PRONGAY & BORDERUD
KEVIN M. PRONGAY (87010)
JON W. BORDERUD (134355)
12121 Wilshire Blvd.
Suite 400
Los Angeles, CA 90025
Telephone: 310/207-2848

Attorneys for Plaintiff
 
 

MELVIN FREEDENBERG, On Behalf of   )    No. C-99-1924-SBA
Himself and All Others Similarly   )
Situated,                          )    CLASS ACTION
                                   )
                    Plaintiff,     )    COMPLAINT FOR VIOLATION OF
    vs.                            )    THE SECURITIES EXCHANGE ACT
                                   )    OF 1934
SECURE COMPUTING CORP., JEFFREY H. )
WAXMAN, TIMOTHY P. MCGURRAN,       )
PATRICK REGESTER, GARY D. TAGGART, )
HOWARD SMITH and CHRISTINE HUGHES, )
                                   )
                    Defendants.    )
                                   )    Plaintiff Demands A
___________________________________)    Trial By Jury
 
 

2. Secure Computing develops and sells network security projects. During the Class Period, defendants assured the investment community that Secure Computing was still enjoying strong growth in orders and was on track to continue to report strong revenue and earnings growth through 1999. As a result, Secure Computing's stock price was artificially inflated during the Class Period from the $12-14 range at the beginning of the Class Period to as high as $28. When Secure Computing ultimately admitted that its revenue was declining and that it was changing its emphasis away from indirect sales of its products, its stock collapsed to as low as $5-9/16 on volume of 4.8 million shares. While investors, who paid as high as $28 for Secure Computing stock, have lost millions, the top officers and directors of Secure Computing have made millions, recently selling and/or filing to sell 366,001 shares worth more than $6 million before disclosing the bad news.

3. Secure Computing went public in 1995 at $16 per share and immediately shot up to $64 per share. Later the price of the Company's shares dropped to just $5 per share, where it remained for several months in 1996-1997 as the Company reported disappointing results, including no revenue growth and consistent losses as it attempted to integrate new acquisitions. In late 1997, additional new management was brought in, new products were introduced and the new management changed Secure Computing's sales focus to indirect sales stating that this would allow the Company to significantly increase its sales and earnings. As a result of these changes and the Company's apparent revenue growth and profitability, its stock price began to increase. However, by the beginning of the Class Period, defendants were aware that Secure Computing's growth rate was slowing. In order to sell millions of dollars of Secure Computing stock before the truth about the problems then afflicting the Company actually reached the market, defendants continued to portray Secure Computing as a growing company and report increasing earnings so as to inflate Secure Computing's stock price. Thus, they represented that demand was strong, that backlog had never been better and it was on track to report growing revenues and EPS of $.09+ in Q1 1999 and EPS of $0.80+ in 1999. It was not until April 1, 1999, just weeks after reiterating at a special presentation on February 18, 1999, that the Company was on target to report its usual 30%-50% revenue and earnings growth for the current and subsequent quarters, that defendants disclosed Secure Computing's terrible operating results and diminishing prospects. Defendants shocked the market by announcing that the Company had revenues of only $10 million in Q1 1999, a decline from Q1 1998 and a large loss of $0.58 per share.

4. Defendants' material omissions with respect to the impact of its problems successfully selling its products through indirect channels, the declining demand for its products both to the government and other customers, and its misrepresentations regarding its past and its future profitability, had the expected and intended effect of materially inflating Secure Computing's stock price throughout the Class Period.

5. During the Class Period, defendants materially misled the investing public, thereby inflating the price of Secure Computing stock, by publicly issuing false and misleading statements and omitting to disclose material facts necessary to make defendants' statements, as set forth herein, not false and misleading. Said statements and omissions were materially false and misleading in that they failed to disclose material adverse information and misrepresented the truth about the Company, its business and operations, including, inter alia, that:

(a) Demand for Secure Computing's products was declining and was materially worse than represented by the defendants;

(b) Defendants misinformed the market regarding the strength and stability of the Company's underlying operations and trends, and Secure Computing was manipulating its reported revenues by shipping excessive product into the sales channel and then recognizing the revenue which resulted in Secure Computing experiencing delays in collecting its receivables as customers would not pay for product they did not need;

(c) The Company's excessive shipment of product into the indirect sales channel would ultimately result in decreased sales of the Company's products as distributors worked through the excess inventory of Secure Computing products;

(d) Secure Computing's financial condition was weakened and diminishing because of undisclosed adverse trends and circumstances that contradicted and undermined defendants' assurances regarding the Company's performance and prospects and the intrinsic value of the stock disseminated to investors during the Class Period;

(e) The Company's increased focus on indirect sales was not successful and Secure Computing's distributors were not effective at selling its products which was hurting Secure Computing's current order flow and future prospects;

(f) Secure Computing's management was not well positioned for growth but was struggling to generate sales and to replace declining sales to the federal government;

(g) The length of Secure Computing's sales cycle was increasing as customers took longer to commit to purchases which was resulting in fewer orders and more uncertainty as to future earnings;

(h) Secure Computing's growth was slowing and the Company was being adversely affected, to a greater degree than Secure Computing disclosed, by international economic turmoil;

(i) Secure Computing's international sales were extremely troubled as the Company relied on independent consultants to perform implementation of Secure Computing's products and many of the consultants were well behind schedule on implementation which was leading to declining orders and sales in Q1 99; and

(j) As a result of the foregoing negative factors, defendants knew that the forecasts of Q1 99 EPS of $.09-$.13, 1999 EPS of $.80+ and growth rates of 27%-50% were false when made as those results could not and would not be achieved.

6. Secure Computing and its insiders named as defendants herein who had knowledge of the true state of affairs of the Company's products, operations and financial condition had strong motives to inflate the price of the stock of Secure Computing. They wanted to foster and perpetuate the perception in the business community that Secure Computing was a "growth" company, thereby ensuring a substantially inflated price for Secure Computing stock. A high stock price was also important to the defendants and other knowledgeable Company insiders in that such individuals had embarked upon a plan to unload hundreds of thousands of shares of Secure Computing stock at artificially inflated prices, on the basis of adverse, non-public information about the Company's future prospects. Secure Computing's insiders thus unloaded their Secure Computing shares with a vengeance during the Class Period, selling⁽¹⁾ over 366,000 shares during the 4½ month Class Period, realizing gross proceeds in excess of $6 million:

Name                Shares Sold        Proceeds

Jeffrey H. Waxman     200,000       $ 3,325,600

Timothy P. McGurran    10,000           200,000

Patrick Regester       50,001           760,014

Gary D. Taggart        70,000         1,070,000

Howard Smith           16,000           320,000

Christine Hughes       20,000           400,000

    Totals:           366,001       $ 6,075,614

8. Market reaction to the devastating disclosures of March 31, 1999 was swift and dramatic. The market price of Secure Computing's common stock, which had traded at as high as $28 per share during the Class Period, plunged to $5-9/16 per share on April 1, 1999, before closing at $5-7/8 on huge volume of 4.8 million shares.

10. The claims herein arise under §§10(b) and 20(a) of the Exchange Act [15 U.S.C. §§78j(b) and 78t(a)] and Rule 10b-5 of the SEC promulgated thereunder [17 C.F.R. §240.10b-5].

11. (a) Venue is properly in this District pursuant to §27 of the Exchange Act and 28 U.S.C. §1331. Many of the acts and transactions giving rise to the violations of law complained of herein, including the preparation and dissemination to the investing public of false and misleading information, occurred in this District.

(b) Assignment of this action to the San Jose division is appropriate as a substantial part of the events or omissions identified herein occurred in Santa Clara County.

13. Defendant Secure Computing is a corporation organized and existing under the laws of the state of Delaware with its principal place of business in San Jose, California. The Company designs, develops, markets and sells firewalls, web filters, authentication, extranet access control, security-related professional services and other interoperable, standards-based products for end-to-end network solutions.

14. (a) Defendant Jeffrey H. Waxman ("Waxman") was CEO and Chairman of the Board of Secure Computing. During the Class Period, Waxman sold 100,000 shares of his Secure Computing stock based on inside information, pocketing over $1.9 million in illegal insider-trading proceeds. Waxman also registered to sell an additional 100,000 shares or $1.4 million worth of Secure Computing stock on March 15, 1999.

(b) Defendant Timothy P. McGurran ("McGurran") was Senior Vice President of Operations and CFO of Secure Computing. During the Class Period, McGurran filed to sell and/or sold 10,000 shares or $200,000 worth of Secure Computing stock based on inside information.

(c) Defendant Patrick Regester ("Regester") was Vice President of International Operations of Secure Computing. During the Class Period, Regester filed to sell and/or sold 50,000 shares or $760,000 worth of Secure Computing stock based on inside information.

(d) Defendant Gary D. Taggart ("Taggart") was Vice President of Worldwide sales of Secure Computing. During the Class Period, Taggart filed to sell and/or sold 70,000 shares or $1 million worth of Secure Computing stock based on inside information.

(e) Defendant Howard Smith ("Smith") was Executive Vice President of Research & Product Group of Secure Computing. During the Class Period, Smith filed to sell and/or sold 16,000 shares or $320,000 worth of Secure Computing stock based on inside information.

(f) Defendant Christine Hughes ("Hughes") was Senior Vice President of Marketing and Business Development of Secure Computing. During the Class Period, Hughes filed to sell and/or sold 20,000 shares or $400,000 worth of Secure Computing stock based on inside information.

16. In addition, by reason of their stock ownership and their status as principal executive officers and/or members of the Board of Directors of Secure Computing, the Individual Defendants participated in the preparation of the false and misleading statements complained of herein and/or were controlling persons within the meaning of §20 of the Exchange Act and had the power to, and did, influence and cause Secure Computing to engage in the unlawful conduct complained of herein.

17. The Individual Defendants, because of their positions with the Company, were able to, and did, directly or indirectly, control the conduct of the Company's business and the content of its annual and quarterly financial reports, public statements and press releases.

18. Because of their Board memberships and/or executive and/or managerial positions with the Company, the Individual Defendants had access to adverse non-public information about the Company's business, finances and future business prospects as a result of access to internal corporate documents, conversations and communication with corporate officers and employees, attendance at management and/or Board meetings and committees thereof, and via reports and other information provided to them in connection therewith.

19. During their tenure with the Company, the Individual Defendants participated in the preparation of and/or were provided with public reports, releases and filings about the Company, the contents of which the Individual Defendants knew or should have known in the exercise of reasonable diligence were false and misleading, but which they failed to correct.

21. The defendants knew, or but for their recklessness would have known, that the acts, practices, misleading statements and omissions particularized herein would be relied upon by plaintiff and the Class, and would adversely affect the integrity of the market for Secure Computing common stock and related options, and would artificially inflate and/or maintain the price of such securities. Each of the defendants, by acting as described herein, did so knowingly, or in such a reckless manner as to constitute a fraud and deceit upon plaintiff and members of the Class.

22. The defendants engaged in a scheme, common enterprise or common course of conduct to artificially inflate and/or maintain the price of Secure Computing's stock by, inter alia, issuing materially false and misleading statements, reports and press releases to the public regarding the Company's business, its investment portfolios, operations and future prospects. These statements and documents portrayed a false picture of the Company's business and operations and misrepresented and/or failed to disclose material adverse facts concerning Secure Computing's investment portfolio, business, revenues, earnings, management, financial condition and future prospects.

23. The purpose and effect of the Individual Defendants' actions was to, inter alia: (a) deceive the investing public, including plaintiff and members of the Class; (b) artificially inflate and maintain the market price of Secure Computing's common stock during the Class Period; (c) cause plaintiff and members of the Class to purchase Secure Computing securities at artificially inflated prices during the Class Period; (d) permit the Individual Defendants to profit from the inflation in Secure Computing's stock price, selling 366,000 shares of their Secure Computing stock for proceeds of $6 million; and (e) protect their executive positions at Secure Computing and the substantial compensation and prestige they obtained thereby. Each Individual Defendant was a direct, necessary and substantial participant in the scheme and common course of conduct complained of herein.

24. Each defendant is sued individually, and the liability of each arises from the fact that each engaged in all or part of the unlawful acts charged herein. Each defendant, by acting as herein described, did so knowingly or in such a reckless manner as to constitute a fraud and deceit upon Secure Computing shareholders.

26. The members of the Class are so numerous that joinder of all members is impracticable. While the exact number of Class members is unknown to plaintiff at the present time, and can only be ascertained from books and records maintained by Secure Computing and/or its agents, plaintiff believes that there are thousands of members of the Class located throughout the United States. Secure Computing has over 16 million shares of common stock outstanding owned by thousands of shareholders of record and beneficial owners. Furthermore, throughout the Class Period, Secure Computing common stock was actively traded on the NASDAQ National Market System.

27. Plaintiff's claims are typical of the claims of the members of the Class as all members of the Class are similarly affected by defendants' wrongful conduct in violation of federal law as complained of herein.

28. Plaintiff will fairly and adequately protect the interests of the members of the Class and has retained counsel competent and experienced in class actions and securities litigation. Plaintiff and members of the Class do not have interests antagonistic to or in conflict with the other members of the Class.

29. Common questions of law and fact exist as to all members of the Class and predominate over any questions affecting solely individual members of the Class. Among the questions of law and fact common to the Class are:

(a) whether defendants' acts as alleged herein have violated the federal securities laws;

(b) whether documents, reports, releases and statements disseminated by defendants to the investing public and security holders during the Class Period omitted and/or misrepresented material facts with respect to the business, financial condition and future prospects of the Company;

(c) whether defendants acted knowingly or recklessly in failing to disclose the truth with respect to the materially false and misleading statements and omissions of material fact described herein;

(d) whether the market price of the Company's securities was artificially inflated due to the non-disclosures and misrepresentations described herein; and

(e) the extent of damages sustained by members of the Class and the appropriate measure of damages.

30. A class action is superior to other available methods for the fair and efficient adjudication of this controversy since joinder of all members of the Class is impracticable. Furthermore, as the damages suffered by individual Class members may be relatively small, the expense and burden of individual litigation make it impossible for Class members to individually redress the wrongs done to them. There will be no difficulty in the management of this action as a class action.

32. In order to monitor Secure Computing's corporate performance throughout the fiscal year, Secure Computing's top managers received periodic reports prepared by its financial department, as well as other written and oral reports from members of management, including divisional managers who were aware of the corporation's performance on a daily basis and were thus aware, virtually immediately, of significant problems which arose.

33. In addition to this daily monitoring system, Secure Computing's sales department generated monthly financial reports providing detailed data with respect to overall corporate revenue, net income and earnings per share, all presented so as to compare performance for that month, that quarter and the year-to-date to the Plan/Budgets. The monthly financial reports also included comparisons of actual performance to forecasted performance.

34. Because of the foregoing, each of the Individual Defendants was aware of Secure Computing's forecasts and budgets and of the internal reports detailing the problems, and the financial reports comparing Secure Computing's actual results to those budgeted and/or forecasted. Based on the negative internal reports specified earlier and reports of the Company's actual performance compared to that budgeted and forecasted, the Individual Defendants each knew Secure Computing's business was not performing as well as publicly represented. Thus, the defendants knew that Secure Computing's forward-looking public statements issued during the Class Period were false and misleading when made.

36. Secure Computing went public in November 1995 in a "hot" IPO going from $16 to $64 per share shortly after the IPO. Taking advantage of the high stock price, Secure Computing acquired four other companies. The integration of these companies was a complete failure and the Company's revenue growth stopped, it incurred consistent operating losses and its stock price plummeted to the $5-$7 range where it remained throughout much of 1997. In late 1997, much of Secure Computing's management was revamped, the Company introduced new products and began to focus on the indirect sales channel (i.e., using distributors and resellers to market its products and services) compared to its traditional direct sales efforts. Sales to the federal government, which represented 38% of the 1996 sales, were de-emphasized and Secure Computing began to concentrate on corporate account sales, which sales it claimed had higher margins.

37. As part of the 1997 restructuring, the Company repriced options (lowered the exercise price) held by executives of the Company from as high as $30.25 to $6.125 per share. Thus, defendants could immediately benefit by reinflating Secure Computing's stock price by exercising their options and immediately selling them for a risk-free profit. One problem was that defendants did not have very many options that were vested (could be currently exercised) which limited the extent to which they could profit from their options. As a group, the Individual Defendants' beneficial ownership⁽²⁾ at March 30, 1998 was less than 2.5% of all the outstanding shares of Secure Computing. There was, however, a unique feature of Secure Computing's stock options which provided an avenue for defendants to accelerate vesting of their options. If Secure Computing's stock price remained above $21.125 on February 13, 1999, certain shares of each of the Individual Defendants would immediately vest and become exercisable. Thus, defendants were motivated to maintain a high stock price not only to be able to sell their shares at an inflated price but also so the vesting of their options would accelerate enabling these insiders to immediately benefit by exercising the options and selling the shares for risk-free profits.

38. On October 20, 1998, Secure Computing announced "record" Q3 1998 results, including revenues of $16.4 million, net income of $2.1 million and EPS of $0.11. The press release stated:

"We are pleased to report another quarterly profit and believe that our results reflect continued success in the evolution of the new Secure Computing[,]" said Jeff Waxman, Chairman and CEO. Our strong sequential growth of 17 percent for products [and] services revenue compares favorably with results reported to date by our peer group for the quarter. This demonstrates the continuing success of our tight focus on building Secure into a leading enterprise security vendor and validates our strategy of providing a comprehensive security products and services solution for customers."

"Secure Computing's SafeWord Server is the most secure, reliable and scalable authentication solution available today," said Jay Goldlist, Vice President and General Manager of Authentication Division at Secure Computing. "The opportunity to provide strong authentication for IBM Global Services, arguably one of the largest, most industrial strength ISPs in the world, signifies not only a strong and forward thinking commitment by IBM to its customers, but is a further validation of the superiority of the SafeWord technology."

• The agreement with IBM would provide revenue immediately and improve earnings going forward.
• Secure Computing was positioned to announce other high- profile deals soon which would lead to revenue and earnings growth in future quarters.
• The Company was successfully competing against Security Dynamics and other competitors.
• Secure Computing was emerging as the leader in the authentication market.
• Secure Computing was growing earnings at 25%-50% per year.
• Secure Computing was on track to report Q1 99 EPS of $0.10 and 1999 EPS of $.85.

42. On 11/16/98, The Wall Street Transcript ("TWST") published an interview given by Waxman. During the interview, Waxman stated the following:

This is the largest professional services organization of any security vendor, and certainly has the greatest depth and breadth of expertise. So with all that accomplished, we took the company from a loss of $0.38 a share to a profit in 1998 Q3, of $0.11, having been profitable every quarter since Q4 of 1997. The company is sound fundamentally, sound financially having delivered on our promise of profitability. We've taken multiple technologies from late 1996 and early 1997, and this year introduced all new generation products, so that each of our different types of products and technologies is on the cutting edge.

Simply stated, the turnaround is complete. We've put together a very strong management team. We've put together a very strong, fundamentally sound company. My measurement is very simple. The company needs to be fully recognized by the investor community, by Wall Street. We took our lumps in the 1995-1996 time frame. We're starting to come back. So we need to continue to drive the success of the company and translate that into success in the investor community. That's the big piece right now, there is still a degree of reticence, at times, in the financial community.

Actually, we have passed the point in which the internal kinds of issues - operational issues, MIS issues, reporting issues, things of that sort - are holding us back. Our main challenge is pure execution. We have a plan in place.

TWST: Do you see that overall [margin] line changing?

Mr. Waxman: The quality of the blend is going up over time. We actually have been somewhat willing to deliver hardware in the past to help a customer and we still do that. But we have it done by an outside party, and that doesn't degrade our margins. I think the quality of margins are going up, the quality of earnings are going up on a progression basis, on a trending basis per quarter. The real home run on the margin side is going to be as we cap professional services at about 50 heads going out a year, we'll be looking at 75 percent utilization, 50 percent margin. But as utilization goes up and as pricing goes up, the margins on professional services also go up. So we think that that will have by this time in 1999 a very positive effect on margins. That's a very good question. Most people never deal with margins.

TWST: The investment community. You had mentioned them early on. At this point how could they improve their understanding of your company? Is it a misperception, is it an underperception? Is it a difficulty now assembling up here review strategy for your company? Is it simply insights that need more attention from their viewpoint, from your viewpoint?

Mr. Waxman: To a degree there are some areas that need to be blown out. For example, as I mentioned earlier, we went heads down in 1997. We had at the time a couple of folks following us. They've certainly watched the company go through its changes and we feel they are beginning to have a belief the company is strong with its fundamentals in place. We've picked up half a dozen new analysts that follow the company since the beginning of this year. The folks at Paine Webber and Loewenbaum came out with very strong buys on us. So we believe we've crossed the bridge in general, but we're still pulling some of the folks over. Our multiples don't reflect, in my opinion, the capability of the company going forward.

43. After these statements, Secure Computing's stock price surged from $14-1/8 on November 9, 1998 to $20-7/8 on November 20, 1998.

44. On December 3, 1998, Secure Computing management (Waxman and McGurran) visited New York to meet with institutional investors and spoke at a luncheon hosted by Loewenbaum. During the luncheon and in follow-up conversations with participants, including analysts, large Secure Computing shareholders and media representatives, management (Waxman and McGurran) stated:

• In Q1 99, Secure Computing would ship its management console which would tie together its main products (firewalls, authentication and web filtering) and would manage third-party products as well which would significantly improve its prospects going forward.
• Secure Computing had been awarded several OEM contracts (which it refused to describe) which would involve implementation into handheld devices that had enormous potential.
• Secure Computing was on track to achieve Q1 99 and 1999 EPS of $.10-$.15 and $.80-$.85, respectively.

"We are pleased to report another solid quarterly operating profit, demonstrating our continued emergence as a leader in enterprise security," said Jeff Waxman, chairman and CEO. "We remain on track as we continue building Secure into a leading enterprise security vendor."

• Demand for Secure Computing's products, as evidenced by its strong Q4 98 results, remained strong.
• The Company was successfully moving its focus away from low-margin government business to commercial software opportunities which would lead to continued growth going forward.
• The Company had signed an agreement with the U.S. Postal Service which would lead to increased revenues in 1999.
• Secure Computing was on track to report Q1 99 and 1999 EPS of $.09-$.13 and $.80-$.85, respectively.

48. On February 13, 1999, options granted to the Individual Defendants vested because the defendants were able to keep the stock price above $21.125 for ten consecutive days. This event resulted in a $4.7 million charge to Secure Computing but also resulted in a corresponding windfall to the officers of the Company. Thereafter, defendants sought to maintain Secure Computing's inflated stock price long enough to allow them to exercise their recently vested options and cash in by immediately selling their shares of Secured Computing stock.

49. On February 18, 1999, as part of defendants' effort to prime the market for defendants' planned insider trading, Waxman and McGurran made presentations at the PaineWebber Silicon Valley Conference. During the conference, and in follow-up conversations with participants, Waxman and McGurran represented that:

• Q1 99 was on track to hit estimates of $16+ million and EPS of $.99.
• Backlog was stronger and broader than at any time in the Company's history.
• Gross margins were also improving and would be 70% in Q1 99 and 75% in 1999.
• The professional services division, which typically had a sales cycle of 8-9 months, was seeking a shortening sales cycle, which would lead to increased earnings in 1999.
• Secure Computing's security assessment service was able to find problems in most businesses' networks which led to increased opportunities to sell its products to these businesses.

                                               Growth

Firm         Date     Q1 1999 EPS   1999 EPS    Rate    Rating    Analyst

PaineWebber  2/19/99    $0.09        $0.81       50%     BUY      Preissler

52. On March 16, 1999, McGurran appeared at the PaineWebber Internet Conference and made a presentation and spoke with analysts and other participants. During these conversations, McGurran represented the following:

• Q1 99 was tracking in line with Company expectations and management was comfortable with consensus estimates of $16 million in revenue and $.09+ in EPS for Q1 99 and $.80+ in EPS for 1999.
• Competition was not hurting Secure Computing because its products were either high end with little competition or were complimentary to Microsoft and Cisco which would benefit the Company's future results.
• The professional services division was highly skilled and was an excellent source of follow-on business which would lead to continued growth in Secure Computing's future revenues.

Secure Computing Corporation today announced that its total revenue will be approximately 36% below the $12.8 million reported for the first quarter ended March 31, 1998, and the company will report a loss for the first quarter. Loss per share is expected to be approximately $0.30 before a non-cash stock option expense charge of approximately $4.7 million, and $0.58 per share including the non-cash stock option expense charge. Products and services revenue for the first quarter ending March 31, 1999 will be approximately 37% below the $10.3 million reported for the first quarter ended March 31, 1998. The company attributes the revenue decline to several factors, including, among others, unanticipated delays in closing several large transactions in the federal and international sectors which management expects will now close in the second quarter, lengthening of the sales cycle on enterprise level transactions and normal seasonality.

Analyst             Comment

Brown Brothers

Harriman            Downgrade to Neutral.

Management maintains that due to the low contract closure rate, the company now has a multi-million dollar backlog and is likely to achieve Street estimates for the remainder for the year. In our view, management will have to build investor confidence from scratch. We believe that this process could take another six to eight quarters to achieve. Recent insider selling may lead to investor class-action suits. Our short-term ratings for the stock has been downgraded from Buy to Neutral. Our long-term rating remains Neutral. The company intends to release full financial data on April 20.

HCFP/Brenner        Downgrade to Sell.

Secure Computing pre-released Q1 results, which can only be described as a disaster. While the full details will not be released until April 20, revenues are projected at about $10 million, well below the expectations of $15.5-$16.0 million. At the bottom line, Secure will report a $0.30 per share loss versus consensus estimates of $0.10. Q1 does not include another $0.28 per share charge for stock options. Frankly, management should reverse the options given Q1. Balance sheet statistics are not available but cash is probably down $2-3 million (to $18.5 million) while DSOs, with the revenue shortfall, will be up 50-75 days to 150+.

We believe the issue lies with the sales and marketing organization its management. With the Q1 miss as big as it is, hopefully some management changes will result. In the most challenging quarter, Secure decides to change its sales focus to direct and accelerates hiring. Why not do these in Q4 when business is the strongest? Secure is now focusing more on the direct channel, the second strategy change in fifteen months.

Secure has a lot of positive things going on, particularly in the authentication business. Unfortunately, the two years of building credibility and investors [sic] interest just went out the window. Management has been saying throughout the quarter that it is business as usual. A doubling of the sales cycle is not business as usual.

57. During the Class Period, defendants materially misled the investing public, thereby inflating the price of Secure Computing stock, by publicly issuing false and misleading statements and omitting to disclose material facts necessary to make defendants' statements, as set forth herein, not false and misleading. Said statements and omissions were materially false and misleading in that they failed to disclose material adverse information and misrepresented the truth about the Company, its business and operations, including, inter alia, that:

(a) Demand for Secure Computing's products was declining and was materially worse than represented by the defendants;

(b) Defendants misinformed the market regarding the strength and stability of the Company's underlying operations and trends, and Secure Computing was manipulating its reported revenues by shipping excessive product into the sales channel and then recognizing the revenue which resulted in Secure Computing experiencing delays in collecting its receivables as customers would not pay for product they did not need;

(c) The Company's excessive shipment of product into the indirect sales channel would ultimately result in decreased sales of the Company's products as distributors worked through the excess inventory of Secure Computing products;

(d) Secure Computing's financial condition was weakened and diminishing because of undisclosed adverse trends and circumstances that contradicted and undermined defendants' assurances regarding the Company's performance and prospects and the intrinsic value of the stock disseminated to investors during the Class Period;

(e) The Company's increased focus on indirect sales was not successful and Secure Computing's distributors were not effective at selling its products which was hurting Secure Computing's current order flow and future prospects;

(f) Secure Computing's management was not well positioned for growth but was struggling to generate sales and to replace declining sales to the federal government;

(g) The length of Secure Computing's sales cycle was increasing as customers took longer to commit to purchases which was resulting in fewer orders and more uncertainty as to future earnings;

(h) Secure Computing's growth was slowing and the Company was being adversely affected, to a greater degree than Secure Computing disclosed, by international economic turmoil;

(i) Secure Computing's international sales were extremely troubled as the Company relied on independent consultants to perform implementation of Secure Computing's products and many of the consultants were well behind schedule on implementation which was leading to declining orders and sales in Q1 99; and

(j) As a result of the foregoing negative factors, defendants knew that the forecasts of Q1 99 EPS of $.09-$.13, 1999 EPS of $.80+ and growth rates of 27%-50% were false when made as those results could not and would not be achieved.

Name                Shares Sold        Proceeds

Jeffrey H. Waxman     200,000       $ 3,325,600

Timothy P. McGurran    10,000           200,000

Patrick Regester       50,001           760,014

Gary D. Taggart        70,000         1,070,000

Howard Smith           16,000           320,000

Christine Hughes       20,000           400,000

    Totals:           366,001       $ 6,075,614

59. Plaintiff incorporates ¶¶1-58 by reference.

60. During the Class Period, defendants disseminated or approved the false statements specified above, which they knew or recklessly disregarded 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.

61. Defendants violated §10(b) of the Exchange Act and Rule 10b-5 in that they:

(a) Employed devices, schemes, and artifices to defraud;

(b) Made untrue statements of material facts or omitted to state material facts necessary in order to make statements made in light of the circumstances under which they were made, not misleading; or

(c) Engaged in acts, practices, and a course of business that operated as a fraud or deceit upon plaintiff and others similarly situated in connection with their purchases of Secure Computing securities and publicly traded options during the Class Period.

62. Plaintiff and the Class have suffered damages in that, in reliance on the integrity of the market, they paid artificially inflated prices for Secure Computing stock and options. Plaintiff and the Class would not have purchased Secure Computing stock or options 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.

63. 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 Secure Computing common stock and its publicly traded options during the Class Period.

64. Plaintiff incorporates ¶¶1-63 by reference.

65. The Individual Defendants acted as controlling persons of Secure Computing within the meaning of §20(a) of the Exchange Act. By reason of their executive positions and ownership of Secure Computing stock, the Individual Defendants had the power and authority to cause Secure Computing to engage in the wrongful conduct complained of herein. Secure Computing controlled each of the Individual Defendants and all of its employees. By reason of such conduct, the Individual Defendants and Secure Computing are liable pursuant to §20(a) of the Exchange Act.

1. Declaring this action to be properly maintainable as a class action pursuant to Rule 23 of the Federal Rules of Civil Procedure and declaring plaintiff to be a proper class representative;

2. Declaring and determining that the defendants violated the federal securities laws by reason of their conduct as alleged herein;

3. Awarding monetary damages against all of the defendants, jointly and severally, in favor of plaintiff and the other members of the Class for all losses and damages suffered as a result of the acts and transactions complained of herein, together with pre-judgment interest from the date of the wrongs to the date of the judgment herein;

4. Awarding plaintiff the costs, expenses and disbursements incurred in this action, including reasonable attorneys' and experts' fees; and

5. Awarding plaintiff and class members extraordinary, equitable and/or injunctive relief as permitted by law, equity and federal statutory provisions sued hereunder, including rescission, and the imposition of a constructive trust upon the proceeds of defendants' insider trading pursuant to Rules 64 and 65; and

6. Awarding plaintiff and other members of the Class such other and further relief as the Court may deem just and proper.

DATED: April 20, 1999

MILBERG WEISS BERSHAD
HYNES & LERACH LLP
REED R. KATHREIN
ALISON M. TATTERSALL
DAVID R. STICKNEY
 
 
 

______________________________
REED R. KATHREIN

222 Kearny Street, 10th Floor
San Francisco, CA 94108
Telephone: 415/288-4545

MILBERG WEISS BERSHAD
HYNES & LERACH LLP
WILLIAM S. LERACH
600 West Broadway, Suite 1800
San Diego, CA 92101
Telephone: 619/231-1058

PRONGAY & BORDERUD
KEVIN M. PRONGAY
JON W. BORDERUD
12121 Wilshire Blvd.
Suite 400
Los Angeles, CA 90025
Telephone: 310/207-2848

Attorneys for Plaintiff

1. Insider selling is based on defendants' Form 144 intention to sell filings. Sales made during March 1999 will not be reported on Form 4's until April 10, 1999.

2. Beneficial ownership includes shares of Secure Computing actually owned and options which are vested or would vest within 60 days.