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Civil Action No. Plaintiff, v. NEW ERA OF NETWORKS, INC., GEORGE F. ADAM, JR., PATRICK J. FORTUNE, and STEPHEN E. WEBB, Defendants. _________________________________________________________________________ CLASS ACTION COMPLAINT Plaintiff, on behalf of himself and all others similarly situated, by his undersigned counsel, alleges the following upon personal knowledge as to himself and his own acts, and upon information and belief as to all other matters. Plaintiff's information and belief is based, inter alia, on the investigation conducted by plaintiff's counsel, including a review of the press releases and public filings of defendant New Era of Networks, Inc. ("NEON" or the "Company"), and articles pertaining to NEON. Plaintiff believes that substantial evidentiary support will exist for the allegations set forth after a reasonable opportunity for discovery. 1. This is a class action on behalf of all purchasers and/or acquirers of NEON securities between October 18, 2000, and November 21, 2000, inclusive (the "Class Period"), seeking to pursue remedies under the Securities Exchange Act of 1934 (the "Exchange Act"). Defendants include: NEON, George F. Adam, Jr., Patrick J. Fortune, and Stephen E. Webb. 2. During the Class Period, defendants, among other things, materially misrepresented the financial condition of NEON by knowingly and/or recklessly disseminating to the investment community false and misleading financial reports. Specifically, on October 18, 2000, NEON announced record revenues for the third quarter of fiscal year 2000. These purported record revenues, however, were based on the Company's practice of selling its software to customers in exchange for barter arrangements or private equity investments in the customer, and then booking the sale as revenue. This was not disclosed to NEON investors at the time of the October 18, 2000 announcement. 3. Subsequently, buried in its third quarter fiscal 2000 10-Q filed with the SEC on November 14, 2000, NEON disclosed that almost 20 percent of its purported "record" revenues for third quarter fiscal year 2000 consisted of nonmonetary transactions in lieu of cash sales. Upon the public reporting of this disclosure in various analyst reports on November 21 and 22, 2000, NEON's stock dropped approximately two-thirds of its value in two days on extraordinary volume of over 33 million shares traded, from a close of $19.875 on November 20 to a close of $ 6.5625 on November 22, 2000. JURISDICTION AND VENUE 4. The claims herein arise under Sections 10(b) and 20(a) (15 U.S.C. §§78j(b) and 78t(a)) of the Securities and Exchange Act of 1934 (15 U.S.C. §78) (the "Exchange Act") and Rule 10b-5 promulgated thereunder (17 C.F.R. §240.10b-5). 5. This Court has subject matter jurisdiction of this action pursuant to 15 U.S.C. §78u. 6. Venue is proper in this District pursuant to 28 U.S.C. §1391(b). Defendant NEON maintains its corporate offices in this district and violations of law complained of herein occurred primarily in this district, including the dissemination of materially false and misleading statements and the omission of material information complained of herein. 7. In connection with the conduct complained of herein, defendants, directly or indirectly, used the means and instrumentalities of interstate commerce, including the mails and interstate telephone communications, and the facilities of a national securities exchange. PARTIES 8. Plaintiff Samuel Zaks purchased NEON common stock during the Class Period and was damaged thereby. 9. Defendant NEON provides products and services which enable its customers to automate business processes and develop systems for conducting internet business transactions. The Company's offices are located at One Greenwood Plaza, Englewood, Colorado and its stock is actively traded on the NASDAQ NMS under the ticker symbol "NEON." As of December 2000, there were approximately 36 million shares of NEON stock outstanding. 10. Defendant George F. Adam, Jr. ("Adam") was at all relevant times hereto, Chairman of the Board of Directors and Chief Executive Officer of NEON. 11. Defendant Patrick J. Fortune ("Fortune") was at all relevant times hereto, President, Chief Operating Officer, and a Director of NEON.. 12. Defendant Steven E. Webb ("Webb") was at all relevant times hereto, Senior Vice President and Chief Financial Officer of NEON. PARTICIPATION OF INDIVIDUAL DEFENDANTS 13. Defendants Adam, Fortune, and Webb (hereinafter "Individual Defendants"), participated in the drafting and preparation of the various public documents and other communications complained of herein and were aware of the misstatements contained therein and omissions therefrom, and were aware of their materially misleading nature. Because of their executive and managerial positions with NEON, the Individual Defendants had access to the adverse non-public information about NEON's financial statements, revenue policies, and condition. The Individual Defendants, by reason of their stock ownership and management positions, were controlling persons of NEON and had the power and influence, and exercised it, to cause NEON to engage in the unlawful practices complained of herein. 14. It is appropriate to treat NEON and the Individual Defendants as a group for pleading purposes and to presume that the false and misleading information conveyed in the Company's public filings, press releases and other publications as alleged herein are the collective actions of the group of defendants identified above. The Individual Defendants, as officers or directors of NEON, by virtue of their high-level position with the Company, directly participated in the management of the Company, were directly involved in the day-to-day operations of the Company at the highest level and were privy to confidential proprietary information concerning the Company and its business, operations and accounting practices as alleged herein. The Individual Defendants were involved or participated in the drafting, producing, reviewing and/or disseminating of the false and misleading statements alleged herein. The Individual Defendants were either aware or recklessly disregarded that these false and misleading statements and financial results were being issued regarding the Company and approved or ratified these statements, in violation of the federal securities laws. CONTROL OF INDIVIDUAL DEFENDANTS 15. The Individual Defendants, because of their position of control and authority as officers and/or directors of the Company, were able to and did control the contents of various quarterly reports, SEC filings and press releases pertaining to the Company. The Individual Defendants were provided with copies of NEON's press releases and SEC filings before and after their issuance, with the opportunity to cause them to be corrected. Because of their board membership and/or executive and managerial positions with NEON, the Individual Defendants had access to the adverse non-public information about NEON's business, finances and accounting practices particularized herein, via access to internal corporate officers and employees, attendance at NEON's management and/or Board of Directors meetings and committees thereof and via reports and other information provided to them in connection therewith. As a result, the Individual Defendants were responsible for the accuracy of the public reports and releases detailed herein as "group published" information, and are therefore responsible and liable for the representations contained therein under Section 20(a) of the Exchange Act. 16. The Individual Defendants either knew or recklessly disregarded the fact that the unlawful acts and practices and misleading statements and omissions described herein would adversely affect the integrity of the market for NEON securities and would artificially inflate or maintain the price 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 the other members of the Class whom plaintiff seeks to represent. CLASS ACTION ALLEGATIONS 17. Plaintiff brings this action as a class action, pursuant to Fed. R. Civ. P. 23(a) and (b)(3), on behalf of a class consisting of all persons who purchased or otherwise acquired NEON securities between October 18, 2000 and November 21, 2000, inclusive, and who were damaged thereby (the "Class"). Excluded from the Class are defendants, the officers and directors of NEON and members of their immediate families and entities in which they have a controlling interest. 18. During the Class Period, there were over 36 million shares of NEON common stock outstanding held by thousands of shareholders. NEON common stock was actively traded on the NASDAQ (under the ticker symbol "NEON") an open and efficient market, during the Class Period. Because persons who purchased or otherwise acquired NEON shares during the Class Period number at least in the thousands and are believed to be located throughout the country, joinder of all such class members is impracticable. 19. There are questions of law and fact common to all Class members which predominate over any questions affecting only individual Class members, including: (a) Whether the federal securities laws were violated by defendants' acts as alleged herein; (b) Whether documents, releases and/or statements disseminated to the investing public and NEON shareholders during the Class Period omitted and/or misrepresented material facts about the business, financial condition and accounting practices of the Company; (c) Whether defendants made materially misleading statements during the Class Period about the business, financial condition and accounting practices of the Company; (d) Whether defendants acted knowingly and/or recklessly in making materially false statements and omitting material facts about the business, financial condition and accounting practices of the Company; (e) Whether the market price of the Company's securities was artificially inflated during the Class Period due to the non-disclosures and/or material misrepresentations complained of herein; and (f) Whether the members of the Class have suffered damages and, if so, what is the proper measure of damages. 20. Plaintiff's claims are typical of all class members' claims. Plaintiff has selected counsel experienced in class and securities litigation and will fairly and adequately protect the interests of the Class. Plaintiff has no interests antagonistic to those of the Class. 21. 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 members of the Class individually to seek redress for the wrongful conduct alleged. 22. Plaintiff knows of no difficulty which will be encountered in the management of this litigation which would preclude its maintenance as a class action. SUBSTANTIVE ALLEGATIONS 23. During fiscal year 2000, NEON was under great pressure by its stockholders and securities analysts to meet its projected revenue figures and not disappoint the market. In the previous year, NEON had seen its price drop from the mid $90s to around $20 per share. The Company knew that if it missed its projected revenues, its stock price would be punished even further. 24. On October 18, 2000, the first day of the Class Period, NEON issued a Press Release announcing record third quarter fiscal year 2000 results. According to its Press Release, NEON's consolidated revenue for the third quarter of 2000 was $55.2 million, a 73 percent increase over 1999 third-quarter revenues of $31.9 million. The Press Release quoted NEON's CFO, defendant Webb, as stating:
25. The Press Release continued by emphasizing the contracts NEON had closed with a large number of customers. The Press Release also noted in that NEON had made private equity investments in several companies during the third quarter:
26. Although NEON notes that it had made several private equity investments, NEON's October 18, 2000 press release materially misrepresented NEON's true financial condition and results, because the release failed to disclose that those private equity investments, totaling approximately $10 million, were accounted for as part of the total reported revenues, and in fact, represented approximately 20 percent of the total third quarter revenues of the Company. NEON failed to disclose that such revenues, rather than being cash based, came in exchange for shares of five closely held companies. NEON further failed to disclose that it exchanged software and services for software and services from three other unnamed companies, rather than closing cash-based sales. Plaintiff and the Class suffered losses as a direct result of NEON's failure to fully and adequately report the basis its financial results. 27. On November 14, 2000, NEON filed its third quarter fiscal 2000 10-Q with the SEC. Buried in this filing was the statement that:
The fair values of equity securities purchased by us were based on concurrent or recent purchases of substantially similar securities of the investees by independent third parties. The values of our software license arrangements were based on similar monetary transactions with other customers. Prepaid professional services to be provided to us are valued at the same rates charged to us for prior engagements. For each of the other nonmonetary transactions reflected in the above table, monetary consideration was at least 25% of the total fair value of the transaction. 28. In effect, NEON had disclosed that almost 20% of the purported "record" revenue it had announced on October 18, 2000 came from nonmonetary transactions -- either barter transactions, or transactions which resulted in the acquisition of equity in private entities. 29. It was not until November 21, 2000, though, that the market grew aware of this disclosure. On that date, after careful scrutiny of the November 14, 2000 10-Q, the analyst for Wit SoundView downgraded NEON from a Strong Buy to a Hold rating, citing questions about the quality of revenues reported for the third quarter due to the inclusion of the nonmonetary sales, and concern that without the nonmonetary sales included in NEON's revenue figures, NEON's revenue could have significantly missed expectations. 30. Also on November 21, 2000, in a Bloomberg News article on NEON, David Breiner, an analyst with Prudential Volpe, was quoted as stating: "Some may draw the conclusion that the company had to resort to exotic contract relationships to satisfy Wall Street's expectations. . . . Almost 20 percent of total third-quarter revenue is a healthy chunk." The article further stated that "Breiner also noted that it isn't clear when or if Neon will profit from the shares it obtained in exchange for its software, since the shares aren't yet publicly traded." 31. On November 22, 2000, several other analysts, including those for Prudential, SG Cowen, and Gerard Klauer Mattison, similarly downgraded NEON, again citing concerns that revenues were artificially boosted by these non-cash sales, and that without the such sales, the Company would have missed revenue targets. 32. Upon these public revelations, NEON's stock dropped approximately two-thirds of its value in two days on extraordinary volume of over 33 million shares traded, from a close of $19.875 on November 20 to a close of $6.5625 on November 22, 2000. 33. During the Class Period, defendant Adam sold over 31,000 shares of NEON stock for total proceeds of over $625,000. During this time period, defendant Adam, as an officer and director of NEON, was under an affirmative duty to refrain from trading without making a full and fair disclosure of the material non-public information in his possession. NO SAFE HARBOR 34. The statutory safe harbor provided for forward looking statements under certain circumstances does not apply to any of the false statements pleaded in this complaint. The statements alleged to be false and misleading herein all relate to then-existing facts and conditions. In addition, to the extent certain of the statements alleged to be false may be characterized as forward looking, they were not identified as "forward looking" when made, there was no statement made with respect to any of those representations forming the basis of this complaint that actual results "could differ materially from those projected," and there were no meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those the purportedly forward-looking statements. Alternatively, to the extent that the statutory safe harbor is intended to apply to any forward-looking statements pled herein, defendants are liable for those false forward-looking statements because at the time each of those forward-looking statements was made, the particular speaker had actual knowledge that the particular forward-looking statement was materially false or misleading, and/or the forward-looking statement was authorized and/or approved by an executive officer of NEON who knew that those statements were false when made. RELIANCE ALLEGATIONS 35. Plaintiff will rely, in part, upon the presumption of reliance established by the fraud-on-the-market doctrine in that, among other things: (a) NEON common stock met the requirements for listing, and was listed, on the NASDAQ, a highly efficient market; (b) as a regulated issuer, the Company filed periodic public reports with the SEC; (c) the trading volume of the Company's stock was substantial, reflecting numerous trades each day; (d) NEON was followed by securities analysts employed by several major brokerage firms who wrote reports which were distributed to the sales force and certain customers of such firms and which were available to various automated data retrieval services; (e) the misrepresentations and omissions alleged herein were material and would tend to induce a reasonable investor to misjudge the value of NEON common stock; and (f) plaintiff and the members of the Class purchased their common stock during the Class Period without knowledge of the omitted or misrepresented facts. 36. Based upon the foregoing, plaintiff and the other members of the Class are entitled to a presumption of reliance upon the integrity of the market for the purpose of class certification as well as for ultimate proof of their claims on the merits. Plaintiff will also rely, in part, upon the presumption of reliance established by material omissions and upon the actual reliance of the class members. FIRST CLAIM FOR RELIEF FOR VIOLATION OF SECTION
10(b) 37. Plaintiff repeats and realleges each and every allegation contained in the paragraphs above of the Complaint as if fully set forth herein. 38. During the Class Period, defendants engaged in a course of conduct, described above, pursuant to which they knowingly or recklessly engaged in acts, transactions, practices, and a course of business which operated as a fraud upon plaintiff and the other members of the Class; made various untrue statements of material facts and omitted to state material facts necessary to make statements made, in light of the circumstances under which they were made, not misleading to plaintiff and the other Class members; and employed manipulative and deceptive devices and contrivances in connection with the purchase of NEON common stock. 39. The purpose and effect of defendants' plan, scheme, conspiracy and course of conduct was to artificially inflate the price of NEON common stock and artificially to maintain the market price of the stock. 40. The Individual Defendants, through their position as officers and directors had actual knowledge of the material omissions and/or the falsity of the statements set forth above, and intended to deceive plaintiff and the other members of the Class or, in the alternative, acted with reckless disregard for the truth when they failed or refused to ascertain and disclose in the aforementioned documents the true facts to plaintiff and the other members of the Class. 41. Defendants had actual knowledge of the material omissions and/or the falsity of the statements set forth above, and intended to deceive plaintiff and the other members of the Class or, in the alternative, acted with reckless disregard for the truth when they failed or refused to ascertain and disclose in the aforementioned documents the true facts to plaintiff and the other members of the Class. 42. As a result of the foregoing, the market price of NEON stock was artificially inflated during the Class Period. In ignorance of the materially false and misleading nature of the misrepresentations, described above, made by defendants and the deceptive and manipulative devices and contrivances employed by defendants, plaintiff and the other members of the Class relied, to their detriment, on the integrity of the market price of the stock in purchasing NEON stock. Had plaintiff and the other members of the Class known of the material adverse information not disclosed by defendants, they would not have purchased NEON stock at the artificially inflated prices that they did. 43. Plaintiff and the other members of the Class have suffered substantial damages as a result of the wrongs alleged herein. 44. By reason of the foregoing, defendants have violated Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder, in that they: (a) employed devices, schemes and artifices to defraud; (b) made untrue statements of material fact or omitted to state material facts necessary to make the statements made not misleading; and (c) engaged in acts, practices and a course of business which operated as a fraud or deceit upon plaintiff and the other members of the Class in connection with their purchases of NEON securities during the Class Period.
45. Plaintiff repeats and realleges each and every allegation set forth in the paragraphs above, as if set forth fully herein. 46. The Individual Defendants, by virtue of their offices, directorships, and specific acts were, at the time of the wrongs alleged herein, controlling persons of NEON within the meaning of Section 20(a) of the Exchange Act. The Individual Defendants had the power and influence and exercised the same to cause NEON to engage in the illegal conduct and practices complained of herein by causing the Company to disseminate to the public, or through analysts, the materially false and misleading information referred to above. 47. The Individual Defendants' positions made them privy to, and provided them with, actual knowledge of the material facts concealed from plaintiff and the Class by NEON during the Class Period. 48. By reason of the conduct alleged in the First Claim for Relief, the Individual Defendants are liable for the aforesaid wrongful conduct and liable to the plaintiff and the other members of the Class for the substantial damages which they suffered in connection with their purchases of NEON securities during the Class Period. WHEREFORE, plaintiff on his own behalf, and on behalf of the other members of the Class, prays for judgment as follows: (a) Declaring this action to be a proper class action, certifying the plaintiff as Class representative and his counsel as Class Counsel; (b) Declaring and determining that the defendants violated the federal securities laws by reason of their conduct as alleged herein; (c) Awarding money damages against the defendants, jointly and severally, in favor of the plaintiff and the other members of the Class for all losses and injuries suffered as a result of the acts and transactions complained of herein, together with prejudgment interest on all of the aforesaid damages which the Court shall award from the date of said wrongs to the date of judgment herein at a rate the Court shall fix; (d) Awarding plaintiff his costs and expenses incurred in this action, including reasonable attorneys', accountants' and experts' fees; and (e) Awarding such other relief as may be just and proper. Dated: January 5, 2001 By:_________________________________ Kevin J. Yourman Joseph H. Weiss
Plaintiff hereby demands a trial by jury pursuant to Rule 38(b) of the Federal Rules of Civil Procedure. _____________________________________ |