MILBERG WEISS BERSHAD
HYNES & LERACH LLP
PATRICK J. COUGHLIN (111070)
RANDI D. BANDMAN (145212)
SPENCER A. BURKHOLZ (147029)
AMBER L. ECK (177882)
600 West Broadway, Suite 1800
San Diego, CA 92101
Telephone: 619/231-1058
BERNSTEIN LIEBHARD & LIFSHITZ
SANDY A. LIEBHARD
MEL E. LIFSHITZ
274 Madison Avenue
New York, NY 10016
Telephone: 212/779-1414
Attorneys for Plaintiff and the Class
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF CALIFORNIA
SAN JOSE DIVISION
|
SARA WERCZBERGER, On Behalf of Plaintiff, vs. STORMEDIA INC., WILLIAM J. ALMON,
Defendants. |
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No. [
97-CV-20538] CLASS ACTION COMPLAINT FOR VIOLATIONS OF Plaintiff Demands A |
1. This is a class action on behalf of all persons who purchased the common stock of StorMedia Inc. ("StorMedia" or the "Company"), a manufacturer of thin film magnetic disks (i.e., "media") for hard disk drives used in portable computers, between November 27, 1995 and August 9, 1996 (the "Class Period"), seeking to remedy violations of federal securities law. During the Class Period, the defendants artificially inflated StorMedia's stock to as high as $30 per share(1) based on representations that StorMedia was enjoying strong demand for its products and that that strong demand and a new, multi-year supply contract with Maxtor Corporation ("Maxtor") (a manufacturer of computer hard disk drives) would result in StorMedia achieving substantial sequential revenue and earnings gains throughout 1996 and 1997.
2. Indeed, StorMedia was well aware of the importance of announcing to the investing public in November, 1995, that StorMedia had entered into a lucrative contract with Maxtor for its media product asserting that Maxtor would supply a significant portion of StorMedia's revenue in the coming year providing StorMedia with the opportunity of doubling revenue and profit for that year. When StorMedia hyped this multi-million dollar agreement, its stock began its meteoric rise. However, according to Maxtor, the truth was that to induce it to sign the supply agreement, StorMedia misrepresented to Maxtor that StorMedia had the ability, at that time, to meet Maxtor's specifications supporting Maxtor's move from flying head to proximity recording technology in its hard disk drives. This was simply not true. (A copy of the Complaint, filed against StorMedia by Maxtor for fraud, including punitive damages, is attached hereto as Ex. 1.)
3. StorMedia benefited from the inflated stock price by avoiding a large loss on certain "put options" and attempted to complete a huge secondary stock offering. However, in June 1996, rumors circulated that demand for StorMedia's products had softened and StorMedia's stock fell sharply. While StorMedia denied the rumors, it cancelled the attempted stock offering. Subsequently, StorMedia admitted that it was, in fact, encountering soft demand for its products and revealed that its second and third quarter 1996 results would decline and that its contract with Maxtor had been cancelled. The contract was cancelled, according to Maxtor, due to StorMedia's inability to successfully manufacture and deliver disks to Maxtor that complied with Maxtor's specifications and quality requirements. As a result, StorMedia's stock collapsed to $9-3/4 per share.
4. However, before the truth about the weak demand for StorMedia's products, the problems with (and ultimate cancellation of) its Maxtor contract and StorMedia's declining financial results came out and its stock collapsed, five of StorMedia's top insiders sold over 207,000 shares of their StorMedia stock on the open market at artificially inflated prices as high as $28.83 per share -- over half of which shares had been acquired by the insiders via stock option exercises at just $.19 per share and then immediately sold off by them so that they could pocket over $4.8 million in illegal, risk-free insider trading proceeds. Two of the insiders unloaded 100% of their StorMedia holdings while three others sold off 63%-79% of their StorMedia holdings. Defendant Almon was quoted on April 8, 1996: "We've bought cars, that's for sure," he said of his new car, a BMW. The chart below shows the Individual Defendants' insider selling while StorMedia stock was artificially inflated:
% of
Shares
Shares Prices Total Owned
Name Position Sold Paid Proceeds Sold
---- -------- ------ ------ -------- -----
Oxsen President & COO 67,500 $18.33-$26.67 $1,520,000 63%
Eltoukhy Senior VP & Chief 12,821 $18.67-$24 $ 295,180 100%(2)
Technical Officer
Abely CFO & VP Finance 67,500 $18-$28.83 $1,644,250 79%
Silverman VP-Sales & Marketing 56,250 $17.83-$26.67 $1,268,750 63%
Lo Treasurer & VP- 3,125 $24 $ 74,988 100%
Investor Relation ------- ----------
TOTALS: 207,196 $17.83-$28.83 $4,803,168
Defendant Almon disposed of 30,000 shares worth nearly a million dollars on May 16, 1996 when the stock was trading at over $29 per share.
5. The charts below demonstrate the price action of StorMedia's shares during the Class Period, defendants' insider selling activities, the collapse of StorMedia's share price as the previously concealed facts about StorMedia's business emerged and the performance of StorMedia's stock compared to indices of similar companies, which shows that the action of StorMedia's shares was due largely to company-specific events and not market forces:
6. Jurisdiction exists pursuant to §27 of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. §78aa, and 28 U.S.C. §1331. The claims asserted arise under §10(b) and 20(a) of the Exchange Act, 15 U.S.C. §§78j(b) and 78t(a) and Rule 10b-5.
7. (a) Venue is proper in this district pursuant to §27 of the Exchange Act and 28 U.S.C. §1391(b). StorMedia has its principal place of business in this district (Santa Clara).
(b) Assignment of this action to the San Jose Division is appropriate as a substantial part of the events or omissions identified herein occurred in Santa Clara County.
8. In connection with the wrongs complained of, defendants used the instrumentalities of interstate commerce, including the United States mails and facilities of the National Securities Markets.
9. Plaintiff Sara Werczberger purchased 150 shares of StorMedia stock on May 21, 1996 at $28-1/2 per share and was damaged thereby.
10. Defendant StorMedia has its headquarters in Santa Clara, California. The shares of StorMedia were traded in an efficient market on the NASDAQ National Market System during the Class Period. StorMedia is a developer, manufacturer and marketer of thin film disks for hard disk drives used in portable and desktop computers.
11. (a) Defendant William J. Almon ("Almon") was Chairman and Chief Executive Officer and a director of StorMedia and a member of its Executive Committee during the Class Period. Because of defendant Almon's positions, he knew the adverse non-public information about StorMedia's business, finances, products, markets and present and future business prospects via access to internal corporate documents (including the Company's operating plans, budgets and forecasts and reports of actual operations compared thereto), conversations and connections with other corporate officers and employees, attendance at management and Board of Directors' meetings and committees thereof and via reports and other information provided to him in connection therewith. Almon signed the contract on behalf of StorMedia with Maxtor that was announced at the start of the Class Period assuring the public that StorMedia could fulfill the contract despite his knowledge that StorMedia could not meet Maxtor's specifications in a timely manner. Defendant Almon, on an initial investment of $1 million, made a paper profit of $26.1 million when the Company went public on May 5, 1995. During the Class Period, on May 16, 1996, defendant Almon disposed of 30,000 shares worth nearly a million dollars. Almon was to sell 295,000 shares of his StorMedia stock in the aborted secondary offering in June 1996.
(b) Defendant Michael E. Oxsen ("Oxsen") was President and Chief Operating Officer of StorMedia during the Class Period. Because of defendant Oxsen's position, he knew the adverse non-public information about StorMedia's business, finances, products, markets and present and future business prospects via access to internal corporate documents (including the Company's operating plans, budgets and forecasts and reports of actual operations compared thereto), conversations and connections with other corporate officers and employees, attendance at management meetings and via reports and other information provided to him in connection therewith. During the Class Period, based on inside information, Oxsen sold 67,500 shares of StorMedia stock -- 63% of his StorMedia holdings -- for approximately $1.5 million.
(c) Defendant Atef Eltoukhy ("Eltoukhy") was Senior Vice President and Chief Technical Officer of StorMedia during the Class Period. Because of defendant Eltoukhy's position, he knew the adverse non-public information about StorMedia's business, finances, products, markets and present and future business prospects via access to internal corporate documents (including the Company's operating plans, budgets and forecasts and reports of actual operations compared thereto), conversations and connections with other corporate officers and employees, attendance at management meetings and via reports and other information provided to him in connection therewith. During the Class Period, based on inside information, Eltoukhy sold 12,821 shares of StorMedia stock -- 100% of his StorMedia holdings -- for approximately $295,000.
(d) Defendant Stephen M. Abely ("Abely") was Chief Financial Officer and Vice President-Finance of StorMedia during the Class Period. Because of defendant Abely's position, he knew the adverse non-public information about StorMedia's business, finances, products, markets and present and future business prospects via access to internal corporate documents (including the Company's operating plans, budgets and forecasts and reports of actual operations compared thereto), conversations and connections with other corporate officers and employees, attendance at management meetings and via reports and other information provided to him in connection therewith. During the Class Period, based on inside information, Abely sold 67,500 shares of StorMedia stock -- 79% of his StorMedia holdings -- for approximately $1.6 million.
(e) Defendant Sherman Silverman ("Silverman") was Vice President-Sales & Marketing of StorMedia during the Class Period. Because of defendant Silverman's position, he knew the adverse non-public information about StorMedia's business, finances, products, markets and present and future business prospects via access to internal corporate documents (including the Company's operating plans, budgets and forecasts and reports of actual operations compared thereto), conversations and connections with other corporate officers and employees, attendance at management meetings and via reports and other information provided to him in connection therewith. During the Class Period, based on inside information, Silverman sold 56,250 shares of StorMedia stock -- 63% of his StorMedia holdings -- for approximately $1.2 million.
(f) Defendant Henry Lo ("Lo") was Treasurer and Vice President-Investor Relations of StorMedia during the Class Period. Because of defendant Lo's position, he knew the adverse non-public information about StorMedia's business, finances, products, markets and present and future business prospects via access to internal corporate documents (including the Company's operating plans, budgets and forecasts and reports of actual operations compared thereto), conversations and connections with other corporate officers and employees, attendance at management meetings and via reports and other information provided to him in connection therewith. During the Class Period, based on inside information, Lo sold 3,125 shares of StorMedia stock -- 100% of his StorMedia holdings -- for approximately $74,000.
(g) The defendants identified in ¶11(a)-(f) are referred to herein as the Individual Defendants.
12. Individual Defendants Almon, Oxsen, Abely, Silverman, Eltoukhy and Lo were each aware of and approved the false statements issued by or on behalf of StorMedia during the Class Period.
13. Each defendant had the opportunity to commit and participate in the fraud described herein. The Individual Defendants were top officers and directors of StorMedia and they controlled its press releases, corporate requests, Securities and Exchange Commission ("SEC") filings and its communications with analysts. Thus, they controlled the public dissemination of, and could falsify, the information about StorMedia's business, products and finances that reached the public and impacted the price of StorMedia's stock.
14. Each of the Individual Defendants also had the motive to commit and participate in the fraud described herein. Defendants wanted to and did cover up the problems with and deterioration in StorMedia's business to make it appear that StorMedia's business was succeeding and growing, so that its stock price would trade at artificially inflated levels, high enough so that StorMedia could minimize its losses on its "put options" contract and they could insider trade by exercising stock options to acquire StorMedia stock at cheap prices and then immediately sell off large amounts of their StorMedia stock at artificially inflated prices, pocketing large sums for themselves. They also wanted StorMedia to accomplish a huge secondary public offering of its stock in which it would raise millions in desperately needed capital to fund StorMedia's expansion plans and which would allow certain of its insiders (including its controlling shareholder, Prudential Private Equity Investors III) to sell off at least 1.1 million of its StorMedia shares and insiders Almon, Oxsen and Silverman to sell off 295,000, 12,500 and 12,500 shares of their StorMedia stock, respectively.
15. When Almon signed the November 17, 1995 contract on behalf of StorMedia and the other defendants with Maxtor to supply media (which was announced on November 27, 1995, the start of the Class Period) Almon and the other defendants knew that its media could not be qualified by the specific dates necessary to enable Maxtor to provide hard disk drives that met the requirements of Maxtor's customers.
16. Specifically, according to Maxtor, StorMedia knew that Maxtor was planning to move from flying head to proximity recording technology in its hard disk drives. StorMedia knew that supplying media to Maxtor to support the change from flying head to proximity recording technology would require changes in the design and technology of StorMedia's media, as well as changes in the manufacturing processes necessary to produce StorMedia's media. StorMedia knew that Maxtor was relying on it for media that would provide a substantial portion of Maxtor's media needs for each of Maxtor's hard disk drives and that Maxtor's success was contingent on StorMedia's performance under the November 1995 Purchase Agreement. However, StorMedia knew it could not perform in a timely manner and in fact did not perform its obligations under the Purchase Agreement. Despite this fact, the announcement regarding the Purchase Agreement was made and defendants Almon and Abely assured the public (including securities analysts) that StorMedia was fully capable of performing the contract.
17. Each of the defendants, namely StorMedia, Almon, Oxsen, Abely, Silverman, Eltoukhy and Lo, is liable as a participant in a fraudulent scheme and course of business that operated as a fraud or deceit on purchasers of StorMedia stock, including false and misleading statements, and/or concealed material, adverse facts. The scheme: (i) deceived the investing public regarding StorMedia's business; (ii) artificially inflated the price of StorMedia stock; (iii) caused plaintiff and other members of the Class to purchase StorMedia stock at inflated prices; and (iv) permitted the Individual Defendants to sell approximately 207,196 shares of StorMedia stock at as high as $28.83 per share, pocketing some $4.8 million. In committing the wrongful acts, the defendants pursued a scheme to inflate the price of StorMedia stock and deceive the investing public regarding demand for StorMedia's products, the success and competitive position of its business, and the nature and status of its Maxtor supply contract, permitting certain of StorMedia's insiders to dispose of over $4.8 million worth of their StorMedia stock at artificially inflated prices, and for StorMedia to avoid suffering a larger loss on the exercise of the October 1995 "put options." When Almon signed the November 17, 1995 contract on behalf of StorMedia and the other defendants with Maxtor to supply media (which was announced on November 27, 1995, the start of the Class Period) Almon and the other defendants knew that its media could not be qualified by the specific dates necessary to enable Maxtor to provide hard disk drives that met the requirements of Maxtor's customers.
18. Specifically, according to Maxtor, StorMedia knew that Maxtor was planning to move from flying head to proximity recording technology in its hard disk drives. StorMedia knew that supplying media to Maxtor to support the change from flying head to proximity recording technology would require changes in the design and technology of StorMedia's media, as well as changes in the manufacturing processes necessary to produce StorMedia's media. StorMedia knew that Maxtor was relying on it for media that would provide a substantial portion of Maxtor's media needs for each of Maxtor's hard disk drives and that Maxtor's success was contingent on StorMedia's performance under the November 1995 Purchase Agreement. However, StorMedia knew it could not perform in a timely manner and in fact did not perform its obligations under the Purchase Agreement. Despite this fact, the announcement regarding the Purchase Agreement was made and defendants Almon and Abely assured the public (including securities analysts) that StorMedia was fully capable of performing the contract.
19. While the Company remained upbeat about its prospects to meet its goals throughout the Class Period, StorMedia, according to Maxtor "repeatedly failed to qualify its media by failing to meet Maxtor's specifications and functional requirements for each hard disk drive required by the Purchase Agreement." Ex. 1, ¶24.
20. Despite this, defendant Almon on January 18, 1996 stated StorMedia remained "optimistic about the coming year's prospects," which he had earlier stated on November 16, 1995 could provide "double revenue and profit." Throughout the Class Period according to Maxtor, "StorMedia provided Maxtor with media that was defective and untimely." Ex. 1, ¶25. All of the defendants knew this and participated in a scheme and conspiracy to keep the information from the public to enable them to effect the purchase of stock on the open market and either sell or dispose of millions of dollars worth of stock and save the Company millions on the October 1995 "put options."
21. The defendants further undertook these transactions to effect a series of transactions in StorMedia's stock to create active trading in the security increasing the volume of trading and inducing the purchase and sale of StorMedia's stock. On April 30, 1996, StorMedia announced a 3-for-2 stock split effective May 28, 1996 in which Almon stated "the stock split will broaden the stockholder base and increase the public float, thereby increasing the liquidity for the Company's stockholders." On Friday, July 12, 1996, StorMedia announced it had signed "a commitment letter for a $50 million term loan facility and a $25 million revolving credit facility with CIBC Wood Gundy, an affiliate of Canadian Imperial Bank of Commerce and Banque Nationale de Paris." These actions were intended to inflate the value of StorMedia's stock, help increase StorMedia's market capitalization, enabling StorMedia to borrow additional funds and/or open additional lines of credit, reap insider trading profits and avoid a loss on the October "put options."
22. StorMedia was formed in May 1994 when Nashua Corporation divested its thin film computer disk operations, which had lost nearly $60 million in 1990-1993. Under a new management team headed by Almon, Oxsen and Abely, StorMedia was restored to profitability, went public in May 1995, did a $120 million secondary offering in July 1995, and, by late 1995, was pursuing a very aggressive growth/expansion strategy, which included the construction of large, new manufacturing facilities in Singapore, requiring cash outlays of over $100 million in 1996 alone, which StorMedia was committed to pay for. As a result of StorMedia's prior losses, its only recent return to profitability and its aggressive expansion program requiring large cash capital expenditures, the Company was under cash flow pressures and needed to raise large amounts of capital, most preferably for the Company by it selling its stock to the public at high (non-dilutive) prices to raise cash. As a result, StorMedia and its top officers were under pressure to keep StorMedia's stock price trading at high prices so that the stock sales necessary to fund StorMedia's ongoing expansion could continue to take place and which sales would have to occur in mid-1996 for StorMedia to raise the cash it needed to meet its commitments during 1996.
23. In addition, as another part of StorMedia's fund-raising strategy, in October 1995 StorMedia pursued an unusual stock transaction, selling "put options" on 500,000 shares of StorMedia stock for a $1.9 million premium, giving the buyers the right to require StorMedia to re-purchase the 500,000 shares for $41.20 (pre-split) per share or $20.6 million, between January and April 1996. During October 1995, StorMedia stock traded between $41-$50 (pre-split) and, if StorMedia stock continued to trade at over $41.20, there would be no adverse impact on StorMedia from the "put options," as the stock would be trading over the re-purchase price. Thus, the higher StorMedia's stock price during January 1996 through April 1996, the less the financial impact on StorMedia of honoring the "put options" would be. This put further pressure on StorMedia's executives to inflate StorMedia stock in 1996, especially when in January 1996, StorMedia was forced to re-purchase 200,000 shares at $41.20 per share (pre-split), which were then trading for only about $30 per share (pre-split) -- a loss of $1.9 million to StorMedia. This situation was further exacerbated by the continuing decline in StorMedia's stock in January through March 1996.
24. The StorMedia insiders named as defendants had a further motive to artificially inflate StorMedia's stock price, as they wanted to sell off large amounts of the StorMedia stock they owned. However, as a result of agreements with StorMedia's stock underwriters and investment bankers in connection with StorMedia's large secondary stock offering in July 1995 in which StorMedia and its insiders sold off 4.5 million shares at $27-1/2 per share, the remaining shares of StorMedia's insiders were "locked up," i.e., they could not be sold until 90 days after the offering, or about October 27, 1995.
25. StorMedia's business was heavily concentrated with two customers -- Seagate Technology, Inc. ("Seagate") and Maxtor -- which were by far StorMedia's two largest customers. Thus, it faced the constant risk or danger that either of these customers might curtail purchases from StorMedia. StorMedia's insiders knew that the market was extremely interested in and sensitive to StorMedia's relations with Seagate and/or Maxtor and that any enlargement of or extension of its business with these customers would be viewed as very important by the market and investors.
26. Thus, by the fall of 1995 -- as StorMedia was selling its "put option" contracts, as the lock-up that restricted StorMedia's insiders' ability to sell off their stock was expiring, and as StorMedia was facing a pressing need to raise millions in cash it needed to fund its ambitious but expensive expansion program -- StorMedia and its insiders wanted to provide the market with favorable news about StorMedia's business and prospects to support its stock price.
27. On October 17, 1995, StorMedia reported record revenue, net income and earnings per share for its third quarter ended September 30, 1995. After releasing these results, StorMedia held a conference call for analysts, institutional investors and StorMedia shareholders. In this conference call and in later follow-up conversations with individual analysts, Almon and Abely stated:
StorMedia had the "opportunity to double revenue and profit in the coming year."
StorMedia expected the Company's net margins to be sustained throughout the coming quarters of sequential growth.
StorMedia expected "all of its major customers to increase [their] total purchase volumes in the coming year" and that "Seagate will still maintain a majority share" and that Maxtor would provide a "significant portion" of StorMedia's revenue.
1996 "look[ed] very solid" for StorMedia, with earnings per share expected to grow to over $2.75.
This information became part of the total mix of information affecting StorMedia's stock price as a result of the conference call and analysts' reports repeating and reporting this information to the market.
28. On October 18, 1995, Morgan Stanley & Co., Inc. ("Morgan Stanley") issued a report on StorMedia, written by Robert Maire ("Maire"), which was based on information provided to Maire by StorMedia in the October 17, 1995, conference call and in follow-up conversations with senior StorMedia executives. The Morgan Stanley report forecast 1996 earnings per share of $2.87 for StorMedia and stated:
William Almon believes that the company has the "opportunity to double revenue and profit in the coming year." He expects the company's net margin line to be sustained throughout the coming quarters of sequential growth. "Next year looks very solid," he continued.
* * * The company expects all of its major customers to increase total purchase volume in the coming year . . . that Seagate will still maintain a majority share, and that Maxtor will still provide a "significant portion" of STMD's revenue.
29. When StorMedia's stock declined in November 1995, on November 15, 1995, Abely spoke with Maire of Morgan Stanley and reassured him as to the basic strength of StorMedia's business, the continued strong demand for its product, and the favorable outlook for 1996, knowing Morgan Stanley would pass this information along to the market. On November 16, 1995, Morgan Stanley reported Abely's statements to Maire to the market in a report that stated:
In a phone call last night, STMD CFO Steve Abely confirmed that demand is as strong as it has ever been, demand from each customer will exceed the company's ability to provide this quarter, and all indications are that demand will not let up in the first several quarters of 1996.
* * * Mr. Abely expressed comfort with our estimates and confidence in STMD's performance for the current quarter.
* * * Mr. Abely said the company's fundamentals are stronger than ever . . . .
The company is still operating on allocation. On all qualified projects, demand looks good for the year.
30. On November 27, 1995, StorMedia announced a huge new long-term supply contract with Maxtor -- one of its most important customers -- via a press release which was headlined and stated:
StorMedia ANNOUNCES SUPPLY AGREEMENT WITH MAXTOR
StorMedia Incorporated today announced that it has signed a multi-year contract with Maxtor Corporation pursuant to which StorMedia will supply media to Maxtor. The increased supply of media will begin to take effect in the second half of calendar year 1996, ramping to a volume of 4.5 million disks per quarter beginning in the first quarter of calendar year 1997. Due to this significant increase in demand and backlog, StorMedia is considering establishing a new manufacturing facility in Singapore.
"This agreement underscores our continued commitment to what has been, and continues to be a strong relationship with Maxtor," said William J. Almon, StorMedia's Chairman and CEO.
31. StorMedia's knowledge about the huge impact that this purchase agreement would have on its stock is evidenced by the fact that it announced this agreement only ten days after it had entered into it, i.e., November 17, 1995 (the "Purchase Agreement"). The Purchase Agreement required StorMedia to provide Maxtor with 2 million units media in the first quarter of 1996, 2 million units of media in the second quarter of 1996, 2.7 million units of media in the third quarter of 1996, 3.5 million units of media in the fourth quarter of 1996, 4.5 million units of media for the first quarter of 1997, and 4.5 million units of media in each successive quarter thereafter for the duration of the four-year agreement. See Ex. 1, ¶20.
32. After issuing this release, Almon and Abely had conversations with securities analysts from Morgan Stanley and Smith Barney, Inc. ("Smith Barney") to explain the details of the Maxtor long-term supply contract, assuring them that StorMedia was fully capable of performing the contract, the contract would lead to increased earnings per share for StorMedia throughout 1996 and 1997, and make a doubling of StorMedia's business in 1996 over 1995 realizable!
33. On November 28, 1995, Morgan Stanley issued a report on StorMedia, authored by Maire, which was based on information provided him by Almon and Abely the day before. The report increased the forecasted 1996 earnings per share for StorMedia to $3.05 and stated:
StorMedia announced last night it has signed a multi-year disk media supply agreement with Maxtor that will double this customer's impact on STMD revenue by 1Q97.
The company is considering establishing a new manufacturing facility in Singapore to handle this increased demand.
We view this as a significant positive for StorMedia, and we are upgrading our stock rating to Strong Buy. We are increasing our estimates for 3Q96 and 4Q96 EPS to $0.80 and $0.93 per share from $0.76 and $0.81 per share. This brings our estimated 1996 EPS to $3.05 per share up from $2.87 per share.
* * * The company's business will double in the current fiscal year, and CEO William Almon believes that an additional doubling next year is "realizable."
34. On January 18, 1996, StorMedia announced its year end 1995 results, via a release which stated, inter alia:
"We are extremely pleased with the Company's operating performance and financial results for the year. 1995 was a year of significant growth and progress for the Company. We successfully ramped production in our new Singapore operation, introduced several new products, and completed our initial public offering. . . . We are on schedule with our dedicated plant to Seagate Technology and anticipate commencing volume production in the first quarter and completion by mid-1996," said William J. Almon, StorMedia's Chairman and CEO.
After releasing these results, StorMedia held a conference call for securities analysts, money managers, institutional investors, large StorMedia shareholders, brokers and stock traders which directly disseminated important information about StorMedia to the market. In that conference call and in later follow-up conversations with individual securities analysts, Almon and Abely asserted:
Demand for all of StorMedia's products remained very strong.
StorMedia would likely "double revenue and profit in the coming year."
StorMedia expected the Company's net profit margins to be sustained throughout coming quarters of sequential growth.
StorMedia expected "all of its major customers to increase total purchase volume in the coming year."
StorMedia was fully capable of performing under the new Maxtor supply contract and that contract would lead to increased earnings per share in 1996 and 1997.
1996 looked very good for StorMedia, with earnings per share expected to grow to over $3.00.
This information became part of the total mix of information affecting StorMedia's stock price as a result of the conference call and analysts' reports repeating and reporting this information to the market.
35. On January 19, 1996, Morgan Stanley issued a report on StorMedia, authored by Robert Maire/Chris Bunn, based on information provided them in the January 18, 1996 conference call and in follow-up conversations with top StorMedia executives. The report forecast 1996 earnings per share of $3.05 for StorMedia and stated:
Summary and Investment Conclusion
StorMedia reported earning $0.68 per share in 4Q95. We had expected $0.65 per share. The company continues to report strong demand and project a very positive business tone. We reiterate our Strong Buy rating of shares of StorMedia stock. Orders continue to be strong, the company is successfully growing at a very high rate, and the company has signed major contracts for exclusive, long-term supply agreements with two major customers, Seagate and Maxtor.
* * * OUTLOOK: No Change -- Still in the driver's seat.
StorMedia's customers are selling as many drives as they can produce, and their performance continues to be limited by the supply of critical components -- read/write heads, and media disks. The average capacity of disk drives is increasing at a tremendous rate, the number of disks per drive is increasing, and disk drive sales continue to exceed the sales of PCs by 40%.
StorMedia's proprietary technology has great room for growth in terms of the performance of the disk products -- one of the company's R&D engineers indicated during the conference call that their technology is capable of producing disks with performance rating in excess of twice the industry's current highest standard.
Finally, there is no technical threat to the role of rigid disk drives in the information age for reasonably rapid-access, mass storage. StorMedia's prospects are very bright, indeed.
36. During mid-January, StorMedia executives Almon, Oxsen and Abely had discussions with securities analysts from Value Line, who were preparing a report on StorMedia. They told the Value Line analysts that:
Demand for all of StorMedia's products remained very strong due to strong sales of disk drives by its customers.
StorMedia would likely double revenue and profit in the coming year.
StorMedia expected the Company's profit margins to be sustained throughout the coming year, as StorMedia reported quarters of sequential growth.
StorMedia expected all of its major customers to increase total purchase volume in the coming year.
StorMedia was fully capable of performing under the new Maxtor long-term supply contract and that contract would lead to increased earnings per share in 1996 and 1997.
StorMedia expected a very good 1996, with earnings per share over $3.00.
37. On January 22, 1996, The Value Line Special Situations Service issued a report on StorMedia, which was based on and contained the information provided to Value Line by StorMedia within the prior few weeks. This report forecast 1996 earnings per share of $3.05 for StorMedia and stated:
Not surprisingly, the boom in the PC market has generated a surge in demand for data storage capacity. Industry watchers expect disk drive unit shipments to advance at a 30% rate in 1996 and to continue climbing, at rates approximating 15% annually, through the remainder of the decade. . . .
Given the favorable fundamental outlook for data storage suppliers, we have selected StorMedia, Inc., a leading independent supplier of thin film disks for hard disk drives, as this issue's New Recommendation. StorMedia produces high-capacity 2.5-inch and 3.5-inch disks for disk drives that are used in portable and desktop computers. Using highly efficient production processes to deliver advanced products at competitive prices, the Santa Clara, California-based company has become a leading supplier to industry heavyweights Seagate Technology and Maxtor Corp.
Part of the credit for StorMedia's success goes to its well-thought-out manufacturing strategy. The company uses manufacturing processes, some of which are proprietary, that produce disks with improved magnetic performance characteristics. Moreover, in contrast to its competitors, StorMedia uses smaller-scale production equipment that can be installed, expanded, and modified quickly. This "modular" approach allows the company to make incremental capacity changes and to incorporate new production technologies rapidly.
More recently, StorMedia has inked contractual relationships with its customers that will help reduce, if not eliminate, the risk of excess capacity in the years ahead. The company has agreed to build a manufacturing facility in Singapore that will be dedicated to supplying disks to Seagate. In addition, the company recently signed a multiyear supply agreement with Maxtor Corp.
* * * All told, we're estimating 1996 earnings of $3.05 a share on revenues of $275 million.
StorMedia reviewed this report in draft form, approved its accuracy and, after the Value Line report was issued, StorMedia reproduced the report and distributed it to the financial press, other securities analysts and prospective investors in StorMedia.
38. During early February 1996, StorMedia executives Almon, Abely and Oxsen communicated with Barry Bosak and Megan Robertson of Smith Barney, who were preparing a research report on StorMedia. StorMedia's executives knew that Smith Barney was seeking to become one of StorMedia's lead investment bankers (along with Morgan Stanley and Montgomery Securities) so it could participate in StorMedia's future stock offerings and thus was eager to issue a favorable report on StorMedia to curry favor with its top executives. As Bosak and Robertson were preparing a report on StorMedia, Almon, Abely and Oxsen told them that, and knew that Smith Barney would eagerly transmit the favorable information to the market, that:
Demand for all of StorMedia's products was very strong.
StorMedia would double revenue and profit in 1996.
StorMedia expected the Company's profit margins to be sustained throughout 1996, as each quarter showed sequential revenue and profit growth.
StorMedia expected all of its major customers to increase total purchase volume in the coming year.
StorMedia was fully capable of performing under the new Maxtor long-term supply contract and that contract would lead to increased earnings per share in 1996 and 1997.
1996 looked very good for StorMedia, with earnings per share expected to grow to over $3.00.
StorMedia's management had also appeared at Smith Barney's emerging growth conference at the end of January, 1996, repeating these same statements.
39. On February 9, 1996, Smith Barney issued a report on StorMedia, based on and repeating the information provided to Smith Barney by StorMedia during early February. The report forecast 1996 earnings per share of $3.20, a five year growth rate of 25% for StorMedia and stated:
Seagate (Singapore plant #3)
Contract is for purchasing 3 million disks per quarter through 3/31/99. Initial output is just ramping up, and full production is expected (specified in the contract) by June. Management believes that it is ahead of schedule. . . .
Maxtor
Maxtor has signed a contract to purchase 4.5 million disks per quarter, with volumes moving up to that level by 1Q97. Pricing is at market levels.
* * * [T]he long-term contracts with Maxtor and Seagate are testimony to the company's ability to supply quality product.
* * * [I]t appears that StorMedia has a challenge in constraining margins very much over the near term given its "sold-out" position and its declining costs. The company's prices are competitive, so it would be foolish to "undercut the market when you are supply-constrained."
Our forecasts show sequential revenue growth over near-term quarters and a step-up this summer as the Seagate Plant #3 becomes fully operational and this fall as the Maxtor contract comes into play. This is primarily a revenue-driven story given the practical limitations on gross margin expansion -- and revenues are growing explosively, as shown in the attached model.
StorMedia reviewed this report in draft form, approved it for accuracy and, after the report was issued, StorMedia reproduced the report and distributed it to the financial press, other securities analysts and prospective investors in StorMedia.
40. At the end of March 1996, StorMedia issued its Annual Report to Shareholders (release of which was approved by all the defendants), which included a letter signed by Almon and Oxsen, which stated:
We signed a multi-year contract with Maxtor Corporation in November pursuant to which we will increase the supply of disks to Maxtor. The increased supply of disks will be effective in the second half of calendar year 1996, ramping to a volume of 4.5 million disks per quarter beginning in the first quarter of calendar year 1997.
* * * Outlook
We are optimistic about the coming year's prospects for profitability and growth.
41. The statements issued between November 27, 1995 and late March 1996, when StorMedia's 1995 Annual Report was issued, as set forth in ¶¶30-40 were each false and misleading when made as the defendants knew, based on their access to material non-public corporate data that the true facts were:
(a) According to Maxtor, it would not have entered into the Purchase Agreement with StorMedia if it had not been for StorMedia's misrepresentations during the course of negotiation and performance of the Purchase Agreement that StorMedia had the ability at that time to be a long term supplier of media to Maxtor; that it possessed the resources, know-how, experience, and ability to properly manufacture, test, and deliver media pursuant to industry standards and Maxtor's contractual specifications and functional requirements for a variety of Maxtor hard disk drives for the entire term of the Purchase Agreement through November 30, 1999; and that StorMedia could support Maxtor's move from flying head to proximity recording technology in its hard disk drives which StorMedia knew would require changes in the design and technology of StorMedia's media, as well as changes in the manufacturing process necessary to produce suitable media. Ex. 1, ¶49.
(b) According to Maxtor, StorMedia's new contract with Maxtor provided that Maxtor need only purchase product that met its specifications and performance requirements, which specifications and performance requirements were new and enhanced from those applying to products previously manufactured for Maxtor by StorMedia, and that: (i) StorMedia lacked the resources, know-how, experience and ability to manufacture, test and deliver media pursuant to industry standards and Maxtor's contractual specifications and functional requirements; (ii) StorMedia was not technologically capable of meeting Maxtor's specifications and functional requirements; (iii) StorMedia had deficiencies in its production and manufacturing processes which rendered it incapable of meeting its obligations under the Purchase Agreement; and (iv) StorMedia was incapable of producing media that would support proximity recording technology, as required by its Purchase Agreement at Maxtor. Ex. 1, ¶50.
(c) According to Maxtor, StorMedia knew during the execution and performance of the Purchase Agreement that its media must be qualified by a specific date and in conjunction with other specific components so that Maxtor could provide hard disk drives that met the requirements of Maxtor's customers. StorMedia also knew that its products must be qualified for a variety of disk drives whose technology is changing over time. Further, StorMedia knew of Maxtor's product plans and technology and performance needs. Specifically, StorMedia knew that Maxtor was planning to move from flying head to proximity recording technology in its hard disk drives. StorMedia knew that supplying media to Maxtor to support the change from flying head to proximity recording technology would require changes in the design and technology of StorMedia's media, as well as changes in the manufacturing processes necessary to produce StorMedia's media. StorMedia knew that Maxtor was relying on it for media that would provide a substantial portion of Maxtor's media needs for each of Maxtor's hard disk drives and that Maxtor's success was contingent on StorMedia's performance under the Purchase Agreement. Ex. 1, ¶21.
(d) That "StorMedia repeatedly failed to qualify its media by failing to meet Maxtor's specifications and functional requirements for each hard disk drive required by the Purchase Agreement." Ex. 1, ¶24.
(e) That "[a]s a result of its inferior production capabilities and inability to control its production processes, StorMedia provided Maxtor with media that was defective and untimely. StorMedia's failure to provide quality media increased Maxtor's costs, reduced Maxtor's profits, and delayed Maxtor's ability to deliver hard disk drives, which had a significant adverse impact on Maxtor's business." Ex. 1, ¶25.
(f) That StorMedia knew that it was highly uncertain that it would be able to produce, in quantity, conforming thin film disks for the Maxtor supply contract and thus it was likely that the Maxtor contract would not result in the revenues and earnings growth being forecast by StorMedia;
(g) That StorMedia was encountering weakening demand for its thin film disk products, resulting in diminished new orders and requests by customers to stretch out and/or cancel deliveries of existing orders;
(h) That StorMedia was encountering much weaker than expected demand for its products, which was resulting in sales below levels previously forecasted or planned internally and necessary for StorMedia to meet the revenue and earnings per share forecasts being made by and for it;
(i) Because of the foregoing, StorMedia knew it was likely that its major customer, Maxtor, would not increase their purchase volume from StorMedia in 1996;
(j) Because of the foregoing, StorMedia knew it was likely that Maxtor would not provide a "significant portion" of StorMedia's revenue in 1996;
(k) Based upon the foregoing, StorMedia knew that there was little, if any, opportunity for StorMedia to double its revenue and profit in 1996 and that it was likely that the Company's net profit margins would not be sustained throughout the year but, in fact, would decline;
(l) As a result of the foregoing, StorMedia knew that it was extremely unlikely that StorMedia could achieve sequential revenue growth throughout 1996 and likely that its revenue would stagnate or decline in 1996, due to the problems with its Maxtor long-term supply contract and the weakening of demand for its products;
(m) Due to the problems StorMedia was having qualifying products for the Maxtor contract, StorMedia would not be able to sell anywhere near the millions of units of those products which StorMedia had announced it would ship during 1996 and 1997; and
(n) As a result of the foregoing, there was no reasonable basis in fact for defendants' repeated forecasts of strong earnings growth for StorMedia during 1996 and 1997, and in fact, those forecasts were contradicted by the adverse facts set forth above and were therefore actually known by each of the Individual Defendants and StorMedia to have been false when made.
42. Further, at the end of March 1996, Maxtor's Dave Hardy, the Commodity Manager at Maxtor, specifically notified defendant Michael Oxsen of Maxtor's findings concerning StorMedia's drive failures in Maxtor's Early Life Stress Test ("ELST") as well as its Machine Interface Test ("MIT") expressing Maxtor's concern regarding StorMedia's struggle to provide drives that meet Maxtor's performance requirements.
43. Notwithstanding the barrage of favorable information defendants issued to the market between November 27, 1995 and the end of March 1996, StorMedia's stock had declined to as low as $14-3/4 per share in late March. Faced with the impending expiration of the "put options" and StorMedia's pressing need to raise cash to pay for the plant expansion expenditures in Singapore it was committed to make, defendants were determined to halt this decline in StorMedia stock and push StorMedia's stock price up higher so they could sell StorMedia stock at higher prices, both the stock they owned individually and stock StorMedia wanted to sell to the public to raise cash, and to lessen the negative financial impact on StorMedia of the exercise of the "put options" on the remaining 300,000 shares. By this date, StorMedia and its insiders were actively planning another large secondary stock offering to be undertaken with the help of Morgan Stanley, Smith Barney and Montgomery Securities. However, no such offering could be successfully completed unless StorMedia stock was pushed up to a much higher price, which StorMedia, its insiders and its stock underwriters were determined to do and cooperated to achieve.
44. Thus, on April 9, 1996, StorMedia voluntarily pre-announced its first quarter 1996 results, telling the market that it expected its first quarter 1996 earnings per share "to exceed analyst's expectations" of $.69, indicating or implying that this was due to successful operations and strong demand for its products. As a result of this announcement, StorMedia's stock jumped from $15-53/64 per share on April 8, 1996 to as high as $21-11/64 per share on April 10, 1996, on very heavy volume. However, this announcement was false and misleading in failing to disclose that all of the amount by which StorMedia's first quarter earnings per share would exceed existing estimates would come from (i) a $500,000 reduction in StorMedia's reserve for sales returns of defective or non-conforming products; and (ii) a lowering of StorMedia's estimated 1996 tax rate to 20% from 27% -- two non-operating items having nothing to do with strong demand for its products -- which changes would boost StorMedia's first quarter results by $.11 per share. Without these non-operating financial adjustments, StorMedia's first quarter earnings would have been below analysts' estimates, due to weakening demand for its products!
45. On April 9 and 10, 1996, Almon and Abely spoke to securities analysts for Morgan Stanley and Smith Barney and indicated to them that demand for all of StorMedia's products remained strong and that StorMedia had made good progress in preparing to start shipments of products under its new Maxtor supply contract and thus was on track to achieve 1996 earnings per share over $3.00, with a further increase in 1997 to over $4.50 per share. After receiving a copy of StorMedia's April 9, 1996 press release, and speaking with executives at StorMedia, Morgan Stanley analysts Robert Maire and Chris Bunn prepared a report dated April 10, 1996, which stated:
Last night StorMedia announced they have resolved an intellectual property dispute with HMT Technology Corporation ($13).
* * * In the same press release, StorMedia indicated that it expects to exceed the Street consensus estimates for its 1Q96 per share earnings results.
In its report, Morgan Stanley again forecasted 1996 earnings per share of $3.05 and 1997 earnings per share of $4.71, as well as a five-year earnings per share growth rate of 40%. Based upon the information provided it by Almon and Abely, on April 11, 1996, Smith Barney issued a report on StorMedia again forecasting 1996 earnings per share of $3.20 and a five-year earnings per share growth rate of 25%.
46. On April 16, 1996, StorMedia reported record first quarter 1996 earnings per share of $.78, $.09 higher than the level previously forecast. The release stated:
William J. Almon, StorMedia's Chairman and CEO, commented:
"We are extremely pleased with the Company's operating performance and financial results for the quarter. Revenues more than doubled year-over-year and grew approximately 16% on a sequential basis as we added capacity in Singapore. Most importantly, earnings kept pace despite the start-up costs of our second Singapore facility and the transition to new products."
"We expect revenue growth to continue in 1996 as compared to 1995, propelled by our contractual agreements with Seagate and Maxtor and the new second facility in Singapore. In the first quarter of 1996 we commenced volume production at our new facility in Singapore which is dedicated to Seagate. In addition, during the second half of 1996, we will begin to increase the supply of disks to Maxtor.(3)
47. After releasing its first quarter 1996 results, StorMedia held a conference call for analysts, StorMedia shareholders and institutional investors. In that call and in later follow-up phone conversations with securities analysts, Almon and Abely stated:
Demand for all of StorMedia's products remained very strong.
StorMedia would double revenue and profit in 1996.
The Company's net profit margins would be sustained throughout 1996, as StorMedia achieved sequential quarterly revenue and profit growth.
StorMedia expected all of its major customers to increase total purchase volume in 1996.
StorMedia had begun performing under the new Maxtor long-term supply contract, all was going well with that contract, and that contract would lead to increased earnings per share in 1996 and 1997.
StorMedia expected its 1996 earnings per share to grow to over $3.00, with further large gains in 1997.
This information became part of the total mix of information affecting StorMedia's stock price as a result of the conference call and analysts' reports repeating and reporting this information to the market.
48. On April 17, 1996, Smith Barney published a report on StorMedia which was based on the information provided to it in the April 16, 1996 conference call and later follow-up conversations with top StorMedia executives, including Almon and Abely. The report again raised the 1996 earnings per share forecast for StorMedia to $3.30 and again forecast a five-year earnings per share growth rate of 25%.
49. On April 30, 1996, StorMedia announced a 3-for-2 stock split effective May 28, 1996, via a release which quoted Almon as stating StorMedia "believes that the stock split will broaden the stockholder base and increase the public float, thereby increasing the liquidity for the Company's stockholders."
50. On May 10, 1996, after conversations with Almon and/or Abely, Smith Barney issued another report on StorMedia disclosing that it had learned from the Company that there was "[p]rogress on the dedicated Seagate Singapore plant" and again forecasting 1996 earnings per share of $3.30, 1997 earnings per share of $4.10-$4.35 and a five-year earnings per share growth rate of 25%.
51. Between April 9, 1996 and May 10, 1996, StorMedia stock soared from $16-53/64 per share to $28-1/4 per share. However, by artificially inflating StorMedia stock during March-April 1996, defendants enabled StorMedia to complete the purchase of the remaining "put option" contracts covering 300,000 shares for just $1.7 million, compared to the $4.8 million it would have had to spend -- 182% more -- if StorMedia's stock price had remained at the $25 per share (pre-split) level it was trading for in January 1996.
52. On May 22, 1996, StorMedia announced a large secondary offering via a release which stated:
StorMedia Incorporated announced the filing of a Registration Statement with the Securities and Exchange Commission for a public offering of 4,500,000 shares of Class A Common Stock (after giving effect to the three-for-two split payable on May 28, 1996). Of the 4,500,000 shares being offered, 3,000,000 shares will be offered by the company and 1,500,000 shares will be offered by certain selling stockholders. . . .
The company plans to use the net proceeds of its portion of the offering for capital expenditures, primarily to establish a substrate facility in Singapore and to further expand its manufacturing capacity in Singapore. The balance of the proceeds will be used for working capital and other general corporate purposes.
53. The statements issued between April 9, 1996 and May 10, 1996, set forth in ¶¶44-50 were each false and misleading when made as the defendants knew, based on their access to material non-public corporate data, that the true facts were: (i) StorMedia was unable to meet Maxtor's specifications and functional requirements; (ii) StorMedia had deficiencies in its production and manufacturing processes which rendered it incapable of meeting its obligations under the Purchase Agreement; and (iii) StorMedia was incapable of producing media that would support proximity recording technology, as required by its Purchase Agreement; Ex. 1, ¶59. Further, StorMedia overall was encountering much weaker than expected demand for its products, which was resulting in sales below levels previously forecasted or planned internally and necessary for StorMedia to meet the revenue and earnings per share forecasts being made by and for it.
54. During the balance of May and in early June 1996, StorMedia and its underwriters and their counsel worked feverishly to try to complete the huge secondary stock offering as soon as possible. However, in early and mid-June 1996, as the defendants were desperately attempting to complete StorMedia's huge secondary offering, StorMedia's stock fell sharply to as low as $19-1/4 per share, as rumors circulated that disk drive manufacturers, including StorMedia's customers, were encountering a sales slowdown and that suppliers of components to disk drive manufacturers like StorMedia might also encounter weakening demand for their products and StorMedia was also having problems with its Maxtor contract, which rumors StorMedia denied. On June 13, 1996, StorMedia suddenly "suspended" its stock offering, supposedly "based on market conditions." This statement was false and misleading as, in fact, the stock offering was abandoned because StorMedia's underwriters for the secondary stock offering had learned that demand for StorMedia's products had softened, that Maxtor had told StorMedia that Maxtor was going to drastically reduce the amount of product it would accept under its contract with Maxtor and was likely going to cancel its contract with StorMedia because of StorMedia's inability to provide to Maxtor products that met Maxtor's specifications, as the contract required and, as a result, StorMedia was going to suffer declining revenues and earnings in 1996.
55. On June 21, 1996, StorMedia's stock fell $6-7/8 per share from $20-1/2 to $13-5/8 per share -- a 33%, one-day decline -- on huge volume of 1.75 million shares as StorMedia admitted in a press release by the Company that Maxtor "is experiencing significant business problems" and was reducing its production volumes. According to StorMedia, its capitalization, as measured by its stock price, declined by $180 million within hours. However, defendants continued to artificially inflate StorMedia's stock by downplaying the true extent of the problems with Maxtor. For instance, in an article that appeared on the Bloomberg news service, Abely "called the speculation [in the market that Maxtor would cut back its orders to StorMedia as] 'over-exaggerated,' and denied that Maxtor is cutting back on orders from StorMedia."
"We have a contract for specific volumes with Maxtor . . . . Our expectation is they are going to honor those volumes."
Other StorMedia insiders desperately attempted to prop up StorMedia's stock by claiming that Maxtor would perform its contract with StorMedia. For instance, on June 21, 1996, the following appeared on the Dow Jones News Wire:
StorMedia Inc.'s treasurer, Henry Lo, said sales to Maxtor Corp. accounted for just under 40% of its media volume for the first quarter of 1996, under a multi-year contract begun during the quarter.
The volume accounted for about 40% of StorMedia's first-quarter revenues of $61 million, the spokesman said.
The contract with Maxtor lasts through 1999. Current volume of 2 million units under the contract ramps up to 4.5 million units in the first quarter of 1997, Lo said.
* * * "We have a contract and we're trying to work it out so they live up to the contract," Lo said.
On June 21, 1996, Reuters also reported:
StorMedia Inc. chief financial officer Steve Abely said he expects Maxtor Corp. will honor its multi-million dollar contract.
He said StorMedia shares fell today on rumors that Maxtor, a subsidiary of Hyundai Electronics of America, may not honor the contract.
"Maxtor is having problems of their own so we are working through it with them and at this point it is our expectation that they will honor the contract," Abely said.
These statements made on June 21, 1996 to the effect that the reasons for the problems with the Maxtor contract were problems Maxtor was having, that StorMedia's contract with Maxtor protected it, and that StorMedia expected Maxtor to honor its purchase obligations under the contract were all false and misleading. In truth, defendants knew that, due to the serious specification and quality problems with the products StorMedia was manufacturing, Maxtor was not only not going to honor its obligations under the contract, it was likely going to cancel the contract.
56. On June 24, 1996 (the next trading day following June 21, 1996), StorMedia revealed that its second quarter revenues and earnings would be much lower than earlier forecast by and for it, "due primarily to reduced sales volume and delayed delivery schedules with Maxtor Corporation." On June 24, 1996, StorMedia's stock again plunged, falling to as low as $9-3/4 per share on June 24, 1996 from its close of $13-5/8 on June 21, 1996 -- a decline of over 28% -- on huge volume of 3 million shares!
57. On June 28, 1996, to heed off any negative impact from the June 24 announcement, defendant Abley stated that "he expects Maxtor Corp. to honor its multi-million dollar contract." In order to deal with the problems from Maxtor's agreement, defendant Abely told Dow Jones on June 25, 1996 that while "the company's earnings woes result from a problem at Maxtor. Seagate is our other big customer, and they're doing very well." Abely also told Dow Jones that "[o]n the chance that Maxtor cannot buy the disks . . . 'we've been working on getting a couple of new customers,' including a supplier to disk-drive maker Quantum Corp. (QNTM). 'It's a pretty quick changeover' to make disks for another customer, he said."
58. On July 23, 1996, StorMedia reported that instead of the sequential revenue and profit growth it had forecast throughout 1996, its second quarter sales had fallen 6% from first quarter levels -- from $61.2 million to $57.7 million and that its second quarter earnings per share had fallen to $.42, 18% below its first quarter earnings per share of $.52. StorMedia also admitted that, due to reduced sales volumes to Maxtor, StorMedia's third quarter sales would also decline from second quarter levels -- and that sales to Maxtor would be "insignificant." Analysts again slashed the 1996 and 1997 earnings forecasts for StorMedia.(4)
59. On August 9, 1996, StorMedia revealed that Maxtor had notified it that Maxtor was "terminating the volume purchase agreement." In order to maintain its liquidity due to the cancellation of its secondary stock offering, StorMedia was forced to quickly arrange $75 million in loans and credit lines, incurring huge interest costs which will further depress StorMedia's earnings going forward. StorMedia stock now trades in the $9-1/2-$12-1/8 range, far below its Class Period high of $30 per share and the $17-$28.83 per share prices at which StorMedia's insiders unloaded over 207,000 shares, pocketing $4.8 million, and the $22.80 to $25.47 per share price StorMedia was able to use to honor the "put options" in April 1996 -- enabling StorMedia to avoid paying millions in losses.
60. StorMedia's problems with Maxtor and the Maxtor contract were due to the failure of StorMedia to perform under the contract and not any problems with Maxtor's operations or business. For instance, HMT Technology, a competitor of StorMedia, also has a large multi-year supply contract with Maxtor, which contract Maxtor is honoring and performing. Specifically, Maxtor has asserted that:
StorMedia breached the terms of the Purchase Agreement in numerous respects, including but not limited to, (i) failing to meet Maxtor's specifications and functional requirements, (ii) failing to comply with express warranties contained in the Purchase Agreement, and (iii) by providing Maxtor with defective media.
Ex. 1, ¶34.
StorMedia's Problems Continue
61. StorMedia's problems have continued. On October 15, 1996, defendants continued to disappoint the market by announcing a net loss per share of $.52 for the third quarter ended September 27, 1996, compared to earnings per share of $.42 for the second quarter, and below prior estimates of ($.09) reported by Needham & Co. as late as September 18, 1996.
62. StorMedia's fourth quarter of 1996 did not fare much better, posting earnings per share of only $.62 compared to $.45 for the year prior. A January 21, 1997 Morgan Stanley report stated that StorMedia continued to have qualification problems with "potential new customers," and "the company had no new wins to announce (qualification appeared to progress somewhat slower than the company would have liked)." In the fourth quarter of 1996, Seagate was virtually StorMedia's only customer, accounting for 95% of all revenue.
63. In March 1997, StorMedia pre-announced its first quarter 1997 results which "would be significantly lower than expected." With analysts expecting earnings per share of ($.03) - $.04, StorMedia pre-announced earnings per share loss of approximately ($.30). In addition, defendants Oxsen (StorMedia's former President and Chief Operating Officer) and Eltoukhy (Sr. Vice President and Chief Technical Officer) have resigned from the Company.
64. In early April 1997, Morgan Stanley issued a report stating that "[l]ast night, StorMedia preannounced that its CQ1:97 results would be even worse than previously expected (the company lowered its CQ1:97 outlook on 3/5/97) due to missed qualifications (design into new disk drive programs) at customers and therefore lower than expected revenue." The report stated that StorMedia expected a loss of $.52 per share for 1Q97.
65. Later in April, StorMedia announced results of a loss of $.52 for 1Q97. In fact, sales to Seagate fell 60% from the prior quarter due to missed qualifications on certain key Seagate programs. Due to qualification problems, StorMedia was only shipping at less than 50% of its capacity in 1Q97.
66. On May 12, 1997, Smith Barney issued a report stating StorMedia "has had trouble qualifying products -- and some of this was organizational (too many people involved in a qualification and control, and start up problems in Singapore)." Thus, the problems in qualifying products that StorMedia had with Maxtor have continued to plague the Company.
67. On April 16, 1996, StorMedia reported earnings per share of $.78 for the first quarter, or $.09 per share higher than the consensus forecast at April 9, 1996. Defendants utilized two adjustments to StorMedia's first quarter financial statements to artificially boost StorMedia's reported earnings per share -- its reserve for sales returns and its tax rate.
68. From December 31, 1995 to March 31, 1996, StorMedia's reserve for sales returns (primarily for defective or non-conforming product), decreased by $500,000 despite a large increase in both sales and receivables in the quarter and despite product problems StorMedia was experiencing with Maxtor. StorMedia's reported sales increased 16% in the first quarter and its gross accounts receivable increased 28%, yet StorMedia improperly and without any justification, reduced its reserve for sales returns by 33%, from $1.55 million to $1.08 million.
69. This reduction occurred as StorMedia accepted returns and charged the returns against its existing reserve and then refused to replenish the reserve when it reported its financial results. No new favorable conditions occurred to justify StorMedia's reduction to the reserve, as StorMedia was dealing with the same two major customers it had dealt with for the past year and a half (Seagate and Maxtor), and given the difficulties StorMedia was having in qualifying its products for acceptance under the new Maxtor contract, if anything, conditions had worsened and the likelihood of large product returns had increased. Further, since StorMedia accepted $500,000 in returns during the first quarter, its $1.5 million reserve was not overly conservative. The $500,000 reduction in its reserve during the first quarter boosted earnings by $.03 per share, and was unjustified and manipulative.
70. In the first quarter, StorMedia used a lower tax rate of 20%, as compared to the rate of 27% StorMedia used for each quarter of 1995. The difference in the two rates was approximately $.08 per share. The different rate was supposedly the result of a tax holiday granted by Singapore which extends until 1999, notwithstanding the fact that StorMedia's Singapore sales were also significant during 1995 and StorMedia should have realized this benefit (lower rate) in 1995 if it was legitimate, as opposed to non-legitimate.
71. During the Class Period, while StorMedia's insiders were issuing false and misleading statements about StorMedia, five of StorMedia's insiders -- certain of the Individual Defendants -- sold 207,196 shares of the StorMedia stock they owned for proceeds of over $4.8 million, to profit from the artificial inflation in StorMedia's stock price their fraud had created before the truth became known and StorMedia's stock price crashed. Notwithstanding their access to material non-public information as a result of their positions with the Company, StorMedia's insiders sold the following amounts of StorMedia shares at artificially inflated prices throughout the Class Period while in possession of material non-public information and without disclosing the same.
% Of
Date Shares Share Total Shares Share Shares
Name Sold Sold Price Proceeds Bought Price Sold
---- ---- ------ ----- -------- ------ ----- ------
Abely, S. 11/30/95 7,500 $26.67 $ 200,000
11/30/95 7,500 $26.50 198,750
11/30/95 15,000 $0.19
12/01/95 7,500 $26.33 197,500 7,500 $0.19
02/05/96 1,500 $18.50 27,750 1,500 $0.19
02/05/96 9,000 $18.33 165,000 9,000 $0.19
02/06/96 7,500 $18.00 135,000 7,500 $0.19
02/08/96 4,500 $18.00 81,000 4,500 $0.19
04/29/96 6,000 $28.50 171,000
04/29/96 1,500 $28.83 43,250
04/29/96 15,000 $28.33 425,000
05/10/96 $ 825 $6.05
------ ---------- ------
Totals: 67,500 $1,644,250 45,825 79%
Oxsen, M. 11/30/95 7,500 $26.67 $ 200,000 7,500 $0.19
11/30/95 15,000 $26.50 397,500 15,000 $0.19
02/05/96 15,000 $18.33 275,000 15,000 $0.19
02/07/96 7,500 $18.33 137,500 7,500 $0.19
02/27/96 7,500 $20.00 150,000 7,500 $0.19
03/25/96 3,750 $0.19
03/25/96 3,750 $1.78
04/22/96 15,000 $24.00 360,000
05/10/96 $ 825 $6.05
------ ---------- ------
Totals: 67,500 $1,520,000 60,825 63%
Silverman, S. 11/30/95 15,000 $26.67 $ 400,000 15,000 $0.19
11/30/95 7,500 $26.67 200,000 7,500 $0.19
02/06/96 7,500 $18.00 135,000 7,500 $0.19
02/06/96 15,000 $17.83 267,500 15,000 $0.19
04/19/96 11,250 $23.67 $ 266,250 11,250 $0.19
------ ---------- ------
Totals: 56,250 $1,268,750 56,250 63%
Eltoukhy, A. 02/23/96 6,084 $1.78
02/28/96 6,084 $22.67 $ 137,904
04/19/96 5,912 $24.00 141,876 5,912 $1.78
05/10/96 825 $18.67 $ 15,400 825 $6.05
------ ---------- ------
Totals: 12,821 $ 295,180 12,821 100%(5)
Lo, H. 04/19/96 3,125 $24.00 $ 74,988 3,125 $13.50
------ ---------- ------
Totals: 3,125 $ 74,988 3,125 100%
------ ---------- ------
GRAND TOTALS 207,196 $4,803,168
Defendant Almon had already reaped a $26.1 million paper profit when the Company went public just six months prior to the start of the Class Period, and disposed of 30,000 shares, worth nearly a million dollars, of his stock during the Class Period on May 16, 1996.
72. The insiders were subject to a lock-up agreement as part of the secondary offering in July 1995, which prohibited them from selling any shares until 90 days after the offering. Almon was subject to additional lock-up agreements signed prior to the secondary offering, which prohibited him from selling the majority of his shares until May 1996. Almon had planned to sell 295,000 shares -- or 23% of his holdings -- in the aborted June 1996 offering.
73. Immediately after the expiration of the 90-day lock-up agreement and after the November 27, 1995 announcement by StorMedia of the supply agreement with Maxtor, the other defendants began to sell their shares. On November 30, 1995 and December 1, 1995, three of the insiders (Abely, Oxsen and Silverman) exercised options to acquire 67,500 shares of StorMedia stock at an exercise price of $.19 per share and immediately sold those shares for prices ranging from $26.33 to $26.67 per share. After the release of the Company's fourth quarter results, the insiders again exercised options to acquire 75,000 shares of StorMedia stock at $.19 per share exercise price, in February 1996 and immediately sold those shares at prices of $17.83 to $28.83. After the first quarter of 1996 results were announced in April 1996, the insiders sold an additional 51,875 shares of StorMedia stock. Oxsen and Silverman had each planned to sell 12,500 shares in the aborted June 1996 offering.
74. These open market stock sales were coordinated by the Individual Defendants, who consulted and agreed upon how many shares they each would sell in order to time and control the sales so as to minimize the impact on the trading price of StorMedia's stock and thus maximize their own profits from their sales. Moreover, these defendants as a practical matter, could not sell any larger amounts of stock than they did in such a brief period of time, as significantly larger sales would have been impossible without attracting the attention of the financial or analyst community, generating negative commentary or publicity of a "bail out," which they wanted to avoid and which could have ruined their scheme by causing StorMedia's stock to collapse before they had completed their sales.
75. 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.
76. 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. Other than statements referenced in ¶¶46 and 58, none of the forward-looking statements were identified as a "forward-looking statement" when made. Nor was it stated that actual results "could differ materially from those projected." Nor did meaningful cautionary statements identifying important factors that could cause actual results to differ materially from that in the forward-looking statements accompany those forward-looking statements. Alternatively, to the extent that the statutory safe harbor does apply to any forward-looking statements pleaded in ¶¶46 and 58, the defendants are liable for those false forward-looking statements because at the time each of those forward-looking statements was made the speaker knew the forward-looking statement was false and the forward-looking statement was authorized and/or approved by an executive officer of StorMedia who knew that those statements were false when made. None of the historic or present tense statements made by defendants were assumptions underlying or relating to any plan, projection or statement of future economic performance, as they were not stated to be such assumptions underlying or relating to any projection or statement of future economic performance when made nor were any of the projections or forecasts made by defendants expressly related to or stated to be dependent on those historic or present tense statements when made. The statutory safe harbor does not apply to StorMedia's financial statements.
77. Plaintiff brings this action as a Class Action pursuant to Federal Rules of Civil Procedure 23(a) and (b)(3) on behalf of all persons who purchased the stock of StorMedia during the Class Period. Excluded from the Class are the defendants, members of their immediate families and any entity in which a defendant has an interest.
78. The members of the Class are so numerous that joinder of all members is impracticable. During the Class Period, StorMedia had more than 8.5 million shares of stock outstanding, owned by hundreds of shareholders.
79. Plaintiff's claims are typical of the claims of the Class because plaintiff and the Class Members sustained damages from defendants' wrongful conduct.
80. Plaintiff will adequately protect the interest of the Class. Plaintiff has retained counsel who are experienced and competent in class action securities litigation. Plaintiff has no interests which conflict with those of the Class.
81. A Class Action is superior to other available methods for the fair and efficient adjudication of this controversy.
82. Common questions of law and fact predominate over questions which affect only individual members. Among the questions of law and fact common to the Class are:
(a) Whether the federal securities laws were violated by defendants' acts;
(b) Whether defendants' statements during the Class Period misrepresented and/or omitted material facts;
(c) Whether defendants pursued the fraudulent scheme and course of business complained of;
(d) Whether defendants acted intentionally or recklessly;
(e) Whether the market price of StorMedia's stock was artificially inflated due to the activities complained of; and
(f) The extent and the measure of damage sustained by the Class.
83. Plaintiff incorporates by reference ¶¶1-82.
84. Each of the defendants: (a) knew or had access to the material adverse non-public information about StorMedia'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 StorMedia.
85. During the Class Period, defendants, with knowledge of or reckless disregard for the truth, disseminated or approved the false statements specified above, which were misleading in that they contained misrepresentations and failed to disclose material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading.
86. Defendants have violated §10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder 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 the 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 the purchasers of StorMedia stock during the Class Period.
87. Plaintiff and the Class have suffered damage in that, in reliance on the integrity of the market, they paid artificially inflated prices for StorMedia stock. Plaintiff and the Class would not have purchased StorMedia 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' false and misleading statements.
88. Plaintiffs incorporate by reference ¶¶1-82.
89. Defendants Almon, Oxsen, Abely, Silverman, Eltoukhy and Lo acted as controlling persons of StorMedia within the meaning of §20 of the Exchange Act. By reason of their positions as officers and/or directors of StorMedia these defendants had the power and authority, and exercised the same, to cause StorMedia to engage in the wrongful conduct complained of herein. StorMedia controlled each of the Individual Defendants and all of its employees.
90. By reason of such wrongful conduct, StorMedia and the Individual Defendants are liable pursuant to §20(a) of the Exchange Act. As a direct and proximate result of these defendants' wrongful conduct, plaintiff and the other members of the Class suffered damages in connection with their purchases of StorMedia stock during the Class Period.
91. Because the Private Securities Litigation Reform Act of 1995 ("PSLRA") §21D(c) [15 U.S.C. §78u-4] requires complaints to be pleaded in conformance with Federal Rule of Civil Procedure 11, plaintiff has alleged the foregoing based upon the investigation of his counsel, which included a review of StorMedia's SEC filings, securities analysts' reports and advisories about the Company, press releases issued by the Company, media reports about the Company, private investigations and, pursuant to Rule 11(b)(3), believes that after reasonable opportunity for discovery, substantial evidentiary support will likely exist for the allegations set forth in the Complaint.
WHEREFORE, plaintiff prays for judgment as follows:
1. Declaring this action to be a proper class action pursuant to Rules 23(a) and (b)(3) of the Federal Rules of Civil Procedure on behalf of the Class defined herein;
2. Awarding plaintiff and the members of the Class compensatory damages;
3. Awarding plaintiff and the members of the Class pre-judgment and post-judgment interest, as well as reasonable attorneys' fees, expert witness fees and other costs;
4. Awarding extraordinary, equitable and/or injunctive relief as permitted by law, equity and the federal statutory provisions sued hereunder, pursuant to Rules 64, 65; and
5. Awarding such other relief as this Court may deem just and proper.
Plaintiff demands a trial by jury.
|
DATED: June 18, 1997 |
MILBERG WEISS BERSHAD ______________________________ 600 West Broadway, Suite 1800 BERNSTEIN LIEBHARD & LIFSHITZ Attorneys for Plaintiff and |
STORMEDI\SGM05533.CPT
1. Unless otherwise noted, all per share prices have been adjusted to reflect StorMedia's 3-for-2 stock split in May 1996.
2. Eltoukhy also disposed of 56,250 shares of his stock by gift on November 30, 1995, when the market value of those shares was $1.5 million, or $26.67 per share, thus obtaining a huge tax benefit, especially since he acquired these shares for $1.80 per share.
3. The release also stated:
The statements in this news release relating to revenue growth in 1996 and contractual commitments for 1997 production capacity contain forward-looking information. The principal factors that could cause actual results to differ include the following: failure to qualify products; reductions in orders from existing customers; delays in completing the facility which is dedicated to Seagate; changes in manufacturing yields; changes in product mix; increased competition; and the risk factors set forth in the Company's Form 10-K, filed with the Securities and Exchange Commission on March 29, 1996 which are incorporated herein by reference. The Company undertakes no obligation to publicly release the result of any revisions to these forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
4. The press release also stated:
The statements in this press release may contain forward-looking information that involve risks and uncertainties that could cause actual results to differ from predicted results. The principal factors that could cause actual results to differ includes the following: failure to qualify products; reductions in orders from existing customers; changes in manufacturing yields; changes in product mix; increased competition; and the risk factors set forth in the Company's Form 10-K and Form 8-K, filed with the Securities and Exchange Commission on March 29, 1996 and July 23, 1996, respectively, which are incorporated herein by reference. The Company undertakes no obligation to publicly release the result of any revisions to these forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
5. Eltoukhy also disposed of 56,250 shares of his stock by gift on November 30, 1995, when the market value of those shares was $1.5 million, or $26.67 per share, thus obtaining a huge tax benefit, especially since he acquired these shares for $1.80 per share.