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Michael D. Braun (167416) Jules Brody Harvey Greenfield [Additional Counsel appear on signature page]
NORTHERN DISTRICT OF CALIFORNIA
Plaintiff, through his attorneys, brings this action on behalf of himself and all others similarly situated, and on personal knowledge as to himself and his activities, and on information and belief as to all other matters, based on investigation conducted by counsel, hereby allege as follows: SUMMARY OF THE ACTION This is a securities fraud class action on behalf of all persons and entities who purchased the publicly traded securities of defendant Secure Computing, Corp. ("Secure Computing" or the "Company") between November 10, 1998 and March 31, 1999, inclusive (the "Class Period"). The defendants are Secure Computing and certain of its officers and directors. Secure Computing designs, develops and sells network security solutions, including web filters, authentication and firewalls. During the Class Period, defendants assured the investment community that Secure Computing was 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 to a high of $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 a low of $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 valued at more than $6 million prior to the disclosure that the company's revenues and prospects were drastically declining. 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. 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. 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: Demand for Secure Computing's products was declining and was materially worse than represented by the defendants; 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; 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; 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; 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 injuring Secure Computing's current order flow and future prospects; 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; 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; 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; 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 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. Secure Computing and the individual insider defendants named herein had knowledge of the true state of affairs of the Company's products, operations and financial condition and strong motives to inflate the price of the stock of Secure Computing. Each defendant 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 swiftly unloaded their Secure Computing shares during the Class Period, selling(1) over 366,000 shares during the Class Period, realizing insider profits in excess of $6 million. As a direct and proximate result of defendants' materially false and misleading statements, Secure Computing's stock price soared during the Class Period. Indeed, the market price of the Company's stock at the beginning of the Class Period was approximately $14 per share. Defendants' materially false and misleading statements had the desired effect of artificially inflating the market price of the stock to a Class Period high of over $28 per share. After the Company insiders' illicitly received over $6 million in gross proceeds realized from their insider sales, the previously undisclosed reality of the true state of the Company's financial condition emerged. Indeed, at the close of the Class Period, on March 31, 1999, Secure Computing stunned the investment community when it disclosed an enormous short-fall in revenues and a large loss. Market reaction to the devastating March 31, 1999 disclosures 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. JURISDICTION AND VENUE This Court has jurisdiction over the subject matter of this action pursuant to 28 U.S.C. §§1331 and 1337, and §27 of the Securities Exchange Act of 1934 (the "Exchange Act") (15 U.S.C. §78aa). This action arises under §§10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder (17 C.F.R. §240.10b-5). Venue is proper in this district pursuant to §27 of the Exchange Act and 28 U.S.C. 1391(b) because the acts charged herein, including the dissemination of materially false and misleading information, occurred in this district. 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. In connection with the acts alleged in this Complaint, defendants, directly or indirectly, used the means and instrumentalities of interstate commerce, including, but not limited to, the mails, interstate telephone communications and the facilities of the national securities markets. THE PARTIES Plaintiff Herbert Silverberg purchased securities of defendant Secure Computing during the Class Period as described in the attached certification and was damaged thereby. 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, and sells network security solutions, including web filters, authentication and firewalls. 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. 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. 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. 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 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. 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. The individuals referred to in ¶15-20 are collectively referred to as the "Individual Defendants." The Individual Defendants were officers of Secure Computing at the time the alleged false and misleading statements and omission were made and are liable as direct participants in the wrongs complained of herein. The Individual Defendants, because of their positions with the Company, controlled and/or possessed the power and authority to control the contents of Secure Computing's 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. And, despite their duty not to sell their Secure Computing stock under such circumstances, defendants Waxman, McGurran, Regester, Taggart, Smith and Hughes nonetheless did so. Defendants are also each liable as individual participants in a fraudulent scheme and course of conduct that operated as a fraud and/or deceit upon the class. Because of their executive, managerial and/or directorial positions with the Company, each of the defendants had access to the adverse, non-public information about the business, finances and future business prospects of Secure Computing as particularized herein and acted to misrepresent, misstate or conceal such information from plaintiff and the investing public. It is also appropriate to treat the defendants as a group for pleading purposes under the federal securities laws and the Federal Rules of Civil Procedure and to presume that the false and misleading information complained of herein was disseminated through the collective actions of the defendants. Defendants were involved in the drafting, producing, reviewing, and/or disseminating of the false and misleading information detailed herein, knew or recklessly disregarded that such materially misleading statements were being issued by the Company, and/or approved or ratified these statements in violation of the federal securities laws. Defendants' false and misleading statements and omissions of fact consequently had the effect of, both on their own and in the aggregate, artificially inflating the price of the common stock of Secure Computing at all times during the Class Period. SCHEME AND COMMON COURSE OF CONDUCT As officers and/or directors of a publicly held company whose stock is registered with the SEC under the Securities Act of 1933 and the Exchange Act, the Individual Defendants had a duty to, among other things: (a) promptly disseminate accurate and truthful information with respect to the Company's business, performance, operations, investment portfolios, management, projections and forecasts, financial condition, market analyses and future prospects; and (b) correct any previously issued statements that had become untrue, so that the market price of the Company's securities would be based on accurate and truthful information. 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. 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. 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. 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. PLAINTIFF'S CLASS ACTION ALLEGATIONS Plaintiff brings this action as a class action pursuant to Federal Rule of Civil Procedure 23(a) and (b)(3) on behalf of a class consisting of all persons who purchased or otherwise acquired shares of Secure Computing common stock from November 10, 1998 to March 31, 1999 inclusive, and who were damaged thereby (the "Class"). Excluded from the Class are the defendants, officers and directors of the Company, members of their immediate families and their legal representatives, heirs, successors or assigns and any entity in which defendants have or had a controlling interest. 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 this time and can only be ascertained through appropriate discovery, plaintiff believes that there are over a thousand members of the Class. 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. Record owners and other members of the Class may be identified from records maintained by Secure Computing or its transfer agent and may be notified of the pendency of this action by mail, using the form of notice similar to that customarily used in securities class actions. 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 the federal law that is complained of herein. Plaintiff will fairly and adequately protect the interests of the members of the Class and have retained counsel competent and experienced in class and securities litigation. 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 the federal securities laws were violated by defendants' acts as alleged herein; (b) Whether defendants participated in and pursued the common course of conduct complained of herein; (c) Whether documents, press releases and other statements disseminated to the investing public and the Company's shareholders during the Class Period misrepresented and/or omitted material facts about the business, management, markets, financial condition, and future business prospects of Secure Computing; (d) Whether defendants acted with scienter in knowingly or recklessly omitting and/or misrepresenting material facts regarding the financial state of the Company; (e) Whether the market price of Secure Computing common stock during the Class Period was artificially inflated due to the material misrepresentations and failure to correct the material misrepresentations complained of herein; and (f) Whether the members of the Class have sustained damages and, if so, the proper measure of damages. Plaintiff will rely, in part, upon the presumption of reliance established by the fraud-on-the-market doctrine in that: (a) defendants made public misrepresentations or omitted material facts during the Class Period, as alleged herein; (b) the misrepresentations and/or omissions were material; (c) Secure Computing's common stock was traded in an efficient market; (d) the misrepresentations and/or omissions alleged tended to induce reasonable investors to misjudge the value of Secure Computing's shares; and (e) plaintiff and members of the Class acquired their shares between the time defendants made the misrepresentations and/or omissions and the time the truth was revealed, without knowledge of the falsity of the misrepresentations. Based upon the foregoing, plaintiff and the other members of the Class are entitled to a presumption of reliance upon the integrity of the market for, at least, the purposes of class certification, as well as for ultimate proof of the claims on their merit. Similarly, plaintiff and the members of the Class are entitled to a presumption of reliance with respect to the omissions alleged herein. A class action is superior to all other available methods for the fair and efficient adjudication of this controversy since joinder of all members 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 members of the Class to individually redress the wrongs done to them. There will be no difficulty in the management of this class action. BACKGROUND 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, and sells network security solutions, including web filters, authentication and firewalls. Secure Computing went public in November 1995 at $16 per share and immediately shot up to $64 per share. 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. 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 re-inflating 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. On October 20, 1998, a Secure Computing press release announced "record" Q3 1998 results, including revenues of $16.4 million, net income of $2.1 million and EPS of $0.11. In that same release Secure Computing 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." "We believe that this quarter's results clearly show that Secure has smoothly completed the transition to next generation products and moved decisively from turnaround mode to a new position as emerging market leader." Said Tim McGurran, Senior Vice President of Operations and CFO. FALSE AND MISLEADING STATEMENTS On November 10, 1998, Secure Computing issued a press release regarding an agreement with IBM to offer Secure's products to IBM customers. The press release announced: "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." On November 10, 1998, Secure Computing made a presentation at the American Electronics Association in San Diego. During that presentation, and in follow-up conversations with participants, Secure Computing made extensive representations to analysts, shareholders and media representatives regarding the continued growth and success of the Company, including that: The deal with IBM would go forward and Secure Computing would immediately receive revenue. Secure Computing was continuing to do very well against Security Dynamics and its other competitors. Secure Computing continued to emerge as a leader in the authentication market and was bringing its strong momentum from Q3 into Q4, as expected. Secure Computing's EPS estimate was $0.15 for Q4 '98 and $0.85 for 1999. In the days following their conversations with Secure Computing management, analysts issued reports on Secure Computing, which were based on and repeated information provided by Waxman and McGurran. On November 11, 1998, J.R. Preissler of Paine Webber Inc. issued a report stating that PaineWebber was maintaining their Buy rating for the Company based on the 1999 EPS estimate of $0.85, as justified by the 50%+EPS. On November 16, 1998, 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. 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. On January 26, 1999, Secure Computing announced Q4 98 revenues, net income and EPS (excluding stock option charges) of $17.8 million, $3.2 million and 0.05, respectively. The release also stated: "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." On January 26, 1999, subsequent to the release of its Q4 98 results, Secure Computing held a telephonic conference call for securities analysts, money and portfolio managers, institutional investors, large Secure Computing shareholders, brokers and stock traders to discuss Secure Computing's Q4 results, its current operations and its prospects. During the call, Waxman and McGurran 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:
In the days following their conversations with Secure
Computing management, analysts issued reports on Secure Computing, which
were based on and repeated information provided by Waxman. On January
27, 1999, J.R. Preissler of Paine Webber Inc. issued a report stating
that PaineWebber was maintaining their Buy rating for the Company based
on the 1999 EPS estimate of $0.85, 50% growth rate and Q1 1999 EPS of
$0.09. 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:
Following the conference, analysts issued reports on Secure Computing, which were based on and repeated information provided by Waxman and McGurran. On February 19, 1999, J.R. Preissler of Paine Webber Inc. issued a report stating that PaineWebber was maintaining their Buy rating for the Company based on the 1999 EPS estimate of $0.81, 50% growth rate and Q1 1999 EPS of $0.09. On February 19, 1999, -- the very next day after his upbeat presentation at the PaineWebber conference -- Waxman immediately filed to sell 100,000 shares and in March 1999 filed to sell an additional 100,000 shares. On February 26, 1999, Taggart, Hughes, McGurran, Smith and Regester also filed to sell 71,000 shares. On March 15-16, 1999, Regester and Taggart filed to sell an additional 99,000 shares. 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:
UNDISCLOSED ADVERSE INFORMATION On March 31, 1999, after the close of trading, Secure Computing shocked the investment community by issuing a press release in which it announced that its financial results for Q1 99 were much worse than their prior forecasts. The press release stated: 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. When the stock market opened on April 1, 1999, Secure Computing's stock immediately collapsed by 55% to as low as $5-9/16 before closing at $5-7/8 on enormous trading of 4.8 million shares, more than 10 times the average daily trading volume. 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. DEFENDANTS' INSIDER TRADING While defendants were issuing the materially false and misleading statements alleged throughout the Complaint, certain individual defendants were taking advantage of their knowledge of the adverse facts not disclosed to the public until the end of the Class period. The extent of defendants trades, the timing of their trades and the nature of their trading habits all establish that defendants had possession of the material adverse facts alleged herein. Specifically, the Individual Defendants sold more than 366,001 shares of the Secure Computing stock they owned for proceeds of over $6 million. The Individual Defendants sold the following amounts of Secure Computing's shares at artificially inflated prices throughout the Class Period while in possession of material non-public information that was not disclosed to the investment community at the time of such transaction: 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
The statutory safe harbor providing for forward-looking statements under certain circumstances does not apply to any of the false forward-looking statements pleaded in this Complaint. None of the forward-looking statements pleaded herein were sufficiently identified as a "forward-looking statement" when made. Nor did meaningful cautionary statements identifying important factors that could cause actual results to differ materially from that in the forward-looking statements accompany those statements. To the extent that the statutory safe harbor does apply to any forward-looking statements pleaded, the defendants are liable for those false forward-looking statements because at the time each of those statements was made, the speaker actually knew the forward-looking statement was false and the forward-looking statement was authorized and/or approved by an executive officer of Secure Computing who actually knew that those statements were false when made. COUNT I AGAINST ALL DEFENDANTS FOR
VIOLATION OF Plaintiff incorporates by reference all preceding paragraphs of the Complaint as if fully set forth herein. During the Class Period, defendants, and each of them, carried out a plan, scheme and course of conduct which was intended to and, throughout the Class Period, did: (i) deceive the investing public, including plaintiff and the other class members, as alleged herein; (ii) artificially inflate and maintain the market price of Secure Computing securities; and (iii) cause plaintiff and other members of the Class to purchase Secure Computing securities at inflated prices. In furtherance of this unlawful scheme, plan and course of conduct, defendants, and each of them, took the actions set forth herein. Defendants (a) employed devices, schemes, and artifices to defraud; (b) made untrue statements of material fact and/or omitted to state material facts necessary to make the statements not misleading; and (c) engaged in acts, practices, and a course of business which operated as a fraud and deceit upon the purchasers of the Company's stock in an effort to maintain artificially high market prices for Secure Computing's securities in violation of section 10(b) of the Exchange Act and Rule 10b-5. The statements made by defendants during the Class Period were materially false and misleading because at the time they were made, the Company and persons acting as corporate officers knew or recklessly ignored, but failed to disclose, the matters set forth herein. In ignorance of the artificially high market prices of Secure Computing's publicly traded securities, and relying directly on defendants or indirectly on the false and misleading statements made by defendants, upon the integrity of the market in which the securities trade, on the integrity of the regulatory process and the truth of any representations made to appropriate agencies at the time of the public offering and/or on the absence of material adverse information that was known to defendants but not disclosed in public statements by defendants during the Class Period, plaintiff and the other members of the Class acquired Secure Computing securities during the Class Period at artificially high prices and were damaged thereby. Had plaintiff and the other members of the Class and the marketplace known the truth about the true financial condition and business prospects of Secure Computing, which were not timely disclosed by defendants, plaintiff and other members of the Class would not have purchased or otherwise acquired their Secure Computing securities during the Class Period, or, if they had acquired such securities during the Class Period, they would not have done so at the artificially inflated prices which they paid. Hence, plaintiff and the Class were damaged by defendants' violations of Section 10(b) and Rule 10b-5. As a direct and proximate result of defendants' wrongful conduct, plaintiff and the other members of the Class, suffered damages in connection with their purchases of the Secure Computing securities during the Class Period. COUNT II AGAINST INDIVIDUAL DEFENDANTS Plaintiff incorporates by reference all preceding paragraphs of the Complaint as if fully set forth herein. Defendants Waxman, McGurran, Regester, Taggart, Smith and Hughes acted as controlling persons of Secure Computing within the meaning of §20 of the Exchange Act. By reason of their respective positions, they had the power and authority to cause Secure Computing to engage in the wrongful conduct complained of herein. By reason of such wrongful conduct, defendants are liable pursuant to §20 (a) of the Exchange Act. As a direct and proximate result of the defendants' wrongful conduct, plaintiff and the other members of the Class suffered damages in connection with their purchases of Secure Computing common stock during the Class Period. PRAYER FOR RELIEF WHEREFORE, plaintiff prays for relief and judgment, as follows: 1. Determining that this action is a proper class action, certifying plaintiff as class representative under Rule 23 of the Federal Rules of Civil Procedure and his counsel as class counsel; 2. Awarding compensatory damages in favor of plaintiff and the other class members against all defendants, jointly and severally, for all damages sustained as a result of the defendants' wrongdoing, in an amount to be proven at trial, including interest thereon; 3. Awarding plaintiff and the Class their reasonable costs and expenses incurred in this action, including counsel fees and expert fees; and 4. Awarding such other and further relief as this Court may deem just and proper including any extraordinary equitable relief and/or injunctive relief as permitted by law or equity to attach, impound or otherwise restrict the defendants' assets to assure plaintiff and the members of the Class have an effective remedy. JURY DEMAND Plaintiff hereby demands a trial by jury. Dated: April 16, 1999 Michael D. Braun Jules Brody Harvey Greenfield Joseph H. Weiss 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 owed and options which are vested or would vest within 60 days. |