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MILBERG WEISS BERSHAD HYNES & LERACH LLP WILLIAM S. LERACH (68581) JAMES A. CAPUTO (120485) JENNIFER J. WELLS (179306) 600 West Broadway, Suite 1800 San Diego, CA 92101 Telephone: 619/231-1058 LOWEY DANNENBERG BEMPORAD & SELINGER, P.C. RICHARD BEMPORAD The Gateway One North Lexington Avenue White Plains, NY 10601 Telephone: 914/997-0500 Attorneys for Plaintiffs and the Class UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF CALIFORNIA MURRAY ALLISON and ISABEL SPERBER, ) No. 97cv0852R On Behalf of Themselves and All ) [filed May 5, 1997] Others Similarly Situated, ) CLASS ACTION ) Plaintiffs, ) COMPLAINT FOR VIOLATION OF ) THE SECURITIES EXCHANGE ACT vs. ) OF 1934 ) BROOKTREE CORPORATION, JAMES A. ) BIXBY, JERRY E. CANNING, STEWART ) KELLY, ROBERT W. ZABARONICK, DAVID ) C. GELVIN and EDWARD P. HOLTAWAY, ) ) Defendants. ) Plaintiffs Demand A ) Trial By Jury
SUMMARY OF ACTION 1. This is a class action on behalf of all persons who purchased or otherwise acquired the common stock of Brooktree Corporation ("Brooktree" or the "Company") between February 13, 1995 and February 7, 1996 (the "Class Period"), alleging violations of the Securities Exchange Act of 1934 (the "Exchange Act"). During the Class Period, defendants made a series of false and misleading statements to the investing public indicating that Brooktree's new BtV MediaStream chipset product (the "BtV chipset") was technologically superior to and more advanced than competing products, was receiving an enthusiastic reception in the marketplace was being incorporated into PC products by several manufacturers and would, as a consequence, provide strong revenue and earnings growth for the fiscal year 1996.1 The truth however, which defendants knew but did not disclose, was that Brooktree had not fully or adequately developed the software necessary to make the BtV chipset function and this failure led directly to customer rejection of the BtV chipset. Defendants also knew, but did not disclose, that customers were reluctant to purchase the two- dimensional ("2-D") version of the BtV chipset, choosing instead to wait for the three-dimensional ("3-D") version of the product which would not be released for at least a year after the announcement of the 2-D version. As a result, defendants had no reasonable basis from which to predict strong revenues and earnings resulting from BtV chipset sales. When it was belatedly disclosed that, contrary ____________________ 1 Brooktree's fiscal year begins on or around October 1 and concludes on or around September 30 in the following calendar year. Thus "fiscal year 1996" is the period from October 1, 1995 - September 30, 1996. - 1 -
to defendants' prior representations, sales of Brooktree's new BtV chipset products were very poor and that the product was a commercial failure, Brooktree's stock plummeted to the $8-$9 per share range, the same range in which the shares had been trading before defendants' scheme to inflate the stock commenced. However, before the truth was revealed, the defendants sold 32,300 shares of their Brooktree stock at artificially inflated prices, pocketing $415,458 for themselves, with four of the defendants selling between 56% and 100% of their Brooktree holdings. 2. Brooktree's primary business has been the design, development and marketing of proprietary, high-performance integrated circuits for use with graphics, imaging, communications and multimedia applications. During late 1993 and throughout 1994, Brooktree stock was a terrible performer. Brooktree's stock price collapsed to $5-3/4 in March 1994 in light of new product failures which led to very disappointing earnings. During the balance of 1994, defendants James A. Bixby, Jerry E. Canning, Stewart Kelly, David C. Gelvin, Robert W. Zabaronick and Edward P. Holtaway (collectively, the "Individual Defendants") sold none of their Brooktree stock, as it languished at low prices. 3. The value of the Individual Defendants' Brooktree stock and options to purchase stock had been greatly diminished by the earlier collapse of Brooktree's stock price in March 1994. The Individual Defendants therefore wanted to push the stock price back up to its previous performance levels so that they could sell their shares at a profit. The adverse 1993-1994 developments also put enormous pressure on Brooktree's management to develop and successfully introduce new products, to achieve earnings growth and - 2 -
to return Brooktree's stock price to its former high level and beyond. Thus, it was important to the Brooktree insiders to make it appear that the Company had been "cleaned up" and that Brooktree was being turned around into a successful enterprise. Therefore, by at least early 1995, defendants commenced a scheme to defraud the purchasers of Brooktree stock and to artificially inflate the price of Brooktree stock by making false statements, directly and indirectly, about the successful development of and prospects for its purportedly very important new multimedia product, the BtV chipset. 4. By 1994, the multimedia segment of the computer products market was fast growing and had become increasingly important. Brooktree had historically focused primarily on computer graphics and imaging products. However, during late 1993 and throughout 1994, Brooktree did not recognize its revenue goals and therefore turned its attention to multimedia products in hopes that it could capitalize on this hot new market. Brooktree realized that its future success would largely depend on the timely introduction of competitive multimedia products. Brooktree therefore made it a top priority to design and develop sophisticated multimedia products and get them to the market before their competitors, purposefully directing a significant portion of its budget toward development of these advanced multimedia products. Under this tremendous self- imposed pressure, Brooktree designed and attempted to market the BtV chipset, Brooktree's first multimedia product. 5. The BtV chipset was designed to coordinate video, graphics and audio capabilities for personal computers on a single, easy-to-install, add-in card or to be designed right onto a - 3 -
motherboard. Even though 3-D capability had become a very important feature in the multimedia market, Brooktree specifically designed the BtV chipset with only 2-D capability so that the product could be developed at a lower cost and reach the market as fast as possible. Brooktree knew that development of a 3-D version of the BtV chipset would take at least one year longer than development of the 2-D version. Brooktree's intended customers for the BtV chipset were Original Equipment Manufacturers ("OEMs"), personal computer ("PC") manufacturers and motherboard manufacturers who Brooktree hoped would incorporate the BtV chipset into their own products for sale to retail outlets or directly to final, end-user customers. 6. Brooktree first introduced the BtV chipset on October 26, 1994, stating that the product would become widely available during the second quarter of fiscal year 1995 (ended March 25, 1995). With great fanfare, Brooktree announced that the BtV chipset had already received strong expressions of interest from important PC manufacturers and that Brooktree expected its earnings to begin to show strong growth by Brooktree's fourth quarter of fiscal year 1995 (ended September 30, 1995). Brooktree then repeatedly represented throughout 1995 and the Class Period that the BtV chipset was technologically superior to and more advanced than competing products, that it was receiving an enthusiastic reception in the marketplace, that it had received several design wins (commitment by computer manufacturers to incorporate the BtV chipset into their own product), numerous orders from several OEMs and PC and motherboard manufacturers, and that the success of the - 4 -
BtV chipset was already leading, and would continue to lead, to strong revenues and earnings gains for Brooktree. 7. Yet even as they were making these statements, defendants knew, but did not disclose, that the BtV chipset did not perform as expected due chiefly to significant problems with the BtV chipset's software drivers, problems of which Brooktree had full knowledge but did not remedy or disclose before selling the product to customers. These problems, and the BtV chipset's comparatively higher cost for the functions that were available, led Brooktree's customers to reject the BtV chipset. Defendants also knew, but did not disclose, that customers were either waiting for the 3-D version of the BtV chipset or choosing instead to buy competitor's 3-D products. Notwithstanding this knowledge, defendants lied to the market, continuing to represent that the BtV chipset was being successfully incorporated into multiple PC products and was leading Brooktree to strong revenue and earnings growth. 8. As a result of these positive, but false representations, the price of Brooktree stock was substantially inflated -- "recovering" from a low of about $8 per share in January 1995 to a Class Period high of $21-3/4 per share in September 1995. Defendants took advantage of the artificial inflation their fraud had created by selling 32,300 shares of their Brooktree stock for proceeds of $415,458, with four insiders selling 56% to 100% of their holdings while a fifth insider sold 14% of his holdings. 9. When information began to enter the marketplace in late 1995 that prices for semiconductor chips were falling (thereby adversely affecting many semiconductor stocks), Brooktree attempted to offset this negative information by representing that its new]- - 5 -
released BtV chipset had gained market acceptance and had already been incorporated into an OEM computer system which was selling very well. Brooktree further represented that it was receiving substantial orders for the BtV chipset, that it expected sales of the BtV chipset to hit $28 million per quarter during fiscal year 1996 (ended September 30, 1996), and that it expected to achieve strong earnings growth in fiscal year 1996 as a result of these significant sales. 10. In early December 1995, defendants revealed that a possible "Pause" in the growth of sales of the BtV chipset could occur because a major customer was going to slow purchases temporarily. However, defendants downplayed this information by continuing to make positive, but false representations about the BtV chipset and Brooktree's future earnings prospects, including representations that "[m]ore than a dozen PC system and add-in card vendors have adopted BtV into their planned multimedia products." As a result, Brooktree's stock continued to trade at artificially inflated levels during the balance of the Class Period. 11. On February 7, 1996, Brooktree finally revealed to analysts that the BtV chipset product was a failure and had been ordered by and sold in material quantities to only one customer who had informed Brooktree that it would not be placing more orders. Brooktree further revealed that it had made almost no BtV chipset sales to any other customer and that it was not going to obtain any significant revenue from the BtV chipset product line until it was redesigned some time in the future to provide, among other things, more functional 3-D capability at a lower price. Robertson Stephens and Smith Barney immediately downgraded Brooktree stock, - 6 -
and, as a result of these belated disclosures, Brooktree's stock fell to as low as $8-1/2 per share by March 1996, the level where it had traded before defendants began their scheme and course of business to inflate Brooktree's stock price artificially. 12. It was also subsequently disclosed that, by March 23, 1996 (halfway through fiscal year 1996), Brooktree had sold only $6.7 million in BtV chipset products, in sharp contrast to defendants' prior representations that Brooktree would be selling $28 million of BtV chipset products per quarter during fiscal year 1996. As a result, Brooktree had very poor earnings per share of just $.02 for the quarter ended March 23, 1996 (excluding a $.17 per share gain from a sale of an investment). In reporting these disappointing results, Brooktree disclosed that sales of its multimedia products had been below expectations and that revenue would not increase during the remainder of fiscal year 1996 (ending September 30, 1996) absent increased market acceptance of Brooktree's multimedia products, but that Brooktree did not expect such an increase. Brooktree also disclosed that its gross margins had decreased and that it expected further decreases in its gross margins as a result of lower than expected selling prices. 13. Brooktree's downward spiral continued into the third quarter of fiscal year 1996 (ended June 29, 1996) when it wrote down approximately $8.4 million in multimedia inventory, reportedly resulting from excess multimedia product beyond estimated sales and a further decline in multimedia products' selling prices. This writedown forced Brooktree to report a loss of $.29 per share (which included a $.16 per share gain on the sale of an investment). When it was announced on July 1, 1996 that Rockwell - 7 -
International Corporation ("Rockwell") had agreed to acquire Brooktree, the price per share to be paid was only $15 per share, much less than the $21-3/4 Brooktree had traded at during the Class Period. Rockwell's shares fell $.75 on the news that it would be acquiring this troubled company. The acquisition of Brooktree was ultimately completed on September 25, 1996, just days before the end of Brooktree's fiscal year 1996, therefore obviating Brooktree's requirement to report its year-end financial results. 14. Each of the positive statements detailed herein about the BtV chipset's development and earnings prospects was materially false and misleading when made. The true facts, known only to defendants from their access to internal corporate information, were: (a) The BtV chipset did not perform properly because, among other problems, the software drivers Brooktree created for the chipset were either not available or were faulty and thus the BtV chipset was not widely compatible with various computer configurations and only a few of the chipset's features could be fully or properly utilized. Instead of taking the time to fix these problems, Brooktree spent its efforts adding new features to the chipset while attempting to market each new release with similarly defective software and dysfunctional features; (b) Brooktree's Multimedia Division lacked the infrastructure to design software adequately and thus in designing the BtV chipset, Brooktree concentrated on designing the hardware while ignoring the software, thus resulting in the ultimately faulty product; - 8 -
(c) Because of conflicting development philosophies and tensions among personnel, Brooktree was unable to coordinate its Multimedia Marketing Division and its software development group to address, let alone correct the software problems limiting the BtV chipset's compatibility with computer operating systems and use with certain applications, ultimately adversely affecting its customer acceptance; (d) The BtV chipset could not readily or easily be installed (or "uninstalled") by OEMs and motherboard manufacturers into their computer systems as they had expected, and could only be installed with significant, detailed help from Brooktree's inadequate customer and technical support staff, further driving customers away; (e) In developing the BtV chipset, Brooktree ignored its stated policy and plan of systematically planning out the features to be included in a new product, outlining them on a Marketing Requirement Document, holding organizational meetings (including pre-release and release meetings), and only then proceeding with design of the new product, providing detailed release notes on the design and changes in such product. Instead, the Company rushed to get new releases of the BtV chipset to market as fast as possible, constantly changing the requirements, demanding that its engineers add new features to the product within a short turnaround time and not allowing for sufficient testing and debugging of supporting software which was provided to Brooktree's customers; (f) Brooktree did not sufficiently test the BtV chipset and Brooktree's schedule for releasing the chipset was known to be too aggressive and did not allow sufficient time for availability - 9 -
of all necessary pre-release review or adequate testing. In fact, the National Software Testing Labs ("NSTL") had even commented on how extremely aggressive Brooktree's release schedule was for its BtV chipset; (g) In its rush to get the BtV chipset to market and to do so at the lowest cost possible, Brooktree designed the product with only 2-D capabilities, even though 3-D capabilities were rapidly becoming very important in the multimedia market. In fact, many potential customers had stated that they would likely not purchase the BtV chipset until it had 3-D capability, which would not occur for at least a year, or that they would purchase one of Brooktree's competitor's products which already had 3-D capability; (h) In spite of the fact that Brooktree employees had specifically pointed out to management that the BtV chipset did not work properly, chiefly due to problems with the software drivers, rather than fixing these problems before the product's release, Brooktree chose instead to fire or demote employees who brought these problems to Brooktree management, thereby controlling the spread of product criticism; (i) Brooktree had received and tracked numerous complaints from customers about the BtV chipset's faulty features and how difficult it was to install. Brooktree was well aware that it could not cheaply address or remedy these problems and that announced design wins would not actually result in significant orders because of these problems, or at most, would result in significantly delayed revenue from delayed product releases; (j) Although customer interest in the BtV chipset was initially positive, resulting in several design wins, upon actually - 10 -
testing the product, customers discovered that it did not work, significantly decreasing their interest in actually purchasing the BtV chipset. Brooktree thus had no basis to represent that this product would drive future earnings growth for Brooktree as it was highly unlikely that Brooktree would ever sell any significant quantity of BtV chipsets; (k) Brooktree was not making any significant progress toward making volume shipments of the BtV chipset in the fourth quarter of fiscal year 1995 because the product was not fully functional, was not supported by necessary software, was too expensive for the functions it did provide, and did not have 3-D capabilities; (l) It was not true that a number of PC or add-on board manufacturers had decided to use the BtV chipset as, in fact, only one customer, IPC, had ever indicated a willingness to use the product in volume. IPC initially refused to pay for and then to reorder the BtV chipset due to its poor quality and performance. Thus Brooktree was not signing up numerous customers or expecting to begin shipping the BtV chipset in volume to several PC and board makers in the fourth quarter of 1995; (m) The few orders Brooktree had received for the BtV chipset from companies other than IPC were extremely small, were chiefly from little-known, second-tier computer companies, were mostly provisional, and consequentially would not result in any major revenue or volume production of the product and thus Brooktree's statements that six other companies had given Brooktree orders for the BtV chipset were misleading; - 11 -
(n) Given the poor quality of the BtV chipset, its lack of 3-D capability, numerous customer complaints and customer resistance to the product, Brooktree had no reasonable basis to state that Brooktree expected the BtV chipset product to propel the Company's growth; (o) Because the BtV chipset's software drivers were dysfunctional and not fully developed, the chipsets could not be shipped, and because customers had chosen 3-D products over the BtV chipset's 2-D functionality, Brooktree's inventory markedly increased, ultimately necessitating an $8.4 million writedown of multimedia inventory in the third quarter of fiscal year 1996; (p) There was no basis in fact for projections and forecasts that sales of the BtV chipset would generate $50-$80 million in revenues during fiscal year 1996, or would expand to and approach $28 million per quarter during fiscal year 1996 leading to total Brooktree revenues of $190+ million in fiscal year 1996, as those forecasts were contradicted by the adverse facts set forth above and thus were false when made; and (q) Brooktree's forecasts of increased earnings growth due to substantial sales of the BtV chipset in fiscal year 1996 to $.85-$1.20 per share and $1.30-$1.40 per share for fiscal year 1997 were known by defendants to be false when made, as they were contradicted by the adverse facts set forth above. 15. Brooktree's earnings during fiscal years 1994, 1995 and 1996, until it was acquired by Rockwell on September 25, 1996, are set forth below: - 12 -
Quarterly Results2 (in thousands) Fiscal 1994 Quarters Fiscal 12/25/93 3/26/94 6/25/94 9/24/94 1994 -------- ------- ------- ------- ----- Revenues $ 27,699 $ 24,924 $ 27,574 $ 28,767 $108,964 Operating Income 2,292 -3,695 280 -569 -1,692 Net Income as reported 1,636 -1,506 1,179 718 2,027 Less Pairgain Tech Gain on Sale 0 -658 -766 -863 -2,297 Net Income w/o Pairgain Gain 1,636 -2,174 413 -145 -270 EPS as reported $.10 -$.09 $.07 $.04 $.12 Less Pairgain Gain $.00 -$.04 -$.05 -$.05 -$.14 EPS w/o Pairgain Gain $.10 -$.13 $.02 -$.01 -$.02 Fiscal 1995 Quarters Fiscal 12/24/94 3/25/95 6/24/95 9/30/95 1995 -------- ------- ------- ------- ----- Revenues $ 31,624 $ 31,372 $ 32,213 $ 42,453 $137,662 Operating Income 1,203 2,254 1,318 3,399 8,174 Net Income as reported 2,069 3,250 2,970 4,255 12,544 Less Pairgain Tech Gain on Sale -1,041 -3,455 -1,802 -1,825 -8,134 Net Income w/o Pairgain Gain 1,028 -215 1,168 2,429 4,410 EPS as reported $.13 $.18 $.16 $.22 $.69 Less Pairgain Gain -$.07 -$.19 -$.10 -$.10 -$.46 EPS w/o Pairgain Gain $.06 -$.01 $.06 $.12 $.23 Fiscal 1996 Quarters Fiscal 12/30/95 3/23/96 6/29/96 9/30/96 1996 -------- ------- ------- ------- ----- Revenues $ 38,232 $ 35,563 $ 30,701 Operating Income 3,648 301 -11,250 Net Income as reported 4,401 3,245 -4,869 Acquired by Rockwell Less Pairgain Tech Gain on Sale -1,816 -2,986 -2,617 Net Income w/o Pairgain Gain 2,585 259 -7,486 EPS as reported $.25 $.19 -$.29 Less Pairgain Gain -$.10 -$.17 -$.16 EPS w/o Pairgain Gain $.15 $.02 -$.45 16. The charts below show Brooktree's stock price from January 1993 through April 23, 1996, the increase in Brooktree's stock price while defendants were issuing false and misleading statements, defendants' stock sales at inflated prices and Brooktree stock's collapse as the true facts became known, and ____________________ 2 During fiscal years 1994-1996, Brooktree sold its shares of Pairgain Technology stock, generating nonrecurring income. - 13 -
Brooktree's stock price action compared to the NASDAQ Composite Index during January 3, 1995 through April 26, 1996, which evidences the action of Brooktree's stock price was due largely to company-specific events and misstatements and not general market forces: Brooktree Corp. January 4, 1993 - April 23, 1996 Daily Stock Prices
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Brooktree Corp. December 30, 1994 - April 23, 1996 Daily Stock Prices
Brooktree Corp. vs. NASDAQ Composite Index January 3, 1995 - April 26, 1996
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JURISDICTION AND VENUE 17. Jurisdiction exists pursuant to §27 of the 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. 18. Venue is proper in this District pursuant to §27 of the Exchange Act and 28 U.S.C. §1391(b). Many of the acts giving rise to the violations complained of occurred in this District. 19. Defendants used the instrumentalities of interstate commerce, the U.S. mails and the facilities of the national securities markets. THE PARTIES 20. Plaintiff Murray Allison purchased 500 shares of Brooktree stock on October 5, 1995 at $17 per share, 500 shares on October 11, 1995 at $15-1/8, 1,000 shares on October 30, 1995 at $11-1/8 per share, 1,000 shares on December 6, 1995 at $11-1/4 per share and 2,000 shares on January 16, 1996 at $9-1/8 per share and was damaged thereby. 21. Plaintiff Isabel Sperber purchased 700 shares of Brooktree stock for her IRA on November 16, 1995 at $14-1/2 per share and was damaged thereby. 22. During the Class Period, defendant Brooktree was headquartered in San Diego, California, with its chief business offices located at 9868 Scranton Road, San Diego, CA 92121. Brooktree's primary business has been the design, development and marketing of high-performance integrated circuits for use with computer graphics, imaging, communications and multimedia applications. During the Class Period, Brooktree stock traded in - 16 -
an efficient market on the NASDAQ National Market System. On September 25, 1996, Brooktree was acquired by Rockwell and is now a wholly owned subsidiary operating as a division of Rockwell Semiconductor Systems. Brooktree continues to maintain its offices in San Diego, California. 23. (a) Defendant James A. Bixby ("Bixby") was at all relevant times President and Chief Executive Officer of Brooktree and a member of its Board. Because of defendant Bixby's position with Brooktree, he knew adverse nonpublic information about its business, finances, products, markets and present and future business prospects via access to internal corporate documents (including Brooktree'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, particularly the weekly management operations review meeting, and Board of Directors' meetings and committees thereof and via reports and other information provided to him in connection therewith. Bixby knew or had reasonable grounds to believe that the statements particularized herein were false or misleading when made and would affect trading in Brooktree securities and would create a false and misleading appearance with respect to the market for Brooktree securities before the truth about Brooktree's products and financial condition was publicly revealed. Furthermore, Bixby was the author of a letter to Brooktree's shareholders, included in the fiscal year 1995 Annual Report, which highlighted positive, but false representations about the BtV chipset product, as set forth more fully in ¶87. Bixby also had first-hand knowledge that the BtV chipset could not be - 17 -
readily or easily installed by customers, as he himself had difficulty installing the product and pointed out these problems to the Company's Multimedia Division as set forth in ¶74. During the Class Period, defendant Bixby also owned options to purchase 475,583 shares of Brooktree stock at low prices per share. Defendant Bixby therefore stood to make huge profits on these options if Brooktree's stock could be artificially inflated to high levels and an acquisition based on that high price arranged, as Brooktree's stock option plan provided that all options would vest and become immediately exercisable upon a "change of control, i.e., a merger or an acquisition. In fact, when Rockwell acquired Brooktree on September 25, 1996, Bixby exercised options to acquire 425,583 shares at prices between $6.75 and $9 per share, immediately selling them to Rockwell as part of the acquisition for $15 per share for proceeds of more than $6.3 million. Had defendants not been forced to disclose the commercial failure of the BtV chipset and the other adverse facts set forth above, Bixby would have realized substantially higher profits in this acquisition. (b) Defendant Jerry E. Canning ("Canning") was at all relevant times, controller and Treasurer of Brooktree. Because of defendant Canning's position with Brooktree, he knew adverse nonpublic information about its business, finances, products, markets and present and future business prospects via access to internal corporate documents (including Brooktree'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 - 18 -
meetings, particularly the weekly management operations review meeting, and via reports and other information provided to him in connection therewith. Canning knew or had reasonable grounds to believe that the statements particularized herein were false or misleading when made and would affect trading in Brooktree securities and would create a false and misleading appearance with respect to the market for Brooktree securities before the truth about Brooktree's products and financial condition was publicly revealed. Furthermore, Canning signed Brooktree's reports on Form 10-Q for the quarters ended March 25, 1995, June 24, 1995, and December 30, 1995. As an integral part of defendants' fraudulent scheme, Canning sold 2,200 shares of Brooktree stock during the Class Period at artificially inflated prices as high as $20.25 per share, based on inside information, pocketing $41,328 for himself Of the 2,200 shares sold by Canning, 1,131 of those shares were obtained by exercising options to purchase those shares at $6.88 or $7.12 per share. Canning sold those shares immediately upon exercise for $19.00-$20.25 per share. Canning sold 82% of his Brooktree holdings during the Class Period. Additionally, during the class Period, defendant Canning also owned options to purchase 24,457 shares of Brooktree stock at low prices per share. Defendant Canning therefore stood to make huge profits on these options if Brooktree's stock could be artificially inflated to high levels and an acquisition based on that high price arranged, a Brooktree's stock option plan provided that all options would vest and become immediately exercisable upon a "change of control," i.e., a merger or an acquisition. In fact, when Rockwell acquired Brooktree on September 25, 1996, Canning exercised options to - 19 -
acquire 23,679 shares at prices between $6.75 and $6.88 per share, immediately selling them to Rockwell as part of the acquisition for $15 per share for proceeds of $355,185. Had defendants not been forced to disclose the commercial failure of the BtV chipset and the other adverse facts set forth above, Canning would have realized substantially higher profits in this acquisition. (c) Defendant David C. Gelvin ("Gelvin") was at all relevant times Vice President, Multimedia Strategic Business Unit (the "Multimedia Division") of Brooktree. Because of Gelvin's position with Brooktree, he knew adverse nonpublic information about its business, finances, products, markets and present and future business prospects via access to internal corporate documents (including Brooktree'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, particularly the weekly management operations review meeting, and via reports and other information provided to him in connection therewith. Gelvin knew or had reasonable grounds to believe that the statements particularized herein were false or misleading when made and would affect trading in Brooktree securities and would create a false and misleading appearance with respect to the market for Brooktree securities before the truth about Brooktree's products and financial condition was publicly revealed. As an integral part of the fraudulent scheme, Gelvin sold 2,000 shares of Brooktree stock during the Class Period at artificially inflated prices of $16.38 per share based on inside information, pocketing $32,760. Gelvin acquired those 2,000 shares by exercising options to purchase those - 20 -
shares at $6 per share, selling the shares immediately upon exercise for $16.38 per share. Gelvin sold 14% of his Brooktree holdings during the Class Period. Gelvin, as the head of the Multimedia Division, was aware of the problems with the BtV chipset and its software. Although aware of these problems, Gelvin himself was an engineer whose experience and training were in the area of hardware, not marketing or software development. Gelvin therefore delegated the task of fixing the known BtV chipset software problems to others in his department who similarly lacked the expertise and talent to address these problems fully and properly. Gelvin also attempted to keep known software problems quiet because, as head of the Multimedia Division, he did not want to appear incompetent in front of his colleagues and superiors at Brooktree who had invested significant resources and energies in the Multimedia Division. Gelvin therefore was fully aware that Brooktree was releasing a product that did not work as planned publicly represented. Additionally, during the class Period, defendant Gelvin also owned options to purchase 98,166 shares of Brooktree stock at low prices per share. Defendant Gelvin therefore stood to make huge profits on these options if Brooktree's stock could be artificially inflated to high levels and an acquisition based on that high price arranged, as Brooktree's stock option plan provided that all options would vest and become immediately exercisable upon a "change of control," i.e., a merger or an acquisition. In fact, when Rockwell acquired Brooktree on September 25, 1996, Gelvin exercised options to acquire 44,705 shares at prices between $6 and $12.13 per share, immediately selling them to Rockwell as part of the acquisition for $15 per - 21 -
share for proceeds of $670,575. Had defendants not been forced to disclose the commercial failure of the BtV chipset and the other adverse facts set forth above, Gelvin would have realized substantially higher profits in this acquisition. (d) Defendant Edward P. Holtaway ("Holtaway") was at all relevant times Vice President of Corporate Quality of Brooktree. Because of defendant Holtaway's position with Brooktree, he knew adverse nonpublic information about its business, finances, products, markets and present and future business prospects via access to internal corporate documents (including Brooktree'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, particularly the weekly management operations review meeting, and via reports and other information provided to him in connection therewith. Holtaway knew or had reasonable grounds to believe that the statements particularized herein were false or misleading when made and would affect trading in Brooktree securities and would create a false and misleading appearance with respect to the market for Brooktree securities before the truth about Brooktree's products and financial condition was publicly revealed. As an integral part of the fraudulent scheme, Holtaway sold 1,100 shares of Brooktree stock during the Class Period at artificially inflated prices of $17.50 per share based on inside information, pocketing $19,250. These sales during the Class Period constituted 56% of Holtaway's Brooktree holdings. Additionally, during the class Period, defendant Holtaway also owned options to purchase 83,058 shares of Brooktree stock at low - 22 -
prices per share. Defendant Holtaway therefore stood to make huge profits on these options if Brooktree's stock could be artificially inflated to high levels and an acquisition based on that high price arranged, as Brooktree's stock option plan provided that all options would vest and become immediately exercisable upon a "change of control," i.e., a merger or an acquisition. In fact, when Rockwell acquired Brooktree on September 25, 1996, Holtaway exercised options to acquire 63,001 shares at prices between $6 and $12.13 per share, immediately selling them to Rockwell as part of the acquisition for $15 per share for proceeds of $945,015. Had defendants not been forced to disclose the commercial failure of the BtV chipset and the other adverse facts set forth above, Holtaway would have realized substantially higher profits in this acquisition. (e) Defendant Stewart Kelly ("Kelly") was at all relevant times Vice President of the Communications Strategies Business Unit of Brooktree. Because of Kelly's position with Brooktree, he knew adverse nonpublic information about its business, finances, products, markets and present and future business prospects via access to internal corporate documents (including Brooktree'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, particularly the weekly management operations review meeting, and via reports and other information provided to him in connection therewith. Kelly knew or had reasonable grounds to believe that the statements particularized herein were false or misleading when made and would affect trading - 23 -
in Brooktree securities and would create a false and misleading appearance with respect to the market for Brooktree securities before the truth about Brooktree's products and financial condition was publicly revealed. As an integral part of the fraudulent scheme, Kelly sold 12,000 shares of Brooktree stock during the Class Period at artificially inflated prices as high as $13.13 per share based on inside information, pocketing $142,410. These sales constituted 100% of Kelly's holdings in Brooktree. Additionally, during the Class Period, defendant Kelly also owned options to purchase 80,480 shares of Brooktree stock at low prices per share. Defendant Kelly therefore stood to make huge profits on these options if Brooktree's stock could be artificially inflated to high levels and an acquisition based on that high price arranged, as Brooktree's stock option plan provided that all options would vest and become immediately exercisable upon a "change of control," i.e., a merger or an acquisition. In fact, when Rockwell acquired Brooktree on September 25, 1996, Kelly exercised options to acquire 21,793 shares at prices between $6.75 and $12-13 per share, immediately selling them to Rockwell as part of the acquisition for $15 per share for profits of $326,895. Had defendants not been forced to disclose the commercial failure of the BtV chipset and the other adverse facts set forth above, Kelly would have realized substantially higher profits in this acquisition. (f) Defendant Robert W. Zabaronick ("Zabaronick") was at all relevant times Senior Vice President of Human Resources of Brooktree. Because of defendant Zabaronick's position with Brooktree, he knew adverse nonpublic information about its business, finances, products, markets and present and future - 24 -
business prospects via access to internal corporate documents (including Brooktree'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, particularly the weekly management operations review meeting, and via reports and other information provided to him in connection therewith. Zabaronick knew or had reasonable grounds to believe that the statements particularized herein were false or misleading when made and would affect trading in Brooktree securities and would create a false and misleading appearance with respect to the market for Brooktree securities before the truth about Brooktree's products and financial condition was revealed to the public. As an integral part of the fraudulent scheme, Zabaronick sold or otherwise disposed of 15,000 shares of Brooktree stock during the Class Period at artificially inflated prices as high as $12.15 per share based on inside information pocketing $179,710. These sales constituted 82% of Zabaronick's holdings in Brooktree. Additionally, during the Class Period, defendant Zabaronick also owned options to purchase 125,500 shares of Brooktree stock at low prices per share. Defendant Zabaronick therefore stood to make huge profits on these options if Brooktree's stock could be artificially inflated to high levels and an acquisition based on that high price arranged, as Brooktree's stock option plan provided that all options would vest and become immediately exercisable upon a "change of control," i.e., a merger or an acquisition. In fact, when Rockwell acquired Brooktree on September 25, 1996, Zabaronick exercised options to acquire 101,500 shares at prices between $6 and $12.13 each, immediately selling - 25 -
them to Rockwell as part of the acquisition for $15 per share for profits of $1.5 million. Had defendants not been forced to disclose the commercial failure of the BtV chipset and the other adverse facts set forth above, Zabaronick would have realized substantially higher profits in this acquisition. (g) The individuals named as defendants in ¶23(a)-(f) are referred to as the "Individual Defendants." The Individual Defendants were aware of and approved the false and misleading statements issued by or on behalf of Brooktree during the Class Period. 24. Defendants Bixby and Canning, by reason of their day-to- day management and respective positions as President and Controller and Treasurer of the Company, and Bixby's further role as a board member and holder of a significant amount of stock, were controlling persons of Brooktree and had the power and influence, and exercised the same, to cause Brooktree to engage in the conduct complained of herein. Brooktree controlled each of the Individual Defendants. 25. During the Class Period, each Individual Defendant occupied a position which made him privy to nonpublic information concerning Brooktree as thoroughly detailed at ¶23(a)-(f). Because of this access, each of these defendants actually knew the adverse facts specified herein and that they were being concealed. Notwithstanding their duty to refrain from selling Brooktree stock while in possession of material, nonpublic information concerning Brooktree, all defendants, except Bixby, sold 32,300 shares of the Company's stock, pocketing $415,458 and thus profiting from their scheme. Brooktree's press releases, corporate reports to - 26 -
shareholders and filings with the SEC were each group-published documents for which each defendant is equally responsible. 26. Each of the defendants is liable for making false and misleading statements, and for willfully participating in a scheme and fraudulent course of business that defrauded and damaged Class members in violation of the federal securities laws. All of the defendants pursued a common goal, i.e., inflating the price of Brooktree stock by making false or misleading statements and concealing material adverse information. The scheme and course of business was designed to and did: (i) deceive the investing public, including plaintiffs and other Class members regarding the success of and prospects for the BtV chipset, Brooktree's asserted competitive advantages in the multimedia market, the quality of Brooktree's management, and the strength of and future business prospects for Brooktree; (ii) artificially inflate the price of Brooktree stock during the Class Period; (iii) cause plaintiffs and other members of the Class to purchase Brooktree stock at inflated prices; and (iv) increase the value of defendants' Brooktree shareholdings and permit them to sell off their holdings at artificially inflated levels, thereby profiting from their scheme. DEFENDANTS' MOTIVE AND OPPORTUNITY TO COMMIT SECURITIES FRAUD 27. Each defendant had the opportunity to commit and participate in the securities fraud described herein. As the top officers and/or directors of Brooktree, they controlled the dissemination of, and could thereby falsify, information about Brooktree's business and finances which reached the investing public and affected the price of Brooktree stock. Such control was - 27 -
manifest in the content of Brooktree's press releases, corporate requests, SEC filings, and its communication with securities analysts, all of which were created, reviewed or approved by the Individual Defendants. Also, their insider corporate positions gave them knowledge about Brooktree's business that was not public -- creating further opportunities to make false public statements, artificially inflate Brooktree's stock price and take advantage of their nonpublic information by trading in Brooktree stock. Defendants' motive for engaging in this scheme, including inflating the price of Brooktree's stock, was to: (i) justify their channeling of substantial resources and energies into the BtV chipset project and the Multimedia Division in general, which came at the cost of lost jobs and opportunities to Brooktree's other business units; (ii) protect and enhance their executive positions and the substantial compensation and prestige they obtained thereby; (iii) try to conceal the results of their mismanagement of the BtV chipset project and the Company generally; and (iv) enhance the value of their holdings of Brooktree stock and options to purchase Brooktree stock so that the insiders could sell large amounts of their Brooktree stock at inflated prices. 28. Defendants also had a further motive to artificially inflate the price of Brooktree stock. The defendants knew that Brooktree's operations were troubled and that its efforts to develop new products were so unsuccessful that it was extremely unlikely that Brooktree could survive as an independent business entity. Thus, defendants hoped to bring about a sale of Brooktree to another larger company and to do so in a manner by which they could personally profit to the tune of millions of dollars. - 28 -
Defendants hoped to accomplish this by artificially inflating Brooktree's stock price to as high a price as possible in advance of any such merger or acquisition so that such merger or acquisition would be based upon Brooktree's higher stock trading price which would, in turn, translate immediately into large profits for them based on their Brooktree stock ownership and, more importantly, their options to purchase Brooktree stock at low prices, which options, under the terms of Brooktree's stock option plans, would immediately vest and become exercisable upon any such "change of control" (i.e., merger or acquisition). Unfortunately for defendants, the problems with Brooktree's business and new product development efforts were so serious that they could not be concealed for a long-enough period of time to permit defendants to bring about an acquisition of Brooktree at a high price. Rather, in February 1996, when the truth about Brooktree's troubled business, including its failed new product development efforts, became public, its stock price collapsed. Because its competitive position was so impaired, Brooktree could not survive as an independent business entity, and the defendants were forced to sell Brooktree to Rockwell at a much lower price per share than they had hoped (only $15 per share when Brooktree stock had traded at as high as $21-3/4 during the Class Period) but nevertheless at a price which permitted the individual Defendants to still reap significant profits on their Brooktree stock options. 29. In making the false and misleading statements as detailed herein, and in selling substantial amounts of Brooktree stock and exercising options for substantial profits while Brooktree's stock - 29 -
traded at artificially inflated levels caused by defendants' fraud, defendants engaged in conscious misbehavior. STATUTORY SAFE HARBOR AND ABSENCE OF CAUTIONARY LANGUAGE 30. The statutory safe harbor provided for forward-looking statements under certain circumstances does not apply to any of the false statements pleaded in this complaint. None of the statements pleaded in ¶¶59, 62, 68, 69, 71, 75, 78, 79 and 84 were identified as "forward-looking statements" when made. Nor was it stated that actual results" could differ materially from those projected." Nor were the statements accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from the statements made. Alternatively, to the extent that the statutory safe harbor does apply to any statements pleaded herein, because of their positions and access to inside information, defendants are liable for those statements because at the time each of those statements was made, the speaker knew the statement was false and the statement was authorized or approved by an executive officer of Brooktree who knew that those statements were false when made. BROOKTREE'S GUIDANCE TO SECURITIES ANALYSTS AND USE OF THEM AS A CONDUIT TO TRANSMIT FALSE INFORMATION TO THE SECURITIES MARKETS AND BROOKTREE'S ADOPTION OF ANALYSTS' REPORTS AS ITS OWN 31. Analysts employed by securities firms prepare written reports and make recommendations from time to time about public companies such as Brooktree. Brooktree is followed by securities analysts employed by investment banking firms and brokerage houses which issue reports and make recommendations concerning Brooktree's common stock to their clients. - 30 -
32. In writing their reports about Brooktree, these analysts relied in substantial part upon information, statements and reports provided publicly by Brooktree, information provided to them privately by Brooktree, and assurances by Brooktree that information in the analysts' reports was not at material variance from the Company's internal knowledge of its operations, and prospects. 33. Brooktree's stock price was sensitive to the Company's and analysts' statements regarding the Company's profits. Brooktree used its communications to analysts to ensure them -- and through them, the investing public -- that demand for Brooktree's products was strong and growing, that its forecasting procedures were adequate, and that the Company was on track to achieve strong earnings per share growth after such earnings had languished in previous years. 34. As part of defendants' scheme and course of business which operated as a fraud and deceit on the purchasers of Brooktree stock during the Class Period, Brooktree and defendants Bixby, Canning, and Gelvin communicated regularly with securities analysts, including those at the firms whose reports have been identified herein (¶¶61, 65, 71, 75), to discuss, among other things, operating results and anticipated revenues, and to provide detailed "guidance" and direction to these analysts with respect to the Company's business and projected revenues and earnings. These communications included, but were not limited to, conference calls during the Class Period, a number of analysts meetings and briefings, and interviews with Bixby where many aspects of the Company's operations and financial prospects were discussed. - 31 -
Brooktree knew that by participating in these regular, periodic communications with analysts, the Company could and would disseminate false information to the investment community and investors would rely and act upon such information (i.e., make purchases and sales of the Company's securities). Brooktree had those communications with analysts to cause or encourage them to issue favorable reports on Brooktree and used these communications to present falsely the successful prospects of Brooktree to the marketplace and to inflate artificially the market price of Brooktree stock, thereby inducing Brooktree stock sales. 35. Brooktree directly and indirectly caused these analysts to issue false and misleading reports that contained false and misleading information about the Company and its prospects. In addition to the false statements made directly to the investing public, Brooktree also misled investors indirectly by using securities analysts to disseminate incomplete and false information. 36. Brooktree thus used the analysts as conduits of misinformation, causing the securities analysts to mislead investors with false statements that Brooktree and its executives intentionally or recklessly induced the analysts to make. Acting through or by the means of securities analysts, these defendants thus were able to directly and indirectly manipulate the price of Brooktree Stock and to deceive investors. 37. The information about Brooktree contained in the various securities analysts' reports, quoted herein, was obtained from, or based on information obtained from Brooktree, as discussed herein. Defendants knew of these reports and their contents and knew that - 32 -
they were based on information Brooktree provided. Defendants further knew the reports would be issued to members of the investing public, be circulated throughout the investment community, and would affect the trading price of Brooktree common stock. Brooktree endorsed these reports, adopted them as its own, and placed its imprimatur on them as well as the projections, forecasts and statements contained therein by reproducing certain of the reports or parts thereof, and publicly circulating them to existing Brooktree stockholders, prospective purchasers of Brooktree stock, members of the financial press and others who requested information from Brooktree about its stock. Despite its duty to do so, Brooktree failed to correct these statements during the Class Period. BROOKTREE'S INTERNAL FORECASTS, PLANS AND PROJECTIONS 38. A key management tool for Brooktree's top executives was Brooktree's annual budget or forecast, by which the Company's Board, after input from top executives, set performance goals and then closely monitored the Company's actual performance, compared to those budgeted and/or forecasted. Brooktree prepared its fiscal year 1996 forecast and budget by mid-1995 and then updated it thereafter. Brooktree's fiscal year 1996 budget and forecast called for substantial revenue growth and was very dependent upon Brooktree obtaining large increases of revenue from sales of its BtV chipset product family. Each of the Individual Defendants was aware of Brooktree's fiscal year 1996 forecast and budget and of internal reports comparing Brooktree's actual results to those budgeted and forecasted. Based on the negative internal reports of - 33 -
the Company's actual performance compared to that budgeted and forecasted, the Individual Defendants each knew Brooktree's business was not performing as well as publicly represented and that Brooktree was encountering very poor sales of its BtV chipset products due to Brooktree's inability to resolve design problems and to timely develop appropriate and necessary software, meaning that Brooktree could not possibly achieve the revenue and earnings per share growth in fiscal year 1996 forecast by and for it. Thus, defendants each knew or recklessly disregarded that the statements issued during the Class Period were false and misleading when made. FACTUAL BACKGROUND TO DEFENDANTS' CLASS PERIOD CONDUCT 39. Historically, Brooktree's primary business focus had been the development and marketing of proprietary high-performance integrated circuits for use with computer graphics and imaging. Brooktree's ostensible business plan for fiscal year 1993 called for a diversified product mix to increase revenue from its communications and multimedia business units. However, during late 1993 and throughout 1994, Brooktree did not realize its revenue goals, absent certain nonrecurring income, and its stock was a terrible performer. Brooktree's stock collapsed from over $18 per share in September 1993 to $5-3/4 in March 1994, when Brooktree reported new product failures leading to very disappointing earnings. At the same time, the market for RAMDACs (random access memory digital to analog converter chips) was becoming increasingly competitive, resulting in price erosion and substantial reduction in revenues from what had been a key Brooktree market. During the balance of 1994, Brooktree's stock performed very poorly due to the impact of a series of negative events and factors adversely - 34 -
affecting its business. During this same time period, the Individual Defendants sold none of their Brooktree stock, as it languished at low prices of between $5-$8 per share. 40. The stinging criticisms of management attending the adverse 1993-1994 developments pressured the Individual Defendants to develop and introduce "successful" new products, to achieve earnings, and to push Brooktree's stock and prestige back to its former high levels. Brooktree's insiders also held Brooktree stock and options, the value of which had been greatly diminished by the collapse in Brooktree's stock price. The Individual Defendants wanted to push the stock back up to higher levels, so they could favorably recharacterize Brooktree's position in the computer- products market and sell off some of the stock they owned for a profit. Thus, it was important to Brooktree's insiders to make it appear that the Company had been "cleaned up" and that Brooktree was being turned around into a successful enterprise. 41. To advance their goal, defendants realigned their commitments and resource allocations to Brooktree's various business units. Brooktree's automatic test equipment products faced significant competition and decreasing revenues. Accordingly, Brooktree spun off this unit, essentially selling it to some of their employees. Brooktree's Communications Business Unit, formed in February 1992 and grounded on technology acquired from Rockwell, was viewed within Brooktree as having considerable long-term potential and possibly surpassing its other business units. However, in the short term, the communications product- development costs would be too high and the time to get the communications products to market would be too long. This is so - 35 -
because any new communications product must be proven to be so superior as to justify the great expense of replacing the existing communications technology and building the new infrastructure to support the new product. Consequently, Brooktree directed a large share of corporate resources and energies to its new Multimedia Division with the express goal of producing revenues more quickly and building a capital base to support its communications development. Thus, defendants knew they were pinning the Company's near-term future and the meeting of shareholder expectations on the successful development of multimedia products. 42. In the early 1990's the multimedia segment of the computer-products market had been growing at an annual rate of 20% to 25% and was becoming an increasingly important segment of the computer industry. Brooktree realized that quick success would be largely dependent on introducing new, competitive multimedia products. Design and development of sophisticated Multimedia products thus became a top Brooktree priority. Brooktree further knew that within the computer industry generally, a company which gets its technology to the market first is more likely to grab a market niche and succeed, regardless of whether or not the product itself ultimately proved to be superior. Brooktree was thus aware that its multimedia success would also turn on beating its competition to the marketplace. Under this tremendous, self- imposed pressure, Brooktree designed the BtV chipset (earlier called Ranger), racing to get it released as soon as possible. BROOKTREE'S ATTEMPT TO DEVELOP THE BtV CHIPSET 43. Unveiled on October 26, 1994, the BtV chipset was actually a family of chipsets intended to coordinate the video, - 36 -
graphics and audio capabilities of personal computers on a single, easy-to-install add-in card or to be designed right onto a motherboard. Various versions of the BtV chipset were produced to match certain operating systems, such as Windows 3.1 and Windows 95. As Thomas Clarkson, Brooktree's Vice President for Multimedia Marketing explained: "We've developed an architecture that knows how to mix and manage all of the media types through one central hub. . . ." Defendant Gelvin headed up the BtV chipset project and the Multimedia Division, which by late 1994, had become the largest operating unit within Brooktree. Gelvin reported directly to Bixby. 44. To reduce the "design-in time," or the time lapse between when Brooktree sold its BtV chipsets to OEMs or motherboard manufacturers and when such entities' products incorporating the BtV chipset were actually sold to customers (thereby providing revenue and recognition of the BtV chipset), Brooktree took the unusual step of doing more than simply selling the product's hardware to its customers. Typically, upon purchasing a chip, a OEM or motherboard manufacturer will design the board or the card upon which the chip is placed for physical installation into the computer itself. These manufacturers then also create the software drivers necessary to use the chip with various computer operating systems and software applications. But instead of relying on OEMs to design the BtV chipset into a card and thereafter create software drivers for it, Brooktree attempted to speed the time-to- market process by designing its own card and creating the necessary software drivers. In theory, Brooktree's strategy would decrease the OEMs' design-in time and perhaps achieve some standardization. - 37 -
Similarly, Brooktree designed the BtV chipset with only 2-D capability, which allowed for quicker and less costly development, even though other multimedia products and customer demand were rapidly moving toward 3-D capabilities. This time-to-market imperative was also driven by the comparatively higher cost of the BtV chipset. Because the BtV chipset employed VRAM chips rather than the less expensive DRAM chips, an initial loss of market share would be difficult to overcome given the BtV chipset's cost disadvantage. 45. Brooktree, however, had essentially no experience in software development. Brooktree's products prior to the BtV chipset were computer hardware items which required either no or very simple software to implement their use. In contrast, the BtV chipset possessed multiple functions and needed to be compatible with the newest and most complex computer operating systems. For example, the widely used Windows 95 operating system is grounded on multitasking, allowing multiple functions to occur simultaneously or rapid switching between functions. To function effectively in this environment, the BtV chipset required software drivers that were able to interact with much more complicated software than Brooktree had ever dealt with previously. 46. To attempt to close this serious gap in its expertise, Brooktree acquired a software development division of Compaq Computer Corporation located in Austin, Texas (the "Austin Design Center") which, along with the Multimedia Marketing Department, formed Brooktree's Multimedia Division. From the very beginning, the Austin Design Center was not a good fit with Multimedia Marketing. David Baker, who originally headed the Austin Design - 38 -
Center as Senior Manager, was an engineer who strove to create software in an organized, methodical manner. This required first identifying, then meeting the requirements for the software's intended use and then thoroughly testing it to ensure that it functioned properly. However, the Austin Design Center was supervised by defendant Gelvin, whose background was in hardware development, and whose primary responsibility was to get the BtV chipset to market as soon as possible. The tensions in these conflicting management styles were exacerbated by the physical distance between the facilities. For example, Brooktree's multimedia Marketing Department in San Diego would promise potential customers that the BtV chipset would be able to perform certain functions without first checking the Austin Design Center's ability to create the necessary software or determining the time frame in which it could be done and tested. Shouting matches would sometimes ensue and, in at least one instance, David Baker hung up on Thomas Clarkson during a conference call addressing the software development problems plaguing the BtV chipset. (Ultimately, the conflicts between the Multimedia Marketing Department and the Austin Design Center could not be constrained, and Baker was demoted in January 1996. Defendant Gelvin took over as Senior Manager of the Austin Design Center directly, even though he had essentially no experience in software engineering and development.) 47. Brooktree did have a highly specific and detailed policy for the release of BtV chipset software. This policy was designed to produce functional, high quality software and included release readiness meetings at which the multimedia Marketing Department and Austin Design Center engineers were to collaborate on the - 39 -
software's status and readiness. Additionally, Brooktree's policy called for software quality assurance, testing and assessment. However, none of these software-development steps were followed. Resources were not allocated to obtain the equipment and personnel necessary to do the required quality checks or to recreate customer's computer environments to identify and then address the problems they were experiencing. Within the upper ranks of the Multimedia Division, resource allocation to product testing and quality assessment were seen as an unwanted drain on the BtV chipset's design and marketing efficiency. When Brooktree employees raised known and emerging software problems with management, instead of trying to fix the stated problems, Brooktree would fire or demote these employees to control the spread of criticism about the BtV chipset to the public. The net result of the conflicts between the Multimedia Marketing Department and the Austin Design Center, and Brooktree's breach of its own software development policies, was that the BtV chipset remained plagued with problems. 48. The BtV chipset also lacked compatible software drivers for numerous operating systems and configurations. Brooktree was aware of these shortcomings but would nevertheless represent to potential customers that the software drivers provided with the BtV chipset were compatible with the customers' proposed configuration or applications. For example, Brooktree represented to OEMs, such as Gateway, NEC, Samsung and Sony, that the BtV chipset was compatible with over 160 games. In fact, Brooktree knew that the BtV chipset was not compatible with 20% to 30% of those computer games. Brooktree, through its own internal testing, also - 40 -
determined that the BtV chipset was not compatible with 486 CPU- based configurations and, in fact, such configurations did not even recognize the product. As part of Brooktree's purported revolutionary design, certain audio functions were planned to run through a software driver, rather than a sound card, which was the more typical design at the time. Brooktree trumpeted that such a design could be produced more cheaply with no loss of function. Yet, many existing computer games did not recognize the software driver, and the sound function was lost. Also, many new computer games were not designed to recognize Brooktree's software driver and the sound similarly proved nonfunctional. In some instances, the Company represented through its product manual to potential customers that software drivers for graphic displays would function with several different configurations when, in fact, they would not. It was widely believed within the Company that some of these incompatibilities would not be recognized because the configurations eliciting them were not likely to be used. 49. Brooktree also received external confirmation of these compatibility problems. The testing engineers of XXCAL Testing Laboratories undertook a review of the BtV chipset's software drivers and determined that the BtV chipset was not compatible with certain motherboards and certain computer games. The NSTL also undertook a preliminary investigation of the BtV chipset's video aspect in January 1995. Numerous incompatibilities and software errors, several of unknown origin, were demonstrated. The Digital and Zenith computers used for this testing would not boot up (get started) with the BtV chipset cards installed. Internally at Brooktree it was reported that NSTL's "experience suggests that the - 41 -
compatibility issue is much greater than we think." Further, NSTL remarked to Brooktree that its schedule for releasing the BtV chipset was more aggressive than other schedules the NSTL was aware of for similar products. 50. Another significant problem, known by defendants throughout the Class Period, was the difficulty, and in some cases, the complete inability to install the BtV chipset and its supporting add-in card and software drivers. In this context, installation is a three-step process for loading the BtV chipset and its software drivers into the memory of the computer incorporating the chipset. First, the chipset is physically placed in the computer. Then the computer's operating system is "told" what new device has been inserted. Finally, the software drivers are copied to a specific location in the computer's memory so that the computer can recognize and use the new chipset. With improper or faulty installation, the software drivers would or could no function, and the BtV chipset's capabilities would be lost or distorted. 51. Throughout the class Period, sales managers in the Multimedia Division knew the BtV chipset would not load properly, but did not forthrightly reveal this to Brooktree's customers. The chipset's installation problems were thoroughly discussed at a December 7, 1995 Multimedia Division meeting. At that time, several sales managers openly voiced their long-standing complaints about the BtV chipset's software problems and their difficulty in explaining these problems to potential customers. Defendant Bixby learned of these installation difficulties firsthand when he tried to install the BtV chipset himself during the late summer or early - 42 -
fall of 1995. Bixby could not successfully install the product, even though he attempted to follow the instruction pamphlet Brooktree had prepared Bixby sent an electronic mail message throughout the Multimedia Division, including Multimedia Marketing, the Austin Design Center and Software Quality Assurance Department detailing the problems he specifically encountered. 52. Similarly, the BtV chipset could not be readily "uninstalled." That is, once installed or even partially installed, the BtV chipset's software could not be readily or wholly deleted from the computer's memory. Software drivers or fragments of software code would continue to contaminate the computer's memory and could adversely affect other aspects of the computer's operation. This could effectively preclude updating the software and similarly result in unexpected interference with other software applications already installed. The inability to be readily "uninstalled" made the BtV chipset noncompliant with the Windows 95 operating system, a serious marketing problem as Windows 95 had become widely used. Thus, even attempting to install the BtV chipset would create significant software problems in the user's computer, which could not be easily undone. 53. Customer enthusiasm for the BtV chipset quickly waned as they become familiar with the problems described above. Many potential customers, such as Hewlett-Packard, Intel and Gateway, had their own quality assurance departments and confirmed the software and hardware problems already known to Brooktree. In many instances, potential customers or the organizations doing testing for them would directly contact Brooktree, often through electronic mail messages, to complain about the problems they encountered. - 43 -
This information was received or sent to Brooktree's Technical Marketing Division. There, the potential customers were given support and their complaints logged. If the Technical Marketing Division could not directly address a customer's problem, such as those which might concern with the BtV chipset's software drivers, it would in turn contact the Software Quality Assurance Department, the Austin Design Center, or defendant Gelvin, who supervised all of these groups. 54. As a direct result of Brooktree's software problems, BtV chipset inventory markedly increased. Although the chips themselves had been completed they could not be packaged with the appropriate software for delivery to customers. 55. Brooktree also attempted to track defects through a database system known internally as the DCS system. Although product defects were supposed to be catalogued in this database, under pressure from management, not all were entered. 56. Customer concerns expressed to the Technical Marketing Division and defects and problems noted on the DCS system and by Brooktree employees generally were communicated to the Individual Defendants through weekly management operations review meetings known by the acronym MOR. During these Monday meetings, each business unit within Brooktree would identify design losses and problems of which it was aware; project current revenues, sales and market share for Brooktree's products; report on extant product inventories and customer concerns; and highlight upcoming projects or product development. 57. Although most of the BtV chipset's problems were software related, several significant hardware problems were also known - 44 -
within Brooktree. For example, the chipset would "latch up," meaning that the chips would overheat, and the circuits would burn, destroying the product. The latch-up problem was a design defect, reflecting a design trade-off between maintaining the BtV chipset's size and adapting to the computer environment in which it was to be used. The BtV chipset also demonstrated difficulties with its physical installation. For example, joysticks, devices frequently required for computer games, could not be plugged into the chipset card. Finally, some software compatibility problems would also require hardware changes. 58. Initially, the BtV chipset was scheduled for volume release by the second quarter of fiscal year 1995 (ended March 25, 1995), with revenues to be manifest by September 1995. Regarding the BtV chipset's revenues, defendant Bixby noted: "'After a flat fiscal 1994, we need to deliver on our promises to shareholders in fiscal 1995.'" However, by August 1995, the Company was still attempting to finalize the software drivers accompanying the BtV chipset and had not met its stated goal for volume shipments. Nevertheless, and as a result of defendants' false and misleading statements as detailed herein, Brooktree's stock price slowly began to rise from the $8-$10 per share range it had been trading at in early 1995, before the Class Period commenced. FALSE AND MISLEADING STATEMENTS AND MATERIAL OMISSIONS DURING THAT CLASS PERIOD 59. On February 13, 1995, the first day of the Class Period, Brooktree appeared at the Cruttenden Roth Southern California Growth Stock Conference through David Russian, its Chief Financial - 45 -
Officer, who addressed the assembled analysts and investors. As reported by Reuters, Russian stated: "We have been cautioning investors that we will probably be flat in revenues over the next two quarters and near breakeven in our bottom line until we ship our new chipset in the fall," Russian told the Cruttenden Roth southern [sic] California Growth Stock Conference here. * * * He said the new chips process audio, video and graphics information and have received strong interest in trade [sic] recent trade shows.3 60. On March 9, 1995, an article about Brooktree appeared in the San Diego Daily Transcript which discussed Brooktree's 1995 Annual Meeting and stated: "Last year the question was 'what's going on around here?'" said James Bixby, Brooktree's president and chief executive officer. "With the restructuring it was really a tough year. This year they will want to know if we've made progress." Well? "Yeah, I think we're on the right track." The leaner integrated circuit designer last year shed its automated test equipment lines to concentrate on two other high-tech markets: multimedia and telecommunications. * * * The investment community seems to agree. Brooktree shares yesterday jumped 88 cents to close at $12.12, the 52-week high. Brooktree is currently analyzing how much of an estimated $1 billion multimedia market it can lay claim to. ____________________ 3 Here, as elsewhere, emphasis has been added unless otherwise noted. - 46 -
"Well, that's the big question," said Bixby. "We've aimed for the middle of the market. If we're successful we may get 20 percent." * * * Brooktree is targeting June for the release of its new line of multimedia products, a family called the BtV MediaStream chipset. 61. On March 14, 1995, Smith Barney issued a research report on Brooktree, authored by J.L. Barlage, who had obtained the information contained in the report from Brooktree's top management, including Bixby and Canning. Prior to the release of this Smith Barney report, these Brooktree executives engaged in conversations with Barlage in which they spoke to him and he spoke to them and there was a two-way dialogue and exchange of information in which they agreed on the contents of the report. Also, Bixby and Canning reviewed and approved the report, knowing it would be publicly released and become part of the total mix of information affecting Brooktree stock. The Smith Barney report forecast 1996 earnings per share for Brooktree of $1.20, upgraded its rating to "buy" from "neutral," and stated the following: • Multimedia: Potentially the most explosive new market for Brooktree could be multimedia. In late calendar 1994 the company introduced its first product for this market which consisted of a four chip chipset that combines audio, graphics and high-resolution, full- motion video together with software for applications in the PC environment. * * * • Brooktree appears to be offering a superior product . . . even a modest market penetration rate could have a substantial impact on the company's financial results. As a result of these positive statements to the market, Brooktree's stock price jumped $1-1/2 per share to $14-1/8 per share on March 14, 1995. - 47 -
62. On April 12, 1995, Brooktree reported its results for the second quarter of fiscal year 1995 ended March 25, 1995, announcing revenues of $31.4 million and earnings of $.18 per share. After reporting these results, Bixby spoke with securities analysts and told them that: • Brooktree's business was doing better than expected, achieving better operating earnings per share than expected. • The Company's multimedia chipset was "on track" to ship in July/August and customer interest in this new product was "strong." • The new multimedia chipset would be the significant driver of Brooktree's future earnings growth. Analysts reported this information to the market where it became part of the total mix of information affecting Brooktree's stock price. Brooktree's stock price continued its steady increase to trade at $16-5/8 per share by April 18, 1995. 63. The positive statements concerning Brooktree made between February 13, 1995 and April 12, 1995 were materially false and misleading when made. The disclosure of the following adverse material facts, which undermined defendants' forward-looking statements, was necessary to make the referenced statements not false and misleading. The true facts, known only to defendants from their access to internal corporate information, were: (a) The BtV chipset did not perform properly because, among other problems, the software drivers Brooktree created for the chipset were either not available or faulty and thus the BtV chipset was not widely compatible with various computer configurations and only a few of the chipset's features could be fully or properly utilized. Instead of taking the time to fix these problems Brooktree spent its efforts adding new features to - 48 -
the chipset while attempting to market each new release with similarly defective software and dysfunctional features; (b) Brooktree's Multimedia Division lacked the infrastructure to adequately design software and thus in designing the BtV chipset, Brooktree concentrated on designing the hardware while ignoring the software, thus resulting in the ultimately faulty product; (c) Because of conflicting development philosophies and tensions among personnel, Brooktree was unable to coordinate its Multimedia Marketing Division with the Austin Design Center to address, let alone correct, the software problems limiting the BtV chipset's compatibility with computer operating systems and use with certain applications, ultimately adversely affecting its customer acceptance; (d) The BtV chipset could not readily or easily be installed (or "uninstalled") by OEMs and motherboard manufacturers into their computer systems as they had expected, and could only be installed with significant, detailed help from Brooktree's inadequate customer and technical support staff, further driving customers away; (e) In developing the BtV chipset, Brooktree ignored its stated policy and plan of systematically planning out the features to be included in a new product, outlining them on a marketing Requirement Document, holding organizational meetings (including pre-release and release meetings), and only then proceeding with design of the new product, providing detailed release notes on the design and changes in such product. Instead, the Company rushed to get new releases of the BtV chipset to market as fast as possible, - 49 -
constantly changing the requirements, demanding that its engineers add new features to the product within a short turnaround time and not allowing for sufficient testing and debugging of supporting software which was provided to Brooktree's customers; (f) Brooktree did not sufficiently test the BtV chipset and Brooktree's schedule for releasing the chipset was known to be too aggressive and did not allow sufficient time for availability of all necessary pre-release review or adequate testing. In fact, the NSTL had even commented on how extremely aggressive Brooktree's release schedule was for its BtV chipset; (g) In its rush to get the BtV chipset to market and to do so at the lowest cost possible, Brooktree designed the product with only 2-D capabilities, even though 3-D capabilities were rapidly becoming very important in the multimedia market. In fact, many potential customers had stated that they would likely not purchase the BtV chipset until it had 3-D capability, which would not occur for at least a year, or that they would purchase one of Brooktree's competitor's products which already had 3-D capability; and (h) In spite of the fact that Brooktree employees had specifically pointed out to management that the BtV chipset did not work properly, chiefly due to problems with the software drivers, rather than fixing these problems before the product's release, Brooktree chose instead to fire or demote employees who brought these problems to Brooktree management, thereby controlling the spread of product criticism. - 50 -
64. On May 10, 1995, Brooktree issued a press release headlined "Leading PC Manufacturers And Add-In Card Vendors to Adopt Brooktree's BtV MediaStream Chipset In Next Generation Products," which stated: Brooktree Wednesday announced that the BtV© MediaStreamTM multimedia accelerator chipset has been adopted for integration into planned multimedia products from vendors, including: Connectware Inc. (Richardson, Texas); Elitegroup Computer Systems Inc. (Fremont, Calif.); First International Computer (FIC) Inc. (Fremont, Calif.); Hercules Computer Technology Inc. (Fremont, Calif.); IPC (Singapore); Micron Electronics Inc. (Nampa, Idaho); Number Nine Visual Technology (Lexington, Mass.); Qlogic Corp.(Irvine, Calif.); STB Systems Inc. (Richardson, Texas); Televideo Inc. (San Jose, Calif.); and Trigem (Seoul, Korea). 65. On May 11, 1995, Bixby spoke to Barlage of Smith Barney and told him that: • Brooktree had received several design wins for its multimedia chipset from Connectware Inc. (Richardson, Texas); Elitegroup Computer Systems Inc. ("ECS") (Fremont, Calif.); First International Computer Inc. ("FIC") (Fremont, Calif.); Hercules Computer Technology Inc. (Fremont, Calif.); IPC (Singapore, Singapore); Micron Electronics Inc. (Nampa, Idaho); Number Nine Visual Technology (Lexington, MA); Qlogic Corp. (Irvine, Calif.); STB Systems Inc. (Richardson, Texas); Televideo Inc. (San Jose, Calif.); and Trigem (Seoul, Korea). • IPC was a significant PC manufacturer in Singapore and FIC and ECS are large motherboard manufacturers which associates them directly with the OEM PC market. Connectware would use the product in a video-conferencing application, while the remaining companies are add-in board manufacturers. • The announcement of these design wins was a significant step in validating the Company's BtV MediaStream multimedia chipset. The Company was progressing toward meeting its target of achieving volume shipment of its BtV MediaStream chipset in the September quarter (fourth quarter of fiscal 1995). Smith Barney reported this information to the market where it became part of the total mix of information affecting Brooktree's stock price. As a result of these positive statements, both in - 51 -
Brooktree's press release and through Smith Barney, Brooktree stock increased to $17-3/4 per share by May 11, 1995. 66. In the June 5, 1995 issue of PC Week, the following appeared about Brooktree, based upon information provided by Brooktree, including Bixby and Gelvin: Brooktree Corp. is signing up numerous customers for its BtV MediaStream multimedia accelerator chip set . . . . * * * The chip set is expected to begin shipping in volume in the fourth quarter from several PC and board makers . . . . said officials. 67. On June 14, 1995, Bixby spoke with Edward White of Lehman Brothers and told him that: • The BtV MediaStream is gaining good acceptance among an important segment of the personal computer customer base. A number of add-in board manufacturers have decided to use the BtV MediaStream. Lehman brothers reported this information to the market where it became part of the total mix of information affecting Brooktree's stock price. 68. On July 12, 1995, Brooktree issued a press release reporting its results from operations for the third quarter of fiscal year 1995, ended June 24, 1995, announcing revenues of $32.2 million and earnings per share of $16. After the issuance of this press release, Bixby spoke with securities analysts and told them that: • The outlook for Brooktree continued to improve. • The BtV MediaStream chipset would begin shipments in the current quarter. • While the Company's graphics and ATE revenues would continue to trend downward, Brooktree felt much more positive about the prospects for its growth businesses. These businesses, led by Brooktree's multimedia business based upon - 52 -
its forthcoming BtV MediaStream chipset, would spur a period of revenue and EPS growth. • Brooktree was encouraged by the prospects for rapid and broad acceptance of its full-motion video and graphics chipset. • Brooktree had multiple orders for shipment of the Company's BtV MediaStream chipset during the fourth quarter of 1995. Interest had been very high among the PC manufacturers for this chipset. • The Company's chipset solution gave superior price- performance-functionality profit compared to competitive solutions. As a result of these positive, but misleading representations by the defendants, Brooktree's stock price jumped to $20-1/8 per share by July 13, 1995. 69. On July 28, 1995, Bixby was interviewed on the Dow Jones Investor Network by Shelly Carabel. During that interview the following was stated: Carabel Your [sic] yourself has been, have been quoted as saying that. . . your company is a company in transition. Bixby Yes, that's true. I believe actually we're emerging from that transition at this point. . . . The biggest investment we've made in multimedia is about to bear fruit, we start our production shipments of that this quarter. * * * Carabel So how have your results been now as, as you're coming out of the transition? Bixby Well, since that low quarter recently was second quarter of '94,. . . a very large loss. Last quarter we did $32 million in revenue, and we made 1.3 million of operating income. That's not a satisfactory number. That's only about 3 or 4 percent for operating income. We've got to drive it up into the teens, but now we believe we have the product positioning to allow us to do that in the future. - 53 -
Carabel So and the thing that should be driving those revenues is something called BtV Media Stream? Bixby Yes, that's our, out newest chipset that's coming into the market right now. . . it's a four-chip set which blends high performance graphics, audio, and video capability all under one software solution, one said of drivers, so we take responsibility for making that suite work together, priced at a point that it can go into the bulk of the personal computer market for multimedia Pcs. * * * Target customers that we've announced are people like Number 9, who recently went public, is developing an add-in board product which we expect to sell both in the reseller channel and also to some of their OEM accounts, like Dell Computer. Micron Computer we've announced as a design win for an add-in board to go into their machines. Motherboard manufactures that have announced that they will be using the chipset include Elite Computer Systems and FIC in Taiwan, Tri-Gem in Korea. So we're not sure which OEMs in the U.S. buy from which of these motherboard manufactures, but we also expect it to be showing up in the U.S. market on motherboards of name brand machines. * * * Okay. In terms of revenue, I think what you have to look to is the available market that we're selling into, and it remains to be seen how well we penetrate that market. About 65 million desktop computers will be sold this year, or personal computers this year. About 50 percent of those are multimedia machines, meaning that they contain CD-ROM and a sound card of some sort, at a minimum. So if you take that as the available multimedia market, and if you figured a content, if you just used a number like $50 per box, for the semiconductor content for multimedia functionality, that multiplies out to a $1.5 billion marketplace. That's bigger than all the markets we've previously addressed combines. So it's a very, very large market. A design win in this market comes in units of $5 to $50 million a year of revenue, so these are significant, every opportunity is a significant opportunity in this business. It - 54 -
also highlights that it'll be a lumpy business. Things will come and go in steps in this business, as opposed to just, say continuous growth. So we have high expectations because of the size of the market and the product positioning that it will be a, a primary growth driver in the corporation. * * * We believe that 1995 is a video year, and then 1996 is the 3-D year. . . and we will be adding 3-D capabilities for the 1996 season into our base chip set offering. Carabel That's quite a forecast. As a result of these positive, but misleading statements, Brooktree's stock price jumped to $20-7/8 per share on July 28, 1995. 70. The positive statements concerning Brooktree made between May 10, 1995 and July 28, 1995 were materially false or misleading when made. The true facts, known only to defendants from their access to internal corporate reports, were as set out at ¶63. Additionally: (a) Brooktree had received and tracked numerous complaints from customers about the BtV chipset's faulty features and difficulty to install. Brooktree was well aware that it could not cheaply address or remedy these problems and that announced design wins would not actually result in significant orders because of these problems, or at most, would result in significantly delayed revenue from delayed product releases; (b) Although customer interest in the BtV chipset was initially positive, resulting in several design wins, upon actually testing the product, customers discovered that it did not work, significantly decreasing their interest in actually purchasing the - 55 -
BtV chipset. Brooktree thus had no basis to represent that this product would drive future earnings growth for Brooktree as it was highly unlikely that Brooktree would ever sell any significant quantity of the BtV chipset product; (c) Brooktree was not making any significant progress toward making volume shipments of the BtV chipset in the fourth quarter of fiscal year 1995 because the product was not fully functional, was not supported by necessary software, was too expensive for the functions it did provide, and did not have 3-D capabilities; (d) It was not true that a number of PC or add-on board manufacturers had decided to use the BtV chipset as, in fact, only one customer, IPC, had ever indicated a willingness to use the product in volume. IPC initially refused to pay for and then to reorder the BtV chipset due to its poor quality and performance. Thus Brooktree was not signing up numerous customers or expecting to begin shipping the BtV chipset in volume to several PC and board makers in the fourth quarter of 1995; (e) The few orders Brooktree had received for the BtV chipset from companies other than IPC were extremely small, were chiefly from little-known, second-tier computer companies, were mostly provisional, and consequentially would not result in any major revenue or volume production of the product; (f) Given the poor quality of the BtV chipset, its lack of 3-D capability, numerous customer complaints and customer resistance to the product, Brooktree had no reasonable basis to state that Brooktree expected the BtV chipset product to propel the Company's growth; and - 56 -
(g) Because the BtV chipset's software drivers were dysfunctional and not fully developed, the chipsets could not be shipped, and because customers had chosen 3-D products over the BtV chipset's 2-D functionality, Brooktree's inventory markedly increased, ultimately necessitating an $8.4 million writedown of multimedia inventory in the third quarter of fiscal year 1996. 71. In late August 1995, top Brooktree executives, including Bixby, communicated with a Robertson Stephens analyst, Daniel Klesken, and told him that: • Brooktree's MediaStream design win momentum was continuing and there was a very positive outlook for the product. • Based on positive user feedback, Brooktree expected a strong ramp in MediaStream sales. • The leverage from MediaStream could have a phenomenal impact on Brooktree's fiscal 1996 revenues. • Brooktree was forecasting $50-80 million in fiscal 1996 revenues from the MediaStream products which would lead to total fiscal 1996 revenues of $190+ million and earnings of close to $1 per share. Robertson Stephens reported this information to the market where it became part of the total mix of information affecting Brooktree's stock price. 72. The positive, but false and misleading statements detailed above, pushed Brooktree's stock to a Class Period high of $21-3/4 per share on September 7, 1995. 73. On September 11, 1995, Brooktree issued a press release headlined and stating: INTEL'S INDEO VIDEO INTERACTIVE TECHNOLOGY GETS BROOKTREE BtV HARDWARE ACCELERATION BOOST Brooktree Corp. Monday announced that the company's BtV© and MediaStreamTM integrated multimedia chipset, is the first hardware solution that directly supports and - 57 -
dramatically enhances key features of the wavelet-based Indeo© video interactive technology introduced by Intel Corp. (Santa Clara) Monday. * * * According to Jon Peddie, president, Jon Peddie Associates in Tiburon, Calif., "The BtV MediaStream chipset is currently the only hardware-acceleration platform of its kind to provide direct support for such powerful new Indeo video interactive features as full- screen video playback and transparent digital overlays. This makes BtV a particularly attractive solution for playing back video clips that have been compressed using the new Indeo technology." * * * BtV also is unique in its ability to fully support these Indeo video interactive features while simultaneously maintaining high-quality graphics and richly reproduced audio even in the complicated mixed- session environments typical of highly interactive multimedia games and titles. Introduced in late 1994, Brooktree's BtV MediaStream chipset is the first in a new category of multimedia accelerators that synergistically handles sound, graphics and video, all in the same set of fully integrated silicon. BtV's revolutionary MediaPacket multimedia data handling architecture seamlessly marries and synchronizes the video, graphics and sounds so that a unified solution may reside on a single easy-to-install add-in card or right on the motherboard. . . . To date, more than a dozen leading PC systems and add-in card vendors have announced they will be adopting the BtV chipset in upcoming products. A wide range of applications that fully exploit the powerful combination of Intel's Indeo video interactive technology and Brooktree's BtV hardware platform are expected to hit the market within the next six months. Companies like Tsunami, Asymetrix, NB Engineering, Compton's New Media, Digital Video Arts, Imagination Pilots, Tri-Digital Software and Microprose are currently developing innovative new games and other applications that aggressively leverage the unique capabilities of BtV-accelerated Indeo video interactive playback. 74. By at least September 1995, Bixby himself confirmed the failure of the BtV chipset to function properly when he took the - 58 -
BtV chipset home and was unable to install the chipset with its supporting software and make it function as expected. Although Bixby informed the Individual Defendants and Multimedia Division personnel of this failure, he did not follow-up to ensure that these installation problems had been fixed. 75. Shortly before September 21, 1995, Brooktree executives, including Bixby and Canning, spoke to Smith Barney analysts Barlage and told him that: • Quoting activity for Brooktree's MediaStream products was high. The announced design wins were proceeding as expected through the normal product development cycle. • Brooktree would ship MediaStream devices for revenue in the current quarter. The current market for multimedia semiconductor devices was approaching some $1 billion this year and will be growing rapidly. Consequently, a 10% share of this market could double Brooktree's size. Smith Barney reported this information to the market where it became part of the total mix of information affecting Brooktree's stock price. 76. In September and October of 1995, information began to enter the marketplace that prices for semiconductor chips were falling, which had a negative impact on many semiconductor stocks, including Brooktree, and the price of Brooktree stock subsided slightly from the $20-$21 per share range it had been trading at during September. In order to maintain the artificial inflation of Brooktree's stock price and to stave off a drop in stock price when the public learned that the BtV chipset was a failure, the defendants continued to make false and misleading statements about the BtV chipset product and Brooktree's future earnings. 77. On October 25, 1995, Brooktree issued a press release reporting its fourth quarter and fiscal year-end 1995 (September - 59 -
30, 1995) results, announcing income and earnings per share of $42.5 million and $.23 for the fourth quarter and $137.7 million and $.72 for the year ended September 30, 1995, stating: "Fiscal 1995 was a year of significant advancements in multimedia and communications efforts for Brooktree," said James A. Bixby, Brooktree's chairman, president and chief executive officer. "A number of PC systems and add- in card vendors adopted our BtV MediaStream chipset into their planned multimedia products." 78. After releasing its fourth quarter fiscal year 1995 results, Brooktree's top executives, including Bixby and Canning, spoke with securities analysts and told them that: • Looking into 1996, Brooktree expected continued growth in the communications, imaging and multimedia product lines. • During the fourth quarter, Brooktree began shipping its new BtV MediaStream multimedia product. During the quarter Brooktree shipped $4.5 million worth of the BtV MediaStream product to a single customer in Asia. The Company is currently in talks with other original equipment manufacturers, but it will not announce design wins until volume orders are placed. This area would contribute to earnings growth in 1996. • The volume generated in the fiscal fourth quarter reflected demand from one of these OEM or motherboard companies which is ramping up production of equipment that combines a home entertainment system together with a personal computer. Six of the other companies have given Brooktree orders for MediaStream Production volumes with shipments scheduled to begin late in the first fiscal quarter (December) or early in the second. Brooktree was also in various stages of sales discussions with several PC manufacturers including Packard Bell, NEC, Hewlett-Packard, Gateway, Dell, Intel and others. • Brooktree expected sales of the BtV MediaStream product line to expand steadily toward the $28 million per quarter evel as 1996 unfolded. • While Brooktree's gross margins would decrease as a result of increased sales of lower-margin multimedia BtV MediaStream products, with higher revenue growth, Brooktree expected significant year-to-year earnings increases in fiscal 1996. • The BtV MediaStream chipset had a very bright future. - 60 -
Analysts reported this information to the market where it became part of the total mix of information affecting Brooktree's stock price. 79. On October 30, 1995, Brooktree issued a press release headlined and stating as follows: MULTIMEDIA HARDWARE VENDORS BEGIN LINING UP BEHIND WINDOWS 95; BROOKTREE BtV CHIPSET IS FIRST TO ACCELERATE ALL MICROSOFT GAME SDK INTERFACES; BROOKTREE SHOWS NEW "KILLER" WINDOW 95-BASED 2D AND 3D VIDEO MULTIMEDIA EFFECTS AT MACABRE HALLOWEEN-THEME EVENT HOSTED BY MICROSOFT. Signaling growing support for the Microsoft© Windows© 95 operating system as a premier multimedia and gaming environment, Brooktree Corp. (San Diego) has emerged as the first of dozens of companies that are expected to offer complete hardware acceleration and synchronization support for all of Microsoft's announced Windows 95 "DirectX" Application Programming Interfaces (APIs) in its game Software Developer's Kit (Game SDK). Brooktree's BtV MediaStream multimedia accelerator chipset has been extended with a new digital gaming chip and optimized to fully support Microsoft's DirectDrawTM API and associated DirectVideoTM interfaces, as well as its DirectSoundTM, DirectInputTM and DirectPlayTM APIs. These false and misleading statements by the defendants maintained Brooktree's stock price at artificially inflated prices of $12-$16 per share in late October and early November 1995. 80. On November 6, 1995, the Electronics Engineering Times reported that: In the first quarter of 1996, according to current plans, Brooktree will offer a new version of the MediaStream controller, the BtV2125. This chip will include a comprehensive 3-D rendering engine to produce planar- shaded, texture-mapped images in the buffers. 81. On November 17, 1995, Bixby was interviewed on the Dow Jones Investor Network by Shelly Carabel, during which the following was stated: - 61 -
Carabel All right. As we know, Brooktree makes multimedia and communications chip sets. You are actually now, in terms of the company, you're beginning to kind of reposition in order to fit better into the converging technology environment. . . . [W]hat's repositioning you? . . . Bixby Yeah, it's a major overhaul. We started the company mostly with graphical products and at one point we were very dominant in that market, but as the technology moved along it needed to integrate, and we had to take a hard look at an old, what had become an old product line and decide where we were gonna go with the company. We decided to invest all of our R&D, this happened a couple years ago, in multimedia chips rather than just graphics and also in communications products. Carabel And so some of the key ones now that, that Are, that you're certainly here at Comdex, what, what, what's leading the pack for you? Bixby Oh, I think our multimedia chip set. We've spent a little over two years and about $25 million developing this chip set, and it's the first and still I think the only multimedia chipset that combines the functions of audio, video, and graphics support into a single integrated chip set, so it's very easy for a customer to use. Carabel Some of your customers for this, the, who, who are they? Bixby In the U.S. add-in board manufacturers such as Number 9 and STB systems, Connectware, Televideo has made a major announcement recently. Samsung Computer in the Far East will be using it in a mainstream computer product. We have about another six or seven customers of that sort. * * * Carabel [B]efore we, we actually turned on the camera, you were mentioning a, a company, IPC Computer Company. Bixby Yes. Yeah. Carabel Tell us a little bit about that because that certainly sounds exciting. - 62 -
Bixby Yeah, IPC is I believe about a $2 billion computer company in Singapore, and their primary markets are in the Far East and in Europe. They have very little presence here in the U.S. They've just introduced a new machine based on our chipset into the Singapore market. It's a complete computer . . . everything you could imagine in a PC. for a total price of $2,200 U.S. in the stores in Singapore, and my understanding is there have been crowds gathered around these storefront displays where they, they just introduced a few weeks ago. 82. Defendants continued to keep Brooktree's stock price at artificially inflated levels by representing, in November 1995, that the 3-D version of the BtV chipset product would be released in early 1996, even though defendants knew, but did not disclose and actually concealed, that they had not solved the software problems with the 2-D version of the BtV chipset, problems which would also be inherent in the 3-D version unless Brooktree could fix them. 83. On December 4, 1995, the following appeared in Electronic News: Brooktree Corp. last week laid out a plan that could more than double its current revenue in the next few years. Through a new wafer agreements signed with Taiwan Semiconductor Manufacturing Co., Ltd. (TSMC), the company will have access to an additional supply of wafers through the year 2000. According to Brooktree -- whose reported FY95 revenues were $137.7 million -- the extended wafer commitments represent additional potential revenue of $200 million to $400 million annually in high-growth multimedia and high-speed communications markets. Its first multimedia chipset, BtV MediaStream, has had strong sales after only one quarter, said James Bixby, Brooktree president and CEO. 84. In early December 1995, Brooktree told certain securities analysts that "growth" in sales of its BtV chipset "could pause" during the current quarter as the customer who purchased the - 63 -
product in the September quarter was going to "temporarily slow" order activity. Also, certain other customers had decided to await the release of the new BtV chipset with 3-D functionality, samples of which were supposed to be available early in the second quarter of 1996 with volume toward the end of that quarter, i.e., March 23, 1996. As a result, Brooktree now expected fiscal year 1996 earnings per share of $.85-$.90 and fiscal year 1997 earnings per share of $1.30-$1.40. Analysts reported this information to the market where it became part of the total mix of information affecting Brooktree's stock price. 85. In December 1995, Brooktree finally released the 3-D version of the BtV chipset, but as a result of Brooktree's delay in getting this product to market as well as the continuing software problems which Brooktree did not take time to fix, Brooktree had already lost a great deal of its potential customers for this product. 86. On January 15, 1996, Brooktree reported its results for the first quarter of fiscal year 1996, announcing revenues of $38.2 million and earnings per share of $.25, indicating its revenues had declined sequentially for the fourth quarter of fiscal year 1995 due to weakness in Brooktree's imaging and communications business. After releasing these earnings, and in order to prevent a decline in Brooktree's stock price, Brooktree's top executive, including Bixby, spoke to analysts, telling them the following about Brooktree's BtV chipset: • In May 1995, Brooktree had announced design wins from 11 add-in card or motherboard manufacturing companies. The volume generated in the fiscal fourth quarter 1995 and fiscal first quarter 1996 reflected mostly demand from one of these which could be ramping up production of equipment that - 64 -
combines a home entertainment system together with a personal computers. Six of the other companies have given Brooktree purchase orders for MediaStream production volumes in the second fiscal quarter. • Brooktree also indicated the receipt of a motherboard design win from a major Japanese PC manufacturer as well as from a large Japanese consumer product manufacturer. The Company has also indicated a motherboard design win from a U.S. PC company. These projects could begin requiring volume shipments about mid-calendar 1996. • By mid-year, the product should be in a strong growth mode. Brooktree's MediaStream chipset is selling into a market that will approximate $1 billion in 1996. Consequently, even a small amount of penetration could have a substantial effect on Brooktree's total revenues. 87. On January 22, 1996, Brooktree issues its fiscal year 1995 Annual Report which included a letter to the shareholders, signed by Bixby, which represented that: Throughout fiscal 1995, Brooktree made significant advancements in three product lines: Multimedia, communications and imaging. . . . Our new products will enable us to enter new, emerging markets to help fuel the Company's next phase of growth. Multimedia Our Multimedia Business Unit made steady progress with the BtV© multimedia accelerator. More than a dozen PC system and add-in card vendors have adopted to BtV into their planned multimedia products. . . .BtV is also the first complete solution from a single supplier to provide hardware acceleration across a full range of new Windows© 95 game interfaces introduced by Microsoft Corporation in October 1995. During the year, our team of multimedia experts developed a true 3-D graphics accelerator, which will be included in future BtV chipsets. . . . 88. The positive statements concerning Brooktree made between August 1995 and January 22, 1996 were materially false or misleading when made. The true facts, known only to defendants from their access to internal corporate information, as set out at ¶¶63 and 70. Additionally: - 65 -
(a) There was no basis in fact for projections and forecasts that sales of the BtV chipset would generate $50-$80 million in revenues during fiscal year 1996, or would expand to and approach $28 million per quarter during fiscal year 1996, leading to total Brooktree revenues of $190+ million in fiscal year 1996, as those forecasts were contradicted by the adverse facts set forth above and thus were false when made; and (b) Brooktree's forecasts of increased earnings growth due to substantial sales of the BtV chipset in fiscal year 1996 to $.85-$1.20 per share and $1.30-$1.40 per share for fiscal year 1997 were known by defendants to be false when made, as they were contradicted by the adverse facts set forth above. DISCLOSURE OF THE TROUBLED NATURE OF BROOKTREE'S BUSINESS AND COMMERCIAL FAILURE OF THE BtV CHIPSET 89. On February 7, 1996, Brooktree finally admitted to Robertson Stephens that it expected declining revenues and earnings in its second quarter of fiscal year 1996 due to weak sales of its BtV chipset, in sharp contrast to defendants' prior positive representations about the BtV chipset's substantial orders. Among other adverse facts, Brooktree belatedly revealed that IPC, who had purchased the chipset, would not be ordering any more, that Brooktree had made almost no sales of the product to any other customer and that Brooktree's 2-D BtV chipset product was not likely to succeed at all in the mainstream market, as it was too expensive, and, due to the now increasing availability of 3-D products, outmoded. In effect, Brooktree conceded it was reverting back to a company dependent on mature products with flat or declining revenues with very limited prospects for growth. As a - 66 -
consequence of defendants' belated, negative announcements, several analysts, including Smith Barney and Robertson Stephens, downgraded their rating of Brooktree stock. Brooktree's stock fell to as low as $8-1/2 per share by March 1996, the level where it traded before defendants began their fraudulent scheme and course of business to artificially inflate Brooktree's stock price. 90. In fact, by March 23, 1996, halfway through Brooktree's fiscal year 1996, Brooktree had sold only $6.7 million in BtV chipset products, as opposed to the $28 million per quarter which Brooktree had earlier predicted it would reach during fiscal year 1996, and had poor prospects for future sales, resulting in sharply reduced earnings per share. Brooktree ultimately reported extremely poor earnings per share of just $.02 for the quarter ended March 23, 1996 (excluding a $.17 per share gain from a sale of an investment). In reporting these disappointing results, Brooktree disclosed that sales of its multimedia products had been below expectations and that revenue would not increase during the remainder of fiscal year 1996 (ending September 30, 1996) absent increased market acceptance of Brooktree's multimedia products (the BtV chipset), but that Brooktree did not expect such an increase. Brooktree also disclosed that its gross margins had decreased and that it expected further decreases in its gross margin as a result of lower than expected selling prices. 91. Brooktree's downward spiral continued into the third quarter of fiscal year 1996 (ended June 29, 1996) when it wrote down approximately $8.4 million in multimedia inventory representing excess multimedia product beyond estimated product sales as well as an expected decline in selling prices. This - 67 -
drastic writedown caused Brooktree to report a loss of $.29 per share, which actually included a $.16 per share gain on the sale of an investment. 92. When it was announced on July 1, 1996, that Rockwell had agreed to acquire Brooktree, the price per share to be paid was only $15 per share, much less than the $21-3/4 per share Brooktree stock had traded at during the Class Period. Rockwell's shares fell $.75 on the news that it would be acquiring this troubled company. The acquisition of Brooktree was ultimately completed on September 15, 1996, just days before the end of Brooktree's fiscal year 1996, therefore obviating Brooktree's requirement to report its year-end financial results. Pursuant to Brooktree's stock option plans, the Individual Defendants, remaining options all vested on the day of the acquisition, with the individual Defendants collectively acquiring 680,261 shares at prices between $6 and $12.13 per share and immediately selling the shares to Rockwell at $15 per share for proceeds of $10.2 million. Had defendants' scheme continued to be successful and had they not been forced to disclose the commercial failure of the BtV chipset, defendants would have realized much higher profits from Rockwell's acquisition of Brooktree than they actually did. DEFENDANTS' INSIDER SELLING 93. During the class Period, while the defendants were issuing false and misleading statements about the BtV chipset and Brooktree's business prospects and forecasts, the Individual Defendants, except Bixby, sold 32,300 shares of their Brooktree stock for proceeds of $415,458, before the truth became known causing the crash in Brooktree's stock price. Through these sales, - 68 -
Brooktree insiders profited from the artificial inflation in Brooktree's stock price which their fraud had created. During the Class Period, the Individual Defendants, except Bixby, sold the following amounts of Brooktree shares at artificially inflated prices while in possession of material nonpublic information: DATE SHARE PRICE PROCEEDS OPTION OPTION % OF NAME SOLD SOLD PER SHARE FOR SALE PURCHASE PRICE STOCK SOLD ---- ---- ----- --------- -------- -------- ------ ---------- Kelly, S. 04/18/95 5,000 $10.94 $ 54,700 04/18/95 1,000 $11.19 11,190 07/17/95 2,000 $13.13 26,260 07/18/95 2,000 $12.50 25,000 07/21/95 2,000 $12.63 $ 25,260 ------ -------- Total: 12,000 $142,410 100% ====== ======== Zabaronick 04/28/95 2,000 $10.88 $ 21,760 05/15/95 13,000 $12.15 $157,950 ------ -------- Total: 15,000 $179,710 82% ====== ======== Holtaway 05/15/95 1,100 $17.50 $ 19,250 06/30/95 201 $ 7.12 12/29/95 185 $10.31 ------ -------- --- Total: 1,100 $ 19,250 386 56% ====== ======== === Canning 05/31/95 600 $16.13 $ 9,678 06/30/95 459 $ 7.12 07/28/95 600 $19.00 11,400 07/31/95 328 $20.25 6,642 07/31/95 672 $20.25 13,608 672 $ 6.88 12/29/95 467 $10.31 ------ -------- ----- Total: 2,200 $ 41,328 1,598 82% ====== ======== ===== Gelvin 05/30/95 2,000 $16.38 $ 32,760 2,000 $ 6.00 14% ====== ======== ===== GRAND TOTALS: 32,000 $415,458 3,984 ====== ======== ===== CLAIM FOR RELIEF I For Violation Of Section 10(b) Of The Exchange Act and Rule 10b-5 Against All Defendants 94. Plaintiffs incorporate by reference ¶¶1-93. 95. Each of the defendants: (a) knew or had access to the material adverse nonpublic information about Brooktree'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 Brooktree. - 69 -
96. 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. 97. Defendants violated §10(b) of the Exchange Act and Rule 10b-5 in that they: (a) Employed devices, schemes and artifices to defraud; (b) Made untrue statements of material facts or omitted to state material facts necessary in order to make 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 plaintiffs and other similarly situated in connection with their purchases of Brooktree common stock during the Class Period. 98. Plaintiffs and the Class have suffered damages in that, in reliance on the integrity of the market, they paid artificially inflated prices for Brooktree stock. Plaintiffs and the Class would not have purchased Brooktree 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. - 70 -
CLAIM FOR RELIEF II For Violation Of Section 20(a) Of The Exchange Act Against Defendants Brooktree And Individual Defendants Bixby And Canning 99. Plaintiffs incorporate by reference ¶¶1-98. l00. Defendants Bixby and Canning acted as controlling persons of Brooktree within the meaning of §20(a) of the Exchange Act. By reason of their positions as directors and/or officers of Brooktree, Bixby and Canning had the power and authority to cause Brooktree to engage in the wrongful conduct complained of herein. Brooktree controlled each of the Individual Defendants and all of its employees. 101. By reason of such wrongful conduct, Bixby, Canning and Brooktree are liable pursuant to §20(a) of the Exchange Act. As a direct and proximate result of these defendants' wrongful conduct, plaintiffs and the other members of the Class suffered damages in connection with their purchases of the Brooktree securities during the Class Period. BASIS FOR CERTIFICATION AS A CLASS ACTION 102. Plaintiffs bring this action as a class action pursuant to Federal Rule of Civil Procedure 23(a) and (b)(3) on behalf of all persons who purchased or otherwise acquired Brooktree stock (the "Class") during the Class Period. Excluded from the Class are the defendants, members of their families and any entity in which a defendant has an interest. 103. 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, Brooktree had more than 38 - 71 -
million shares of stock outstanding owned by thousands of shareholders. 104. There is a well-defined community of interest in the questions of law and fact involved in this case. The questions of law and fact common to the members of the Class 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 omitted and/or misrepresented material facts; (c) Whether defendants knew or recklessly disregarded the fact that the statements made by them were false and misleading; (d) Whether the price of Brooktree stock was artificially inflated during the Class Period; and (e) The extent of damage sustained by Class members and the appropriate measure of damages. 105. Plaintiffs' claims are typical of those of the Class because plaintiffs and the Class sustained damages from defendants' wrongful conduct. 106. The prosecution of separate actions by individual Class members would create a risk of inconsistent and varying adjudications. 107. Plaintiffs will adequately protect the interests of the Class. They have retained counsel who are experienced in class action securities litigation. Plaintiffs have no interests which conflict with those of the Class. - 72 -
108. A class action is superior to other available methods for the fair and efficient adjudication of this controversy. BASIS OF ALLEGATIONS 109. Because the Private Securities Litigation Reform Act of 1995 (specifically, §21D(c) of the Exchange Act, 15 U.S.C. §§78u- 4(c)) requires complaints to be pleaded in conformance with Federal Rule of Civil Procedure 11, plaintiffs have alleged the foregoing based upon the investigation of their counsel, which included a review of Brooktree's SEC filings, securities analysts' reports and advisories about the Company, press releases issued by the Company, media reports about the Company and information obtained from former employees, 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 ¶¶1-10, 14, 17-19, 23-30, 32-38, 40-42, 44-58, 61-63, 65, 67-68, 70-71, 74- 76, 78, 82, 84-86, 88, 93, 95-98, 100-01, 103-06, and 108. PRAYER FOR RELIEF WHEREFORE, plaintiffs pray for judgment as follows: 1. Declaring this action to be a proper class action pursuant to Rules 23(a) and 23(b)(3) of the Federal Rules of Civil Procedure an behalf of the Class defined herein; 2. Awarding plaintiffs and the members of the Class compensatory damages; 3. Awarding plaintiffs 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 - 73 -
provisions sued hereunder, including the imposition of a construc- tive trust upon the proceeds of defendants' insider trading, pursuant to Rules 64 and 65 of the Federal Rules of Civil Procedure and any appropriate state law remedies; and 5. Awarding such other relief as this Court may deem just and proper. JURY DEMAND Plaintiffs demand a trial by jury. Dated: May 5, 1997 MILBERG WEISS BERSHAD HYNES & LERACH LLP WILLIAM S. LERACH JAMES A. CAPUTO JENNIFER J. WELLS /s/ ______________________________ WILLIAM S. LERACH 600 West Broadway, Suite 1800 San Diego, CA 92101 Telephone: 619/231-1058 LOWEY DANNENBERG BEMPORAD & SELINGER, P.C. RICHARD BEMPORAD The Gateway One North Lexington Avenue White Plains, NY 10601 Telephone: 914/997-0500 Attorneys for Plaintiff and the Class - 74 -
CERTIFICATION OF NAMED PLAINTIFF PURSUANT TO FEDERAL SECURITIES LAWS MURRAY ALLISON ("Plaintiff") declares, as to the claims asserted under the federal securities laws, that: 1. Plaintiff has reviewed the complaint and authorized its filing. 2. Plaintiff did not purchase the security that is the subject of this action at the direction of plaintiff's counsel or in order to participate in this private action. 3. Plaintiff is willing to serve as a representative party on behalf of the class, including providing testimony at deposition and trial, if necessary. 4. Plaintiff's transaction(s) in the security that is the subject of this action during the Class period is/are as follows: Price Security Transaction Date Per Share -------- ----------- ---- --------- Common Stock Purchased 500 shares 10/05/95 $17 Common Stock Purchased 500 shares 10/11/95 $15-1/8 Common Stock Purchased 1000 shares 10/30/95 $11-1/8 Common Stock Purchased 1000 shares 12/06/95 $11-1/4 Common Stock Purchased 2000 shares 01/16/96 $ 9-1/8 5. During the three years prior to the date of this Certificate, Plaintiff has sought to serve or served as a repre- sentative party for a class in the following actions filed under the federal securities laws: 6. Plaintiff has sought or served as a represen- tative party for a class in the following actions filed subsequent to December 22, 1995:
7. The Plaintiff will not accept any payments for serving as a representative party on behalf of the class beyond the Plaintiff's pro rata share of any recovery, except such reasonable costs and expenses (including lost wages) directly relating to the representation of the class as ordered or approved by the court. I declare under penalty of perjury that the foregoing is true and correct. Executed this 2 day of May, 1997, at Del Mar California. /s/ ______________________________ MURRAY ALLISON
CERTIFICATION OF NAMED PLAINTIFF ISABEL M. SPERBER PURSUANT TO FEDERAL SECURITIES LAWS ISABEL M. SPERBER, trustee of the Isabel M. Sperber IRA ("Plaintiff") declares, as to the claims asserted under the Federal Securities laws, that: 1. I have reviewed the Class Action Complaint against Brooktree Corporation and several of its officers and directors and have authorized its filing in my name on behalf of the Isabel M. Sperber IRA. 2. I did not purchase the security that is the subject of this action at the direction of plaintiff's counsel or in order to participate in this private action. 3. I am willing to serve as a class representative in this action and provide testimony at deposition and trial if necessary. 4. My only transaction in the securities of Brooktree Corporation during the Class Period is my purchase of 700 shares of Brooktree Corporation stock for my IRA, at $14.50 per share on November 16, 1995. 5. During the three years prior to the date of this certificate, I sought or served as a representative party as trustee of the Isabel M. Sperber IRA, for a class in the case of Isabel M. Sperber, on Behalf of the Isabel M. Sperber IRA v. Intelcom Group Inc. et al., 95 D-1417 in the United States District Court for the District of Colorado, which by Order of Consolidation dated November 15, 1995, was consolidated with three others as In Re: Intelcom Group Inc. Securities Litigation, Master File No. 95-D-1166. I am also a class representative in
the case of Isabel M. Sperber, on behalf of Herself and all others similarly situated v. Incomnet, Inc. et al. 95-0404 WBM (Ex) in the United States District Court for the Central District of California, which by order of Consolidation dated September 8, 1995 was consolidated with the three other cases as Saundra Gayles et al. V. Sam D. Schwartz et al. Case No. CV95-0399 KMW (BQRx). Other than these two cases, I have neither sought nor been a class representative during the prior three years. 6. I will not accept payment for serving as class representative beyond pro rata share of any recovery, except as ordered or approved by the court with respect to an award for reasonable costs and expenses (including lost wages). I declare under penalty of perjury that the foregoing is true and correct. Executed this 2nd day of May 1997. /s/ _______________________________ Isabel M. Sperber 2
6 Jan 1998