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Stanford
University Law School - Securities Class Action Clearinghouse
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Brent D. Ward, Esq. (No. 3377)
Brad W. Merrill, Esq. (No. 6932)
PARRY MURRAY & WARD
1270 Eagle Gate Tower
60 East South Temple
Salt Lake City, Utah 84111
Telephone: (801) 521-3434
Richard Bemporad, Esq,
Neil L. Selinger, Esq.
Jeanne F. D'Esposito, Esq.
LOWEY DANNENBERG BEMPORAD & SELINGER, P.C.
One North Lexington Avenue
White Plains, NY 10601
Telephone: (914) 997-0500
Attorneys for Plaintiff
___________________________________________________________________
IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF UTAH
CENTRAL DIVISION
___________________________________________________________________
EDOUARD SERFATY, )
)
Plaintiff, ) CLASS ACTION COMPLAINT
) JURY TRIAL DEMANDED
v. )
)
INTERNATIONAL AUTOMATED )
SYSTEMS, INC., and NELDON )
JOHNSON, )
) Case No: 2:96CV 0583C
Defendants. )
) Judge______________________
)
___________________________________________________________________
Plaintiff, by his undersigned attorneys, for his
complaint alleges, upon personal knowledge as to himself and his
own acts and upon information and belief as to all other matters,
as follows:
INTRODUCTION
1. This is a securities class action against
International Automated Systems, Inc. ("IAS" or the "Company") and
its President, Neldon Johnson ("Johnson"). During the class period
of May 13, 1996 through June 28, 1996 (the "Class Period"),
defendants disseminated numerous statements through company press
releases and advertisements in publications such as Investor's
Business Daily touting that they had developed an allegedly
revolutionary communications technology called Digital Wave
Modulation ("DWM") that, among other things, would allow the
transmittal of information at speeds 200 times faster than current
modems. Defendants also made several published statements
specifically promising to unveil a working prototype of DWM on June
27, 1996, notwithstanding the fact that defendants did not have a
working prototype of DWM in existence or anywhere near completion.
2. On June 27, 1996, at a two-hour multimedia
presentation, Johnson and IAS failed to unveil a working prototype
of the new technology as defendants had promised to do in numerous
public statements. As a result, the market price of IAS stock,
which, based on defendants' repeated representations concerning
IAS's purportedly revolutionary new product, had traded as high as
$57 during the Class Period described herein, plunged from a
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closing price of $40 per share on June 26, 1996, to as low as $10
per share and closed at $20 per share on June 28, 1996, on
extraordinarily heavy volume. As a result, plaintiff and the
members of the Class suffered damages aggregating many millions of
dollars.
JURISDICTION AND VENUE
3. Jurisdiction of this Court is founded upon Section
27 of the Securities Exchange Act of 1934 (the "Exchange Act"), 15
U.S.C. § 78aa, and Section 1331 of Title 28, U.S.C. § 1331.
4. The claims herein arise under Sections 10(b) and
20(a) of the Exchange Act, 15 U.S.C. §§ 78j(b) and 78t(a), and Rule
10b-5 promulgated thereunder by the Securities and Exchange
Commission (the "SEC").
5. Venue is proper in this district pursuant to Action
27 of the Exchange Act and 28 U.S.C. § 1391(b). Defendants conduct
business here or have agents in this district, and many of the acts
comprising the transactions giving rise to the violations of law
complained of herein occurred in this judicial district.
6. In connection with the acts, conduct and other
wrongs complained of herein, defendants, directly and indirectly,
used the means and instrumentalities of interstate commerce and the
United States mail, and the facilities of a national securities
exchange.
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THE PARTIES
7. Plaintiff Edouard Serfaty is a resident of Fountain
Valley, California, and made the following purchases of IAS common
stock during the Class Period at prices which were artificially
inflated by defendants' misstatements and misrepresentations:
Date
Quantity Purchased Price
100 5/14/96 $42
100 6/10/96 $40
100 6/18/96 $41 1/2
8. (a) Defendant IAS is incorporated under the laws of
the State of Utah and maintains its principal executive offices at
321 East 300 North, Suite D, American Fork, Utah, 84403. IAS is in
the business of developing and marketing communications technology,
including an automated grocery checkout system and a fingerprint
identification system. IAS has not yet marketed any of its
products.
(b) As of June 30, 1996, there were approximately
16.3 million shares of IAS common stock outstanding, which shares
are listed and traded on the OTC Bulletin Board, an efficient and
developed securities market that is run by NASDAQ.
9. Defendant Johnson, the Company's founder, has served
as Chairman of the Board and president of IAS from its inception in
1986.
10. By virtue of his positions at IAS, his ability to
exercise power and influence with respect to IAS's course of
conduct, and his access to material or nonpublic information about
the Company, defendant Johnson was, at all relevant times, a
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controlling person at IAS within the meaning of Section 20(a) of
the Exchange Act, and both had and exercised the power and
influence to cause IAS to engage in the legal practices complained
of herein.
CLASS ACTION ALLEGATIONS
11. This action is brought by plaintiff pursuant to
Rules 23(a) and 23(b)(3) of the Federal Rules of Civil Procedure,
individually and on behalf of a class (the "Class") consisting of
all persons and entities who purchased shares of IAS common stock
from May 13,1996, through and including June 27, 1996. Excluded
from the Class are the defendants, officers and directors of IAS,
members of Johnson's immediate family, any entity in which either
defendant has a controlling interest, and the heirs, successors and
assigns of any of the excluded persons or entities.
12. The members of the Class are so numerous that
joinder of all members is impracticable. While the precise number
of class members is unknown to plaintiff at this time and can only
be ascertained through appropriate discovery, plaintiff believes
that there are thousands of members of the Class.
13. Among the questions of law and facts involved herein
which are common to the Class and which predominate over questions
affecting individual members of the class are:
(a) whether the federal securities laws were
violated by defendants' acts as alleged herein;
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(b) whether documents and information disseminated
to the investing public and the shareholders of IAS during the
Class Period were materially misleading in claiming that IAS had
successfully completed the development of DWM technology;
(c) whether defendants acted wilfully or recklessly
in misrepresentating and/or omitting material facts;
(d) whether the market price of IAS common stock
was inflated artificially during the Class Period due to the
misrepresentations and/or omissions complained of herein; and
(e) whether the members of the Class sustained
damages and, if so, what is the proper measure thereof.
14. Plaintiff's claims are typical of the claims of the
members of the Class in that he purchased shares of IAS common
stock during the Class period and sustained injury as a result of
the material misrepresentations alleged herein.
15. Plaintiff will fairly and adequately protect the
interests of the members of the Class. He retained competent
counsel experienced in class action litigation under the federal
securities laws and does not have interests antagonistic to or in
conflict with those he seeks to represent as a class
representative.
16. The Company's shares are traded on an efficient and
developed securities market.
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ADDITIONAL SUBSTANTIVE ALLEGATIONS
17. On June 19, 1995, IAS announced a patent pending for
a new communication system. In touting this new technology,
defendants made the following statements in their press release:
It is called Digital Wave Modulation (DWM) and will
affect approximately every type of communication
around the world. DWM can operate completely
wireless without any signal degradation or interface.
Computer Networking: Current network systems
transmit a approximately 200,000 bytes of
information per second. And, only two computers can
communicate with each other at one time. DWM
transmits more than 1.8 billion bytes of information
per second. And, over 1,000 costumers [sic] can
communicate with each other simultaneously.
Telephone: DWM transmits 1,000 times more efficient
than current cellular phones. Therefore, DWM
cellular phones can be sold at a flat rate --
possibly between $20 and $100 a month. Customers
would not have to pay for any airtime. In addition,
they would pay very little for long distance calling.
Also, in order to switch more than 150,000
conventional telephones, present systems require an
area equal to a building six or seven stories high
and a quarter of a city block square. An equal
number of DWM phone can be switched automatically on
a single 586 PC computer.
Television: For each television channel currently
broadcasted, DWM can broadcast over 900.
Radio: DWM sends a signal so precise that it can
transmit each specific sound or instrument to an
individual speaker.
Versatility: DWM is capable of transmitting
television, radio, two-way video conferencing, and
computer communications by way of a single DWM
cellular phone. Also, each of these transmissions
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can be sent to and from a DWM phone at a higher
digital quality than currently possible (eg. [sic]
stereo, surround sound, etc.)
Simple Implementation: DWM is simple to implement.
It can be set up with minor modifications to current
transmitters and receivers.
Potential Market: According to Forbes ASAP, April
10 -- this market is potentially worth $2 trillion.
18. IAS lost $199,554 on revenue of $6,000 for the year
ending June 30, 1995. As of that date, assets totaled $53,226 and
IAS had a negative net worth of $128,558.
19. According to a August 20, 1995 article in The Salt
Lake Tribune, during fiscal 1994, IAS lost more that $27,000 or a 3
cents per share. The article also reported that "[a]ccountants at
H. Sherwood & Company in 1994 said IAS 'may not be able to continue
its existence' unless Johnson can promote new products and increase
his cash flow."
20. On February 13, 1996, Johnson filed a Form 4 with
the SEC stating his intent to sell 15,000 shares of IAS common
stock.
21. On February 27, 1996, Johnson filed a Form 4 with
the SEC stating his intent to sell 20,000 shares of IAS common
stock.
22. On March 27, 1996, Johnson filed a Form 4 with the
SEC stating his intent to sell 20,000 shares of IAS common stock.
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Defendants' Misleading Statements
23. During the spring of 1996, defendants ran several
advertisements in such publications as Investor's Business Daily, a
widely read daily financial publication, promising to unveil the
Company's DWM technology on June 27, 1996. In such
advertisements, defendants further stated that DWM technology "will
spearhead a revolution" in communications and claimed that DWM is
nearly 200 times faster than today's modems in transmitting
information. Defendants also represented that the technology
"redefines the boundaries of science."
24. Following IAS's announcements, telecommunications
analyst Rob Rich of the Yankee Group in Boston publicly voiced his
skepticism with regarding to IAS's claims about DWM stating,
"Chutzpa is alive and well in American Fork" and "I'll believe it
when I see it."
25. In response to the criticism of Rob Rich and others,
IAS placed advertisements, one of which appeared in the May 13,
1996 issue of Investor's Business Daily, touting the Company's
stock. In that advertisement, defendants dismissed the "creative
insults directed at us by skeptics," and stated "[w]e encourage
those of you have missed the opportunity to ridicule us to hurry --
you only have about two more months."
26. In response to defendants' positive representations
regarding DWM, the market price of IAS common stock rose
dramatically, rising from its low of $1/4 per share in July of 1994
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to trade as high as $57 per share on May 28, 1996 and closing on
that date at $47 1/2 per share.
27. On June 12, 1996, an advertisement appeared in The
Investor's Business Daily in which defendants proclaimed "Edison
Did it, Bell Did it, and We'll Do it -- on June 27th."
Furthermore, defendants specifically represented that "[o]n June
27th, IAS will unveil its operational DWM prototype. This
prototype will prove that DWM works and the DWM is entirely capable
of living up to its claims as stated above." (emphasis added).
Defendants also claimed:
DWM Wireless: Can transmit 1,000 times more
cellular phones within the same air space as one
current cellular phone . . . [c]an transmit 1.2
Gigabytes per second . . . [c]an network an
unlimited number of computers . . . [and c]an transmit
1,000 times more channels than current television.
. . .
DWM Modem Transmitting Through Current
Telephone lines (POTS): Can transmit 150,000 to
600,000 BAUD (apx. 20xs faster than current modems
over POTS.
THE BELATED DISCLOSURE OF THE TRUTH CAUSES
IAS SHARES TO PLUNGE
28. On June 27, 1996, IAS conducted a public, two-hour
presentation at the David O. McKay Special Events Center at Utah
Valley State College in which Johnson and several IAS employees
spoke about DWM, but failed to produce the working prototype of DWM
that had been promised. Johnson admitted that the actual
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engineering for DWM remains to be done. Furthermore, although
Johnson claimed that products using DWM technology would be
available by the end of the year, a company spokesperson could not
say when IAS would be able to produce a working prototype.
29. The market's reaction to these belated admissions
was immediate and adverse. IAS common stock plunged by 20 points
to close on June 28, 1996 at $20, down from its close of $40 per
share on June 26, 1996, a loss of 50%.
CLAIM FOR RELIEF
(For Violations of Sections 10(b) and 20(a)
Of the Exchange Act and SEC Rule 10b-5)
30. Plaintiff incorporates Paragraphs 1 through 29
above, as if set forth fully herein.
31. During the Class Period, defendants, individually
and in concert, directly and indirectly, engaged and participated
in a continuous course of wrongful conduct misrepresenting material
information relating to the development of DWM technology.
Defendants employed devices, schemes and artifices to defraud and
engaged in acts, practices and a course of conduct as hereinafter
alleged in an effort to maintain an artificially high market price
for IAS common stock, which included the making of or participation
in the making of untrue statements of materials facts and omitting
to state material facts necessary in order to make the statements
made about IAS's DWM technology, in light of the circumstances
under which they were made, not misleading and engaged in
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transactions, practices, and a course of business which operated as
a fraud and deceit upon the purchasers of IAS common stock during
the Class Period.
32. During the Class Period, defendants issued public
statements in the Company's advertisements and press releases which
were materially false and misleading. Those statements and
releases, which are particularized in paragraphs 23 through 27,
supra, were materially false and misleading in representing that
IAS had successfully completed the development of DWM technology.
33. Each of the defendants acted knowingly or recklessly
in making the foregoing materially false and misleading statements.
34. Plaintiff and other members of the Class, relying on
the integrity of the market, purchased the Company's common stock
during the Class Period at artificially inflated prices and were
damaged thereby. Had plaintiff and members of the Class known the
true facts, plaintiff and members of the Class would not have
purchased the common stock of the Company at inflated prices during
the Class Period, if at all.
35. Defendant Johnson, by virtue of his executive
position, had the power and influence, and exercised same, to cause
IAS to engage in the unlawful conduct and practices complained of
herein. As a result, defendant Johnson is a controlling person of
IAS within the meaning of Section 20(a) of the Exchange Act and is
liable for the wrongful acts of IAS.
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36. As a result of defendants' aforesaid wrongful
conduct, plaintiff and members of the Class have been damaged in an
amount to be proved at trial.
WHEREFORE, plaintiff demands judgment as follows:
1. Determining the action to be a proper class action
maintainable pursuant to Rule 23 of the Federal Rules of Civil
Procedure;
2. Awarding to plaintiff and the other members of the
Class damages from defendants, together with appropriate interest;
3. Awarding to plaintiff and the other members of the
Class the costs and disbursements of this action, including
reasonable fees to plaintiff's attorneys and experts; and
4. Awarding plaintiff and the other members of the
Class such other and further relief as may be just and property
under the circumstances.
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JURY DEMAND
Pursuant to Rule 38 of the Federal Rules of Civil
Procedure, plaintiff hereby demands a trial by jury.
DATED this 2nd day of July, 1996.
PARRY MURRAY & WARD
/s/
_________________________
Brent D. Ward, Esq.
Brad W. Merrill, Esq.
LOWEY DANNENBERG BEMPORAD
& SELINGER, P.C.
Richard Bemporad, Esq.
Neil L. Selinger, Esq.
Jeanne F. D'Esposito, Esq.
Attorneys for Plaintiff
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CERTIFICATION OF NAMED PLAINTIFF
PURSUANT TO FEDERAL SECURITIES LAWS
EDOUARD SERFATY ("Plaintiff") certifies, as to the claims
asserted under the federal securities laws, that:
1. Plaintiff has reviewed the complaint and authorized its
filing.
2. Plaintiff did not purchase the security that is the
subject of this action at the direction of plaintiff's counsel or
in order to participate in this private action.
3. Plaintiff is willing to serve as a representative party
on behalf of the class, including providing testimony at
deposition and trial, if necessary.
4. Plaintiff's transactions in the security that is the
subject of this action during the Class Period are as follows:
Date
Quantity Purchased Price
100 5/14/96 $42
100 6/10/96 $40
100 6/18/96 $41 1/2
5. During the three years prior to the date of this
Certificate, Plaintiff has not served as a representative party
for a class in any action filed under the federal securities
laws.
6. The Plaintiff will not accept any payment for serving
as a representative party on behalf of the class beyond the
Plaintiff's pro rata share of any recovery, except such
reasonable costs and expenses (including lost wages) directly
relating to the representation of the class as ordered or
approved by the court.
I declare under penalty of perjury that the foregoing is
true and correct. Executed this 2nd day of July, 1996.
/s/
___________________________
EDOUARD SERFATY
2
3 Aug 1997