According to a press release dated May 2, 2006, Cray Inc. reported that on April 27, 2006, Judge Thomas S. Zilly of the U.S. District Court for the Western District of Washington dismissed both the consolidated class action litigation filed against the Company and certain of its present and former officers and directors, as well as the consolidated derivative litigation filed against the Company's present and former officers and directors.
The class action against the Company and five of its present and former officers and directors initially filed in May 2005 alleged that the defendants had violated the securities laws by knowingly making false or misleading statements to the public. Judge Zilly, in a 49-page opinion, found that plaintiffs failed to plead adequately that defendants intentionally or recklessly made false statements (acted with scienter), and failed to plead adequately that many of the statements made by defendants were false. Judge Zilly also ruled that plaintiffs failed to plead adequately that plaintiffs' alleged losses were caused by some of defendants' actions. The Court gave the class action plaintiffs 120 days to file an amended complaint should they choose to do so.
The original complaint alleges that during the Class Period, Cray failed to disclose and misrepresented material adverse facts which were known to defendants or recklessly disregarded by them, including: (1) that business metrics having a direct bearing on revenue recognition, including the speed and costs of on- site acceptance testing or improved processes for building machines in accordance with customer requirements, were increasingly unfavorable and unlikely to improve anytime soon (2) manufacturing processes internal controls and testing were flawed and ineffective; (3) Cray's own auditors and Audit Committee knew of the flawed and ineffective internal controls; (4) delays in inventory recognition realization and revenue were a recurring and unpredictable feature of Cray's business model; and (5) Cray was losing money or breaking even on certain customer orders.
The complaint further alleges that on or around May 9, 2005, Cray revealed that it had failed to include an auditor's opinion on management's assessment of internal control over financial reporting. Moreover, Cray continued to report revenue results adversely impacted by faulty internal controls and past quarter practices. In response, Cray's stock price fell $0.74 per share over a three-day period ending May 12, 2005 -- an astonishing 35.6% loss -- to close at $1.34 on 9.5 million shares combined volume.