S3 had recognized revenue in violation of Generally Accepted Accounting Principles ("GAAP") on shipments to distributors that were contingent on resale or acceptance or contained other contingent terms, such as exchange rights or new version upgrade provisions, etc.;
(b) That S3 recognized revenue for which it had no reasonable basis to estimate future returns;
(c) That defendants had no reasonable basis for a belief that S3's sales would continue to rapidly increase because defendants knew that there was already an excess of products in the OEM, reseller and distribution channels and that huge amounts of sales previously recorded were improper and were contingent on resale or other contingencies occurring;
(d) That future demand for many of S3's products would be constrained by the excess levels of product already held by OEMs, distributors, and other resellers, who had accepted shipments of more product than they expected to sell because S3 agreed that they could return the product if it could not be sold;
(e) That absent S3's improper revenue recognition, S3 was experiencing little if any growth and its projections of future growth were false;
(f) That S3's largest customer, Diamond Multimedia, was sharply cutting its purchases from S3, and revenues from such sales were declining dramatically;
(g) That S3 was facing enormous pricing pressure in the market;
(h) That S3's new ViRGE products were not gaining widespread market acceptance and thus S3 was not well positioned to take advantage of the growing multimedia accelerator market nor was S3 poised to grow faster than the industry rate;
(i) That, as a result of the foregoing, there was no basis in fact for the assurances that S3 would sustain sequential earnings growth. As a result of the foregoing, defendants' forecasts that S3 would achieve sequential earnings per share increases in the second quarter of 1997 and beyond, were false, had no reasonable basis in fact, as such earnings per share were impossible to achieve in light of these undisclosed problems; and
(j) That the forecasts of S3's sequential earnings growth were false and were not genuinely believed by the defendants, as they were aware of the adverse information set forth above which contradicted these forecasts.
8. S3's insiders personally profited from their illegal behavior, i.e., issuing false and misleading statements to inflate S3's stock price by insider trading in S3 stock, i.e., selling off large amounts of their S3 stock at artificially inflated prices based on material, non-public information known to them, but not to the market. The chart below summarizes defendants' illegal insider trading:
DIOSDADO P. BANATAO
Co-Founder of the Company and current Chairman of the Company's Board of Directors since 1992; President and CEO from S3's inception in 1989 until January of 1992
Date of Sale Number of Shares Sale Price Gross Proceeds August 26, 1996 1,701 $14.63 $ 24,886 August 26, 1996 10,000 14.63 146,300 August 26, 1996 3,000 14.63 43,890 August 26, 1996 50,000 14.63 731,500 August 28, 1996 10,000 15.00 150,000 November 26, 1996 10,000 16.38 163,800 November 27, 1996 5,000 16.50 82,500 November 27, 1996 5,000 16.38 81,900 January 27, 1997 10,000 17.00 170,000 January 28, 1997 10,000 17.13 171,300 January 28, 1997 20,000 17.00 340,000 January 28, 1997 19,667 16.88 331,979 Totals: 154,368 $2,438,055
NEAL MARGULIS
Senior Vice-President of Research and Technology
Date of Sale Shares Sold Sale Price Gross Proceeds August 21, 1996 4,000 $13.63 $ 54,520 August 22, 1996 4,000 14.00 56,000 August 23, 1996 3,000 14.50 43,500 August 26, 1996 2,000 14.63 29,260 August 28, 1996 5,000 15.00 75,000 August 28, 1996 3,000 14.88 44,640 August 30, 1996 2,000 14.63 29,260 November 7, 1996 5,000 20.38 101,900 November 7, 1996 5,000 20.00 100,000 November 8, 1996 2,000 21.13 42,260 November 26, 1996 4,000 16.63 66,520 November 27, 1996 4,000 16.50 66,000 December 2, 1996 5,000 17.00 85,000 February 7, 1997 4,000 17.00 68,000 February 13, 1997 4,000 18.00 72,000 February 19, 1997 6,000 18.50 111,000 February 20, 1997 2,000 19.00 38,000 February 27, 1997 4,000 18.00 72,000 February 27, 1997 2,900 18.00 52,200 February 28, 1997 10,000 17.38 173,800 Totals: 80,900 $1,380,860
JACKSON K.C. HU
Senior Vice-President, Vice-President/Engineering and Operations
Date of Sale Shares Sold Sale Price Gross Proceeds August 26, 1996 2,000 $14.63 $ 29,260 August 27, 1996 4,000 14.88 59,520 November 5, 1996 5,000 19.00 95,000 November 6, 1996 5,000 19.63 98,150 November 7, 1996 5,000 20.50 102,500 November 27, 1996 2,500 16.50 41,250 November 27, 1996 2,500 16.63 41,575 February 13, 1997 1,000 18.13 18,130 February 13, 1997 2,000 17.88 35,760 February 13, 1997 7,000 18.00 126,000 February 19, 1997 5,000 18.75 93,750 February 19, 1997 5,000 18.25 91,250 February 20, 1997 5,000 19.00 95,000 February 21, 1997 5,000 18.25 91,250 February 24, 1997 6,000 18.13 108,780 February 24, 1997 4,000 18.00 72,000 February 25, 1997 2,000 18.25 36,500 February 25, 1997 5,000 18.13 90,650 February 27, 1997 2,000 18.00 36,000 May 28, 1997 4,000 12.77 51,080 May 28, 1997 1,000 13.02 13,020 May 28, 1997 1,000 13.00 13,000 May 28, 1997 2,000 12.25 24,500 May 29, 1997 2,000 12.50 25,000 Totals: 85,000 $1,488,925
GEORGE A. HERVEY
Chief Financial Officer, Vice-President of Finance
Date of Sale Shares Sold Sales Price Gross Proceeds August 28, 1996 3,000 $14.88 $ 44,640 August 29, 1996 2,148 14.75 31,683 August 29, 1996 1,352 14.75 19,942 August 30, 1996 1,000 14.63 14,630 August 30, 1996 1,050 14.63 15,362 August 30, 1996 450 14.63 6,584 November 7, 1996 1,000 21.00 21,000 November 7, 1996 2,000 20.25 40,500 November 12, 1996 5,000 20.88 104,400 November 12, 1996 2,000 20.88 41,760 November 21, 1996 3,000 17.88 53,640 November 25, 1996 2,000 17.88 35,760 November 29, 1996 455 16.88 7,680 November 29, 1996 3,272 17.00 55,624 Totals: 27,727 $ 493,205
JOHN C. COLLIGAN
Member of the Board of Directors
Date of Sale Shares Sold Sales Price Gross Proceeds November 26, 1996 10,000 $16.69 $166,900 February 6, 1997 6,864 17.04 116,963 February 6, 1997 28,136 17.04 479,437 Total: 45,000 $ 763,300
HARRY L. DICKINSON
Senior Vice-President of Sales
Date of Sale Shares Sold Sale Price Gross Proceeds August 29, 1996 5,000 $15.00 $ 75,000 November 13, 1996 5,000 20.13 100,650 February 18, 1997 16,502 18.00 297,036 February 18, 1997 8,870 18.00 159,660 February 18, 1997 3,730 18.00 67,140 Total: 39,102 $ 699,486
TERRY N. HOLDT
Vice-Chairman of the Board of Directors, formerly President and Chief Executive Officer
Date of Sale Shares Sold Sale Price Gross Proceeds November 12, 1996 5,000 $20.75 $103,750 November 12, 1996 10,000 21.00 210,000 Total: 15,000 $313,750
CARMELO J. SANTORO
Member of the Board of Directors
Date of Sale Shares Sold Sale Price Gross Proceeds November 8, 1996 20,000 $21.13 $422,600
RONALD T. YARA
Co-Founder of the Company, Senior Vice-President of Strategic Marketing
Date of Sale Shares Sold Sale Price Gross Proceeds August 28, 1996 80,000 $15.13 $1,210,400 August 28, 1996 20,000 15.00 300,000 November 7, 1996 20,000 19.88 397,600 Total: 120,000 $1,908,000
ROBERT P. LEE
Member of the Board of Directors
Date of Sale Shares Sold Sale Price Gross Proceeds November 8, 1996 5,000 $21.00 $ 105,000
GARY JOHNSON
President, Chief Executive Officer and Chairman of the Board of Directors
Date of Sale Shares Sold Sale Price Gross Proceeds August 27, 1996 5,000 $14.88 $ 74,400 August 27, 1996 2,000 15.00 30,000 August 28, 1996 3,000 15.00 45,000 October 24, 1996 5,000 19.25 96,250 November 6, 1996 5,000 19.75 98,750 November 7, 1996 5,000 21.00 105,000 November 7, 1996 5,000 20.25 101,250 February 13, 1997 8,000 17.88 143,040 February 14, 1997 8,000 18.50 148,000 Totals: 46,000 $ 841,690 Grand Total: 638,097 $10,854,871
These stock sales all took place as S3's stock price was soaring higher than it had ever traded at before. They took place near the stock's all-time high, and just a few months before S3's stock plunged back to the levels it sold at before defendants began making false and misleading statements in the summer of 1996.
9. Jurisdiction exists pursuant to §27 of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. §78aa, and 28 U.S.C. §1331. The claims asserted herein arise under §§10(b) and 20(a) of the Exchange Act, 15 U.S.C. §§78j(b) and 78t(a), and Rule 10b-5.
10. (a) Venue is proper in this District pursuant to §27 of the Exchange Act and 28 U.S.C. §1391(b). Many of the acts giving rise to the violations complained of occurred in this District.
(b) Assignment of this action to the San Jose Division is appropriate as a substantial part of the events or omissions identified herein occurred in Santa Clara County.
11. In connection with the wrongs complained of, defendants used the instrumentalities of interstate commerce including the U.S. mails and the facilities of the national securities markets.
12. (a) Plaintiff Edward Rudolph purchased 3,000 shares of S3 stock on December 17, 1996 at $19.50 per share and was damaged thereby.
(b) Plaintiff Maurice Krisel purchased 4,900 shares of S3 stock on March 21, 1997 at $13-1/4 per share, 700 shares on April 22, 1997 at $9-7/16 per share and 900 shares on April 22, 1997 at $9-3/8 per share and was damaged thereby.
(c) Plaintiff Idy Mandel purchased 1,000 shares of S3 stock on September 30, 1997 at $11-1/4 per share and 1,000 shares on October 21, 1997 at $10.3125 per share and was damaged thereby.
(d) Plaintiff Lorry Wagner purchased 1,000 shares of S3 stock on January 21, 1997 at $18.375 per share and was damaged thereby.
13. (a) Defendant S3 is headquartered in Santa Clara, California. S3, which was founded by defendants Diosdado Banatao and Ronald Yara in 1989, represents itself to be a leading supplier of high-performance multimedia acceleration hardware and associated software for the PC market. S3's products are used for audio, video, graphics and platform acceleration for the home, desktop and mobile markets. The Company represents that its accelerators are designed to work cooperatively with a PC's control processing unit ("CPU"), while implementing functions best suited for a dedicated accelerator and allowing the CPU to perform the more general purpose computing functions of today's advanced graphical user interface ("GUI") environment and applications. By complementing the computing power of the general purpose CPU, the Company's integrated software and silicon-based accelerator solutions reportedly improve the multimedia performance of PCs while reducing overall system cost and complexity.
(b) S3 has been in the graphics acceleration industry since 1991, when it began shipping a single-chip graphics accelerator with a local bus interface. S3 has since delivered additional generations of accelerator solutions with 32-bit and 64-bit multimedia products such as integrated 2D graphics and video accelerators, integrated 3D graphics and video accelerators, MPEG decoders and audio processors and integrated full-motion video acceleration. In November 1995, S3 introduced its initial members of a family of 3D graphics and video accelerator products to enable 3D graphics on mainstream PCs. The Company's 2D graphics and video accelerators are marketed under the "Trio" family of names, and the 3D graphics and video accelerators are marketed under the "ViRGE" family of names.
(c) The Company reportedly sells its graphics and multimedia accelerators through a direct sales organization supported by field applications engineers, as well as through a network of independent manufacturers' representatives. The Company also uses regional distributors. The single largest S3 customer is Diamond Multimedia Systems, Inc., an add-in board manufacturer, which reportedly accounts for nearly a quarter of S3's sales. The Company's other customers include: (1) add-in board manufacturers such as Micro Technology Corporation, and STB Systems, Inc., and (2) systems and motherboard manufacturers such as Acer Incorporated, AST Research Incorporated, Compaq Computer Corporation, Dell Computer Corporation, Digital Equipment Corporation, Gateway 2000, Inc., Hewlett-Packard Company, Intel Corporation, International Business Machines Corporation, Packard Bell NEC, and VTech Holdings, Ltd.
(d) S3's stock is traded in an efficient market on the NASDAQ National Market System.
14. The following present and former officers and directors of S3 ("collectively, the "Individual Defendants") are also named as defendants herein:
(a) Defendant Gary J. Johnson ("Johnson") has, since September of 1996, served as President, Chief Executive Officer and a member of the Board of Directors of S3. Before August of 1996, defendant Johnson served as Senior Vice President of the Company's Graphics Business Units. Because of defendant Johnson's position, he knew or should have known the adverse non-public information about the business of S3, as well as its finances, markets and present and future business prospects via access to internal corporate documents (including the Company's operating plans, budgets and forecasts and reports of actual operations compared thereto), conversations and connections with other corporate officers and employees, attendance at management and Board of Directors' meetings and committees thereof and via reports and other information provided to him in connection therewith. Defendant Johnson's participation included the preparation of false and/or misleading press releases, dissemination of false statements during presentations at securities conferences, analyst conference calls and during individual conversations with securities analysts. During the Class Period, defendant Johnson sold at least 46,000 shares of S3 common stock on the basis of adverse, non-public information concerning S3, realizing gross proceeds of over $841,000.
(b) Defendant Neal G. Margulis ("Margulis") was, at all times relevant hereto, S3's Senior Vice President of Research and Technology. Because of defendant Margulis' position, he knew or should have known the adverse non-public information about the business of S3, as well as its finances and present and future business prospects via access to internal corporate documents (including the Company's operating plans, budgets and forecasts and reports of actual operations compared thereto), conversations and connections with other corporate officers and employees, attendance at management and Board of Directors' meetings and committees thereof and via reports and other information provided to him in connection therewith. Defendant Margulis' participation included the preparation of false and/or misleading press releases, dissemination of false statements during presentations at securities conferences, analyst conference calls and during individual conversations with securities analysts. During the Class Period, defendant Margulis sold 80,900 shares of S3 common stock on the basis of adverse, non-public information concerning S3, realizing gross proceeds of over $1.3 million.
(c) Defendant Diosdado P. Banatao ("Banatao"), one of the founders of S3, has served Chairman of the Company's Board of Directors since January of 1992. Defendant Banatao is also interim/acting Senior Vice-President of S3's Audio/Communications Business Unit. Defendant Banatao served as President and Chief Executive Officer of S3 from its inception in 1989 until January 1992. Because of defendant Banatao's position, he knew or should have known the adverse non-public information about the business of S3, as well as its finances and present and future business prospects via access to internal corporate documents (including the Company's operating plans, budgets and forecasts and reports of actual operations compared thereto), conversations and connections with other corporate officers and employees, attendance at management and Board of Directors meetings and via reports and other information provided to him in connection therewith. Defendant Banatao's participation included the preparation of false and/or misleading press releases, dissemination of false statements during presentations at securities conferences, analyst conference calls and during individual conversations with securities analysts. During the Class Period, defendant Banatao sold 154,368 shares of S3 common stock on the basis of adverse, non-public information concerning S3, realizing gross proceeds of over $2.4 million.
(d) Defendant Terry N. Holdt ("Holdt"), at all times relevant hereto, has served as Vice-Chairman of the Company's Board of Directors. Defendant Holdt served as President and Chief Executive Officer of the Company from January 1992 to August 1996. Because of defendant Holdt's position, he knew or should have known the adverse non-public information about the business of S3, as well as its finances and present and future business prospects via access to internal corporate documents (including the Company's operating plans, budgets and forecasts and reports of actual operations compared thereto), conversations and connections with other corporate officers and employees, attendance at management and Board of Directors meetings and via reports and other information provided in connection therewith. Defendant Holdt's participation included the preparation of false and/or misleading press releases, dissemination of false statements during presentations at securities conferences, analyst conference calls and during individual conversations with securities analysts. During the Class Period, defendant Holdt sold at least 15,000 shares of S3 common stock on the basis of adverse, non-public information concerning S3, realizing gross proceeds in excess of $313,000.
(e) Defendant George A. Hervey ("Hervey") served as S3's Chief Financial Officer and Vice-President of Finance from the time he joined the Company in June 1992 until his abrupt resignation from the Company in March of 1997. Because of defendant Hervey's position, he knew or should have known the adverse non-public information about the business of S3, as well as its finances and present and future business prospects via access to internal corporate documents (including the Company's operating plans, budgets and forecasts and reports of actual operations compared thereto), conversations and connections with other corporate officers and employees, attendance at management meetings and via reports and other information provided to him in connection therewith. Defendant Hervey's participation included the preparation of false and/or misleading press releases, dissemination of false statements during presentations at securities conferences, analyst conference calls and during individual conversations with securities analysts. During the Class Period, defendant Hervey sold 27,727 shares of S3 common stock on the basis of adverse, non-public information concerning S3, realizing gross proceeds in excess of $493,000.
(f) Defendant Ronald T. Yara ("Yara"), a co-founder of S3, also serves as the Company's Senior Vice-President of Strategic Marketing, and as a Director of the Company. Because of defendant Yara's position, he knew or should have known the adverse non-public information about the business of S3, as well as its finances and present and future business prospects via access to internal corporate documents (including the Company's operating plans, budgets and forecasts and reports of actual operations compared thereto), conversations and connections with other corporate officers and employees, attendance at management meetings and via reports and other information provided to him in connection therewith. Defendant Yara's participation included the preparation of false and/or misleading press releases, dissemination of false statements during presentations at securities conferences, analyst conference calls and during individual conversations with securities analysts. During the Class Period, defendant Yara sold at least 120,000 shares of S3 common stock on the basis of adverse, non-public information concerning S3, realizing gross proceeds in excess of $1.9 million.
(g) Defendant Jackson K.C. Hu ("Hu") has served as Vice-President, Engineering from August, 1990 to December 1993, and served as Senior Vice-President, Engineering and Operations during the Class Period. Because of defendant Hu's position, he knew or should have known the adverse non-public information about the business of S3, as well as its finances and present and future business prospects via access to internal corporate documents (including the Company's operating plans, budgets and forecasts and reports of actual operations compared thereto), conversations and connections with other corporate officers and employees, attendance at management meetings and via reports and other information provided to him in connection therewith. Defendant Hu's participation included the preparation of false and/or misleading press releases, dissemination of false statements during presentations at securities conferences, analyst conference calls and during individual conversations with securities analysts. During the Class Period, defendant Hu sold 85,000 shares of S3 common stock on the basis of adverse, non-public information concerning S3, realizing gross proceeds in excess of $1.4 million.
(h) Defendant Harry L. Dickinson ("Dickinson"), who joined the Company in February of 1992, has served as Senior Vice-President of Sales since April of 1995. Before April of 1995, defendant Dickinson served as Vice-President of Sales. Because of defendant Dickinson's position, he knew or should have known the adverse non-public information about the business of S3, as well as its finances and present and future business prospects via access to internal corporate documents (including the Company's operating plans, budgets and forecasts and reports of actual operations compared thereto), conversations and connections with other corporate officers and employees, attendance at management meetings and via reports and other information provided to him in connection therewith. Defendant Dickinson's participation included the preparation of false and/or misleading press releases, dissemination of false statements during presentations at securities conferences, analyst conference calls and during individual conversations with securities analysts. During the Class Period, defendant Dickinson sold 39,102 shares of S3 common stock on the basis of adverse, non-public information concerning S3, realizing gross proceeds in excess of $699,000.
(i) Defendant Dale R. Lindly ("Lindly") served as the acting Chief Financial Officer (Principal Financial and Accounting Officer) after the resignation of defendant Hervey in March 1997. Because of defendant Lindly's position, he knew or should have known the adverse non-public information about the business of S3, as well as its finances and present and future business prospects via access to internal corporate documents (including the Company's operating plans, budgets and forecasts), conversations with other officers and attendance at management meetings. Defendant Lindly's participation included the preparation of false and/or misleading financial reports and press releases and dissemination of false statements at conference calls and in individual conversations with analysts.
(j) Defendant Carmelo J. Santoro ("Santoro") has, at all times relevant hereto, served as a member of the Company's Board of Directors. Because of defendant Santoro's position, he knew or should have known the adverse non-public information about the business of S3, as well as their finances and present and future business prospects via access to internal corporate documents (including the Company's operating plans, budgets and forecasts and reports of actual operations compared thereto), conversations and connections with corporate officers and employees, attendance at Board of Directors meetings and via reports and other information provided to him in connection therewith. During the Class Period, defendant Santoro sold at least 20,000 shares of S3 common stock in a single day on the basis of adverse, non-public information concerning S3, realizing gross proceeds of over $420,000.
(k) Defendant John C. Colligan ("Colligan") has, at all times relevant hereto, served as a member of the Company's Board of Directors. Because of defendant Colligan's position, he knew or should have known the adverse non-public information about the business of S3, as well as its finances and present and future business prospects via access to internal corporate documents (including the Company's operating plans, budgets and forecasts and reports of actual operations compared thereto), conversations and connections with corporate officers and employees, attendance at Board of Directors meetings and via reports and other information provided to him in connection therewith. During the Class Period, defendant Colligan sold at least 45,000 shares of S3 common stock on the basis of adverse, non-public information concerning S3, realizing gross proceeds of over $760,000.
(l) Defendant Robert P. Lee ("Lee") has, at all times relevant hereto, served as a member of the Board of Directors. Because of defendant Lee's position, he knew or should have known the adverse non-public information about the business of S3, as well as its finances and present and future business prospects via access to internal corporate documents (including the Company's operating plans, budgets and forecasts and reports of actual operations compared thereto), conversations and connections with corporate officers and employees, attendance at Board of Directors meetings and via reports and other information provided to him in connection therewith. During the Class Period, defendant Lee sold at least 5,000 shares of S3 common stock in a single day on the basis of adverse, non-public information concerning S3, realizing gross proceeds of $105,000.
15. Each defendant had the opportunity to commit and participate in the fraud. The Individual Defendants were the top officers and/or directors of S3 and they controlled its press releases, corporate reports, SEC filings and its communications with analysts. Thus, they controlled the public dissemination of, and could falsify, the information about S3's business, products, financial results and future prospects that reached the public and impacted the price of its stock.
16. Each of the Individual Defendants also had the motive to commit and participate in the fraud. In recent years, S3's stock traded at a price-earnings multiple reserved for premier growth companies with track records of meeting the investment community's expectations for high profit growth. This stock performance enabled S3's corporate executives to exercise stock options and to sell stock at large profits and enabled S3 to grow by using its stock to make acquisitions of other companies, and to be able to issue more than $100 million in subordinated convertible notes in September 1996. The executives wanted to maintain their positions with S3 which would have been threatened had S3's actual results and poor prospects been exposed. For all these reasons, maintaining S3's image of strong growth and its high stock price was extremely important to S3's top executives, in addition to avoiding a complete stock collapse. The Individual Defendants also wanted to cover up the problems with and deterioration in S3's business to make it appear as if S3's business was succeeding and achieving the strong growth they had forecasted, so that its stock would trade at artificially inflated levels, high enough so that they could sell significant amounts of their S3 stock in part by exercising stock options to acquire S3 stock and then immediately selling off the S3 stock they acquired at artificially inflated prices, pocketing large sums for themselves. The Individual Defendants also were motivated to conceal the serious problems S3 was having with its largest customers in an attempt to maintain S3's competitive position in its markets, which was increasingly impaired by aggressive competitors.
17. As part of S3's corporate planning and management process, it prepares a corporate business plan and budget for each fiscal year, typically referred to as the Fiscal Year Corporate Plan/Budget. The Fiscal Year Corporate Plan/Budget ("Plan/Budget") for a given fiscal year is prepared and revised during the last half of the preceding fiscal year and is completed by top management for Board review and approval near the end of the prior fiscal year. Thus, with respect to S3's 1996 and 1997 Plan/Budgets, work began on the Plan/Budgets in the last half of 1995 and 1996, respectively, and the 1996 and 1997 Plan/Budgets were completed by top management for Board review and approval by October or November of 1995 and 1996, respectively. S3's Plan/Budgets were very detailed presentations of the corporation's operations and included planned or forecasted revenues, expenses, net income and earnings per share for the fiscal year on an overall corporate basis. In addition, S3's Plan/Budgets also included forecasted revenues by product line, and by geographic area, i.e., North America, Europe, and Asia. S3's Plan/Budgets presented these forecasted or budgeted results on a monthly, quarterly and annual basis and contained narrative explanations as to the plans' key assumptions and how management proposed to achieve those results. Each Individual Defendant was aware of and received copies of S3's 1996 and 1997 Plan/Budgets and each played a significant role in preparing, revising and/or approving those Plan/Budgets.
18. In order to monitor S3's corporate performance throughout the fiscal year, S3's top managers receive monthly financial reports prepared by its financial department, headed by Hervey, Chief Financial Officer ("CFO") (until his resignation) and Lindly, acting CFO after Hervey's resignation, as well as other written and oral reports from members of management, including divisional managers. In order to effectively manage its business and control its cash flow, S3's management information system was capable of generating reports on a daily basis showing orders received (by product), shipments (by product), software development costs (by product), as well as overall corporate revenue, cash balances, receivables, etc. As a result of this system, S3's top managers were aware of the corporation's performance on a daily basis and were thus aware, virtually immediately, of any significant problems with orders, channel inventories, demand for new and existing products or shipment delays, etc.
19. In addition to this daily monitoring system, S3's finance department generated monthly financial reports providing detailed data with respect to overall corporate revenue, net income and earnings per share, as well as sales by specific product lines and by geographic region -- all presented so as to compare performance for that month, that quarter and the year-to-date compared to the Plan/Budgets. These financial reports included a so-called "Flash" report prepared after the end of each month (and also throughout each month) and distributed immediately to top management, which provided summary product shipment, sales and income data. The monthly financial reports also included a so-called "Monthly Financial Statement/Package," which provided even more detailed information, including graphic comparisons of actual performance to forecasted performance and a narrative explanation of material variances of actual results compared to forecasted or budgeted results, which was completed within ten days after the end of the month and immediately provided to members of top management.
20. Thus, when the unsold inventory began accumulating at distributors in 1996 and during 1997, the Individual Defendants were immediately advised of the problems by the sales and finance personnel. S3 closely monitored the amount of unsold product in the distribution channel and received sell-through reports from its distributors, OEMs and other resellers via its sales personnel. The significant amount of unsold channel inventory was immediately a matter of major concern and discussion among S3's top corporate managers, including the Individual Defendants. Moreover, when sales and/or orders fell short of internal projections throughout the Class Period, the Individual Defendants were immediately apprised.
21. Because of the foregoing, each of the Individual Defendants was aware of S3's 1996 and 1997 forecasts and budgets and of the internal reports detailing the distribution problems, and the financial reports comparing S3's actual results to those budgeted and/or forecasted. Based on the negative internal reports specified earlier and reports of the Company's actual performance compared to that budgeted and forecasted, the Individual Defendants each knew S3's business was not performing as well as publicly represented. Thus, the defendants knew that S3's forward-looking public statements issued during the Class Period were false and misleading when made and actually knew or recklessly disregarded that the Company's financial statements issued during the Class Period were false and misleading when made.
22. Analysts employed by securities firms prepare written internal advisories and research reports about public companies such as S3. S3 was followed by securities analysts employed by Lehman Brothers, Hambrecht & Quist, Cowen & Co., Donaldson, Lufkin & Jenrette Securities Corporation, PaineWebber Incorporated, and Robertson, Stephens & Co., among others.
23. In writing their reports about S3, these analysts relied in substantial part upon information provided to them by the Company and its senior-most officials, including the Individual Defendants named herein, and assurances by the Company that information in the analysts' reports was not at material variance with the Company's internal knowledge of its operations and prospects.
24. Because S3 was a rapidly expanding Company and its stock a "growth stock," S3's growth and growth trends in its earnings per share were critical to the investment community. S3 and the Individual Defendants used its communications to analysts to assure them -- and by and through them, the investing public -- that S3's relations with its key customers were secure, stable and predictable, that demand for S3's products was strong and growing, that the markets for its products were large and expanding, and that it would achieve significant earnings-per-share growth for successive periods of time.
25. As part of the fraudulent scheme, S3 had certain of its senior officers communicate regularly with securities analysts, including those at the firms identified above. The purpose of these communications was to disseminate favorable information concerning the Company's business and to provide detailed "guidance" and direction to these analysts reporting the Company's business and expected earnings in fiscal 1996, 1997 and beyond. These communications included telephone conference calls, meetings, and analyst briefings where they discussed many aspects of the Company's operations and future earning prospects. S3's top officers had these communications with analysts to cause them to disseminate favorable information on S3 and used these communications to falsely present the business and prospects of S3 to the marketplace, thus artificially inflating the market price of S3's stock.
26. S3 copied and circulated certain of the securities analysts' reports as part of its "investors' relations package" which it distributed to members of the financial press, investors, and stockholders, thus endorsing them and adopting them as its own. The investment community, and in turn, investors, relied and acted upon the information communicated in these reports and advisories that recommended that investors purchase S3 stock. Many reports issued by the securities analysts were available to the market immediately through the "First Call" network, a computerized data base of analysts' reports available to brokers and analysts. Copies of each of these reports were provided to S3 immediately upon issuance and were either approved by it or not objected to by it.
27. The securities analysts thus became conduits by and through which S3 and the Individual Defendants provided false information to the marketplace in order to deceive investors and artificially inflate the price of S3 stock. Acting through or by means of these securities analysts, S3 and the Individual Defendants were able to manipulate the price of its stock and to deceive investors in contravention of applicable law, all as alleged in this Complaint.
28. In early 1996, S3's stock price declined significantly due to lower than expected sequential growth in Q4 1995, higher than anticipated inventory levels and weakness at S3's largest customer, Diamond Multimedia. Thus, after trading as high as $20 per share in late 1995, S3's stock price stagnated at between $10-$14 per share in the Spring and Summer of 1996. The defendants wanted to inflate S3's stock price to increase the value of their S3 stockholdings, and to enable them to reap millions of dollars in gross proceeds by selling hundreds of thousands of shares of S3 stock at artificially inflated prices and so that S3 could complete a $100 million subordinated convertible note offering. To boost S3's stock substantially, defendants knew they had to convince the investment community that S3's revenues and earnings per share would grow at a rapid rate over succeeding quarters and years. The defendants hoped this would result in investors valuing S3's stock as a "growth stock," creating a high price-earnings multiple for the stock, thus dramatically increasing its price. However, defendants also realized during the Class Period that, unbeknownst to the investment community, the Company's principal customer, Diamond Multimedia, was sharply curtailing its level of business with the Company and every indication was that the revenues the Company could reasonably expect to derive from this key customer would decline sharply. Defendants were also aware, but did not adequately disclose to the investment community before April 1997, that the Company was facing extraordinary pressure in the pricing of its products to a far greater degree than was being disclosed to investors. Defendants further realized that, as a result of these two critical, but undisclosed facts, the Company's public statements prior to April 1997, concerning its relations with its key customers, including Diamond Multimedia, were false and misleading. The Company and its insiders were further aware that due to its difficulties with Diamond Multimedia, coupled with the substantial downward pressure the Company was facing in the pricing of its products, it was impossible for the Company to sustain earnings growth (or even stability) for succeeding financial reporting periods, as they directly and through unwitting securities analysts were conditioning the market to expect and which formed the basis for the Company's high stock price.
29. However, defendants also realized that if, as the law required, they accurately reported their financial results and if they disclosed the whole truth about the declining level of business the Company was doing with its largest single customer, and if they disclosed the details of what they actually knew about the extraordinary downward pressure they were facing in the pricing of their products, the investment community would have sold off the Company's stock because the continued sequential revenue and earnings growth which was the linchpin of the stock's price was impossible to sustain under the circumstances. Therefore, rather than fully and adequately disclose the whole truth as they were required to do, defendants withheld the truth and embarked upon a further scheme to conceal the Company's prospects and weakening financial condition by concealing these adverse facts and by falsifying S3's financial results.
30. On July 15, 1996, S3 issued a press release announcing that its ViRGE 3D accelerator had been selected for the Compaq Presario line of home PC's:
"The 3D market is clearly here in volume in 1996 -- and S3s ViRGE 2D/3D accelerator is the driving force," said Gary Johnson, senior vice president of Graphics Business Units. "Leading computer manufacturers such as Compaq are choosing S3s ViRGE technology, and as a result, we believe that S3 is well-positioned to be the leading supplier of 3D accelerators into the volume PC marketplace in 1996."
31. On July 18, 1996, S3 reported its results for the second quarter ended June 30, 1996:
S3 Incorporated (NASDAQ: SIII) today reported net revenues for the second quarter of 1996 increased 47% to $103.8 million, compared to $70.6 million for the second quarter of 1995. Net income for the quarter increased 10% to $8.8 million, or $0.18 per share, compared to net income for the same quarter last year of $8.0 million, or $0.17 per share. Common and equivalent shares outstanding for the second quarter 1996 were 50.1 million, compared to 46.1 million shares in the second quarter 1995. Net revenues for the first six months of 1996 increased 67% to $213.9 million, compared to $128.0 million for the first six months of 1995. Net income for the first six months of 1996 increased 50% to $21.1 million, or $0.42 per share, compared to net income of $14.1 million or $0.32 per share in the first six months of 1995.
32. After reporting its results for the second quarter, S3 management (Holdt, Johnson and Hervey) spoke with analysts regarding the Company's results and its future prospects. S3's management represented to the analysts that:
33. On July 23, 1996, PaineWebber issued a report authored by J.J. Lazlo estimating 1997 revenue of $640,000 and earnings per share of $1.36. The report, which rated S3 a "buy," also stated:
The shares are rated buy because the Company has emerged as the leading supplier of high-performance, integrated graphics, controller chips for the mainstream PC market. S3 should benefit from the normal second half seasonal demand rebounding PC's and from the success of its new products including ViRGE. The Company will introduce other new products in the second half that will pave the way for additional revenue growth through 1997.
34. On July 25, 1996, S3 announced it had added HP to its list of manufacturers incorporating its ViRGE 3D accelerators:
S3 (R) Incorporated (Nasdaq: SIII), the World's largest supplier of graphics accelerators, announced today that its ViRGE (TM) 3D accelerators are powering the newest models of HP's Pavilion line of home multimedia PCs. Matching the performance of S3s 3D acceleration with the strength of Intel's high-end Pentium processors, the new HP Pavilion PCs deliver innovation and performance to the home PC market. With this announcement HP joins S3s list of more than 25 system, add-in card and OEM motherboard manufacturers that have adopted S3s ViRGE technology and more than 70 software developers currently designing ViRGE-based titles. TD "Delivering the industry's highest-performing 2D, 3D and video solution available in volume today, S3s ViRGE technology has rapidly become the most widely accepted 3D solution for the mainstream PC market," said Ramesh Singh, senior director, Home Business Unit. "We believe that S3 is well-positioned to be the leading supplier of 3D accelerators into the volume PC marketplace in 1996 and beyond."
(Emphasis added.)
35. On August 19, 1996 S3 announced that AST was incorporating S3's ViRGE 3D accelerators into its Advantage! PC's:
"Adding AST to our list of customers means we are supplying more than half of the top ten PC manufacturers with our leading edge ViRGE 3D technology," said Ramesh Singh, senior director, Home Business Unit, S3 Incorporated. "The list of system and add-in-board suppliers implementing ViRGE continues to grow and we believe that this list, combined with S3s recent announcement that it has shipped over one million units of ViRGE, establishes S3s position as the leading supplier of 3D solutions." "3D technology has become a mainstream requirement for desktop computer users," said Terry Baker, director of marketing, Worldwide Consumer Products, AST Computer. "Implementing S3s ViRGE accelerator will allow us to deliver leading 3D technology at a mainstream price point while also providing the software content consumers demand."
36. On September 18, 1996, S3 announced the sale of $103.5 million in Convertible Subordinated Notes.
37. On October 16, 1996, S3 issued a press release reporting the Company's financial results for the quarter ending September 30, 1996. In this press release, defendants boasted of S3's "growing list" of customers, and identified Diamond Multimedia as one of those customers. The press release also emphasized the continued sequential growth the Company had experienced, stating that "[b]ased on revenue growth over the past five years, S3 revenue grew 9.627% in that time period, earning the distinction as the fourth fastest growing technology company in Silicon Valley." The press release continued that "[w]hen S3 announced that it had shipped more than 1 million units of its ViRGE 3D accelerators earlier this quarter, the company emerged as the market leader of 3D graphics chips." The press release further reported that revenues for the quarter increased 41% to a record $119.4 million, compared with reported revenues of $84.8 million for the third quarter of 1995. The press release also boasted that net income for the quarter increased 19% to $11.8 million, or $0.23 per share, compared with reported net income of $9.9 million, or $.20 per share, for the quarter ended September 30, 1995. The Company's net revenues for the third quarter of 1996 were said to have increased by 15% from reported second quarter 1996 revenue of $103.8 million. In this press release, defendant Johnson referred to S3 as a "market leader" and is quoted as stating:
Our third quarter results reflect the continued demand for 2D graphics and the industry-wide acceptance of S3's 3D multimedia solutions. S3's product mix has been right on target to meet market requirements. As we enter the last quarter of fiscal 1996, S3, as an industry leader, will continue to concentrate on developing and delivering new and innovative platform solutions to address the 1997 PC architecture.
38. On October 17, 1996, based on information communicated to it by defendants, Hambrecht & Quist issued an extremely upbeat and bullish research report which commented upon the financial results released by the Company the previous day. This research report, which reiterated a "buy" rating on S3's stock, emphasized the sequential revenue growth for the third quarter, sequential quarterly growth for each quarter of 1997, that "S3's business environment has strengthened with backlog increasing, inventory being replenished in the channels and demand significantly strong as they exited the quarter," and that "[w]e believe the future looks very promising as the company begins to roll out its new mobil graphics Aurora chip and new communication products. This diversification allows S3 to grow faster than the industry rate." The research report attributed the Company's reported success, in part, upon the reported "slight increase in average selling prices for the company's products."
39. Robertson Stephens & Co. issued a research report of similarly bullish import on October 17, 1997 which expressly stated that it was prepared on the basis of "guidance" provided by the Company. This report reiterated a "buy" rating on S3's stock, boasted of "stronger than expected business across the board," stated that "S3 appears to be steam rolling . . . with the momentum now swinging upwards," and spoke of "the strong fundamentals in S3's business," and "[t]he appeal of the company's product line centers around its leading position with respect to price performance in each center of the industry." The report also projected continued "double digit sequential revenue growth" and "strong gross margin expansion" based expressly on information provided by the Company. The research report attributed this rosy outlook to indications provided by the Company concerning the "resurgence in demand," "strong outlook," the "disproportionate level of interest [in S3] as it remains the best positioned with respect to its product offerings and as a result continues to gain market share." The report attributed "[t]he strength in the gross margin outlook" to, among other things, "[a]n incrementally firmer pricing environment on more mature products," and "[a] favorable mix shift towards higher priced 3D products."
40. The report further stated that "[w]e are raising our revenue and gross margin outlook for the Company in Q4 and in FY 97," and that "we believe S3 is positioned to gain market share and grow rapidly," that "the company is among the best positioned to benefit as the industry transitions through a period of consolidation among second tier players while still highly capable of leading in many of the emerging areas of the industry," and that "S3 remains among the best positioned to deal with a more normal pricing environment as the industry copes with the specter of more industry-wide capacity available in 1996, after the capacity constrained situation of 1995."
41. On October 28, 1996, S3 issued another bullish press release which touted the advantages S3 enjoyed over its competitors. Indeed, defendant Johnson is quoted in this press release as boasting that "S3 has experienced much success with its first ViRGE part, which has out shipped its nearest competitor by 3:1." The press release also highlighted S3's relations with "industry leaders" such as Diamond Multimedia.
42. On November 19, 1996, S3 issued a press release reporting on its participation in the annual Comdex computer trading show. This was a very upbeat and bullish press release, in which defendant Johnson is quoted as stating, "[i]t's very apparent, looking at the number of S3-based products being demonstrated at Comdex, that S3 continues to deliver solutions that meet the rapidly evolving needs of today's PC users." The press release also described the uses to which S3's customers were putting the Company's products. Among the customers mentioned as utilizing and being based upon S3's ViRGE family of 3D accelerators was Diamond Multimedia's Stealth 3D 2000 and Stealth 3D 3000 products.
43. On November 26, 1996, Lehman Brothers issued a research report, based on information communicated to it by defendants, which stated that "S3 shares were off yesterday due to concern about increasing competition. We believe that S3 can maintain its dominant position in the graphics accelerator market as well as increase its share of the silicon content in a PC with its new audio product." The report further stated that "S3 has a very strong position in the graphics accelerator market. Its technology, product road map, manufacturing, marketing and customer relationships provide difficult barriers for would be competitors." Further, the report stated that "[o]ur one-year price target on the shares is $26 per share. We do not believe that this stock sell off is warranted and see this as a great opportunity to buy the stock." The release concluded that "[w]e believe S3 shares are undervalued at the current levels and we recommend buying the shares."
44. In a similar vein, on December 3, 1996, Hambrecht & Quist issued a research report concerning S3 based on information communicated to it by defendants. This research report boasted that "S3 is experiencing stronger sales of its graphic accelerators than previously anticipated, and that now that October and November are complete we feel more confident S3 should achieve quarterly sequential growth at the upper range of their guidance of 10% plus or minus 2%." The research report not only commented positively upon S3's reported operating results, but also upon the Company's future prospects. In that regard, the research report commented that the following quarter's "bookings are substantially strong for what most people anticipated would be a weaker quarter of PC sales. S3 is experiencing quite the opposite as visibility is better now than it was this time last quarter." The research report continued:
Sequentially, revenue growth could reach a similar increase in the first quarter as modeled in the December quarter of 10%-12% growth. The strong PC corporate upgrade cycle is fueling strong demand for S3's 2D graphics accelerator led by Trio 64V+ which is the mainstream 2D graphics chip offering 2D graphics and video for the corporate desktop PC. We feel S3 will continue to expand market share in '97 due to its early lead in the 3D graphics market and also to its outstanding value offered by the 2D graphics chip family.
45. The research report also boasted of S3's "strong complete product family" which, according to the report "should offer excellent 3D graphics performance in time for the strong '97 Christmas selling season and position S3 as a sustainable leader in 3D graphics." The research report also commented glowingly about S3's prospects in a competitive market:
We believe S3 is well positioned to sustain its lead in the 3D market in the face of expected new entrants; at the same time, S3 can expand its presence in the strong 2D corporate desktop market which seems to be receiving less industry-wide graphics R&D resources these days, but is a much bigger market than the consumer area.
Hambrecht & Quist concluded the report by raising its earnings estimates for fiscal 1997.
46. A December 3, 1996 research report issued by Cowen & Co. summarized: "Weakness overdone. Momentum has increased but stock has underperformed. Demand remains very strong. . . . See no real competitive threats."
47. On December 9, 1996, PaineWebber issued a research report which reported on a recent "visit with company management," where it "learned that orders have remained strong through November," that "[s]ales of the company's current 2D product . . . have been stronger than expected as S3 has taken advantage of solid demand from the corporate desktop sector while its competitors have been focusing on catching S3's leadership position in 3-D," that "S3's manufacturing prowess has enabled the company to weather the seasonal price declines," and that "[t]he company is the current market leader in integrated graphics and video processors which are used in most leading PCs and has a demonstrated track record of hitting the market at the right time and right price points."
48. On January 3, 1997, Lehman Brothers issued a research report which stated that "[r]ecently, S3's share have traded off -- at a time when the fundamentals are, in our view, rock solid." The report also specifically stated:
[W]e do not believe that the pricing pressure and inventory situation will be nearly as bad as early 1996, since there are no companies with excess inventories of older 3-D products that can affect pricing . . . . In the 2-D market, volume has been very robust. S3 and other participants are reporting stable pricing and don't expect a severe pricing turndown in early 1997.
(Emphasis added.)
49. On January 3, 1997, Hambrecht & Quist issued a research report which stated that it "[e]xpect[ed] the company to slightly exceed [its] recently revised FY Q4 estimate of $.27. Company continues to experience strong demand for its 3D and 2D graphics accelerator products with Q1 1997 orders looking solid."
50. On January 13, 1997, S3 issued a press release in which it boasted that it had shipped more than five million ViRGE 3D graphics and video accelerators during 1996. The press release further boasted that "award winning add-in card manufacturers" such as Diamond Multimedia were included among the Company's "impressive customer best," along with other "industry leaders" which reportedly had "adopted" S3's ViRGE 3D family. Defendant Johnson is quoted in this press release as stating:
As we closed 1996, we are pleased that we continue to be in the number one market share position in providing 2D and 3D multimedia technology to our customers. . . . As we enter 1997, we plan to bring to market graphics, video and audio products that will enhance the MMX platform bringing the optimum computing experience to end users.
51. On January 20, 1997, S3 issued a press release reporting the Company's operating results for the quarter and year ended December 31, 1996. This press release reported that net revenues for the quarter increased 28% to $132 million, compared with $103.5 million for the fourth quarter of 1995. Reported net income for the quarter increased 35% to $15.5 million, compared with net income for the same quarter during the prior year of $11.5 million, or $0.23 per share.
The 1996 fiscal year end results marks (sic) the sixth consecutive year of top line growth for the company as reported net revenues for 1996 increased 47% to $465.5 million, compared to $316.3 million for 1995. Net income for 1996 was $48.4 million, or $.94 per share, compared to reported net income of $35.4 million, or $0.75 per share for 1995.
52. Defendant Johnson is quoted in this press release as stating:
This has been an exceptional year of growth and leadership for S3. In the coming year our customers will be offered a breadth of products that will bring differentiation to their expanding product lines. S3's graphic, video and audio acceleration offerings together with Intel's MMX technology, can bring the optimum multimedia experience to the PC consumer. In addition, we once again intend to pioneer new technologies to heighten the computing experience through the combination of consumer electronics and the PC platform.
53. Yet another research report, issued on January 21, 1997 by Robertson Stephens & Co., and based on information communicated to it by defendants, highlighted the Company's "robust" fourth quarter, with revenues "driven by stronger than expected 2D sales and continued strong 3D demand." The report stated: "The gross margin was boosted by a reportedly controlled pricing environment," and "Management's outlook for the March quarter is for 3% to 7% sequential revenue growth. Further gross margin expansion is also indicated while expenses are expected to remain in check." The research report also noted the "relatively stable pricing environment referred to by the company," and the "generally higher selling prices" of the Company's products.
54. On January 21, 1997, Lehman Brothers issued a research report commenting upon S3's reported financial results for the fourth quarter and year ended December 31, 1996. This report, which specifically stated that the Company had provided "guidance" with respect thereto, assigned S3 an "outperform" rating, and stated that "[t]he company provided positive guidance on the call for sequential growth. The Company's position as a leader in 3-D should allow it to sell its solutions in this seasonally slower quarter." The Lehman Brothers report also boasted of S3's "product mix," "cost reduction efforts," "improved margins," "strong revenue growth" and S3's strength in the 3D market as well as continuing strong demand for high performance 2-D graphic accelerators. The Lehman Brothers report also spoke of "an increase in gross margin guidance" that had been provided by the Company, and stated that "the company is comfortable with this new guidance because of the long term benefits of its move to lower cost manufacturing, lower cost designs of the new products, and a sustainable shift to better margin product mix."
55. Another research report, issued on January 21, 1997 by Donaldson, Lufkin & Jenrette ("DLJ"), and based on information communicated by defendants, indicated that although new private companies "could" provide competition in the 2-D/3-D graphics/video PC market, the Company was facing "significant order momentum." The DLJ report also stated that "[r]esults were driven by accelerated acceptance of S3 3-D ViRGE chips and unexpectedly brisk sales of the more mature 64-Bit 2-D Trio product," and that "[t]he company appears to be well-positioned with its ViRGE 3-D graphics video solutions for the mainstream PC market at affordable price points."
56. On January 27, 1997, an article appearing on the Dow Jones International Newswire reported a number of bullish and positive statements about the Company's earnings, prospects and competitive position made to it by certain defendants. For example, the article reported that "U.S. computer peripherals market leader S3, Inc. expects its graphics chip to be the biggest contributor to its forecast sales of $600 for the year to end December 1997." Defendant Johnson is quoted in the article as projecting "that S3 expects to maintain its worldwide market share of about 50%, achieving a sales rise of 29% this year." Defendant Johnson is also quoted in the article as downplaying the impact of competitive pressures upon S3, stating that "[a]lthough prices of graphics chips are expected to fall by about 20-30% a year, S3 has a lead because it is now selling its third-generation chips while its competitors are still struggling with older technologies."
57. In a similar vein, a February 14, 1997 research report issued by Hambrecht & Quist issued a "buy" recommendation for S3 stock and reported, based on information communicated to it by defendants, that S3 was "experiencing strong 2D and 3D graphic chip sales as the corporate upgrade cycle continues." The report represented:
Quarter on track toward upper range of guidance; after speaking with management it appears that the March quarter continues to be strong as S3 experiences strong demand and the price environment is stabilizing. The Company's initial guidance for the March quarter was 5% +/- 2% sequential growth, and we now believe the company is on target to reach the higher end of that range, which is already in line with our model."
The release further represented:
Under the current strong business conditions, we remain confident that S3 will achieve our estimate of 7% growth for the quarter. In addition, based on the increased possibility of significant design wins in new market areas (notebooks and audio), as well as a new desktop design win, we believe that company is in an extremely strong competitive position and is hitting on all cylinders. As S3 was the only company among its competitors to give positive sequential growth guidance for the March quarter, we are confident that the company will be able to deliver on this guidance and expect the stock to rise as more visibility on the quarter increases.
58. A February 18, 1997 research report issued by PaineWebber represented, based on information communicated to it by defendants, that sales at S3
[h]ave been much stronger than expected as S3 has taken advantage of solid demand from the corporate desktop sector while its competitors have been focused on catching S3's leadership position in 3D. The gross margin improved to 41% (39% in the prior quarter and 40% last year) owing to the manufacturing efficiency gained from the shift from .035 micron to .25 micron process technology, and a return to a more normal pricing environment as well as higher ASPs from the increased shipments of ViRGE.
59. On March 4, 1997, S3 announced that defendant Hervey, S3's Senior Vice President of Finance and CFO, had resigned from the Company and that defendant Lindly, the Company's corporate controller, would assume the role of acting CFO until the Company named a replacement for Hervey.
60. A March 5, 1997 research report issued by Robertson, Stephens & Co. stated that "[t]he company has reiterated its guidance for the March quarter, calling for 3% to 7% sequential revenue growth with gross margins in the 42% range." The report also stated:
The company is among the best positioned to deal with a more normal pricing environment as the industry copes with the specter of more industry-wide capacity available in 1996, after the capacity constrained situation of 1995. S3 aggressively moved to 0.5 micron manufacturing by mid-1996 and started migration to 0.35 micron manufacturing in earnest during Q4:F96--well ahead of most, if not all competitors. Such moves allow the company to deal from a leadership cost position among its peers.
61. On March 6, 1997, S3 issued a press release announcing that the Company had achieved an industry-first ISO 9001 quality certification for the design and marketing of its multimedia accelerators. In commenting on the certification, defendant Johnson represented:
S3 has continued to lead the market, capturing nearly 40% of the desktop graphics market share and over 50% of the rapidly growing 3D market share. As the first major graphics acceleration company to achieve ISO 9001 certification, S3 is once again showing its market leadership by clearly differentiating itself from the competition.
62. A March 6, 1997 report issued by PaineWebber, which expressly stated in its body that it was based on
[a] recent conversation with management [and which] confirmed that the first quarter is on track to meet our estimates of $139 million in revenues and $.30 per share. Last year the company reported revenues of $110 million and EPS of $.25. Sales of the ViRGE 3D graphics accelerator chip continues to be strong, and 2D accelerator demand is also robust due to strength in the business systems market as the business sector has no significant need for 3D yet. The company will derive approximately $60 million from ViRGE sales and $70 million from Trio64 sales during Q1. S3 remains the undisputed market leader in 2D and 3D graphics chips.
The stock has come under some pressure in recent weeks for no particular reason. Although there has been modest inside selling and the resignation of CFO George Hervey was unexpected, the fundamentals of the company remain solid. We are not aware of any analysts reducing estimates or downgrading the stock. Moreover, now that the expectations for Auburn have been stretched back into 1998 and no other competitive entrants will appear to have significant volumes ready in time for the Christmas selling season, it would appear that S3's near term competitive position has improved.
The research report concluded: "We reiterate our BUY (1) rating. The stock is quite cheap as it is currently trading at 12X our 1997 EPS estimate of $1.35, and 10x our 1998 EPS forecast of $1.70. Our price target of $34 assumes a historic 20 P/E times our 1998 EPS projection."
63. The stream of positive information continued on March 11, 1997, when S3 issued a press release emphasizing the Company's strong relationship with Diamond Multimedia. Specifically, the press release reported that its "ViRGE/DX multimedia accelerator is shipping this month on Diamond Multimedia's Stealth 3D 2000 Pro." This was touted as "the first add-in card shipment of the ViRGE/DX accelerator which provides a 3X increase in 3D performance, leading edge 2D acceleration and full 30 frames per second video capability." In this press release, defendant Dickinson is quoted as stating:
The ViRGE family exhibits S3's ability to ship quality products that meet market demands, enabling us to capture more than 50 percent of the 1996 consumer 3D accelerator market. . . . S3 and Diamond Multimedia's combined technological leadership should make the Staelth 3d 2000 Pro a valued extension to the award-winning Stealth family of products that has pushed the performance envelope since 1991.
64. However, on April 21, 1997, a research report issued by Cowen & Co. stunned the investment community by revealing: "We are sharply reducing earnings estimates because of the weakening outlook for the June quarter for both revenues and margins." The report further emphasized that the Company's gross margins were "flat sequentially," and that the outlook was "downbeat." Indeed, according to the Company:
Unit sales of graphics components are expected to decline in the June quarter as part of a typical seasonal slowdown. That slowdown, however, will be exacerbated by unusually weak pricing. Management said that average pricing for its graphite products, including Trion and ViRGE components, fell by 10% to 15% late in Q1, a much steeper decline than the company views as 'typical.' As a result, sales are now expected to decline by about 13% sequentially. Margins, obviously, will be influenced as well-we are now estimating 33% GM in Q2. Given the rapid rate of new product development, operating expenses will expand in Q2 putting more pressure on operating results. The impact will be earnings in the range of $.10, a sharp sequential decline.
65. On April 21, 1997, S3 announced that net revenues for the first quarter of 1997 increased 26% to $138.2 million, compared to $110.1 million for the first quarter of 1996. Net income for the quarter increased 29% to $15.9 million, or $.30 per share compared to net income for the same quarter in the prior year of $12.3 million or $.25 per share. Commenting on these results, Johnson stated:
We exit the first quarter of 1997 with a great sense of satisfaction with the accomplishments we have achieved with leadership products and technology. Historically on a cyclical basis the second quarter is the weakest in our industry and the market is currently experiencing substantial pricing pressure. Consequently we anticipate our operating results will be lower than those in the first quarter. However we look with cautious optimism to the second half of 1997 as the market continues to respond to our innovative products such as the newly introduced ViRGE/MX mobile and ViRGE/GX2 home 2D/3D offerings.
66. Securities professionals were understandably concerned by these revelations, having previously been guided by defendants to expect continued, sequential revenue and income growth. Indeed, in an April 22, 1997 research report, Oppenheimer & Co. revealed it found S3 management's guidance "disturbing," and that "[w]e would avoid S3's shares" pending further illumination from the Company, and urged the market to seriously consider aggressively purchasing shares of one of S3's primary competitors, 3DLabs. On April 24, 1997, PaineWebber also downgraded S3 due to a "difficult pricing environment that will reduce earnings power."
67. On or about May 7, 1997, S3 issued its report on Form 10-Q for the quarter ended March 31, 1997, signed by defendant Lindly.
68. On June 26, 1997, S3 announced that, based on its most recent preliminary assessment of the Company's second quarter financial status, "second quarter revenues are expected to be $108 million plus or minus 2%." According to Johnson:
Significant pricing pressures leaving the first quarter coupled with softer seasonal demand lead S3 management to enter the second quarter with `cautious optimism.' While pricing pressure is still a consideration, issues at some of S3's major customers have compounded the situation. Given the earlier cautionary outlook for the quarter, we had to hoped to see the return of a more normal pricing environment as the quarter progressed. However, the pricing climate still remains competitive, both in 2D and 3D graphics, and some of our customers are working through competitive issues. Our graphics products continue to secure design wins for the second half of the year and we are optimistic about the progress our mobile and audio products are making and expect to see double digit growth in the next quarter.
69. On July 21, 1997, these forebodings were confirmed when S3 reported that revenues for the second fiscal quarter of 1997 were $108.9 million, down dramatically from the reported revenues of $132 for the first quarter of 1997. Reported net income for the quarter was $2.3 million, off $.05 per share, down dramatically from reported net income of $15.5 million for the first quarter of 1997. Commenting on these results, Johnson stated:
As anticipated, financial results in the second quarter were hampered by pricing pressure and a seasonal slowdown. Moving into the second half of the year, however, S3 expects to return to double digit growth in quarterly revenues. This growth will be fueled by the continuing ramp of our product in the corporate desktop and mobile market, along with further acceptance of our audio offerings. In addition, pricing appears to be returning to a more normalized environment and we expect to see the additional rise in demand during the quarter.
(Emphasis added.) The Company also reported that for the second quarter of 1997, accounts receivables had increased approximately 38% between December 31, 1996 and June 30, 1997. Furthermore, in a conference call with analysts later that same day, the Company reported that days sales outstanding ("DSOs") in the second quarter rose to 87 from 63 in the previous quarter.
70. On or about July 30, 1997, S3 issued its report on Form 10-Q for the quarter ended June 30, 1997, signed by defendant Lindly, acting CFO of the Company.
71. On August 26, 1997, S3 announced that Walter D. Amaral had joined the Company as Senior Vice President of Finance and CFO.
72. On October 20, 1997, S3 issued a press release announcing that net revenues for the third fiscal quarter of 1997 were $120.4 million compared to $119.4 million for the third quarter of 1996. Net income for the quarter was $3.9 million or $.08 per share compared to net income for the same quarter of the prior year of $11.8 million or $.23 per share. Despite the Company's previously announced "cautious optimism" for the second half of 1997, Johnson revealed:
We believe however that our financial performance will be impacted by price competition in the short term at least until our next generation of high performance products move into volume production. These products are currently under development and are expected to be launched in the first half of 1998. The company currently anticipates that both revenue and earnings in the fourth quarter will be below levels achieved in the third quarter of 1997. S3 has always taken a long term approach to its business. We intend to continue our research and development in order to bring to market the compelling products required for tomorrow's computing solutions.
73. Finally, on November 3, 1997, in a shocking disclosure, S3 reported that it had uncovered "material errors in the timing of its recognition of sales to several international distributors." Due to these accounting irregularities, the Company expected to restate its revenues downward for prior quarters by a cumulative total of between $40 million and $70 million. Further, the Company expected resulting net income for these quarters to be cumulatively decreased by $.14 to $.29 per share. In connection with this disclosure, Johnson revealed that "according to S3's accounting policies which S3 does not believe have been fully adhered to, the company defers recognition of revenue on all sales to distributors until the product is actually sold by each distributor to its end customers." Johnson further disclosed:
We are currently implementing measures to ensure that this type of error will not recur. Inventory at our distributors' locations today consist largely of S3's 2D and 3D mainstream products. Based on the rates at which this existing inventory is expected to move through the channel, we expect the bulk of the revenue from that existing inventory to be recognized during the fourth quarter of 1997. Any new shipments into the channel during and subsequent to the fourth quarter of 1997 will be recognized during the quarter in which those products move off the distributors' shelves in line with company policy.
According to Walt Amaral, S3's recently appointed CFO and Senior Vice President of Finance, the Company would "initiate[] tighter monitoring and control procedures to ensure strict compliance with our revenue recognition policy moving forward." Moreover, the Company announced that the Audit Committee of the Company's Board of Directors was in the process of reviewing the revenue recognition matters raised by the Company's necessitated restatement.
74. On November 3, 1997, S3 stock traded as high as $9-1/8 per share. After the close of the market, S3 reported it would be restating its results from prior quarters. These startling revelations caused S3 stock to collapse further to as low as $7 on November 4, 1997, on extraordinarily huge volume of over 5.2 million shares -- a 70% decline from its Class Period high.
75. In order to inflate the price of S3's stock defendants caused the Company to falsely report its results beginning at least as early as 1996 and continuing at least as late as the first quarter of 1997 through improper revenue recognition on shipments to distributors thereby materially overstating its revenue, net income and earnings per share. Ultimately, S3 could not continue to accelerate revenue recognition by shipping excess product to distributors as the distributors were over-inventoried, thus hurting second and third quarter 1997 results and S3 belatedly admitted that its prior results had been misstated and announced that it would restate its results for prior quarters to eliminate up to $70 million in previously reported revenues.
76. S3 included its first quarter 1997 results in its Form 10-Q filed with the SEC and included the following representation:
Basis of Presentation:
The condensed consolidated financial statements have been prepared by S3 Incorporated, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission and include the accounts of S3 Incorporated and its wholly-owned subsidiaries ("S3" or collectively the "Company"). Certain information and footnote disclosures, normally included in financial statements prepared in accordance with generally accepted accounting principles, have been condensed or omitted pursuant to such rules and regulations. In the opinion of the Company, the financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial position at March 31, 1997 and December 31, 1996, and the operating results and cash flows for the [periods] ended March 31, 1997 and 1996. These financial statements and notes should be read in conjunction with the Company's audited financial statements and notes thereto for the year ended December 31, 1996, included in the Company's Form 10-K filed with the Securities and Exchange Commission.
(Emphasis added.) S3's 1996 financial statements were also represented to have been presented in accordance with GAAP.
77. These representations were false and misleading when made, as S3's financial statements for 1996 and at least the first quarter of 1997 were not a fair presentation of S3's results and were presented in violation of GAAP and SEC rules.
78. GAAP are those principles recognized by the accounting profession as the conventions, rules and procedures necessary to define accepted accounting practice at a particular time. SEC Regulation S-X (17 C.F.R. §210.4-01(a)(1)) states that financial statements filed with the SEC which are not prepared in compliance with GAAP are presumed to be misleading and inaccurate, despite footnote or other disclosure. Regulation S-X requires that interim financial statements must also comply with GAAP, with the exception that interim financial statements need not include disclosure which would be duplicative of disclosures accompanying annual financial statements. (17 C.F.R. §210.10-01(a)).
79. The Individual Defendants caused S3 to falsify its reported financial results through its improper revenue recognition on S3's shipments of graphics and video accelerators and software to its distributors while granting its distributors' rights to return unsold product to the distributors. Pursuant to GAAP, and S3's stated revenue recognition method, S3 should have deferred recognition of revenue on such shipments until such product was sold through by the distributors, but did not in order to inflate its reported results.
80. GAAP, as set forth in FASB Statement of Accounting Standard ("SFAS") No. 48, Revenue Recognition When Right of Return Exists, prohibits the recognition of revenue when the right of return exists unless certain conditions are met. SFAS No. 48 applies to transactions "in which a product may be returned, whether as a matter of contract or as a matter of existing practice." SFAS No. 48, ¶3. SFAS No. 48, ¶¶6-7 states:
6. If an enterprise sells its product but gives the buyer the right to return the product, revenue from the sales transaction shall be recognized at time of sale only if all of the following conditions are met:
a. The seller's price to the buyer is substantially fixed or determinable at the date of sale.
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.
* * *
7. If sales revenue is recognized because the conditions of paragraph 6 are met, any costs or losses that may be expected in connection with any returns shall be accrued in accordance with FASB Statement No. 5, Accounting for Contingencies. Sales revenue and cost of sales reported in the income statement shall be reduced to reflect estimated returns.
81. GAAP, as set forth in AICPA Statement of Position ("SOP") 91-1, Software Revenue Recognition, requires the following conditions be met with regard to the recognition of revenue on software licenses: (1) delivery has occurred; (2) other remaining vendor obligations are no longer significant; and (3) collectibility is probable.
82. Moreover, SOP 91-1.36 states:
If, after delivery, there is significant uncertainty about customer acceptance of the software, license revenue should not be recognized until the uncertainty becomes insignificant.
83. Despite granting its distributors the right to return unsold merchandise, S3 recognized the revenue contrary to GAAP and to its stated revenue recognition method to inflate its reported results, and mislead the public as to the Company's success and prospects.
84. In SEC filings both before and during the Class Period, S3 represented the following with regard to its revenue recognition method:
Revenue Recognition
Revenue from product sales direct to customers is generally recognized upon shipment. Accruals for estimated sales returns and allowance are recorded at the time of sale. Certain of the Company's sales are made to distributors under agreements allowing price protection and rights of return on unsold products by the distributors. The Company defers recognition of revenue on such sales until the product is sold by the distributors.
85. Unfortunately for investors, however, the Company's results for at least as early as 1996 and at least as late as the first quarter of 1997, and the representations concerning them, were false.
86. Due to these accounting improprieties, the Company presented its financial results and statements in a manner which violated GAAP, including the following fundamental accounting principles:
(a) The principle that interim financial reporting should be based upon the same accounting principles and practices used to prepare annual financial statements (APB No. 28, ¶10);
(b) The principle that financial reporting should provide information that is useful to present and potential investors and creditors and other users in making rational investment, credit and similar decisions was violated (FASB Statement of Concepts No. 1, ¶34);
(c) The principle that financial reporting should provide information about the economic resources of an enterprise, the claims to those resources, and effects of transactions, events and circumstances that change resources and claims to those resources was violated (FASB Statement of Concepts No. 1, ¶40);
(d) The principle that financial reporting should provide information about how management of an enterprise has discharged its stewardship responsibility to owners (stockholders) for the use of enterprise resources entrusted to it was violated. To the extent that management offers securities of the enterprise to the public, it voluntarily accepts wider responsibilities for accountability to prospective investors and to the public in general (FASB Statement of Concepts No. 1, ¶50);
(e) The principle that financial reporting should provide information about an enterprise's financial performance during a period was violated. Investors and creditors often use information about the past to help in assessing the prospects of an enterprise. Thus, although investment and credit decisions reflect investors' expectations about future enterprise performance, those expectations are commonly based at least partly on evaluations of past enterprise performance (FASB Statement of Concepts No. 1, ¶42);
(f) The principle that financial reporting should be reliable in that it represents what it purports to represent was violated. That information should be reliable as well as relevant is a notion that is central to accounting (FASB Statement of Concepts No. 2, ¶¶58-59);
(g) The principle of completeness, which means that nothing is left out of the information that may be necessary to insure that it validly represents underlying events and conditions was violated (FASB Statement of Concepts No. 2, ¶79); and
(h) The principle that conservatism be used as a prudent reaction to uncertainty to try to ensure that uncertainties and risks inherent in business situations are adequately considered was violated. The best way to avoid injury to investors is to try to ensure that what is reported represents what it purports to represent (FASB Statement of Concepts No. 2, ¶¶95, 97).
87. Further, the undisclosed adverse information concealed by defendants during the Class Period is the type of information which, because of SEC regulations, regulations of the national stock exchanges and customary business practice, is expected by investors and securities analysts to be disclosed and is known by corporate officials and their legal and financial advisors to be the type of information which is expected to be and must be disclosed.
88. S3's insiders issued false and misleading statements about S3's business for the purpose of selling their S3 securities at inflated prices, selling more than 638,000 shares for proceeds of over $10.8 million, profiting handsomely from the artificial inflation in S3's stock price their fraud and illegal conduct had created. Notwithstanding their access to non-public information as a result of their positions with the Company, the S3 Individual Defendants sold the following amounts of S3 shares at artificially inflated prices throughout the Class Period while in possession of material non-public information:
DIOSDADO P. BANATAO
Co-Founder of the Company and current Chairman of the Company's Board of Directors since 1992; President and CEO from S3's inception in 1989 until January of 1992
Date of Sale Number of Shares Sale Price Gross Proceeds August 26, 1996 1,701 $14.63 $ 24,886 August 26, 1996 10,000 14.63 146,300 August 26, 1996 3,000 14.63 43,890 August 26, 1996 50,000 14.63 731,500 August 28, 1996 10,000 15.00 150,000 November 26, 1996 10,000 16.38 163,800 November 27, 1996 5,000 16.50 82,500 November 27, 1996 5,000 16.38 81,900 January 27, 1997 10,000 17.00 170,000 January 28, 1997 10,000 17.13 171,300 January 28, 1997 20,000 17.00 340,000 January 28, 1997 19,667 16.88 331,979 Totals: 154,368 $2,438,055
NEAL MARGULIS
Senior Vice-President of Research and Technology
Date of Sale Shares Sold Sale Price Gross Proceeds August 21, 1996 4,000 $13.63 $ 54,520 August 22, 1996 4,000 14.00 56,000 August 23, 1996 3,000 14.50 43,500 August 26, 1996 2,000 14.63 29,260 August 28, 1996 5,000 15.00 75,000 August 28, 1996 3,000 14.88 44,640 August 30, 1996 2,000 14.63 29,260 November 7, 1996 5,000 20.38 101,900 November 7, 1996 5,000 20.00 100,000 November 8, 1996 2,000 21.13 42,260 November 26, 1996 4,000 16.63 66,520 November 27, 1996 4,000 16.50 66,000 December 2, 1996 5,000 17.00 85,000 February 7, 1997 4,000 17.00 68,000 February 13, 1997 4,000 18.00 72,000 February 19, 1997 6,000 18.50 111,000 February 20, 1997 2,000 19.00 38,000 February 27, 1997 4,000 18.00 72,000 February 27, 1997 2,900 18.00 52,200 February 28, 1997 10,000 17.38 173,800 Totals: 80,900 $1,380,860
JACKSON K.C. HU
Senior Vice-President, Vice-President/Engineering and Operations
Date of Sale Shares Sold Sale Price Gross Proceeds August 26, 1996 2,000 $14.63 $ 29,260 August 27, 1996 4,000 14.88 59,520 November 5, 1996 5,000 19.00 95,000 November 6, 1996 5,000 19.63 98,150 November 7, 1996 5,000 20.50 102,500 November 27, 1996 2,500 16.50 41,250 November 27, 1996 2,500 16.63 41,575 February 13, 1997 1,000 18.13 18,130 February 13, 1997 2,000 17.88 35,760 February 13, 1997 7,000 18.00 126,000 February 19, 1997 5,000 18.75 93,750 February 19, 1997 5,000 18.25 91,250 February 20, 1997 5,000 19.00 95,000 February 21, 1997 5,000 18.25 91,250 February 24, 1997 6,000 18.13 108,780 February 24, 1997 4,000 18.00 72,000 February 25, 1997 2,000 18.25 36,500 February 25, 1997 5,000 18.13 90,650 February 27, 1997 2,000 18.00 36,000 May 28, 1997 4,000 12.77 51,080 May 28, 1997 1,000 13.02 13,020 May 28, 1997 1,000 13.00 13,000 May 28, 1997 2,000 12.25 24,500 May 29, 1997 2,000 12.50 25,000 Totals: 85,000 $1,488,925
GEORGE A. HERVEY
Chief Financial Officer, Vice-President of Finance
Date of Sale Shares Sold Sales Price Gross Proceeds August 28, 1996 3,000 $14.88 $ 44,640 August 29, 1996 2,148 14.75 31,683 August 29, 1996 1,352 14.75 19,942 August 30, 1996 1,000 14.63 14,630 August 30, 1996 1,050 14.63 15,362 August 30, 1996 450 14.63 6,584 November 7, 1996 1,000 21.00 21,000 November 7, 1996 2,000 20.25 40,500 November 12, 1996 5,000 20.88 104,400 November 12, 1996 2,000 20.88 41,760 November 21, 1996 3,000 17.88 53,640 November 25, 1996 2,000 17.88 35,760 November 29, 1996 455 16.88 7,680 November 29, 1996 3,272 17.00 55,624 Totals: 27,727 $ 493,205
JOHN C. COLLIGAN
Member of the Board of Directors
Date of Sale Shares Sold Sales Price Gross Proceeds November 26, 1996 10,000 $16.69 $166,900 February 6, 1997 6,864 17.04 116,963 February 6, 1997 28,136 17.04 479,437 Total: 45,000 $ 763,300
HARRY L. DICKINSON
Senior Vice-President of Sales
Date of Sale Shares Sold Sale Price Gross Proceeds August 29, 1996 5,000 $15.00 $ 75,000 November 13, 1996 5,000 20.13 100,650 February 18, 1997 16,502 18.00 297,036 February 18, 1997 8,870 18.00 159,660 February 18, 1997 3,730 18.00 67,140 Total: 39,102 $ 699,486
TERRY N. HOLDT
Vice-Chairman of the Board of Directors, formerly President and Chief Executive Officer
Date of Sale Shares Sold Sale Price Gross Proceeds November 12, 1996 5,000 $20.75 $103,750 November 12, 1996 10,000 21.00 210,000 Total: 15,000 $313,750
CARMELO J. SANTORO
Member of the Board of Directors
Date of Sale Shares Sold Sale Price Gross Proceeds November 8, 1996 20,000 $21.13 $422,600
RONALD T. YARA
Co-Founder of the Company, Senior Vice-President of Strategic Marketing
Date of Sale Shares Sold Sale Price Gross Proceeds August 28, 1996 80,000 $15.13 $1,210,400 August 28, 1996 20,000 15.00 300,000 November 7, 1996 20,000 19.88 397,600 Total: 120,000 $1,908,000
ROBERT P. LEE
Member of the Board of Directors
Date of Sale Shares Sold Sale Price Gross Proceeds November 8, 1996 5,000 $21.00 $ 105,000
GARY JOHNSON
President, Chief Executive Officer and Chairman of the Board of Directors
Date of Sale Shares Sold Sale Price Gross Proceeds August 27, 1996 5,000 $14.88 $ 74,400 August 27, 1996 2,000 15.00 30,000 August 28, 1996 3,000 15.00 45,000 October 24, 1996 5,000 19.25 96,250 November 6, 1996 5,000 19.75 98,750 November 7, 1996 5,000 21.00 105,000 November 7, 1996 5,000 20.25 101,250 February 13, 1997 8,000 17.88 143,040 February 14, 1997 8,000 18.50 148,000 Totals: 46,000 $ 841,690 Grand Total: 638,097 $10,854,871
89. Plaintiffs incorporate by reference ¶¶1-88.
90. Each of the defendants: (a) knew or had access to the material, adverse non-public information about S3's financial results and then existing business conditions, which was not disclosed; and (b) participated in drafting, reviewing and/or approving the misleading statements, releases, reports and other public representations of and about S3.
91. During the Class Period, with knowledge of or reckless disregard for the truth, defendants disseminated or approved the false statements specified above, which were misleading in that they contained misrepresentations and failed to disclose material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading.
92. Defendants have violated §10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder in that they: (a) employed devices, schemes and artifices to defraud; (b) made untrue statements of material facts or omitted to state material facts necessary in order to make statements made, in light of the circumstances under which they were made, not misleading; or (c) engaged in acts, practices and a course of business that operated as a fraud or deceit upon the purchasers of S3 stock during the Class Period.
93. Plaintiffs and the Class have suffered damage in that, in reliance on the integrity of the market, they paid artificially inflated prices for S3 stock. Plaintiffs and the Class would not have purchased S3 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.
94. Plaintiffs incorporate by reference ¶¶1-93.
95. Johnson, Banatao, Hervey and Lindly acted as controlling persons of S3 within the meaning of §20 of the Exchange Act. By reason of their respective positions as President and CEO, Chairman of the Board, CFO and acting CFO, Johnson, Banatao, Hervey and Lindly had the power and authority to cause S3 to engage in the wrongful conduct complained of herein. S3 controlled each of the Individual Defendants and all of its employees.
96. By reason of such wrongful conduct, S3, Johnson, Banatao, Hervey and Lindly are liable pursuant to §20(a) of the Exchange Act. As a direct and proximate result of these defendants' wrongful conduct, plaintiffs and the other members of the Class suffered damages in connection with their purchases of S3 stock during the Class Period.
97. Plaintiffs bring this action as a class action pursuant to Federal Rules of Civil Procedure 23(a) and 23(b)(3) on behalf of all persons who purchased the stock of S3 during the Class Period (the "Class"), except defendants, members of their immediate families and any entity in which a defendant has a controlling interest.
98. The members of the Class are so numerous that joinder of all members is impracticable. S3 has more than 49 million shares of stock outstanding. During the Class Period, millions of shares of S3 stock were purchased by thousands of persons who were damaged thereby.
99. Plaintiffs' claims are typical of the claims of the Class because plaintiffs and the Class members sustained damages from defendants' wrongful conduct.
100. Plaintiffs will adequately protect the interests of the Class. Plaintiffs have retained counsel who are experienced and competent in class action securities litigation. Plaintiffs have no interests which conflict with those of the Class.
101. A class action is superior to other available methods for the fair and efficient adjudication of this controversy.
102. Common questions of law and fact predominate over questions which affect only individual members. Among the questions of law and fact common to the Class are:
(a) Whether the federal securities laws were violated by defendants' acts;
(b) Whether S3's statements during the Class Period misrepresented and/or omitted material facts;
(c) Whether defendants pursued the fraudulent scheme and course of business complained of;
(d) Whether defendants acted intentionally or recklessly;
(e) Whether the market price of S3's stock was artificially inflated due to the activities complained of; and
(f) The extent and measure of damage sustained by the Class.
103. Because the PSLRA, §21D(c) of the Exchange Act [§78u-4(c)], requires complaints to be pleaded in conformance with Federal Rule of Civil Procedure 11, plaintiffs have alleged the foregoing based upon the investigation of their counsel, which included a review of S3's SEC filings, securities analysts' reports and advisories about the Company, press releases issued by the Company, media reports about the Company, private investigations, interviews and discussions with consultants, and, pursuant to Rule 11(b)(3), believe that after reasonable opportunity for discovery, substantial evidentiary support will likely exist for the allegations set forth herein.
WHEREFORE, plaintiffs pray for judgment as follows:
1. Declaring this action to be a proper class action on behalf of the Class defined herein;
2. Awarding plaintiffs and the members of the Class compensatory damages;
3. Awarding plaintiffs and the members of the Class pre-judgment and post-judgment interest, as well as reasonable attorneys' fees, expert witness fees and other costs;
4. Awarding extraordinary, equitable and/or injunctive relief as permitted by law and/or equity; and
5. Awarding such other relief as this Court may deem just and proper.
Plaintiffs demand a trial by jury.
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DATED: November 5, 1997 |
MILBERG WEISS BERSHAD ______________________________ 600 West Broadway, Suite 1800 SPECTOR & ROSEMAN, P.C. SPECTOR & ROSEMAN, P.C. WOLF POPPER LLP BERNSTEIN LIEBHARD & LIFSHITZ KAUFMAN, MALCHMAN, KIRBY Attorneys for Plaintiffs |
COMPLNTS\S3.CPT
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