BERNSTEIN LITOWITZ BERGER
& GROSSMANN LLP
ALAN SCHULMAN (Bar No. 128661)
ROBERT S. GANS (Pro Hac Vice)
BLAIR A. NICHOLAS (Bar No. 178428)
12730 High Bluff Drive, Suite 100
San Diego, CA 92130
Tel: (858) 793-0070
Fax: (858) 793-0323

-and-

DOUGLAS M. McKEIGE
1285 Avenue of the Americas
New York, New York 10019
Tel: (212) 554-1400
Fax: (212) 554-1444

Attorneys for Lead Plaintiff The
Policemen and Firemen Retirement
System of the City of Detroit
and Lead Counsel for the Class

Plaintiffs, on behalf of themselves and all others similarly situated, allege as follows:

NATURE OF THE ACTION

1. This action is brought on behalf of plaintiffs and other persons and entities who purchased the securities of Legato Systems, Inc. ("Legato" or the "Company") from April 22, 1999 through May 17, 2000, inclusive (the "Class Period").

2. During the Class Period, Legato was locked in a highly-competitive battle for customers and market share with two principal competitors in the enterprise storage and recovery software market. Throughout its fiscal year ended December 31, 1999 ("Fiscal 1999"), Legato represented that it was successfully competing in its market, reporting sequential revenue growth in each of the first three quarters of Fiscal 1999. As the Company has now admitted, these financial results were materially false and misleading.

3. During the Class Period, Legato's revenues were generated primarily from two sources: (i) product licensing and royalty revenues earned from product sales to resellers, end-users and original equipment manufacturers ("OEMs"); and (ii) service and support revenues generated from software updates, support and education, and consulting services to end-users. Under generally accepted accounting principles ("GAAP"), and as represented in its own filings with the Securities and Exchange Commission ("SEC"), Legato could not recognize revenue from the sale of licenses to resellers unless an unconditional contract existed and the fee was "fixed and determinable."

4. Legato has now admitted that the Company improperly recognized $23 million in revenue throughout Fiscal 1999 on bogus transactions with resellers, and that its net income and earnings per share for the periods March 31, June 30, and September 30, 1999 had been improperly overstated by material amounts. Legato also materially overstated its fourth quarter Fiscal 1999 results, as detailed herein. The magnitude of the overstatements in each quarter are summarized in the following chart:

FIRST QUARTER FISCAL 1999 RESTATEMENT

SECOND QUARTER FISCAL 1999 RESTATEMENT

THIRD QUARTER FISCAL 1999 RESTATEMENT

FOURTH QUARTER FISCAL 1999 REVISION

5. The business practices of Legato and its employees which gave rise to the financial misstatements now admitted by the Company were pervasive and occurred with the knowledge and, in some cases, the direct participation of senior management. As particularized below, the accounting irregularities admitted to by Legato were orchestrated and approved by defendants Cole and Wise, the Chief Executive Officer ("CEO"), and Chief Financial Officer ("CFO") of the Company, respectively. These two senior officers knowingly disseminated the materially false financial information to the market set forth herein, and sold significant amounts of Legato common stock at prices inflated by the fraudulent results.

6. The restatement of Legato's results for the first three quarters of Fiscal 1999, contained in three reports on Form 10Q/A filed with the SEC on June 8, 2000, show that Legato's actual growth in product license revenue during the first quarter of Fiscal 1999 was 12% -- not 38.5% as falsely reported by Legato during the Class Period. Growth product license revenue during the second quarter of Fiscal 1999 was 19% -- not 59% as falsely reported by Legato during the Class Period, while growth in product license revenue during the third quarter of Fiscal 1999 was 51%, not 63% as falsely reported. The impact of the restatements on Legato's earnings growth trend is also very dramatic and is demonstrated by the graph below:

7. By restating its financial results, Legato has admitted that the publicly-issued financial statements for each of the restated periods were not prepared in conformity with GAAP, and that Legato materially misrepresented its financial condition and results of operations. Under GAAP, the restatement of previously issued financial statements is reserved for circumstances where no lesser remedy is available. Under Accounting Principles Board Opinion No. 20, Accounting Changes, restatements are only permitted, and are required, to correct material accounting errors or irregularities that existed at the time the financial statements were prepared and issued.

8. By restating its financial statements, Legato has admitted that each document publishing the original financial results contained an untrue statement of material fact. Thus, the restatement is an admission that each of the press releases and the quarterly reports filed on Form 10-Q with the SEC for the periods ended March 31, June 30 and September 30, 1999, contained untrue statements of material fact.

9. The public dissemination of this materially false and misleading financial information caused Legato's shares to trade at artificially inflated prices throughout the Class Period. As the false financial results were reported throughout Fiscal 1999, Legato's stock price increased from $42.125 per share at the beginning of the Class Period to a Class Period high of $82.50 per share on December 23, 1999. As the fraud was revealed and assimilated by the marketplace, the price of Legato's stock declined to a low of $11.00 per share on May 19, 2000.

10. This Court has jurisdiction over the subject matter of this action under Section 27 of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. §78aa, and 28 U.S.C. §§ 1331, 1337, and 1367. The claims alleged herein arise under Sections 10(b) and 20(a) of the Exchange Act, 15 U.S.C. §§78j(b), and Rule 10b-5 promulgated thereunder by the SEC.

11. Venue is proper in this District pursuant to Section 27 of the Exchange Act and 28 U.S.C. §1391(b). Many of the acts and transactions giving rise to the violations of law complained of herein, including the preparation and dissemination to the investing public of materially false and misleading financial statements, occurred in this District. Legato maintains its principal executive offices in this District at 2350 West El Camino Real, Mountain View, California 94040.

12. In connection with the acts, conduct and other wrongs complained of herein, the defendants, directly or indirectly, used the means and instrumentalities of interstate commerce, the United States mails, and the facilities of a national securities market.

THE PARTIES

13. (a) Lead Plaintiff, The Policeman and Fireman Retirement System of the City of Detroit ("Detroit"), is a public pension fund system located in Detroit, Michigan, which is organized for the benefit of current and retired policemen and firemen of the City of Detroit. During the Class Period, Detroit purchased 32,800 shares of Legato common stock, and suffered damages as a result of the violations of law alleged herein. On May 10, 2000, the Court appointed Detroit as Lead Plaintiff for the Class, as defined in 20, below, pursuant to Section 21D of the Exchange Act, 15 U.S.C. §78u-4.

(b) Plaintiff Sovereign Bankcorp, Ltd. ("Sovereign") is a California corporation with its headquarters in Newport Beach, California. During the Class Period, Sovereign purchased 40,000 shares of Legato common stock, and suffered damages as a result of the violations of law alleged herein.

(c) Plaintiff Robert B. Rutherford ("Rutherford") is an individual who resides in the State of Ohio. During the Class Period, Rutherford purchased 10,000 shares of Legato common stock and suffered damages as a result of the violations of law alleged herein.

(d) Plaintiff Edward Berger ("Berger") is an individual who resides in the State of New Jersey. During the Class Period, Berger purchased 14,000 shares of Legato common stock and suffered damages as a result of the violations of law alleged herein.

14. Defendant Legato is in the business of manufacturing and marketing network storage management software products. The Company licenses its products through distributors, systems integrators and value-added resellers (collectively, "resellers"), and directly to end-users located in North America, Europe and Asia Pacific. The Company also licenses its source code to OEMs in exchange for licensing fees and royalties from the OEMs' product sales.

15. (a) Defendant Louis C. Cole ("Cole") has served as President, CEO and a director of Legato since 1989. In April 1995, he was named Chairman of the Board and continued to hold that position throughout the Class Period. Cole is also one of the largest shareholders of the Company.

(b) By virtue of his positions with Legato as CEO and Chairman, and the size of his holdings of Legato common stock, Cole was a controlling person of the Company and exercised his power and influence to cause Legato to engage in the wrongful conduct complained of herein.

(c) Cole, along with CFO Wise, was responsible for Legato's communications to securities analysts and investors during the Class Period. Cole also reviewed and authorized the release of Legato's publicly reported quarterly financial statements for Fiscal 1999, the Company's reports on Form 10-Q filed with the SEC for each of these periods, and its financial press releases and other group-published corporate reports.

SOURCE OF ALLEGATIONS IN PARAGRAPH 15(c)

(i) The information contained in paragraph 15(c) was obtained by counsel from Legato's former Director of Financial Reporting ("Source 1"), who had knowledge of the facts asserted therein. According to Source 1: (a) his primary responsibility was to ensure that the Company's public filings with the SEC complied with all applicable laws and regulations from a financial reporting perspective; (b) he regularly interacted with defendant Cole in performing this function; (c) Cole was directly involved in the preparation of Legato's SEC filings; (d) Cole was one of the primary authors of Legato's press releases; and (e) Cole retained final approval authority over the contents of these press releases.

(d) Cole knew or was deliberately reckless in disregarding the fact that the Company's internal controls, designed to ensure accurate financial reporting by Legato, were weak or non-existent. For example, Cole knew that the Company did not have a functioning Audit Committee of its Board. In fact, Cole was responsible for appointing Philip White to the Legato Board and installing him as a member of Legato's two-person Audit Committee. Cole knew that White had been fired in July 1997 as CEO and Chairman of Informix Corporation for his role in a massive accounting fraud scandal in which Informix admitted that it had improperly recognized hundreds of millions of dollars of revenue on phony sales to resellers, and restated its financial results for 1994, 1995, and 1996 based upon these "pervasive" "errors and irregularities." Cole also knew that Legato's Audit Committee, which had responsibility for overseeing the Company's accounting practices, failed to hold any meetings during the fiscal year ended December 31, 1998 ("Fiscal 1998"), and held only one meeting during Fiscal 1999 -- a period during which Legato's reported quarterly revenues increased more than 100%, from $34 million to over $70 million.

(e) Further, Cole knew that Legato set aggressive growth targets and pressured its sales personnel each quarter to "make the numbers." Cole presided over weekly "executive management" meetings held in a conference room next to his office in Legato's headquarters, which were attended by CFO Wise and top sales personnel. The primary purpose of these weekly meetings was to update and discuss the financial outlook for the current quarter and to review larger enterprise license agreements anticipated to close during the quarter. Through these meetings, Cole closely monitored the progress of these "big deals," as they were commonly referred to in the Company, as well as Legato's progress toward meeting revenue and earnings targets in each quarter.

SOURCE OF ALLEGATIONS IN PARAGRAPH 15(e)

(i) The information contained in paragraph 15(e) was obtained by counsel from Legato's former Director of Human Resources ("Source 2"), who attended many of these meetings with Cole, Wise and other top sales personnel during the period of her employment, which extended through the beginning of Fiscal 1999. According to Source 2: (i) the meetings were "religiously" held on a weekly basis, in the conference room adjacent to Cole's office; (ii) the topics discussed at these meetings included the financial/sales outlook for the given quarter, sales forecasts, performance of domestic vs. international sales offices, and the status of individual transactions anticipated to close with specific customers; and (iii) Cole used these meetings to monitor the Company's progress in closing its "big deals" during the quarter.

(f) From these weekly executive management meetings and his own direct involvement in the Company's sales activities, Cole knew that resellers were unwilling to commit to large enterprise license agreements unless an end-user committed to purchase the product from the reseller. Cole also knew that, to induce resellers to issue purportedly non-reversible purchase orders for these products, Legato typically entered into "side agreements" which often made payment contingent upon sale of the product to the intended end-user. In fact, during the third quarter of Fiscal 1999, Cole became so concerned that Legato's outside auditors would discover these hidden side agreements, and force the Company to reverse the revenue booked on these contingent sales, that he directed CFO Wise to prepare a form letter, to be signed by the CFO or CEO of every Legato reseller, "acknowledging" that the products purchased by the reseller could not be returned. Cole knew that every reseller who received a copy declined to sign and return the letter to Legato. Nevertheless, as detailed below, Cole continued to permit Legato to recognize revenue derived from contingent sales to these resellers in violation of GAAP, thereby artificially inflating the Company's revenues and earnings.

SOURCE OF ALLEGATIONS IN PARAGRAPH 15(f)

(i) The information contained in paragraph 15(f) was obtained by counsel from a former Vice President of Legato ("Source 3"), who was responsible for the Company's sales organization and reported directly to defendant Cole in this position, and a former Legato Vice-President responsible for one of the Company's sales regions ("Source 4"). According to Source 4: (a) Legato often entered into side letter agreements with its resellers containing contingent payment terms and other incentives to induce resellers to issue purchase orders before the intended end-user committed to purchase the product in question; (b) Legato typically booked revenue from these transactions during the quarter in which the purchase order was issued despite the fact that the sale was contingent and no end-user had committed to purchase the product; and (c) the practice of engaging in such side letter agreements was so widespread at Legato that "no one even cared" about tracking the side letters. Further, according to Source 3: (a) Cole and Wise were kept apprised of all sales that were in the channel and the status of such sales, including whether a reseller had failed to find an end-user for a sale that had already been booked in revenue; (b) with respect to the form letter described above, Wise distributed the form letter to all Legato executives and sales personnel, and instructed Source 3 to have the form letter signed by the CEO or CFO of each reseller to whom a contingent sale had been made, or to sign the letter himself in the event that the CEO or CFO refused to sign; (c) Wise told Source 3 that the letter was necessary because the DSOs of the Company had "gotten too big"; and (d) none of the resellers agreed to sign the letter.

(g) Cole also directly participated in the negotiation of the bogus transactions that succeeded in artificially inflating the Company's revenues and earnings during the Class Period. For example, as detailed in 50-51, below, Cole was directly involved in the negotiation of a transaction with end-user Storage Networks, Inc. ("SNI"), pursuant to which Legato attempted to book millions of dollars in revenue despite the fact that SNI's payment obligation was contingent upon Legato's purchase of an equal amount of product from SNI. Indeed, Cole was instrumental in negotiating the terms of this agreement, which provided for the simultaneous execution of two separate contracts, neither of which referred to the other, in an effort to hide the contingent nature of the transaction from Legato's outside auditors.

SOURCE OF ALLEGATIONS IN PARAGRAPH 15(g)

(i) The information contained in paragraph 15(g) concerning the SNI transaction was obtained by counsel from Source 3 and Source 4, both of whom participated with defendant Cole in the negotiation of this transaction.

(h) Cole also had direct knowledge of other transactions that artificially inflated Legato's revenue and earnings results. For example, as detailed in 45-47, below, Cole participated in an emergency meeting with Legato's outside auditors prior to the filing of the Company's Form 10-Q for the third quarter of Fiscal 1999, during which the auditors warned Cole and Wise that the Company could not record millions of dollars in revenue derived from a product license agreement entered into with reseller Logicon, purportedly on behalf of the United States Air Force. Cole ignored the auditors' warning, and instead authorized the Company to include the revenue in its quarterly report on Form 10-Q.

SOURCE OF ALLEGATIONS IN PARAGRAPH 15(h)

(i) The information contained in paragraph 15(h) was obtained by counsel from a former Legato employee ("Source 5"), whose office cubicle at Legato's headquarters was adjacent to the offices occupied by Cole and Wise, as well as the conference room where the emergency meeting took place. According to Source 5: (a) on Monday, November 8, he passed defendant Wise in the hallway and was shocked by his disheveled appearance, which was "highly uncharacteristic of Steve [Wise]"; (b) shortly thereafter, Source 5 asked Legato's Sales and Marketing Finance Manager ("Finance Manager"), to whom Source 5 reported, about Wise's "near death" demeanor; and (c) Finance Manager responded that, according to Wise, a partner with Legato's outside auditing firm, Larry DeBower, had requested an "emergency meeting" with Cole and Wise to discuss the Air Force transaction, at which the outside auditors objected to Legato's recognition of revenue from this transaction during the third quarter of Fiscal 1999. According to Source 5, this information about the emergency meeting was corroborated in part by the fact that he personally observed two subsequent meetings among the "same players" "within days" of the emergency meeting, in the same conference room adjoining Cole's office. Finance Manager told Source 5 that the subject matter discussed at these two subsequent meetings was the outside auditors' objections to Legato's recognition of revenue from the Air Force transaction during the third quarter of Fiscal 1999.

(ii) The following sources confirmed to counsel that: (a) Legato booked revenue from the Air Force transaction during the third quarter of Fiscal 1999; (b) Legato's outside auditors objected to the recognition of revenue from this transaction during the third quarter of Fiscal 1999; and (c) Legato ultimately eliminated these revenues at the insistence of its outside auditors:

(1) Source 3, who had knowledge of the terms of this transaction, and stated that Cole was involved with Wise in the decision concerning how much revenue should be properly recognized from this contract. According to Source 3, Legato's outside auditors objected to Legato booking revenue from the Air Force contract during the third quarter of Fiscal 1999 based upon the contingent nature of the transaction, which included Legato's agreement to find another end-user for Logicon if the Air Force backed out of the agreement. Source 3 also stated that the contract accounted for over $5 million in third quarter revenues.

(2) Legato's press release, dated January 19, 2000, which stated that the Company would restate its third quarter results to eliminate $5.8 million in revenue derived from a single, unspecified contract which was "recorded as revenue in the third quarter [but] should be recorded as revenue in the first and second quarters of 2000."

(i) During the Class Period, Cole sold 246,000 shares of Legato stock on the open market at prices ranging from $64.50 to $77.88 per share, realizing gross proceeds of more than $15.9 million. Cole sold 75,000 of these shares, for proceeds of $4.8 million, in late November 1999, shortly after the "emergency meeting" in which Legato's auditors advised the Company not to record revenues derived from the Air Force transaction described above. When selling his stock, Cole either knew or, but for his deliberate recklessness, should have known that Legato's quarterly results were overstated by millions of dollars, and that the Company's outside auditors would force Legato to restate these results to reverse the Air Force transaction at year-end.

(j) On July 26, 2000, Legato announced that Cole would step-down as President of the Company, and that a search was underway to find a replacement.

• (a) Defendant Stephen C. Wise ("Wise") served as Senior Vice President and CFO of Legato since 1996. Wise participated in the day-to-day control of the Company and orchestrated the preparation of Legato's false financial statements. By reason of his positions as Senior Vice President and CFO, Wise was a controlling person of Legato, and used his power and influence to cause Legato to engage in the unlawful conduct alleged herein.

(b) As particularized below, Wise orchestrated the scheme alleged herein to inflate Legato's reported revenues and earnings throughout Fiscal 1999. During the Class Period, Wise approved the booking of revenue on contingent transactions with resellers even though he knew that revenue recognition was improper under GAAP and violated the Company's stated revenue recognition policies.

(c) Wise actively participated in weekly "executive management" meetings with defendant Cole and top sales personnel throughout the Class Period. During Fiscal 1999, Wise monitored Legato's total dollar exposure on reseller transactions with side agreements and kept Cole informed of the total exposure from such improper transactions.

SOURCE OF ALLEGATIONS IN PARAGRAPH 16(c)

(i) The information contained in paragraph 16(c) was obtained by counsel from the following sources: (a) Source 2, who attended "weekly executive management meetings" with Cole, Wise, and other top sales personnel during the period of his employment, through the beginning of Fiscal 1999, as described in paragraph 15(e)(i), above; (b) Source 3, who stated that defendant Wise was kept apprised of all sales transactions "in the channel" during each quarter, and the status of these transactions; and (c) Source 4, who stated that defendant Wise approved these improper transactions and maintained records as to "what deals are real and what deals are not real", for the purpose of providing Wise with the ability to "effectively monitor Legato's liability".

(d) Wise also was responsible for reviewing and approving terms of all product licensing agreements whose terms varied from the standard terms provided to customers, along with all "big deals." For example, Wise knew that Legato maintained a policy of only selling products to resellers who had already designated an end-user to purchase the product. Further, consistent with this policy, Legato embedded its software with an encryption code "keyed" to the particular end-user designated for the transaction. Despite this policy, Wise knew that sales personnel were assuring resellers throughout the Class Period that they could return product not ultimately purchased by end-users. Among other things, Wise authorized the use of side agreements which allowed resellers to "return and rotate" product if the deal with the end-user fell through, as detailed in 42-44, below, pursuant to which Legato agreed to "re-key" the product to a new end-user when and if it materialized. For the reasons set forth in 55-60, below, Wise also knew that the "return and rotate" side agreements were a subterfuge to disguise the contingent nature of the contracts, and that revenue recognition on such transactions violated GAAP. Nevertheless, Wise knowingly allowed material amounts of reseller deals to be booked in each quarter of Fiscal 1999 pursuant to these improper agreements.

SOURCE OF ALLEGATIONS IN PARAGRAPH 16(d)

(i) The information contained in paragraph 16(d) was obtained by counsel from Source 3 and a former Legato Vice President who was responsible for the company's sales organization ("Source 6"), both of whom had knowledge of defendant Wise's involvement in the negotiation of reseller contracts that included "return and rotate rights." Further, according to Source 3, Wise was required to approve any contract that had any type of "non-standard" payment terms or financing.

(e) Wise also knew that, by the third quarter of Fiscal 1999, Cole was concerned about the growing number of contingent reseller deals booked earlier in the Class Period that had not sold through to end-users, which triggered the resellers' rights of return. Thus, pursuant to Cole's instructions, and in an effort to hide these contingent sales from Legato's outside auditors, Cole prepared the form letter described in 15(f), above, directing each reseller to "acknowledge" that no right of return existed. Wise knew that none of the resellers signed the acknowledgment, yet he continued to allow Legato to book revenue from these contingent sales and to artificially inflate its reported quarterly financial results based on these transactions.

SOURCE OF ALLEGATIONS IN PARAGRAPH 16(e)

(i) The information contained in paragraph 16(e) was obtained by counsel from Source 3, whose knowledge is based upon the facts set forth in paragraph 15(f)(i), above. According to Source 3: (a) Wise distributed the form letter to all Legato executives and sales personnel, and Wise instructed Source 3 to have the form letter signed by the CEO or CFO of each reseller to whom a contingent sale had been made, or to sign the letter himself in the event that the CEO or CFO refused to sign; (b) Wise told Source 3 that the letter was necessary because the DSOs of the Company had "gotten too big"; and (c) none of the resellers agreed to sign the letter.

(f) Wise also actively participated in negotiating the terms of the bogus "reciprocal" transaction with SNI described in 50-51, below, and also participated in the "emergency meeting" in November 1999 in which Legato's auditors advised against booking revenues from the Air Force transaction during the third quarter. Wise not only authorized the recognition of revenue despite this advice, but also signed and authorized the filing of the false Form 10-Q which included revenues from the Air Force transaction, as set forth in 86-88, below.

SOURCE OF ALLEGATIONS IN PARAGRAPH 16(f)

(i) The information contained in paragraph 16(f) was obtained by counsel from Source 3 and Source 4, whose knowledge of the SNI transaction is based upon the facts set forth in paragraph 15(g)(i), above, and paragraph 52A, below, and Source 5, whose knowledge of the Air Force transaction is based upon the facts set forth in Paragraph 15(h)(i), above and paragraph 48A, below. Certain additional sources, as set forth in paragraph 15(h)(ii), above, and paragraph 48B, below, confirmed to counsel that: (a) Legato booked revenue from the Air Force transaction during the third quarter of Fiscal 1999; (b) Legato's outside auditors objected to the recognition of revenue from this transaction during the third quarter of Fiscal 1999; and (c) Legato ultimately eliminated those revenues at the insistence of its outside auditors.

(g) Wise also caused the Company to improperly recognize revenue on other contingent transactions or product license agreements in which the reseller retained the right to return the product. During the Class Period, as detailed in 45-47, 50-51, below, Wise directly participated in the negotiation of such transactions with reseller Logicon, as well as end-user SNI. Wise also participated in the dissemination of Legato's financial results for the first three quarters of Fiscal 1999 and signed Legato's reports on Form 10-Q filed for the quarters ended March 31, June 30, and September 30, 1999, although he knew that the financial statements contained therein were false.

SOURCE OF ALLEGATIONS IN PARAGRAPH 16(g)

(i) The information contained in paragraph 16(g) was obtained by counsel from Source 3 and Source 4, whose knowledge of the SNI and Air Force/Logicon transactions is based upon the facts set forth in paragraphs 48B and 52A, below.

(h) During the Class Period, Wise sold 111,968 shares of Legato stock in the open market, at prices ranging from $37.25 to $72.82 per share, realizing proceeds of over $6.5 million. Wise sold 40,422 of these shares for proceeds of over $2.6 million in late November 1999, shortly after the "emergency meeting" at which Legato's outside auditors advised against booking revenues from the Air Force transaction described above. At the time he sold this stock, Wise either knew or, but for his deliberate recklessness, should have known that Legato would be forced to restate its financial results at year-end to eliminate revenues derived from the Air Force transaction.

(i) On July 26, 2000, Legato announced that Wise would resign from the Company.

• Defendants Cole and Wise (collectively, the "Individual Defendants") possessed the power and authority to control the contents of Legato's SEC reports and filings, press releases and presentations to securities analysts and knew that such information was conveyed through the analysts to the investing public. Because of their positions they were able to and did control the contents of the various quarterly and annual financial reports, SEC filings, press releases, and presentations to securities analysts pertaining to Legato, which the Company has now admitted were materially false and misleading when issued.
• Cole and Wise reviewed each of Legato's press releases and SEC filings, alleged herein to be false prior to their issuance, and had the ability to prevent their issuance and the authority to cause them to be corrected. They had a duty to promptly disseminate accurate and truthful information with respect to Legato's products, operations, financial condition and future business prospects or to cause and direct that such information be disseminated so that the market price of Legato's shares would be based on truthful and accurate information.
• Cole and Wise knew, or were deliberately reckless in disregarding, that the illegal acts and practices and misleading statements described herein would adversely affect the integrity of the market for Legato stock and would artificially inflate or maintain the price of Legato stock during the Class Period.

• Plaintiffs bring this action as a class action pursuant to Federal Rules of Civil Procedure 23(a) and 23(b)(3) on behalf of a class (the "Class") of all persons who purchased Legato securities on the open market between April 22, 1999 -- the first day of trading after Legato announced its financial results for the first quarter of Fiscal 1999 -- through May 17, 2000, inclusive (the "Class Period"), and who were damaged thereby. Excluded from the Class are: the defendants herein; members of the families of each of the Individual Defendants; any parent, subsidiary, affiliate, partner, officer, executive or director of any defendant; any entity in which any such excluded person has a controlling interest; and the legal representatives, heirs, successors and assigns of any such excluded person or entity.
• The members of the Class are so numerous that joinder of all members is impracticable. While the exact number of Class members is unknown to plaintiff at the present time and can only be ascertained from books and records maintained by Legato and/or its agent(s), plaintiffs believe that Class members number in the thousands. As of April 30, 2000, the Company had 86,828,506 shares of common stock issued and outstanding which, at all relevant times, traded on the NASDAQ National Market System, an efficient market. During the Class Period, Legato was followed and reported on by analysts at numerous securities firms, including SG Cowen, Hoak Breedlove, CIBC Oppenheimer, Hambrecht & Quist and BancBoston Robertson Stephens.
• Common questions of law and fact exist as to all members of the Class and predominate over any questions solely affecting individual members of the Class. Among the questions of law and fact common to the Class are:

(a) Whether the federal securities laws were violated by defendants' acts and omissions as alleged herein;

(b) Whether defendants participated in and pursued the common course of conduct and fraudulent scheme complained of herein;

(c) Whether the documents, reports, filings, releases, and statements disseminated to the Class by defendants during the Class Period misrepresented material facts about the business, performance, and financial condition of Legato;

(d) Whether defendants acted knowingly or with deliberate recklessness in misrepresenting material facts;

(e) Whether the market price of Legato common stock during the Class Period was artificially inflated due to the misrepresentations complained of herein; and

(f) Whether plaintiffs and the other members of the Class have sustained damages and, if so, the appropriate measure thereof.

• Lead Plaintiff and the other named plaintiffs will fairly and adequately represent and protect the interests of the members of the Class. Lead Plaintiff has retained competent counsel experienced in class and securities litigation and intends to prosecute this action vigorously. Plaintiffs are members of the Class and do not have interests antagonistic to, or in conflict with, the other members of the Class.
• Plaintiffs' claims are typical of the claims of the members of the Class. Plaintiffs and all members of the Class purchased Legato securities during the Class Period at artificially inflated prices and have sustained damages arising out of the wrongful course of conduct alleged herein.
• A class action is superior to other available methods for the fair and efficient adjudication of this controversy. Since the damages suffered by individual class members may be relatively small, the expense and burden of individual litigation make it virtually impossible for the Class members individually to seek redress for the wrongful conduct alleged. Plaintiffs know of no difficulty that will be encountered in the management of this litigation that would preclude its maintenance as a class action.

• Legato develops, markets, and provides technical support for a wide range of data storage management products designed to support diverse computer networks. The Company's products are designed to work on a variety of operating systems, including NetWare, Windows NT, and UNIX, and provide the means for customers to back-up and archive computer data efficiently, without placing excessive strain on the network.
• Beginning in 1998, Legato began to focus its sales efforts on large, "enterprise-level" license transactions, in which the Company provides an enterprise-wide suite of data storage and disaster recovery products designed to fulfill the end-users' total data management needs. These transactions are often very large, ranging from hundreds of thousands to millions of dollars in value per transaction.
• Legato's focus on obtaining enterprise-level license contracts has fueled substantial growth in the Company's business in recent years. Product license sales were not only the most significant contributor to the Company's operating performance in Fiscal 1998, accounting for 63.8% of revenues, but also were Legato's most profitable business area during this time frame. By focusing on high margin product license sales, Legato was able to grow profits at a faster rate than revenues. This, in turn, fueled a substantial increase in the price of Legato common stock, which rose to a high of $65.94 per share during the final quarter of Fiscal 1998.
• The dramatic rise in the price of Legato common stock provided the means for the company to pursue strategic acquisitions of complementary businesses, while using its stock as currency for these purchases. For example:

(a) On August 6, 1998, Legato entered into a definitive agreement for the acquisition of Software Moguls, Inc., a developer of advanced backup-retrieval products for the Windows NT and UNIX environments, in exchange for 250,000 shares of Legato common stock;

(b) On October 25, 1998, the Company entered into a definitive agreement to acquire Qualix Group, Inc. (dba FullTime Software, Inc.) ("FullTime"), a developer of distributed, enterprise-wide, cross-platform, adaptive computing solutions, in exchange for 1,721,000 shares of Legato common stock; and

(c) On January 28, 1999, Legato entered into a definitive agreement to acquire Intelliguard Software, Inc. ("Intelliguard"), a developer of standards-based storage management solutions for Storage Area Networks ("SAN"), in exchange for $9,112,500 in cash and 720,000 shares of Legato common stock.

• Although Legato maintains a direct sales force for the purpose of marketing its large, highly profitable enterprise license agreements, the customized nature of the software packages subject to these agreements often requires on-site customization and integration that the Company is not equipped to provide. Further, the relatively small size of Legato's direct sales force limits its ability to penetrate the enterprise license market and secure large product license sales.
• To broaden the reach of its marketing efforts while also providing "one-stop" sales and support shopping for its end-user customers, Legato relies heavily upon value-added resellers, such as third party integrators, for the majority of its revenues. As detailed in the Company's annual report on Form 10-K for Fiscal 1998 (the "1998 Form 10-K"), these resellers purchase the product licenses from Legato, and then resell the license to a specified end-user through Legato's Enterprise Solution Partners program:

The Enterprise Solution Partners program enables third-party integrators specializing in storage management and client/server network solutions to provide end user customers with complete solutions, including systems and storage hardware, complementary software and our software. The reseller is responsible for managing the sales and installation process in each customer situation. In large, complex opportunities, our support personnel work with the reseller to provide technical support. This approach enables us to cost effectively achieve broader market coverage, while maintaining close contact with end user customers in order to obtain input on product direction and to monitor customer satisfaction.

• Despite the expectation that resellers would sell Legato's products to end-users, GAAP prohibits recognition of any revenue from a sale to a reseller that is contingent for payment upon the reseller's subsequent sale of the product to the end-user. Therefore, Legato represented in its filings with the SEC both before and during the Class Period that the Company recognizes revenue from product license sales to resellers only if the transaction is not contingent upon resale to the end-user. Indeed, in its 1998 Form 10-K, Legato contrasted these reseller transactions with contingent sales to distributors, where the Company purported not to recognize revenue until the distributor sold the product to the end-user:

[T]he Company recognizes product revenue upon shipment if a signed contract exists, the fee is fixed and determinable, collection of resulting receivables is probable and product returns are reasonably estimable, except for sales to domestic distributors which are recognized upon sale by the distributor to end-users. The Company has recognized revenue from domestic distributors upon sale by the distributor to end users since these distributors have unlimited rights of return and the Company historically has not been able to make reasonable estimates of product returns from these distributors.

• Legato reiterated these representations concerning its revenue recognition policies in each of its quarterly reports filed with the SEC during the Class Period for the quarters ended March 31, June 30, and September 30, 1999, as set forth below:

We recognize product license revenue upon shipment if a signed contract exists, the fee is fixed and determinable, collection of resulting receivables is probable and product returns are reasonably estimable, except for sales to domestic distributors, which are recognized upon sale by the distributors to end-users. We recognize revenue from domestic distributors upon sale by the distributor to end-users since these distributors have unlimited rights of return and we historically have not been able to make reasonable estimates of product returns from these distributors.

Thus, Legato assured the readers of its SEC filings during the Class Period that its revenues and earnings were not improperly inflated through the improper recognition of revenue from contingent sales from which Legato might never receive payment.

• Nevertheless, as the size of the enterprise license agreements pursued by Legato grew, the Company's difficulty in closing these transactions also increased, as purchase commitments from end-users required approval at the top echelons of management. Further, without a purchase commitment from an end-user, Legato's resellers were unwilling to enter into irrevocable, non-contingent "big deal" software licensing agreements and unconditionally obligate themselves to purchase the product with uncertain sell-through prospects. Instead, the resellers required significant inducements to accommodate Legato's pressure to enter into such transactions as the Company neared the end of each reporting period.
• Faced with these obstacles to revenue and earnings growth, defendants embarked upon a scheme in which they knowingly violated their own revenue and recognition policies, as set forth in 15-16, above, and instead caused Legato to inflate its reported revenue and earnings through the use of side agreements with resellers to induce them to enter into "big deals," the term used within the Company to describe enterprise software license agreements.
• In these transactions, Legato knowingly recognized revenue from software licensing deals with resellers despite the fact that one or more conditions for proper recognition of revenue under GAAP were never met, including the following: (i) the product was never delivered to the reseller; (ii) the fees owed to Legato on the sale were not fixed and determinable; (iii) collectability of the fee was not probable; or (iv) the reseller's obligation to pay for the product was contingent upon subsequent sale of the product to the end-user. In addition, Legato provided certain resellers with side payments, deep discounts on future product offerings, and rebate arrangements to induce them to enter into enterprise license agreements where no end-user had committed to purchase the product. Indeed, as detailed below, defendants caused Legato to recognize revenue based upon these transactions even after being informed by the Company's outside auditors, the international accounting firm of PricewaterhouseCoopers LLP ("PWC"), that recognition of revenue from certain of these transactions was prohibited under GAAP. Examples of such transactions during the Class Period include the following:

Q1 1999 Transactions

• In March 1999, Legato improperly recognized $1.4 million in product license revenue based upon a purported sale of its Networker and Smart Media products to the Internal Revenue Service ("IRS"), despite the fact that the IRS did not agree to purchase the products until June 1999 - three months later. Indeed, Legato never shipped any products "keyed" for the IRS, during the first quarter. Instead, in March 1999, Legato entered into a side agreement with one of its resellers, DLT, pursuant to which DLT agreed to "hold" the products targeted for the IRS in return for a $150,000 payment from Legato once a purchase commitment had been secured from the IRS. It was explicitly agreed that DLT had no obligation to purchase the product if a purchase commitment from the IRS never materialized. In return for this assurance, DLT issued a non-cancellable purchase order and Legato recognized revenue on the contract. DLT, however, never took delivery of the products keyed for the IRS. Instead, when the IRS finally committed to the purchase in June 1999, Legato altered its internal accounting records to show that the product had been transferred from DLT to Storage Tech, another Legato reseller, even though the product had never been delivered to DLT. Legato then shipped the products directly to Storage Tech, who completed the transaction with the IRS. In return for its participation in this sham transaction, Legato paid DLT $150,000.

• Another bogus transaction booked during the first quarter was a $500,000 reseller deal for products keyed for end-user Dow Industrial. Dow Industrial never agreed to purchase any products from Legato during the first quarter. Instead, in late March 1999, Legato induced reseller Vanguard to issue a purchase order for the products keyed for Dow Industrial in return for, among other things, extended payment terms of 90-days, well beyond the customary 30-day payment terms provided to resellers in their contracts with Legato, and assurances that Vanguard would not be required to pay for the products if Dow Industrial's purchase commitment failed to materialize. Legato never delivered the Dow Industrial products to Vanguard as required to recognize revenue, even though it booked $500,000 in revenue from the transaction during the quarter.

• By the end of June 1999, Dow Industrial still had not committed to purchase the products held by Vanguard. Legato did not require Vanguard to pay $500,000 for the goods. Instead, it arranged to substitute MTI for Vanguard, as the ostensible reseller of the goods. Like Vanguard, MTI never accepted delivery of the underlying products, nor did it assume any obligation to pay for the goods until they were resold to end-user Dow Industrial.
• By September 1999, Dow Industrial still had not committed to purchase the goods now held by MTI. Again, Legato did not require MTI to pay for the goods. Instead, Legato arranged to substitute Storage Tech for MTI as the ostensible reseller of the goods keyed to Dow Industrial, again with a side agreement that made Storage Tech's obligation to pay contingent upon sell-through to the end-user. Finally, in October 1999 - seven months after Legato recognized $500,000 in revenue on this transaction through its original agreement with Vanguard - Dow Industrial committed to purchase the goods and Legato finally received payment.

SOURCE OF ALLEGATIONS IN PARAGRAPHS 37 - 40

40A. The information contained in paragraph 37, above, was obtained by counsel from Source 4, who had knowledge of the various dealings between Legato and its resellers in connection with the IRS transaction. According to Source 4: (i) Legato recognized $1.4 million in revenue from the sale of Networker and Smart Media products keyed to the IRS during the first quarter of Fiscal 1999; (ii) DLT agreed to issue a purchase order for the products, in return for a $150,000 payment from Legato; (iii) Legato entered into a side agreement with DLT providing it with a right of return if the IRS purchase commitment did not materialize; (iv) DLT never took delivery of the goods; (v) the IRS purchase commitment did not materialize during the first quarter; (vi) during the second quarter of Fiscal 1999, Legato altered its internal accounting records to show the transfer of the product from DLT to Storage Tech; (vii) the IRS committed to purchase the goods in June 1999; and (viii) after the IRS committed to purchase the goods, Legato shipped the products to Storage Tech, who completed the transaction.

40B. The information contained in paragraphs 38 through 40, above, was obtained by counsel from Source 4, who had knowledge of the various dealings between Legato and its resellers in connection with the Dow Industrial transaction. According to Source 4: (i) Legato recognized $500,000 in revenue from the sale of products keyed to Dow Industrial during the first quarter of Fiscal 1999; (ii) Vanguard agreed to issue a purchase order for the products during the first quarter in return for extended payment terms and a right of return if Dow Industrial failed to purchase the product; (iii) Legato never shipped any products to Vanguard; (iv) when Dow Industrial failed to commit to purchase the product by June 1999, Legato substituted MTI for Vanguard as the reseller of the products; (v) MTI's payment obligation was contingent upon the issuance of a purchase commitment by Dow Industrial; (vi) Legato never shipped any products to MTI; (vii) when Dow Industrial failed to commit to purchase the product by September 1999, Legato substituted Storage Tech for Vanguard as the reseller of the products; (viii) Storage Tech's payment obligation was contingent upon the issuance of a purchase commitment by Dow Industrial; and (ix) Dow Industrial agreed to purchase the goods in October 1999.

Q2 1999 Transactions

• During the second quarter of Fiscal 1999, Legato inflated its reported revenues by over $10 million by engaging in more improper transactions in contravention of the assurances provided by the Company set forth in 31-33, above, and in violation of GAAP. For example, Legato booked revenues from at least five product license agreements with reseller Vanguard during the quarter, despite the fact that Vanguard could return the product to Legato if a subsequent transaction with the end-user did not materialize. With respect to four of these transactions intended for end-users Richardson School District, CLR, IXC and Blockbuster, Legato entered into side agreements with Vanguard providing that the reseller could return the product for full refund if the end-user did not agree to purchase the goods. In return for these side agreements, Vanguard issued purportedly "non-cancellable" purchase orders for each product license agreement, and Legato improperly recognized revenue for the full amount of each purchase order.

• Legato also improperly booked revenue during the second quarter on another license agreement with Vanguard keyed for end-user MCI/UUNET, despite the fact that Legato provided Vanguard with "return and rotate" rights if the end-user failed to consummate the transaction. Specifically, as discussed in 32-33, above, Legato's internal policies contemplate sales of products to resellers only when an end-user has committed to purchasing the product. Accordingly, Legato encrypts software provided to its resellers, and also supplies the reseller with the "key" that permits the designated end-user to install and use the software. Once the software is encrypted, only the specified end-user may use the software that is the subject of the transaction.
• "Return and rotate" terms were devised to avoid this control on transactions with resellers where no end-user had committed to purchase the product. Thus, in the MCI/UUNET transaction, Legato assured Vanguard in a side agreement that, if the end-user did not commit to purchase the product, Vanguard could return it, and Legato would change the key so that Vanguard could "rotate" the product to a new end-user if one materialized.
• Legato also booked revenues in the second quarter from transactions with reseller Applied Digital Systems ("ADS"), despite the fact that ADS had a right of return if the end-user did not commit to purchase the product. For example, in late June 1999, ADS issued a purchase order for a $250,000 licensing agreement although no end-user had committed to purchase the product. To induce ADS to sign the standard purchase agreement, which purported to unconditionally obligate the reseller to pay within 30 days, Legato entered into a side agreement that allowed ADS, among other things, 90-day extended payment terms and assurances that if it could not close the deal with the keyed end-user, ADS had no obligation to pay for the product, or could exercise "return and rotate rights." As an additional incentive, Legato also agreed to increase the credit limits offered to ADS to purchase Legato products, despite the fact that an increase was not permitted under Legato's internal credit criteria, and collectability of the license fee was therefore not probable.

SOURCE OF ALLEGATIONS IN PARAGRAPHS 41-44

44A. The information contained in paragraphs 41 through 44, above, is based upon information obtained by counsel from the following sources with knowledge of the facts alleged therein:

a. Source 3, who had knowledge of the terms of the four Vanguard transactions intended for end-users Richardson School District, CLR, IXC and Blockbuster described in paragraph 41, above. According to Source 3: (i) Vanguard issued purchase orders for software keyed to each of these end-users during the second quarter of Fiscal 1999; (ii) none of the designated end-users had committed to purchase the product at the time Vanguard issued its purchase orders to Legato; (iii) Vanguard agreed to issue these purchase orders based upon side agreements accompanying each transaction, which provided Vanguard the right to return the products for full refund if the designated end-user failed to commit to the purchase; and (iv) Legato recognized revenue from each of these contingent sales during the second quarter of Fiscal 1999.

b. Source 3 and Source 6, both of whom had knowledge of the terms of the MCI/UUNET transaction, as set forth in Paragraphs 42 through 43, above. According to Source 3 and Source 6: (i) Legato recognized revenue during the second quarter of Fiscal 1999 from the sale of products keyed to MCI/UUNET; and (ii) reseller Vanguard agreed to issue a purchase order for these products, despite the fact that MCI/UUNET itself had not committed to purchase the goods. Further, according to Source 3: (i) Legato typically encrypted its software with a code that was "keyed" to a particular end-user; (ii) every Legato product sold to a reseller was keyed to an intended end-user; (iii) Legato evaded this internal control on various transactions by providing its resellers with "return and rotate" rights, which allowed the reseller to return the product to be re-keyed if the intended end-user failed to purchase the product; and (iv) Legato entered into a side letter agreement with Vanguard promising the reseller "return and rotate" rights in the event that MCI/UUNET failed to consummate the transaction, to ensure that Vanguard would not be stuck with the product if the deal fell through. According to Source 6, Legato improperly recognized $1.8 million in revenue from this contingent transaction, which he described as a "bad deal" designed to allow Legato to meet its second quarter revenue target.

c. Source 4, who had knowledge of the terms of the ADS transaction, described in paragraph 44, above. According to Source 4: (i) reseller ADS issued a purchase order for $250,000 in software product licenses in June 1999; (ii) at the time ADS issued its purchase order, no end-user had committed to purchase the product; (iii) ADS agreed to issue this purchase order based upon a side agreement in which Legato provided the reseller with 90-day extended payment terms, "return and rotate rights", and the right to return the product for full refund if the end-user failed to purchase the product; (iv) as an additional incentive to ADS, Legato agreed to raise the reseller's credit limit to allow it to make this purchase, despite the fact that a credit check revealed that an increase was not authorized under Legato's internal credit guidelines; and (v) Legato recognized $250,000 in revenue during the second quarter of Fiscal 1999 from this contingent transaction.

44B. The following sources provided counsel with additional information that is consistent with the facts set forth in paragraph 44A:

a. Source 5, who was responsible for handling accounts receivable and collections from Legato customers, and who frequently interacted with Legato's Vice-President for Worldwide Channel Operations with respect to credit extensions to customers. Source 5 stated that it was common knowledge within the Company that Legato's credit policies were "somewhat more lenient" at the end of every quarter, and "more lenient still" as the year-end approached; and

b. A former Legato employee ("Source 7"), who stated that he was told by a Legato Sales Representative on several occasions between April and August 1999 that Legato was "cooking its books" and "changing the contract date of sale" for the purpose of accelerating revenue recognition in contravention of GAAP.

Q3 1999 Transactions

• Legato improperly recognized millions of dollars in revenues from contingent sales to resellers during the third quarter despite having been warned by its auditors, PWC, against recognizing revenues on one such transaction that PWC discovered in early November 1999. Specifically, PWC learned that Legato had booked $5.8 million in revenues during the third quarter of Fiscal 1999 on the sale of Networker and Smart Media products to the United States Air Force through government contract reseller Logicon. Pursuant to the terms of this transaction, Logicon agreed to issue a purchase order for the products keyed to the Air Force, in return for Legato's agreement to substitute another end-user if the Air Force failed to commit to the purchase.

• On or about November 8, 1999, prior to the filing of the Company's third quarter Form 10-Q with the SEC, Larry De Bower, a PWC partner, convened an "emergency meeting" with Cole and Wise at Legato's executive offices, at which he stated that PWC believed revenue should not be recognized on the Air Force contract in the third quarter. De Bower further informed them that PWC's conclusion was based primarily upon Legato's agreement to find a substitute end-user for the products if the Air Force did not commit, rendering Logicon's obligation to pay contingent and precluding revenue recognition.
• Legato booked $5.8 million in revenue from this transaction, despite the fact that PWC warned defendants Cole and Wise that recognition of revenue under these circumstances was improper under GAAP, and would require restatement at year-end if recorded.
• As detailed in 110, below, defendants Cole and Wise sold millions of dollars in Legato stock shortly after this meeting, knowing or deliberately disregarding the fact that PWC would require Legato to reverse this transaction and restate its third quarter results at year-end.

SOURCE OF ALLEGATIONS IN PARAGRAPHS 45-48

48A. The information contained in paragraphs 45 through 48, above, was obtained by counsel from Source 5, whose office cubicle at Legato's headquarters was adjacent to the offices occupied by Cole and Wise, as well as the conference room where the emergency meeting took place. According to Source 5: (i) on Monday, November 8, he passed defendant Wise in the hallway and was shocked by his disheveled appearance, which was "highly uncharacteristic of Steve [Wise]"; (ii) shortly thereafter, Source 5 asked Finance Manager, to whom Source 5 reported, about Wise's "near death" demeanor; and (iii) Finance Manager responded that, according to Wise, DeBower had requested an "emergency meeting" with Cole and Wise to discuss the Air Force transaction, at which PWC objected to Legato's recognition of revenue from this transaction during the third quarter of Fiscal 1999. According to Source 5, this information about the emergency meeting was corroborated in part by the fact that he personally observed two subsequent meetings among the "same players" "within days" of the emergency meeting, in the same conference room adjoining Cole's office, and Finance Manager told him that the subject matter discussed was PWC's objections to Legato's recognition of revenue from the Air Force transaction during the third quarter of Fiscal 1999.

48B. The following sources confirmed that Legato booked revenue from the Air Force transaction during the third quarter of Fiscal 1999, and that Legato ultimately eliminated these revenues at the insistence of PWC:

a. Source 3, who had knowledge of the terms of this transaction. According to Source 3: (i) Wise and Cole were involved in the decision concerning how much revenue should be properly recognized from this contract; and (ii) PWC objected to Legato booking revenue from the Air Force contract during the third quarter of Fiscal 1999 based upon the contingent nature of the transaction, which included Legato's agreement to find another end-user if the Air Force backed out of the agreement. Source 3 also stated that the contract accounted for over $5 million in third quarter revenues.

b. Legato's press release, dated January 19, 2000, which stated that the Company would restate its third quarter results to eliminate $5.8 million in revenue derived from a single, unspecified contract that was "recorded as revenue in the third quarter [but] should be recorded as revenue in the first and second quarters of 2000."

Q4 1999 Transactions

• As the year-end approached, Cole and Wise became concerned that the Company's average days sales outstanding ("DSOs"), (i.e., the average amount of time it takes for the Company to receive payment on its receivables), had materially increased due to the amount of undisclosed, contingent sales to resellers, and the lack of payment from these sales. They worried not only about the market reaction to a sharp increase in DSOs, but also that PWC would discover that the increase was attributable to revenues booked on contingent reseller deals. Cole and Wise also were concerned about an expected shortfall in fourth quarter results, the effects of which would be exacerbated if PWC required Legato to restate the Air Force transaction at year-end.

• In late December 1999, to cover the quarterly revenue shortfall, Cole and Wise directly participated in negotiating a $10 million bogus transaction with end-user SNI, a data storage provider. The SNI deal ostensibly required SNI to purchase $10 million in software from Legato that SNI would then package with its own software and sell to SNI's customers. Under the contract, Legato would receive $30,000 for each package SNI sold to its customers, and SNI was given three years to pay the $10 million. In addition, Legato agreed to provide SNI with personnel to assist SNI with sell-through and service to SNI customers. The quid pro quo for this transaction, which Cole and Wise directly participated in negotiating with SNI, was that Legato would simultaneously enter into a reciprocal agreement with SNI to purchase $10 million of SNI data storage over a four year period.

• Cole and Wise knew that GAAP prohibited upfront revenue recognition on this transaction since the reciprocal nature of the agreement, along with Legato's continuing obligation to provide personnel to SNI, rendered the agreement a contingent sale. Initially, SNI's CEO, Peter Bell, refused to memorialize the understanding in a side letter and insisted that the reciprocal obligation be reflected in the primary contract. Wise and Cole knew that the improper revenue recognition would be easily discovered if this were done, so they suggested a compromise whereby Legato and SNI would execute two separate stand alone agreements, neither of which would reference the reciprocal nature of the "true" agreement. The purpose of this subterfuge was to hide the true substance of the transaction from PWC. With this subterfuge in place, Wise and Cole caused $10 million in revenue for this transaction to be improperly booked as revenue in the fourth quarter.
• In addition to the SNI transaction, Legato booked material amounts of contingent license sales agreements with resellers during the fourth quarter, despite the fact that the resellers' payment obligations were fully contingent upon resale to the end-user. For example, in December 1999, Legato booked revenues from product license sales to reseller CMC for goods keyed to the University of Pennsylvania Medical Center, despite the fact that CMC's payment obligation was contingent upon sell-through to the end-user. Indeed, the side agreement entered into between Legato and CMC further provided that the reseller could return the products to Legato for a full refund if no end-user purchased the license. Legato's improper booking of revenue based upon this transaction contributed to the artificial inflation of its revenues and earnings during the fourth quarter of Fiscal 1999.

SOURCE OF ALLEGATIONS IN PARAGRAPHS 49-51

52A. The information contained in paragraphs 49 through 51, above, was obtained by counsel from Source 3 and Source 4, each of whom had knowledge of the facts pertaining to the SNI transaction. According to Source 3 and Source 4: (i)during late December 1999, Legato simultaneously entered into two contracts with SNI; (ii) one contract provided for SNI to purchase $10 million in software from Legato, while the other provided for Legato to purchase $10 million in storage space from SNI; (iii) as a condition to the transaction, Legato was required to provide personnel to SNI to assist in the sell-through of the Legato software to SNI customers; and (iv) Legato booked $10 million in revenue from this transaction during the fourth quarter of Fiscal 1999. Source 3 also stated that: (i) the Legato software provided to SNI would be pre-packaged and sold to SNI customers; (ii) Legato would receive $30,000 from SNI for each package sold; and (iii) SNI was provided a period of three years to pay the $10 million balance of the contract. Further, according to Source 4: (i) SNI CEO Peter Bell refused Legato's request to memorialize its reciprocal obligation in a side letter, and insisted that its reciprocal obligation be stated in the primary contract; and (ii) Cole and Wise suggested using two separate contracts as a compromise.

52B. The facts supplied by Source 3 and Source 4 concerning the SNI transaction, and the fact that PWC determined that recognition of revenue from this transaction violated GAAP, were corroborated in part by Legato's January 19, 2000 press release, which attributed the Company's $14 to $19 million revenue shortfall to the Company's determination, "in consultation with its auditors", that "revenue from two contracts signed during the fourth quarter should be recognized during 2000."

SOURCE OF ALLEGATIONS IN PARAGRAPH 52

52C. The information contained in paragraph 52 was obtained by counsel from Source 3 and Source 4, both of whom had knowledge of the facts pertaining to the CMC transaction. According to Source 3 and Source 4: (i) Legato booked product license revenue during the fourth quarter of Fiscal 1999 based upon the sale of software keyed for the University of Pennsylvania to reseller CMC; (ii) at the time CMC issued its purchase order, the designated end-user had not committed to purchase the product; and (iii) to induce CMC to issue its purchase order, Legato provided the reseller with a side letter providing that CMC could return the products for full refund if the University of Pennsylvania failed to purchase the product.

• SEC Regulation S-X (17 C.F.R. §210.4-01(a)(1)) provides that financial statements filed with the SEC which are not prepared in compliance with GAAP are presumed to be misleading and inaccurate, despite footnote or other disclosure. Regulation S-X requires that interim financial statements must also comply with GAAP, with the exception that interim financial statements need not include disclosure which would be duplicative of disclosures accompanying annual financial statements. 17 C.F.R. §210.10-01(a). The responsibility for preparing financial statements that conform to GAAP rests with corporate management as set forth in Section 110.02 of the AICPA Professional Standards:

The financial statements are management's responsibility. . . . Management is responsible for adopting sound accounting policies and for establishing and maintaining internal control that will, among other things, record, process, summarize, and report transactions (as well as events and conditions) consistent with management's assertions embodied in the financial statements. The entity's transactions and the related assets, liabilities, and equity are within the direct knowledge and control of management. . . . Thus, the fair presentation of financial statements in conformity with [GAAP] is an implicit and integral part of management's responsibility.

• Pursuant to these requirements, Legato represented in its quarterly reports on Forms 10-Q for the quarters ended March 31, June 30, and September 30, 1999, filed with the SEC during the Class Period, that its financial results were presented appropriately, in accordance with GAAP:

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (all of which are normal and recurring in nature) necessary to present fairly the financial position, results of operations and cash flows of Legato Systems, Inc. and its subsidiaries.

• Despite these assurances, Legato inflated its revenues and net income during the Class Period by improperly recognizing revenue on the types of transactions set forth in 37-52, above. AICPA Statement of Position ("SOP") 97-2, entitled Software Revenue Recognition, which governs the accounting for the product license sales consummated by Legato during the Class Period, sets forth the criteria under which a software vendor is permitted to recognize revenue derived from software license agreements. Specifically, .08 of SOP 97-2 precludes recognition of revenue from license sales, where the contract "does not require significant production, modification, or customization of software", unless all of the following criteria are met:

--Persuasive evidence of an arrangement exists.

--Delivery has occurred.

--The vendor's fee is fixed or determinable.

--Collectability is probable (i.e., is likely to occur).

• Each of these requirements for revenue recognition must be met regardless of whether the software is sold directly to the end-user, or through a reseller. For example, .18 of this SOP expressly provides that the delivery requirement "applies whether the customer is a user or a reseller." Further, SOP 97-2 expressly precludes recognition of revenue from product license sales to resellers where the fee is not fixed and determinable, or collectability is not likely to occur. In such circumstances, the sale to the reseller is not final but, in reality, is contingent upon the reseller's subsequent sale of the product to the end-user.
• Thus, .30 of SOP 97-2 requires consideration of the following factors, among others, to evaluate whether product license sales to resellers are legitimate, final sales, and recognition of revenue from the agreement is appropriate:

i. Business practices, the reseller's operating history, competitive pressures, informal communications, or other factors indicate that payment is substantially contingent on the reseller's success in distributing individual units of the product.

ii. Resellers are new, undercapitalized, or in financial difficulty and may not demonstrate an ability to honor a commitment to make fixed or determinable payments until they collect cash from their customers.

iii. Uncertainties about the potential number of copies to be sold by the reseller may indicate that the amount of future returns cannot be reasonably estimated on delivery; examples of such factors include the newness of the product or marketing channel, competitive products, or dependence on the market potential of another product offered (or anticipated to be offered) by the reseller.

iv. Distribution arrangements with resellers require the vendor to rebate or credit a portion of the original fee if the vendor subsequently reduces its price for a product and the reseller still has rights with respect to that product (sometimes referred to as price protection) . . .

• As detailed above, defendants knowingly or with deliberate recklessness caused Legato to recognize revenue from sales to both resellers and end-users where one or more conditions for proper recognition of revenue under GAAP were never met, including the following: (i) the product was never delivered to the purchaser; (ii) the purchaser's obligation to pay for the product was not fixed and determinable; (iii) collectability of the fee was not probable; or (iv) the reseller's obligation to pay for the product was contingent upon subsequent sale of the product to the end-user.
• As detailed in 37-52, above, Legato employed a variety of means to incentivize its customers to enter into these transactions, including the following: (i) providing cash payments or substantial extensions of credit to resellers; (ii) agreeing to transfer the reseller's obligation to purchase the products to another reseller if an end-user did not materialize by the time payment was due; (iii) agreeing to find an end-user for products already delivered to resellers, to provide a means for the reseller to make payment to Legato; (iv) providing resellers with "return and rotation" rights to subvert Legato's internal requirement that sales to resellers be conditioned upon a purchase commitment from an identified end-user; and (v) agreeing to purchase equivalent volumes of products from end-users in return for their agreement to purchase identical sums in Legato products.
• As detailed in 37-47, above, defendants sought to hide these terms from Legato's auditors by entering into multiple agreements with respect to each product license sale: (i) a primary contract, which provided for the reseller to take delivery of the product, make payment within thirty days, and providing no right of return; and (ii) a verbal or written side agreement, which included one or more of the terms set forth in 59, above, designed to make the sale of the product contingent upon performance of additional obligations.
• Further, Legato's ultimate disclosure that it would restate its previously reported financial results during the Class Period constitutes an admission that each of these statements, as included in the Company's press releases and Forms 10-Q, were materially false and misleading when issued. Indeed, under Statement of Financial Accounting Standards No. 16, Prior Period Adjustments, restatements are only permitted -- and are required -- for material accounting errors or irregularities. Section 316 of the American Institute of Certified Public Accountant's Codification of Statements on Auditing Standards defines accounting irregularities as

intentional misstatements or omissions of amounts or disclosures in financial statements. Irregularities include fraudulent financial reporting undertaken to render statements misleading, sometimes called management fraud. . . . Irregularities may involve acts such as the following: manipulation, falsification, or alteration of accounting records or supporting documents from which financial statements are prepared; misrepresentations or intentional omission of events, transactions, or other significant information; intentional misapplication of accounting principles relating to amounts, classification, manner of presentation, or disclosure.

• Legato's announced restatement confirms that the Company's financial results for the first three quarters of Fiscal 1999 were materially false and misleading when disseminated.

Q1 1999

• On April 21, 1999, after the market closed, Legato announced its results for the first quarter, ended March 31, 1999, reporting "record" revenues of $48.3 million, and net income of $10.1 million. In this press release, Wise described the recently completed quarter as "the strongest quarter in company history," while Cole stated "[t]he momentum of the company has never been stronger, and our growth reflects broad customer acceptance."
• On or about May 10, 1999, Legato filed with the SEC its Form 10-Q for the quarter ended March 31, 1999. The Form 10-Q reported Legato's false financial results for the quarter, which were materially overstated as described in 4, above. The Form 10-Q was signed by Wise, and approved by Cole.
• The Form 10-Q also highlighted the growth in the Company's high margin product license sales, which it attributed to its success in penetrating the market for enterprise-wide product licenses:

Product license revenue was $30.5 million in the first quarter of 1999 and $17.5 million in the first quarter of 1998. Product license revenue increased 74 percent from the first quarter of 1998 to first quarter of 1999 primarily as a result of the continued acceptance of our products and increased product sales to large-scale enterprises.

• Legato has now admitted that its publicly reported results for the first quarter of Fiscal 1999 were false. The Company's reported revenues and net income were overstated by $8.4 million and $5.4 million, respectively, for the reasons detailed in 37-40, 58-60, above. If Legato's financial results had been reported accurately for the quarter, the Company would have been forced to reveal that net income had declined by nearly 47% from the same period of the prior year, from $5.195 million to $2.76 million.
• Legato and its senior officers, Cole and Wise, knew that the Company was reporting false financial results during this period and that, instead of reaching "record" revenue levels, as represented in the April 21, 1999 press release, Legato's revenues actually declined between the fourth quarter of Fiscal 1998 and the first quarter of Fiscal 1999. Indeed, by at least March 1999, Wise and Cole knew from information presented by sales personnel at the weekly executive management meetings that the Company would fall short of revenue and earnings expectations for the first quarter, based, among other things, on its inability to close the IRS Transaction and the Dow Industrial Transaction described in 37-40, above. Cole and Wise also were concerned that the announcement of an earnings shortfall in the first quarter would cause Legato's stock price to fall, jeopardizing the recently announced Intelliguard acquisition described in 29(c), above, and impairing the Company's ability to make other acquisitions for stock.
• Rather than risk a substantial decline in the market price of Legato stock, Cole and Wise authorized the use of improper side agreements and other incentives to induce certain resellers to "close" transactions before the end of the quarter. This included booking $1.9 million in revenue from the product license transactions involving the IRS and Dow Industrial Transactions, discussed in 37-40, above, despite the fact that neither customer had committed to purchase these products and no products were ever shipped or delivered to these customers during the first quarter of Fiscal 1999.

SOURCE OF ALLEGATIONS IN PARAGRAPHS 67-68

68A. The information contained in paragraphs 67 through 68, above, concerning defendants' knowledge of the improper revenue recognition practices described therein was obtained by counsel from Source 3 and Source 4, whose knowledge of the participation by Cole and Wise in this wrongful conduct, as well as the facts pertaining to the IRS transaction and the Dow Industrial transaction is set forth in paragraphs 40A and 40B, above. According to Source 3: (i) Cole and Wise were kept apprised of all sales that were in the channel and the status of such sales, including whether a reseller had failed to find an end-user for a sales transaction that Legato already had booked as revenue; and (ii) all contracts that contained any type of non-standard payment or financing terms were approved by defendant Wise. According to Source 4: (i) Legato often entered into side letter agreements with its resellers containing contingent payment terms that induced resellers to issue purchase orders before the intended end-user committed to purchase the product in question; (ii) Legato typically booked revenue from these transactions, despite the fact that no end-user had committed to purchase the product; (iii) the practice of engaging in such side letter agreements was so widespread at Legato that "no one even cared" about tracking the side letters; and (iv) Wise approved these improper transactions and maintained records as to "what deals are real and what deals are not real," for the purpose of providing Wise with the ability to "effectively monitor Legato's liability."

68B. Source 2, who interacted with Cole and Wise on a daily basis during the period of his employment, through the beginning of Fiscal 1999, provided the following additional information that was consistent with the facts set forth in paragraphs 67 through 68, above: (i) Source 2 attended weekly "executive management meetings" with Cole, Wise, and other top sales personnel during the period of his employment, through the beginning of Fiscal 1999; (ii) the meetings were "religiously" held on a weekly basis, in the conference room adjacent to Cole's office; (iii) the topics discussed at these meetings included the financial/sales outlook for the given quarter, sales forecasts, performance of domestic vs. international sales offices, and the status of individual transactions anticipated to close with specific customers; and (iv) Cole used these meetings to monitor the Company's progress in closing its "big deals" during the quarter.

• Following the release of the Company's false results for the first quarter, securities analysts issued reports on Legato which were based on and repeated the false financial information provided by Legato's senior management. For example, on April 22, 1999, Hoak Breedlove issued a report in which it recommended the purchase of Legato stock following "what we judge to have been the best conference call ever held by the Legato senior management." In its report, Hoak Breedlove rated Legato stock a "Strong Buy" based largely upon the Company's representations that its first quarter results represented increased penetration of the market for large, high-margin enterprise license agreements contributing $250,000 or more to annual revenues, including the IRS and Dow Industrial transactions described above:

Legato had the following large deal content in 1Q99, which was up 15% sequentially in unit count from 4Q98: 100 over $100,000; 30 over $250,000; of which "more than a handful" [we estimate 6] over $1 million - this total calculates to an estimate of more than $15 million of revenues.

Conclusion: Legato has already begun to demonstrate contract value growth, even before the inclusion of the products just acquired from the just completed FullTime and Intelliguard transactions.

• Other analysts echoed the positive reaction to Legato's reported first quarter earnings found in the Hoak Breedlove report. For example, in a report dated April 22, 1999, the investment firm CIBC Oppenheimer recommended the purchase of Legato common stock, based largely upon the Company's purported success in obtaining large, high-margin enterprise contracts during the first quarter:

The enterprise story is working as large deals (those over $250,000) accounted for 25% of revenue. These deals are being generated through direct and high-end indirect channel partners.

The operating margin improved to 32% in the quarter, significantly ahead of our estimate of 29% due to the stronger than expected license growth. The upside surprise on licenses improved the gross margin to 88% vs. our expectation of 87% due to the higher margin nature of license revenues.

• Similarly, the investment firm Hambrecht & Quist issued a report on or about April 22, 1999, in which it also applauded Legato's ability to win large contracts, noting that "[t]he Company had 100 sales over $100,000, 30 transactions over $250,000, and several deals over $1M." In a report dated April 22, 1999, BancBoston Robertson Stephens analyst John Powers commented:

Strong growth in enterprise license agreements indicated the success of Legato in providing an integrated storage management solution to large customers. 60% of revenue came from transactions larger than $250K with several multi-million dollar deals. The fact is key to realizing Legato's clear competitive advantage in large multi-platform (UNIX and NT) deals . . .

• The price of Legato common stock began to rise significantly following the release of the Company's first quarter financial results. On the first day of the Class Period, April 22, 1999, the first day of trading following the Company's first quarter Fiscal 1999 earnings announcement, the price of Legato common stock rose by approximately 25% from its price one day prior to the announcement to close at $44.125 per share. The stock continued to rise during the second quarter, providing the means for Legato to make strategic acquisitions in exchange for Legato stock. For example, on June 8, 1999, Legato announced that it had agreed to acquire Vinca Corp., a provider of data availability solutions for workgroup environments, in exchange for $18 million in cash and $76 million in Legato common stock.

Q2 1999

• Legato's management continued to assure the investment community during the second quarter of Fiscal 1999 that the Company's business remained strong, and that it would report sequential growth in revenue and favorable earnings results. On May 24, 1999, Robertson Stephens issued a report in which it upgraded its rating on Legato common stock to "Strong Buy" from "Buy", "[b]ased on extensive conversation with company management . . ."
• On July 21, 1999, Legato announced its results for the second quarter ended June 30, 1999, reporting "record" revenues of $62 million and net income of $12.5 million. In the Company's press release, Wise again described the second quarter as "our strongest quarter in company history," while Cole stated that Legato's second quarter results "are a direct reflection of the strong momentum we are seeing in our business as customers continue to demand fully-integrated software solutions to support their complex storage environments."
• On or about August 12, 1999, Legato filed with the SEC its Form 10-Q for the quarter ended June 30, 1999. The Form 10-Q reported Legato's false financial results for the quarter which were materially overstated as described in 4, above. The Form 10-Q was signed by Wise, and approved by Cole.
• In addition to containing false financial results for the quarter, the Form 10-Q also highlighted the growth in the Company's high margin product license sales, which Legato attributed to its continuing success in penetrating the market for enterprise-wide product licenses:

Product license revenue was $41.2 million in the second quarter of 1999 and $25.9 million in the second quarter of 1998, representing an increase of 59 percent. Product license revenue was $74.4 million in the first six months of 1999 and $47.9 million in the first six months of 1998, representing an increase of 55 percent. The increases were primarily attributable to the continued acceptance of our family of products, expansion of our product lines and increased product sales to large-scale enterprises.

• Legato has now admitted that its publicly reported results for the second quarter were false. The Company's reported revenues and net income were overstated by $10.4 million and $5.5 million, respectively. If Legato's financial results had been reported accurately for the quarter, the Company would have been forced to reveal that Legato actually suffered a net loss for the quarter of $1.093 million.
• Legato and its senior officers, Cole and Wise, knew that the Company was reporting false financial results during this period. Indeed, by at least June 1999, Wise and Cole knew from information presented by sales personnel at the weekly executive management meetings that the Company would fall short of revenue and earnings expectations due to Legato's continued difficulty in securing purchase commitments from end-users on various "big deals," including the MCI/UUNET transaction described in 42-43, above.
• As in the prior quarter, rather than risk a substantial decline in the market price of Legato stock, Cole and Wise authorized the use of improper side agreements and other inducements to induce certain resellers, including Vanguard and ADS, to "close" product license agreements before the end of the quarter, as described in 41, 44, above, despite the fact that no end-user had committed to purchase these products.

SOURCE OF ALLEGATIONS IN PARAGRAPHS 78 -79

79A. The information contained in paragraphs 78 through 79, above, concerning defendants' knowledge of the improper revenue recognition practices described therein was obtained by counsel from Source 3 and Source 4, whose knowledge of the participation by Cole and Wise in this wrongful conduct, as well as the facts pertaining to the MCI/UUNET, Vanguard, and ADS Transactions is set forth in paragraph 44A, above. According to Source 3: (i) Cole and Wise were kept apprised of all sales that were in the channel and the status of such sales, including whether a reseller had failed to find an end-user for a sales transaction that Legato already had booked as revenue; (ii) all contracts that contained any type of non-standard payment or financing terms, including return and rotate rights, were approved by defendant Wise; and (iii) defendants Cole and Wise were aware no later than the third quarter of Fiscal 1999 that the four Vanguard transactions intended for end-users Richardson School District, CLR, IXC and Blockbuster were accompanied by side letters providing that the reseller could return the product for full refund if the intended end-user did not agree to purchase the goods. According to Source 4: (i) Legato often entered into side letter agreements with its resellers containing contingent payment terms that induced resellers to issue purchase orders before the intended end-user committed to purchase the product in question; (ii) Legato typically booked revenue from these transactions, despite the fact that no end-user had committed to purchase the product; (iii) the practice of engaging in such side letter agreements was so widespread at Legato that "no one even cared" about tracking the side letters; (iv) Wise approved these improper transactions and maintained records as to "what deals are real and what deals are not real," for the purpose of providing Wise with the ability to "effectively monitor Legato's liability"; and (v) Wise was aware of the terms of the MCI/UUNET and ADS transactions through information that Source 4 provided to Wise, and regular updates Wise received from Legato's Vice President of Worldwide Channel Operations concerning quarter-end transactions.

• Legato's stock price surged after the Company reported its second quarter results. On July 23, 1999 - two days after the Company issued its materially false and misleading earnings announcement, Legato's common stock closed at a new high of $80.75 per share, representing an increase of more than 83% above its closing price on the first day of the Class Period. Further, numerous analyst reports recommended investment in Legato, based on its apparent success in securing large, high margin enterprise license agreements. For example, on July 22, 1999, Hoak Breedlove issued an analyst report recommending the purchase of Legato common stock, in which it described Legato's enterprise license agreements as "the major new element and the fastest-growing element in the Company's revenue mix for the past seven quarters."
• Similarly, in a report dated July 22, 1999, CIBC World Markets commented on Legato's ability to obtain larger, enterprise-wide contracts in recommending the purchase of Legato stock, and noted that "management said that the number of $1 million deals grew from a 'handful' to 'more than a handful.'" On the same day, Robertson Stephens also issued a report recommending the purchase of Legato common stock, noting that "[s]trong growth in enterprise license agreements indicates the success of Legato in providing an integrated storage management solution to large customers." The Robertson Stephens report stressed the company's reported increase in product revenues, which "grew sequentially from the prior quarter by an astounding 23% to $46.2 million." In a report issued by Investor's Business Daily on August 16, 1999, David Breiner, an analyst with the investment firm Volpe Brown Whelan & Co., echoed these remarks, commenting that "[t]he Company has proven itself adept in managing and exceeding expectations. It has produced an enviable string of upside surprises in both revenue and earnings."
• Following the release of Legato's materially false and misleading second quarter results, between July 26 and August 24, 1999, defendants Wise and Cole sold over 177,000 shares of Legato common stock, at prices approaching its all-time high (adjusting for the 2 for 1 stock split effective August 16), realizing proceeds of $11.8 million, as detailed in 108-109, below.

Q3 1999

• After the substantial stock sales set forth in 82, above, Legato's management continued to assure the investment community that the Company's prospects remained solid for the third quarter of Fiscal 1999. On August 27, 1999, SG Cowen analyst Drew Brosseau issued a report which cited guidance given by management that Legato's third quarter results were in line with expectations:

Our mid-quarter check with management suggests the Q3 is shaping up well, with solid prospects for meeting or beating our estimates of $72MM (+ 67%) in revenues and operating EPS of $0.15 (vs. $0.08). July results were strong and the pipelines continue to grow a solid pace in line with recent quarters. As described in more detail below, Legato is benefitting from robust market demand for storage management solutions and its expanding product portfolio that ties the company more directly to rapid growth in high availability software solutions and storage area networks.

• Consistent with this guidance, on October 20, 1999, Legato announced its results for its third quarter ended September 30, 1999, again reporting "record" revenues of $71.7 million and net income of $16 million. Once again, in the Company's earnings release, defendant Wise described the recently completed quarter as "our strongest quarter in company history," while Cole commented that Legato's second quarter results "reflect the strong momentum we have seen in our business as customers continue to demand comprehensive software solutions for their data protection and data availability needs."
• Following the release of the Company's false third quarter results, securities analysts issued reports on Legato which were based on and repeated the false financial information provided by Legato's senior management. For example, on October 21, 1999, Robertson Stephens issued a report reiterating its "strong buy" rating on Legato stock:

Legato reported revenues above the midpoint of consensus, and although revenues came in slightly below our estimate, we would like to emphasize that license revenues were higher than anticipated.

Strong growth in enterprise license agreements indicates the success of Legato in providing an integrated storage management solution to large customers. Over 120 deals signed by the company were over $100K, and over 10 deals signed were over $1 million.

The Robertson Stephens report noted that enterprise licenses accounted for 20% of total product revenue, providing "an indication that Legato is dominating sales to larger customers and fulfilling the majority of their storage needs."

• On or about November 10, 1999, Legato filed with the SEC its Form 10-Q for the quarter ended September 30, 1999. The Form 10-Q reported Legato's false financial results for the quarter which were materially overstated as described in 4, above. The Form 10-Q was signed by defendant Wise, with the approval of defendant Cole. The Form 10-Q also highlighted the growth in the Company's high margin product license sales, which Legato attributed to its continuing success in penetrating the market for enterprise-wide product licenses:

Product license revenue was $47.6 million in the third quarter of 1999 and $29.0 million in the third quarter of 1998, representing an increase of 64 percent. Product license revenue was $122.0 million in the first nine months of 1999 and $76.9 million in the first nine months of 1998, representing an increase of 59 percent. The increases were primarily attributable to the continued acceptance of our family of products, expansion of our product lines resulting from research and development efforts and integration of products from acquired companies and increased product sales to large-scale enterprises.

• Legato has now admitted that its publicly reported results for the third quarter were false. The Company's reported revenues and net income were overstated by $3.8 million and $2.0 million, respectively, for the reasons set forth in 45-47, above. Rather than the "record" results reported to the market, Legato's actual revenues were $67.9 million for the quarter, or at least $3.7 million less than previously reported. Net income for the quarter of Fiscal 1999 was $13.6 million, or $2 million less than previously reported.
• Cole and Wise knew that Legato's reported financial results for the period were materially false. For example, by at least September 1999, Wise and Cole knew from information presented by sales personnel at the weekly executive management meetings that the Company would fall short of revenue and earnings expectations due to Legato's continued difficulty in securing purchase commitments from end-users on various "big deals," including the Air Force Transaction described in 45-47, above. Nevertheless, Cole and Wise continued to authorize the use of improper side agreements and other incentives to induce its resellers, including Logicon, to "close" these transactions before the end of the quarter, as described in 15-16, above, despite the fact that no end-user had committed to purchase these products.
• During these weekly executive management meetings, Wise and Cole also learned that many of the reseller transactions booked in earlier quarters had still failed to yield a purchase commitment from the intended end-user, including the Richardson School District transaction described in 41, above. Wise and Cole also became concerned that the growing number of unclosed contingent deals with resellers had caused the Company's DSOs to increase significantly, which they feared would attract the attention of the auditors. Rather than eliminate the revenues improperly recognized through these transactions, or risk detection by the auditors, Cole directed Wise to prepare the form letter described in 15(f), above, providing for each Legato reseller to "acknowledge" that payment terms on these outstanding transactions were net 30 days, and that the products were not returnable to the Company. Although Wise and Cole knew that none of the resellers agreed to sign the form letter, they continue to improperly recognize revenue from these transactions during the third quarter.

SOURCE OF ALLEGATIONS IN PARAGRAPHS 88-89

89A. The information contained in paragraphs 88 through 89, above, concerning defendants' knowledge of the improper revenue recognition practices described therein was obtained by counsel from Source 3 and Source 5, whose knowledge of the participation by Cole and Wise in this wrongful conduct, as well as the facts pertaining to the Air Force transaction, the Richardson School District transaction, and the "form letter" is set forth in paragraphs 15(f)(i), 16(e)(i), 44A, 48A and 48B, above. According to Source 3: (i) Cole and Wise were kept apprised of all sales that were in the channel and the status of such sales, including whether a reseller had failed to find an end-user for a sales transaction that Legato already had booked as revenue; (ii) all contracts that contained any type of non-standard payment or financing terms, including return and rotate rights, were approved by defendant Wise; and (iii) defendants Cole and Wise were aware no later than the third quarter of Fiscal 1999 that the four Vanguard transactions intended for end-users Richardson School District, CLR, IXC and Blockbuster were accompanied by side letters providing that the reseller could return the product for full refund if the intended end-user did not agree to purchase the goods. Further, with respect to the "form letter", Source 3 stated that: (i) Wise distributed the form letter to all Legato executives and sales personnel, and instructed Source 3 to have the form letter signed by the CEO or CFO of each resller to whom a contingent sale had been made, or to sign the letter himself in the event that the CEO or CFO refused to sign; (ii) Wise told Source 3 that the letter was necessary because the DSOs of the Company had "gotten too big"; and (iii) none of the resellers agreed to sign the letter. With respect to the Air Force transaction, Source 3 stated that: (i) Wise and Cole were involved in the decision concerning how much revenue should be properly recognized from this contract; and (ii) PWC objected to Legato booking revenue from this contract during the third quarter of Fiscal 1999 based upon the contingent nature of this transaction. According to Source 5, Cole and Wise participated in the "emergency meeting" with PWC partner Larry DeBower concerning this transaction, as detailed above.

• As the price of Legato common stock climbed to record levels following the Company's earnings release, Cole and Wise sold over 115,000 shares of Legato stock in late November 1999, realizing proceeds exceeding $7.5 million. This insider selling was particularly egregious because it occurred shortly after the "emergency meeting" described in 15(h), 46-47, above, at which PWC advised Wise and Cole against recognizing revenue on the Air Force transaction during the third quarter.

Q4 and Year-End 1999

• On November 11, 1999, Legato convened its annual "Analyst Day" in Redwood City, California, at which securities analysts covering the Company heard presentations from most members of Legato's senior management team, including Wise and Cole. At this meeting, Legato's senior management endorsed prevailing revenue and earnings estimates which were $90 million and $0.19 for the fourth quarter and $275 million and $0.62 for the full-year, respectively.
• Following Legato's Analyst Day, the price of Legato common stock rose to new all-time highs, closing at $76.78 per share (split adjusted) on November 17, 1999. On November 18, 1999, Legato announced a deal to acquire Ontrack Data International, Inc., in exchange for $20 million in cash and 1.485 million shares of Legato common stock, for total consideration of $134 million. Cole and Wise knew that a substantial drop in the price of Legato stock would jeopardize the Company's announced acquisition of Ontrack, which was scheduled to close in January 2000.
• In an interview reported by Bloomberg News Service on January 12, 2000, Wise flatly lied about the Company's fourth quarter results, characterizing them as being "within the analysts' expectations" of $85 to $90 million in revenues and $0.19 to $0.21 in earnings per share:

Both in the revenue and earnings range, the Company is within the analysts' expectations. Were we to be outside of this, we would do a pre-release of our earnings.

• This statement was false when made. At the time this statement was made, Wise knew that the $10 million SNI transaction booked during the fourth quarter, as described in 50-51, above, was a sham. Wise also knew that PWC had advised Wise and Cole against recognizing revenue on the Air Force transaction in the third quarter during the emergency meeting described in 15(h), 46-47, above. Wise also knew or was deliberately reckless in disregarding the fact that, at year-end, PWC would require Legato to restate its third quarter results to reverse the Air Force deal, and would reverse revenue recognition of the SNI deal when it scrutinized its substance. Together, these two deals alone accounted for approximately $16 million in revenues.

SOURCE OF ALLEGATIONS IN PARAGRAPH 94

94A. The information contained in paragraph 94 concerning defendant Wise's knowledge that his January 12 statement was false when made was obtained by counsel from Source 3, Source 4, and Source 5, whose knowledge of the SNI and Air Force transactions is set forth in paragraphs 15(h)(i), 16(f)(i), 48A, 48B, and 52A, above. According to Source 3 and Source 5, Wise was aware that PWC objected to Legato booking revenue from the Air Force transaction during the third quarter of Fiscal 1999. Further, according to Source 3 and Source 4: (i) Cole and Wise were directly involved in the negotiation of the SNI transaction; and (ii) PWC advised Cole and Wise during the fourth quarter of Fiscal 1999 that Legato could not recognize revenue from the SNI transaction in accordance with GAAP.

• In early January 2000, auditors from PWC commenced field work for the audit of the Company's Fiscal 1999 results at Legato's headquarters. During this initial field work, the auditors discovered the true substance of the SNI transaction, and informed Legato that revenue could not be recognized on the sale. PWC also reiterated its earlier conclusion that recognition of $5.8 million in revenue from the Air Force transaction during the third quarter was improper, and that the quarter must be restated to reverse this revenue.
• On January 19, 2000, Legato announced its results for the fourth quarter of Fiscal 1999, reporting revenues of $71.2 million, well below the $85 to $90 million range endorsed by Wise just a week earlier. Legato also announced that net income was only $9.9 million, nearly 90% below prevailing analyst estimates. For the full year, the Company reported net income of $43 million on revenues of $251.1 million, falling 9% and 22% below prevailing revenue and earnings expectations of $275 million and $55 million, respectively.
• Legato also announced that it would restate its third quarter results to eliminate $5.8 million in revenue derived from a single, unspecified contract. In the release, Wise stated:

During the last few days, in connection with the audit of the Company's 1999 results, Legato was informed by its auditors that one contract recorded as revenue in the third quarter should be recorded as revenue in the first and second quarters of 2000.

• In the same release, Cole attributed both the fourth quarter shortfall and the third quarter restatement to a dispute with Legato's auditors over the appropriate timing of revenue recognition:

The shortfall in fourth quarter revenue resulted primarily from the Company's determination, in consultation with its auditors during the last few days in connection with the 1999 audit, that revenue from two contracts signed during the fourth quarter should be recognized during 2000. The Company believes that these contracts properly could have been recorded as revenue in the fourth quarter but has elected to implement its auditors' recommendation.

• These statements were false when made. Even with the adjustments, Cole and Wise knew that Legato's financial results for Fiscal 1999 were still overstated by tens of millions of dollars. Wise and Cole knew that, throughout Fiscal 1999, dozens of resellers were given side agreements to induce them to enter into enterprise license transactions, and were given assurance that if these deals could not be finalized with the keyed end-users, they could "rotate and return" the product. Moreover, Wise and Cole knew that resellers had refused to sign Wise's form letter during the third quarter falsely affirming the purported unconditional nature of their obligations. Thus, Wise and Cole knew that revenue recognition on these transactions throughout Fiscal 1999 was improper.
• The market price of Legato common stock plummeted following the January 19, 2000 announcement, falling 45% to close at $29.75 per share on January 20, 2000, the first trading day following the release. Further, on or about January 24, 2000, Ontrack announced that it had canceled its deal to be acquired by Legato. Legato's stock price rebounded, however, over the course of the following weeks, as the Company issued a series of false assurances to assuage the investment community. For example, in an interview reported by Dow Jones Newswire on January 21, 2000, Cole misleadingly stated that Legato's restatement and purported deferral of revenues resulted from a decision to adopt "a more conservative revenue recognition methodology." Similarly, on March 12, 2000, defendants Cole and Wise met with various analysts to reassure them that Legato was "on track" to achieve revenue and earnings growth of at least 50% in Fiscal 2000. The following day, the investment firm Bear Stearns & Co. issued a report recommending the purchase of Legato common stock based upon the prior day's meeting, in which defendants represented that, "[t]he company's revenues during the first two months [of the first quarter of Fiscal 2000] were on target and there has been no trouble seen on the horizon for March."
• These statements sparked a rebound in Legato's stock price. On March 27, 2000, the stock closed at $45.68 per share, representing an increase of 50% above its closing price of $29.75 per share on January 20 - immediately following the Company's initial disclosure of its third quarter restatement and fourth quarter revenue and earnings shortfall.

The Scheme Begins To Unravel

• On April 3, 2000, Legato announced that, in addition to the previously announced restatement of its third quarter Fiscal 1999 results, it was revising downward its previously reported results for the fourth quarter and full year Fiscal 1999, because of the Company's use of "side agreements" with resellers. Legato also revealed that it would be unable to timely file its 1999 Form 10-K for Fiscal 1999 because its auditors were investigating these transactions:

[O]n March 31, 2000, [Legato] filed with the Securities and Exchange Commission a Notification of Late Filing with respect to its Annual Report on Form 10-K for the year ended December 31, 1999. The Company expects to file its Form 10-K on or before April 14, 2000.

In its notification, the Company reported that it was unable to file its Form 10-K by March 30, 2000 because, based on its regular first quarter review of certain fourth quarter 1999 transactions, it discovered additional information that related to such transactions. The Company has requested that its independent auditors evaluate such transactions in light of this additional information.

• This statement was false. It was not the Company, but rather PWC during its year-end audit, that "discovered" the improprieties associated with these transactions. The announcement also falsely attributed these improprieties to "a small number of its sales representatives, acting outside their authority," who had entered into side agreements involving approximately $7 million of fourth quarter Fiscal 1999 revenues. The price of Legato common stock plummeted following the April 3, 2000 announcement, losing more than 55% of its value to close at $19.875 per share on that day.
• On April 17, 2000, Legato announced that the filing of its 1999 Form 10-K, and the release of its results for the first quarter of the fiscal year ending December 31, 2000 would be further delayed:

While the Company had previously anticipated it would file its 10-K by April 14th, the evaluation of transactions throughout Fiscal 1999 by the Company and its independent auditors has not yet been completed. It is the Company's objective to complete this review over the next several weeks. As a result of its ongoing investigation, the Company will delay the release of its financial results and teleconference briefing for the first quarter of fiscal 2000, previously scheduled for April 26, 2000, until it has filed its Form 10-K for fiscal 1999.

Three days later, Legato revealed that NASDAQ had initiated delisting procedures due to the Company's failure to file its 1999 Form 10-K in a timely manner.

• On May 17, 2000, after the close of trading, Legato finally revealed the magnitude and extent of its restatements for the first three quarters of Fiscal 1999, and the revision of its previously announced results for the fourth quarter and year-end, revealing that previously reported revenues had been overstated by $23 million:

Of the $23.0 million total net revision in Fiscal 1999 revenue, approximately $18.2 million relates to transactions with resellers where, due to the existence of unauthorized side agreements and verbal promises on certain specific transactions, the Company has determined that the fees from transactions with such resellers are not fixed or determinable. Accordingly, the Company has elected to recognize the revenue from transactions with these resellers when the fees are deemed fixed or determinable, which generally coincides with the receipt of payments from these resellers. The remaining $4.8 million of revised revenue relates to contracts where subsequent events and additional information required different accounting treatment than adopted at the time the contracts were originally recorded. Of the total $23.0 million reduction in fiscal 1999 revenue, the Company believes it will recognize approximately $16.0 million during Fiscal 2000.

• The Company also revealed that a newly formed "special committee" of independent directors, consisting of H. Raymond Bingham and David N. Strohm, after investigating the circumstances surrounding the misstatement of the Company's Fiscal 1999 results, had concluded that Legato directors Phillip E. White and Kevin A. Fong (its only 2 members) should be dismissed from the Company's Audit Committee, and that neither would be re-elected to the Board. Thereafter, on July 26, 2000, the Company announced that defendant Cole would be relieved of responsibility for managing the day-to-day operations of the Company, and that defendant Wise would be replaced with a new CFO.
• On May 18, 2000, the first day of trading after the Company announced its restated results for Fiscal 1999, the Company's common stock closed at $11.9375 per share, representing a decline of 85% from its high during the Class Period of $79.25 per share.

• Notwithstanding their direct participation in and knowledge of the financial fraud as detailed herein, and their possession of material non-public information about Legato, Cole and Wise sold 357,968 shares of Legato common stock during the Class Period, for proceeds of over $22.5 million, as set forth below:

Defendant Date Shares Price Sale

Sold Proceeds

Cole 07/26/99 20,000 $76.42 $1,528,400.00

07/26/99 20,000 $77.88 $1,557,600.00

07/28/99 20,000 $76.66 $1,533,200.00

07/29/99 20,000 $73.28 $1,465,600.00

07/30/99 16,000 $72.79 $1,164,640.00

08/11/99 10,000 $68.56 $ 685,600.00

08/12/99 5,000 $68.81 $ 344,050.00

08/13/99 10,000 $71.49 $ 714,900.00

08/23/99 30,000 $41.51 $1,245,300.00

08/24/99 10,000 $42.44 $ 424,400.00

08/24/99 10,000 $41.34 $ 413,400.00

11/23/99 30,000 $64.50 $1,935,000.00

11/24/99 40,000 $65.05 $2,602,000.00

11/29/99 5,000 $67.75 $ 338,750.00

TOTAL 246,000 $15,952,840.00

Wise 07/30/99 12,546 $72.73 $ 912,470.58

07/30/99 21,000 $72.82 $1,529,220.00

08/16/99 15,500 $37.25 $ 557,375.00

08/17/99 18,000 $38.88 $ 699,840.00

08/17/99 1,000 $38.88 $ 38,880.00

08/17/99 3,500 $38.75 $ 135,625.00

11/24/99 5,822 $65.00 $ 378,430.00

11/24/99 3,600 $67.00 $ 241,200.00

11/24/99 20,000 $67.00 $1,340,000.00

11/29/99 11,000 $66.75 $ 734,250.00

TOTAL 111,968 $6,587,290.58

GRAND TOTALS: 357,968 $22,540,130.58

• This insider selling by Cole and Wise was unusual and suspicious, both in timing and amount. The first round of insider sales by Cole and Wise came on the heels of Legato's July 21, 1999 press release announcing "record" revenues for the second quarter of Fiscal 1999, which defendants knew was materially false and misleading. Between July 26 and August 24, 1999, Cole sold 171,000 shares for proceeds of over $11 million, and Wise sold over 71,000 shares for proceeds of over $3.8 million.
• The second round of unusual and suspicious insider selling by Cole and Wise came just after Legato filed its Form 10-Q for the third quarter of Fiscal 1999, which Cole and Wise knew contained false financial results for the quarter based upon the improper inclusion of revenues from the Air Force transaction, among others, as described in 49-52, above. Between November 23 and November 29, 2000, Cole sold 75,000 shares for proceeds of $4,875,750, and Wise sold 40,422 shares for proceeds of $2,693,880. These sales occurred shortly after the November 8, 1999 "emergency meeting" described in 15(h), 46-47, above, at which PWC partner Larry De Bower advised Cole and Wise that recognition of revenue on the Air Force deal in the third quarter was improper.

• Plaintiffs repeat and reallege each of the allegations set forth in the foregoing paragraphs. This Count is brought pursuant to Section 10(b) of the Exchange Act, and Rule 10b-5 promulgated thereunder, on behalf of all purchasers of Legato securities on the open market during the Class Period.
• Throughout the Class Period, Legato, Cole and Wise, by the use and means of instrumentalities of interstate commerce and/or of the mails, made a series of false and misleading statements and omissions, all of which caused the market price of Legato securities to be artificially inflated throughout the Class Period. As detailed herein, defendants' false and misleading statements during the Class Period included the following:

(a) The statements contained in each Form 10-Q for Fiscal 1999 filed by Legato with the SEC during the Class Period that, "[i]n the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (all of which are normal and recurring in nature) necessary to present fairly the financial position, results of operations and cash flows of Legato Systems, Inc. and its subsidiaries;"

(b) The statement contained in each Form 10-Q filed by Legato during the Class Period that the Company "recognize[s] product license revenue upon shipment if a signed contract exists, the fee is fixed and determinable, collection of resulting receivables is probable and product returns are reasonably estimable. . .;"

(c) The statements contained in Legato's press release, dated April 21, 1999, and in the Company's Form 10-Q for the first quarter of Fiscal 1999, which was filed with the SEC on or about May 10, 1999, that the Company earned $10.1 million on revenues of $48.3 million;

(d) The statements contained in Legato's press release, dated July 21, 1999, and in the Company's Form 10-Q for the second quarter of Fiscal 1999, which was filed with the SEC on or about August 12, 1999, that the Company earned $12.5 million, excluding various merger and acquisition costs, on revenues of $62 million;

(e) The statements contained in Legato's press release, dated October 20, 1999, and in the Company's Form 10-Q for the second quarter of Fiscal 1999, which was filed with the SEC on or about November 10, 1999, that the Company earned $16 million, excluding various merger and acquisition costs, on revenues of $71.7 million;

(f) The statement by defendant Wise, as reported by Bloomberg News Service on January 12, 2000 that, for the fourth quarter and full year Fiscal 1999, "[b]oth in the revenue and earnings range, the Company is within the analysts' expectations;"

(g) The statements contained in Legato's press release, dated January 19, 2000, that the Company earned $9.9 million, excluding various merger and acquisition costs, on revenues of $71.2 million; and

(h) The statements contained in Legato's press releases dated April 3, 2000 and May 17, 2000, and the Company's Form 10-K for Fiscal 1999, filed with the SEC on or about May 17, 2000, that the overstatement of the Company's revenues and earnings during the Class Period was attributable to "a small number of its sales representatives, acting outside their authority. . . ."

• Legato, Cole and Wise acted with scienter throughout the Class Period, in that they had actual knowledge of the misrepresentations and omissions of material facts set forth in 15-16, above. Specifically, defendant Cole, as Chairman of the Board and CEO of the Company, and Wise, as Senior Vice-President and CFO of Legato, were directly responsible for each of the statements set forth in 112, above, as evidenced by their knowledge of and direct involvement in the various improper transactions detailed above.
• Legato, Cole and Wise made and/or participated in the making of the false and misleading statements described in 112, above, to inflate the price of Legato securities for the purpose of, among other things: (i) allowing Cole and Wise to recoup millions of dollars in proceeds from the sale of Legato common stock at artificially inflated prices; and (ii) allowing Legato to use its stock as currency to make various significant business acquisitions.
• As a result of these deceptive practices and false and misleading statements and omissions, the market price of Legato securities was artificially inflated during the Class Period. In ignorance of the false and misleading nature of the representations and omissions described above and the deceptive and manipulative devices employed by the defendants, plaintiffs and the other members of the Class, in reliance on either the integrity of the market or directly on the statements and reports of defendants, purchased Legato securities at artificially inflated prices.
• Had plaintiffs and the other members of the Class known of the material adverse information not disclosed by defendants, or been aware of the truth behind defendants' material misstatements, they would not have purchased Legato securities at artificially inflated prices.
• By virtue of the foregoing, defendants named in this Count have violated Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder.

• Plaintiffs repeat and reallege each of the allegations set forth in the foregoing paragraphs. This Count is brought pursuant to Section 20(a) of the Exchange Act on behalf of all purchasers of Legato securities on the open market during the Class Period.
• Each of the Individual Defendants was a controlling person of the Company within the meaning of Section 20(a) of the Exchange Act during the Class Period. Specifically, throughout the Class Period, each of the Individual Defendants had the power and authority to cause the Company to engage in the wrongful conduct complained of herein by reason of the following:

(a) Defendant Cole had the power and authority to cause Legato to engage in the wrongful conduct complained of herein by virtue of his positions as Chairman of the Board and CEO of the Company, and through his substantial ownership of the Company's common stock outstanding; and

(b) Defendant Wise had the power and authority to cause Legato to engage in the wrongful conduct complained of herein by virtue of his positions as Senior Vice President and CFO of the Company.

• By reason of their positions of control over the Company, as alleged herein, each of the Individual Defendants is liable jointly and severally with and to the same extent that Legato is liable to plaintiffs and the members of the Class as a result of the wrongful conduct alleged herein.

WHEREFORE, plaintiffs, on behalf of themselves and the members of the Class, pray for judgment as follows:

1. Declaring this action to be a proper class action maintainable pursuant to Rule 23 of the Federal Rules of Civil Procedure and declaring plaintiffs to be proper Class representatives;

2. Awarding plaintiffs and the other members of the Class compensatory damages as a result of the wrongs alleged in Counts I and II of the Complaint;

3. Awarding plaintiffs and the other members of the Class their costs and expenses in this litigation, including reasonable attorneys' fees and experts' fees and other costs and disbursements; and

4. Granting plaintiffs and the other members of the Class such other and further relief as the Court may deem just and proper.

Plaintiffs demand a trial by jury of all issues so triable.

DATED: February 12, 2001