MILBERG WEISS BERSHAD
HYNES & LERACH LLP
WILLIAM S. LERACH (68581)
ALAN SCHULMAN (128661)
DARREN J. ROBBINS (168593)
600 West Broadway, Suite 1800
San Diego, CA 92101
Telephone: 619/231-1058
KAUFMAN, MALCHMAN, KIRBY
& SQUIRE, LLP
JEFFREY H. SQUIRE
IRA M. PRESS
919 Third Avenue, 11th Floor
New York, NY 10022
Telephone: 212/371-6600
SHALOV STONE & BONNER
LEE S. SHALOV
70 West 36th Street
Suite 1404
New York, NY 10018
Telephone: 212/268-2727
Attorneys for Plaintiff
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF CALIFORNIA
|
ALAN FRIEDMAN, On Behalf of Himself Plaintiff, vs. SYBASE, INC., MITCHELL E.
Defendants. |
No. C-98-0252-MEJ CLASS ACTION CLASS ACTION COMPLAINT Plaintiff Demands A |
1. This is a securities class action on behalf of persons who purchased the common stock of Sybase Inc. ("Sybase" or the "Company") between April 18, 1997 and January 21, 1998, inclusive (the "Class Period"), against Sybase and certain of its senior officers. During the Class Period, Sybase consistently reported profitable results claiming that Sybase was successfully executing a turn-around from its disastrous 1995 and 1996 performances. While defendants were publicly reporting profits of more than $13 million for Q1, Q2 and Q3 1997, Sybase insiders directly or indirectly sold over $6 million of Sybase stock. For example, Mitchell Kertzman, Sybase CEO and Chairman sold 197,500 shares, or more than 50% of his Sybase stock holdings, for proceeds of more than $3.1 million. As Sybase continued to report profits from operations, the price of Sybase stock reacted rising to a Class Period high of $23-1/2 in October 1997. On January 2, 1998, Sybase surprised the market, disclosing that -- at best -- it would report EPS of $0.02 for Q4 1997. The revelation surprised the market and caused Sybase's stock to fall by approximately 25% to $9-15/16 per share. Then, after the close of the market on January 21, 1998, Sybase dropped a neutron bomb on investors, revealing that all of the Company's 1997 revenue growth in the Company's Intercontinental Region, which included Asia and Latin America, had been obtained via accounting fraud and that Sybase would report a loss "substantially" beyond that even hinted at on January 2, 1998. In fact, Sybase revealed that it would be restating its previously reported financial results for each of the prior three quarters of fiscal 1997. This revelation was the final straw, causing Sybase stock to fall as low as $7-1/8 per share, a decline of more than 65% from its Class Period high.
2. The chart set forth below shows the price action of Sybase stock between January 1, 1997 and January 22, 1998 indicating the defendants' insider trading that occurred:
3. In late January 1997 Sybase reported its results for the year ended December 31, 1996, including a net profit of $5.1 million in Q4 1996. However, a 10% sequential decrease in license revenue, a substantial increase in days sales outstanding (DSO) and flat sequential PowerBuilder revenues left many investors and analysts unconvinced of the strength of Sybase's turn-around and caused Sybase's stock to decline from its January 1997 high of over $20 per share to less than $13 per share by April 1997. Sybase insiders were extremely concerned about this as they held millions of shares and/or options to purchase Sybase shares. Consequently, beginning in early April defendants began reporting positive financial results and issuing a steady drumbeat of positive news. Although the Company's overall revenue for the first quarter ended March 31, 1997 was stagnant, significant revenue growth of 8.5% in its Intercontinental region which includes Japan, Asia, Australia and Latin America, appeared to confirm defendants' ability to deliver on their promises of continued profitability and successfully halted the decline in Sybase stock, pushing the price of Sybase stock up 30% to over $16 per share, by the end of April 1997. Sybase insiders, including defendants Mitchell Kertzman and Peter F. Pervere, immediately took advantage of the upward movement in Sybase stock, dumping hundreds of thousands of Sybase shares.
4. On July 17, 1997, Sybase reported revenues of $237.6 million, including strong growth in Intercontinental revenue and again reported another quarterly profit. Commenting on Sybase's reported net income of $4.4 million, defendant Kertzman noted that Sybase was "pleased to report profitable results for the fourth consecutive quarter." However, during July 1997, the technology market suffered a significant correction dragging the price of Sybase stock to below $13 per share. As the technology market steadied and defendants' reassurances that Sybase's 1997 profits would continue, Sybase shares moved back above $20 per share. On October 16, 1997 Sybase reported revenue of $244.2 million and net income of $5.2 million. In October 1997, as Sybase continued to report earnings from operations, its stock price hit a high of $23-1/2 per share and Sybase insiders completed their selling binge, dumping another $2.4 million of Sybase stock.
5. On January 2, 1998, after Sybase insiders had dumped over $6 million of Sybase stock at artificially inflated prices, defendants were confronted by their auditors who were unwilling to go along with Sybase's improper accounting practices and defendants were forced to begin priming the market for its disastrous January 21, 1998 revelation, announcing first that Sybase would generate less than expected revenues of $245-$250 million and EPS of ($0.07) - $0.02, for the quarter ended December 31, 1997. The market reacted strongly as Sybase shares fell by approximately 25% to $9-15/16 per share on heavy volume of 9.35 million shares. Then, on January 21, 1998, Sybase dropped a neutron bomb on investors, revealing that all of the Company's 1997 revenue growth in Asia had been obtained via accounting fraud and that Sybase would report a loss "substantially" beyond that even hinted at on January 2, 1998. In fact, Sybase revealed that it would be restating its results for each of the previously reported three quarters of fiscal 1997. This revelation was the final straw, causing Sybase stock to fall as low as $7-1/8 per share, a decline of more than 65% from its Class Period high.
6. This court has jurisdiction over the subject matter of this action pursuant to §27 of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. §78aa, and 28 U.S.C. §1331. The claims asserted herein arise under §§10(b) and 20(a) of the Exchange Act, 15 U.S.C. §§78j(b) and 78t(a), and Rule 10b-5 promulgated thereunder by the Securities and Exchange Commission ("SEC").
7. (a) Venue is proper in this District pursuant to §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 false and misleading information, occurred in this District. Sybase has its principal place of business at Emeryville, California.
(b) Assignment of this action to the San Francisco Division is appropriate as a substantial part of the events or omissions identified herein occurred in Alameda County.
8. In connection with the acts, conduct and other wrongs complained of, the defendants, directly or indirectly, used the means and instrumentalities of interstate commerce, the United States mails, and the facilities of the national securities markets.
9. Plaintiff Alan Friedman purchased 300 shares of Sybase common stock the Class Period as detailed in the attached certification and was damaged thereby.
10. Defendant Sybase, Inc. designs and develops software products geared towards open, distributed, high-performance end-to-end solutions. Sybase's client/server products consist of RDBMS servers, interoperability software, application development tools and system management and multimedia products. In addition to its software products, Sybase also offers consulting, education and technical support services to support the implementation of its software products by customers.
11. (a) Defendant Mitchell E. Kertzman ("Kertzman") is President, Chief Executive Officer, and a Chairman of the Board of the Company. Because of Kertzman's positions, he knew the adverse non-public information about the business of Sybase, as well as its finances, markets and present and future business prospects via access to internal corporate documents (including the Company's operating plans, budgets and forecasts and reports of actual operations compared thereto), conversations and connections with other corporate officers and employees, attendance at management and Board of Directors' meetings and committees thereof and via reports and other information provided to him in connection therewith. During the Class Period, Kertzman participated in the issuance and/or review of false and/or misleading statements, including the preparation of false and/or misleading press releases and SEC filings. Defendants Kertzman sold 197,500 shares of Sybase common stock, or more than 54% of his holdings during the Class Period for proceeds of more than $3.1 million.
(b) Defendant Jack L. Acosta ("Acosta") was Senior Vice President and Chief Financial Officer of the Company. Because of Acosta's positions, he knew the adverse non-public information about the business of Sybase, as well as its finances, markets and present and future business prospects via access to internal corporate documents (including the Company's operating plans, budgets and forecasts and reports of actual operations compared thereto), conversations and connections with other corporate officers and employees, attendance at management meetings and via reports and other information provided to him in connection therewith. During the Class Period, Acosta participated in the issuance of false and/or misleading statements, including the preparation and/or review of the false and/or misleading press releases and SEC filings. Acosta signed the Form 10-Q's filed with the SEC for each of the interim periods during the Class Period.
(c) Defendant Peter F. Pervere ("Pervere") was Vice President and Controller of the Company. Because of Pervere's positions, he knew the adverse non-public information about the business of Sybase, as well as its finances, markets and present and future business prospects via access to internal corporate documents (including the Company's operating plans, budgets and forecasts and reports of actual operations compared thereto), conversations and connections with other corporate officers and employees, attendance at management meetings and via reports and other information provided to him in connection therewith. During the Class Period, Pervere participated in the issuance of false and/or misleading statements, including the preparation and/or review of false and/or misleading press releases and SEC filings. Defendant Pervere sold 7,417 shares of Sybase common stock, or more than 43% of his holdings during the Class Period for proceeds of more than $122,000.
12. By reason of their positions, the officer and/or director defendants identified above, (collectively the "Individual Defendants") had access to material inside information about Sybase and were able to control directly or indirectly the acts of Sybase and the contents of the representations disseminated during the Class Period by or in the name of Sybase. Defendants Kertzman and Pervere took advantage of the inflation in Sybase common stock by selling significant portions of their Sybase stock holdings. These defendants' insider sales were suspicious in timing and amount, as defendant Kertzman sold over 50% of his stock holdings while Pervere dumped over 40% of his holdings of Sybase stock during the Class Period.
13. The defendants are liable, jointly and severally, as direct participants in the wrongs complained of herein. Defendants had a duty promptly to disseminate accurate and truthful information with respect to Sybase'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 Sybase stock would be based on truthful and accurate information.
14. The Individual Defendants, because of their positions of control and authority as officers and/or directors of the Company 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 the Company. Each Individual Defendant was provided with copies of Sybase's press releases and SEC filings alleged herein to be misleading prior to or shortly after their issuance and had the ability and opportunity to prevent their issuance or to cause them to be corrected. Because of their board membership and/or executive and managerial positions with Sybase, each Individual Defendant had access to the adverse non-public information about Sybase's business, finances, products, markets and present and future business prospects particularized herein, via access to internal corporate documents, conversations or connections with corporate officers and employees, attendance at Sybase's management and Board of Directors meetings and committees thereof and via reports and other information provided to them in connection therewith.
15. The Individual Defendants engaged in the scheme in order to conceal Sybase's badly flagging performance in order to stem the decline in the price of Sybase stock in order to: (i) protect and enhance their executive positions and the substantial compensation; (ii) enhance the value of their personal Sybase securities holdings and options, especially those which had been repriced at $19.25 per share; and or (iii) allow Sybase insiders to sell over $6 million of Sybase common stock they owned at inflated prices to obtain large amounts of cash and large profits and/or avoid significant losses which they expected once the market was apprised of how badly Sybase's operations were performing.
16. Each of the defendants either knew or recklessly disregarded the fact that the illegal acts and practices and misleading statements and omissions described herein would adversely affect the integrity of the market for Sybase common stock and would artificially inflate or maintain the prices of those securities. Each of the defendants, by acting as herein described, did so knowingly or in such a reckless manner as to constitute a fraud and deceit upon plaintiff and members of the Class plaintiff seeks to represent.
17. In late January 1997 Sybase reported its results for the year ended December 31, 1996, including a net profit of $5.1 million in Q4 1996. However, a 10% sequential decrease in license revenue, a substantial increase in days sales outstanding (DSO) and flat sequential PowerBuilder revenues left many investors and analysts remained unsure about Sybase's turn-around and caused Sybase's stock to retreat from its January 1997 high of over $20 per share to less than $13 per share by April 1997. Sybase insiders were extremely concerned about this as they held millions of shares and/or options to purchase Sybase shares. Consequently, beginning in early April, defendants initiated the scheme complained of herein which included the regular reporting positive financial results and issuing a steady drumbeat of positive news.
18. On April 17, 1997, Sybase issued a release reporting revenue and net income of $241.9 million and $3.5 million, respectively, for the quarter ended March 31, 1997. Defendant Kertzman noted that "[w]e are pleased by our profitable first quarter results."
19. In May 1997, Kertzman spoke with securities analysts assuring them that Sybase's turn-around would continue to generate profits in 1997 as the Company had now reported two consecutive quarterly profits and was seeing revenue growth in its Intercontinental region which, combined with the introduction of PowerBuilder 6.0, would ensure that Sybase would earn at least $0.28 per share in 1997.
20. On May 7, 1997, defendant Kertzman made a presentation to securities analysts and large investors at the Hambrecht & Quist Technology Conference in San Francisco. Defendant Kertzman made an upbeat presentation, stating:
Just to give you an idea, you know, we have been generally credited, and I'll give Jack Acosta, our chief financial officer, the lion's share of the credit, for doing a great job for managing expenses, managing our balance sheet. Last quarter, where we produced five cents a share, our earnings, well ahead of analysts' expectations, in a tight revenue environment, we not only did that, but we also added $20 million cash to our balance sheet to bring us up to about $200 million. And that kind of financial management is something that I think people give us credit for. And people now expect that Sybase is around for the long term, and that we are doing very well at that.
* * *
I mentioned that we've been focused on restoring operating profitability. I became CEO in July of 1996 in the third quarter. Jack became CFO then, and as you can see, since then, we have reversed the trends that existed in the company before that and have established, I think, a pretty strong commitment to and an ability to deliver operating profitability.
21. On May 14, 1997, Sybase filed with the SEC its report on Form 10-Q for the quarter ended March 31, 1997. The report on Form 10-Q contained the Company's previously reported financial statements for the quarter ended March 31, 1997.
22. The financial results reported by Sybase for Q1 1997 were false and misleading and prepared in violation of GAAP as detailed in ¶¶33-53.
23. On July 17, 1997, Sybase issued a release entitled "Sybase, Inc. Reports Continued Profitability In Second Quarter." The release stated:
Sybase, Inc. today announced profits for the quarter ended June 30, 1997. Second quarter revenues were $237.6 million, compared with $249.9 million recorded in the second quarter of 1996. Net income for the period was $4.4 million, or $0.06 per share, up from a loss of $24.6 million, or $0.33 per share, in the second quarter of 1996.
"We are pleased to report profitable results for the fourth consecutive quarter," said Mitchell Kertzman, Chairman and Chief Executive Officer. "We are on track with our plan, and have remained focused on managing expenses and maintaining profitability while preparing the market for the delivery of our innovative architecture and new products, which we currently anticipate in the second half of the year.
* * *
"We are increasing our management strength and continue to fine tune our service model to better meet the needs of our customers," said Kertzman. "I am delighted to bring on John Chen, one of the industry's most highly regarded executives. I am confident that his technology management expertise will bring world class operations to Sybase. The quality and innovation of our new products combined with the strength of our management team will create the foundation for future revenue growth," Kertzman added.
24. Also on July 17, 1997, Kertzman replaced Mark Hoffman as Chairman of the Board.
25. On July 18, 1997, defendant Kertzman was interviewed for national television. In response to questions from a CNBC financial reporter, defendant Kertzman reiterated his belief that Sybase had "tremendous growth potential ahead of us," stating:
Well, I think we are halfway through a turnaround, the first half of which is complete and which was meant to stabilize the company, return the company to profitability which we've done for the past 4 quarters while we developed a completely refreshed or completely updated product line. And that product line is now ready to hit the market in this quarter. So now the focus in this turnaround is shifting from just a cost -- an expense controls to revenue growth. That's going to be the focus going forward.
26. On August 14, 1997, Sybase filed with the SEC its report on Form 10-Q for the quarter ended June 30, 1997. The report on Form 10-Q included Sybase's previously reported financial statements for the quarter ended June 30, 1997.
27. The financial results reported by Sybase for Q2 1997 were false and misleading and prepared in violation of GAAP as detailed in ¶¶33-53.
28. On October 16, 1997, Sybase issued a release titled "Sybase Reports Sequential Growth in Third Quarter." The release reported revenue of $244.2 million and net income of $5.2 million for the quarter ended September 30, 1997. The release also stated:
"We've seen an enthusiastic response to the third quarter new product launches of Adaptive Server' Enterprise 11.5, the next generation of our flagship database, PowerJô Java development tool, and Jaguar CTS' component transaction server," said Mitchell Kertzman, chairman and chief executive officer of Sybase.
* * *
"The third quarter growth in our server product line was based on the strength of Sybase's technology and proved a critical factor in many significant third quarter transactions," said John Chen, Sybase's president and chief operating officer.
* * *
"We are pleased with our improvement in profitability in the quarter," said Chief Financial Officer Jack Acosta. "Sybase has significantly invested in new product development while maintaining a very strong balance sheet. Cash totaled $229.9 million as of September 30th -- up $31.0 million during the quarter. Day sales outstanding was 74 days, down from 80 days in the preceding quarter," Acosta said.
"We're pleased to see the wide acceptance that Adaptive Server Enterprise 11.5 is receiving from existing customers and new customers alike," said John Chen. "The third quarter growth in our server product line proves that we have met our first milestone in growing key license revenue," Chen said. "This coupled with our significant product accomplishments will be major contributors to Sybase's future growth."
29. On October 17, 1997, in connection with the Sybase's release of its results for the quarter ended September 30, 1997, defendant Kertzman appeared on CNBC "Squawk Box," stating:
Well, I've said the recovery of Sybase really has three stages to it, like a three-staged rocket. The first was sustainable profitability. We've done that for five quarters in a row of operating profitability, four quarters of networking profitability. The second stage was launching some great products and exciting technology into the market. We've done that over the past quarter or so with more yet to come, and the third stage is revenue growth that will of course over time fuel earnings growth.
* * *
Well, accounts receivables is down. If you look at the past 5 quarters, cash is up significantly from $100 million to $230 million. Day sales outstanding is down. I think that reflects a terrific performance by Jack O'Costa and his financial team, that has just done a great job managing our balance sheet. So I feel very, very positive about the growth in our balance sheet.
30. On November 13, 1997, Sybase filed with the SEC its report on Form 10-Q for the quarter ended September 30, 1997. The report on Form 10-Q included the Company's false financial results previously reported on October 16, 1997.
31. The financial results reported by Sybase for Q3 1997 were false and misleading and prepared in violation of GAAP as detailed in ¶¶33-53.
32. On January 2, 1998, Sybase disclosed that -- at best -- it would report EPS of $0.02 for Q4 1997. The revelation surprised the market and caused Sybase's stock to decline by approximately 25% to $9-15/16. Then, on January 21, 1998, Sybase shocked investors, revealing that all of the Company's 1997 revenue growth in Asia had been obtained via accounting fraud and that Sybase would report a loss "substantially" beyond that even hinted at on January 2, 1998. In fact, Sybase revealed that it would be restating its results for each of the previously reported three quarters of fiscal 1997. Stunned by the revelation that Sybase's revenue growth in Asia had been obtained via accounting trickery, that Sybase would suffer a "substantially" larger loss than previously disclosed and that Sybase would restate each of its prior quarters in 1997, Sybase's stock collapsed, falling to $7-1/8 per share on a heavy volume of over 6 million shares.
33. Sybase's actual financial results and the true status of its operations were concealed by defendants, which operated to artificially inflate or maintain the market price of Sybase common stock during the Class Period. Each of the releases, SEC filings and statements particularized herein was false and misleading and misrepresented and/or failed to disclose the following material adverse information:
(a) That Sybase's financial results were the result of accounting trickery as detailed in ¶¶33-53;
(b) That defendants knowingly tolerated Sybase's inadequate internal accounting controls and, consequently lacked any reasonable basis for the financial results reported by them;
(c) That Sybase's reported Intercontinental revenues were overstated by at least 70% for the first three quarters of 1997 due to the Company's improper revenue recognition;
(d) That Sybase's Intercontinental revenues were much lower than internally budgeted, forecast and well below the levels necessary for Sybase to achieve the 1997 earnings per share it had disseminated;
(e) That only through Sybase's accounting fraud had Sybase achieved the revenue and earnings for 1997 reported by defendants;
(f) That sales of Sybase's database products were encountering substantial difficulty due to competition from Oracle and Informix such that Sybase's net income was being adversely affected, i.e., it was actually a loss versus the profits that had been internally budgeted or forecast, and was less than was being publicly reported by Sybase; and
(g) As a result of the foregoing, there was no reasonable basis in fact for defendants' statements that Sybase's interim profits would ensure 1997 earnings per share of at least $.28 in 1997 as these adverse facts set forth above were inconsistent with and seriously undermined those forecasts such that defendants had no reasonable basis to believe them and did not, in fact, believe them.
34. In order to inflate the price of Sybase's stock, the Company falsely reported its results for the first three quarters of 1997 through improper revenue recognition on sales made through the Company's Japanese subsidiary which provided Sybase's customers with the right to return its products, thereby materially overstating its revenue, net income and earnings per share in each of the first three quarters of 1997. Ultimately, Sybase admitted that its results had been misstated and revealed that it would restate its results to eliminate up to $65 million in previously reported revenues. Absent this improper revenue recognition, Sybase would have reported a loss for the three quarters ended September 30, 1997 instead of the profits the Company actually reported.
35. Sybase reported the following amounts for the first three quarters of 1997:
3/31/97 6/30/97 9/30/97
------- ------- -------
Revenue $241.9M $237.6M $244.2M
Net Income $ 3.5M $ 4.4M $ 5.2M
EPS $ 0.05 $ 0.06 $ 0.07
36. Sybase included its Q1, Q2 and Q3 1997 results in Form 10-Qs filed with the SEC, which reports were prepared by defendants Kertzman and Acosta and signed by defendant Acosta. The Form 10-Qs included the following representation:
The accompanying unaudited condensed consolidated financial statements include the accounts of Sybase, Inc. and its subsidiaries, and, in the opinion of management, reflect all adjustments (consisting only of normal recurring adjustments) necessary to fairly state the Company's consolidated financial position, results of operations and cash flows for the periods stated.
37. These representations were false and misleading when made, as Sybase's financial statements for Q1, Q2, and Q3 1997 were not a fair presentation of Sybase's results and were presented in violation of GAAP and SEC rules.
38. GAAP are those principles recognized by the accounting profession as the conventions, rules and procedures necessary to define accepted accounting practice at a particular time. SEC Regulation S-X (17 C.F.R. §210.4-01(a)(1)) states 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).
39. Sybase falsified its reported financial results through its improper revenue recognition on Sybase's shipments and licensing of software (including Adaptive Server, EnterpriseConnect and Powersoft products) to reseller/customers of the Company's Japanese subsidiary, while granting rights of return to the customers through "side agreements" and other means. Pursuant to GAAP, Sybase should have deferred recognition of revenue on such shipments, but did not in order to inflate its reported results.
40. GAAP, as set forth in AICPA Statement of Position ("SOP") 91-1, Software Revenue Recognition, requires the following conditions be met with regard to the recognition of revenue on software licenses: (1) delivery has occurred; (2) other remaining vendor obligations are no longer significant; and (3) collectibility is probable.
41. Moreover, SOP 91-1.36 states:
If, after delivery, there is significant uncertainty about customer acceptance of the software, license revenue should not be recognized until the uncertainty becomes insignificant.
42. GAAP, as set forth in FASB Statement of Accounting Standard ("SFAS") No. 48, Revenue Recognition When Right of Return Exists, prohibits the recognition of revenue when the right of return exists unless certain conditions are met. SFAS No. 48 applies to transactions "in which a product may be returned, whether as a matter of contract or as a matter of existing practice." SFAS No. 48, ¶3. SFAS No. 48, ¶6 states in part:
6. If an enterprise sells its product but gives the buyer the right to return the product, revenue from the sales transaction shall be recognized at time of sale only if all of the following conditions are met:
* * *
b. The buyer has paid the seller, or the buyer is obligated to pay the seller and the obligation is not contingent on resale of the product.
43. Sybase's 1996 Annual Report, released in late April 1997, represented the following with regard to the Company's revenue recognition practices for software licenses:
Sybase licenses software to end users under noncancellable license agreements. License fee revenue is recognized when a noncancellable license agreement is in force, the product has been shipped, the license fee is fixed or determinable, and collectibility is reasonably assured. Sublicense fees are recognized as reported to the Company by its licensees.
44. Despite granting the right to return unsold merchandise, and cancel the licenses, to customers of the Japanese subsidiary, Sybase recognized the revenue to inflate its reported results (i.e., to report profits in the interim periods during 1997, instead of the losses it was actually incurring), contrary to GAAP and to Sybase's stated revenue recognition method.
45. Ultimately, Sybase could not continue to misrepresent its results and during the 1997 year-end audit by Sybase's outside accountants, Sybase was forced to reveal that its 1997 results had been misstated due to "improper revenue recognition relating to a number of transactions by the Company's Japanese subsidiary," which improper revenue recognition was estimated to be in the range of $60-$65 million.
46. Due to these accounting improprieties, the Company presented its financial results and statements in a manner which violated GAAP, including the following fundamental accounting principles:
(a) The principle that interim financial reporting should be based upon the same accounting principles and practices used to prepare annual financial statements (APB No. 28, ¶12);
(b) The principle that financial reporting should provide information that is useful to present and potential investors and creditors and other users in making rational investment, credit and similar decisions was violated (FASB Statement of Concepts No. 1, ¶34);
(c) The principle that financial reporting should provide information about the economic resources of an enterprise, the claims to those resources, and effects of transactions, events and circumstances that change resources and claims to those resources was violated (FASB Statement of Concepts No. 1, ¶40);
(d) The principle that financial reporting should provide information about how management of an enterprise has discharged its stewardship responsibility to owners (stockholders) for the use of enterprise resources entrusted to it was violated. To the extent that management offers securities of the enterprise to the public, it voluntarily accepts wider responsibilities for accountability to prospective investors and to the public in general (FASB Statement of Concepts No. 1, ¶50);
(e) The principle that financial reporting should provide information about an enterprise's financial performance during a period was violated. Investors and creditors often use information about the past to help in assessing the prospects of an enterprise. Thus, although investment and credit decisions reflect investors' expectations about future enterprise performance, those expectations are commonly based at least partly on evaluations of past enterprise performance (FASB Statement of Concepts No. 1, ¶42);
(f) The principle that financial reporting should be reliable in that it represents what it purports to represent was violated. That information should be reliable as well as relevant is a notion that is central to accounting (FASB Statement of Concepts No. 2, ¶¶58-59);
(g) The principle of completeness, which means that nothing is left out of the information that may be necessary to insure that it validly represents underlying events and conditions was violated (FASB Statement of Concepts No. 2, ¶79); and
(h) The principle that conservatism be used as a prudent reaction to uncertainty to try to ensure that uncertainties and risks inherent in business situations are adequately considered was violated. The best way to avoid injury to investors is to try to ensure that what is reported represents what it purports to represent (FASB Statement of Concepts No. 2, ¶¶95, 97).
47. Further, the undisclosed adverse information concealed by defendants during the Class Period is the type of information which, because of SEC regulations, regulations of the national stock exchanges and customary business practice, is expected by investors and securities analysts to be disclosed and is known by corporate officials and their legal and financial advisors to be the type of information which is expected to be and must be disclosed.
48. Sybase had a responsibility to maintain sufficient accounting controls to accurately report its financial results. It is well settled that the representations made by a company in its financial statements and in other financial disclosures to the public are the representations of that company's management. Indeed, even when a company issues audited financial statements together with the report of that company's independent auditors, that report always expressly provides that "the financial statements are the responsibility of [the company's] management."
49. According to SEC rules, to accomplish the objectives of accurately recording, processing, summarizing and reporting financial data, a company must establish an internal control structure. Pursuant to §13(b)(2) of the Exchange Act, Sybase was required to:
[M]ake and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer; and
(A) devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that
(i) -- transactions are executed in accordance with management's general or specific authorization;
(ii) transactions are recorded as necessary (I) to permit preparation of financial statements in conformity with generally accepted accounting principles . . . .
50. Moreover, according to Appendix D to Statement on Auditing Standards No. 55, "Consideration of the Internal Control Structure in a Financial Statement Audit" ("SAS 55"), management should consider, among other things, such objectives as (i) making certain that "[t]ransactions are recorded as necessary . . . to permit preparation of financial statements in conformity with generally accepted accounting principles . . . [and] to maintain accountability for assets," and (ii) making certain that "[t]he recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences."
51. As described in SAS 55, the applicability and importance of specific control environment factors, accounting system methods and records, and control procedures that an entity should establish should be considered within the context of such criteria as an entity's size, its organization and ownership characteristics, the nature of its business, the diversity and complexity of its operations, the entity's method of processing data, and its applicable legal and regulatory requirements. In short, the larger the entity, the more the nature of the entity's business is complex, diverse and sophisticated, and the public ownership of the entity customarily requires a sophisticated internal control structure to ensure that transactions are accurately recorded and that, prior to the public disclosure of any financial information, such transactions are compared to the existing assets (e.g., comparing inventory as recorded on a company's books to those amounts actually "on hand") to eliminate any discrepancies between the recorded and actual amounts.
52. According to SAS 55:
Establishing and maintaining an internal control structure is an important management responsibility. To provide reasonable assurance that an entity's objectives will be achieved, the internal control structure should be under ongoing supervision by management to determine that it is operating as intended and that it is modified as appropriate for changes in conditions.
53. Contrary to the requirements of GAAP and SEC rules, Sybase failed to implement and maintain an adequate internal accounting control system. Since the beginning of 1997, at the latest, Sybase management knowingly tolerated the existence of inadequate internal controls and/or recklessly disregarded its obligation to implement adequate controls to ensure that revenues were properly recorded in compliance with GAAP.
DEFENDANT DATE SHARES PRICE PROCEEDS
--------- ---- ------ ----- --------
Kertzman, M. 04/23/97 40,000 $15.25 $610,000
05/06/97 2,500 16.25 40,625
05/06/97 5,000 16.00 80,000
05/06/97 7,500 16.13 120,975
10/24/97 10,000 18.63 186,300
10/24/97 5,000 19.00 95,000
10/24/97 5,000 18.88 94,400
10/27/97 15,000 17.31 259,650
10/27/97 5,000 17.00 85,000
10/27/97 10,000 17.25 172,500
10/27/97 2,500 16.63 41,575
10/28/97 5,000 16.06 80,300
10/28/97 5,000 16.48 82,400
10/28/97 5,000 16.50 82,500
10/28/97 5,000 16.56 82,800
10/28/97 5,000 14.50 72,500
10/28/97 5,000 14.75 73,750
10/28/97 10,000 14.63 146,300
10/28/97 5,000 17.50 87,500
10/28/97 10,000 17.00 170,000
10/28/97 5,000 15.38 76,900
10/28/97 5,000 14.44 72,200
10/28/97 5,000 14.13 70,650
11/25/97 20,000 14.75 295,000
------- ----------
197,500 $3,178,825
Percent of shares owned sold 54%
Pervere, P 05/05/97 3,000 16.88 50,640
05/15/97 2,000 16.25 32,500
05/29/97 417 16.50 6,881
05/29/97 2,000 16.38 32,760
------- ----------
7,417 $122,781
Percent of shares owned sold 43%
------- ----------
TOTALS: 204,917 $3,301,606
======= ==========
54. The statutory safe harbor provided for forward-looking statements under certain circumstances does not apply to the allegedly false statements pleaded in this Complaint, as the statutory safe harbor does not apply to the defendants' misrepresentations of currently existing or historical facts, including defendants' dissemination of false financial statements.
55. Plaintiff incorporates by reference ¶¶1-54.
56. Each of the defendants: (a) knew or had access to the material adverse non-public information about Sybase' financial results and then existing business conditions, which was not disclosed; and (b) participated in drafting, reviewing and/or approving the misleading statements, releases, reports and other public representations of and about Sybase.
57. During the Class Period, defendants, with knowledge of or reckless disregard for the truth, disseminated or approved the false statements specified above, which were misleading in that they contained misrepresentations and failed to disclose material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading.
58. Defendants violated §10(b) of the Exchange Act and Rule 10b-5 in that they:
(a) Employed devices, schemes and artifices to defraud;
(b) Made untrue statements of material facts or omitted to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or
(c) Engaged in acts, practices and a course of business that operated as a fraud or deceit upon plaintiff and others similarly situated in connection with their purchases of Sybase common stock during the Class Period.
59. Plaintiff and the Class have suffered damages in that, in reliance on the integrity of the market, they paid artificially inflated prices for Sybase stock. Plaintiff and the Class would not have purchased Sybase common stock at the prices they paid, or at all, if they had been aware that the market prices had been artificially and falsely inflated by defendants' misleading statements.
60. Plaintiff incorporates by reference ¶¶1-59.
61. Defendant Kertzman acted as a controlling person of Sybase within the meaning of §20(a) of the Exchange Act. By reason of his corporate position, defendant Kertzman had the power and authority to cause Sybase to engage in the wrongful conduct complained of herein. Sybase controlled each of the Individual Defendants and all of its employees.
62. By reason of such wrongful conduct, Kertzman and Sybase are liable pursuant to §20(a) of the Exchange Act. As a direct and proximate result of these defendants' wrongful conduct, plaintiff and the other members of the Class suffered damages in connection with their purchases of Sybase securities during the Class Period.
63. Plaintiff brings this action as a class action pursuant to Federal Rule of Civil Procedure 23(a) and (b)(3) on behalf of all persons who purchased or otherwise acquired the common stock of Sybase (the "Class") during the Class Period. Excluded from the Class are the defendants, members of their families and any entity in which a defendant has an interest.
64. The members of the Class are so numerous that joinder of all members is impracticable. The disposition of their claims in a class action will provide substantial benefits to the parties and the Court. During the Class Period, Sybase had more than 78 million shares of stock outstanding, owned by hundreds if not thousands of shareholders.
65. There is a well-defined community of interest in the questions of law and fact involved in this case. The questions of law and fact common to the members of the Class which predominate over questions which may affect individual Class members include the following:
(a) Whether the federal securities laws were violated by defendants;
(b) Whether defendants omitted and/or misrepresented material facts;
(c) Whether defendants knew, had reason to know or recklessly disregarded that their statements were false and misleading or failed to have a reasonable basis for those statements;
(d) Whether the price of Sybase stock was artificially inflated during the Class Period; and
(e) The extent of damage sustained by Class members and the appropriate measure of damages.
66. Plaintiff's claims are typical of those of the Class because plaintiff and the Class sustained damages from defendants' wrongful conduct.
67. The prosecution of separate actions by individual Class members would create a risk of inconsistent and varying adjudications.
68. Plaintiff will adequately protect the interests of the Class. He has retained counsel who are experienced in class action securities litigation. Plaintiff has no interests which conflict with those of the Class.
69. A class action is superior to other available methods for the fair and efficient adjudication of this controversy.
70. Because the PSLRA, §21D(c) of the Exchange Act [15 U.S.C. §78u-4(c)], requires complaints to be pleaded in conformance with Federal Rule of Civil Procedure 11, plaintiff has alleged the foregoing based upon the investigation of his counsel, which included a review of Sybase's SEC filings, securities analysts' reports and advisories about the Company, press releases issued by the Company, media reports about the Company, and discussions with consultants, and, pursuant to Rule 11(b)(3), believes that, after reasonable opportunity for discovery and further investigation, substantial, additional evidentiary support will likely exist for the allegations set forth at ¶¶11-16, 33-34, 37, 39, 44-46, 53, 56-58 and 61.
WHEREFORE, plaintiff prays for judgment as follows:
1. Declaring this action to be a proper class action pursuant to Rule 23(a) and (b)(3) of the Federal Rules of Civil Procedure on behalf of the Class defined herein;
2. Awarding plaintiff and the members of the Class compensatory damages;
3. Awarding plaintiff and the members of the Class pre-judgment and post-judgment interest, as well as reasonable attorneys' fees, expert witness fees and other costs;
4. Awarding extraordinary, equitable and/or injunctive relief as permitted by law, equity and the federal statutory provisions sued hereunder, including the imposition of a constructive trust upon the proceeds of defendants' insider trading, pursuant to Rules 64, 65 and any appropriate state law remedies; and
5. Awarding such other relief as this Court may deem just and proper.
Plaintiff demands a trial by jury.
|
DATED: January 22, 1998 |
MILBERG WEISS BERSHAD ______________________________ KAUFMAN, MALCHMAN, KIRBY SHALOV STONE & BONNER Attorneys for Plaintiff |
COMPLNTS\SYBASE2.CPT