As reported by the Company’s Form 10-K for the fiscal year ended December 31, 2004, on April 16, 2004, the parties to these Consolidated Actions held a mediation in San Francisco. The parties entered into a Memorandum of Understanding settling the case for $1.5 million, subject to certain terms and conditions, including approval by the Court. The Court granted a final hearing for approval of the settlement on October 7, 2004 ending the litigation. The $1.5 million negotiated settlement was funded by the Company’s directors and officers insurance carrier.
Earlier, according to the same Form 10-K, four lawsuits filed between February 7, 2002 and March 6, 2002, three of which were filed in the United States District Court for the District of Colorado and one of which was filed in the Colorado District Court for the City and County of Denver. In each of the lawsuits, plaintiffs, who purport to be purchasers or holders of SpectraLink common stock, initially sought to assert claims either on behalf of a class of persons who purchased securities in SpectraLink between July 19, 2001 and January 11, 2002, or in the case of two of the lawsuits (one filed in the United States District Court and one in the Colorado District Court), derivatively on behalf of SpectraLink. Two of the lawsuits filed in the United States District contained essentially identical claims alleging that SpectraLink and certain of its officers and directors violated Sections 10(b) and 20(a) and Rule 10b-5 under the Securities Exchange Act of 1934.
The Kerns and Molieri purported class actions were consolidated, and the plaintiffs filed a Consolidated Amended Complaint in these Consolidated Actions. In January of 2003, the Court denied a motion to dismiss that amended pleading, and discovery commenced. The Court certified a class of all purchasers of publicly traded common stock of SpectraLink from April 19, 2001 through January 11, 2002, inclusive. On November 26, 2003, the Lead Plaintiffs in these Consolidated Actions moved the court for permission to file a second consolidated amended class action, which would have deleted certain of the original claims, would have extended the class period so that it would commence on February 1, 2001 instead of April 19, 2001, and would have added more detail on claims relating to alleged improper revenue recognition. The Company filed an opposition to that motion. On March 5, 2004, the Magistrate Judge entered his Order denying plaintiffs’ motions, and plaintiffs appealed that decision to the district court.
The Complaint alleges that defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder, by issuing a series of material misrepresentations to the market between July 19, 2001 and January 11, 2002, thereby artificially inflating the price of Spectralink securities. Throughout the Class Period, as alleged in the complaint, defendants issued statements which represented that the Company was experiencing continued growth and increasing its market share and would continue to do so in the future. Unbeknownst to investors, however, the Company was suffering from a host of undisclosed adverse factors which were negatively impacting its business and which would cause it to report declining financial results, materially less than the market expectations defendants had caused and cultivated. Specifically, defendants misrepresented or failed to disclose that (a) the Company was experiencing declining sales as its business began to be affected by general market forces. Throughout the Class Period, defendants repeatedly emphasized that the Company was not being affected by the slowdown in the U.S. economy, when, in fact, that was not true; (b) the Company was becoming increasingly reliant on end-of-the-quarter sales to meet its sales forecasts. This sales pattern necessarily subjected the Company to the increased risk that it would not meet its sales expectations should it not successfully complete certain anticipated sales; and (c) certain of Spectralink's customers were experiencing financial difficulty such that it was highly unlikely that they would be able to complete anticipated sales, thereby causing Spectralink to suffer a decline in its revenues. On January 14, 2002, before the open of the NASDAQ stock market, Spectralink issued a press release announcing preliminary financial results for its fourth quarter of 2001, and disclosed, for the first time, that its revenue and earnings would in fact be affected by the slowdown in the overall economy. In response to this announcement, the price of Spectralink common stock dropped precipitously, falling from$16.02 per share to $10.16 per share, a decline of more than 36%. While Spectralink was being adversely affected by the aforementioned factors, but prior to any disclosure to the market, the Individual Defendants and other Spectralink senior executives sold more than$13.7 million worth of their personally-held Spectralink common stock to the unsuspecting public.