MILBERG WEISS BERSHAD
HYNES & LERACH LLP
WILLIAM S. LERACH (68581)
ALAN SCHULMAN (128661)
600 West Broadway, Suite 1800
San Diego, CA 92101
Telephone: 619/231-1058
     - and -
REED R. KATHREIN (139304)
222 Kearny Street, 10th Floor
San Francisco, CA 94108
Telephone: 415/288-4545

SCHIFFRIN CRAIG & BARROWAY, LLP
RICHARD S. SCHIFFRIN
ANDREW L. BARROWAY
Three Bala Plaza East
Suite 400
Bala Cynwyd, PA 19004
Telephone: 610/667-7706

Attorneys for Plaintiff

UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORNIA

SHELDON RAIKEN, On Behalf of
Himself and All Others Similarly Situated,

                      Plaintiff,

           vs.

ADAPTEC, INC., JOHN G. ADLER,
F. GRANT SAVIERS, ROBERT N.
STEPHENS, ANDREW J. BROWN,
PAUL G. HANSEN, LAURENCE B.
BOUCHER, JOHN EAST, PHILLIP E.
WHITE, RICHARD J. CLAYTON,
MICHAEL G. FISHER, RICHARD S.
GOURLEY and SAM KAZARIAN,

                      Defendants.
___________________________________

No. C-98-0282-SI
[filed Jan. 26, 1998]

CLASS ACTION

COMPLAINT FOR
VIOLATION OF THE
SECURITIES EXCHANGE
ACT OF 1934

Plaintiff Demands
A Trial By Jury

INTRODUCTION AND OVERVIEW

1. This is an action on behalf of purchasers of the common stock of Adaptec, Inc. ("Adaptec" or the "Company") between 4/29/97 and 1/8/98 (the "Class Period"), seeking to pursue remedies under the federal securities laws, complaining of a fraudulent scheme and course of business that operated as a fraud and deceit on purchasers of Adaptec stock. Adaptec makes SCSI adapters for use in personal computer products, including "host" adapters for use in PC servers and adapters for disk drive controllers. During early 1997, Adaptec's stock was a poor performer, declining from $46-7/8 per share in mid-1/97 to just $30-1/8 in mid-4/97, as the investment community was concerned that Adaptec's SCSI products were becoming a mature, aging technology and doubts over Adaptec's ability to continue to achieve consistent revenue and earnings per share ("EPS") gains as it had in recent years surfaced. During the spring of 1997, Adaptec's top insiders became determined to halt the decline in Adaptec's stock and drive Adaptec stock to higher, artificially inflated levels so that they could capitalize on that price inflation by selling large amounts of the shares of Adaptec stock they actually owned, to pocket millions in illegal insider-trading profits and personally profit from their deliberate and dishonest acts.

2. By the beginning of the Class Period when Adaptec announced its record 4thQ FY97 and FY97 results on 4/29/97, defendants knew Adaptec was already encountering two substantial problems with its business which, if disclosed, would result in its stock trading at a significantly lower price. First, sales of Adaptec's SCSI products for use in hard disk drive controller chips were slowing due to the problems being encountered with hard disk drive sales by Adaptec's largest disk drive customers, including Western Digital. In addition, sales of Adaptec's SCSI host adapter products to OEM manufacturers and into Adaptec's distribution channel were also slowing because, as PC manufacturers attempted to manufacture and market "stripped-down" PCs selling for $2,000 or less, they were eliminating SCSI host adapters due to cost considerations, which was resulting in slowing demand for Adaptec's SCSI products. Because Adaptec received 20%-25% of its revenue and profits from sales of hard disk drive controller adapters and about 75%-80% of its revenues and profits from sales of SCSI host adapters for PC servers, defendants knew these two adverse developments would have a material adverse impact on Adaptec's business in the near term and result in Adaptec's record of strong revenue and EPS gains coming to an end, with a resultant sharp decline in its stock price.

3. In order to conceal these adverse factors and their negative impact on Adaptec's business and thus support and artificially inflate Adaptec's stock price while they unloaded substantial amounts of their own stock holdings, Adaptec's insiders not only failed to disclose these two problems with Adaptec's business, but also affirmatively misrepresented the state of demand for all of Adaptec's SCSI products and Adaptec's prospects for continued strong revenue and EPS growth during FY98 and FY99, while manipulating and inflating Adaptec's reported EPS for the 4thQ of FY97 and the 1stQ and 2ndQ of FY98, ended 6/30/97 and 9/30/97. Thus, Adaptec exceeded its forecasted EPS "numbers" and was able to show the consistent quarter-over-quarter EPS growth it had forecasted to analysts and the investment community, but only by improperly and prematurely recognizing revenue on shipments of SCSI products into its distribution channel to several of its large distributor customers, including Ingram Micro, Merisel, Tech Data, Gates/Arrow, Computer 2000 and Actebis, by recognizing millions in revenue from the shipment of such products in violation of Generally Accepted Accounting Principles ("GAAP") because, in fact, Adaptec had secretly agreed that those distributors could return those products if they did not resell them, and also by failing to take required write-offs of accounts receivables of doubtful collectibility necessary for a fair presentation of its results. As a result of these false statements, reassurances, forecasts and false financial results, Adaptec's stock increased to $54-1/4 per share in 10/97 from as low as $34-1/2 in late 6/97 -- a 60% increase in just over three months.

4. When Adaptec reported its FY97 results in late 4/97, it represented that its business and competitive position were both very strong and that demand for its SCSI products -- both for disk drives and host adapters -- was so strong that it expected FY98 revenues and EPS to grow by at least 25% over the next several years. Adaptec also told investors it expected to begin to receive revenues from its RAID, Fibre Channel and 1394FireWire products during the second half of FY98. During the summer of 1997, Adaptec told the market that notwithstanding a slowdown in Europe, due mostly to anticipated seasonal factors, and negative publicity about slowing sales of high-end hard disk drives, Adaptec had good SCSI growth prospects and expected to meet its revenue and EPS estimates with FY98 EPS of $2.15-$2.25 and FY99 EPS of $2.40-$2.65. When Adaptec reported 1stQ and 2ndQ FY98 EPS that slightly exceeded prevailing expectations, it attributed these excellent results to strong demand for its products from both its OEM customers and its distribution channel, assured investors that the problems of Seagate Technology (a disk drive manufacturer that was not an Adaptec customer) were company-specific and not due to industry factors and that Adaptec expected its growth to accelerate in the second half of FY98 due to increasing demand for Adaptec's SCSI PC products, and as a result it was actually increasing its FY98 and FY99 forecasts. During the fall of 1997, Adaptec continued to reassure investors of the underlying strength of its core business, telling them Adaptec's business was actually better than expected -- especially in Europe -- and that, due to continuing strong demand for its products, it was on track to achieve its forecasted results. In early 11/97, when Adaptec held its first-ever analysts conference, defendants again assured analysts of robust underlying demand for Adaptec's products and its significant revenue and earnings growth prospects -- assuring them that current business trends remained favorable. Thus, as of 11/97, Adaptec had apparently achieved several quarters of consistent revenue and EPS growth, as shown below:

Adaptec, Inc.
Quarterly & Annual Results
Excluding Estimated Effects of Charges for
Purchased Research & Development
in thousands, except EPS

                                            Fiscal 1995                         
                    07/01/94     09/30/94     12/31/94     03/31/95         Year

Revenues            $106,061     $106,574     $123,367     $130,192     $466,194
Net Income           $17,592      $18,458      $27,403      $29,949      $93,402
Earnings Per Share     $0.17        $0.18        $0.26        $0.28        $0.88

                                            Fiscal 1996                         
                    07/01/95     09/30/95     12/31/95     03/31/96         Year

Revenues            $138,025     $149,110     $176,187     $196,025     $659,347
Net Income           $31,163      $33,557      $37,587      $41,068     $143,375
Earnings Per Share     $0.29        $0.31        $0.34        $0.37        $1.31

                                            Fiscal 1997                         
                    06/30/96     09/29/96     12/30/96     03/31/97         Year

Revenues            $202,014     $215,043     $251,703     $265,108     $933,868
Net Income           $42,914      $43,237      $53,584      $57,826     $197,561
Earnings Per Share     $0.39        $0.38        $0.46        $0.49        $1.72

                         Fiscal 1998                                            
                    06/30/97     09/29/97                                       

Revenues            $271,442     $278,088                                       
Net Income           $59,689      $62,719                                       
Earnings Per Share     $0.51        $0.53

5. When problems surfaced in certain Asian markets in late 1997, Adaptec assured analysts that Adaptec had minimal exposure to most Asian economies, the dislocations there would not have any material adverse impact on Adaptec's FY98 results and that its sales in Japan, its largest Asian market, were relatively stable. In early 12/97, when the business problems of hard disk drive manufacturers, like Adaptec's customer Western Digital, became so widely known that Adaptec could no longer credibly deny that the problems of its disk drive customers were not adversely impacting its shipments of SCSI controls to them, Adaptec confirmed that its sales of SCSI products into the hard disk drive market were slowing slightly and that, as a result, Adaptec's 3rdQ and 4thQ FY98 EPS would be a few pennies less than earlier forecast due to a slight revenue shortfall, while emphasizing that Adaptec's core business -- the sale of SCSI products to PC manufacturers and into its distribution channels, which provided 80% of its revenues and profits -- remained extremely strong with robust demand and thus Adaptec was well positioned to achieve revenue and EPS growth in the 3rdQ and 4thQ of FY98 and throughout FY99, as previously forecast.

6. However, on 1/8/98, contrary to its prior representations, Adaptec suddenly revealed that it would suffer a huge ($30-$35 million) revenue shortfall for its 3rdQ FY98 resulting in EPS of just $.21-$.23 -- well less than half the levels previously forecast -- and that such disappointing results would continue in the 4thQ FY98 due to very weak sales of Adaptec's SCSI products into its distribution channels in the United States and the adverse impact on its business of economic conditions in Asia, especially Japan. Adaptec's stock immediately collapsed on these revelations, falling by almost $16 per share to as low as $20 per share -- a stunning 44% one-day collapse on volume of 29.8 million shares -- the largest one-day stock price and percentage decline and trading volume in Adaptec's history as a public company, leaving Adaptec's stock 63% below its Class Period high just three months earlier.

7. However, before these startling revelations occurred, and Adaptec's stock price collapsed, the 12 Adaptec insiders named as defendants herein unloaded 757,311 shares of their Adaptec stock at artificially inflated prices as high as $50.63 per share, pocketing $31 million in illegal insider trading proceeds! John Adler -- the Chairman of Adaptec -- unloaded 383,750 shares for $14.5 million -- an astonishing 99% of the stock he actually owned, while Grant Saviers -- the CEO of the Company -- unloaded 114,800 shares for $5.2 million -- over half his shares. All told, eight of the 12 insiders sued sold between 90% and 100% of the Adaptec stock they owned, three of the Individual Defendants sold between 80% and 90% of the Adaptec stock they owned and one sold 51% of the Adaptec stock he owned. In the aggregate, these top Adaptec insiders, collectively unloaded 85% of the Adaptec stock they actually owned, while Adaptec stock was selling at artificially inflated levels because they were issuing very positive but false statements about Adaptec's business, financial results and its prospects for continued EPS growth.

8. The Individual Defendants' massive insider selling during the Class Period is summarized below: 

                                                                    % of                       
                         Shares                                   Holdings              Total  
Defendants                Sold              Price Range             Sold               Proceeds

Adler                   383,750             $36.75-$41.69            99%            $14,596,813
Boucher                  12,500             $33.00-$50.44           100%            $   477,900
Brown                    18,936             $42.00                   93%            $   795,312
Clayton                  13,175             $39.38-$49.63            88%            $   583,242
East                     10,000             $42.00-$47.25           100%            $   446,250
Fisher                   10,000             $49.00                   81%            $   490,000
Gourley                  34,150             $42.00-$47.63           100%            $ 1,574,313
Hansen                   45,000             $40.00-$46.75            95%            $ 1,967,063
Kazarian                 10,000             $37.50-$50.25            81%            $   438,750
Saviers                 114,800             $39.25-$47.00            51%            $ 5,280,900
Stephens                 90,000             $38.13-$48.32            91%            $ 3,788,350
White                    15,000             $37.38-$50.63           100%            $   641,430

Totals:                 757,311             $33.00-$50.63            85%            $31,080,323

9. Each of the positive statements about Adaptec's business during the Class Period was materially false and misleading when issued, and failed to disclose, inter alia, the following adverse information which was then known only to defendants due to their access to internal Adaptec data:

10. The chart below shows the price of Adaptec stock while defendants were issuing their false and misleading statements about the Company, defendants' sales of their Adaptec stock at inflated prices during that period and the subsequent collapse as the previously concealed adverse facts began to be disclosed.

JURISDICTION AND VENUE

11. The claims asserted herein arise under §§10(b) and 20(a) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. §§78j(b) and 78t(a), and Rule 10b-5, 17 C.F.R. §240.10b-5.

12. Jurisdiction is conferred by §27 of the Exchange Act, 15 U.S.C. §78aa, and 28 U.S.C. §1331.

13. Venue is proper in this District pursuant to §27 of the Exchange Act, and 28 U.S.C. §1391(b). Adaptec is headquartered in this District. The false and misleading statements were made or issued from this District and most of the Individual Defendants live here. Thus, most of the acts and transactions giving rise to the violations of law complained of occurred in this District.

INTRADISTRICT ASSIGNMENT

14. 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.

THE PARTIES

15. Plaintiff Sheldon Raiken purchased 50 shares of Adaptec common stock on 12/4/97 at $38-11/16 per share and 25 shares on 12/4/97 at $38-3/16 per share, and was damaged thereby.

16. Defendant Adaptec maintains its headquarters at Milpitas, California. During the Class Period, Adaptec's common stock traded in an efficient market on the NASDAQ National Market System.

17. (a) Defendant John G. Adler ("Adler") was, at all relevant times, Chairman of the Board of the Company. Because of his position with the Company, he had access to the adverse non-public information about its 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. During the Class Period and as part of the fraudulent scheme, Adler sold 383,750 shares of Adaptec stock at prices as high as $41.69 per share based on inside information, pocketing over $14.5 million. These sales constituted 99% of Adler's holdings in Adaptec. All shares acquired by Adler by exercising stock options during the Class Period (283,750 shares) were sold by him for huge, risk-free and illegal profits. Adler's stock sales during the Class Period were unusual in timing and amount as set forth below:

(b) Defendant F. Grant Saviers ("Saviers") was, at all relevant times, President, Chief Executive Officer and a director of the Company. Because of his position with the Company, he had access to the adverse non-public information about its 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. During the Class Period and as part of the fraudulent scheme, Saviers sold 114,800 shares of Adaptec stock at prices as high as $47 per share based on inside information, pocketing over $5.2 million. These sales constituted 51% of Saviers' holdings in Adaptec. All the shares acquired by Saviers during the Class Period by exercising stock options were sold by him for huge, risk-free and illegal profits. Saviers' stock sales during the Class Period were unusual in timing and amount as set forth below:

(c) Defendant Robert N. Stephens ("Stephens") was, at all relevant times, Chief Operating Officer of the Company. Because of his position with the Company, he had access to the adverse non-public information about its 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. During the Class Period and as part of the fraudulent scheme, Stephens sold 90,000 shares of Adaptec stock at prices as high as $48.32 per share based on inside information, pocketing over $3.7 million. These sales constituted 91% of Stephens' holdings in Adaptec. All these shares were acquired by Stephens exercising stock options, which he then instantly sold for a huge, risk-free and illegal profit. Stephens' stock sales during the Class Period were unusual in timing and amount as set forth below:

(d) Defendant Andrew J. Brown ("Brown") was, at all relevant times, Vice President, Corporate Controller and Principal Accounting Officer of the Company. Because of his position with the Company, he had access to the adverse non-public information about its 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. During the Class Period and as part of the fraudulent scheme, Brown sold 18,936 shares of Adaptec stock at $42 per share based on inside information, pocketing over $795,312. These sales constituted 93% of Brown's holdings in Adaptec. All these shares were acquired by Brown exercising stock options, which he then instantly sold for huge, risk-free and illegal profits. Brown's stock sales during the Class Period were unusual in timing and amount as set forth below:

(e) Defendant Richard J. Clayton ("Clayton") was, at all relevant times, Vice President and General Manager of the Company. Because of his position with the Company, he had access to the adverse non-public information about its 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. During the Class Period and as part of the fraudulent scheme, Clayton sold 13,175 shares of Adaptec stock at prices as high as $49.63 per share based on inside information, pocketing over $583,000. These sales constituted 88% of Clayton's holdings in Adaptec. All these shares were acquired by Clayton exercising stock options, which he then instantly sold for huge, risk-free and illegal profits. Clayton's stock sales during the Class Period were unusual in timing and amount as set forth below:

(f) Defendant Michael G. Fisher ("Fisher") was, at all relevant times, Vice President and General Manager of the Company. Because of his position with the Company, he had access to the adverse non-public information about its 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. During the Class Period and as part of the fraudulent scheme, Fisher sold 10,000 shares of Adaptec stock at $49 per share based on inside information, pocketing over $490,000. These sales constituted 81% of Fisher's holdings in Adaptec. All these shares were acquired by Fisher exercising stock options, which he then instantly sold for a huge, risk-free and illegal profit. Fisher's stock sales during the Class Period were unusual in timing and amount as set forth below:

(g) Defendant Richard S. Gourley ("Gourley") was, at all relevant times, Vice President, Worldwide Sales of the Company. Because of his position with the Company, he had access to the adverse non-public information about its 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. During the Class Period and as part of the fraudulent scheme, Gourley sold 34,150 shares of Adaptec stock at prices as high as $47.63 per share based on inside information, pocketing over $1.5 million. These sales constituted 100% of Gourley's holdings in Adaptec. All shares acquired by Gourley by exercising stock options (33,750 shares) were sold by him for huge, risk-free and illegal profits. Gourley's stock sales during the Class Period were unusual in timing and amount as set forth below:

(h) Defendant Paul G. Hansen ("Hansen") was, at all relevant times, Vice President of Finance and Chief Financial Officer of the Company. Because of his position with the Company, he had access to the adverse non-public information about its 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. During the Class Period and as part of the fraudulent scheme, Hansen sold 45,000 shares of Adaptec stock at prices as high as $46.75 per share based on inside information, pocketing over $1.9 million. These sales constituted 95% of Hansen's holdings in Adaptec. All these shares were acquired by Hansen exercising stock options, which he then instantly sold for huge, risk-free and illegal profits. Hansen's stock sales during the Class Period were unusual in timing and amount as set forth below:

(i) Defendant Sam Kazarian ("Kazarian") was, at all relevant times, Vice President of Operations of the Company. Because of his position with the Company, he had access to the adverse non-public information about its 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. During the Class Period and as part of the fraudulent scheme, Kazarian sold 10,000 shares of Adaptec stock at prices as high as $50.25 per share based on inside information, pocketing over $438,000. These sales constituted 81% of Kazarian's holdings in Adaptec. All these shares were acquired by Kazarian exercising stock options, which he then instantly sold for risk-free and illegal profits. Kazarian's stock sales during the Class Period were unusual in timing and amount as set forth below:

(j) Defendant Laurence B. Boucher ("Boucher") was, at all relevant times, a director of the Company. Because of his position with the Company, he had access to the adverse non-public information about its 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. During the Class Period and as part of the fraudulent scheme, Boucher sold 12,500 shares of Adaptec stock at prices as high as $50.44 per share based on inside information, pocketing over $477,000. These sales constituted 100% of Boucher's holdings in Adaptec. All these shares were acquired by Boucher exercising stock options, which he then sold for huge, risk-free and illegal profits. Boucher's stock sales during the Class Period were unusual in timing and amount as set forth below:

(k) Defendant John East ("East") was, at all relevant times, a director of the Company. Because of his position with the Company, he had access to the adverse non-public information about its 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. During the Class Period and as part of the fraudulent scheme, East sold 10,000 shares of Adaptec stock at prices as high as $47.25 per share based on inside information, pocketing over $446,000. These sales constituted 100% of East's holdings in Adaptec. 5,000 of these shares were acquired by East exercising stock options, which he then sold for a huge, risk-free and illegal profit. East's stock sales during the Class Period were unusual in timing and amount as set forth below:

(l) Defendant Phillip E. White ("White") was, at all relevant times, a director of the Company. Because of his position with the Company, he had access to the adverse non-public information about its 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. During the Class Period and as part of the fraudulent scheme, White sold 15,000 shares of Adaptec stock at prices as high as $50.63 per share based on inside information, pocketing over $641,000. These sales constituted 100% of White's holdings in Adaptec. All these shares were acquired by White exercising stock options, which he then instantly sold for a huge, risk-free and illegal profit. White's stock sales during the Class Period were unusual in timing and amount as set forth below:

18. The individuals named as defendants in ¶17(a)-(l) are referred to herein as the "Individual Defendants." Adler and Saviers by reason of their stock ownership, management positions, and/or membership on Adaptec's Board, were controlling persons of Adaptec and had the power and influence, and exercised the same, to cause it to engage in the illegal conduct complained of herein. The Individual Defendants are liable for the false statements pleaded herein at ¶¶23, 37 and 51, as those statements were each "group-published" information, the result of the collective action of the Individual Defendants.

19. The Individual Defendants, because of their positions with the Company, controlled and/or possessed the power and authority to control the contents of its quarterly and annual reports, press releases and presentations to securities analysts, which information was conveyed through the analysts to the investing public. Each defendant was provided with copies of the Company's reports and press releases alleged herein to be misleading prior to or shortly after their issuance and had the ability and opportunity to prevent their issuance or cause them to be corrected. Because of their positions and access to material non-public information available to them but not to the public, each of these defendants knew or recklessly disregarded that the adverse facts specified herein had not been disclosed to and were being concealed from the public and that the positive representations which were being made were then materially false and misleading. Despite their duty not to sell their Adaptec stock under such circumstances, defendants nonetheless did so.

MOTIVE AND OPPORTUNITY

20. The defendants' motive to engage in this conduct included a desire to attempt to continue Adaptec's historic record of sequential quarterly revenue and EPS growth, especially on the part of Saviers who was Adaptec's new CEO, to manipulate and artificially inflate the price of Adaptec's stock, to enhance the value of their holdings of Adaptec stock and/or options to purchase Adaptec stock and permit Adaptec's insiders to sell off large portions of their Adaptec stock at inflated prices.

DEFENDANTS' FRAUDULENT SCHEME
AND COURSE OF BUSINESS

21. Each of the defendants is liable as a participant in a fraudulent scheme and course of business that operated as a fraud or deceit on purchasers of Adaptec stock, including false and misleading statements and/or concealed material, adverse facts. The fraudulent scheme and course of business: (i) deceived the investing public regarding Adaptec's products and business; (ii) deceived the commercial markets regarding Adaptec's success with its products; (iii) artificially inflated the price of Adaptec stock; (iv) caused plaintiff and other members of the Class to purchase Adaptec stock at inflated prices; and (v) permitted the defendants to dispose of over 757,000 shares of Adaptec stock, pocketing some $31 million in illegal insider-trading profits.

STATUTORY SAFE HARBOR

22. The statutory safe harbor provided for forward-looking statements under certain circumstances does not apply to any of the allegedly false forward-looking statements pleaded in this Complaint because none of the forward-looking statements pleaded herein were identified as a "forward-looking statement" when made. Nor was it stated that actual results "could differ materially from those projected." Nor did meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statements accompany those forward-looking statements. In any event, each of the forward-looking statements alleged herein was authorized by an executive officer of Adaptec, and was actually known by each of the Individual Defendants to be false when made.

FALSE AND MISLEADING STATEMENTS
ISSUED DURING THE CLASS PERIOD

23. On 4/29/97, Adaptec reported its 4thQ FY97 and FY97 results for the quarter and year ended 3/31/97 by a release which was headlined and stated:

ADAPTEC POSTS RECORD YEAR AND RESULTS; Q4 FY'97 REVENUES AND EARNINGS SUSTAIN RECORD PACE

The Company's fiscal fourth quarter revenues were $265 million, up 35% from the $196 million reported for the same quarter of the prior fiscal year. Net income, for the quarter, excluding non-recurring acquisition charges, was $58 million or $0.50 per share.

* * *

For its 1997 fiscal year, Adaptec's revenues were $934 million, an increase of 42% over fiscal year 1996. . . . Net income, excluding acquisition charges, for fiscal year 1997 was $198 million or $1.72 per share.

"This has been a landmark year for Adaptec," said Grant Saviers, Adaptec President and CEO. "In the third quarter, we achieved a run rate of $1 billion. The fourth quarter marks our 51st consecutive profitable quarter and our 19th consecutive quarter of operating profit over 20 percent."

24. On 4/29/97, subsequent to the release of its FY97 results, Adaptec held a conference call for securities analysts, money and portfolio managers, institutional investors, large Adaptec shareholders, brokers and stock traders to discuss Adaptec's business and its prospects. During the call, Saviers (the CEO) and Hansen (the CFO) made presentations and answered questions. During the call -- and in follow-up conversations with participants -- they directly disseminated important information to the market by stating:

25. On 4/30/97, Robertson Stephens issued a report on Adaptec written by Rossi, which was based on and reported information provided Rossi in the 4/27/97 conference call and follow-up conversations with Saviers and/or Hansen. The report forecast FY98 EPS of $2.15, and following quarterly FY98 EPS:

Q1     $0.51 
Q2     $0.51 
Q3     $0.55 
Q4     $0.58 

Year   $2.15

The report also stated:

In the conference call following the report, company management sketched out some encouraging guidelines for F1998: sales growth of at least 25%, with the usual seasonal pattern; gross margin within the recent range[; and] . . . operating margin within the recent range . . . . Encouraged by the quarter's results and the favorable outlook, we have raised our EPS estimate for F1998 from $2.08 to $2.15.

* * *

Adaptec management stands by its previously enunciated view that sales can grow at least 25% year to year in F1998.

* * *

We reiterate that the important elements of the Adaptec investment thesis remain intact. First, Adaptec's competitive position remains extremely strong, rivaling those of Intel and Microsoft in their respective markets. Second, the network server market, which accounts for 55% of Adaptec's sales, is undergoing a major retooling that could last for two-to-three years. A large slice of the server market still runs 486 processors on an AT bus and is moving resolutely to Pentium Pro servers with PCI, which require new host adapters from Adaptec. Interface standards are highly resistant to change, so the installed base of servers also provides a large stream of recurring revenue. Third, Adaptec's sales to high-end PC manufacturers are on the rise with the advent of a new class of PC, the PC technical workstation. Like its UNIX brethren, the PC workstation typically comes equipped with high-performance SCSI peripherals, again involving Adaptec. Fourth, rising memory requirements and the emergence of the hard drive as a recording-and-playback device for multimedia applications should keep the rate of growth in the drive business lively. We forecast that unit shipments of disk drives will continue to expand at about a 30% annual rate.

* * *

Encouraged by the quarter's results and the favorable outlook, we have raised our EPS estimate for F1998 from $2.08 to $2.15.

26. On 4/30/97, Lehman Brothers issued a report on Adaptec, written by Valeiras, which was based on and reported information provided Valeiras in the 4/29/97 conference call and follow-up conversations with Saviers and Hansen. The report forecast FY98 and FY99 EPS of $2.17 and $2.63, respectively, and the following quarterly FY98 EPS:

Q1     $0.51
Q2     $0.52
Q3     $0.56
Q4     $0.59

Year   $2.17

The report also stated:

The strong revenue growth . . . was driven by ongoing demand for the company's SCSI host adapter solutions as well as its disk controller silicon. We expect these two sectors to continue to grow at a 25%+ rate, with potential additional growth coming from new product lines.

Gross margin was a solid 59.6% above our estimate of 57.5%. The company attributed the strong gross margin to wafer price declines as well as a favorable product mix.

Guidance for fiscal 1998 was quite bullish, and we are comfortable with our estimate of $2.17 per share. We are also initiating an estimate for FY99 of $2.63 per share. We believe that continued growth in Adaptec's core business as well as new growth from new technologies can continue to fuel 25%+ growth over the next several years.

* * *

Growth Drivers and Outlook. We believe that Adaptec's growth will continue to be fueled by growth in its core SCSI Host Adapter and Peripheral Technologies businesses throughout FY98. New technologies and products could contribute as much as 10% to revenues in the coming year. These new products include 1394FireWire, Redundant Array of Independent Disk (RAID), and Fibre Channel solutions.

On a conference call after the close yesterday, management stated that its 5th generation SCSI solution will be available later this year with generations 6 and 7 already in the design channel. In addition to refreshing average selling prices through new products, the company is also increasing its software offerings. A better mix of software to hardware will help Adaptec maintain its gross margin in the high 50% range.

Our long term outlook remains very bullish for Adaptec.

27. On 4/30/97, Bear Stearns issued a report on Adaptec written by Neff, which was based on and reported information provided Neff in the 4/29/97 conference call and follow-up conversations with Saviers and Hansen. The report forecast FY98 and FY99 EPS of $2.15 and $2.60, respectively, for Adaptec. The report forecast the following quarterly FY98 and FY99 EPS for Adaptec:

EARNINGS      Q1          Q2          Q3           Q4              
              Jun         Sep         Dec          Mar         Year

1998        $0.51E      $0.51E      $0.54E       $0.59E      $2.15E
1999        $0.60E      $0.62E      $0.66E       $0.73E      $2.60E

The report stated:

Business remained strong . . . .

* * *

In addition to the demand for faster access to data through the SCSI standard in servers and an increasing share of desktop PCs, ADPT is well positioned to benefit from new initiatives including Fibre Channel, which is aimed at the high-end Enterprise storage systems, and FireWire, which is aimed at hooking up multimedia devices to PCs.

Adaptec has emerged as the market leader in products based on standards (e.g. SCSI) -- developed through its expertise in semiconductors and software . . . . From a larger perspective, through acquisitions of other growth companies, ADPT is positioning itself to have multiple engines of growth -- all of which leverage on its ability to move data faster.

28. On 4/30/97, PaineWebber issued a report on Adaptec written by Lazlo, which was based on and reported information provided Lazlo in the 4/29/97 conference call and follow-up conversations with Saviers and Hansen. The report forecast FY98 and FY99 EPS of $2.15 and $2.80, respectively. The report also stated:

Adaptec reported another solid financial performance for its fourth fiscal quarter as operating EPS of $0.50 increased 33% from the $0.37 reported last year and were slightly above our consensus estimates of $0.49. . . . SCSI sales grew 25% to $197 million, reflecting demand for Pentium and Pro-based file servers that contain SCSI host adapter cards. Each file server uses an average of 1.7 SCSI host adapters per system. Hard disk drive controller sales soared 79% to $68 million due to strong demand for high density drivers during the period . . . . The gross margin expanded to nearly 60% . . . .

For fiscal 1998, we are maintaining our EPS estimate of $2.15, suggesting a 25% annual gain. Revenues could climb to $1.1 billion. SCSI revenues are expected to expand 27% almost $900 million due to estimated 25-30% unit growth of Intel-based file servers, and increased penetration of SCSI on the desktop. Less than 10% of all desktop PCs contain SCSI technology. Hard disk drive revenue growth is expected to moderate to around 20% to better reflect the underlying unit growth of hard drives. The gross margin is expected to remain in the 59% area . . . .

We are also maintaining our fiscal 1999 EPS estimate of $2.80. Revenues could expand 25% to $1.5 billion reflecting the solid outlook for file server and hard disk drive demand. We predict that the gross margin will remain in the 58-59% region . . . .

29. During 6/3/97-6/5/97, Adaptec executives Saviers and Hansen appeared at the PaineWebber Aggressive Growth and Technology Conference at the Grand Hyatt Hotel in New York City. In a formal presentation and in break-out sessions, they said to the assembled security analysts, money and portfolio managers, institutional investors, brokers and stock traders:

30. On 6/3/97, Saviers and Hansen of Adaptec met with Valeiras of Lehman Brothers in New York City and told him that:

31. On 6/4/97 Lehman Brothers issued a report on Adaptec written by Valeiras which was based on and repeated the information provided Valeiras by Adaptec executives Saviers and Hansen on 6/3/97. The report forecast the following FY98-FY99 EPS:

         EPS/1998  EPS/1999
QTR                        
1st:       0.51E     0.61E 
2nd:       0.52E     0.62E 
3rd:       0.56E     0.68E 
4th:       0.59E     0.72E 

Year:     $2.17E    $2.63E

The report also forecast a five-year EPS growth rate for Adaptec of 26%. The report also stated:

After a meeting with Adaptec management last night, we continued to believe that the company remains in a solid position . . . and should be able to deliver strong year over year growth of 25%+.

The June and September quarters are the seasonally slower quarters for Adaptec. Our estimates have anticipated slower growth and we believe that Adaptec can continue to meet our estimates for these two quarters.

* * *

Yesterday, Seagate's announcement of slowdown in its high end drive market caused some concern. We have determined that the products in question do not use Adaptec controllers. Adaptec's key customers in this area are Western Digital and IBM.

* * *

We believe that SCSI has good growth prospects ahead of it. When Fibre Channel is ready to challenge SCSI on cost, performance, and features, we think Adaptec will be the one driving the transition.

32. On 6/17/97, Adaptec's CEO Saviers appeared at a Bear Stearns Technology Conference in New York City. Saviers appeared and made a formal presentation and then met with analysts, money and portfolio managers, institutional investors, brokers and stock traders in a break-out session. He stated:

33. On 6/18/97, Bear Stearns issued a report on Adaptec which reflected Saviers' presentation to the Technology Conference the day before. The report stated:

At the Bear Stearns Technology Conference, Adaptec CEO Grant Saviers noted that 1Q98 EPS are on track -- up sequentially -- at $0.51 vs. $0.38 the year before. Europe, as previously noted, is below plan, but the U.S. and Asia on plan.

Company is positioned to benefit from key industry trends: demand for servers, move to NT, need for quicker access to data.

* * *

Maintaining our estimates for fiscal 1998 at $2.15 and fiscal 1999 at $2.60, which could be conservative in view of strong demand for servers and high-end storage devices.

The Bear Stearns report also forecast the following FY98 and FY99 quarter results:

            Q1      Q2      Q3      Q4       Year 
1998      $0.51E  $0.51E  $0.54E  $0.59E    $2.15E
1999      $0.60E  $0.62E  $0.66E  $0.73E    $2.60E

34. Each of the positive statements about Adaptec's business during the Class Period between 4/29/97-6/18/97, as set forth in ¶¶23-33, was materially false and misleading when issued, and failed to disclose, inter alia, the following adverse information which was then known only to defendants due to their access to internal Adaptec data:

35. On 7/1/97 Lehman Brothers issued a report on Adaptec, written by Valeiras. This report was written after Valeiras had extensive discussions with Saviers and Hansen and was based on and repeated information provided him by them. Saviers and Hansen reviewed this report before it was issued and assured Valeiras it was substantially accurate knowing it would be publicly issued and affect the total mix of information impacting Adaptec's stock price. The report forecast FY98 and FY99 EPS of $2.17 and $2.63, respectively, a 26% five-year EPS growth rate and the following FY98/FY99 quarterly results:

          EPS/1998   EPS/1999
QTR.                       
1st:       0.51E      0.61E
2nd:       0.52E      0.62E
3rd:       0.56E      0.68E
4th:       0.59E      0.72E

Year:    $ 2.17E    $ 2.63E

The report also stated:

We believe Adaptec's core SCSI business should continue to provide 25%+ growth for several years.

* * *

Over the next several quarters, Adaptec's growth should be mainly driven by Network Server growth. Server demand is expected to grow 25-30% year over year, with no imminent signs of slowdown. Coupled with server demand is ongoing demand for larger storage devices and faster backup systems to keep pace with applications that require access to larger centralized databases and multi-tasking operating environments that require fast disk access. These trends make Adaptec's current and future connectivity solutions critical for improving the overall performance of the networked system.

We believe Adaptec's core SCSI business can grow at a rate of 25%+ per year . . . .

36. On 7/21/97 Lehman Brothers issued another report on Adaptec, written by Valeiras. This report was written after Valeiras had extensive discussions with Saviers and Hansen and was based on and repeated information provided him by them. Saviers and Hansen reviewed this report before it was issued and assured Valeiras it was substantially correct knowing it would be publicly issued and affect the total mix of information impacting Adaptec's stock price. The report forecast FY98 and FY99 EPS of $2.17 and $2.63, respectively, and a 26% five-year EPS growth rate for Adaptec and the same quarterly FY98 and FY99 EPS as in the Lehman Brothers' 7/1/97 report.

37. On 7/24/97, Adaptec issued a release reporting its 1stQ FY98 results for the quarter ended 6/30/97, which was headlined and stated:

ADAPTEC FIRST QUARTER REVENUES UP 34%; 24TH CONSECUTIVE QUARTER OF REVENUE GROWTH

Revenues were $271 million, up 34% from the $202 million reported for the corresponding quarter of the prior fiscal year. Net income for the first quarter was $60 million or $0.51 per share.

Grant Saviers, Adaptec's president and CEO, said: "With this quarter's results, I'm pleased to announce yet another milestone for Adaptec. For the first time, revenues from our past four quarters total more than $1 billion. This great accomplishment reflects . . . the strong demand for Adaptec's broad array of bandwidth solutions."

Paul Hansen, Adaptec's chief financial officer, added: "I'd like to emphasize our continuing record of success as well. This marks our 52nd consecutive quarter of profitability, and our 24th consecutive quarter[] of revenue growth. We are all proud of Adaptec's record of solid financial achievement and continuing operational excellence."

38. On 7/24/97, subsequent to the release of Adaptec's 1stQ FY98 results, Adaptec held a conference call for securities analysts, money and portfolio managers, institutional investors, large Adaptec shareholders and stock traders to discuss Adaptec's business. During the call, Saviers and Hansen made presentations and answered questions, directly disseminating important information to the market, by stating:

39. On 7/25/97, Bear Stearns issued a report on Adaptec, written by Neff, which was based on and repeated information provide Neff in the 7/24/97 conference call and follow-up conversations with Saviers and Hansen. The report increased the forecasted FY98 and FY99 EPS for Adaptec to $2.15 and $2.60, respectively. The report forecast the following FY98 and FY99 quarterly results for Adaptec:

EARNINGS         Q1       Q2      Q3      Q4           
                 Jun      Sep     Dec     Mar      Year

1998           $0.51A   $0.51E  $0.54E  $0.59E   $2.15E
1999           $0.60E   $0.62E  $0.66E  $0.73E   $2.60E

The report also stated:

Business remained strong from multiple geographies and both OEM and distribution.

Its gross margin of 60.4% was above our forecast owing to favorable mix trends, favorable pricing environment and wafer cost reduction.

* * *

In addition to the demand for faster access to data through the SCSI standard in servers and an increasing share of desktop PCs, ADPT is well positioned to benefit from new initiatives including Fibre Channel, which is aimed at the high-end Enterprise storage systems, and FireWire, which is aimed at hooking up multimedia devices to PCs.

40. On 7/25/97, Donaldson Lufkin & Jenrette issued a report on Adaptec, written by Shankar, which was based on and reported information provided Shankar in the 7/24/97 conference call and follow-up conversations with Saviers and Hansen. The report increased the forecasted FY98 and FY99 EPS for Adaptec to $2.10 and $2.30, respectively. The report also forecast the increased quarterly FY98 results:

1998 

F1QA    $0.51 
F2QE     0.51 
F3QE     0.53 
F4QE     0.55

The report stated:

Adaptec reported strong first quarter, fiscal 1998 revenue and earnings of $271 million and $0.51 per share . . . . Results were driven by continuing high margin PCI/SCSI host adapter sales for Pentium Pro based WindowsNT workstations/servers . . . .

41. On 7/25/97, PaineWebber issued a report on Adaptec, written by Lazlo, which was based on and repeated information provided Lazlo in the 7/24/97 conference call and follow-up conversations with Saviers and Hansen. The report increased the forecasted FY98 and FY99 EPS for Adaptec to $2.20 and $2.80, respectively. The report stated:

Expected . . . robust 30% growth in file server market that should produce 25% secular EPS growth for Adaptec.

* * *

Historically, the company has experienced slightly higher sequential revenues and flat EPS in the summer quarter. We expect the same trend this year as revenues could edge up [to] the $275 million area, up 28% over last year, lead by higher disk drive controller sales. Revenues from SCSI boards may remain essentially flat around $197 million as Weakness in Europe will be off-set by higher sales in the US. The gross margin is expected to remain in the 60% area, while slightly higher operating expenses could prevent earnings growth. Still, estimated EPS of $0.51 will compare favorably with $0.38 last year (up 34%).

For the year, we raised our EPS estimate to $2.20 from $2.15 to reflect the slightly better than expected first quarter results . . . .

We maintained our fiscal 1999 EPS projection of $2.80, up 27% from this years estimate . . . .

42. On 7/25/97, Lehman Brothers issued a report on Adaptec, written by Valeiras, which was based on and reported information provided Valeiras in the 7/24/97 conference call and follow-up conversations with Saviers and Hansen. The report forecast FY98 and FY99 EPS of $2.17 and $2.63, respectively, for Adaptec and the following quarterly results:

EPS       1998       1999 
QTR.                      
1st:      0.51E      0.61E
2nd:      0.52E      0.62E
3rd:      0.56E      0.68E
4th:      0.59E      0.72E

Year:    $2.17E     $2.63E

The report stated:

The company reported a solid quarter with revenues and earnings meeting our expectations. Revenue growth was mainly driven by growth in the Peripherals Technology Solutions group, which was up over 10% sequentially. The key products in the PST group include SCSI disk controllers that are sold to disk drive manufacturers such as Western Digital and IBM. Over the course of the quarter, Adaptec's shares came under pressure as Seagate's high end disk drive business began to deteriorate. From Adaptec's performance in disk controllers, it appears that Seagate's problems were not an industry wide issue and that IBM and WDC's high end disk drive business remained robust.

The SCSI host adapter business, which represents 73% of Adaptec's revenue, was essentially flat sequentially. This was the result of a seasonally slower growth period as well as a slow down in Europe, specially in April and May. Although the September quarter is still in the seasonally slow part of the year and Europe tends to be slow through mid-August, we believe we will see nominal growth from the host adapter business in the September quarter.

Second half outlook. Adaptec is positioned extremely well for the second half of the year. The December and March quarters are traditionally strong for the company and we believe that this year will be no exception. Growth into the second half should be fueled by accelerating demand for Window NT based servers . . . . In addition, new products for RAID, Fibre Channel and 1394 FireWire should begin to contribute to the revenue growth in 2H FY98.

43. On 7/25/97, Robertson Stephens & Co. issued a report on Adaptec, written by Rossi, which was based on and repeated information provided Rossi in the 7/24/97 conference call and follow-up conversations with Saviers and Hansen. The report forecast FY98 and FY99 EPS of $2.15 and $2.55, respectively, for Adaptec and the following FY98 quarterly results:

QTRLY        1998E

EPS:1Q A     $0.51
    2Q       $0.51
    3Q       $0.55
    4Q       $0.59

Year         $2.15

The report also stated:

In the conference call following the release of the June-quarter results, Adaptec management made its usual cautionary remarks about the September quarter, noting that it is a period of just "nominal (sequential) growth." On top of that, the European market, always treacherous in the summertime, is already in a slump. Yet there is no reason for more than the usual fretting about the summer. According to management, the company began the quarter with "a strong order position" and backlog that is above average for this point in the year. Although the team did not reiterate its earlier guidance that sales growth would be in the range of 25% for F1998, it did not change it either, but simply remarked that the year would likely follow the usual pattern and show stronger sales in the second half than the first. . . . [S]o we leave our current F1998 EPS estimate of $2.15 unchanged. We also establish an EPS estimate of $2.55 for F1999.

* * *

Acceleration in December in March

[W]e still expect Adaptec's business to show solid results this quarter and then accelerate in the December and March quarters. We reiterate that the important elements of the Adaptec investment thesis remain intact. First, Adaptec's competitive position remains extremely strong, rivaling those of Intel and Microsoft in their respective markets. Second, the network server market, which accounts for 55% of Adaptec's sales, is undergoing a major retooling, sparked partly by corporations' need to move to new distributed networks to solve legacy Year 2000 problems. Third, Adaptec's sales to high-end PC manufacturers are on the rise with the advent of a new class of PC, the technical workstation. Like its UNIX brethren, the PC workstation typically comes equipped with high-performance SCSI peripherals, again involving Adaptec. Fourth, rising memory requirements and the emergence of the hard drive as a recording-and-playback device for multimedia applications should keep the rate of growth in the drive business lively. Adaptec looks geared to continue its enviable financial performance, which includes more than 30% growth in sales and earnings . . . .

44. On 8/1/97, Saviers gave an interview to Ann Sundius on the MSNBC Private Financial Network. He stated:

SUNDIUS: You mentioned the SCSI technology . . . this is a technology Adaptec pioneered, and today you own a very high percentage of the market in the PC -- 75 percent, I believe. But it's only in about 12 percent of the PC market. Is that true?

SAVIERS: That's true. On an overall basis, SCSI is used on a small fraction of the total personal computers sold. But when you look inside the market, you find that more than one SCSI host adapter is used per server. So, our servers are approaching about two SCSI host adapters per server. High performance workstations are rapidly using SCSI . . . .

* * *

[T]here's several reasons we say to investors we have the wind at our back as a company. One of those is the way the industry is structured. The companies with horizontal focus are doing very well. And vertical integration as a model is kind of dead. There's another reason which is companies want to do more out-sourcing. A third reason is really a technological reason that IO is very important as systems get to be higher and higher horsepower.

* * *

So, we've been the SCSI company, but we're now becoming the fiber channel company and the fire-wire company and the fast Ethernet company for servers, and even interesting things like direct satellite broadcast of data is a new technology that we're working.

* * *

SUNDIUS: Here at the conference focusing on semiconductors, what did you feel was the highlight of your pitch that you wanted to get across?

SAVIERS: Well, that the wind is at our back in the sense of technology trends, the industry structure trends, the growth of Pentium, the growth of NT into the enterprise, we're really excited about riding the NT wave into the enterprise, as NT becomes the preferred enterprise solutions platform. And that we have the strategy to capitalize on that, that we can expand our franchise. We have a very strong brand.

We are doing well in our core businesses and are expanding the company out from those core businesses and core competencies into exciting new markets.

45. On 8/8/97, Morgan Stanley issued a report on Adaptec written by Munson. This report was written after Munson had extensive discussions with Saviers and Hansen and was based on and repeated information provided him by them. Saviers and Hansen reviewed this report before it was issued and assured Munson it was correct, knowing it would be publicly issued and affect the total mix of information impacting Adaptec stock price. The report forecast FY98 and FY99 EPS of $2.16 and $2.61 respectively and a five-year 20% EPS growth rate for Adaptec. The report forecast the following FY98 and FY99 quarterly EPS:

Qtrly      1Q       2Q       3Q       4Q   
EPS                                       
98E      $0.51A   $0.51E   $0.56E   $0.58E
99E      $0.61E   $0.62E   $0.67E   $0.72E

The report stated:

We expect disk drive unit growth to be strong (17%+ annually) for the next several years due to growth in multi-disk-drive systems, sales of add-on storage, and solid underlying PC unit growth. Disk drive growth should exceed PC growth.

* * *

Very consistent results -- Adaptec has posted 24 quarters of sequential revenue and net income growth, 52 consecutive profitable quarters, and 20 consecutive quarters of 20%-plus operating profits. Moreover, ADPT has maintained steady gross margins above 57% for the last ten quarters. This is one of the company's biggest positives and one of the reasons we like the stock so much. This management team has proven over and over again that they are capable of returning consistency, with conservative accounting.

[W]e expect Adaptec to continue to post sequential increases in revenue, gross margin in the high 50%'s to low 60%'s range, pretax margins in the high 20%'s, and a 25% tax rate.

For F1998 (Mar), we look for Adaptec to report a 26% Y/Y increase in revenue to $1.2B . . . and EPS of $2.16 (up 26% Y/Y).

In F1999, we look for revenue of $1.4B (up 22% Y/Y) . . . . Our F1999E EPS is $2.61 (up 21% Y/Y).

46. On 8/12/97, Saviers met with Lazlo of PaineWebber and told him:

47. On 8/13/97, PaineWebber issued a report on Adaptec, written by Lazlo, entitled "Strategic Update With Management," which was based on and repeated information given Lazlo by Saviers and stated:

1. We met with Grant Saviers, CEO, to discuss the current business outlook, the company's strategic direction, the progress of new products and competitive issues.

2. Current business conditions are somewhat better than expected and as expressed on the FQ1 conference call on July 24. Demand for both host adapters and controller IC's have not experienced the normal seasonal fall-off, but instead, have shown some sequential growth in July. In particular, Europe has not weakened, but has remained stable.

48. Each of the positive statements about Adaptec's business during the Class Period between 7/1/97-8/13/97 set forth in ¶¶35-47 was materially false and misleading when issued, and failed to disclose, inter alia, the following adverse information which was then known only to defendants due to their access to internal Adaptec data:

49. On 10/21/97 and 10/22/97, Hansen met with analysts, money and portfolio managers and brokers in New York City and Boston under the auspices of Bear Stearns. During those meetings Hansen told participants that:

50. On 10/21/97 Bear Stearns issued a report on Adaptec written by Neff. This report was written after Neff had extensive discussions with Saviers and Hansen and was based on and repeated information provided him by them. Saviers and Hansen reviewed this report before it was issued and assured Neff it was correct knowing it would be publicly issued and affect the total mix of information impacting Adaptec's stock price. The report forecast FY98 and FY99 EPS of $2.15 and $2.60, respectively, for Adaptec and the following quarterly EPS:

EARNINGS      Q1      Q2     Q3      Q4            
              Jun     Sep    Dec     Mar       Year

1998        $0.51A  $0.51E  $0.55E  $0.60E   $2.15E
1999        $0.60E  $0.61E  $0.66E  $0.72E   $2.60E

The report stated:

As the market leader in the SCSI standard, Adaptec is positioned to see continued growth from the demand for faster access to data . . . .

* * *

We are maintaining our estimates for fiscal 1998 at $2.15 and fiscal 1999 at $2.60, which could be conservative in view of strong demand for servers and high-end storage devices.

The company has a superb record of 52 consecutive quarters of profitability, 24 quarters of revenue growth and 21 quarters with pretax margins over 20% and a return on invested capital of over 50%.

Key factors favoring Adaptec:

* * *

Server demand will drive growth. Server growth is strong and the SCSI attach rate exceeds 100%--average number of SCSI devices per server sold exceeds one. Intelligent input/output is particularly important to file servers where response time is critical (servers manage intranets, Internets, electronic data interchanges, database and other "mission critical" applications).

We anticipate 20-30% top-line growth driven by growth in servers, increased penetration of the desktop, and increased utilization of peripherals such as optical drives, video and scanners that have massive bandwidth requirements. Basically, any change or progress in microprocessors, connections or peripherals is good for Adaptec; e.g. bigger drives require faster throughputs to make the data readily accessible.

Strong fundamentals: Gross margins and operating margins are approximately 59% and 28.1% respectively. The firm is also notable for its consistency; 52 consecutive quarters of profitability and 24 consecutive quarters of revenue growth.

51. On 10/28/97, Adaptec reported its 2ndQ FY98 results -- the quarter ended 9/30/97 -- in a release which was headlined and stated:

ADAPTEC POSTS RECORD EARNINGS; 53RD CONSECUTIVE QUARTER OF PROFITABILITY

Adaptec, Inc. today reported financial results for its fiscal 1998 second quarter. Revenues were $278 million, up 29% from the $215 million reported for the corresponding quarter of the prior fiscal year. Net income for the second quarter was $63 million or $0.53 per share.

Grant Saviers, Adaptec's Chairman, President and CEO, said: "I am extremely pleased to announce our success to our shareholders. This quarter's results confirm our belief that SCSI is being incorporated into more servers and systems than ever before. We are leveraging our core competencies into new markets by introducing new system bandwidth solutions that meet evolving market needs."

Paul Hansen, Adaptec's Chief Financial Officer, added: "I'm proud to note that this marks our 53rd consecutive quarter of profitability, and our 25th consecutive quarter of revenue growth."

52. Subsequent to the release of Adaptec's 2ndQ FY97 results, Adaptec held a conference call on 10/28/97 for securities analysts, money and portfolio managers, institutional investors, large Adaptec shareholders and stock traders to discuss Adaptec's business. During the call, Saviers and Hansen made presentations and answered questions, directly disseminating important information to the market, by stating:

53. On 10/29/97, Bear Stearns issued a report on Adaptec, written by Neff, which was based on and repeated information provided Neff in the 10/28/97 conference call and follow-up conversations with Saviers and Hansen. The report increased the forecasted FY98 and FY99 EPS to $2.20 and $2.70, respectively, for Adaptec and now forecast the following FY98 and FY99 quarterly results for Adaptec:

EARNINGS       Q1      Q2      Q3      Q4           
               Jun     Sep     Dec     Mar      Year

1998          $0.51A  $0.53A  $0.56E  $0.61E  $2.20E
1999          $0.62E  $0.63E  $0.69E  $0.75E  $2.70E

Owing to strong demand for servers, expanding markets for SCSI products and management's ability to execute, Adaptec extended its earnings record to 53 consecutive quarters of profitability, 25 consecutive quarters of revenue growth, 22 consecutive quarters of pretax margins over 20% and 12 consecutive quarters with pretax margins over 25% (its pretax margin reached a record 30.1%).

Business remained strong from U.S., Europe, and Japan and from both OEM and distribution. Revenues of $278 million were up 29% from the year before with strong growth in both SCSI host adapters and ASIC chips . . . .

54. On 10/29/97, Morgan Stanley issued a report on Adaptec, written by Munson, which was based on and reported information provided Munson in the 10/28/97 conference call and follow-up conversations with Saviers and Hansen. The report increased the forecasted FY98 and FY99 EPS for Adaptec to $2.20 and $2.64, respectively. The report also forecast the following quarterly EPS for Adaptec in FY98 and FY99:

Qtrly     1Q         2Q         3Q         4Q  

98E     $0.51A     $0.53A     $0.57E     $0.59E
99E     $0.61E     $0.62E     $0.68E     $0.73E

The report stated:

Last night, Adaptec . . . reported a classic ADPT quarter -- slightly above expectations with characteristically solid financial performance.

* * *

We are raising our CQ4:97E EPS a tad to $0.57 (up 25% Y/Y, up 9% Q/Q) on revenue of $307MM (up 22% Y/Y), gross margin of 62% and a 25% tax rate. . . .

Our F1998E EPS goes to $2.20 (up 28% Y/Y) from $2.16. . . . For F1999E we are raising our EPS estimate to $2.64 from $2.61 on revenue of $1.4B (up 21% Y/Y) . . . .

ADPT is hosting its first analysts' meeting on Thursday, November 6, in San Francisco. . . . We expect sentiment to be positive surrounding the meeting.

55. On 10/29/97, PaineWebber issued a report on Adaptec, written by Lazlo, which was based on and reported information provided Lazlo in the 10/28/97 conference call and follow-up conversations with Saviers and Hansen. The report increased the forecasted FY98 and FY99 EPS for Adaptec to $2.25 and $2.85, respectively. The report also forecast a secular growth rate of 25% and the following FY98 quarterly EPS for Adaptec:

          1998E     1999E

Q1        $0.51A    $0.66
Q2        $0.53A    $0.67
Q3        $0.58     $0.73
Q4        $0.63     $0.79

Year (PW) $2.25     $2.85

The report also stated:

CURRENT OUTLOOK REMAINS ROBUST

Based on the slightly better than expected second fiscal quarter results and the assumption that unit shipments of Intel-based file server shipments should continue to grow at a 25-30% pace, we have slightly increased our FY1998 EPS estimate to $2.25 from $2.22. Estimates for each of the next two quarters were raised by one penny due to slightly higher gross margin assumptions around 62%.

SLIGHTLY RAISED FY1999 PROSPECTS

We slightly raised our FY1999 EPS projections to $2.85 from $2.80 to reflect the continuation of the 62% gross margin into next year based on a moderately altered revenue mix which contains a higher portion of board products. Board product sales were projected to grow 26% to $1.1 billion lead by higher sales of SCSI boards. The company expects to start volume shipments of the next generation Ultra-SCSI II product in the fourth fiscal quarter of FY1998 (March) and should increase production of this product line as customers gradually shift to this faster input/output solution. Ultra II provides twice the bandwidth of 80 Megabytes per second peak data transfer rates over the existing Ultra-SCSI line. In the meantime, Ultra-SCSI III is in the late stages of development and should be introduced later in the fiscal year for delivery in the second half of calendar 1999.

56. On 11/6/97 Adaptec held an analysts conference in San Francisco attended by a large number of analysts, money and portfolio managers, institutional investors, brokers and stockholders. Several top Adaptec executives attended and made presentations at the conference, including Gourley, Hansen, Kazarian, Clayton, Stephens and Saviers, stating:

57. On 11/7/97, Bear Stearns issued a report on Adaptec, written by Neff, which was based on and repeated information provided him during the 11/7/97 analysts conference and stated:

* * *

The report also forecast the following FY98 and FY99 EPS for Adaptec:

EARNINGS        Q1       Q2       Q3       Q4           
                Jun      Sep      Dec      Mar      Year

1998          $0.51A   $0.53A   $0.56E   $0.61E   $2.20E
1999          $0.62E   $0.63E   $0.69E   $0.75E   $2.70E

58. On 11/7/97, Morgan Stanley issued a report on Adaptec, written by Munson, which was based on and reported information provided Munson during the 11/7/97 analysts conference. The report forecast FY98 and FY99 EPS of $2.20 and $2.64, respectively, for Adaptec and forecast the following FY98 quarterly EPS:

Qtrly      1Q        2Q       3Q        4Q  
EPS                                         

98E      $0.51A    $0.53A   $0.57E    $0.59E

* * *

Yesterday, Adaptec hosted its first ever analyst meeting in San Francisco, CA.

Managers from virtually all the company's product areas were at the meeting and the management team presented a comprehensive view of ADPT's core technology capabilities, as well as its products, markets, and strategy. Though there was no substantial new news, we believe that this was a very solid and informative analyst meeting . . . .

* * *

We are making no changes to our earnings estimates, however, the meeting gave us more confidence that our estimates are solid and that there could likely be upside. We believe that our 21% year-over-year EPS growth rate for F1999 could prove to be conservative if the company's product plans and execution continue to proceed as planned (which we believe is very possible).

59. Each of the positive statements about Adaptec's business during the Class Period between 10/21/97-11/7/97, as set forth in ¶¶49-58, was materially false and misleading when issued, and failed to disclose, inter alia, the following adverse information which was then known only to defendants due to their access to internal Adaptec data:

60. On 11/20/97, BancAmerica-Robertson Stephens issued a report on Adaptec written by Rossi. This report was written after Rossi had extensive discussions with Saviers and Hansen and was based on and repeated information provided by them. Saviers and Hansen reviewed this report before it was issued and assured Rossi it was correct knowing it would be publicly issued and affect the total mix of information impacting Adaptec's stock price. The report forecast FY98 and FY99 EPS of $2.20 and $2.60, respectively, and the following quarterly FY98 EPS for Adaptec:

FYE       March           1998E

EPS:       1Q             $0.51
           2Q             $0.53
           3Q             $0.57
           4Q             $0.60
          Year            $2.20

The report stated:

STRONG OEM DEMAND KEEPS ADAPTEC ON COURSE IN THE DECEMBER QUARTER

Business Update:

Slight Decline in Drive Controllers -- Drive controller sales will likely decline slightly quarter to quarter, following the pricing and demand trends in the drive industry.

Healthy Shipments of Host Adaptors -- Demand for host adaptors remains very robust, driven by healthy orders from OEMs for servers and PC workstations and by new business from H-P and IBM for RAID on the motherboard. The strength in host adaptor sales is offsetting the softness on the drive controller side and keeping revenue on track.

The distribution channel for host adaptors has had mixed results, but, on average, is on track:

The U.S. distribution channel picked up steam in early November.

After a surprisingly strong summer, the European distribution channel has slightly underperformed expectations in the fall.

Despite the general downtrend in Japan, Adaptec's sales there remain reasonably stable.

Southeast Asia is weak but is a relatively small part of the overall mix.

* * *

EPS Appears On Track -- The net of it is that we feel comfortable with our sales and EPS estimates of $295 million and $0.57 for the December quarter.

61. In early 12/97, due to the difficulties certain disk drive companies, including Adaptec's customer Western Digital, were having with their businesses, analysts became concerned that this might have an adverse impact on Adaptec's business since about 25% of its revenues came from sales of SCSI products for use in hard disk drive controller chips. Adaptec, through Saviers and Hansen, again confirmed that weakening sales of such products would result in slightly lower 3rdQ FY98 revenues -- perhaps $10 million less than the $285-$300+ million currently forecast and EPS in the 3rdQ FY98 and 4thQ FY98 of about $.53-$.54 and $.55-$.56, compared to the $.56-$.58 and $.59-$.63, currently forecast, and its FY98 and FY99 EPS to $2.13-$2.20 and $2.50-$2.60 from $2.20-$2.25 and $2.60-$2.70 being forecast. However, Adaptec assured analysts that its core business (which accounted for 75%-80% of its revenues) -- sale of SCSI host adapters for personal computers -- remained intact and was enjoying strong, even robust, demand. While Adaptec stock fell sharply in 12/97 from $50-1/2 on 12/1/97 to $33-7/8 by 12/15/97, the stock stabilized and continued to trade at artificially inflated levels through the balance of the Class Period due to defendants' continuing false and misleading statements and assurances and nondisclosures of material adverse non-public information.

62. The statements about Adaptec's business during late 11/97 and early 12/97, as set forth in ¶¶60-61, were materially false and misleading when issued, and failed to disclose, inter alia, the following adverse information which was then known only to defendants due to their access to internal Adaptec data:

63. On or about 12/8/97, an article entitled "Adaptec: VARs Will See New Life Breathed Into SCSI" appeared in Computer Reseller News, which stated:

This year, Adaptec, Milpitas, Calif., expects to ship nearly 10 million SCSI units, with that number growing to upward of 20 million by the year 2000, said Grant Saviers, Adaptec chairman, chief executive and president.

* * *

As a company, Adaptec has enjoyed a 39 percent compounded annual growth rate for its revenue over the past six years and 64 percent growth rate for its net income. For more than the past 50 consecutive quarters, Adaptec has been profitable, he said.

Particularly given the growth of servers and the increased trend in networking, more opportunities are opening up for the company, Saviers said.

64. On 1/5/98, Friedman Billings Ramsey & Co. issued a report on Adaptec, written by Valeiras. This report was written after Valeiras had extensive discussions with Saviers and Hansen and was based on and repeated information provided him by them. Saviers and Hansen reviewed this report before it was issued and assured Valeiras it was correct, knowing it would be publicly issued and affect the total mix of information impacting Adaptec's stock price. The report forecast the following FY98, FY99 and FY2000 EPS, a 20% five-year EPS growth rate and stated:

FY (March)    Revenue     EPS     Quarterly        Revenue      EPS

1998E         $1,121MM   $2.13    Q2/98 (Sept.)A   $278MM     $0.53
1999E         $1,300MM   $2.50    Q3/98 (Dec.)E    $280MM     $0.54
2000E         $1,673MM   $2.95    Q4/98 (Mar.)E    $291MM     $0.56

* * *

Recent Price Volatility. Adaptec's shares have recently been hit as a result of the problems in the disk drive market, the data networking market, the Asian economies and the overall weakness in the technology sector. We believe that the severity of the price decline is unwarranted and the shares now represent an attractive buying opportunity.

Problems in the disk drive market. This is the only issue that will have a real impact on Adaptec's performance. There is excess inventory of high-end disk drives that use Adaptec's SCSI controllers. We expect soft demand for these parts for the next several quarters. Adaptec sells its controllers to IBM, Western Digital, and several Asian disk manufacturers. We do not expect to see accelerating growth in this area until the September 1998 quarter.

Problems in the data networking market. Cabletron Systems and 3Coms' problems in early December sent the entire data networking sector reeling. It is important to note that Adaptec's exposure to this sector is minimal (less than 2% of total revenue).

Problems in Asia. Although end demand for all products in Asia will be somewhat muted for some time to come, we do not believe that the conditions in Asia will have a strong impact on Adaptec's business. Adaptec sells a significant portion of its product into Asia; however, the end consumption of Adaptec products in Asia is only 15%.

65. Each of the positive statements about Adaptec's business made during 12/97 and through 1/5/98, as set forth in ¶¶63-64, was materially false and misleading when issued, and failed to disclose, inter alia, the following adverse information which was then known only to defendants due to their access to internal Adaptec data:

66. On 1/8/98, Adaptec stock traded as high as $36-5/8. After the close on 1/8/98, Adaptec suddenly revealed it had suffered a huge revenue and EPS shortfall for its 3rdQ FY98 ended 12/31/97 and would suffer similar disappointing results for the 4thQ FY98 to end 3/31/98. In its release and conversations with analysts, Adaptec admitted that its 3rdQ FY98 revenues would be only $250-$255 million, at least $30-$35 million below forecast, with EPS of just $.21-$.23, far below the $.53-$.54 forecast as recently as 12/97, and that its results in the 4thQ FY98 would not be any better. Adaptec admitted it had encountered poor sales in both North America and Asia (especially Japan) of SCSI host adapters (the most important part of its business with 75%-80% of its sales), especially in Adaptec's distribution channel. According to Adaptec, increasing sales of "stripped down" $2,000 PCs without add-on SCSI Host Bus adapters had greatly reduced sales of SCSI host adapters, and in addition to the weak sales of SCSI disk drive controller chips, had caused these shocking revenue and EPS shortfalls. These stunning revelations resulting in an almost unprecedented collapse of Adaptec's stock as it declined by $15.92 per share to as low as $20 per share -- a 44% one-day decline on volume of 29.8 million shares, the largest one-day price and percentage decline and trading volume in Adaptec's history as a public company.

ADAPTEC'S FALSE FINANCIAL
REPORTING DURING THE CLASS PERIOD

67. In order to inflate the price of Adaptec's stock, defendants caused the Company to falsely report its results for the 4thQ of FY97 and first two quarters of FY98 through improper revenue recognition on shipments to distributors (including Ingram Micro, Merisel, Tech Data, Gates/Arrow, Computer 2000 and Actebis) and failing to adequately accrue for bad debts, thereby materially overstating its revenue, net income and EPS in each of the 4thQ of FY97, 1stQ of FY98 and 2ndQ of FY98. Ultimately, Adaptec admitted that its results for 3rdQ of FY98 would be adversely affected due to excess inventory in the distribution channel (i.e., $25-$35 million in product which distributors had not been able to resell which could potentially be returned) and by increased reserves for bad debts of at least $12 million.

68. Adaptec reported the following amounts for 4thQ FY97 and 1stQ and 2ndQ FY98 (before charges for purchased research and development):

                  3/31/97      6/30/97      9/30/97 

Revenue           $265.1 M     $271.4 M     $278.1 M
Net Income        $ 57.8 M     $ 59.7 M     $ 62.7 M
EPS               $ 0.49       $ 0.51       $ 0.53

69. Reporting these results -- with sequential EPS gains -- enabled Adaptec to meet its own and analysts' forecasts for its EPS growth and continue its highly vaunted record of consistent revenue and EPS growth achieved utilizing conservative accounting practices.

70. Adaptec included its 4thQ FY97 results in a Report on Form 10-K which was filed with the SEC. The Form 10-K was signed by Adler, Saviers, Stephens, Hansen, Boucher, East and White and included a "Report of Management" signed by Hansen and Saviers which represented that the "accompanying financial statements were prepared in conformity with generally accepted accounting principles and as such include some amounts based on management's best judgments and estimates."

71. The 1stQ and 2ndQ FY98 results were included in Form 10-Q's filed with the SEC. The Form 10-Q's, which were signed by Hansen, represented that the accompanying financial statements included all adjustments "necessary to provide a fair presentation of the results for the interim periods presented."

72. These representations were false and misleading when made, as Adaptec's financial statements for 4thQ FY97 and 1stQ and 2ndQ FY98 were not a fair presentation of Adaptec's results and were presented in violation of GAAP and SEC rules.

73. GAAP are those principles recognized by the accounting profession as the conventions, rules and procedures necessary to define accepted accounting practice at a particular time. SEC Regulation S-X (17 C.F.R. §210.4-01(a)(1)) states that financial statements filed with the SEC which are not prepared in compliance with GAAP are presumed to be misleading and inaccurate, despite footnote or other disclosure. Regulation S-X requires that interim financial statements must also comply with GAAP, with the exception that interim financial statements need not include disclosure which would be duplicative of disclosures accompanying annual financial statements. 17 C.F.R. §210.10-01(a).

74. The Individual Defendants caused Adaptec to falsify its reported financial results through its improper revenue recognition on Adaptec's shipments of host adapters to distributors including Ingram Micro, Merisel, Tech Data, Gates/Arrow, Computer 2000 and Actebis while granting to the distributors the right to return unsold product. Pursuant to GAAP, Adaptec should have deferred recognition of revenue on such shipments, but did not in order to inflate its reported results. Moreover, pursuant to GAAP, Adaptec was required to adequately accrue losses for uncollectible accounts receivable, but did not in order to report growing EPS during the Class Period.

75. GAAP, as set forth in FASB Statement of Accounting Standard ("SFAS") No. 48, Revenue Recognition When Right of Return Exists, prohibits the recognition of revenue when the right of return exists unless certain conditions are met. SFAS No. 48 applies to transactions "in which a product may be returned, whether as a matter of contract or as a matter of existing practice." SFAS No. 48, ¶3. SFAS No. 48, ¶6 states:

6. If an enterprise sells its product but gives the buyer the right to return the product, revenue from the sales transaction shall be recognized at time of sale only if all of the following conditions are met:

76. GAAP, as set forth in SFAS No. 5, Accounting for Contingencies, requires that the estimated portion of uncollectible accounts receivable be accrued in the period it becomes evident that receivables or some portion of the receivables will not be collected. SFAS No. 5, ¶22 states in part:

Losses from uncollectible receivables shall be accrued when both conditions in paragraph 8 [it is probable that an asset has been impaired and the amount of loss can be reasonably estimated] are met. Those conditions may be considered in relation to individual receivables or in relation to groups of similar types of receivables. If the conditions are met, accrual shall be made even though the particular receivables that are uncollectible may not be identifiable.

77. Despite granting the right to return unsold merchandise to its distributors, Adaptec improperly recognized the revenue and failed to adequately accrue losses for uncollectible receivables in order to inflate its reported results, contrary to GAAP.

78. Unfortunately for investors, these results, and the representations concerning them, were false. Absent the Company's improper accounting for revenues and receivables, Adaptec would not have reported sequential growth in EPS during 4thQ FY97 and 1stQ and 2ndQ FY98. Moreover, Adaptec would not have been able to show revenue growth in 2ndQ FY98 which Adaptec falsely represented was its "25th consecutive quarter of revenue growth."

79. Ultimately, Adaptec disclosed that 3rdQ FY98 results would be adversely affected by lower than expected sell-through of inventory in the channel, resulting in revenues of $250-$255 million compared to estimates of $280 million, and due to write-offs of $.15 per share for higher bad debt reserves and other charges.

80. Due to these accounting improprieties, the Company presented its financial results and statements in a manner which violated GAAP, including the following fundamental accounting principles:

81. Further, the undisclosed adverse information concealed by defendants during the Class Period is the type of information which, because of SEC regulations, regulations of the national stock exchanges and customary business practice, is expected by investors and securities analysts to be disclosed and is known by corporate officials and their legal and financial advisors to be the type of information which is expected to be and must be disclosed.

INSIDER SELLING

82. While Adaptec's top insiders were issuing favorable statements about Adaptec, the Individual Defendants sold 757,311 shares of Adaptec stock, for more than $31 million -- over 85% of their collective holdings of Adaptec stock -- to personally profit from the artificial inflation in Adaptec's stock price which their fraudulent scheme had created. Notwithstanding their access to confidential information as a result of their status as directors, officers and/or insiders of the Company, and their corresponding duty to disclose adverse material facts before trading in Adaptec stock, the Individual Defendants sold significant amounts of Adaptec shares at artificially inflated prices in order to profit from the fraud, and did so while in possession of material non-public information. Defendants' insider selling during the Class Period is detailed below:

               DATE          SHARES          PRICE                PROCEEDS 
NAME           SOLD           SOLD         PER SHARE             FROM SALE 

Adler          05/02/97      283,750        $36.75              $10,427,813 
               07/20/97      100,000        $41.69              $ 4,169,000 

                             383,750                            $14,596,813 

Percent of shares actually owned sold:                                       99% 

Boucher        06/12/97        8,750        $33.00                 288,750 
               11/04/97        3,750        $50.44               $ 186,150 

                              12,500                             $ 476,900 

Percent of shares actually owned sold:                                      100% 

Brown          07/29/97       18,936        $42.00               $ 795,312 

Percent of shares actually owned sold:                                       93% 

Clayton        05/28/97        3,375        $39.38               $ 132,908 
               07/29/97        2,000        $41.00                  82,000 
               08/04/97        3,000        $44.00                 132,000 
               08/15/97        3,000        $49.00                 147,000 
               09/11/97        1,800        $49.63                $ 89,334 

                              13,175                             $ 583,242 

Percent of shares actually owned sold:                                       88% 

East           07/31/97        5,000        $42.00               $ 210,000 
               10/31/97        5,000        $47.25               $ 236,250 

                              10,000                             $ 446,250 

Percent of shares actually owned sold:                                      100% 

Fisher         08/18/97       10,000        $49.00               $ 490,000 

Percent of shares actually owned sold:                                       81% 

Gourley        07/29/97          400        $42.00                $ 16,800 
               08/05/97       25,000        $45.63               1,140,750 
               10/31/97        8,750        $47.63               $ 416,763 

                              34,150                           $ 1,574,313 

Percent of shares actually owned sold:                                      100% 

Hansen         05/28/97       20,250       $40.00                  810,000 
               08/08/97       24,750       $46.75              $ 1,157,063 

                              45,000                           $ 1,967,063 

Percent of shares actually owned sold:                                       95% 

Kazarian       06/17/97        5,000       $37.50                $ 187,500 
               11/10/97        5,000       $50.25                $ 251,250 

                              10,000                             $ 438,750 

Percent of shares actually owned sold:                                       81% 

Saviers        05/28/97       14,800       $39.25                $ 580,900 
               08/13/97      100,000       $47.00              $ 4,700,000 

                             114,800                           $ 5,280,900 

Percent of shares actually owned sold:                                       51% 

Stephens       05/27/97       55,000       $38.13              $ 2,097,150 
               09/05/97       35,000       $48.32              $ 1,691,200 

                              90,000                           $ 3,788,350 

Percent of shares actually owned sold:                                       91% 

White          05/09/97        5,000       $37.38                $ 186,900 
               07/20/97        5,000       $40.38                  201,900 
               08/22/97        1,000       $50.63                   50,630 
               08/22/97        4,000       $50.50                $ 202,000 

                              15,000                             $ 641,430 

Percent of shares actually owned sold:                                      100% 

TOTALS:                      757,311                           $31,080,321 

Percent of shares actually owned sold:                                       85%

83. Defendants massive insider selling during the Class Period is summarized below: 

                                                             % of                      
                    Shares                                 Holdings             Total  
Defendants           Sold            Price Range             Sold              Proceeds

Adler              383,750           $36.75-$41.69            99%           $14,596,813
Boucher             12,500           $33.00-$50.44           100%           $   477,900
Brown               18,936           $42.00                   93%           $   795,312
Clayton             13,175           $39.38-$49.63            88%           $   583,242
East                10,000           $42.00-$47.25           100%           $   446,250
Fisher              10,000           $49.00                   81%           $   490,000
Gourley             34,150           $42.00-$47.63           100%           $ 1,574,313
Hansen              45,000           $40.00-$46.75            95%           $ 1,967,063
Kazarian            10,000           $37.50-$50.25            81%           $   438,750
Saviers            114,800           $39.25-$47.00            51%           $ 5,280,900
Stephens            90,000           $38.13-$48.32            91%           $ 3,788,350
White               15,000           $37.38-$50.63           100%           $   641,430

Totals:            757,311           $33.00-$50.63            85%           $31,080,323

FIRST CLAIM FOR RELIEF

For Violation Of §10(b) Of The
Exchange Act And Rule 10b-5 Against All Defendants

84. Plaintiff incorporates ¶¶1-83 by reference.

85. Each of the defendants: (a) knew the material, adverse, non-public information about Adaptec's financial results and then-existing business conditions, which was not disclosed; and (b) participated in drafting, reviewing, and/or approving the misleading statements, releases, reports, and other public representations of and about Adaptec.

86. During the Class Period, defendants disseminated or approved the false statements specified above, which they knew 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. Defendants violated §10(b) of the Exchange Act and Rule 10b-5 in that they:

88. The undisclosed adverse information concealed by defendants during the Class Period is the type of information which, because of SEC regulations, regulations of the national stock exchanges and customary business practice, is expected by investors and securities analysts to be disclosed and is known by corporate officials and their legal and financial advisors to be the type of information which is expected to be and must be disclosed. For example:

89. Plaintiff and the Class have suffered damages in that, in reliance on the integrity of the market, they paid artificially inflated prices for Adaptec stock. Plaintiff and the Class would not have purchased Adaptec stock at the prices they paid, or at all, if they had been aware that the market prices had been artificially and falsely inflated by defendants' misleading statements.

SECOND CLAIM FOR RELIEF

For Violation Of §20(a) Of The Exchange Act
Against Defendants Adler, Saviers and Adaptec

90. Plaintiff incorporates ¶¶1-89 by reference.

91. Defendants Adler and Saviers acted as controlling persons of Adaptec within the meaning of §20(a) of the Exchange Act. By reason of their positions as directors and/or officers of Adaptec they had the power and authority to cause Adaptec to engage in the wrongful conduct complained of herein. Adaptec controlled each of the Individual Defendants and all of its employees.

92. By reason of such wrongful conduct, Adaptec, Saviers and Adler are liable pursuant to §20(a) of the Exchange Act. As a direct and proximate result of these defendants' wrongful conduct, plaintiff and the other members of the Class suffered damages in connection with their purchases of Adaptec common stock during the Class Period.

CLASS ACTION ALLEGATIONS

93. Plaintiff brings 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 Adaptec stock (the "Class") on the open market during the Class Period. Excluded from the Class are defendants herein, members of their immediate families, any entity in which a defendant has a controlling interest, and the legal representatives, heirs, successors-in-interest, or assigns of any excluded party.

94. 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, Adaptec had more than 300 million shares of stock outstanding, owned by hundreds of shareholders.

95. There is a well-defined commonality of interest in the questions of law and fact involved in this case. The questions of law and fact common to the members of the Class which predominate over questions which may affect individual Class members include the following:

96. Plaintiff's claims are typical of those of the Class because plaintiff and the Class sustained damages from defendants' wrongful conduct.

97. Plaintiff will adequately protect the interests of the Class and he has retained counsel who are experienced in class action securities litigation. Plaintiff has no interests which conflict with those of the Class.

98. A class action is superior to other available methods for the fair and efficient adjudication of this controversy.

99. The prosecution of separate actions by individual Class members would create a risk of inconsistent and varying adjudications.

BASIS OF ALLEGATIONS

100. Because the PSLRA, §21D(c) of the Exchange Act [15 U.S.C. §78u-4(c)], requires complaints to be pleaded in conformance with Federal Rule of Civil Procedure 11, plaintiff has alleged the foregoing based upon the investigation of his counsel, which included a review of Adaptec's SEC filings, securities analysts' reports and advisories about the Company, press releases issued by the Company, media reports about the Company, private investigations and discussions with consultants, and, pursuant to Rule 11(b)(3), believes that after reasonable opportunity for discovery, substantial evidentiary support will likely exist for the allegations set forth at ¶¶1, 3, 9, 34, 48, 59, 62, 65, 67, 72, 74, 77 and 78-81.

PRAYER FOR RELIEF

WHEREFORE, plaintiff prays for judgment as follows:

JURY DEMAND

Plaintiff demands a trial by jury.

DATED: January 23, 1998

MILBERG WEISS BERSHAD
HYNES & LERACH LLP
WILLIAM S. LERACH
ALAN SCHULMAN

______________________________
WILLIAM S. LERACH

600 West Broadway, Suite 1800
San Diego, CA 92101
Telephone: 619/231-1058

MILBERG WEISS BERSHAD
HYNES & LERACH LLP
REED R. KATHREIN
222 Kearny Street, 10th Floor
San Francisco, CA 94108
Telephone: 415/288-4545

SCHIFFRIN CRAIG &
BARROWAY, LLP
RICHARD S. SCHIFFRIN
ANDREW L. BARROWAY
Three Bala Plaza East
Suite 400
Bala Cynwyd, PA 19004
Telephone: 610/667-7706

Attorneys for Plaintiff

COMPLNTS\ADAPTEC2.CPT

 

Source: Milberg Weiss website