According to the Company’s FORM 10-Q for the quarterly period ended June 30, 2006, on March 31, 2006, the parties filed a motion for preliminary approval of a class action settlement. On April 4, 2006, the Court entered an Order preliminarily approving the settlement and scheduled deadlines for the settlement approval process, including scheduling a settlement conference for July 25, 2006. The settlement was subject to a notice and comment period, during which class members could object, opt out of the settlement, or file claims under the settlement. No class members objected to the settlement or opted out of the class. On July 25, 2006, the Court approved the settlement. The Court entered an Order and Final Judgment approving the terms of the settlement in its entirety. The Order and Final Judgment is subject to any appeal within the next 30 days. The terms of the settlement require the Company’s insurance provider to pay $2,875,000 in full settlement of the claims asserted by the class. At June 30, 2006, Company’s recorded accrued litigation settlement and a receivable for insurance recovery in the amount of $2,875,000.
As summarized by the same SEC filing, on March 17, 2004, the United States District Court for the District of Massachusetts (the “Court”) consolidated a number of purported class action lawsuits filed against the Company and certain individual Network Engines defendants (collectively the “Defendants”). These suits generally concern the timing of the announcement of an amendment to Network Engines’ agreement with EMC Corporation regarding the resale of EMC-approved Fibre Channel HBAs. The Plaintiffs filed an amended consolidated complaint on June 4, 2004. The Defendants on August 13, 2004 filed a motion to dismiss the amended consolidated complaint. The Plaintiffs on October 12, 2004 filed an opposition to the Defendants’ motion to dismiss and the Defendants filed a reply to the Plaintiff’s opposition on November 12, 2004. The Court on November 22, 2004 denied the Defendant’s motion to dismiss the amended consolidated complaint. On December 9, 2004, the Defendants filed an answer to the amended consolidated complaint. Since that time the parties engaged in some informal discovery, have exchanged formal discovery requests, and then pursued active settlement discussions.
The original complaint alleges that by the start of the Class Period, defendants knew, but failed to disclose, that Network Engines was in the process of renegotiating its distribution contract with EMC, and that EMC was demanding price reductions, which, if agreed to, would negatively impact the Company's future financial results. Nevertheless, throughout the Class Period, defendants issued positive statements highlighting the Company's strong financial performance, continued growth and the success of its relationship with EMC, its largest customer. Defendants failed to disclose, however: (i) that the Company was in the process of renegotiating its distribution contract with EMC; (ii)
that EMC was demanding price concessions to bring its agreement with Network
Engines in line with the pricing that Network Engines was providing to other
customers; (iii) that the new distribution contract with EMC would negatively
impact the Company's future financial performance; (iv) that the Company would
not be able to sustain the growth in its gross margins as a result of the
amended contract; and (v) as a result, the Company's positive statements issued
during the Class Period were materially false and misleading when made.
Finally, according to the complaint, on December 10, 2003, the Company announced, among other things, that
it had renegotiated its distribution contract with EMC and the amended contract
would negatively impact the Company's gross profit related to the sale of EMC-
approved Host Bus Adapters and the Company's distribution operations gross
The complaint further alleges that after this announcement, shares of Network Engines common stock fell $3.92 per share, or 39%, to close at $6.10 per share, on extraordinarily high trading volume, and have continued to decline since that time.