MILBERG WEISS BERSHAD
HYNES & LERACH LLP
WILLIAM S. LERACH (68581)
600 West Broadway, Suite 1800
San Diego, CA 92101
Telephone: 619/231-1058
- and -
REED R. KATHREIN (139304)
JOHN K. GRANT (169813)
222 Kearny Street, 10th Floor
San Francisco, CA 94108
Telephone: 415/288-4545
Lead Counsel for Plaintiffs
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF CALIFORNIA
SAN JOSE DIVISION
In re SMART MODULAR TECHNOLOGIES,
INC. SECURITIES LITIGATION
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This Document Relates To:
ALL CASES.
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Master File No. C-98-20692-JW(PVT)
CLASS ACTION
CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATION
OF THE FEDERAL SECURITIES LAWS
Plaintiffs Demand A Trial By Jury
1. This is an action on behalf of all purchasers of the stock of Smart Modular Technologies Inc. ("Smart Modular" or the "Company") between 7/1/97 and 5/21/98 (the "Class Period"), complaining of a fraudulent scheme and course of business that operated as a fraud and deceit on purchasers of Smart Modular stock. The defendants are Smart Modular and its top officers and directors (the "Defendants").
2. Smart Modular is a manufacturer of add-on components for PCs, including specialty and standard memory modules and PC cards, which permit PC manufacturers and assemblers of specialty computer equipment to "customize" the amount of memory in a computer. The majority of Smart Modular's sales were to PC OEMs, such as Compaq Computer (its largest customer), Hewlett-Packard and Dell Computer. Smart Modular went public in 11/95 in an initial public offering ("IPO"). Subsequent to Smart Modular's IPO, notwithstanding Smart Modular's reporting of growing earnings per share ("EPS") its stock only gradually increased in price and performed worse than Defendants had hoped.
3. By mid-97, Smart Modular's insiders realized that growth in demand for its memory module products from its OEM and end-user customers was beginning to slow, that the pricing environment for Smart Modular's memory modules was beginning to weaken and that Smart Modular's rapid expansion in Europe was not only costing more than originally anticipated but likely would not produce the kind of profitable growth originally hoped for. Smart Modular's insiders knew that if these negative conditions continued or worsened, this would have an adverse impact on Smart Modular's growth and profitability and when these negative trends became publicly known would cause Smart Modular's stock to decline sharply. So, Smart Modular and its insiders decided to undertake a large secondary offering of millions of shares of Smart Modular's stock in which the Company and its top insiders would sell shares, via a registered offering exempt from the Rule 144 restrictions which apply to open market stock sales by corporate insiders and then only after they had pushed the stock up much higher via "Roadshow" presentations. This offering would allow Smart Modular to raise large amounts of needed capital at high prices and on non-dilutive terms to help buffer Smart Modular's business from the downturn which its insiders realized was beginning. Sales in a secondary offering would also allow Smart Modular's insiders to sell their shares in transactions where they could use underwriters to help them sell their stock and stabilize the price of Smart Modular stock while these sales were taking place, via the underwriters' stabilization bid, which would not be possible in normal open market sales. This large secondary offering would allow Smart Modular to raise substantial additional amounts of capital on favorable terms to help buffer it from the decline in its business which was already beginning, while enabling Smart Modular's top insiders to sell off much larger amounts of their Smart Modular stock at higher prices than they could sell it at in open market sales. To help pull off this crucial secondary offering, Smart Modular and its top three insiders hired underwriters to help them and then illegally promised to indemnify and hold the underwriters of the secondary offering harmless from any suits or liability arising out of the underwriters' assistance in helping them inflate Smart Modular's stock price and complete the stock offering.
4. The key element in Defendants' scheme was to artificially inflate Smart Modular's stock, so that the secondary offering would raise larger amounts of money for Smart Modular and the Smart Modular insiders who sold shares in the offering and so that the stock offering by Smart Modular would be non-dilutive, thus minimizing the adverse impact of the offering on Smart Modular's EPS power going forward. In late 6/97, Smart Modular stock traded as low as $15-3/4 per share. To help boost Smart Modular's stock price, beginning in 7/97, the Defendants worked with the underwriters they had selected for the offering, i.e., Cowen & Co. ("Cowen"), Donaldson Lufkin & Jenrette ("DLJ") and Morgan Stanley Dean Witter ("Morgan Stanley"), to mount a major publicity campaign for Smart Modular by disseminating extremely favorable, but false, information about Smart Modular's business and prospects.
5. While concealing the adverse conditions which they knew had already begun to adversely impact Smart Modular's business, the Defendants falsely represented that Smart Modular was "experiencing accelerating demand" for its memory modules, its strong EPS reflected the "fundamental . . . strength of the markets we address" and Smart Modular's "growth rate will likely accelerate." According to Smart Modular, its options program whereby it supplied memory modules to its customers' channels directly via electronic order was succeeding, "minimizing Smart Modular's inventory risk," and was being expanded to Europe. According to Smart Modular, it was "competing on speed rather than price," and "declining component prices help" its business. Smart Modular also stated it would "expand its European sales rapidly" due to "robust demand" there, and it expected "non-U.S. sales to represent 35% of revenue within three years," as Europe presented an "enormous opportunity for us to grow and better address the growing market in Europe."
6. These false representations had the desired impact. Smart Modular's stock skyrocketed in the summer of 97, reaching a then all-time high of $34-1/4 in late 8/97.(1) By 9/1/97, as Defendants were working to complete the secondary offering, conditions inside Smart Modular's business had worsened. Nonetheless, Mukesh Patel, Ajay Shah and Lata Krishnan went on a nationwide Roadshow and told potential investors that:
7. Then, on 9/11/97, Defendants completed the offering -- selling 4,760,000 shares of Smart Modular stock at $32.375. Smart Modular sold 2.82 million shares, raising $91.3 million. Smart Modular's top four insiders sold 1.94 million shares for $62.8 million. After the secondary was completed, Smart Modular stock reached $44-5/8 on 10/3/97. Immediately after the secondary offering, Smart Modular's insiders who did not sell stock as part of the secondary offering took advantage of Smart Modular's inflated stock price to sell off 78,000 shares of their Smart Modular stock, pocketing $2.8 million in illegal insider-trading proceeds.
8. However, in early 10/97, just three weeks after Smart Modular's secondary stock offering had been completed, Smart Modular's stock declined, falling very sharply back to $17-1/2 by late 10/97, as information about price cutting of DRAM chips circulated in the investment community. This sharp decline in Smart Modular's stock, coming just weeks after Smart Modular's huge secondary offering, alarmed the Defendants as they knew that such a sharp stock price decline, immediately following a large securities offering, would likely result in a securities class action suit, which could include claims under §11 of the Securities Act of 1933 which would have exposed them to millions in damages without proof of fraud. Thus, Defendants were determined to stop the decline in Smart Modular stock and push the stock back up to higher levels. To accomplish this, Defendants accelerated their barrage of very favorable statements about Smart Modular's business and prospects, representing that Smart Modular's "rapid growth in Europe, market share gains in the reseller channel and new OEMs . . . show strong momentum," Smart Modular "is experiencing ['strong'] accelerating demand for memory modules," "business looks great -- [and] business trends remain strong." Smart Modular's "options build-to-order memory module business . . . continues to be very strong" and "continues to be well received," and Smart Modular "would be very disappointed if we weren't able to . . . exceed [25%] growth" and Smart Modular's "growth rate will likely accelerate" with respect to DRAM pricing. Smart Modular said its "business does not depend on DRAM pricing" and it had "limited exposure to volatile pricing" as "none of these things [i.e., negatives of DRAM price cuts] apply to us." Thus, Smart Modular increased its forecasted F98 and F99 EPS to $1.30+ and $1.55+, while continuing for forecast 25%-30% EPS growth over the next five years.
9. As a result of these false reassurances, Smart Modular's stock rallied strongly, recovering to $34-1/16 by late 11/97 and was trading as high as $36-3/8 in mid-2/98. Smart Modular's insiders took advantage of this continued artificial inflation in Smart Modular's stock price to unload another 160,000 shares of Smart Modular's stock between late 12/97 and early 3/98, for $4+ million more in illegal insider-trading proceeds.
10. However, in late 2/98, Defendants' scheme began to unravel when Smart Modular was no longer able to completely conceal the deterioration of its business. On 2/19/98, Smart Modular revealed that its 2ndQ F98 results, i.e., the quarter to end 4/30/98, would be lower than earlier forecast, blaming this on its inability to qualify its 66MHz PC memory modules with a major customer. However, the Defendants misrepresented that the reason for Smart Modular's inability to obtain this qualification was due to capacity manufacturing constraints which made it unable to supply these 66MHz products in sufficient quantities -- thus implying that demand for these products remained strong. They also falsely assured investors that the qualification issue was a short-term issue only, which was being or had been overcome, and that since the market was rapidly transitioning from 66MHz to 100MHz memory module products (which 100MHz products Smart Modular was prepared to produce in volume), this rapid product transition would benefit Smart Modular. Thus, Defendants continued to forecast that Smart Modular would still achieve strong revenue and EPS growth in F98-F99 with F98 and F99 EPS of $1.35+ and $1.69+, respectively. As a result of these reassurances and forecasts, while Smart Modular's stock declined upon the revelation that its 2ndQ F98 EPS would be lower than forecast, the stock continued to trade at artificially inflated levels through the balance of the Class Period.
11. Then, on 5/20/98, the "other shoe" dropped when Smart Modular shocked investors by revealing that it now expected sharply declining revenues and EPS for and the 2nd half of F98, due to very weak pricing and weak OEM and end-user demand for its products, a much slower than earlier indicated transition to 100MHz products, continuing production problems with Smart Modular's 66MHz products, excessive inventories of Smart Modular's specialty and standard memory modular products and substantial problems with its OEM "options" program. Upon these startling revelations, Smart Modular stock utterly collapsed, falling from $22-1/4 on 5/21/98 to $13-1/8 on 5/22/98 -- a 41% one-day decline on huge volume of 11.1 million shares -- the largest one-day percentage decline and the largest one-day stock trading volume in Smart Modular's history as a public company.
12. Investors who purchased Smart Modular stock and paid as high as $44-5/8 per share for Smart Modular's stock due to representations about continuing strong demand for Smart Modular's products and its forecasts of strong revenue and EPS growth in F98-F99, have suffered millions in damages. However Smart Modular and its insiders who knew the truth about its business did not fare nearly so poorly. Before the startling revelations of 2/19/98 and 5/21/98 caused Smart Modular's stock to collapse to $13-1/8, Smart Modular's insiders unloaded 2,178,000 shares of their Smart Modular stock at artificially inflated prices as high as $36 per share, pocketing over $69.6 million in illegal insider-trading proceeds, while Smart Modular itself was able to sell 2.82 million new shares to the public, at $32.375 per share raising $91.3 million in new capital. Defendants sold almost five million shares of Smart Modular stock for $160 million. These stock sales at artificially inflated prices are summarized below:
Shares Total
Defendants Sold Proceeds
Smart Modular 2,821,000 $ 91,300,000
Shah/Krishnan 1,160,000 37,555,000
Patel 700,000 22,662,500
Marten 280,000 8,038,740
Mullin 38,000 1,372,940
TOTALS: 4,999,000 $160,929,180
13. Each of the positive statements about Smart Modular's business during the Class Period was materially false and misleading when issued and failed to disclose, inter alia, the following adverse information which was then known only to Defendants due to their access to internal Smart Modular data and disclosure of which was required to be made to make the statements made not misleading:
(a) Demand for Smart Modular's specialty and standard memory module products was weakening, resulting in increasing inventories of these products in Smart Modular's distribution channels and softening prices for these products, which would result in sharply decreased demand for these products in the near-term;
(b) To boost its reported results in front of the secondary offering, Smart Modular had shipped extra amounts of memory module products to certain of its OEM customers and specialty PC assemblers, giving them special price concessions but knowing that while this would boost Smart Modular's reported EPS before the secondary offering, it would decrease demand afterwards, hurting Smart Modular's EPS;
(c) Lower DRAM prices would, in fact, hurt Smart Modular's business, as it was unable to recover the full value of certain SDRAM/DRAM inventory it held, due to the rapidly falling prices of these components;
(d) It was not true that falling component part prices benefited Smart Modular's business as, due to weakening demand for its products, falling prices for components were actually having an adverse impact on Smart Modular's business;
(e) Smart Modular had received indications from its largest customer, Compaq, that Compaq had accumulated excessive inventories of PCs and Smart Modular's memory module products and, as a result, was going to sharply reduce its orders of Smart Modular's products in the near-term;
(f) Smart Modular had received indications from specialty assemblers of Compaq PCs and accessories that they had also accumulated excess inventories of Smart Modular's products, which would result in them curtailing their orders in the near-term;
(g) Smart Modular was not insulated from falling prices as, contrary to its public statements, most of its customers did in fact hold inventories of Smart Modular memory modules such that, as demand weakened, these customers would sharply curtail purchases of Smart Modular's memory modules;
(h) Smart Modular's failure to be qualified by a large PC OEM for 66MHz PC memory modules was due to Smart Modular's manufacturing problems, not lack of manufacturing capacity, which problems were serious and persistent and were resulting in Smart Modular being unable to produce 66MHz memory module products of sufficient quality to satisfy this major customer's quality standard;
(i) Smart Modular knew that the transition to 100MHz SDRAM (PC 100) products to support faster PC operating speeds was not occurring nearly as rapidly as had been anticipated or forecast, due, in significant part, to substantial oversupply of PCs and PC components and, as a result, Smart Modular's competitive position was impaired, as it was unable to produce as many 66MHz PC memory modules as it could otherwise have sold;
(j) Smart Modular's options program with Compaq was, in fact, now hurting Smart Modular's business because under the options program whereby Compaq ordered memory modules on a short-term basis to meet short-term demand and manufacturing, Compaq was now quickly and sharply curtailing orders for Smart Modular memory modules which was adversely impacting Smart Modular's business;
(k) Smart Modular's options program was not going to spread to other PC OEMs as there was so much inventory of memory modules available (both from Smart Modular and others) that the options program had lost its appeal to PC OEMs;
(l) Due to reduced PC demand and the accumulation of excessive inventory (especially at Compaq, Smart Modular's largest customer), Smart Modular was suffering from a glut of standard memory modules, which was having a materially adverse impact on Smart Modular's results;
(m) Smart Modular did not possess any significant competitive advantage over either Samsung or Micron Technology, its two primary competitors, nor were there any significant barriers to entry in its business which protected it from competition or the adverse impacts of oversupply or price-cutting; and
(n) Due to the foregoing negative factors, Defendants knew that Smart Modular's forecasts of F98 and F99 EPS were false because those results could not be achieved.
14. The huge artificial inflation of Smart Modular's stock, Defendants' huge stock sales at artificially inflated prices during the Class Period and the later collapse of Smart Modular's stock when the previously concealed and/or misrepresented facts about Smart Modular's business and its greatly diminished prospects for future growth came out, are graphically displayed below:
15. The charts below show the price of Smart Modular stock while Defendants were issuing their false and misleading statements about the Company, the subsequent collapse as the previously concealed adverse facts began to be disclosed and that when compared to an index of similar stocks that Smart Modular's stock actually was largely due to Company-specific events and not market or industry forces:
16. (a) The claims asserted arise under §§10(b) and 20(a) of the Securities Exchange Act of 1934 ("1934 Act") and Rule 10b-5. Jurisdiction is conferred by §27 of the 1934 Act. Venue is proper here pursuant to §27 of the 1934 Act.
(b) Assignment of this action to the San Francisco division is appropriate as a substantial part of the events or omissions identified herein occurred in Alameda County.
17. (a) Jeffrey M. Boren purchased 2,000 shares of Smart Modular common stock on 11/05/97; 900 shares on 3/05/98; 9,100 shares on 3/23/98; 500 shares on 3/23/98; 2,500 shares on 3/24/98; 2,100 shares on 4/03/98; 1,200 shares on 4/03/98; 2,000 shares on 4/17/98; and 1,700 shares on 5/04/98 and was damaged thereby.
(b) Michael Powell purchased 2,000 shares of Smart Modular common stock on 4/22/98; and 3,000 shares on 5/04/98 and was damaged thereby.
(c) Michael J. Meyer purchased 300 shares of Smart Modular common stock on 2/25/98; and 200 shares on 3/18/98 and was damaged thereby.
(d) Albert Woszczak purchased 5,000 shares of Smart Modular common stock on 2/12/98; 5,000 shares on 2/20/98; 7,000 shares on 3/31/98; 1,000 shares on 3/31/98; 9,500 shares on 5/22/98; and 500 shares on 5/22/98 and was damaged thereby.
(e) Anthony D'Amato purchased 700 shares of Smart Modular common stock on 3/02/98 and was damaged thereby.
(f) James Cha purchased 2,000 shares of Smart Modular common stock on 4/14/98 and was damaged thereby.
18. Smart Modular is headquartered at Fremont, California. Smart Modular's common stock trades in an efficient market on the NASDAQ National Market System.
19. (a) Ajay Shah ("Shah") is President, CEO and Chairman of the Company. As part of the scheme, Shah (jointly with Lata Krishnan) sold 1,160,000 shares of Smart Modular stock at $32.375 based on inside information, pocketing over $35.6 million in proceeds net of offering costs.
(b) Lata Krishnan ("Krishnan") was Vice President, Finance and Administration and Chief Financial Officer of the Company during part of the Class Period and Vice President, Business Development and Administration during the balance of the Class Period. As part of the scheme, Krishnan (jointly with Shah) sold 1,160,000 shares of Smart Modular stock at prices as high as $32.375 based on inside information, pocketing over $35.6 million in proceeds net of offering costs. Krishnan is married to Shah.
(c) Mukesh Patel ("Patel") was, at all relevant times, Vice President and General Manager Memory Product Line and a director of the Company. As part of the scheme, Patel sold 700,000 shares of Smart Modular stock at $32.375 based on inside information, pocketing over $21.5 million in proceeds net of offering costs.
(d) Alan Marten ("Marten") is Vice President, Sales and Product Line Manager Memory Product Line of the Company. As part of the scheme, Marten sold 280,000 shares of Smart Modular stock at prices as high as $35.875 based on inside information, pocketing almost $8 million in proceeds net of offering costs.
(e) David Mullin ("Mullin") was Vice President, Finance and Chief Financial Officer of the Company during part of the Class Period. As part of the scheme, Mullin sold 38,000 shares of Smart Modular stock at prices as high as $36 based on inside information, pocketing over $1.3 million.
(f) The defendants in ¶19(a)-(e) are referred to as the "Individual Defendants," and are liable for the false statements at ¶¶31, 53 and 64, as they were each "group-published" information, the result of the collective action of the Individual Defendants. The Individual Defendants controlled the contents of Smart Modular's quarterly and annual reports, press releases and presentations to securities analysts. Each Individual Defendant was provided with the Company's allegedly false reports and press releases prior to issuance and had the ability to prevent their issuance or cause them to be corrected.
(g) Because of the Individual Defendants' positions with the Company, they each knew that the adverse facts specified herein were being concealed from the public and that the positive representations being made were false due to their access to internal corporate documents (including the Company's operating plans, budgets and forecasts and reports of actual operations compared thereto), conversations with corporate officers and employees and attendance at management and/or Board meetings. Despite their duty not to sell Smart Modular stock under such circumstances, the Individual Defendants nonetheless did so.
20. Shah, Krishnan and Patel, by reason of their stock ownership, executive positions and Board membership were controlling persons of Smart Modular and had the power to cause it to engage in the illegal conduct complained of. They are therefore liable under §20(a) of the 1934 Act.
21. Each defendant is liable for participating in a fraudulent scheme and course of business that operated as a fraud or deceit on purchasers of Smart Modular stock, including making false and misleading statements or concealing material adverse facts while selling Smart Modular stock, which (i) deceived investors regarding Smart Modular; (ii) deceived the commercial markets regarding Smart Modular's success with its products; (iii) artificially inflated Smart Modular's stock; (iv) caused plaintiffs and Class members to purchase Smart Modular stock at inflated prices; and (v) permitted the Defendants to sell 4,999,000 shares of Smart Modular stock at inflated prices for over $160 million.
22. By mid-97, Smart Modular's insiders realized that demand for its memory module products from its OEM customers and downstream assemblers of specialty computer equipment was beginning to slow, that the pricing environment for its memory module products was beginning to weaken and that its rapid expansion in Europe was costing more than originally anticipated and would likely not produce the kind of profitable growth originally hoped for. Smart Modular's insiders knew that if these negative conditions continued or worsened, they would have a very adverse impact on its growth and profitability and when these adverse trends became publicly known would cause Smart Modular's stock to decline sharply. In order to raise substantial capital for Smart Modular on favorable terms before this negative information became public and to enable Smart Modular's top insiders to sell off larger amounts of their Smart Modular stock than they could legally sell in open market sales, Defendants decided to undertake a large secondary offering of millions of shares of Smart Modular's stock. In a secondary offering Smart Modular's insiders would sell shares without the Rule 144 volume restrictions in transactions where underwriters would help them sell the stock and stabilize the price of Smart Modular stock when these large stock sales were taking place. By selling shares in this way, Smart Modular, Shah, Krishnan and Patel could maximize their stock sale proceeds because they could condition the market for the stock offering by issuing very positive reports and forecasts and push the stock up to higher levels, including making Roadshow presentations jut before the offering to disseminate very favorable information to potential stock purchasers. Also, they could use the underwriters to help merchandize the stock and rely upon the underwriting firms' "firm commitment" purchase obligations to buy all their shares and then resell them while the underwriters used special marketing techniques, only allowed to be used in registered stock offerings to "stabilize" the stock price, in effect, thus supporting the market price of the stock via techniques that would not be legal in normal open market stock sales. This would enable them to sell large amounts of stock without disrupting the market and they could sell many more shares than they could in open market sales because the stock sold would be registered with the SEC and thus exempt from the volume restrictions of Rule 144. To help pull off this large secondary offering at a very high price, Defendants engaged Cowen, DLJ and Morgan Stanley to help them in their scheme, illegally promising to indemnify and hold the underwriters harmless from any suits or financial liability arising out of the underwriters helping to inflate Smart Modular's stock price and complete the secondary offering.
23. The key element of Defendants' scheme was to push Smart Modular's stock much higher, artificially inflating it, so that the secondary offering would raise larger amounts of money for Smart Modular and the Smart Modular insiders who sold shares in the offering, and so that the stock offering by Smart Modular would be non-dilutive, thus minimizing the adverse impact of the offering on Smart Modular's EPS power going forward. In late 6/97, Smart Modular stock sold as low as $15-3/4. Thus, beginning in 7/97, the Defendants, working together and with Cowen, DLJ and Morgan Stanley, mounted a major publicity campaign, intentionally disseminating extremely favorable, but false, information to the marketplace about Smart Modular, while deliberately concealing the adverse conditions inside Smart Modular's business.
24. On 7/1/97, Cowen issued a report on Smart Modular after its analyst Stone had discussions with Shah, Krishnan and Patel and which was based on and repeated information provided Stone by them. Shah, Krishnan and Patel reviewed this report and assured Stone it was accurate. The report forecast F98 EPS of $1.075 for Smart Modular and stated:
A recent visit to the company's Scotland facility reinforces our bullish stance on SMOD, a leading independent manufacturer of specialty memory modules, standard memory modules, embedded processor modules and PC cards. . . . Declining component prices help, too, because price elasticity should lead to higher unit volumes. The Scotland facility is well ahead of plan . . . .
* * *
SMOD's options program with a major PC OEM has ramped successfully in the U.S. and is beginning to ramp in Europe. . . . In the program, SMOD supplies memory modules to the customer's channel directly via electronic order -- turns are 24-48 hours -- helping to reduce working capital requirements for OEMs and minimizing SMOD's inventory-risk.
25. On 7/7/97, DLJ issued a report on Smart Modular after its analyst Shankar had discussions with Shah, Krishnan and Patel which was based on and repeated information provided Shankar by them. Shah, Krishnan and Patel reviewed this report and assured Shankar it was accurate.
The company is experiencing accelerating demand for memory modules . . . . SMOD's growth rate will likely accelerate . . . .
26. The 7/14/97 Electronics Buyers' News contained a story on Smart Modular, which was headlined and quoted Shah as follows:
Europe May Spell Growth -- Following Success In U.S., Smart Modular Sets Up Shop In Scotland
Having grown rapidly in the United States in the past three years, Smart Modular Technologies Inc. is counting on Europe to fuel future growth.
The . . . memory-module maker . . . expects non-U.S. sales to represent 35% of revenue within the next three years. Last year, that figure was just 15%, said chairman and chief executive Ajay Shah.
. . . "We see an enormous opportunity for us to grow and better address the growing market in Europe."
27. On 7/21/97, an article about Smart Modular ran on Bloomberg, which stated:
Smart Modular said its new Scottish factory and its efficient manufacturing will allow it to expand its European sales rapidly.
28. On 7/21/97, Cowen issued a report on Smart Modular, written after its analyst Stone had discussions with Shah, Krishnan and Patel which was based on and repeated information provided Stone by them. Shah, Krishnan and Patel reviewed this report and assured Stone it was accurate. The report forecast F98 EPS of $1.075 and stated:
Its Scotland facility is well ahead of plan and new options programs are helping drive 40%+ growth in earnings.
* * *
SMOD is already experiencing robust demand from U.S. multinationals at its Scotland manufacturing facility, and has the infrastructure in place to attract European OEMs.
29. On 7/25/97, an article about Smart Modular appeared in the San Francisco Business Times, which stated:
Despite a 10 percent contraction in its main product area last year, the Fremont-based company's revenues jumped 46 percent to $401 million.
* * *
Smart Modular is poised for even more spectacular growth on its way to $1 billion in sales. For the first half of 1997, Smart's sales are up 42 percent while the industry continues to consolidate and struggle.
Although the memory-module business has grown 20 percent in units over the last 18 months, dollar growth has shriveled. Personal computer makers chopped their prices to remain competitive, forcing their suppliers to cut prices in turn.
Smart, however, said it is competing on speed rather than price.
Shah provided the information in this article to the San Francisco Business Times.
30. By 7/30/97, Smart Modular had advanced to $24 -- its then all-time high price. On 8/11/97, Smart Modular publicly announced the planned secondary offering.
31. On 8/21/97, Smart Modular announced much better than expected 3rdQ F97 results via a release headlined and stating:
SMART MODULAR TECHNOLOGIES, INC. REPORTS THIRD QUARTER FISCAL 1997 FINANCIAL RESULTS; REVENUES UP 100%; NET INCOME UP 88%; EPS UP 84%
* * *
"We are very pleased with our third quarter operating results," stated Ajay Shah, SMART's President and Chief Executive Officer. "We believe they reflect the fundamental size and strength of the markets we address . . . .
32. On 8/21/97, subsequent to the release of its 3rdQ F97 results, Smart Modular held a conference call for analysts, money and portfolio managers, institutional investors and large Smart Modular shareholders. During the call -- and in follow-up conversations with participants -- Shah, Krishnan and Patel directly disseminated important information to the market, stating:
33. On 8/22/97, Cowen issued a report on Smart Modular, written by Stone, which was based on and repeated information provided Stone in the 8/22/97 conference call and in follow-up conversations with Shah, Krishnan or Patel. The report increased the forecasted F98 EPS for Smart Modular to $1.075 and stated:
Rapid growth in Europe, market share gains in the reseller channel, and new OEMs like Dell and Fujitsu-ICL, show strong momentum.
* * *
Options Programs, Shift To SDRAM Driving Market Share Gains; Europe rapidly Expanding -- Direct order fulfilment programs are helping drive faster revenue growth . . . because delivery times are so short, resellers can carry less inventory, so we do not believe growth has resulted from a channel fill. The market shift to SDRAM (synchronous) should help SMOD continue to pull ahead of competition . . . .
34. On 8/22/97, Oppenheimer issued a report on Smart Modular, written by J. Poyner, which was based on and repeated information provided Poyner in the 8/22/97 conference call and in follow-up conversations with Shah, Krishnan and Patel. The report increased the forecasted F98 EPS for Smart Modular to $1.38 and stated:
We are increasing our estimate . . . from [$1.075 to $1.38] for fiscal 1998, principally driven by revenue increases from an expanding relationship with a key customer . . . .
. . . The . . . revenue increase was powered once again by the very successful memory option program with Compaq, which we estimate is now the company's largest customer at more than 15% of revenue, as well as continued momentum in specialty-memory modules related to the server and workstation markets.
* * *
Smart clearly is growing its unit production and should continue to see some sequential revenue and gross-profit growth . . . .
In our estimate increase, we have raised revenue for fiscal 1998 to $990 million, up more than $200 million from the previous forecast.
35. On 8/27/97, DLJ issued a report on Smart Modular, written by Shankar, which was based on and repeated information provided Shankar in the 8/22/97 conference call and in follow-up conversations with Shah, Krishnan or Patel. The report forecast F98 and F99 EPS of $1.25 and $1.525, respectively, a 20%-25% five-year EPS growth rate for Smart Modular and also stated:
We are raising our fiscal estimates to reflect the higher than expected third quarter results. . . . For fiscal 1998 we are raising our numbers . . . to $890 million and [$1.25] per share; and for fiscal 1999 we are raising our estimates . . . to $1,022.5 [million] and [$1.525] per share.
36. Smart Modular's stock price soared higher after Smart Modular reported its stronger than expected 3rdQ F97 EPS and held its 8/21/97 conference call, increasing its F98 and F99 revenue and EPS forecasts, jumping from $24-13/16 on 8/21/97 to $34-1/4 on 8/26/97, just three trading days later.
37. Each of the positive statements about Smart Modular's business during the Class Period between 7/1/97-8/27/97, as set forth in ¶¶24-35, was materially false and misleading when issued, and failed to disclose, inter alia, the following adverse information which was then known only to Defendants due to their access to internal Smart Modular data:
(a) Demand for Smart Modular's specialty and standard memory module products was weakening, resulting in increasing inventories of these products in Smart Modular's distribution channels and softening prices for these products, which would result in sharply decreased demand for these products in the near-term;
(b) To boost its reported results in front of the secondary offering, Smart Modular had shipped extra amounts of memory module products to certain of its OEM customers and specialty PC assemblers, giving them special price concessions but knowing that while this would boost Smart Modular's reported EPS before the secondary offering, it would decrease demand afterwards, hurting Smart Modular's EPS;
(c) Lower DRAM prices would, in fact, hurt Smart Modular's business, as it was unable to recover the full value of certain SDRAM/DRAM inventory it held, due to the rapidly falling prices of these components;
(d) It was not true that falling component part prices benefited Smart Modular's business as, due to weakening demand for its products, falling prices for components were actually having an adverse impact on Smart Modular's business;
(e) Smart Modular had received indications from its largest customer, Compaq, that Compaq had accumulated excessive inventories of PCs and Smart Modular's memory module products and, as a result, was going to sharply reduce its orders of Smart Modular's products in the near term;
(f) Smart Modular had received indications from specialty assemblers of Compaq PCs and accessories that they had also accumulated excess inventories of Smart Modular's products, which would result in them curtailing their orders in the near-term;
(g) Smart Modular's options program was not going to spread to other PC OEMs as there was so much inventory of memory modules available (both from Smart Modular and others) that the options program had lost its appeal to PC OEMs;
(h) Due to reduced PC demand and the accumulation of excessive inventory (especially at Compaq, Smart Modular's largest customer), Smart Modular was suffering from a glut of standard memory modules, which was having a materially adverse impact on Smart Modular's results;
(i) Smart Modular did not possess any significant competitive advantage over either Samsung or Micron Technology, its two primary competitors, nor were there any significant barriers to entry in its business, which protected it from competition or the adverse impacts of oversupply or price cutting; and
(j) Due to the foregoing negative factors, Defendants knew that Smart Modular's forecasts of F98 and F99 EPS were false because those results could not be achieved.
38. By 8/97, the adverse conditions that had begun to manifest themselves internally at Smart Modular's business earlier had worsened and were having an adverse impact on Smart Modular's business. Defendants knew these conditions would continue to worsen and that Smart Modular results going forward would be much worse than what had been or was being forecast. Nevertheless, during the last week of 8/97 and first week of 9/97, Smart Modular and Shah, Krishnan and Patel conducted a multi-city "Roadshow" during which Shah, Krishnan and Patel visited with and made presentations to money and portfolio managers, institutional investors and potential investors about Smart Modular to create strong demand for the Smart Modular stock to be sold in the upcoming stock offering. During these Roadshow presentations the participants disseminated the following information:
39. On 9/11/97, Smart Modular completed its secondary offering of 4,760,000 shares(2) (underwritten by, inter alia, Morgan Stanley, DLJ and Cowen) at $32.375. Smart Modular sold 2,821,000 shares for $91.3 million. The Company received net proceeds of $86.7 million in new capital. Smart Modular's top three insiders sold 1.94 million shares as set forth below:
Total
Name Shares Proceeds
Shah/Krishnan 1,160,000 $37,555,000
Patel 700,000 $22,662,500
Marten 80,000 $ 2,590,000
Totals: 1,940,000 $62,807,500
40. On 9/15/97, Cowen issued a report on Smart Modular to help push the price of Smart Modular up higher after the secondary offering, written after its analyst Stone had discussions with Shah, Krishnan and Patel and which was based on and repeated information provided Stone by them. Shah, Krishnan and Patel reviewed this report before it was issued and assured Stone it was accurate. The report forecast F98 and F99 revenues of $925 million and $1.113 billion and EPS of $1.275 and $1.535, respectively, and the following F98 quarterly results:
EPS/F98
QTR.
1st: $ .305
2nd: $ .31
3rd: $ .325
4th: $ .335
Year: $1.275
The report also stated:
Rapid growth in Europe, market share gains in the reseller channel, and new OEMs like Dell and Fujitsu-ICL, show strong momentum. Given SMOD's consistent performance and likely continued market share gains, we believe our estimates are conservative. . . .
Raised Estimates Reflect Strong Momentum, Likely Further Market Share Gains -- SMOD should benefit as the memory market shifts to SDRAM . . . . SMOD has strong engineering, is likely to be first-to-market with new designs, and can support the more complex manufacturing and test requirements for SDRAM. . . . We project F97/98 revenues of $687MM (+71%) and $925MM (+35%), vs. our previous estimates of $593MM and $744MM, and we are setting F99 conservatively at $1.113B (+22%).
41. During 9/97, Morgan Stanley initiated coverage on Smart Modular in a report on Smart Modular, written after its analyst Fleck had discussions with Shah, Krishnan and Patel which was based on and repeated information provided Fleck by them, and repeated information that Smart Modular had disseminated during the recent Roadshow. Shah, Krishnan and Patel reviewed this report before it was issued and assured Fleck it was accurate. The report forecast F98 EPS of $1.30, F99 EPS of $1.525 and stated:
We believe the company is well positioned to benefit from the trend toward outsourcing by OEMs and semiconductor manufacturers, and strong unit demand for memory modules. . . .
. . . Management estimates that it is one of the leading manufacturers of memory modules based on units, and it is one of the few independent manufacturers that focuses assembling modules on a build-to-order basis for OEMs rather than developing a brand name and selling memory modules to retailers such as computer superstores. This OEM strategy has differentiated SMART from its competitors and enabled it to increase sales and earnings even during a volatile market for memory components. . . . SMOD is a way to participate in higher unit demand for memory modules with limited exposure to volatile pricing.
* * *
Rapid Sales and Earnings Growth . . . Near term, we believe that SMART can continue to increase earnings more than 40% per annum.
* * *
Demand for Memory Modules Remains Strong . . . .
* * *
Earnings Outlook
Our earnings estimates for SMART Modular Technologies are . . . [$1.30] for F1998, and [$1.525] for F1999 . . . we believe that it can increase earnings in excess of 40% near term and 20-25% longer term. . . .
. . . We believe revenues are poised to reach . . . $965 million in F1998.
42. During 9/15-17/97, Smart Modular executives Shah, Krishnan and Patel appeared at the 25th Annual Fall Technology Conference sponsored by Cowen, entitled "Opportunities Beyond 2000," in New York City. In a formal presentation and in break-out sessions, they told the assembled security analysts, money and portfolio manager, institutional investors, brokers and stock traders:
43. On 9/18/97, Cowen issued a report on Smart Modular written after its analyst Stone had discussions with Shah, Krishnan or Patel which was based on and repeated information provided Stone by them and repeated information Smart Modular had disseminated during the recent Roadshow. Shah, Krishnan and Patel reviewed this report before it was issued and assured Stone it was accurate. The report forecast F98 and F99 EPS of $1.275 and $1.535, and stated:
Rapid growth in Europe, market share gains in the reseller channel, and new OEMs like Dell and Fujitsu-ICL, show strong momentum. Given SMOD's consistent performance and likely continued market share gains, we believe our estimates are conservative . . . .
44. By 10/3/97, based on these continued bullish statements and forecasts, Smart Modular's stock sold at $44-5/8, its Class Period and all-time high. However, Smart Modular's stock then plunged to as low as $17-1/2 by 10/28 as information entered the market that DRAM/SDRAM prices were falling, causing concerns over Smart Modular's business and growth forecasts. This sharp decline in Smart Modular's stock, falling quickly on the heels of the huge secondary stock offering, alarmed Defendants as they knew that such sharp stock price declines immediately following large securities offerings frequently result in securities class action lawsuits, which would have exposed them to huge amounts of damages, without proof of fraud. Thus, Defendants were determined to arrest the decline in Smart Modular stock and re-inflate the stock back to much higher levels. To accomplish this, Defendants accelerated their barrage of very favorable statements about Smart Modular's business and prospects.
45. On 10/13/97, Cowen issued a report on Smart Modular written after its analyst Stone had extensive discussions with Shah, Krishnan or Patel which was based on and repeated information provided Stone by them. Shah, Krishnan or Patel reviewed this report before it was issued and assured Stone it was accurate. The report forecast F98 and F99 EPS of $1.275 and $1.535, respectively, for Smart Modular and stated:
Rapid growth in Europe, market share gains in the reseller channel, and new OEMs like Dell and Fujitsu-ICL, show strong momentum. Given SMOD's consistent performance and likely continued market share gains, we believe our estimates are conservative. . . .
. . . In a recent First Call note, one of our competitors expressed great concern about the potential impact of DRAM pricing on SMOD's revenue, even while admitting that the price of pass through memory has no impact on SMOD's value-added, and therefore gross profit DOLLARS. . . . Even more puzzling is the suggestion that SMOD is likely to begin feeling unusual price pressure for its services, when: 1) the market is shifting to SDRAM, which requires more complex manufacturing . . . (So, let's see Jim, I'm offering a more complex product, which costs more to make, and I have less competition, so you think I should charge lower prices?). . . . Finally, the suggestion that a sudden shift to 64-megabit memory is likely to occur and would create a contraction in unit volumes for SMOD is a gross oversimplification on several points: 1) SMOD's business is driven by many more products than commodity memory for desktop PCs (some 500 different line items); 2) the supply of 64-megabit components cannot support a sudden density switch, and 3) a module with 64 megabytes has more components than one with 32, and so carries a higher assembly price, regardless of memory pricing.
* * *
. . . We visited SMOD's Fremont location recently and business looks great. . . .
46. On 10/13/97, DLJ issued a report on Smart Modular written after its analyst Shankar had extensive discussions with Shah, Krishnan or Patel which was based on and repeated information provided Shankar by them. Shah, Krishnan or Patel reviewed this report before it was issued and assured Shankar it was accurate. The report forecast F98 and F99 revenue of $890 million and $1.023 billion and EPS of $1.25 and $1.525, respectively and a 25%-30% five-year EPS growth rate for Smart Modular. It also stated:
[B]usiness conditions at the company remain strong thus far in the quarter, driven by continued strength in specialty and standard memory modules for PCs, servers, peripherals, and telecom and networking equipment. The options built-to-order memory module business with companies such as CPQ continues to be very strong. . . . We reiterate that the company's business model does not depend upon DRAM pricing; it is driven more by unit volume growth and the trend toward efficient outsourcing of specialty and standard memory modules by systems companies. . . . [B]usiness trends remain strong . . . .
* * *
The company is experiencing accelerating demand for memory modules added to PCs and servers configured in the VAR/reseller/distributor channel. . . .
Longer-term, SMOD's expertise in high-density, high-performance memory module design using new types of memory such as synchronous SDRAM, Sync-Link, and Rambus-based DRAM, combined with the company's flexible, high-volume and low-cost module manufacturing and advanced test/quality control capabilities are unique entry barriers. SMOD's growth rate will likely accelerate, driven by increasing outsourcing of memory module systems and specialized design trends in main DRAM memory, cache SRAM memory and flash memory modules. . . .
. . . The company's "Options" customer services program for quick order turnaround and delivery (72 hrs. from order placement to delivery) continues to be well received by PC OEM's and has driven demand for standard memory modules above the historical segment average. We believe that the acceptance of the Options service program is reflective of a secular OEM shift towards assembling PC in the channel, closer to the consumer and to tightly manage DRAM inventory levels.
47. On 10/22/97, Morgan Stanley issued a report on Smart Modular, written after its analyst Fleck had extensive discussions with Shah, Krishnan or Patel, which was based on and repeated information provided Fleck by them. Shah, Krishnan or Patel reviewed this report before it was issued and assured Fleck it was accurate. The report forecast F98 and F99 EPS of $1.30 and $1.525 and stated:
We recently initiated coverage of SMART Modular Technologies . . . . We believe the company is well positioned to benefit from the trend toward outsourcing by OEMs and semiconductor manufacturers, and strong unit demand for memory modules. . . .
. . . Management estimates that it is one of the leading manufacturers of memory modules based on units, and it is one of the few independent manufacturers that focuses assembling modules on a build-to-order basis for OEMs rather than developing a brand name and selling memory modules to retailers such as computer superstores. This OEM strategy has differentiated SMART from its competitors and enabled it to increase sales and earnings even during a volatile market for memory components. . . . SMOD is a way to participate in higher unit demand for memory modules with limited exposure to volatile pricing.
Our EPS estimates are . . . [$1.30] for F1998, and [$1.525] for F1999 ending in October.
* * *
Investment Positives
Rapid Sales and Earnings Growth . . . . Near term, we believe that SMART can continue to increase earnings more than 40% per annum.
* * *
Demand for Memory Modules Remains Strong . . . .
* * *
Earnings Outlook
Our earnings estimates for SMART Modular Technologies are . . . [$1.30] for F1998, and [$1.525] for F1999 . . . [W]e believe that it can increase earnings in excess of 40% near term and 20-25% longer term. . . .
. . . We believe revenues are poised to reach . . . $965 million in F1998.
48. Each of the positive statements about Smart Modular's business during the Class Period between 8/97-10/22/97, as set forth in ¶¶38-47, was materially false and misleading when issued, and failed to disclose, inter alia, the following adverse information which was then known only to Defendants due to their access to internal Smart Modular data:
(a) Demand for Smart Modular's specialty and standard memory module products was weakening, resulting in increasing inventories of these products in Smart Modular's distribution channels and softening prices for these products and which would result in sharply decreased demand for these products in the near-term;
(b) To boost its reported results in front of the secondary offering, Smart Modular had shipped extra amounts of memory module products to certain of its OEM customers and specialty PC assemblers, giving them special price concessions but knowing that while this would boost Smart Modular's reported EPS before the secondary offering, it would decrease demand afterwards, hurting Smart Modular's EPS;
(c) Lower DRAM prices would, in fact, hurt Smart Modular's business, as it was unable to recover the full value of certain SDRAM/DRAM inventory it held, due to the rapidly falling prices of these components;
(d) It was not true that falling component part prices benefited Smart Modular's business as, due to weakening demand for its products, falling prices for components were actually having an adverse impact on Smart Modular's business;
(e) Smart Modular had received indications from its largest customer, Compaq, that Compaq had accumulated excessive inventories of PCs and Smart Modular's memory module products and, as a result, was going to sharply reduce its orders of Smart Modular's products in the near term;
(f) Smart Modular had received indications from specialty assemblers of Compaq PCs and accessories that they had also accumulated excess inventories of Smart Modular's products, which would result in them curtailing their orders in the near term;
(g) Smart Modular was not insulated from falling prices as, contrary to its public statements, most of its customers did in fact hold inventories of Smart Modular memory modules such that, as demand weakened, these customers would sharply curtail purchases of Smart Modular's memory modules;
(h) Smart Modular's options program with Compaq was, in fact, now hurting Smart Modular's business because under the options program whereby Compaq ordered memory modules on a short-term basis to meet short-term demand and manufacturing, Compaq was now quickly and sharply curtailing orders for Smart Modular memory modules which was adversely impacting Smart Modular's business;
(i) Smart Modular's options program was not going to spread to other PC OEMs as there was so much inventory of memory modules available (both from Smart Modular and others) that the options program had lost its appeal to PC OEMs;
(j) Due to reduced PC demand and the accumulation of excessive inventory (especially at Compaq, Smart Modular's largest customer), Smart Modular was suffering from a glut of standard memory modules, which was having a materially adverse impact on Smart Modular's results;
(k) Smart Modular did not possess any significant competitive advantage over either Samsung or Micron Technology, its two primary competitors, nor were there any significant barriers to entry in its business which protected it from competition or the adverse impacts of oversupply or price cutting; and
(l) Due to the foregoing negative factors, Defendants knew that Smart Modular's forecasts of F98 and F99 EPS were false because those results could not be achieved.
49. On 11/6/97, Smart Modular executive Shah appeared at the AEA Classic Investment Conference in San Diego. In a formal presentation and in break-out sessions, he told the assembled security analysts, money and portfolio manager, institutional investors, brokers and stock traders that:
50. On 11/6/97, Shah was interviewed by MSNBC at the AEA Conference. MSNBC broadcast the interview as follows:
Schacknow: One thing I noticed about your business, since last year you've opened new manufacturing sites and the business in general seems to be expanding. Tell me about that.
Shah: We've had a good year in spite of the fact that the FRAM memory market has had a poor year. Overall demand for a lot of the devices we make has come up very nicely and we've been able to gain a couple of new customers and as you mentioned we put up a site in Scotland and that has done very well and our percentage of sales in Europe has gone up as a result and we're quite pleased with the progress.
Schacknow: Now Wall Street hasn't always been kind to your stock in the past couple of months . . . . What concerns have you come here to address, since it's a good forum to do that obviously?
Shah: . . . [W]e've spent a lot of time explaining our business model and the fact that we're not going to be a DRAM manufacturer. That's why DRAM does pass through us. We buy and sell DRAM as part of our business, but we don't largely depend on DRAM . . . for our value added.
* * *
. . . The point is when you have excessive supply like perhaps in the DRAM market today and a posity, perhaps, of demand, or there's some mismatch in timing between supply and demand availability, then you have an issue of extraordinary price movements to the point where people are losing money. And this is particularly true for extremely capital intensive businesses like DRAMs are. However, none of these things apply to us. We're having a natural price curve of downward pricing, which is normal in our business, and you know, as new products come out, they come out with higher prices.
51. On 11/13/97, Cowen issued a report on Smart Modular written after its analyst Stone had discussions with Shah, Krishnan or Patel which was based on and repeated information provided Stone by them. Shah, Krishnan or Patel reviewed this report before it was issued and assured Stone it was accurate. The report forecast F98 and F99 EPS of $1.275 and $1.535, respectively, for Smart Modular and stated:
Rapid growth in Europe, market share gains in the reseller channel, and new OEMs like Dell and Fujitsu-ICL, show strong momentum. Given SMOD's consistent performance and likely continued market share gains, we believe our estimates are conservative. The sharp pullback in share price (down 45% from an early October high) creates an attractive buying opportunity.
* * *
Market Share Gains, Not Total Market Growth, Is Key Factor In F98-99E EPS Growth -- Market share gains should be the significant driver of growth in F98-99, and should greatly overshadow other factors such as unit growth of PCs, and the impact of DRAM pricing.
52. On 11/18/97, DLJ issued a report on Smart Modular written after its analyst Shankar had extensive discussions with Shah, Krishnan or Patel which was based on and repeated information provided Shankar by them. Shah, Krishnan or Patel reviewed this report before it was issued and assured Shankar it was accurate. The report forecast F98 and F99 EPS of $1.25 and $1.525, respectively, a 30% five-year EPS growth rate for Smart Modular and stated:
The options build-to-order memory module business with companies such as CPQ (more than 50% of revenues) continues to be very strong. We reiterate that the company's business model does not depend upon DRAM pricing; it is driven more by unit volume growth and the trend toward efficient outsourcing of specialty and standard memory modules by systems companies.
* * *
The company is experiencing accelerating demand for memory modules added to PC's and servers configured in the VAR/reseller/distributor channel. . . .
Longer-term, SMOD's expertise in high-density, high-performance memory module design using new types of memory such as synchronous DRAM, Sync-Link, and Rambus-based DRAM, combined with the company's flexible, high-volume and low-cost module manufacturing and advanced test/quality control capabilities are unique entry barriers. SMOD's growth rate will likely accelerate, driven by increasing outsourcing of memory module systems and specialized design trends in main DRAM memory, cache SRAM memory and flash memory modules.
53. On 11/20/97, Smart Modular announced a 2-for-1 stock split, effective 12/3/97. On 11/20/97, Smart Modular also announced better than expected 4thQ F97 results via a release headlined and stating:
SMART MODULAR TECHNOLOGIES, INC. REPORTS RESULTS FOR FOURTH QUARTER AND FISCAL 1997; FOURTH QUARTER NET SALES UP 105%; NET INCOME UP 108%; EPS UP 91%
* * *
"In summary, fiscal 1997 was a successful year . . . in enhancing our overall competitive positions in the markets we serve," concluded Shah.
54. On 11/20/97, subsequent to the release of its F97 results, Smart Modular held a conference call for securities analysts, money and portfolio managers, institutional investors and large Smart Modular shareholders. During the call -- and in follow-up conversations with participants -- Shah, Krishnan and Patel disseminated important information to the market by stating:
55. On 11/21/97, Cowen issued a report on Smart Modular written by Stone which was based on and repeated information provided Stone in the 11/20/97 conference call and in follow-up conversations with Shah, Krishnan or Patel. The report increased the forecasted F98 and F99 EPS for Smart Modular to $1.375 and $1.65, respectively, and stated:
2. Raising F98-99 Estimates On Higher Unit Volumes, New Customers, Another Options Program
3. Significant Opportunities For Geographic Expansion, Further Market Share Gains
* * *
Rapid growth in Europe, market share gains in the reseller channel, broadening relationship with semiconductor memory makers, and an impressive based of OEMs, show strong momentum. Given consistent performance and likely continued market share gains, SMOD deserves a premium valuation. . . . Despite concerns about DRAM pricing, EPS were [$.03] above our estimate and [$.02] above the Street high, as SMOD's profits are driven by its value added in design, manufacturing, test and delivery logistics.
* * *
Raising F98-99 Estimates On Higher Unit Volumes, New Customers, Another Options Program -- SMOD should benefit from increasing unit volumes across all its segments. Another option program is expected to begin in Q1:98 (Jan) and should ramp to volume in Q2. . . . [W]e are raising our F98-99 estimates by [$.10] . . . to [$1.375] (+33%) and [$1.65] (+20%).
56. On 11/21/97, DLJ issued a report on Smart Modular, written by Shankar, which was based on and repeated information provided Shankar in the 11/20/97 conference call and in follow-up conversations with Shah, Krishnan and Patel. The report increased the forecasted F98 and F99 EPS for Smart Modular to $1.375 and $1.625, respectively, continued to forecast a 20%-25% five-year EPS growth rate for Smart Modular and also stated:
The company saw particular strength in its higher margin consignment business with synchronous DRAM (SDRAM) manufacturers which are outsourcing the implementation of memory modules. . . .
In addition, we believe that the "Options" customer services program for quick order turnaround and delivery (72 hrs. from order, placement to receipt) continues to expand with PC OEM's that are rapidly switching to the Build-To-Order (BTO) model. We view the strong reception of the Options program as reflection of the secular shift towards OEMs assembling PCs in the channel, closer to the consumer as well as a consequence of the movement to minimize DRAM inventory levels. In summary, we believe that very high order volumes were driven by sustained growth in memory unit volumes, strength in module outsourcing and the shift to BTO. We are raising our fiscal 1998 estimates from $890 million and [$1.25] per share to $930 million and [$1.375] per share and we are raising our fiscal 1999 numbers from $1,023 [million] and [$1.525] per share to $1,100 [million] and [$1.625] per share. . . .
SMOD uses DRAM only as a material input for its value added module solutions and cheap memory coupled price elasticity have pushed accelerating unit growth of standard products. In addition, we believe that standard memory modules, which enable putting memory on the board at the end of the PC production cycle, have attracted brisk OEM demand, as manufacturers have shifted toward later memory installation to limit DRAM inventory risk. . . .
Business trends will likely remain strong across the board in SMOD's standard memory modules, specialty memory modules and PC cards in all key market areas including PCs, peripherals, servers/high end computers, telecom, networking equipment, etc.
57. On 11/24/97, Cowen issued a report on Smart Modular written after its analyst Stone had discussions with Shah, Krishnan or Patel which was based on and repeated information provided Stone by them. Shah, Krishnan or Patel reviewed this report before it was issued and assured Stone it was accurate. The report increased the forecasted F98 and F99 EPS for Smart Modular to $1.375 and $1.65, respectively, and also stated:
Strong momentum is driven by rapid expansion in Europe, new OEMs such as Dell, Fujitsu-ICL and Intergraph, market share gains in the reseller channel, and broadening relationships with semiconductor memory makers. . . . Given SMOD's consistent performance, beating estimates for nine consecutive quarters, and likely continued market share gains, we believe our estimates are conservative. The shares have pulled back again on concerns about DRAM pricing, which do not impact EPS as SMOD's profits are driven by unit volumes. . . .
New Products, Design Wins Create Expanded, Diverse Customer Base
Shift to Synchronous DRAM Is Accelerating: An Opportunity To Gain Share
Options Programs Boost Reseller Channel Share: Second To Ramp In January
Recent Offering Adds Ample Capital For Facility Expansion, Acquisitions
Strong Momentum, Likely Further Market Share Gains
Significant Technology Transitions Create Opportunities For Specialists
We believe unit volume and market share are the most significant factors driving the growth opportunity in memory modules, easily overwhelming secondary issues such as the overall growth rate for PCs or price trends for components. With quicker response to technology transitions and more focused design and engineering efforts, specialists such as SMOD are gaining market share at the expense of captive players. Moreover, the market is shifting rapidly to synchronous DRAM, and SMOD is well ahead of the adopting curve with SDRAM Accounting for 50% of its memory module shipments in October.
* * *
Options Programs Capitalize On OEMs' Outsourcing Trend
SMOD successfully implemented an options program in F97 for a major PC OEM. In the program, SMOD supplies memory modules directly to the OEM's channel in response to electronic orders on very short (24-48 hour) turnaround. With the options program, SMOD has gained a presence in the reseller channel, and we believe SMOD has helped its customer double its memory module "connect rate," driving sales gains for both. The total market for memory options in the U.S. is estimated at $3-3.5B, and this opens the door to programs for other OEMs who are increasingly using outsourcing to emulate the high asset turns model exemplified by Dell. SMOD is already setting up a second option program, for another top-tier PC OEM, which should begin to ramp in January.
* * *
Consistent Performance, Multiple Growth Drivers Support $80-86 Target
SMOD has delivered consistent earnings and outperformed estimates, even during the most precipitous drops in DRAM pricing last year. We believe our estimates are conservative, and that recent concerns about the impact of DRAM pricing are unfounded, especially with SMOD's strong potential to gain more business from OEMs . . . .
58. On 12/3/97, Morgan Stanley issued a report on Smart Modular written after its analyst Fleck had discussions with Shah, Krishnan or Patel which was based on and repeated information provided Fleck by them. Shah, Krishnan or Patel reviewed this report before it was issued and assured Fleck it was accurate. The report increased the forecasted F98 and F99 EPS for Smart Modular to $1.40 and $1.60, respectively, continued to forecast a 25%-30% five-year EPS growth rate for Smart Modular and also stated:
Once again, this leading independent manufacturer of memory modules proved that it can increase its sale and profit margins, even when prices for memory components are under pressure.
. . . To reflect better-than-expected F4Q97 results and expectations for a continuation of rapid earnings growth, we raised F1998E EPS to [$1.40] from [$1.30] and our F1999 estimate to [$1.60] from [$1.525].
* * *
Management believes that the transition to synchronous DRAM and the adoption of build-to-order business models by PC OEMs will drive more outsourcing opportunities for SMART.
59. On 12/24/97, DLJ issued a report on Smart Modular written after its analyst Shankar had discussions with Shah, Krishnan or Patel which was based on and repeated information provided Shankar by them. Shah, Krishnan or Patel reviewed this report before it was issued and assured Shankar it was accurate. The report forecast F98 and F99 EPS of $1.38 and $1.63, respectively, a 30% five-year EPS growth rate and the following F98 quarterly results for Smart Modular:
EPS/1998
QTR.
1st: $ .33
2nd: $ .34
3rd: $ .35
4th: $ .35
Year: $1.38
The report also stated:
The company is experiencing strong demand for memory modules added to PC's and servers configured in the VAR/reseller/distributor channel. As companies such as CPQ, HWP, IBM and DEC move toward the flexible options program to equip PCs and servers with memory modules in the distribution channel or the "build-to-order" model by OEMs emulating the Dell model, SMOD benefits from more OEM orders for memory modules. . . . In fiscal 1998, we expect $930 million in revenues and $1.38 per share and in fiscal 1999 we expect $1100 million and $1.63 per share, respectively.
60. On 12/30/97, Shah was interviewed on CNBC by Ron Asana, as follows:
Ron: Here to tell us about his company and what it is exactly they do is Ajay Shah, Chairman and CEO of Smart Modular Technologies.
* * *
Ron: Well, is everything working on all cylinders at your firm at the moment?
Shah: Well, we think things are going well. I mean, there is always pluses and minuses but overall we think that business is going well.
* * *
Ron: . . . Could you give us an idea what kind of growth are you expecting both in terms of earnings and profits going forward?
Shah: . . . You know, the memory and memory module memory card marketplaces are growing at we believe greater than 25% a year and many market forecasts show greater numbers than that. The data communication product market is growing at close to 20% a year and the embedded computer market, one of the ones we are most excited about, at least the segment we serve, is growing at over 50% a year. So, and our goal is to keep ahead of the growth rates which are the overall market growth rates. And that is really -- you know, we would be very disappointed if we weren't able to, you know, exceed those growth rates because we are trying to gain market share.
On 12/30/97, Dow Jones OnLine News reported:
SMART MODULAR EXECUTIVE SEES OPPORTUNITY FOR CORE-MARKET GROWTH
Smart Modular Technologies Inc. Chairman and Chief Executive Ajay Shah said Tuesday he expects "significant opportunity" for growth in the company's core-product markets in 1998.
61. On 2/17/98, Cowen issued a report on Smart Modular written after its analyst Stone had discussions with Shah, Krishnan or Patel which was based on and repeated information provided Stone by them. Shah, Krishnan or Patel reviewed this report before it was issued and assured Stone it was accurate. The report forecast F98 and F99 EPS of $1.37 and $1.65, respectively, for Smart Modular and also stated:
Rapid expansion in multiple plant locations, market share gains in the reseller channel, broadening relationship with semiconductor memory makers, and an impressive base of OEMs, show strong momentum.
62. Each of the positive statements about Smart Modular's business during the Class Period between 11/97-2/17/98, as set forth in ¶¶49-61, was materially false and misleading when issued, and failed to disclose, inter alia, the following adverse information which was then known only to Defendants due to their access to internal Smart Modular data:
(a) Demand for Smart Modular's specialty and standard memory module products was weakening, resulting in increasing inventories of these products in Smart Modular's distribution channels and softening prices for these products, which would result in sharply decreased demand for these products in the near term;
(b) To boost its reported results in front of the secondary offering, Smart Modular had shipped extra amounts of memory module products to certain of its OEM customers and specialty PC assemblers, giving them special price concessions but knowing that while this would boost Smart Modular's reported EPS before the secondary offering, it would decrease demand afterwards, hurting Smart Modular's EPS;
(c) Lower DRAM prices would, in fact, hurt Smart Modular's business, as it was unable to recover the full value of certain SDRAM/DRAM inventory it held, due to the rapidly falling prices of these components;
(d) It was not true that falling component part prices benefited Smart Modular's business as, due to weakening demand for its products, falling prices for components were actually having an adverse impact on Smart Modular's business;
(e) Smart Modular had received indications from its largest customer, Compaq, that Compaq had accumulated excessive inventories of PCs and Smart Modular's memory module products and, as a result, was going to sharply reduce its orders of Smart Modular's products in the near term;
(f) Smart Modular had received indications from specialty assemblers of Compaq PCs and accessories that they had also accumulated excess inventories of Smart Modular's products, which would result in them curtailing their orders in the near term;
(g) Smart Modular was not insulated from falling prices as, contrary to its public statements, most of its customers did in fact hold inventories of Smart Modular memory modules such that, as demand weakened, these customers would sharply curtail purchases of Smart Modular's memory modules;
(h) Smart Modular's failure to be qualified by a large PC OEM for 66MHz PC memory modules was due to Smart Modular's manufacturing problems, not lack of manufacturing capacity, which problems were serious and persistent and were resulting in Smart Modular being unable to produce 66MHz memory module products of sufficient quality to satisfy this major customer's quality standard;
(i) Smart Modular knew that the transition to 100MHz SDRAM (PC 100) products to support faster PC operating speeds was not occurring nearly as rapidly as had been anticipated or forecast, due, in significant part, to substantial oversupply of PCs and PC components and, as a result, Smart Modular's competitive position was impaired, as it was unable to produce as many 66MHz PC memory modules as it could otherwise have sold;
(j) Smart Modular's options program with Compaq was, in fact, now hurting Smart Modular's business because under the options program whereby Compaq ordered memory modules on a short-term basis to meet short-term demand and manufacturing, Compaq was now quickly and sharply curtailing orders for Smart Modular memory modules which was adversely impacting Smart Modular's business;
(k) Smart Modular's options program was not going to spread to other PC OEMs as there was so much inventory of memory modules available (both from Smart Modular and others) that the options program had lost its appeal to PC OEMs;
(l) Due to reduced PC demand and the accumulation of excessive inventory (especially at Compaq, Smart Modular's largest customer), Smart Modular was suffering from a glut of standard memory modules, which was having a materially adverse impact on Smart Modular's results;
(m) Smart Modular did not possess any significant competitive advantage over either Samsung or Micron Technology, its two primary competitors, nor were there any significant barriers to entry in its business, which protected it from competition or the adverse impacts of oversupply or price-cutting; and
(n) Due to the foregoing negative factors, Defendants knew that Smart Modular's forecasts of F98 and F99 EPS were false because those results could not be achieved.
63. As a result of these strong positive and reassuring statements, the 10/97 decline in Smart Modular stock to as low as $17-1/2 was halted. By 11/97, Smart Modular stock had advanced to $34-1/16. By 2/19/98, Smart Modular stock was still trading at $36-3/8.
64. On 2/19/98, Smart Modular reported its 1stQ F98 results with revenues and EPS lower than earlier forecasted. Subsequent to the release of these results, Smart Modular held a conference call for securities analysts, money and portfolio managers, institutional investors and large Smart Modular shareholders. During the call -- and in follow-up conversations with participants -- Shah, Krishnan and Patel disseminated important information to the market by stating:
65. On 2/20/98 Dow Jones Online News ran an item on Smart Modular:
SMART MODULAR SHARES TUMBLE AS FIRM PREDICTS "SMALL" REVENUE DIP
* * *
In a conference call Thursday afternoon, Smart Modular (SMOD) officials projected a "relatively small" sequential revenue decline for the three months ending April 30 because the company missed a qualification window with a major customer. The lost opportunity, they said, resulted in a short-term loss in sales volume.
* * *
"It was an issued of convincing the customer that we could service their demand," President and Chief Executive Ajay Shah said . . . but the qualification problem affected a PC66 synchronous DRAM module order.
* * *
While slower than many types of random-access-memory chips, DRAM chips are commonly used for many functions because they are inexpensive and perform adequately. Lower DRAM prices prompted Cowen & Co. analyst Robert Stone to cut his second-quarter estimate by 2 cents a share to 32 cents. . . .
Stone said he isn't bearish on the company's long-term prospects. He added that the lost volume appears likely to last for only a couple of months, as the PC66 "appears to be a short-lived standard."
Smart Modular Chief Financial Officer David Mullin agreed that the problem looks to be short-term. "We think that this is a very specific issue and we can get it contained in a short timeframe . . . certainly within the quarter," he said in a phone interview.
66. On 2/20/98, Cowen issued a report on Smart Modular, written by Stone, which was based on and repeated information provided Stone in the 2/19/98 conference call and in follow-up conversations with Shah, Krishnan or Patel. The report continued to forecast F98 and F99 EPS of $1.37 and $1.65, respectively, and the following quarterly F98 EPS for Smart Modular:
Q1 $ .35
Q2 $ .32
Q3 $ .35
Q4 $ .36
Year $1.37
The report also stated:
Due to the sharp drop in DRAM pricing in Q1, and because SMOD missed being qualified for PC66 (66 Mhz SDRAM subsystems) with one existing customer in Q1, we expect Q2 revenues and EPS to be down slightly, Q/Q. . . . [W]e believe it is a one-quarter event.
* * *
* Short-Term Impact On One PC66 Qualification, But Ramp In PC100 Looks Promising -- As processor speeds have changed, memory subsystems have had to keep up with this change since memory is the next likely bottleneck in system performance. SMOD had expected the shift to PC66 SDRAM modules to more than offset the expected decline in L2 cache modules, which are used on older generation Pentium systems. However, it missed a window of opportunity in Q1 to qualify PC66 for one of its long-standing customers (due to issues with capacity to ramp volume at one of its plants), which had a small impact on sales. The lost volume is likely for only a couple of months, as P66 appears to be a short-lived standard. In fact, as soon as chipsets are available (perhaps this month), SMOD expects to begin volume production of PC100 modules for various customers. . . . As a result, we are maintaining our F98-99 estimates at $1.37 (+32%) and $1.65 (+21%) on sales of $808MM (+16%) and $978MM (+21%).
67. On 2/20/98, DLJ issued a report on Smart Modular written by Shankar which was based on and repeated information provided Shankar in the 2/19/98 conference call and in follow-up conversations with Shah, Krishnan or Patel. The report continued to forecast F98 and F99 EPS of $1.35 and $1.62, respectively, a 25%-30% 5-year EPS growth rate and the following quarterly F98 EPS for Smart Modular:
Q1 $ .35A
Q2 $ .30
Q3 $ .34
Q4 $ .36
Year $1.35
The report also stated:
Beyond the April (Q2, FY98) quarter, business trends are expected to be strong, driven by continuing demand for high performance memory modules, the switch to more value added DRAM modules such as PC100-compliant 100MHz SDRam memory modules, and additional new computer OEM and semiconductor customers looking to outsource memory module production. . . . For FY98, we are trimming our revenue and EPS estimates slightly . . . to $815 million and $1.35 per share. Our longer-term FY99 EPS estimate remains at $1.62 per share . . . . [W]e believe that the memory module market is poised for explosive growth ahead and SMOD is well established with leading OEMs in high value added memory modules with world class manufacturing, testing, and time-to-market capabilities.
Business conditions at the company were strong in the first quarter, driven by continued strength in specialty and standard memory modules for PCs, servers, peripherals, and telecom and networking equipment. The company is experiencing strong demand for memory modules added to PC's and servers configured in the VAR/reseller/ distributor channel.
68. Upon Smart Modular's announcement of 2/19/98, Smart Modular stock fell from $36-3/8 on 2/19/98 to $26-1/2 on 2/24/98. However, the Defendants misrepresented that the reason for Smart Modular's inability to obtain this qualification was due to capacity manufacturing constraints which made it unable to supply these 66MHz products in sufficient quantities -- thus implying that demand for these products remained strong. They also falsely assured investors that the qualification issue was a short-term issue only, which was being or had been overcome, and that since the market was rapidly transitioning from 66MHz to 100MHz memory module products (which 100MHz products Smart Modular was prepared to produce in volume), this rapid product transition would benefit Smart Modular. Thus, Defendants continued to forecast that Smart Modular would still achieve strong revenue and EPS growth in F98-F99 with F98 and F99 EPS of $1.35+ and $1.69+, respectively. As a result of these reassurances and forecasts, while Smart Modular's stock declined upon the revelation that its 2ndQ F98 EPS would be lower than forecast, the stock continued to trade at artificially inflated levels.
69. On 3/23/98, Oppenheimer issued a report on Smart Modular, written after its analyst Poyner had discussions with Shah, Krishnan or Patel which was based on and repeated information provided Poyner by them. Shah, Krishnan or Patel reviewed this report before it was issued and assured Poyner it was accurate. The report forecast F98 and F99 EPS of $1.39 and $1.85, respectively, and the following F98 quarterly results for Smart Modular:
EPS/1998
QTR.
1st: $ .35A
2nd: $ .30
3rd: $ .36
4th: $ .38
Year: $1.39
The report also stated:
Smart remains well positioned to grow its market share in the memory module segment . . . .
Smart Modular's stock has been beset with a string of investor worries that have seen the share price tumble some 38% in the past month or so. First came management's lowering of guidance concerning the April second quarter due to production problems that caused one major customer to move some of its module requirement to a Korean supplier. Then came the preannouncement of a significant shortfall in revenue for the March quarter from Compaq . . . .
* * *
However, we think the stock may have suffered disproportionately on the issue of Compaq because some investors may not clearly understand Smart's position in the Compaq food chain as a key memory-module supplier. The vast majority of Smart's business with Compaq is downstream from Compaq's production operations. Smart supplies modules to resellers performing final memory configurations of Compaq computers or to customers that are adding memory modules to the installed base of Compaq equipment, particularly servers. In other words, Smart's volume of Compaq's business depends not on Compaq's production levels, which are being reduced right now to lower channel inventory, but on the sell through of Compaq products as well as demand from Compaq's installed base. This is the so-called "options" program that demands the kind of build-to-order capability Smart is known for. We would, in fact, argue that Compaq's further price cuts and, indeed, monitor and even memory-module giveaways potential[ly] increase Smart's level of Compaq business as these incremental price promotions theoretically cause higher sell through. Importantly, we do not believe Smart is seeing significant pressure on its fee that it charges Compaq to provide modules even though Compaq is offering some free memory upgrades. This is testament to Smart's value to Compaq, which is increasingly anxious to accelerate its own build-to-order program at the box level. Therefore, we do not believe Compaq's woes are translating into incremental woes for Smart Modular.
70. On 5/18/98, Cowen issued a report on Smart Modular written after its analyst Stone had discussions with Shah, Krishnan or Patel which was based on and repeated information provided Stone by them. Shah, Krishnan and Patel reviewed this report before it was issued and assured Stone it was accurate. The report forecast F98 and F99 EPS of $1.37 and $1.65 for Smart Modular and also stated:
Shift To 100 MHz SDRAM Modules, Higher Densities Should Fuel Sales Growth -- In Q1, SMOD missed a qualification opportunity with one customer for PC66 SDRAM modules, as it was capacity constrained. SMOD did qualify and began shipping PC66 modules to this customer in Q2, and it is no longer constrained. PC66 accounted for more than 50% of SMOD's DRAM sales in Q1, and it began sampling PC100 modules this quarter. As OEMs transition to new products with faster microprocessor speeds and higher memory requirements over the Summer months, we expect the shift to PC100 will begin to ramp to volume. By Q4:C98, PC100 modules will likely represent a significant portion of SMOD's DRAM module sales. . . . SMOD is well-positioned to deliver the required volumes of PC100 modules to its customers.
71. During 3/98-5/18/98 the Defendants continued to misrepresent that the reason for Smart Modular's inability to obtain this qualification was due to capacity manufacturing constraints which made it unable to supply these 66MHz products in sufficient quantities -- thus implying that demand for these products remained strong. They also falsely assured investors that the qualification issue was a short-term issue only, which was being or had been overcome, and that since the market was rapidly transitioning from 66MHz to 100MHz memory module products (which 100MHz products Smart Modular was prepared to produce in volume), this rapid product transition would benefit Smart Modular. Thus, Defendants continued to forecast that Smart Modular would still achieve strong revenue and EPS growth in F98-F99 with F98 and F99 EPS of $1.35+ and $1.69+ respectively. As a result of these reassurances and forecasts, Smart Modular's stock continued to trade at artificially inflated levels.
72. On 5/21/98, Smart Modular's stock traded as high as $22-1/4. After the close of trading on 5/21/98, Smart Modular revealed that, due to an inventory oversupply at PC makers, an inventory glut of standard and specialty memory modules and lower demand from both OEM and end-users, its F98 revenues and EPS would not only be much lower than earlier forecast, but those revenues and EPS would show large declines from F97 results! Upon these startling revelations, Smart Modular stock collapsed to as low as $13-1/8, a 41% decline on huge volume of over 11 million shares, the largest one-day percentage stock price decline and one-day stock trading volume in Smart Modular's history as a public company!
73. While Smart Modular's top insiders were issuing favorable statements about Smart Modular, the Individual Defendants sold 2,178,000 shares of Smart Modular stock, for more than $69 million in illegal insider-trading proceeds -- to personally profit from the artificial inflation in Smart Modular's stock price which their fraudulent scheme had created. Smart Modular itself sold 2.82 million shares at $32.375 for $91.3 million. Notwithstanding their access to confidential information as a result of their status as directors, officers and/or insiders of the Company, and their corresponding duty to disclose adverse material facts before trading in Smart Modular stock, the Individual Defendants sold significant amounts of Smart Modular shares at artificially inflated prices in order to profit from the fraud, and did so while in possession of material non-public information. The Individual Defendants' insider selling during the Class Period is detailed below:
PRICE
DATE SHARES PER PROCEEDS
NAME SOLD SOLD SHARE FROM SALE
Shah/Krishnan 09/11/97 1,160,000 $32.375 $37,555,000
Percent of shares actually owned sold: 11%
Patel 09/11/97 700,000 $32.375 $22,662,500
Percent of shares actually owned sold: 10%
Marten 09/11/97 80,000 $32.375 $2,590,000
09/18/97 40,000 $35.875 1,435,000
12/23/97 10,000 $ 24.13 241,300
12/24/97 5,000 $ 23.23 116,150
12/29/97 10,000 $ 24.00 240,000
12/29/97 2,000 $ 24.06 48,120
12/29/97 18,000 $ 24.00 432,000
12/30/97 10,000 $ 24.13 241,300
12/30/97 5,000 $ 24.75 123,750
12/30/97 5,000 $ 23.88 119,400
12/31/97 10,000 $ 22.85 228,500
12/31/97 5,000 $ 24.25 121,250
12/31/97 5,000 $ 23.88 119,400
12/31/97 5,000 $ 24.13 120,650
01/02/98 5,000 $ 24.31 121,550
02/25/98 10,000 $ 27.31 273,100
02/25/98 5,000 $ 27.19 135,950
02/26/98 5,000 $ 28.81 144,050
02/26/98 10,000 $ 28.50 285,000
03/03/98 2,000 $ 25.81 51,620
03/03/98 5,000 $ 26.38 131,900
03/03/98 10,000 $ 26.75 267,500
03/05/98 8,000 $ 25.00 200,000
03/05/98 5,000 $ 24.75 123,750
03/06/98 5,000 $ 25.50 $ 127,500
280,000 $8,038,740
Percent of shares actually owned sold: 46%
Mullin 09/16/97 500 $ 36.13 $ 18,065
09/16/97 37,500 $ 36.13 $1,354,875
38,000 $1,372,940
Percent of shares actually owned sold: 96%
Total Individual
Defendants Insider
Selling: 2,178,000 $69,629,180
Smart Modular 09/11/97 2,821,000 $32.375 $91,300,000
74. Defendants' stock sales during the Class Period are summarized below:
Shares Total
Defendants Sold Proceeds
Smart Modular 2,821,000 $ 91,300,000
Shah/Krishnan 1,160,000 37,555,000
Patel 700,000 22,662,500
Marten 280,000 8,038,740
Mullin 38,000 1,372,940
TOTALS: 4,999,000 $160,929,180
75. The volume restrictions of SEC Rule 144 imposed on the sale of unregistered securities by corporate insiders do not apply to sales of stock via a registration statement. Therefore, the top Smart Modular insiders could sell much more of their stock in a secondary offering than in open market sales.
76. When underwriters sell or distribute stock via a registered stock offering, they are permitted to use techniques to stabilize the price of the stock while they are distributing the registered stock, known as the underwriters' stabilization bid. Such activities would be illegal in normal, open market stock sales by insiders.
77. Smart Modular insiders Shah/Krishnan, Patel and Marten, who sold stock in the secondary offering, agreed to a "lock-up" agreement, whereby they agreed with the underwriters, as is customary in underwritten stock offerings, to not sell any more of their Smart Modular for 90 days after the offering. However, as is not customary, Smart Modular provided an exception to the 90-day "lock-up" wherein executive officers could sell an aggregate of 100,000 shares on the open market, up to 40,000 per person. This was done to appease Mullin and Marten who wanted to benefit from the inflation in Smart Modular's stock price. Thus, immediately following the offering, Mullin and Marten sold 38,000 and 40,000 shares, respectively.
For Violation Of §10b Of The 1934
Act Against All Defendants
78. Each Defendant: (a) knew the material, adverse, non-public information about Smart Modular's financial results and then-existing business conditions, which was not disclosed; and (b) participated in drafting, reviewing, and/or approving the misleading statements, releases, reports, and other public representations of and about Smart Modular.
79. Defendants disseminated the false statements specified above, which they knew were false in that they contained misrepresentations and failed to disclose material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading.
80. Defendants violated §10(b) of the 1934 Act and Rule 10b-5 in that they:
(a) Employed devices, schemes, and artifices to defraud;
(b) Made untrue statements of material facts or omitted to state material facts necessary in order to make statements made, in light of the circumstances under which they were made, not misleading; or
(c) Engaged in acts, practices, and a course of business that operated as a fraud or deceit upon plaintiffs and others similarly situated in connection with their purchases of Smart Modular common stock during the Class Period.
81. Plaintiffs and the Class have suffered damages in that, in reliance on the integrity of the market, they paid artificially inflated prices for Smart Modular stock. Plaintiffs and the Class would not have purchased Smart Modular stock at the prices they paid, or at all, if they had been aware that the market prices had been artificially and falsely inflated by Defendants' misleading statements.
82. The statutory safe harbor provided for forward-looking statements under certain circumstances does not apply to any of the allegedly false forward-looking statements pleaded in this Complaint because none of the particular oral forward-looking statements pleaded herein were identified as a "forward-looking statement" when made and none of the written forward-looking statements made were identified as forward-looking statements. Nor was it stated as to either type of forward-looking statement that actual results "could differ materially from those projected." Nor did meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statements accompany those forward-looking statements. In any event, each of the forward-looking statements alleged herein was authorized by an executive officer of Smart Modular, and was actually known by each of the Individual Defendants to be false when made.
83. Plaintiffs bring this action as a class action pursuant to Rule 23 of the Federal Rules of Civil Procedure on behalf of all persons who purchased Smart Modular stock on the open market during the Class Period. Excluded from the Class are Defendants and members of their families.
84. The members of the Class are so numerous that joinder of all members is impracticable. The disposition of their claims in a class action will provide substantial benefits to the parties and the Court. During the Class Period, Smart Modular had millions of shares of stock outstanding, owned by hundreds of shareholders.
85. There is a well-defined commonality of interest in the questions of law and fact involved in this case. Common questions of law and fact which predominate over questions which may affect individual Class members include the following:
(a) Whether the federal securities laws were violated by Defendants;
(b) Whether Defendants' statements omitted material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading;
(c) Whether Defendants acted with scienter;
(d) Whether the Smart Modular stock was artificially inflated during the Class Period; and
(e) The extent of damage sustained by Class members and the appropriate measure of damages.
86. Plaintiffs' claims are typical of those of the Class because plaintiffs and the Class sustained damages from Defendants' wrongful conduct.
87. Plaintiffs will adequately protect the interests of the Class and have retained competent counsel. Plaintiffs have no interests which conflict with those of the Class.
88. A class action is superior to other available methods for the fair and efficient adjudication of this controversy.
89. Because the PSLRA, §21D(c) of the 1934 Act [15 U.S.C. §78u-4(c)], requires complaints to be pleaded in conformance with Rule 11, plaintiffs have alleged the foregoing based upon the investigation of their counsel, which included a review of Smart Modular's SEC filings, securities analysts' reports and advisories about the Company, press releases issued by the Company, media reports about the Company and discussions with consultants, and, pursuant to Rule 11(b)(3), believe that after reasonable opportunity for discovery, substantial evidentiary support will likely exist for the allegations set forth at ¶¶1, 3-4, 8, 13, 21, 37, 44, 48, 62, 68 and 71.
WHEREFORE, plaintiffs pray for judgment as follows:
1. Declaring this action to be a proper class action;
2. Awarding compensatory damages and pre-judgment and post-judgment interest, as well as costs;
3. Awarding equitable and/or injunctive relief including rescission, the imposition of a constructive trust on Defendants' insider trading proceeds, pursuant to Rules 64, 65, and any appropriate state law remedies; and
4. Awarding such other relief as may be just and proper.
Plaintiffs demand a trial by jury.
DATED: November 30, 1998
MILBERG WEISS BERSHAD
HYNES & LERACH LLP
WILLIAM S. LERACH
______________________________
WILLIAM S. LERACH
600 West Broadway, Suite 1800
San Diego, CA 92101
Telephone: 619/231-1058
MILBERG WEISS BERSHAD
HYNES & LERACH LLP
REED R. KATHREIN
JOHN K. GRANT
222 Kearny Street, 10th Floor
San Francisco, CA 94108
Telephone: 415/288-4545
Lead Counsel for Plaintiffs
SMARTMOD\LSN00869.CPT
DECLARATION OF SERVICE BY MAIL
PURSUANT TO NORTHERN DISTRICT LOCAL RULE 23-2(c)(2)
I, the undersigned, declare:
1. That declarant is and was, at all times herein mentioned, a citizen of the United States and a resident of the County of San Francisco, over the age of 18 years, and not a party to or interested in the within action; that declarant's business address is 222 Kearny Street, 10th Floor, San Francisco, California 94108.
2. That on November 30, 1998, declarant served the CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS by depositing a true copy thereof in a United States mailbox at San Francisco, California in a sealed envelope with postage thereon fully prepaid and addressed to the parties listed on the attached Service List and that this document was forwarded to the following designated Internet site at:
http://securities.milberg.com
3. That there is a regular communication by mail between the place of mailing and the places so addressed.
I declare under penalty of perjury that the foregoing is true and correct. Executed this 30th day of November, 1998, at San Francisco, California.
______________________________
LISA NEWELL
1. All per share amounts are adjusted for Smart Modular's 2-for-1 stock split in 12/97.
2. 621,000 shares were sold by Smart Modular via the over-allotment.