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Stanford University Law School
- Securities Class Action Clearinghouse
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Joseph H. Weiss
Mark D. Smilow
WEISS & YOURMAN
551 Fifth Avenue, Suite 1600
New York, NY 10176
(212) 682-3025
Edward P. Dietrich (176118)
STULL, STULL & BRODY
10940 Wilshire Blvd., Suite 2300
Los Angeles, CA 90024
(310) 209-2468
Jules Brody
Aaron Brody
Tzivia Brody
Eduard Korsinsky
STULL, STULL & BRODY
East 45th Street
New York, New York 10017
(212) 687-7230
Attorneys for Plaintiffs
UNITED STATES DISTRICT COURT
| REBECCA JAKUBOWITZ, MISHEL S.
TEHRANI, AARON SCHLUSSER and JACOB TYBERG On Behalf of Themselves and All Others Similarly Situated, Plaintiffs, vs. ASCEND COMMUNICATIONS, INC.,
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Case No. 97-8861 MRP(ANx)
[filed Dec. 2, 1997] CLASS ACTION COMPLAINT FOR VIOLATION OF
JURY TRIAL DEMAND |
2. This action arises out of defendants' fraudulent scheme and common course of conduct to artificially inflate and maintain Ascend's stock price by manipulating and falsifying information concerning its business, its earnings, and the development, efficiency, introduction and deployment of the latest and newest technology, digital modems based on emerging 56 K-bps technology. To support the critical introduction of its new product defendants disseminated materially false and misleading information, and omitted to state matters which, under the circumstances, made their statements materially false and misleading, with regard to Ascend's 56 K-bps digital modem technology and its position and ability to acquire and maintain a high share of the market for networking equipment for online services and Internet access providers in this new and expanding arena.
3. Defendants were in part motivated to commit the foregoing scheme and to engage in such deceptive and illegal conduct in order to reap enormous gains from selling or otherwise disposing of millions of dollars worth of their own Ascend stock. Specifically, the defendants amassed approximately forty (40) million dollars from their sales of the Company's stock during the Class Period.
4. As part of the scheme to ensure that Ascend remained favored by and a darling of the investment community, the defendants sought to maintain an artificially high price for the Company's stock, which would stem the tide of uncertainty plaguing Ascend as a result of actions taken by its most fiercest competitors. Further, the Company undertook to merge with Cascade in a stock swap which would result in a synergistic integration that would catapult the Company above and beyond any competitive threats. Thus, in order to accomplish the merger without incurring any cash expenditures or long term liabilities, defendants were also motivated to maintain an artificially high price for Ascend stock so that the Company could use its stock as currency in the transaction.
5. As a result of the foregoing, the Company, its officers and directors, made materially false and misleading statements concerning Ascend's business, its earnings, its technological advances, its positioning for growth and its ability to sustain rapid growth, despite the fact that, at the time the statements were made, defendants knew or recklessly disregarded, but failed to disclose to investors, that sales of its most prominent products would all but cease because of software and firmware problems with its 56 K-bps digital modems, which Ascend persisted to claim would be available in January 1997, were quick, were efficient and were reliable. Moreover, during the Class Period, Ascend officials announced shipment dates of the new digital modems that were false and misleading because defendants knew or recklessly disregarded that the new modems had serious technical problems that would impede the release and broad acceptance of said products.
6. Defendants also realized that, in order to maintain Ascend's high stock price, it was important that the Company provide guidance to and meet earnings estimates being made by and for it by securities analysts. By doing so, the defendants fostered the trust and allegiance of both the analysts and marketplace in the truth, accuracy and foresight of the Company's management, strategy and guidance which would garner belief in the Company's represented prospects and accomplishments. This was so because, as reported in Bloomberg News, in the fast-moving technology sector, analysts depend upon regular and candid conversations with management to guide their forecasts for sales and earnings.
7. It was not until the close of the Class Period that analysts and the investment marketplace were stunned to learn, by the Company's own admission, that, inter alia, its new technology did not work, cut off users and overheated, and that management was forced to significantly discount its product to get customers to take it, and even then it had a hard time selling it, all of which had a material impact on the Company's earnings.
8. Defendants' misstatements and/or omissions created and maintained an artificially high Ascend stock price throughout the Class Period.
9. The facade that defendants created began to crumble shortly after Ascend's merger with Cascade when -- contrary to the defendants' prior representations -- Ascend shocked the investment community by reporting that its July 1997 revenue significantly lagged its prior representations and analysts' forecasts for the whole quarter and that it was facing tougher competition from its rivals.
10. In the following month, the Company further surprised the market when it announced that certain European bureaucracies would not accept Ascend shipments until they were absolutely certain that the technology operated flawlessly. These announcements contradicted the Company's earlier representations during the Class Period that its technology development, efficiency and speed were solid and beyond reproach, even though it had suffered some small delays in reaching the market.
11. The foregoing partial disclosures were themselves materially false and misleading and only the tip of the iceberg. On September 30, 1997, the final day of the Class Period, defendants disclosed that earnings for the quarter ending that day would fall 12 to 13 cents, or at least 1/3, below expectations, which was diametrically opposed to what the defendants fostered the investment community to expect. This resulted in a pronounced back-lash as analysts decried the Company's lack of candor in disclosing its problems during the Class Period, openly accusing it of misleading investors about severe flaws in its new technology. Analyst Christine Chien, a technology analyst at Zurich Kemper Investment Inc., which held 1.68 million Ascend shares at the end of June, said she was particularly concerned about the July 1997 investor conference at which defendant Mory Ejabat expressly said that business was strong, but whose words rang hollow less than two weeks later when the Company reported that business was well below expectations. "Nobody trusts them. Why should they?" she said.
12. In addition, Hambrecht & Quist analyst Joe Noel expressed amazement at defendant Ejabat's insolence. Noel said that at one investors conference, when Ejabat was asked about sales to the regional Bell phone companies, he said that business was fine and Ascend did business with all seven Baby Bells. But Noel said he subsequently discovered that Ascend only sold products to two of the Bells. According to Noel, "[Ejabat] looked that investor straight in the eye and said we do business with all seven. I will never forget that meeting."
13. After defendants' fraudulent scheme unraveled, Ascend's stock plunged dramatically in value to less than $33 per share, a considerable fall from the class period high of $78 3/4.
14. Because of defendants' deceptive and illegal conduct, plaintiffs and the other Class members purchased their Ascend stares at grossly inflated prices. Had plaintiffs and the other Class members been aware of the truthful condition of Ascend or that the Company was disseminating materially false and misleading information concerning, inter alia, shipment dates, flaws in its digital modem chips and software, and the inoperability and the inefficiencies of its new technology, they would not have purchased their shares, or at least not at the artificially inflated prices at which they purchased them.
16. This action arises under §§ 10(b) and 20(a) of the Exchange Act (15 U.S.C. §§78j(b)and 78t(a))and Rule 10b-5 promulgated thereunder (17 C.F.R. §240.10b-5), §§11,12(a)(2)and l5 of the Securities Act (15 U.S.C. §§77K, 771(a)(2) and 77o) and under state law.
17. Venue is proper is this district pursuant to §27 of the Exchange Act, Section 22 of the Securities Act, and 28 U.S.C. 1391(b). The Company has offices in this District, the violations of law charged herein, including the preparation and dissemination of materially false and misleading information occurred in substantial part in this District.
18. In connection with the acts alleged in this complaint, the 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.
20. Defendant Ascend is a Delaware corporation with its principal place of business at one Ascend Plaza, 1701 Harbor Bay Parkway, Alameda, California, 94502. Ascend has regional offices in this District, including offices located in Calabasas and Westlake. Ascend specializes in making computer networking equipment for online services and Internet access providers. Online services and Internet access companies receive hundreds of calls from their customers' simultaneously. Ascend's products act as the switchboard for these calls. At all relevant times herein, Ascend was listed as a publicly held corporation whose shares traded on the NASDAQ Stock Exchange under the symbol ASND.
21. Defendant Mory Ejabat ("Ejabat") is the Chief Executive Officer, President and a Director of the Company. During the Class Period, defendant Ejabat sold 143,341 shares of Ascend stock, more than 70% of his outstanding shares, which garnered $9,070,760.06 in insider trading proceeds. Ejabat signed the registration statement complained of herein.
22. Defendant Betsy Atkins ("Atkins") is a Director of the Company. During the Class Period, defendant Atkins sold 30,000 shares of Ascend stock garnering $1,955,650.00 in insider trading proceeds. Atkins signed the Registration Statement complained of herein.
23. Defendant Robert K. Dahl ("Dahl") is Vice President Finance, Chief Financial Officer, Principal Financial Officer and a Director of the Company. During the Class Period, defendant Dahl sold 18,960 shares of Ascend stock, garnering $1,353,175.20 in insider trading proceeds. Dahl signed the Registration Statement complained of herein.
24. Defendant Roger L. Evans ("Evans") is a Director of the Company. During the Class Period defendant Evans sold 170,000 shares of Ascend stock, garnering $10,467,750.00 in insider trading proceeds. Evans signed the Registration Statement complained of herein.
25. Defendant Michael Hendren ("Hendren") is Senior Vice President of North American Sales with the Company. During the Class Period, defendant Hendren sold 88,541 shares of Ascend stock, garnering $5,872,086.29 in insider trading proceeds.
26. Defendant Michael J. Johnson ("Johnson") is Controller and Chief Accounting Officer of the Company. During the Class Period, defendant Johnson sold 14,166 shares of Ascend stock, garnering $929,110.72 in insider trading proceeds. Johnson signed the Registration Statement complained of herein.
27. Defendant C. Richard Kramlich ("Kramlich") is a Director of the Company. Defendant Kramlich signed the Registration Statement complained of herein.
28. Defendant James P. Lally ("Lally") is a Director of the Company. Defendant Lally signed the Registration Statement complained of herein.
29. Defendant Curtis Sanford ("Sanford") is Senior Vice President of International Sales, General Manager of International Sales Finance, and Principal Accounting Officer of the Company. During the Class Period, defendant Sanford sold 17,000 shares of Ascend stock, garnering $1,064,710.00 in insider trading proceeds.
30. Defendant Martin Schoffstall ("Schoffstall") is a Director of the Company. Defendant Schoffstall signed the Registration Statement complained of herein.
31. Defendant Anthony Stagno ("Stagno") is Vice President of Manufacturing of the Company. During the Class Period, defendant Stagno sold 23,581 shares of Ascend stock, garnering $1,407,402,60 in insider trading proceeds.
32. Defendant Jeanette Symons ("Symons") is Executive Vice President of Advanced Products and technology Group and Chief Technical Officer of the Company. During the Class Period, defendant Symons sold 160,000 shares of Ascend stock, garnering $10,381,000.00 in insider trading proceeds.
33. Defendants Ejabat, Atkins, Dahl, Evans, Hendren, Johnson, Kramlich, Lally, Sanford, Stagno, and Symons (collectively referred to herein as the "Individual Defendants") were at all relevant times controlling persons of Ascend within the meaning of §20(a) of the Exchange Act. In addition, the Individual Defendants had the power and influence, and exercised such power and influence, to cause Ascend to engage in the unlawful practices complained of herein. Because of their executive, managerial and/or directorial positions with Ascend, each of the Individual Defendants had access to the adverse, non-public information about the business, finances and business prospects of Ascend, as particularized herein, and acted to misrepresent, misstate or conceal such information from plaintiffs and the investing public.
34. As officers, directors and/or controlling persons of a Company registered with the SEC under the federal securities laws, whose common stock is registered with the SEC, traded on the NASDAQ Stock Exchange, and governed by the provisions of the federal securities laws, the Individual Defendants, as officers and directors of a publicly-held company, and as controlling persons of Ascend, each had a duty to disseminate promptly accurate and truthful information with respect to the Company's operations, products, markets, management, earnings and business prospects, to correct any previously issued statements that had become materially misleading or untrue, and to disclose any trends that would materially affect earnings and the financial results of Ascend, so that the market price of the Company's publicity traded securities would be based upon truthful and accurate information. Under rules and regulations promulgated by the SEC under the Exchange Act, specifically Item 303 of Regulation S-K, the Individual Defendants also had a duty to report all trends, demands or uncertainties that were likely to influence (i) Ascend's liquidity; (ii)Ascend's net sales, revenue and/or income;. and/or (iii) previously reported financial information such that it would not be indicative of operating results. The Individual Defendants representations during the Class Period violated these specific requirements and obligations.
35. The Individual Defendants all participated in the drafting, preparation, and/or approval of the various public, shareholder and investor reports and other communications complained of herein and were aware of, or recklessly disregarded, the misstatements contained therein and omissions therefrom, and were aware of their materially misleading nature. Because of their Board membership and/or executive and managerial positions with Ascend, each of the Individual Defendants had access to the adverse non-public information about the Company's business prospects with the above-referenced market as particularized herein and knew that these adverse facts rendered the positive statements made by and about Ascend and its business and sales materially false and misleading.
36. The Individual Defendants, because of their positions of control and authority as officers and/or directors of the Company, could and did control the contents of the various financial reports, press releases and presentations to securities analysts concerning the Company. Each Individual Defendant was provided with copies of the Company's shareholder and investor reports, press releases and other disseminations alleged herein to be misleading before, or shortly after, their issuance and had the ability and opportunity to prevent their issuance or cause them to be corrected. As a result, each of the Individual Defendants is responsible for the accuracy of the public reports and releases detailed herein and is therefore primarily liable for the representations contained therein.
37. Each defendant is liable as a participant in a fraudulent scheme and common course of conduct that operated as fraud and deceit on purchasers of Ascend's stock, by disseminating materially false and misleading statements and/or concealing material, adverse facts. The scheme: (i) deceived the investing public regarding Ascend's business, its performance and performance trends and the intrinsic value of the Company's shares; (ii) caused plaintiffs and other members of the Class and Sub-Class to purchase Ascend stock at artificially inflated prices; (iii) permitted the Individual Defendants to profit handsomely from insider sales of their own stock at materially inflated prices; and (iv) facilitated Ascend's purchase of Cascade during the Class Period using the value of the Company's grossly inflated stock as consideration for the transaction.
39. Counts III, IV and V of the Complaint are brought on behalf of the Sub-Class and are based solely on the false and misleading statements made in the Registration Statement and Prospectus issued in connection with the Ascend-Cascade merger. These claims are brought pursuant to Sections 11, 12(a)(2) and 15 of the Securities Act.
40. Counts VI and VII of the Complaint are brought on behalf of the Class pursuant to State Law violations by all of the defendants.
42. Each defendant had the opportunity and motive to commit the acts alleged herein. The Individual Defendants who, by their positions as officers and/or directors, controlled the dissemination of false and misleading information to the public through SEC filings, press releases and communications with analysts, benefitted from the positive public and industry-wide perception of Ascend and from their sale of stock at artificially inflated prices. By virtue of their positions with Ascend and because of significant reputational and monetary benefit they stood to gain from positive public perception of Ascend and its artificially inflated stock price, the Individual Defendants had both the opportunity and motive to commit the acts alleged herein.
43. In writing their reports, several of which are referred to herein, securities analysts relied in substantial part upon information provided to them privately by the Company. Indeed, it was the Company's practice to have key members of its management team, including defendant Ejabat, communicate with securities analysts on a regular basis to discuss the Company's business, operations, performance and prospects. Defendants knew that by disseminating information to the investment community, investors would rely and act upon such information and that such information would affect the market price of the Company's stock.
44. In light of the foregoing, the Individual Defendants throughout the Class Period knew or were reckless in disregarding, inter alia, (i) the technical flaws associated with the Company's 56 K-bps product line and (ii) that such products were not going to reach use market on the schedule that the Company had publicly announced.
45. By and through the acts of its officers and/or directors, Ascend also had both the opportunity and motive to commit the acts alleged herein, As a publicly held company, defendant Ascend had the opportunity to distribute false and misleading information to the public through SEC filings, press-releases and communications with analysts and in fact, took advantage of this opportunity by committing the acts alleged herein. Moreover, defendants directly benefitted from portraying Ascend as a financially strong company whose growth was unlimited because it caused the Company's stock price to artificially rise, allowing the Individual Defendants to sell their own stock for insider trading proceeds of approximately $43,041,644.87 and the Company itself to sell its stock in exchange for acquiring Cascade.
47. The members of the Class and Sub-Class are so numerous that joinder of all members is impracticable. While the exact number of Class and Sub-Class-members is unknown to plaintiffs at this time and can only be learned through appropriate discovery, plaintiffs believe that there arc thousands of members of the Class and Sub-Class throughout the United States. As of October 6, 1997, there were more than 188,000,000 shares of Ascend common stock outstanding and actively traded over the counter in an efficient market. Record owners and other members of the Class and Sub-Class may be identified from records maintained by Ascend 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.
48. Plaintiffs' claims are typical of the claims of the members of the Class and Sub-Class as all members of the Class and Sub-Class are similarly affected by defendants' wrongful conduct in violation of the federal and state law complained of herein.
49. Plaintiffs will fairly and adequately protect the interests of the members of the Class and Sub-Class and have retained counsel competent and experienced in class and securities litigation.
50. Common questions of law and fact exist as to all members of the Class and Sub-Class and predominate over any questions affecting solely individual members of the Class or Sub-Class. Among the questions of law and fact common to the Class and Sub-Class are:
(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 material facts about the business, management, products, markets, financial condition, and business prospects of Ascend;
(D) Whether the market price of Ascend common stock during the Class Period was artificially inflated due to the material misrepresentations and the failure to correct the material misrepresentations complained of herein; and
(E) Whether the members of the Class and Sub-Class have sustained damages and, if so, the proper measure of damages as a result of the actions of the defendants complained of herein.
53. In writing reports about Ascend, analysts relied, in substantial part, upon the information provided to them by the Company, upon statements and reports issued by the Company, upon information provided to them privately by the Company through the officers of Ascend, and upon assurances by the Company that information in the analyst's reports was not of material variance from the Company's internal knowledge of its operations and prospects.
54. Ascend communicated with analysts to assure them -- and through them the investing public -- that Ascend's business was strong, and that the Company was on track to continue achieving strong earnings and revenue growth as a result of sales of its technologically innovative products and services. As part of their scheme to defraud purchasers of Ascend common stock during the Class Period, certain officers and directors of Ascend, including but not limited to defendant Ejabat, communicated regularly with securities analysts to discuss, among other thin s, the Company's prospects, operating results and expected revenues, and to provide detailed "guidance" and direction to these analysts with respect to the Company's business and projected revenues and earnings. These communications included, but were not limited to, frequent conference calls, meetings and analysts' briefings. Defendant Ejabat knew that by participating in regular periodic communications with analysts, the Company could disseminate false information to the investment community and that investors, including the members of the plaintiff class, would rely and act upon such information. Ejabat, among others, had such communications with analysts in order to cause or encourage them to issue favorable reports on Ascend and used these communications to falsely present Ascend's prospects to the marketplace and artificially to inflate the market price of Ascend common stock.
55. By intentionally or recklessly misleading securities analysts, defendants, directly or indirectly, caused the analysts to issue false and misleading reports that contained the false and misleading information provided by defendants. In addition, defendants caused the analysts to express misleading opinions and to make misleading recommendations and projections based on false and misleading information that defendants provided to the analysts.
56. The role of securities analysts who wrote reports on Ascend was that of conduits by and through which defendants provided false and misleading information to the market in order to deceive Ascend investors and to artificially inflate the price of Ascend common stock. Acting through the securities analysts, defendants could manipulate the price of Ascend common stock and deceive investors in violation of Section 10(b) of The Exchange Act, which makes it unlawful to employ any manipulative or deceptive device or contrivance without regard to whether they accomplish the manipulation or the deception "directly or indirectly," or without regard to whether a defendant acts personally or "through or by means of any other person." 15 U.S.C. Section 78j(b)
57. As alleged above. information about Ascend set forth in the securities analysts' reports was obtained from or based upon information received from the named defendants. The Individual Defendants knew of the issuance of such analysts' reports and the contents of such reports and that they were based on information provided by the Individual Defendants. AU defendants knew that they would issue such analysts' reports to members of the investment public, including plaintiffs and the Class and Sub-Class, be circulated throughout the investing community and would affect the trading price of Ascend common stock and the offering price of its stock in connection with the Ascend-Cascade merger. The Individual Defendants endorsed the analysts' reports, adopted them as their own, and approved the contents of such reports including the projections, forecasts, and statements contained in them. Despite their: duty to do so, the Individual Defendants failed to correct the materially false and misleading statements made in these reports during the Class Period.
58. Plaintiffs, the Class, Sub-Class and the market generally relied and acted upon the information communicated in these written reports, including the recommendation that investors purchase Ascend common stock.
60. As a result of its enormous growth rate, Ascend's stock traded at a multiple reserved for premier growth companies with track records of meeting the investment community's expectations for high profit growth. Ascend's stock performance enabled its corporate executives to exercise stock options and sell stock at large profits and enabled Ascend to grow by using its stock to make acquisitions of other companies. For these reasons, maintaining Ascend's image of strong growth and its high stock price was critical to Ascend's top executives, who closely monitored the trading of the Company's stock on a daily basis.
61. The defendants' fraudulent scheme began in November 1996 when Ascend announced that it was introducing digital modems that would allow companies to offer Internet access at speeds 68% faster than products available at that time.
62. On November 5, 1996, the beginning of the Class Period, Bloomberg News reported the following:
Ascend Communications Inc. stock rose to a record close after the computer-networking company unveiled products that allow companies to offer Internet access at higher speeds.63. On November 14, 1996, M2 Presswire reported similarly:Ascend jumped 5 33/64, or 8.1 percent, to 73 17/64 in trading of 5.98 million shares, almost double the three-month daily average.
Ascend said its central-site modems, which transmit 56,000 bits of data a second, will be shipped to Internet-service providers starting in January. The company developed the products with Rockwell Semiconductor Systems, a unit of Rockwell International Corp...
"Ascend plans to be the first remote-access vendor to actually deliver on the promise, of 56 Kbps technology," Ascend Chief Executive Mory Ejabat said in a statement.
Hambrecht & Quist analyst Joseph Noel, who reiterated a "buy" on the stock last week, said the company is beginning to receive notice after its presentation at The American Electronics Association conference in Monterey, California, last week. (Emphasis Added).
Ascend Communications, Inc. and Rockwell Semiconductor Systems today announced a joint development effort for the first fully integrated central-site modem solution supporting 56 kbps transmission speeds. The solution, based on Rockwell's 56 kbps technology, called K.56PLUS, and the Ascend MAX WAN access switch architecture, will allow ISPs to market high-speed 56 kbps transmission services to analogue-based end-users and customers, while providing support for the full compliment of integrated WAN services already available on Ascend MAX platforms -- conventional analogue, ISDN, SW56, and frame relay. The product is expected to ship January, 1997. According to Ascend, no other WAN access product on the market delivers more comprehensive set of connectivity options. Offering its customers an easy upgrade path, starting November 1, Ascend will ship the first in a family of central site modems capable of supporting Rockwell's new K56PLUS technology.64. Defendants made the foregoing statements to impress public investors that Ascend was a company possessing the capacity, innovation and ability to dominate its market and rapidly grow as a result of its technological breakthrough. Defendants' statements were, however, materially false and misleading because at the time of these statement, defendants knew or were reckless in disregarding that: (1) software and firmware problems plagued the 56 K-bps technology; (2) the proposed products actually ran at inferior data transfer rates than that represented by Ascend; (3) Ascend could not and would not obtain the components needed to ship the products by January 1997; and, inter alia; (4) Ascend could not and would not ship the products by January 1997 because of severe problems and delays actually encountered in obtaining the custom designed chips needed for the digital modems. As such, defendants knew, but failed to disclose, that Ascend could not and would not sustain its, represented rate of growth and profitability."Ascend will be the fire remote access vendor to actually deliver on the promise of 56 kbps technology," says Mory Ejabat, Ascend president and CEO. "We believe this technology can open the door for a new generation of high-performance Internet and remote-access applications, so our goal is to provide the most robust implementation and the earliest deployment. Through out partnership with Rockwell, we are not just the first vendor to deliver this technology, but, more significantly, we have delivered the right technical solution for a very complex transmission challenge."
65. Subsequently, defendants continued to issue materially false and misleading statements in order to inflate Ascend's stock price by further representations to investors that Ascend was a company with the capacity, innovation and ability to dominate its market and facilitate rapid growth.
66. On December 12, 1996, in Reuters Financial Service, Ascend said "they expect to end the year on a pretty strong financial note despite summer pricing pressures which slowed Ascend's blistering revenue growth."
67. In the same article, defendants went on to add that:
"Revenues have been doubling year to year for about four years in a row now. We'll continue that revenue growth although not at quite the same percentage rate this year." Bernard Schneider, vice president of strategic business development at Ascend, told investors at a Montgomery Securities technology conference here.68. On January 20, 1997, M2 Presswire reported:"If you look at the units year to year the growth has been about the same. Those who follow Ascend closely will recognize there were fairly significant pricing pressures during the summer and as a result revenues haven't grown quite as quickly, but we think we'll finish the year pretty strongly," he said.
Schneider also said the company's balance sheet was in a strong position, and "We're well positioned to fund both internal growth and make any acquisitions." (Emphasis Added).
... Mory Ejabat president and chief executive officer of Ascend said: "We are very pleased to report continued growth in revenues in the fourth quarter, particularly given that for the quarter we did not record any revenue for our newest products, the MAX TNT and the GRF 400, and in addition during the quarter we announced a 30% price reduction for our Pipeline products."69. As a result of defendants' comments, Ascend's stock price continued to trade at artificially high prices. For example, on January 17, 1997 Ascend's stock price climbed 8.9% to $75 per share as a result of information disseminated by the Company.Mr. Ejabat also stated: "Customer interest in the TNT and the GRF 400 is very strong, and we expect that each of these products will contribute to the business in 1997. Full production shipments of the TNT commenced in December, and we expect production shipments of the GRF 400 to commence either late in the first quarter or early in the second quarter of 1997."
Commenting on the Company's performance for the year, Mr. Ejabat said: "We are very pleased to report this growth in revenues and earnings for 1996. In light of the many other accomplishments we made during the year, successful achievement of our financial objectives as well makes us particularly proud."
Looking forward to 1997, Ejabat said that the Company will continue to focus on the multitude of opportunities in the remote networking arena. "We have been very successful in addressing the changing needs of our customer base, on an almost real-time-basis. Our business is the business of identifying the challenges of rapidly growing networks - in the areas of access, concentration and backbone infrastructure - and addressing those challenges first with the most technically advanced products on the market. As remote networking markets continue to develop we intend to do more of the same." (Emphasis Added).
70. Defendants' statements were materially false and misleading because at the time of the statements, defendants knew, or were reckless in disregarding, but failed to disclose, that revenue from sales would not increase because: (1) customers would 1) not buy MAX products until they were assured the new digital modems worked properly; (2) software and firmware problems plagued the 56 K-bps technology digital modems; (3) the proposed products actually ran at substantially inferior data transfer rates than was represented by the Company; (4) Ascend could not and would not obtain necessary parts needed to ship the new digital modems; and (5) because of the problems with and capacity of custom designed chips for the products. As such, defendants knew that the Company could not and would not sustain its represented rate of growth and profitability.
71. In the aftermath of these materially false and misleading announcements, defendants sought to and did cashout on the profits of their fraud and scheme as set forth more fully herein.
72. As a result of unexpected industry developments compounding Ascend's inability to profit from its new technology, as set forth more fully herein, on February 28, 1997, Bloomberg News reported:
Ascend Communications Inc. share fell 8.3 percent on fears that 3Com Corp.'s planned takeover of U.S. Robotics could produce a stronger competitor in Ascend's main business.73. Feeling the pressure of a declining mark-et share and in order to stem the price decline of Ascend stock deriving from a response to the proposed merger between 3Com and U.S. Robotics, and the Company's failure to introduce its new technology in January, as originally represented, Ascend officials announced a planned merger between Cascade (a developer and manufacturer of carrier class Frame Relay, ATM and IP switching products), hoping that the merger would facilitate the supply of its customers with the products they needed and add luster to the Company's marketplace appeal.Ascend shares fell 4 3/4 to 52 1/4 in trading of 11.5 million, compared with a three-month daily average of 3.56 million.
Ascend is likely to fall further behind U.S. Robotics in the market for remote-access equipment if the 3 Corn takeover is completed, said William Rabin, an analyst at J.P. Morgan Securities.
Remote-access products connect telephone users to computer networks, including the Internet. U.S. Robotics is No. 1 in that market with a 28 percent share last year, Rabin said. Ascend is No. 2 and 3Com No. 3.
74. On March 31, 1997, Associated Press reported:
Ascend Communications Inc. is purchasing Cascade Communications Corp. for about $2.7 billion in stock, further reducing the number of players in the computer networking business.75. Notwithstanding the announced merger with Cascade, the price of Ascend stock continued to drop.The combined company will retain Ascend's name and Alameda, Calif., headquarters, but Cascade said it didn't expect any layoffs at its home base of Westford, Mass....
Last month, 3Com Corp. agreed to buy U.S. Robotics Corp. for more than $ 6 billion. Cisco Systems Inc., the leader of the networking pack, bought Stratacom Corp. last year for $4 billion.
Those and other mergers have increased pressure on smaller companies like Ascend, with 1996 sales of $549 million, and Cascade, with revenues of $341 million last year... (Emphasis Added).
76. On April 11, 1997, the Boston Business Journal noted:
Within a day of Ascend Communication Inc.'s March 31 deal to acquire Westford-based Cascade Communications Inc. in a $3.7 billion stock swap, Ascend's stocks plunged 22 percent.77. Recognizing that the planned merger with Cascade did not reverse the decline of Ascend's stock price, defendants reinvigorated their campaign to disseminate false and misleading information concerning shipments of 56 K-bps technology digital modems.The deal is still on. But its value is $730 million less -- at least for now.
When Alameda, Calif. -based Ascend's stock fell to $40.75 from $51 within a day of the deal, the value of the transaction fell by $2.97 billion. Ascend's stock has since recovered some of the loss, trading at $47 early yesterday.
The recent and rapid fluctuation in stock prices points to the risk involved in high-tech mergers and acquisitions in the midst of a jittery market that sent dozens of Massachusetts stocks tumbling last week.
"If there is an acquisition that is going to occur, you are taking a huge risk, The market will not look on the acquisition as favorably as you would and that's reflected with an instantaneous discomfort," said T.L. Stebbins, managing director at the Boston-based Adams, Harkness & Hill Inc. investment banking firms. (Emphasis Added).
78. On April 15, 1997, more than four months after the announced January 1997 shipment date, Ascend for the first time announced that it would begin shipping its MAX products, M2 Presswire reported:
Ascend Communications (NASDAQ; ASND) today introduced the new Series56 family of digital modems for its MAX and MAX TNT WAN access switches. The Series56 Digital Modem modules begin shipping this month and will further enhance the industry-leading functionality of the MAX and MAX TNT. The Series56 Digital Modem modules are based on the K56flex technology developed by Rockwell Labs and Lucent Systems. They can operate at connection rates of up to 56 Kbps while also supporting the V.34bps standard. The 56Kbps speed is achieved by means of a unique hierarchical Digital Signal Processor (DSP) architecture that sends calls all the way through the central site in pure digital format. The long-term viability of the modems is assured through a software-based upgrade method that allows ongoing compliance with 56K standards.79. Announcement of the pending shipments caused Ascend's stock price to surge 43%, from a low of 41 7/8 on April 16, 1997 to a high of 59 1/2 on May 28, 1997."The Ascend Series56 Digital Modems provide a new level of performance and flexibility to the MAX and MAX TNT platforms," said Kurt Bauer, vice president of core product management at Ascend. "This new technology Internet Service Providers or corporate/business network operations to dramatically increase their performance and service levels while at the same time maintaining backward compatibility with existing subscriber equipment."
"Ascend is offering its customers highest performance plus higher density modem cards for 10- to 20 percent less. This coupled with Ascend's large installed base should kick start the mass deployment of K56 flex technology," according to Bobbi Murphy, chief analyst with San Jose, Calif.-based Dataquest ...
Availability The Series56 products are available for the MAX 1800, MAX 20xx Series, MAX 40xx Series, and MAX TNT WAN access switches. The modules come in 8-, 12-, 16-, and 48-modem configurations and can be used to upgrade existing MAX installations. The Series56 Digital Modem modules are available now except for the 48-modem module which will be available beginning in May. (Emphasis Added).
80. To sustain the artificially high price of Ascend stock, defendant Ejabat continued to disseminate materially false and misleading information about Ascend's growth rate and purposes.
81. On or about April 16,1997, the Company tiled a Registration Statement with the SEC in connection with its merger with Cascade, which subsequently became effective as amended. It submitted the final Registration Statement over the signatures of defendants Ejabat, Evans, Atkins, Dahl, Johnson, Kramlich, Lally and Schoffstall.
82. The Registration Statement, after describing the technology laden products that Ascend offered in the marketplace, continued to represent:
NEW PRODUCT DEVELOPMENT AND TIMELY INTRODUCTION OF NEW AND ENHANCED PRODUCTS. The markers for Ascend's ... products are. . . characterized by rapidly changing technologies, evolving industry standards, frequent new product introductions and short product life cycles. Inherent in the product development process are a number of risks. The development of new, technologically advanced products is a complex and uncertain process requiring high levels of innovation, as well as the accurate anticipation of technological and market trends. The introduction of new or enhanced products also may require Ascend ... to manage the transition from older products in order to minimize disruption in customer ordering patterns, to avoid excessive levels of older product inventories and to ensure that adequate supplies of new products can be delivered to meet customer demand. There can be no assurance that Ascend . . . will successfully develop, introduce or manage the transition of new products. Products may contain undetected or unresolved software or hardware errors when they are first introduced or as new versions are released. There can be no assurance that, despite extensive testing, software or hardware errors will not be found in new products or upgrades after commencement of commercial shipments of new or enhanced products. The inability of such products to gain market acceptance or problems associated with new product transitions could adversely affect Ascend's ... results of operations, particularly on a quarterly basis.83. The Registration Statement continues:
DEPENDENCE ON CONTRACT MANUFACTURERS AND SINGLE-SOURCE SUPPLIERS. Ascend's ... production operations consist ... primarily of materials planning and procurement, quality control and final assembly, burn-in and testing of certain products. Ascend Ö rel[ies] on independent contractors to manufacture certain of their products or components find subassemblies used in their products to their specifications. Ascend. . . [is] dependent upon single or limited source suppliers for a number of components and parts used in [its] products, including certain key microprocessors and integrated circuits. There can be no assurance that these independent contractors and suppliers will be able to meet Ascend's ... future requirements for manufactured products, components and subassemblies. Ascend ... generally purchase[s] single or limited source components pursuant to purchase orders and ha[s] no guaranteed supply agreements with these suppliers. In addition, the availability of many of these component to Ascend ... will be dependent in part on their ability to provide their respective suppliers with accurate forecasts of their future requirements. Ascend... believe[s] that there are alternative suppliers or alternative components for all of the components contained in their products and the products of the combined company. However, any extended interruption in the supply of any of the key components currently obtained from a single or limited source or the time necessary to transition a replacement supplier's product or a replacement component into Ascend's Products could disrupt their operations and have a material adverse effect on the operating results of [the] company in any given period.84. The Registration Statement continues under the heading Joint Reasons for the Merger:
In reaching their decision to approve the Merger Agreement and the Merger, the Ascend Board ... consulted with . . . management teams and advisors and independently considered the proposed Merger Agreement and the transactions contemplated thereunder.... The Ascend Board ... believes that the Merger will result in a combined company that will be a leading provider of end-to-end wide area networking solutions for public telecommunications carriers, ISPs, network service providers and enterprises worldwide, with a more complete portfolio of integrated, best-of-breed wide area networking products, supported by a global sales, distribution and support organization.85. The Registration Statement goes on to discuss the following under the heading "Ascend's reasons for the Merger":The Ascend Board. . . ha[s] both identified several potential benefits of the Merger which they believe will contribute to the success of the combined company. These potential benefits include the following:
(i) Best-of-Breed, End-to-End Wide Area Networking Solutions. Ascend is a leading provider of access concentration/remote networking products ... The combination of Ascend and Cascade is expected to create a company able to provide superior end-to-end wide area networking solutions from the edge to the core of the network with a more complete portfolio of integrated, complementary best-of-breed products.
(ii) Shared Strategic Vision. The management teams of Ascend and Cascade share a common strategic vision of creating a combined company that is the provider of choice for purchasers of wide area networking products. Both companies believe that emerging network infrastructures will require best-of-breed technology in four key areas. remote products, IP switching products, backbone switching products and access switching and concentration products. The combination of the products, technologies and sales channels of both companies, in addition to the leadership each company has in different market segments, will position the combined company to, serve a broad base of customers with industry-leading technology in each of these four key technological areas.
In the face of an increasingly competitive and consolidating industry, Ascend must continue to invest in industry-leading technology. The Ascend Board believes that the combined company will be in a stronger competitive position than Ascend alone to effectively meet the industry's technology challenges and evolving customer demands.86. The Registration Statement also addresses the following:
Ascend provides the major components of a remote networking solution: access equipment for the remote site, access equipment for the edge of the network, and high speed backbone switching equipment for the core of the network. Ascend's access and backbone systems establish high-speed transparent connections whose bandwidth, duration and destination can be adjusted to suit user application needs.87. The statements contained in the Registration Statement were, however, materially false and misleading because at the time of these statements, defendants knew or were reckless in disregarding, but did not disclose to investors, that: (1) the 56 K-bps technology modem, Ascend's new introduction into the marketplace, was plagued by software and firmware problems, (2) the proposed product actually ran at inferior data transfer rates from that represented by Ascend; (3) Ascend could not and would not obtain the components needed to ship the products by January 1997; and, inter alia (4) that Ascend could not and would not ship the products by January 1997 because of severe problems and delays actually encountered in obtaining the custom designed chips needed for the digital modems.* * *
Ascend's product families incorporate scaleable, modular software and hardware architectures that facilitate rapid, flexible customer deployments. This scalability and modularity also has allowed Ascend to rapidly develop new products and additional features. Hardware platforms range from lower cost systems using general purpose microprocessors to high-performance scaleable systems with state-of-the-art RISC processors. All products have integrated hardware and software platforms that can be configured into a wide variety of systems to suit customers' specific needs for capacity, functionality and cost effectiveness.
88. In an interview printed in the June 1997 issue of Upside entitled "One on One with Richard L. Brandt Mory Ejabat Ascending or Cascading," defendant Ejabat responded to questions in the following colloquy.
Any roadblocks ahead? No. Of course, all the cylinders have to work, and you have to execute on your plans. We see the company continuing to grow. Obviously we aren't going to grow like in the past-we were doing 40 percent quarter over quarter. But we're going to grow.
One market report says that your core business is still growing at a compound annual growth rate of 34 percent, from now until 2000. Does that indicate the level of growth you can achieve? Industry people have different grades. Our plan is to be able to grow as much as we can manage so we don't get ahead of ourselves.
Do you have any guidance for Wall Street on what your growth rate ought to be during the next few years? The industry's growing between 30 percent and 50 percent, and we believe we are going to be in the higher end and possibly beat that. (Emphasis Added).
89. Defendant Ejabat's statements were materially false and misleading because at the time he spoke he knew or recklessly disregarded, but failed to disclose, that: (1) customers would not buy MAX products, which account for more than 75% of sales revenues, until they were assured the new digital modems worked properly; (2) software and firmware problems plagued the digital modems with the proposed 56 K-bps technology; (3) the proposed products actually ran at substantially inferior data transfer rates. Consequently, without extensive concentration on 56 K-bps technology, Ejabat knew that the Company cannot sustain its represented rate of growth and profitability.
90. Defendants' fraud began to unravel when in early June 1997, Ascend disclosed that it would delay 56 K-bps technology shipments because of a "product defect." Nonetheless, defendants continued to assure and represent to the investing public that the delay would not hurt sales.
91. On June 4, 1997, Bloomberg News noted:
Ascend Communications Inc. said shipments of its Max family of networking products are being delayed by a flaw in the software that enables the devices to run at 56 kilobits a second.92. On June 10, 1997, Bloomberg News reported further:Ascend's Max remote access concentrators are used by Internet service providers to link telephone lines to the Internet. They accounted for 80 percent of Ascend's revenue last quarter.
Ascend Vice President Bernie Schneider said that a glitch in the software provided by Rockwell International Corp. enabling the Max family to send Internet data at 56K was the cause of the delay. The glitch has been ironed out and Ascend is working to catch up on Max production.
"Our customers said don't ship us any product until you've fixed the 56K problem," Schneider said. He said he did not expect the delay to hurt sales this quarter.
"The onus is on our manufacturing to catch up," he said. He said the company just stared shipping its products.
Ascend Communications Inc. shares fell as much as 10 percent on concern that a software problem in its Max networking products may cause Ascend to miss revenue targets for the second quarter.93. Bloomberg News reported further:Ascend shares fell 4 1/4 to 43 3/8 in early trading of 3.94 million, making Ascend the most active stock in U.S. composite trading. Earlier the shares touched 42 3/4.
Ascend may miss its revenue targets because a software flaw in the 56 kilobit-per-second modem chips inside the Max family of networking products has delayed shipments by about five weeks, Salomon Brothers analyst Peter Swartz said in a research report. The equipment is used primarily by Internet service providers to link telephone lines into the global computer network.
The Max family of products makes up about three quarters of Ascend's revenue.
The 56K chips are made by Rockwell International Corp. The chips are working, although running at slightly "inferior" rates to U.S. Robotics Corp.'s competing X-2 technology, Swartz said.
Ascend Communications Inc. and Xylan Corp. shares fell as the companies failed to get the parts needed for their key networking products in time to meet the tight deadlines demanded by customers.94. On June 30, 1997, PC Week reported:Ascend dropped 6 to 41 in late trading after a glitch in a chip it buys from Rockwell International Corp. delayed shipments of a product that accounts for three-quarters of its revenue. Xylan fell 3 5/16 to 13 15/16, citing supply and manufacturing problems in its warning of lower second-quarter sales and profit.
Such less-established networking companies are more at risk than their bigger counterparts from trouble with suppliers. A flawed chip or poorly designed circuit board that sets back production even for a week can mean that customers clamoring for the latest technology will turn elsewhere.
"Product cycles are becoming shorter and competition is fiercer than ever," said Peter Swartz, an analyst at Salomon Brothers ...
Ascend's problem is that in February U.S. Robotics brought out its new 56 kilobit-per-second modems. U.S. Robotics is using its new X2 technology to sell more of its big modem concentrators to Internet service providers.
To compete, Ascend and Rockwell, its supplier, rushed out their products.
Ascend said last Wednesday that because of a flaw in the software on the Rockwell chip, it hasn't been able to ship any of its Max TNT concentrators with 56K since early May. The delay may cause it to miss analysts' target for revenue this quarter.
"Given the company has only three weeks to fix the software glitch and ship about five weeks worth of backlog, we believe our numbers for the quarter may be at risk," Swartz said. (Emphasis Added).
As users clamor for higher bandwidth and vendors rush to meet that demand, corporate network administrators and ISPs are expressing trepidation over Ascend Communications Inc.'s implementation of 56K-bps modems in its RAS equipment. The Alameda, Calif., company is currently facing problems involving its remote access server equipment, including the fact that users must upgrade all modules in the server to support 56K, rather than just a portion of the cards.95. Faced with continuing critical setbacks in the deployment of its new technology and the challenges presented thereby in overcoming its competitors, Ascend emboldened its scheme to mislead investors. In July 1997, defendant Ejabat told investors and analysts in a conference call that "[o]ver the course of the year as a whole, Ascend has not lost any business due to the 56K snafuÖ" Ejabat added that "We are either maintaining or increasing our market share in our businesses. . .""The reason you can't commingle cards is that the packet processor on the card offloads some of the work to the CPU," said analyst Bobbi Murphy of Dataquest Inc., in San Jose, Calif. "It's really an architecture change, not just a modem upgrade,"
Further compounding the problem, Ascend has guaranteed free upgrades to 56K, but since the chassis only works with all 56K-bps cards, supplies of the cards are expected to drain quickly. Ascend has put pressure on its own supplies via a card "swap program," which gives users 60 days to swap the cards and 30 more days to return the old cards.
"They're going to have to give customers more time to order and install the new cards, especially if the users have to swap out all their cards," said Murphy. "From an ISP Internet service provider perspective, that's their business. If that card doesn't work well, they're the next America Online."
As if that weren't enough, sources now say the Ascend Max servers run hot with V-34 modems in them, possibly too hot far a full chassis of 56K-bps cards.
Officials in Alameda, Calif., declined to comment, citing an upcoming earnings report, due this week, as the reason.
One ISP testing an Ascend Max RAS 56K implementation said its tests with the 56K cards have not gone well.
"The Ascend staff came, out and they were great to work with, but we haven't been able to get the server to work," said an administrator at the ISP, who requested anonymity. "Connections are not even close to 56K bps."
Another Ascend user said he won't upgrade until the technology is mature. "56K technology is not reliable. Until the technology is proven, it's not a concern to me," said Jeff Konz, network monitoring manager at US West Enterprise, in Minneapolis.
Brian Deardorff, senior system network engineer at The Internet Access Co. in Bedford. Mass., expressed frustration with the way companies have bowed to the marketing pressure.
"Customers are definitely pushing us," said Deardorff. "A lot of people want to do 56K, and we need to pick between protocols x2 and K56Flex right now and go for it. That worries me a little." (Emphasis Added).
96. As a result of Ejabat's representations, Ascend stock began to rise in price and reached a price of $55 per share on July 16, 1997.
97. On July 29, 1997, defendant Ejabat told a Bloomberg Forum that:
[Ejabat] expects sequential growth in revenue this quarter in sales from its Cascade Communications division.98. On July 29, 1997, Bloomberg News reported:Ejabat told the Bloomberg Forum that both of Cascade's major product areas, frame relay switches and asynchronous transfer mode switches, are expected to show sales growth over their second-quarter levels.
"We are seeing increased demand for frame relay, and especially ATM," Ejabat said. Both products are used largely by telephone companies to send large amounts of data over long distances.
Ejabat said the integration of Cascade, which Ascend bought last month for $3.7 billion, is proceeding smoothly. with new products combining Ascend and Cascade technology due out later this year. (Emphasis added).
Ascend Communications Inc. shares rose 14 percent after Chief Executive Mory Ejabat told investors that he's confident sales this quarter and next will be higher than the second quarters.99. Analysts reacted quickly and favorably to Ejabat's comments. The same July 29, 1997 Bloomberg News article noted:Ascend shares rose 6 318 to 53 1/8. Ascend's second-quarter sales were $311.7 million.
Ejabat spoke to analysts and investors at Network Connections, an annual conference on the computer networking industry in Santa Clara, California. The conference was closed to the press.
Ejabat later told the Bloomberg Forum that the two major products from Ascend's Cascade Communications unit -- frame relay switches and asynchronous transfer mode switches -- are likely to show sales growth over their second quarter levels. Both products are used, largely by telephone companies, to send large amounts of data over long distances.
"We are seeing increased demand for frame relay and especially ATM," Ejabat said.
Ejabat said the integration of Cascade, which Ascend bought last month for $3.7 billion, is proceeding smoothly, with new products combining elements of Ascend and Cascade technology due later this year.
"I've done a number of acquisitions in my lifetime and this is by far the smoothest and most productive," Ejabat said.
Cascade sales dropped in the first quarter, raising fears that the company's growth was petering out, and contributing to a steep fall in Ascend's stock price in April when it unveiled the takeover offer.
Ejabat said Ascend will broaden its product range further by both internal development and acquisition, because networking customers are demanding that companies supply a full range of networking equipment.
"We will do some more acquisitions, but I don't know if it will happen this year," he said.
Ascend solved the chip problems this delayed shipments of its Max remote access concentrators for several weeks, Ejabat said. A flaw in the chip inside the 56 kilobit-per-second modems inside the Max delayed shipments and held back Ascend's revenue growth in the second quarter.
The company is now shipping in volume the full range of Max products with the 56K chips, he said. (Emphasis added).
Montgomery Securities analyst Al Tobia described Ejabat's presentation as "upbeat".100. Defendants' foregoing statements were materially false and misleading because at the time defendants made the statements, defendants knew or were reckless in disregarding, but failed to disclose, that sales of its MAX products, which account for over 75% of sales revenues, could not and would not pick up for the lost sales gone by, let alone meet the expectations the defendants fostered by their misrepresentations because Ascend's customers and other online services and Internet access providers would not buy the product until they worked properly."After a close-to-flat second quarter, people just want to be a little more comfortable that the numbers will start going up again," he said.
Ascend said its sales will pick up in Europe in the second half, Tobia said. Ascend had said that its second-quarter sales were held back by weakness in some European markets. (Emphasis Added).
101. On August II, 1997, Bloomberg News reported:
Ascend Communications Inc. shares fell 9.6 percent after a Securities and Exchange Commission filing by the networking company showed its July revenue was below analysts' expectations.102. The truth about Ascend's financial condition continued to drip out in a September 11, 1997 Bloomberg News article:Ascend shares fell 4 3/4 to 44 11/16 in trading of 24.8 million, putting it atop the list of most-active U.S. stocks.
Ascend said in an 8-K filing that its revenue last month was about $62.8 million, which lags analysts' forecasts of about $235 million for the third quarter as a whole. The company is facing tougher competition from rivals 3Com Corp. and Cisco Systems Inc., said Martin Pyykkonen, an analyst at Furman Selz.
"I expect the softness to continue into August," he said.
Cisco in June unveiled the Access Path, a combination of its remote-access product and other networking equipment including the market-leading Cisco 7500 router. That helped it win new customers including CompuServe Corp., Pyykkonen said.
Ascend competes with 3Com for the leading position in the market for remote-access equipment which is used by Internet service providers to link telephone callers into the Internet. Cisco is No. 3 in that market.
3Com recently won a foothold with some large Ascend customers, including Internet service provider PSINet Inc., which are moving from total reliance on Ascend to buying products from many suppliers, 3Com is helped in this market by its purchase of U.S. Robotics Corp., which it bought for $8.9 billion. (Emphasis Added).
Ascend Communications Inc. shares fell 5.5 percent on concern that the company won't meet third-quarter profit estimates because of slowing sales and competition from Cisco Systems Inc.103. Defendants' fraudulent scheme faltered, however, when the second shoe dropped on September 30, 1997, when Ascend announced a shocking, last minute profit warning.Ascend shares fell 2 3/16 to 37 13/16, their lowest level since January 1996, in trading of 27.7 million, making Ascend by far the most active U.S. stock.
Ascend shares are down almost a third since Aug. 1, a sharp drop for what six months ago was one of the hottest technology stocks. The company is having trouble selling its Max remote-access concentrators used by Internet service providers and is facing beefed-up competition from networking leader Cisco, which analysts said is pushing into the market with lower prices.
"These guys have got a lot on their plate trying to introduce new technology while the Internet is growing at 15 percent a month," said Steven Carhart, manager of the Pioneer Mid-Cap Fund, which had assets of $878 million and 1.37 million Ascend shares at the end of June.
Ascend told investors at a presentation earlier this week that sales of its main product, Max TNT remote-access concentrator, are being slowed because European telephone companies are putting the product through rigorous tests before making large orders, Carhart said.
Shipments of the Max TNT, used by Internet service providers to link hundreds of telephone callers into the Internet, were delayed by problems with the chips for high-speed 56 kilobit-per-second communications. The delay, from late May until July, meant that European companies were into their long summer vacations by the time they received the first Max TNTs for testing.
"The European bureaucracies won't accept shipments until they're completely satisfied the product works perfectly," Carhart said.
Ascend was expected to earn 34 cents a share, according to the average estimate of 30 analysts surveyed by IBES International Inc.
In the year-earlier third quarter, Ascend had a profit of $24.9 million, or 20 cents a share, on revenue of $154.6 million. That did not include Cascade.
Analysts said they have concerns about Ascend's U.S. sales too. If true, that's potentially much more serious. Europe accounted for just 15 percent of Ascend's revenue last quarter, while North America represented about half.
In a research note, Salomon Brothers analyst Peter Swartz said the MAX TNT with 56K has encountered technological problems in handling telephone calls from other modems and has had difficulty maintaining connections.
And Everen Securities analyst Christin Armacost said Ascend's fourth-quarter sales may be hurt because its largest customer, UUNet Technologies Inc., is expected to complete its modem upgrade program this month. Worldcom Inc. unit UUNet, the world's largest wholesaler of Internet access, has almost finished adding 200,000 modems to reach its 1997 target of 280,000 modems, Armacost said.
"We don't yet know how all of that will shake out, but it's possible UUNet will decline as a customer for Ascend," she said.
Armacost cut her estimate for the third quarter to 30 cents a share from 35 cents. For next quarter, she reduced her estimate to 35 cents a share from 39 cents. (Emphasis Added).
104. In a Bloomfield News article on September 30, 1997, the end of the Class Period, the following was disclosed:
Ascend Communications Inc. shares fell 8.2 Percent after the company's last-minute profit warning led investors to question whether management has been disclosing all of Ascend's problems.105. As a result of the foregoing, plaintiffs, and other members of the classes, who relied on defendants' representations when purchasing Ascend common stock during the Class Period, were damaged by defendants' scheme to misread and defraud the Class and Sub-Class as alleged within.Ascend shares fell 2 7/8 to 32 3/8 in trading of 33.8 million, making them the most active in U.S. markets. The shares reached their lowest since January 1996, after Ascend's warning that its third-quarter profit will lag analysis' projections by as much as 13 cents a share.
The expected shortfall follows months of secrecy and in some cases misleading information about flaws in the company's main product that links Web surfers into the Internet, analysts and investors said. That calls into question the credibly of Chief Executive Mory Ejabat.
"Nobody trusts them. Why should they?" said Christine Chien, technology analyst at Zurich Kemper, Inc., which held 1.68 million Ascend shares at the end of June.
Ascend warned late yesterday that earnings for the quarter ending today will be 18 cents to 20 cents a share, while analysts were expecting 31 cents, the average estimate of 30 surveyed by RBES International Inc. Profit was 29 cents in the year-earlier quarter.
"It absolutely floors me that a company of this size would announce a shortfall of this magnitude and then not hold a conference call about what's going on," said Jeff Coe, a fund manager at Campbell Advisers, which holds 60,000 Ascend shares.
Ascend said in a statement that revenue and earnings will lag expectations because of weaker sales in Europe as telephone companies delay approval for the Max TNT, Ascend's flagship product The company also cited weaker demand for personal computers in Japan.
Chien said she was particularly concerned about a July investors conference at which Ejabat said business was strong. Less than two weeks later, Ascend filed a report with the Securities & Exchange Commission showing that business in July was well below analysts' expectations.
Hambrecht & Quist analyst Joe Noel said that Ascend's management, Ejabat in particular, has been "very promotional." Analysts who cover fast-moving technology companies depend on regular and candid conversations with managers to guide their forecasts for sales and earnings.
Noel said that at one investors conference, when Ejabat was asked about sales to the regional Bell phone companies, he said that business was fine and Ascend did business with all seven Baby Bells.
Noel said he subsequently discovered that Ascend only sold products to two of the Bells.
"He looked that investor straight in the eye and said we do business with all seven. I will never forget that meeting," Noel said.
Ascend management was not immediately available for comment.
Chien and others said Ascend has become too huge for Ejabat to control, and that he doesn't have the skills to handle investor and public relations. "Mory is a micromanager. He controls everything," she said.
Fund manager Peter Anastos of Alliance Capital Management LP said Ejabat doesn't have much time to restore Ascend to the fast-growth track. Ascend's competition is intensifying, especially from Cisco Systems Inc., the No. 1 networking equipment maker, Anastos said.
"He has a window of about six months, but it will close on him unless he gets his act together," Anastos said. Alliance held 9.5 million Ascend shares at the end of June, which made it the company's largest shareholder. That stake has come down substantially since then, Anastos said, without giving details.
Behind Ascend's third-quarter shortfall is a series of chip and technical flaws and delays in the software inside its new 56 kilobit-per-second Max products. Ascend also is being hampered by the existence of two incompatible 56K standards, which could be resolved next year through a universal standard. Consumers have been reluctant to buy 56K modems until they're sure their modem will connect with every service provider. (Emphasis Added).
Insider Date Shares Price Total Proceeds ------- ---- ------ ----- -------------- M. Ejabat 11/07/96 9,000 $73.00 $647,000.00 2/03/97 4,339 $70.00 $303,730,00 2/12/97 10,000 $64.06 $640,600,00 2/13/97 10,002 $65.03 $650,430.06 2/20/97 20,000 $64.50 $1,290,000.00 2/24/97 20,000 $60.00 $1,200,000.00 2/25/97 20,000 $61.00 $1,220,000.00 2/26/97 50,000 $62.18 $3,109,000.00 ------- ------------- Subtotal 143,341 $9,070,760.06 ------- ------------- R. Evans 2/13/97 10,000 $65.25 $652,500.00 2/21/97 10,000 $61.63 $616,300.00 2/21/97 10,000 $61.88 $618,800.00 2/24/97 20,000 $60.00 $1,200,000.00 2/25/97 20,000 $61.00 $1,220,000.00 2/25/97 10,000 $60.25 $602,500.00 2/25/97 10,000 $60.63 $606,300.00 2/25/97 10,000 $61.00 $610,000.00 2/25/97 10,000 $61.13 $611,300.00 2/25/97 10,000 $62.00 $620,000.00 2/25/97 5,000 $62.38 $311,900.00 2/25/97 5,000 $62.13 $310,650.00 2/26/97 20,000 $62.00 $1,240,000.00 2/26/97 10,000 $61.75 $617,500.00 2/26/97 10,000 $63.00 $630,000.00 ------- -------------- Subtotal 170,000 $10,467,750.00 ------- -------------- B. Atkins 2/12/97 5,000 $64.63 $323,150.00 2/13/97 7,000 $65.00 $455,000.00 2/13/97 3,000 $65.00 $195,000.00 2/13/97 15,000 $65.50 $982,500.00 ------ ------------- Subtotal 30,000 $1,955,650.00 ------ ------------- J. Symons 2/06/97 30,000 $63.85 $1,915,500.00 2/06/97 10,000 $63.88 $638,800.00 2/06/97 10,000 $64.50 $645,000.00 2/07/97 20,000 $65.85 $1,317,000.00 2/07/97 10,000 $67.00 $670,000.00 2/07/97 10,000 $66.50 $665,000.00 2/07/97 15,000 $65.75 $986,250.00 2/07/97 10,000 $65.63 $656,300.00 2/13/97 10,000 $65.03 $650,300.00 2/13/97 35,000 $63.91 $2,236,850.00 ------- -------------- Subtotal 160,000 $10,381,000.00 ------- -------------- M. Hendren 11/26/96 2,917 $71.25 $207,836.25 11/26/96 11,249 $71.50 $804,303.50 11/26/96 7,083 $71.25 $504,663.75 2/05/97 29,696 $65.25 $1,937,664.00 2/05/97 7,083 $66.38 $470,169.54 2/07/97 12,804 $66.00 $845,064.00 2/26/97 14,167 $62.25 $881,895.75 2/26/97 3,542 $62.25 $220,489.50 ------ ------------- Subtotal 88,541 $5,872,086.29 ------ ------------- C. Sanford 2/26/97 15,000 $62.63 $939,450.00 2/26/97 2,000 $62.63 $125,260.00 ------ ------------- Subtotal 17,000 $1,064,710.00 ------ ------------- A. Stagno 11/27/97 415 $71.88 $29,830.20 11/27/97 4,830 $71.88 $347,180.40 11/27/97 461 $71.88 $33,136.68 11/27/97 939 $71.88 $67,495.32 11/27/97 1,250 $71.88 $89,850.00 2/27/97 8 $60.00 $480.00 2/27/97 420 $60.00 $25,200.00 2/27/97 7,308 $60.00 $438,480.00 2/27/97 4,200 $60.00 $252,000.00 2/27/97 3,750 $33.00 $123,750.00 ------ ------------- Subtotal 23,581 $1,407,402.60 ------ ------------- R. Dahl 11/27/97 18,960 $71.37 $1,353,175.20 ------ ------------- M. Johnson 11/26/96 3,542 $72.88 $258,140.96 2/13/97 5,000 $65.03 $325,150.00 2/25/97 5,624 $61.49 $245,819.76 ------ ----------- Subtotal 14,166 $929,110,72 ------ -------------- Total All Defendants $43,041,644.87 ==============
(B) the misrepresentations and/or omissions were material;
(C) Ascend's common stock was traded in an efficient market;
(D) the misrepresentations and/or omissions alleged induced reasonable investors to misjudge the value of Ascend shares; and
(E) plaintiffs 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 and/or omissions of material fact; and
(F) plaintiffs Tehrani and members of the Sub-Class acquired their shares between the time defendants made the misrepresentations and/or omissions contained in the registration statement and prospectus issued by the Company in connection with the Ascend-Cascade merger and the time the truth was revealed, without knowledge of the falsity of the misrepresentations and/or/ omissions of material fact.
(B) As a regulated issuer, the Company filed periodic reports with the SEC;
(C) The Company's trading volume in its stock was substantial, reflecting numerous trades each day; and
(D) Ascend regularly communicated with, and was actively followed by, business media and analysts.
112. 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 plaintiffs and the other class members, as alleged herein; (ii) artificially inflate and maintain the market price of Ascend securities; and (iii) cause plaintiffs and other members of The Class to purchase Ascend securities at inflated prices: and (iv) permit the defendants to engage in heavy and profitable insider sales. In furtherance of this unlawful scheme, plan and course of conduct, defendants, and each of them, took the actions set forth herein.
113. 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 violation of Section 10(b) of the Exchange Act and Rule 10b-5. All defendants are sued either as primary participants in the wrongful and illegal conduct charged herein or as controlling persons as alleged below.
114. In addition to the duties of full disclosure imposed on defendants, as a result of their making of affirmative statements aid reports, or participation in the making of affirmative statements and reports, or participation in the making of affirmative statements and reports to the investing public, and by virtue of the defendants' insider sales of Ascend stock at artificially inflated prices, the Individual Defendants had a duty to promptly disseminate truthful, accurate and complete information that would be material to investors in compliance with the integrated disclosure provisions of the SEC as embodies in SEC Regulation S-X (17 C.F.R. Sections 210.10 et seq.) and S-K (17 C.F.R. Sections 229.10 et seq.) and other SEC regulations, financial condition and earnings so that the market price of the Company's common stock would be based on the same.
115. Ascend and the Individual Defendants, individually and in concert, directly and indirectly, by the use of means or instrumentalities of interstate commerce and/or by mails, engaged and participated in a continuous course of conduct to conceal adverse material information about the business, operations and prospects of the Company as specified herein. Ascend and the Individual Defendants employed devices, schemes and artifices to defraud, while in possession of material adverse non-public information and engaged in acts, practices, and a course of conduct as alleged herein in an effort to assure investors of Ascend's value and performance and continued substantial growth, which included the making of, or the participation in the making of, untrue statements of material facts and omitting to state material facts necessary in order to make the statements made about Ascend and its business operations and prospects in the light of the circumstances under which they were made, not misleading, as set forth more particularly herein, and engaged in transactions, practices and a course of business which operated as a fraud and deceit upon the purchasers of Ascend securities during the Class Period.
116. Each of the Individual Defendants' primary liability, scienter and controlling person liability, arises from the following facts. (i) each of the Individual Defendants was a high level executive and/or director at the Company during The Class Period and was a member of the Company's management team; (ii) each of the Individual Defendants, by virtue of his or her responsibilities and activities as a senior officer and/or director of the Company, was privy to and participated in the creation, development and reporting of the Company's budgets, plans, projections and/or reports and press statements, (iii) each of the Individual Defendants enjoyed significant personal contact and familiarity with the other Individual Defendants and was advised of and had access to other members of the Company's management team, internal reports and other data and information about the Company's finances, operations, sales and business prospects at all relevant times; and (iv) each of the Individual Defendants was aware of the Company's, dissemination of information to the investing public which they knew or recklessly disregarded was material, false and misleading.
117. The statements made by defendants during the Class Period were materially false and misleading because at the time they were made, the Company, the Individual Defendants and Persons acting as corporate officers knew or recklessly ignored, but failed to disclose, the matters set forth herein. Such defendants' material misrepresentations and/or omissions were done knowingly or reckless and for the purpose and effect of concealing Ascend's true operation condition and business prospects from the investing public and supporting the artificially inflated price of its stock. As demonstrated by defendants' overstatements and misstatements regarding the Company's business, operations and earnings prospects throughout the Class Period, defendants, if they did not have actual knowledge of the misrepresentations and omissions alleged, were reckless in failing to obtain such knowledge by deliberately refraining from taking those steps necessary to discover whether those statements were false and/or misleading.
118. As a result of the defendants' unlawful conduct, as set forth above, the market price of Ascend securities was artificially inflated during the Class Period. In ignorance of the fact that market price of the Company's publicly-traded securities was artificially inflated, and relying directly or indirectly on the false and misleading statements made by defendants, or upon the integrity of the market in which the securities traded, and the truth of any representations made to appropriate agencies as to the investing public, at the times at which the statements were made, and/or on the absence of material, adverse information that was known to, or recklessly disregarded by, defendants but not disclosed in public statements by defendants during the Class Period, plaintiffs and the other members of the Class acquired Ascend securities during the Class Period at artificially high prices and were damaged thereby.
119. At the time of said misrepresentations, plaintiffs and other members of the Class were ignorant of their falsity, and believed them to be true. Had the other class members and the marketplace known the truth about the Company's business and inability to grow at the rate the defendants were representing, which were not timely disclosed by defendants, plaintiffs and other members of the Class would not have purchased or otherwise acquired their Ascend securities during the Class Period, or, 6 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, plaintiffs and the. Class were damaged by defendants' violations of Section 10(b) and Rule 10b-5.
120. As a direct and proximate result of defendants' wrongful conduct, plaintiffs and the other class members suffered damages in connection with their purchases of the Company's securities during the Class Period.
121. By virtue of the foregoing, defendants have violated Section 10(b) of the Exchange Act, and Rule 10b-5 promulgated thereunder.
123. The Individual Defendants acted as controlling persons of Ascend within the meaning of Section 20 of the Exchange Act as alleged herein. By virtue of their executive and directorial positions, their participation in and/or awareness of the Company's operations and/or intimate knowledge of the Company's true business condition, their stock ownership, and their power and ability to make public statements on behalf of Ascend to shareholders, potential investors and the media, the Individual Defendants had the power to influence and control and did influence and control, directly or indirectly, the decision-making of the Company, including the content and dissemination of the various statements which plaintiffs contend are false and misleading. Each of the Individual Defendants was provided with or had unlimited access to copies of the Company's reports, press releases, public filings and other statements alleged by plaintiffs to be misleading prior to and/or shortly after these statements were issued and had the ability to prevent issuance of said statements or cause the statements to be corrected.
124. In particular, each of the defendants had direct involvement in the day-to-day operations of the Company and therefore, is presumed to have had the power to control or influence the particular transactions giving rise to the securities violations as alleged herein and exercised the same.
125. As set forth above, Ascend and the Individual Defendants each Violated Section 10(b) and Rule 10b-5 and by their acts and omissions as alleged in this Complaint. By virtue of their positions as controlling persons, the Individual Defendants are also liable pursuant to Section 20(a) of the Exchange Act. As a direct and proximate result of the defendants' wrongful conduct, plaintiffs and other members of the Class suffered damages in connection with their purchases of the Company's securities during the Class Period.
127. This count is brought for violations of Section 11 of the Securities Act, on behalf of the Sub-Class as defined herein against Ascend and defendants Ejabat, Evans, Atkins, Dahl, Johnson, Kramlich, Lally and Schoffstall.
128. The Ascend-Cascade registration statement, which contained the prospectus, and the documents incorporated by reference therein, as set forth above, were inaccurate and misleading, contained untrue statements of material facts, omitted to state other facts necessary to make the statements made not misleading, and concealed and failed adequately to disclose material facts, all as set forth in greater detail above.
129. Ascend is the registrant for the shares exchanged to the Sub-Class plaintiff and the other members of the Sub-Class. Ascend issued, caused to be issued and participated in the issuance of materially false and misleading written statements to the investing public which were contained in the registration statement which misrepresented or failed to disclose, inter alia, the facts set forth above.
130. Each of the defendants named in this Count either personally or through and attorney-in-fact, signed the registration statement and was a director and/or senior executive of Ascend at the time of the merger referred to herein.
131. The defendants named in this Count were responsible for the contents and dissemination of the registration statement and the prospectus. None of the defendants named in this Count made a reasonable investigation or possessed reasonable grounds for believing that the statements contained in the registration statement and prospectus were true and did not omit any material facts and were not materially misleading, all for the reasons set froth hereinabove.
132. Defendants named in this Count had actual knowledge of the misrepresentations and omissions of material facts set forth herein, or acted with reckless disregard for the truth in that they failed to ascertain and to disclose such facts, even though such facts were available to them. Defendants' material misrepresentations and/or omissions were made knowingly or recklessly and for the purpose and effect of concealing the truth with respect to the Company's operations, business management, performance and prospects from the investing public and supporting the artificially inflated price of its stock.
133. The Sub-Class plaintiff acquired shares of Ascend stock issued pursuant to the registration statement.
134. The Sub-Class plaintiff and the other members of the Sub-Class have sustained damages. The value of the Company's shares has declined substantially subsequently due to defendants' violations.
135. At the times they purchased the Company's shares, the Sub-Class plaintiff and the other members of the Sub-Class were without knowledge of the facts concerning the wrongful conduct alleged herein and could not have reasonably discovered those facts. Less than one year has elapsed from the time that the Sub-Class plaintiff discovered or reasonably could have discovered the facts upon which this Complaint is based to the time of filing this Complaint. Less than three years has passed from the time that the securities upon which this claim is asserted were bona fide offered to the public to the time of filing this Complaint.
136. Sub-Class is entitled to recover from defendants damages measured by the difference between their exchange price for Ascend securities and the actual value of such securities.
138. This count is brought for violations of Section 12 of the Securities Act, on behalf of the Sub-Class as defined herein against Ascend and the Individual defendants named in Count III.
139. The Ascend-Cascade registration statement, which contained the prospectus, and the documents incorporated by reference therein, as set forth above, were inaccurate and misleading, contained untrue statements of material facts, omitted to state other facts necessary to make the statements made not misleading, and concealed and failed adequately to disclose material facts, as set forth in greater detail above.
140. Ascend is the registrant for the shares exchanged to the Sub-Class plaintiff and the other members of the Sub-Class. Ascend issued, caused to be issued and participated in the issuance of materially false and misleading written statements to the investing public which were contained in the registration statement, which misrepresented or failed to disclose, inter alia, the facts set forth above.
141. The actions of the individual defendants named in Count III solicited the sale of shares of Ascend common stock in connection with the Ascend-Cascade merger for their personal financial gain. These actions included participating in the preparation of the materially false and misleading prospectus and other materials used in the sale of Ascend common stock.
142. The Count III individual defendants had actual knowledge of the misrepresentations and omissions of material facts set forth herein, or acted with reckless disregard for the truth in that they failed to ascertain and to disclose such facts, even though such facts were available to them. The Count III individual defendants' material misrepresentations and/or omissions were made knowingly or recklessly and for the purpose and effect of concealing the truth with respect to the company's operations, business management, performance and prospects from the investing public and supporting the artificially inflated price of its stock.
143. The Sub-Class plaintiff acquired shares of Ascend stock issued pursuant to the registration statement.
144. The Sub-Class plaintiff and the other members of the Sub-Class have sustained damages. The value of the Company's shares has declined substantially subsequently due to the Count III individual defendants' violations.
145. At the times they purchased the Company's shares, the Sub-Class plaintiff and the other members of the Sub-Class were without knowledge of the facts concerning the wrongful conduct alleged herein and could not have reasonably discovered those facts.
146. By reason of the conduct alleged herein, the defendants named in this count violated Section 12(a)(2) of the Securities Act. Accordingly, the Sub-Class plaintiff and the other members of the Sub-Class who hold the Company's shares, have the right to rescind and recover the consideration paid for the Company's shares and hereby elect to rescind and tender their shares of the Company to the defendants sued herein. Sub-Class members who have sold their shares of Ascend stock are entitled to rescissory damages.
147. Less than one year has elapsed from the time that the Sub-Class plaintiff discovered or reasonably could have discovered the facts upon which this Complaint is based to the time of filing this Complaint. Less than three years has elapsed from the time that those securities upon which this claim is asserted were bona fide offered to the public to the time of filing this Complaint.
149. The individual Count III defendants acted as controlling persons of Ascend within the meaning of Section 15 of the Securities Act as alleged herein. By virtue of their executive and directorial Positions, their participation in and/or awareness of the Company's operations and/or intimate knowledge of the Company's true business condition, their stock ownership, and their power and ability to make public statements on behalf of Ascend to shareholders, potential investors and the media, they had the power to influence and control and did influence and control, directly or indirectly, the decision-making of the Company, including the content and dissemination of the various statements which plaintiffs contend are false and misleading in Count III herein.
150. In particular, each of the individual Count III defendants had direct involvement in the day-to-day operations of the Company and therefore is presumed to have had the power to control or influence the particular transactions giving rise to the securities violations as alleged herein, and exercised the same.
151. By virtue of their positions as controlling persons, the individual Count III defendants are also liable pursuant to Section 15 of the Securities Act. As a direct and proximate result of the defendants' wrongful conduct alleged in Count III herein, the Sub-Class plaintiff and other members of the Sub-Class suffered damages in connection with their purchases of the Company's securities pursuant to the Ascend-Cascade merger.
153. By virtue of making the foregoing materially false and misleading statements, defendants directly or indirectly, have committed common law fraud and deceit upon plaintiffs and the other members of the Class.
154. Plaintiffs, and the other members of the Class, ignorant of the falsity of these statements, relied upon them, as well as the integrity of the marketplace, in purchasing Ascend common stock.
155. As a result, plaintiff and the other members of the Class have suffered substantial damages arising out of defendants' foregoing unlawful conduct.
157. The individual defendants' negligence and failure to exercise reasonable care and competence was a direct and proximate cause of the misrepresentations and omissions to state material facts complained of herein.
158. Defendants knew and intended that plaintiffs and the other members of the Class would rely on the reports, filings, press releases and other statements disseminated by defendants during the Class Period which are described herein in making investment decisions with respect to Ascend common stock. Defendants owed a duty to plaintiffs and the other members of the Class to disseminate accurate, truthful and complete information concerning the business, financial condition and prospects of Ascend.
159. The decision by each member of the Class whether to invest in Ascend constituted a business decision by each such person.
160. At the time defendants made the material misrepresentations and omissions complained of herein, plaintiffs and the other members of the Class were ignorant of their falsity and believed them to be true. In reasonable and justifiable reliance on said misrepresentations and omissions and on the fidelity, integrity, superior knowledge and experience of the defendants, and in ignorance of the true facts, plaintiffs and the other members of the Class were induced to, and did, purchase Ascend common stock at artificially inflated prices. Had plaintiffs and the other members of the Class known the truth with respect to the aforesaid misrepresentations and omissions they would not have taken such action.
161. By reason of the foregoing, plaintiffs and the other members of the Class have suffered substantial damages.
2. Awarding compensatory damages in favor of plaintiffs and the other class members against all defendants, for all damages sustained as a result of the defendants' wrongdoing, and rescissory damages where appropriate for the members of the Sub-Class, in an amount to be-proven at trial, including interest thereon;
3. Awarding plaintiffs and the Class their reasonable costs and expenses incurred in this action, inclining counsel fees and expert fees; and
4. Awarding such other and further relief as rids 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 reflect the defendants' assets to assure plaintiffs and the members of the Class have an effective remedy.
| Dated: December 2 1997 | Kevin J. Yourman
James E. Tullman Donald S. Urrabazo WEISS & YOURMAN /s/
Joseph H. Weiss
Edward P. Dietrich
Jules Brody
Attorneys for Plaintiffs |
| Dated: December 2 1997 | Kevin J. Yourman
James E. Tullman Donald S. Urrabazo WEISS & YOURMAN /s/
Joseph H. Weiss
Edward P. Dietrich
Jules Brody
Attorneys for Plaintiffs |
3 Jan 1998
Source: Scanned copy of court-stamped paper document