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Stanford
University Law School - Securities Class Action Clearinghouse
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MILBERG WEISS BERSHAD
HYNES & LERACH LLP
WILLIAM S. LERACH (68581)
ALAN SCHULMAN (128661)
MARK SOLOMON (151949)
600 West Broadway, Suite 1800
San Diego, CA 92101
Telephone: 619/231-1058
- and -
KIMBERLY C. EPSTEIN (169012)
222 Kearny Street, 10th Floor
San Francisco, CA 94108
Telephone: 415/288-4545
WEISS & YOURMAN
JOSEPH H. WEISS
JACK I. ZWICK
551 Fifth Avenue
Suite 1600
New York, NY 10176
Telephone: 212/682-3025
- and -
KEVIN J. YOURMAN (147159) BERNSTEIN LIEBHARD & LIFSHITZ
10940 Wilshire Blvd. MEL E. LIFSHITZ
24th Floor 274 Madison Avenue
Los Angeles, CA 90024 New York, NY 10016
Telephone: 310/208-2800 Telephone: 212/779-1414
Attorneys for Plaintiffs
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF CALIFORNIA
SAN JOSE DIVISION
BROOKE GRAUBART, MORRIS RUBIN and ) No. C-97-20265
SOLOMON EISENBERG, On Behalf of )
Themselves and All Others Similarly ) CLASS ACTION
Situated, )
)
Plaintiffs, ) COMPLAINT FOR VIOLATION
) OF THE FEDERAL
vs. ) SECURITIES LAWS
)
INSIGNIA SOLUTIONS PLC, INSIGNIA )
SOLUTIONS INC., ROBERT P. LEE, ROGER D. )
FRIEDBERGER, PAUL R. GRIFFITHS, JOHN R. )
JOHNSTON, RICHARD M. NOLING, NICHOLAS )
A. SAMUEL and DAVID L. GIBBS, )
)
Defendants. ) Plaintiffs Demand A
_______________________________________ ) Trial By Jury
INTRODUCTION AND OVERVIEW
1. This is a securities class action on behalf of all
purchasers of the American Depository Shares ("ADS") of Insignia
Solutions plc ("Insignia" or the "Company") between November 14,
1995 and February 26, 1997 (the "Class Period"), seeking to remedy
violations of the federal securities laws committed by the Company
and certain of its insiders.
2. In November 1995, as part of the scheme complained of
herein, the defendants collectively sold 3.6 million ADSs to the
public ("IPO" or the "Offering") at an artificially inflated price
of $12 per share, including some $20 million of ADSs sold by
Insignia insiders. Thereafter, defendants artificially inflated
the price of Insignia's ADSs by making false and misleading
statements to securities analysts and others and by falsifying the
company's financial statements for the first three fiscal quarters
of 1996. During that time, the defendants made it their practice
to improperly recognize revenue from contingent sales in order to
meet their misleading forecasts.
3. Defendants misleadingly represented in the Registration
Statement and Prospectus disseminated in November 1995 in
connection with the offering and via additional statements directed
at the investing public thereafter that Insignia: (i) competed
favorably in the cross-platform compatibility software market;
(ii) had an effective direct sales force; (iii) had successfully
introduced new computer software products (SoftWindows 2.0) for
both the UNIX and Apple/Macintosh operating systems; (iv) had a
very strong third quarter of 1995 with revenues jumping to $16.3
million; (v) anticipated strong growth in the fourth quarter of
COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS - 1 -
1995 with revenues increasing to $18 million; (vi) projected
revenues of $80-81 million for 1996; and (vii) projected 1996
earnings per share of $0.80.
4. In truth, however, defendants knew that the Company was
unable to make the sales necessary to meet their forecasts. In
early January 1996 they experienced, first-hand, the market's
reaction to the news that their forecasts for Insignia's first
quarter as a public company were woefully inaccurate. On
January 2, 1996, barely six weeks after the offering, the Company
stunned the market by revealing that revenues had shrunk rather
than grown in the quarter ended December 31, 1995 because of
disappointing sales. The disclosure caused Insignia's ADS price to
collapse to $5-3/4 per share from $13-1/4 per share; a 56% one-day
drop and a 74% drop from its December high of $22 per share.
5. After the disastrous announcement of January 2, 1996,
defendants knew that the price of Insignia's ADSs had to be
supported by the issuance of even more positive projections and the
concomitant reporting of revenues meeting those projections.
Unable to do so if Insignia's revenues were accurately projected
and reported, defendants continued their deceitful course of
conduct by misrepresenting the true status of the Company's sales,
earnings and assets. Accordingly, through the use of securities
analysts, Insignia told the market to expect 1996 revenues of $14.5
million, $16.6 million, $17.7 million and $19.3 million for the
first, second, third and fourth quarters of 1996, respectively, and
earnings per share of $0.06, $0.12, $0.14 $0.23 for the first,
second, third and fourth quarters of 1996, respectively. During
these periods, Insignia continued to offer incentives and absolute
COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS - 2 -
rights of return to its customers including Merisel, TechData and
Ingram Micro. Insignia's improper revenue recognition caused the
Company to materially misstate its earnings for the first three
fiscal quarters of 1996 and record them in violation of Generally
Accepted Accounting Principles ("GAAP"). Defendants' false
financial statements were contained in the 1996 quarterly Form
10-Q's filed by Insignia with the Securities Exchange Commission
("SEC"). By improperly recognizing revenue for Insignia's
contingent sales, defendants materially inflated its revenue,
earnings and assets -- resulting in the continued artificial
inflation of the Company's share price.
6. Finally, on February 27, 1997, the Company announced
that, due to accounting "irregularities" involving certain sales
contracts and reseller inventories that resulted in improper
recognition of revenue in violation of GAAP, the first and second
quarter 1996 revenues and net income must be restated. The Company
expressly admitted to "irregularities in the reporting of sales
contracts and reseller inventories." As a result, Insignia's
reported profit of $749,000 for the first quarter of 1996 was
restated as a loss of $225,000. The previous reported earnings per
share of $0.06 was revised to a loss of $0.02 per share.
Insignia's reported profit of $1.5 million for the second quarter
of 1996 was slashed to a mere $569, 000. The previous reported
earnings per share of $0.11 was revised to just $0.04. Insignia's
previous reported revenues of $39.5 million for the nine months
ended September 30, 1996, was reduced to $37.1 million. As
reported by UBS Securities, "[a]side from weak fundamentals, the
company must now deal with additional operational problems and
COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS - 3 -
another blow to management's credibility." Upon these revelations,
the price of Insignia's ADSs dropped from $3-7/8 to $2-1/2 per
share.
7. Defendants' conduct represents a flagrant abuse of the
federal securities laws which were designed to protect investors
and is an example of how sophisticated corporate insiders and
financiers can mislead the investing public. Utilizing the
offering, the defendants (other than Richard M. Noling who joined
the company subsequently) sold over $43 million of Insignia
securities to the public at grossly inflated prices when they knew
Insignia's business was in trouble, performing poorly, and
declining instead of growing and prospering as the defendants
represented in connection with the Offering. As a result, and to
stave off the disclosure of the truth, all of the defendants then
continued the fraudulent scheme throughout the Class Period, the
truth being revealed. Only after a former employee sued the
Company for being unfairly singled out as a "scapegoat" blamed for
the defendants' unlawful revenue recognition practices and,
thereafter, the Company's ultimate admission that, owing to
improper sales reporting, it was forced to restate its revenues for
the first and second quarters of 1996.
8. As set forth more fully below, defendants' positive
statements during the Class Period about Insignia's business,
products, competitive position and prospects as well as the
Company's financial statements for the first and second quarters of
1996 were false and misleading when made and failed to disclose
material adverse information known to or recklessly disregarded by
defendants.
COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS - 4 -
9. The charts below demonstrate the price action of
Insignia's ADSs during the Class Period and the collapse of
Insignia's ADS price as the previously concealed facts about
Insignia's business emerged, and the performance of Insignia's ADSs
compared to indices of similar companies, which shows that the
action of Insignia's ADSs was due largely to company-specific
events and not market forces:
Insignia Solutions PLC
November 14, 1995 - February 28, 1997
Daily Stock Prices
COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS - 5 -
Insignia Solutions PLC
vs. H&Q Software Products Index and S&P Software Index
November 14, 1995 - February 28, 1997
JURISDICTION AND VENUE
10. Jurisdiction exists pursuant to §27 of the Securities
Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. §78aa, and 28
U.S.C. §1331. The claims asserted arise under §§10(B) and 20(a) of
the Exchange Act, 15 U.S.C. §§78j(b) and 78t(a), and Rule 10b-5,
promulgated thereunder.
11. (a) Venue is proper in this District pursuant to §27 of
the Exchange Act and 28 U.S.C. §1391(b). Many of the acts giving
rise to the violations complained of occurred in this District; and
(b) Assignment of this action to the San Jose Division
is appropriate as a substantial part of the events or omissions
identified herein occurred in Santa Clara County.
12. Defendants used the instrumentalities of interstate
commerce, the U.S. mails and the facilities of the national
securities markets.
COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS - 6 -
CLASS ACTION ALLEGATIONS
13. Plaintiffs bring this action as a class action pursuant
to Federal Rule of Civil Procedure 23(a) and (b)(3) on behalf of
all persons who purchased or otherwise acquired Insignia ADSs from
November 14, 1995 through February 26, 1997 (the "Class"),
excluding the defendants, members of their families and any entity
in which a defendant has an interest.
14. The members of the Class are so numerous that joinder of
all members is impracticable. The disposition of their claims in
a class action will provide substantial benefits to the parties and
the Court. During the Class Period, Insignia had more than 11
million ADSs outstanding, owned by at least hundreds of
shareholders.
15. The questions of law and fact are common to the members
of the Class and predominate over questions which may affect
individual Class members, including the following:
(a) Whether defendants omitted and/or misrepresented
material facts;
(b) Whether defendants knew or recklessly disregarded
the fact that the statements made by them were false and
misleading;
(c) Whether the price of Insignia ADSs was artificially
inflated during the Class Period;
(d) The extent of damage sustained by Class members and
the appropriate measure of damages; and
(e) Whether the federal securities laws were violated by
defendants.
COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS - 7 -
16. Plaintiffs' claims are typical of those of the Class
because plaintiffs and the Class sustained damages from defendants'
wrongful conduct uniformly directed at the Class.
17. Plaintiffs will adequately protect the interests of the
Class. They have retained counsel who are experienced in class
action securities litigation. Plaintiffs have no interests which
conflict with those of the Class.
18. A class action is superior to other available methods for
the fair and efficient adjudication of this controversy.
19. The prosecution of separate actions by individual Class
members would create a risk of inconsistent and varying
adjudications.
THE PARTIES
20. (a) Plaintiff Brooke Graubart purchased 1,000 Insignia
ADSs on May 10, 1996, 1,000 Insignia ADSs on May 14, 1996, 2,000
Insignia ADSs on May 29, 1996, 1,000 Insignia ADSs on June 11,
1996, and 3,000 Insignia ADSs on June 17, 1996, and was damaged
thereby.
(b) Plaintiff Morris Rubin purchased 1,000 Insignia ADSs
on May 30, 1996, and was damaged thereby.
(c) Plaintiff Solomon Eisenberg purchased 3,600 Insignia
ADSs on January 3, 1996, and 2,000 Insignia ADSs on May 28, 1996,
and was damaged thereby.
21. (a) Defendant Insignia Solutions plc, is an English
public limited corporation, which operates through its subsidiary,
defendant Insignia solutions Inc., a Delaware Corporation, both of
which have their principal executive offices and place of business
in Mountain View, California (collectively "Insignia") - Insignia's
COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS - 8 -
ADSs are traded in an efficient market on the NASDAQ National
Market System.
(b) Insignia develops, markets and supports cross-
platform compatibility software solutions. SoftWindows, Insignia's
principal product line, supposedly enables Macintosh and UNIX
platforms to run substantially all MicroSoft Windows ("Windows")
and MS-DOS ("DOS") applications by emulating the underlying
hardware. Insignia began shipping SoftWindows 2.0, the latest
version of its principal product line, for Apple's Power Macintosh
in August 1995 and for UNIX in October 1995.
(c) According to Insignia, although MicroSoft's Windows
had emerged as the leading computer operating system, Macintosh and
UNIX platforms continued to succeed in various markets, such as
desktop publishing and engineering applications, and many computer
users working in a Macintosh or UNIX environment chose to use some
of the thousands of applications available for the Windows
operating system, some of which did not have Macintosh or UNIX
versions available. Also, according to Insignia, incompatibility
among various platforms often makes it difficult for users to run
their applications of choice, creates workflow inefficiencies among
users and complicates the roles of corporate MIS managers
responsible for integrating and supporting organizations' computing
resources across multiple platforms. Insignia claimed to solve
these incompatibility problems by providing cross-platform
compatibility software with high levels of performance.
22. (a) Defendant Robert P. Lee ("Lee") is President, Chief
Executive Officer and Chairman of the Board of Directors of
Insignia. Because of defendant Lee's position, he knew or
COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS - 9 -
recklessly disregarded the adverse non-public information about
Insignia's business, finances, products, markets and present and
future business prospects via access to internal corporate
documents (including the Company's operating plans, budgets and
forecasts and reports of actual operations compared thereto),
conversations and connections with other corporate officers and
employees, attendance at management and Board of Directors'
meetings and committees thereof and via reports and other
information provided to him in connection therewith. Lee signed
Insignia's l0-K for the fiscal year ended December 31, 1995.
(b) Defendant Roger D. Friedberger ("Friedberger") was,
until March 1996, the Chief Financial Officer and Senior Vice
President-Finance and Operations of Insignia and Secretary of
Insignia. Because of defendant Friedberger's position, he knew or
recklessly disregarded the adverse non-public information about
Insignia's business, finances, products, markets and present and
future business prospects via access to internal corporate
documents (including the Company's operating plans, budgets and
forecasts and reports of actual operations compared thereto),
conversations and connections with other corporate officers and
employees, attendance at management and Board of Directors'
meetings and committees thereof and via reports and other
information provided to him in connection therewith. Friedberger
signed Insignia's 10-K for the fiscal year ended December 31, 1995.
(c) Defendant Richard M. Noling ("Noling") replaced
Friedberger as Senior Vice President and Chief Financial Officer in
March 1996. Noling also was appointed head of the accounting,
finance, MIS, legal, human resources, facilities and manufacturing
COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS - 10 -
departments. Because of defendant Noling's position, he knew or
recklessly disregarded the adverse non-public information about
Insignia's business, finances, products, markets and present and
future business prospects via access to internal corporate
documents (including the Company's operating plans, budgets and
forecasts and reports of actual operations compared thereto),
conversations and connections with other corporate officers and
employees, attendance at management and Board of Directors'
meetings and committees thereof and via reports and other
information provided to him in connection therewith. Noling signed
Insignia's l0-Qs for the quarters ended March 31, 1996, June 30,
1996 and September 30, 1996. Noling is a recidivist stock
manipulator and violator of the securities laws. Immediately
before joining Insignia, as Chief Financial Officer of Gupta
Corporation, he had participated in a scheme to defraud the
investors of Gupta by engaging in a multitude of improper revenue
recognition practices, thereby artificially inflating the stock
price of that company. The Gupta securities litigation, In re
Gupta Corporation Sec. Litig., Master File No. 94-1517-FMS(EAI)
(N.D. Cal.), in which Noling was a named defendant, settled in
1996, after Noling had joined Insignia, for $14.75 million.
Insignia's shareholder were never informed of these facts.
(d) Defendant Paul R. Griffiths ("Griffiths") is a
director of Insignia. Because of defendant Griffiths' position
with Insignia, he knew or recklessly disregarded the adverse non-
public information about Insignia's business, finances, products,
markets and present and future business prospects via access to
internal corporate documents (including the Company's operating
COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS - 11 -
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.
Griffiths is a member of the Board of Directors of RIT Capital
Partners plc ("RITCP"), a principal shareholder in Insignia. RITCP
with Griffiths sold 753,484 shares in the offering for $12 per ADS
or $9 million. Griffiths signed Insignia's 10-K for the fiscal
year ended December 31, 1995.
(e) Defendant John R. Johnston ("Johnston") is a
director of Insignia. Because of defendant Johnston's position
with Insignia, he knew or recklessly disregarded the adverse non-
public information about Insignia's business, finances, products,
markets and present and future business prospects via access to
internal corporate documents (including the Company's operating
plans, budgets and forecasts and reports of actual operations
compared thereto), conversations and connections with other
corporate officers and employees, attendance at management and
Board of Directors' meetings and committees thereof and via reports
and other information provided to him in connection therewith. A
venture capital firm headed by Johnston sold 144,525 shares in the
offering for $12 per ADS or $1.7 million. Johnston signed
Insignia's 10-K for the fiscal year ended December 31, 1995.
(f) Defendant Nicholas A. Samuel ("Samuel") is a
director of Insignia. Because of defendant Samuel's position with
Insignia, he knew or recklessly disregarded the adverse non-public
information about Insignia's business, finances, products, markets
COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS - 12 -
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. A
venture capital firm headed by Samuel sold 67,994 shares in the
offering for $12 per ADS or $815,928. Samuel signed Insignia's 10-
X for the fiscal year ended December 31, 1995.
(g) Defendant David L. Gibbs ("Gibbs") was Insignia's
Vice President of North American Macintosh Product Sales. In early
1996, Gibbs was promoted to Vice President Channel Sales. Because
of defendant Gibbs' position with the Company, he knew or
recklessly disregarded the adverse non-public information about
Insignia's business, finances, products, markets and present and
future business prospects via access to internal corporate
documents (including the Company's operating plans, budgets and
forecasts and reports of actual operations compared thereto),
conversations and connections with other corporate officers and
employees, attendance at management meetings and via reports and
other information provided to him in connection therewith.
(h) The defendants identified in ¶22(a)-(g) are referred
to herein as the Individual Defendants. Each of the Individual
Defendants, other than Noling and Gibbs, participated in the
preparation of and/or signed the November 14, 1995 Registration
Statement pursuant to which the Insignia ADSs were sold to the
public and which contained the false and misleading statements
COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS - 13 -
listed in ¶¶30-35. Each of the Individual Defendants participated
in the continuing scheme throughout the Class Period to issue false
projections and false financial statements and drafting and/or
reviewing the Company's press releases and public filings and by
concealing the truth about Insignia's true prospects and its
improper accounting practices.
MOTIVE AND OPPORTUNITY
23. Each Individual Defendant had the opportunity to commit
and participate in the fraud described herein. The Individual
Defendants were officers and/or directors of Insignia and they
controlled its press releases, corporate reports, SEC filings,
preparation of its financial statements and its communications with
analysts. Thus, they controlled the public dissemination of, and
could and did falsify, the information about Insignia's business
and products that reached the public and impacted the price of its
shares.
24. Each of the Individual Defendants also had the motive to
commit and participate in the fraud described herein. Defendants
wanted to and did cover up the problems with and deterioration in
Insignia's business to make it appear that Insignia's business was
succeeding and would achieve the earnings per share they had
forecasted during the Class Period, so that its share price would
trade at artificially inflated levels, high enough so that insiders
could sell off significant amounts of their Insignia shares.
25. Defendants, other than defendants Noling and Gibbs, were
motivated to take Insignia public so that they could recover a
portion of their investment in Insignia, escalate the book value of
the shares they retained and create a market in which to sell their
COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS - 14 -
shares. Those defendants were aware by at least mid-1995 that they
were in a difficult and threatened position. They were "locked in"
to Insignia, then a private corporation, without any way to realize
on their investment because there was no trading market in which to
sell their shares. They knew also that Insignia's growth prospects
were severely diminished, especially due to the introduction of
Windows 95 and the growing popularity of the Windows 95 operating
system which, in essence, made Insignia a "dead end" company,
limited to selling software products to the shrinking Apple/
Macintosh and UNIX markets.
26. To make the Offering a success, it was necessary to make
it look as though Insignia would continue to grow and be profitable
and that Insignia had new and successful products and would achieve
strong revenue and profit growth, even though it was selling only
to the Apple/Macintosh and UNIX markets. Consequently, defendants
were motivated to take and, in fact, took the opportunity presented
by virtue of the power of their positions with the Company to
arrange for the dissemination of false statements and false
financial statements, portraying the Company as successful and
growing in revenues and profits. The trend in Insignia's reported
revenues is shown by the following graph:
COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS - 15 -
Insignia Solutions plc
Quarterly Revenues
27. Aware that Insignia's business prospects actually were
declining by late 1995, defendants took full advantage of the third
quarter "growth." Insignia embarked on the Offering, portraying
the Company as being in a "growth" mode even though it had no need
to raise capital for any business reason, such as expansion or new
product development. The true purpose of the Offering was to raise
tens of millions of dollars from the investing public to benefit
Insignia's controlling shareholders and also enable them to dump
their Insignia ADSs.
28. In the Offering, several defendants took that opportunity
to sell significant amounts of their ADS holdings. Griffiths sold
over 750,000 shares for over $9 million in proceeds. Johnston sold
nearly 150,000 shares for $1.7 million in proceeds. Samuel sold
nearly 70,000 shares for proceeds of over $815,000.
COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS - 16 -
29. After Insignia disclosed that its fourth quarter 1995
results would not meet the expectations defendants had fostered
(but that revenues would decline) and after the price of Insignia's
ADSs collapsed in response to the disclosure, defendants were
motivated to avoid the complete collapse of Insignia's ADSs.
Accordingly, defendants knowingly misrepresented Insignia's true
deteriorating conditions and rendered false forecasts to the
investing public. At the same time, Insignia recognized revenue
derived from transactions with customers who were granted secret
discount and liberal return privileges for which the Company
deliberately failed to reserve. As a result, defendants issued
false financial statements for the first three fiscal quarters of
1996 by overstating the revenue that could properly be recognized
while, at the same time, the defendants issued forecasts that
depended upon their improper "channel-stuffing" practices.
DEFENDANTS' FALSE AND MISLEADING STATEMENTS
30. In the few weeks prior to the Offering, the underwriters
and Insignia's top executives, including defendant Lee, conducted
Roadshow meetings and individual investor presentations in several
U.S. cities, including San Francisco, Boston and New York. At the
Roadshow meetings, very favorable information about Insignia was
distributed, with the purpose and effect of overcoming and
neutralizing the "risks" supposedly disclosed in the Prospectus and
thereby further stimulating demand for Insignia ADSs to be sold in
the Offering. During the Roadshow meetings, the participants told
potential investors:
(a) That Insignia successfully operated in a niche
market which provided it tremendous opportunities for growth in
COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS - 17 -
selling cross-platform software to users of the Apple/Macintosh and
UNIX computer operating systems, which growth would be achieved
notwithstanding MicroSoft's 1995 successful introduction of the
Windows 95 operating system and MicroSoft's growing dominance of
computer operating systems;
(b) That Insignia's SoftWindows 2.O for the Apple/
Macintosh introduced in August 1995 had been a tremendous success
with strong distributor acceptance and retail sell-through;
(c) That while Insignia's third quarter 1995 results
reflected revenues from initial "channel-fill" of SoftWindows 2.0
for Apple/Macintosh, the amounts of this product shipped were
normal and customary for new product introduction and Insignia had
not engaged in "channel stuffing" to inflate its revenues for the
third quarter;
(d) That Insignia's SoftWindows 2.0 UNIX had been
successfully introduced in October 1995 and had received an
enthusiastic response from customers;
(e) That Insignia's strong third quarter 1995 results
indicated a trend of revenue growth which would continue in the
fourth quarter of 1995, resulting in fourth quarter 1995 revenues
of approximately $18 million, yielding fourth quarter 1995 earnings
per share of $0.17-$O.18; and
(f) That Insignia forecasted strong revenue and profit
growth throughout 1996, with revenues of approximately $80-$82
million and earnings per share of $0.81-$O.82.
31. The information disseminated during the Roadshow meetings
was part of the total mix of information affecting Insignia's ADS
COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS - 18 -
Offering on November 14, 1995 and the price of its ADSs on
November 14, 1995, when they started trading.
32. Insignia's November 14, 1995 Prospectus reported its
third quarter revenues and earnings per share had increased very
substantially and thus reinforced the impression that Insignia's
revenues and profitability were growing. The Prospectus stated:
The Company's total revenues have grown every year
since inception, except in 1993 when the market and the
Company's products were in transition from DOS to
Windows. Also in 1993, the market was in transition to
RISC-based platforms sufficiently powerful to support the
Company's Windows products. The Company's revenue growth
has resulted from the increasing number of platforms
available to run the Company's products, the improving
performance of the underlying hardware and the additional
functionality offered in new versions of the Company's
products.
The Prospectus also showed that Insignia's revenues and earnings
per share had jumped substantially in the third quarter of 1995,
indicating that Insignia's revenue growth had resumed after three
flat quarters:
QUARTER ENDED
==========================================================================
| 3/31 6/30 9/30 12/31 3/23 6/30 9/30 |
| 1994 1994 1994 1994 1995 1995 1995 |
|--------------------------------------------------------------------------|
| Revenues: |
| License |
| revenue $6,411 $7,866 $9,305 $12,211 $11,096 $10,834 $15,308 |
| Service |
| revenue $ 715 $ 905 $ 922 $ 1,026 $ 1,347 $ 1,509 $ 1,000 |
|--------------------------------------------------------------------------|
| Total |
| Revenue $7,126 $8,771 $10,227 $13,237 $12,443 $12,343 $16,308 |
|--------------------------------------------------------------------------|
| Net $ 490 $1,069 $1,271 $1,925 $1,484 $1,161 $1,982 |
| Income |
|--------------------------------------------------------------------------|
| Net $ 0.04 $ 0.09 $ 0.11 $ 0.17 $ 0.13 $ 0.10 $ 0.17 |
| income |
| per share |
==========================================================================
33. The large increase in Insignia's revenues during the
third quarter, based on the introduction of SoftWindows 2.0 for the
Apple/Macintosh market combined with defendants' representations
COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS - 19 -
made in connection with the Offering, made it appear that
Insignia's fourth quarter results would also show a large increase
due to the introduction in October 1995 of SoftWindows 2.0 for
UNIX. The Prospectus reaffirmed this impression by stating:
Generally, sales volumes of new products increase in the
first few months following introduction of a new product
due to the purchase of upgrades by existing users and the
purchase of initial inventory by distribution channels.
Moreover, Insignia represented during the Roadshow that sales of
its UNIX-related products were normally higher in its fourth
quarter, reinforcing this message in the Prospectus, which stated:
Although historically the Company's business has not been
subject to seasonal variations, the Company's sales of
products for UNIX workstations have been higher in the
fourth quarter as a result of customer purchase cycles
related to expiration of budgetary authorizations.
These statements, indicating that sales of Insignia's SoftWindows
2.0 UNIX product would be strong in Insignia's fourth quarter of
1995, were extremely important to investors. Insignia's investors
knew that Insignia had clearer foresight into future sales of UNIX-
related products as compared to Apple/Macintosh-related product
sales because a majority of the Company's direct sales were for
UNIX products, whereas Apple/Macintosh product sales were fulfilled
through the distributor/retail sales channel.
34. With respect to the sales and marketing of Insignia's
products, the Prospectus stated:
Sales and Marketing
Insignia has built a complementary multiple channel
distribution system. . . . Insignia's multiple channels
in the United States include OEM bundling arrangements,
distributors, retailers, direct sales and telesales.
* * *
COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS - 20 -
Distributor and Retail Sales
Insignia has established a worldwide two-tier
distribution channel. Its distributor relationships
include Ingram Micro and Merisel in North America,
Hewlett-Packard Germany in Europe and Mitsubishi in
Japan. . . .
. . . Currently, substantially all of the Company's
sales through the distributor channel are Macintosh
products. . . . [A] portion of the Company's net
revenues in the third quarter of 1995 comprised initial
stocking orders of SoftWindows 2.0 for Power Macintosh.
* * *
Direct Sales
The Company employs a sales force that sells
directly to organizations. The Company's complementary
sales channel model integrates direct sales through OEMs
and distributors. . . . Currently, a majority of the
Company's total revenues from direct sales are UNIX
products.
The Registration Statement and Prospectus warned of no significant
risks concerning Insignia's sales and marketing organization, when
defendants knew that Insignia's direct sales force was ineffective
and ill-trained and was having serious problems in selling the new
SoftWindows 2.0 UNIX product and could not sell Insignia's
SoftWindows 2.0 Apple/Macintosh product effectively either.
35. The Registration Statement and Prospectus were drafted so
that they contained certain generic warnings of possible risks
which concealed the fact that Insignia's business was already
encountering the negative factors the Prospectus warned were only
possible or contingent, including:
Potential Fluctuations In Operating Results
* * *
Due to all of the foregoing factors, it is possible that
in some future quarters the Company's operating results
will be below the expectations of stock market analysts
and investors.
COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS - 21 -
Dependence upon UNIX Workstation Manufacturers and
Continued Demand for UNIX Platforms
. . . The Company's future success will depend on market
acceptance of SoftWindows 2.0 for UNIX, which the Company
began shipping in October 1995.
* * *
The future success of the Company depends in part
upon the demand for the Company's products among users of
UNIX workstations . . . . Any decline in sales of UNIX
workstations would decrease the demand for the Company's
UNIX products and have a material adverse effect on the
Company's business, financial condition and results of
operations.
By the time the Prospectus was disseminated to investors and the
Registration Statement became effective, defendants already knew
that Insignia's SoftWindows 2.0 UNIX product was meeting with poor
success which would hurt Insignia's results in the short term.
36. On December 11-12, 1995, almost immediately after the
expiration of the SEC-mandated quiet period, analysts working for
the underwriters circulated what are known in the underwriting
community as "booster shots" (i.e., "shots" designed to "boost" the
price of a stock) containing identical fourth quarter and full year
1995 revenue projections of $18 million and $59 million,
respectively, and fourth quarter 1995 earnings per share of $0.17,
on behalf of the defendants. Defendants supplied these forecasts
to analysts, knowing they were false, in order to maintain and
further inflate the price at which Insignia's shares were then
trading.
37. On December 11, 1995, based on information supplied by
Insignia executives, including defendant Lee, Andrew Brousseau of
Cowen & Co. ("Cowen") forecast earnings per share of $0.17 for the
fourth quarter of 1995, year-end revenues of $59 million and
COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS - 22 -
earnings per share of $0.59 for 1995 and 1996 earnings per share of
$0.81 on revenues of $80 million; John F. Powers of Robertson
Stephens & Co. forecast 1995 fourth quarter earnings per share of
$0.17 and 1995 year-end revenues of $59.1 million and 1996 earnings
per share, of $0.82 on revenues of $80 million. On December 12,
1995, based on information supplied by Insignia's executives,
including defendant Lee, Michael P. Wallace of UBS Securities
forecast earnings per share of $0.17 for the fourth quarter of
1995, 1995 year-end revenues of $59 million and 1996 earnings per
share of $0.82 on revenues of $81 million.
38. Defendants' forecasts had the desired effect, pushing the
Company's stock to a high of $22 per share on December 4, 1995.
However, defendants knew that sales of its SoftWindows 2.0 product
would likely not meet their forecasts for the fourth quarter of
1995 and beyond. SoftWindows 2.0 UNIX sales were primarily direct
sales as opposed to sales through distributors. Insignia had begun
shipping its new SoftWindows 2.0 UNIX in October 1995 and knew by
mid-November 1995 that sales of this product were underperforming
the defendants' projections. Thus, Insignia did not have to
estimate the "sell-through" and Insignia knew how unsuccessful the
introduction of SoftWindows 2.0 UNIX actually was at the time of
the Offering and on December 11, 1995, when analysts employed by
the underwriters reiterated the glowing representations made by
defendants Lee and Friedberger. As for shipments of SoftWindows
2.0 Apple/Macintosh, Insignia had shipped product into the
distribution channel in amounts so well above that normally shipped
to "fill" the channel with inventory of a new product that
COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS - 23 -
defendants knew it would start seeing returns of such product and
sharply reduced sales.
39. Initially, defendants' scheme was entirely successful.
While the Offering price of Insignia ADSs was $12 per share,
Insignia's ADS price advanced sharply, jumping to $14-3/4 per ADS
on the day of the offering, $20-1/2 per ADS by November 30, 1995 (a
71%-increase in just 12 trading days) and later climbing to its
Class Period high of $22 per ADS in early December 1995. In
addition to the $20+ million pocketed by Insignia insiders,
including the defendants, the infusion of $20+ million of new
capital into Insignia benefitted its controlling shareholders,
instantly increasing the book value of the Insignia shares they
owned by over 100% to $2.67 per share -- a $7.5 million windfall
for these controlling shareholders.
40. After the close of the market on January 2, 1996 -- just
33 trading days after the Offering and without any prior warning or
indication -- Insignia suddenly revealed that its fourth quarter
1995 revenues would decline from third quarter levels of $16.3
million "due primarily to lower North American sales of its
SoftWindows for UNIX products and, to a lesser extent, lower North
American retail sales of its SoftWindows for Power Macintosh
products," and, as a result, instead of earnings per share of $0.17
for the fourth quarter, it would report "approximately break-even
results" for the December quarter. This incredible revelation --
contrary to everything that defendants had earlier represented to
investors to pull off the $43 million offering on November 14, 1995
-- resulted in an instant collapse of Insignia ADSs -- tumbling to
as low as $5-1/4 per ADS on January 3 & 4, 1996 on 5.6 million
COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS - 24 -
shares volume, a 56% two-day collapse, and a 74% drop from
Insignia's $22 per ADS high just 20 trading days earlier.
41. From the beginning of the Class Period through January 2,
1996, defendants (other than Noling who had yet to join Insignia),
knew or should have known a host of adverse facts about Insignia's
business and prospects. These facts were concealed by defendants
and they contradicted the statements and forecasts that had been
disseminated. These known, concealed facts included:
(a) That Insignia's new SoftWindows 2.0 product for the
Apple/Macintosh operating system introduced in August 1995 was not
selling well through Insignia's distribution channel and that sales
of this product were at such low levels that Insignia's revenues
would decline, rather than increase, in the fourth quarter of 1995;
(b) That Insignia knew that its customers for its
SoftWindows 2.0 UNIX product would not be purchasing that product
in sufficient quantities during the fourth quarter of 1995 to meet
its forecasts and projections and that, therefore, it was likely
that there would be a decline in Insignia's revenues in the fourth
quarter;
(c) That Insignia's new SoftWindows 2.0 product for the
UNIX operating system introduced in October 1995 was not selling
well and that sales of this product were at such low levels that
Insignia's revenues would decline, rather than increase, in the
fourth quarter of 1995;
(d) That the introduction of MicroSoft's Windows 95 in
August 1995 had badly damaged Insignia's business because Windows
95 contained a number of new and improved features which provided
functions which operators formerly needed the Apple/Macintosh or
COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS - 25 -
UNIX systems to perform and which had created demand in the past
for Insignia's software emulation program products and thus there
was not any reasonable basis for defendants' forecasts of strong
growth for Insignia;
(e) That Insignia had not created a complementary sales
and marketing product distribution system as it had represented
and, in fact, Insignia's direct sales marketing force was suffering
from significant training deficiencies which interfered with their
ability to sell Insignia's products, especially those designed for
the Apple/Macintosh operating system;
(f) That Insignia's direct sales force was disorganized
and ineffective, suffering from inadequate training, such that
Insignia was having difficulty selling its SoftWindows 2.0
products, and which would prevent Insignia from achieving the
revenues and earnings per share forecast by and for it for the
fourth quarter of 1995, as well as throughout 1996;
(g) That Insignia was having difficulty selling its
products for the UNIX operating system and was encountering
difficulty in closing several large OEM deals for this product
(including a large transaction with Silicon Graphics, Inc.) which
made it virtually certain that Insignia's revenues and earnings per
share would decline sharply in the fourth quarter of 1995 and be
well below the level forecast by and for Insignia during 1996;
(h) That Insignia's new SoftWindows 2.0 product for the
UNIX market was not being well received by customers and, as a
result, sales of that product would be much lower than internally
budgeted or forecasted by Insignia for the fourth quarter of 1995
and during 1996 as well;
COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS - 26 -
(i) That Insignia's direct sales and marketing force was
not adequately trained or informed as to how to sell Insignia's new
SoftWindows 2.0 UNIX product or its SoftWindows 2.0 Apple/Macintosh
product and, as a result, sales of those products were very slow
which would result in Insignia not obtaining the levels of revenues
and earnings per share forecast by and for it during the fourth
quarter of 1995 and during 1996 as well;
(j) That Insignia did not compete favorably with respect
to the important competitive factors identified in the Prospectus;
(k) That Insignia's public offering had been planned and
undertaken to permit Insignia's venture capital investors to bail
out of a poor and losing investment and not for any bona fide or
legitimate business reasons;
(1) That Insignia's Offering price did not fairly
reflect the Company's growth rate, the business potential of the
Company or its present state of development but, rather, was fixed
at an arbitrary and unfairly high level to benefit Insignia and the
selling shareholders;
(m) That as a result of the foregoing, Insignia's
forecasts of strong revenue growth were false, as such growth was
impossible to achieve in light of these undisclosed problems;
(n) That defendants had no basis for their positive
forecasts and projections regarding Insignia's revenues or earnings
growth during 1995 and 1996, which statements were, in fact, false
as they were inconsistent with the above negative factors;
(o) That the forecasts of increased earnings per share
for Insignia in its fourth quarter of 1995 to $0.17-$O.18 were
COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS - 27 -
false, as they were contradicted by the adverse facts as set forth
above and were not genuinely believed by defendants; and
(p) That defendants did not genuinely believe their
forecasts of $0.17-$O.18 earnings per share for the fourth quarter
of 1995 or $0.81-$O.82 earnings per share for 1996, as they were
aware of adverse information which contradicted these forecasts.
42. In connection with their January 2, 1996 disclosures, and
a to conceal the full impact of their fraudulent scheme, defendants
again utilized securities analysts to disseminate false and
misleading information about Insignia's condition and prospects.
Based on information supplied by Insignia's executives, including
defendant Lee, on January 3, 1996 Andrew Brousseau of Cowen
reported the shocking news released the previous day by the
Company, but stated:
Management remains comfortable with existing Street
estimates for 1996, but we are cutting our estimates
. . . by $9MM to $71MM (+27%) [and] . . . we are cutting
our EPS estimate by 26 to 55 (+38%).
On January 29, 1996, based on information provided by Insignia's
executives, including defendant Lee, Andrew Brousseau of Cowen
forecast 1996 revenues of $65 million, with earnings per share for
1996 of $0.55 comprised of $0.06 for the first quarter, $0.12 for
the second, $0.14 for the third and $0.23 for the fourth.
43. However, defendants knew that even these revised
forecasts could not be attained honestly and that to prevent an
immediate and total collapse of Insignia's share price they would
have to continue to "stuff the channel," issue false projections
and disseminate false financial statements. Therefore, continuing
the practice that had begun at least by the time of the Offering,
COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS - 28 -
through the fiscal third quarter of 1996, Insignia's North American
Macintosh sales groups stuffed the Company's distribution channels
with more product than could be absorbed by its customers by
offering special incentives and secret, liberal rights of return.
In a sweeping reorganization, Gibbs, Insignia's head of the
Macintosh sales group who spearheaded the Company's channel-
stuffing efforts, was elevated to the position of Vice President of
Channel Sales for Macintosh and UNIX. On January 22, 1996, it was
reported via PR Newswire:
The company has integrated its former Macintosh(R)
and UNIX(R) sales groups into one sales organization,
jointly headed by David Gibbs, vice president of channel
sales and Bill McCarthy, vice president of corporate
sales.
* * *
"Our newly-combined forces will allow us to make our
UNIX product line more accessible to the reseller and
distributor channels, and introduce our Macintosh product
line to previously untapped corporate opportunities. The
combined sales organization is well situated to grow
business across the company's product lines by meeting
the company's objectives for 1996 and beyond."
44. On March 21, 1996, after discussions with defendant Lee,
Andrew Brousseau of Cowen reported:
Q1 Still Tight -- Discussions with management suggest
that the March quarter is on track but still tight. The
Macintosh business is progressing on target and the UNIX
business is recovering somewhat from the Q4 shortfall,
but the, new NTrigue product is ramping up more slowly
than expected. The company claims that NTrigue interest
and site growth is strong, but that user deployment is
lower than anticipated. We estimate total revenues of
$14.7MM on $9.9MM in SoftWindows for Macintosh, $2.0MM in
SoftWindows UNIX and $1.5MM in NTrigue and EPS of 6*.
Although still hoping to meet expectations, management
claims that any shortfall against these estimates would
be small.
45. Also on March 21, 1996, Insignia announced the
appointment of defendant Noling as Senior vice President of Finance
COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS - 29 -
and Operations and Chief Financial Officer. Noling was also given
responsibility for the Company's accounting, finance, MIS, legal,
human resources, facilities and manufacturing departments.
46. On April 23, 1996, Insignia announced its first quarter
1996 financial results:
Quarter Ended March 31,
1996 1995
Total Revenues $14,724 $12,443
Net income per share $ 0.06 $ 0.13
47. Following discussions with the Company on April 24, 1996,
Michael P. Wallace of UBS Securities reported:
* Insignia Solutions reported Q1 (March) EPS of $0.06
(versus $0.13), in line with our expectations.
Revenues were $14.7 million, up 5% sequentially and
up 18% year-to-year.
* Growth in the UNIX channel returned to historical
levels, with UNIX sales reaching 31% of revenues
versus only 22% in the December quarter. Concerns
about softness in the U.S. UNIX market have
dissipated somewhat.
* The company continued to see good acceptance of its
new products SoftWindows 3.0, SoftWindows 95, and
NTrigue for WinFrame throughout the quarter, with
NTrigue products accounting for 7% of total sales
in their first revenue quarter.
* * *
Q1 EPS in line. Insignia reported first quarter EPS of
$0.06 (versus $0.13), in line with our estimate.
Revenues were also in line, coming in at $14.7 million
(versus $12.4 million). International revenues accounted
for 27% of revenues, compared to 19% in 1Q95. Revenue
growth was boosted mainly by good market acceptance of
new product releases, SoftWindows 3.0, SoftWindows 95,
and NTrigue for WinFrame.
48. On or around May 15,1996, Insignia filed its Form 10-Q
with the SEC for the quarter ended March 31, 1996. In the 10-Q,
which is signed by defendant Noling, defendants reported that
COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS - 30 -
Insignia's first quarter revenues were $14.7 million, that net
income was $749,000 and that earnings per share were $0.06. The
10-Q, further reported that "in the opinion of management, all
adjustments . . . which are necessary for a fair presentation of
the financial position had results for the interim period have been
included."
49. However, as defendants knew would be the case when they
issued their misleading forecast for the first quarter of 1996, and
when they filed Insignia's Form 10-Q for that quarter, Insignia's
reported revenues and earnings for the first quarter were
materially artificially inflated as a result of Insignia's improper
recognition of revenue on contingent sales as described in ¶¶70-80.
50. On July 23, 1996, the Company issued a press release
which reported revenues of $15.7 million for the second quarter
ended June 30, 1996, an increase of 27% compared to $12.3 million
in the June 1995 quarter. According to the press release, earnings
per share for the June 1996 quarter were $0.11 on 13.0 million
shares, compared to $0.10 on 11.4 million shares in the June 1995
quarter. The Company reported revenues of $30.4 million for the
six months ended June 30, 1996, an increase of 23% compared to
$24.8 million in the prior year. Earnings per share for the six-
month period were $0.17 on 12.9 million shares, compared to $0.23
on 11.4 million shares in the prior year.
51. Based on information provided by and at the direction of
defendants, and by Lee and Noling in particular, on July 24, 1996,
John F. Powers of Robertson Stephens reported that revenue from
sales related to Apple/Macintosh were down only 16% from the prior
quarter.
COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS - 31 -
Revenue Mix
% of rev.
Q1 Q2
Apple related 57 41
Unix related 31 31
NTrigue 7 12
NT 5 15
Other 1 1
However, Insignia was stuffing the channel with Apple/Macintosh and
UNIX SoftWindows products and recognizing as revenue sales which
were contingent in violation of GAAP. Thus, defendants knew that
the actual percentage of revenue derived from Apple/Macintosh and
UNIX emulation products was much lower than publicly reported.
52. Based on information provided by and at the direction of
the Company, and by Lee and Noling in particular, on July 24, 1996,
Michael P. Wallace of UBS Securities reported:
Offsetting this revenue growth were higher than
expected above- and below-the-line expenses. Gross
margins of 70% were nearly 2% below our expectations.
This was mostly due to higher royalty payments associated
with the company's NTrigue products, which grew faster
than we anticipated. S&M expenses came in at 37.4% of
revenues; we were looking for 33%. Finally, G&A outpaced
our expectations, coming in at 9.7%; we were looking for
8.5%. Most of this increase was due to a $250,000 charge
taken against the uninsured portion of shareholder
litigation costs related to the class action law suit
filed against the company last Spring. . . .
2H96 Outlook
Looking ahead to the second half of the year, we
expect to see good revenue growth, especially as NT
becomes more widely accepted in the corporate
environment. Mac-related sales should be flat
sequentially, and NTrigue should continue to grow as a
percent of revenues. While this helps revenue growth, it
puts pressure on margins because of the higher royalty
payments associated with the product. As a result, we
are lowering our 1996 EPS estimate to $0.45 from $0.60
and our 1997 EPS to $0.75 from $0.80. We retain our Hold
in INSGY.
COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS - 32 -
53. Based on information provided by and at the direction of
defendants, and by Lee and Noling in particular, on July 26, 1996,
Andrew Brosseau of Cowen reported:
Annual EPS Quarterly EPS
FY Q1 Q2 Q3 Q4
(Dec)
1995 $0.42 $0.37 $0.13 $0.10 $0.18 $0.05
1996E 0.45 0.45 0.06A 0.11A 0.12 0.18
1996E 0.60 0.60 0.10 0.13 0.15 0.22
Q2 revenues of $15.7MM (+27%) finished just above our
estimate, but EPS of 11c needed a good boost from taxes
to finish in the midrange of Street expectations. . . .
Revenues were mixed. On the one hand, SoftWindows for
Unix (+42%) is recovering from the Q4:95 shortfall and
NTrigue is finally beginning to gain momentum, with sales
jumping sharply from last quarter to 11% of revenues-in
Q2. This, along with healthy growth in Windows NT
royalties were key to revenues. On the other hand,
SoftWindows for Macintosh (-5% and 38% of total) is doing
poorly, with sales slowing sharply following the new
product sell-in in Q1. Gross margins of 70% were in
line, but operating expenses (+37%) were somewhat higher
than expected, due partly to one-time legal fees stemming
from the shareholder lawsuit.
* * *
We are maintaining our 1996-97 EPS estimates on finetuned
revenue and expense assumptions. For 1996, we look for
revenues to reach $65MM (+18%) on license sales of $60MM
(+19%) and services fees of $5MM (+13%). Among the major
product lines, we expect SoftWindows for Mac revenues
$26MM (-19%), SoftWindows for Unix of $20MM (+52%),
NTrigue sales of $9MM, and NT royalties of $5MM. Gross
margins should stay around 70% and operating expenses
should flatten over coming quarters, bringing operating
margins to 10% and EPS to 45c. For 1997, we project
revenues of $77MM (+18%) and EPS of 60c (+33%) on 12.5%
operating margins.
54. On or around August 14, 1996, Insignia filed its Form
10-Q with the SEC for the quarter ended June 30, 1996. In the
10-Q, which is signed by defendant Noling, defendants represented
that Insignia's second quarter revenues were $15.7 million, that
net income was $1.45 million and that earnings per share were
COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS - 33 -
$0.11. In the 10-Q, defendants also report that "in the opinion of
management, all adjustments . . . which are necessary for a fair
presentation of the financial position and results for the interim
period have been included."
55. However, as defendants knew would be the case when they
issued their misleading forecast for the second quarter of 1996 and
when they filed Insignia's Form 10-Q for that quarter, Insignia's
reported revenues and earnings for the second quarter were
materially artificially inflated as a result of Insignia's improper
recognition of revenue on contingent sales as described in ¶¶70-80.
Lee attributed Insignia's false financial results to the success of
Insignia's products claiming:
"The revenues for the second quarter reflected a
healthy growth of our Windows(R) NT(R)-based NTRIGUE(TM)
product line." . . . "In fact, NTRIGUE was awarded
Analyst's Choice in this week's issue of PC Week
(July 22, 1996), which summarized NTRIGUE 2.0 as 'an
excellent choice for companies that want to standardize
on Windows applications but still let networked users
work on the platform of their choice -- ranging from x86
PCs to Mac and UNIX workstations."'
56. Based on information provided by and at the direction of
defendants, and by Lee and Noling in particular, on September 11,
1996, Michael P. Wallace of UBS Securities reported:
We met with management yesterday and got a brief
update on the current quarter and business in
general. . . . The two key issues to focus on here are
the ramp-up of NTrigue, the company's most recent
product, and the effect of weak Macintosh sales on
Insignia's business.
* * *
Q3 Outlook. For the September quarter we are
looking for revenues of $16.8 million (vs. $15.7 last
quarter and $16.3 million a year ago) and EPS of $0.13
(vs. $0.11 last quarter and $0.17 last year). There is
a chance that revenues come in light, given the big
question mark for Mac-related sales. If revenues come in
COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS - 34 -
$1 million short, using the above scenario, EPS would
likely be around $0.11 or $0.12. Cost cutting may
recover some of this, but the company is approaching the
limits of how much it can trim back operating expenses.
57. Based on information provided by and at the direction of
defendants, and by Lee and Noling in particular, on October 10,
1996, John F. Powers of Robertson Stephens issued a report which
reiterated prior projected revenue and earnings estimates of $65.4
million for fiscal year 1996 with earnings per share of and $0.35,
$16.8 million for the third quarter with earnings per share of
$0.12.
58. However, on October 15, 1996, the Company issued a press
release announcing financial results for the third quarter ended
September 30, 1996. The Company reported revenues of $9.1 million,
for a loss of $0.44 per share. The Company reported revenues of
$39.5 million for the nine months ended September 30, 1996, a
decrease of 4% compared to $41 million in the prior year. This
represented a loss per share of $0.22 on 12.5 million shares for
the nine-month period, compared to earnings of $0.41 on 11.4
million shares for the same period in the prior year.
59. On October 17, 1996, based on information provided by
Insignia's executives, including Lee and Noling, Andrew Brosseau of
Cowen reported that Insignia's management blamed the "huge
operating loss" on "poor reordering by the channel" and "[d]efferal
of SoftWindows for Unix revenues from a multi-million [dollar] deal
with SGI."
60. On or around November 14, 1996, Insignia filed its Form
10-Q with the SEC for the period ended September 30, 1996. In the
10-Q, which is signed by defendant Noling, defendants represent
COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS - 35 -
that Insignia's third quarter revenues were $9.1 million, that the
net loss for the quarter was $5 million and that net losses per
share were $0.44. In the 10-Q, defendants represent that "in the
opinion of management, all adjustments which are necessary
for a fair statement of the financial position and results for the
interim period have been included."
61. These third quarter financial results, disappointing as
they were, still were materially inflated due to the channel
stuffing and improper revenue-recognition practices described
herein. In reaction to the Company's abject failure to meet its
forecasts, Insignia ADSs collapsed from $6 to $4 per share.
62. After the third quarter results had been announced,
defendants were aware that the truth about Insignia's condition and
prospects would become more and more difficult to conceal. In an
effort to blame solely lower level employees and not the Board of
Directors and senior executives, defendants fired Stuart McIntosh
accusing him of improper channel-stuffing and other related
improprieties.
63. However, on February 3, 1997, McIntosh responded by
filing a complaint in the Orange County Superior Court against
Insignia, Gibbs and unnamed Does for breach of contract and
tortious conduct in association with his dismissal. McIntosh
alleges, inter alia, that:
Defendants, and each of them, in discharging plaintiff
accused plaintiff of formulating a distribution process
known as "stuffing the channel" and the numerous business
ramifications involved in said distribution process. At
the time of discharge, defendants, and each of them, knew
or should have known that the plaintiff was not
responsible for Insignia's distribution policies involved
in "stuffing the channel."
COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS - 36 -
Complaint, McIntosh v. Insignia Solutions, Inc., et al., Case No.
774906 (Orange County Sup. Ct., filed Feb. 3, 1997).
64. Finally, on February 27, 1997, while Price Waterhouse was
performing its audit of Insignia's 1996 financial results, the
Company admitted that its channel-stuffing practices had led to
Insignia's improperly recognizing revenue in the first two quarters
of 1996, necessitating the restatement of earnings and revenues for
each period. Thereafter, Insignia's share price collapsed to
$2-1/2 per share.
MANAGEMENT'S RESPONSIBILITY FOR INTERNAL
ACCOUNTING CONTROL AND FOR FINANCIAL REPORTING
65. Insignia had a responsibility to maintain sufficient
accounting controls to accurately report its financial results. It
is well-settled that the representations made by a company in its
financial statements and in other financial disclosures to the
public are the representations of that company's management.
Indeed, even, as in Insignia's case, when a company issues audited
financial statements together with the report of that company's
independent auditors, that report always expressly provides that
"the financial statements are the responsibility of the company's
management."
66. To accomplish the objectives of accurately recording,
processing, summarizing and reporting financial data, a company
must establish an internal control structure. In that structure,
according to Appendix D to Statement on Auditing Standards No. 55,
Consideration of the Internal Control Structure in a Financial
Statement Audit ("SAS 55"), management should consider, among other
things, such objectives as (i) making certain that "[t]ransactions
COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS - 37 -
are recorded as necessary . . . to permit preparation of financial
statements in conformity with generally accepted accounting
principles . . . and to maintain accountability for assets," and
(ii) making certain that "[t]he recorded accountability for assets
is compared with the existing assets at reasonable intervals and
appropriate action is taken with respect to any differences."
67. As described in SAS 55, the applicability and importance,
of specific control environment factors, accounting system methods
and records and control procedures that an entity should establish
should be considered within the context of such criteria as an
entity's size, its organization and ownership characteristics, the
nature of its business, the diversity and complexity of its
operations, the entity's method of processing data, and its
applicable legal and regulatory requirements. In short, the larger
the entity, the more the nature of the entity's business is
complex, diverse and sophisticated, and the public ownership of the
entity customarily requires a sophisticated internal control
structure to ensure that transactions are accurately recorded and
that, prior to the public disclosure of any financial information,
such transactions are compared to the existing assets (e.g.,
comparing inventory as recorded on a company's books to those
amounts actually "on hand") to eliminate any discrepancies between
the recorded and actual amounts.
68. According to SAS 55:
Establishing and maintaining an internal control
structure is an important management responsibility. To
provide reasonable assurance that an entity's objectives
will be achieved, the internal control structure should
be under ongoing supervision by management to determine
that it is operating as intended and that it is modified
as appropriate for changes in conditions.
COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS - 38 -
69. When management permits a condition to exist in the
company's internal control structure such that
the design or operation of one or more of the internal
control structure elements does not reduce to a
relatively low level the risk that errors or
irregularities in amounts that would be material in
relation to the financial statements . . . may occur and
not be detected within a timely period by employees in
the normal course of performing their assigned functions,
that condition is defined by Statement on Auditing Standards No.
60, Communications of Internal Control Structure Related Matters
Noted in an Audit ("SAS 60"), as a "material weakness" in the
company's internal control structure.
FALSE FINANCIAL STATEMENTS
70. GAAP are those principles recognized by the accounting
profession as the conventions, rules and procedures necessary to
define accepted accounting practice at a particular time.
Regulation S-X (17 C.F.R. §210.4-01 (a) (1)) states that financial
statements filed with the SEC which are not prepared in compliance
with GAAP are presumed to be misleading and inaccurate.
71. On or around March 26, 1996, Insignia represented in its
Annual Report for the year ended December 31, 1995, the following
with regard to its revenue recognition practices:
The Company recognizes revenue in accordance with the
American Institute of Certified Public Accountants'
Statement of Position 91-1 on Software Revenue Recogni-
tion.
* * *
Product licensing fees are recognized upon shipment
if no significant vendor obligations remain and if
collection of the resulting receivable is deemed
probable. The Company grants distributors and resellers
certain rights of return and price protection on unsold
merchandise held by those distributors and resellers.
Accordingly, reserves for estimated future returns,
COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS - 39 -
exchanges and credits for price protection are accrued
upon product shipment.
72. In its interim reports for 1996, filed with the SEC on
May 15, 1996, August 13, 1996, and November 14, 1996, respectively,
Insignia represented the following with regard to the accompanying
financial information:
The condensed consolidated financial statements are
unaudited. However, in the opinion of management, all
adjustments (consisting only of normal recurring
adjustments) which are necessary for a fair presentation
of the financial position and results for the interim
period have been included.
73. These representations with regard to Insignia's financial
statements and revenue recognition practices were false and
misleading due the Company's violation of GAAP, as set forth in
Statement of Position ("SOP") 91-1 and other pronouncements.
74. GAAP, as set forth in the FASB Statement of Concepts
("Concepts") No. 5, provides the basic requirements for the
recognition of revenue. Concepts No. 5, ¶83 requires that revenue
be realizable (or collectible) prior to recognition and also that
revenue be "earned," prior to recognition, meaning that an entity
has "substantially accomplished what it must do to be entitled to
the benefits represented by the revenues."
75. SOP 91-1 requires that revenue not be recognized on
software licenses unless: (a) delivery has occurred; (b) other
remaining vendor obligations are no longer significant; and
(c) collectibility is probable. SOP 91-1.34. Revenue from
cancelable licenses should not be recognized until cancellation
privileges lapse. SOP 91-1.53. Transactions in which companies
are granted the right to exchange software products for different
software products or for similar software products with more than
COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS - 40 -
minimal differences in price, functionality, or features are
considered returns that should be accounted for in conformity with
FASB Statement No. 48.1 SOP 91-1.54.
76. During the Class Period, Insignia entered into agreements
with certain of its distributors and resellers which granted those
distributors and resellers the right to cancel certain software
license agreements and the right to exchange software products for
refunds or for different types of software. In violation of GAAP,
Insignia reported these transactions as revenue and failed to
adequately reserve for estimated returns and/or cancellation. The
impact of these misstatements was to materially misstate the
company's revenues, earnings and assets during the Class Period.
77. As a result of the Company's improper revenue
recognition, the Company materially inflated its earnings during
the Class Period. The Company's improper revenue recognition
caused its collection of accounts receivable to decrease
dramatically. Whereas Insignia's average collection time as
measured by days' sales outstanding ("dso," a calculation of the
average time it takes Insignia to collect on its receivables based
on current quarter sales) was only 28 days at September 30, 1995,
by March 31, 1996 it had grown to 86 days, and by September 30,
1996 it had grown to 140 days. Insignia's customers stopped paying
_____________________
1 FASB Statement No. 48 requires that where the right of return
exists, certain conditions must all be met prior to revenue being
recognized on those transactions. The conditions include the
following: (i) the obligation of the buyer to pay the seller is not
contingent on resale of the product; (ii) the seller does not have
significant obligations to bring about the resale of the product by
the buyer; and (iii) the amount of future returns can be reasonably
estimated. SFAS No. 48, ¶6. Where revenue is recognized because
these conditions are met, any costs or losses that may be expected
in connection with any returns shall be accrued. SFAS No. 48,¶7.
COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS - 41 -
at the same rate they had in earlier periods due to the fact they
did not believe they owed the money based on the agreements they
had with Insignia that certain of the sales with these customers
were contingent on acceptance or were subject to cancellation.
78. Ultimately in the fourth quarter of 1996, when the
Company was in the midst of its year-end audit, the improper
revenue recognition was discovered by the Company's external
auditors. On February 27, 1997, Insignia for the first time
revealed that its results were misstated. Insignia reported that
it would restate its results for the first and second quarters of
1996.
79. In fact, the Company's restated amounts are dramatically
different than those reported for the first two quarters of 1996:
Insignia Solutions plc
Reported and Restated Revenues
COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS - 42 -
Insignia Solutions plc
Earnings Per Share
80. In its financial statements for the nine months ended
September 30, 1996, Insignia reported revenues of $39.5 million and
net accounts receivable of $11.7 million. When Insignia released
is its fourth quarter and year-end 1996 results, it reported net
accounts receivable of only $6..9 million and, from the amount of
revenue Insignia reported for the fourth quarter and year ended
December 31, 1996, it is now apparent that Insignia's revenues for
the nine months ended September 30, 1996 were actually only $37.1
million. Whereas Insignia originally reported a net loss of $2.8
million for the nine months ended September 30, 1996, it is now
apparent Insignia incurred a loss of $4.6 million for the nine
months ended September 30, 1996.
COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS - 43 -
DEFENDANTS' INSIDER TRADING
81. As part of defendants' scheme, Insignia's insiders sold
$20+ million of Insignia ADSs in the Offering, to profit from the
artificial inflation in Insignia's ADS price their fraud had
created before the truth became known and Insignia's ADS price
crashed. Notwithstanding their access to material non-public
information obtained in connection with the Offering and prior
thereto, and as a result of their positions with the Company,
Insignia's insiders sold the following amounts of Insignia ADSs, at
artificially inflated prices while in possession of material non-
public information:
NUMBER OF SHARES PRICE
INSIDER OFFERED PER SHARE PROCEEDS
------- ---------------- --------- --------
Griffiths, Paul R. 753,484 $12 $9,041,808
Johnston, John R. 144,525 $12 $1,734,300
Gilde Venture Fund B.V. 267,623 $12 $3,211,476
Samuel, Nicholas A. 67,994 $12 $815,928
Euroventures Benelux B.V. 175,416 $12 $2,104,992
Hancock International 79,476 $12 $953,712
Private Equity Partners L.P.
Euroventures (UK) B.V. 101,313 $12 $1,215,756
Others 158,586 $12 $1,903,032
--------- -----------
TOTAL: 1,748,417 $20,981,004
82. On May 13, 1996, after he had left the Company, but while
he was aware of the continuing fraudulent scheme, defendant
Friedberger sold 10,000 shares at $9 per share, realizing proceeds
of $90,000.
STATUTORY SAFE HARBOR
83. The statutory safe harbor provided for forward-looking
statements under certain circumstances does not apply to any of the
allegedly false statements pleaded in this Complaint. The safe
COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS - 44 -
harbor has no application to conduct that predated its enactment,
nor does it apply to statements associated with the offering. None
of the statements pleaded herein were sufficiently identified as
"forward-looking statements" when made. Nor were any of the
statements accompanied by meaningful cautionary statements
identifying important factors that could cause actual results to
differ materially from the statements made. Alternatively, to the
extent that the statutory safe harbor does apply to any statements
pleaded herein, because they are deemed to be "forward-looking,"
defendants are liable for those statements because at the time each
of those statements was made, the speaker knew the statement was
false and the statement was authorized and/or approved by an
executive officer of Insignia who knew that the statement was
false.
COUNT I
For Violations of Section 10(b) Of The Exchange
Act And Rule 10b-5 Against All Defendants
84. Plaintiffs incorporate by reference ¶¶1-83, above, as if
set forth fully herein.
85. The defendants knew, or were reckless in failing to know,
of the material omissions from and misrepresentations contained in
the statements as set forth above. Each of the defendants:
(a) knew or had access to the material adverse non-public
information about Insignia'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 including SEC
filings of and about Insignia.
COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS - 45 -
86. Throughout the Class Period, defendants, with knowledge
of or reckless disregard for the truth, disseminated or approved
releases, statements and reports, referred to 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.
87. During the Class Period, defendants, individually and via
a scheme, directly and indirectly, participated in a common course
of business to conceal material adverse information regarding the
financial performance of the Company and the then existing business
conditions as specified herein. Defendants employed devices,
schemes and artifices to defraud and engaged in acts, practices and
a course of business as herein alleged to commit a fraud on the
integrity of the market for the Company's ADSs and to maintain
artificially high market prices for the ADSs of Insignia. This
included the formulation, making of and/or participation in the
making of untrue statements of material facts and the omission to
state material facts necessary in order to make the statements
made, in light of the circumstances under which they were made, not
misleading, and engaging in the acts, practices and a course of
business which operated as a fraud and deceit upon plaintiffs and
the Class, all of the above in connection with the IPO of Insignia
ADSs to plaintiffs and members of the Class.
88. By reason of the conduct alleged herein, defendants
knowingly or recklessly, directly or indirectly, 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;
COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS - 46 -
(b) made untrue statements of material facts or omitted to state
material facts necessary in order to make the 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 plaintiffs and
others similarly situated in connection with their purchases of
Insignia shares during the Class Period.
89. Plaintiffs and the Class have suffered substantial
damages in that, in reliance on the integrity of the market, they
paid artificially inflated prices for Insignia shares as a result
of defendants' violations of §10(b) of the Exchange Act and SEC
Rule 10b-5. Plaintiffs and the Class would not have purchased
Insignia ADSs at the prices they paid, or at all, if they had been
aware that the market prices had been artificially and falsely
inflated-by defendants' misleading statements and concealment. At
the time of the purchases by plaintiffs and the Class of Insignia
ADSs, the fair and true market value of said ADSs was substantially
less than the prices paid by them.
COUNT II
For Violation Of Section 20(a)
Of The Exchange Act Against All Defendants
90. Plaintiffs incorporate by reference ¶¶1-89, above, as if
set forth fully herein.
91. The Individual Defendants each acted as controlling
persons of Insignia within the meaning of §20(a) of the Exchange
Act. By reason of their positions as officers and/or directors of
Insignia and also because of their interest in Insignia ADSs, they
had the power and authority to cause Insignia to engage in the
COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS - 47 -
wrongful conduct complained of herein. Insignia controlled each of
the Individual Defendants and all of its employees.
92. By reason of such wrongful conduct, the defendants named
in this count 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 the Company's
securities during the Class Period.
BASIS OF ALLEGATIONS
93. Plaintiffs have alleged the foregoing based upon the
investigation of their counsel, which included a review of
Insignia's SEC filings, securities analysts' reports and advisories
about the Company, press releases issued by the Company, media
reports about the Company and discussions with consultants, and
believe that substantial evidentiary support will exist for the
allegations set forth in ¶¶2-9, 24-44, 47, 49, 51-53, 55-57, 59 61-
62 and 04-83 after a reasonable opportunity for discovery.
PRAYER FOR RELIEF
WHEREFORE, plaintiffs pray for judgment as follows:
1. Declaring this action to be a proper class action
pursuant to Rule 23 (a) and (b) (3) of the Federal Rules of Civil
Procedure on behalf of the Class defined herein;
2. Awarding 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;
COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS - 48 -
4. Awarding extraordinary, equitable and/or injunctive
relief as permitted by law, equity and the federal statutory
provisions sued hereunder, including the imposition of a construc-
tive trust upon the proceeds of defendants' insider trading,
pursuant to Rules 64, 65 and any appropriate state law remedies;
and
5. Awarding such other relief as this Court may deem just
and proper.
JURY DEMAND
Plaintiffs demand a trial by jury.
DATED: March 21, 1997
MILBERG WEISS BERSHAD
HYNES & LERACH LLP
WILLIAM S. LERACH
ALAN SCHULMAN
MARK SOLOMON
/s/
__________________________
ALAN SCHULMAN
600 West Broadway, Suite 1800
San Diego, CA 92101
Telephone: 619/231-1058
MILBERG WEISS BERSHAD
HYNES & LERACH LLP
KIMBERLY C. EPSTEIN
222 Kearny Street, 10th Floor
San Francisco, CA 94108
Telephone: 415/288-4545
WEISS & YOURMAN
JOSEPH H. WEISS
JACK I. ZWICK
551 Fifth Avenue
Suite 1600
New York, NY 10176
Telephone: 212/682-3025
COMPLAINT FOR VIOLATION OF THE FEDERAL SECU