The original complaint alleges that InfoSonics and its top officers engaged in a scheme to defraud InfoSonics investors in violation of the federal securities laws by reporting false financial results on May 8, 2006 for its first quarter ended March 31, 2006. Specifically, the Complaint alleges that defendants knew, or with deliberate recklessness disregarded, that the Company had improperly accounted for warrants issued in connection with a January 2006 private placement which enabled it to report net income of $1.738 million for that quarter. Before the market opened on Monday, June 12, 2006, InfoSonics shocked the market when it disclosed that it would need to restate its previously reported net income for the first quarter down to $1.173 million, a decrease of 32.5%, due to the improper accounting treatment of the warrants. InfoSonics stock immediately plunged more than 28% that day on extraordinarily high volume.
The Complaint further alleges that, while in possession of material nonpublic information concerning InfoSonics accounting for the warrants, defendants sold massive amounts of their personal holdings between May 11, 2006 and June 7, 2006 for proceeds exceeding $3 million. Indeed, as the Company admitted in a Form 8-K filed on June 12, 2006 with the SEC, InfoSonics had determined by Monday, June 5, 2006 that it would need to restate its previously reported financial results because it had improperly accounted for the warrants. Nevertheless, its Chief Financial Officer and the President of the Company's Latin American operations continued to sell their personal InfoSonics stock even after that determination.
On October 23, 2006, the Court entered the Order signed the Order granting the motion to consolidate cases, appoint lead plaintiff and lead counsel. According to the Order, the SUL Group is appointed lead plaintiff and Berger & Montague P.C. and Klafter & Olsen LLP are appointed co-lead counsels. On February 14, 2007 the plaintiffs filed a Consolidated Amended Class Action Complaint. The defendants responded by filing a motion to dismiss the Consolidated Amended Class Action Complaint on April 16, 2007. On August 7, 2007, U.S. Judge Barry Ted Moskowitz granted in part and denied in part the motion to dismiss with leave to amend. According to the Order, one individual defendant was dismissed without prejudice. Plaintiffs filed a Second Consolidated Amended Class Action Complaint on September 10, 2007 against the Company and certain of its officers and directors. On October 1, 2007, the defendants filed a motion to dismiss the Second Consolidated Amended Class Action Complaint. On April 28, 2008, the Court issued an order granting in part and denying in part defendants’ motion to dismiss the Second Consolidated Amended Class Action Complaint. Plaintiffs were given leave to file a third amended class action complaint on or before May 26, 2008. On May 23, 2008, the plaintiffs filed a Third Consolidated Amended Class Action Complaint. Soon after, the parties engaged in settlement negotiations.
According to a press release dated August 12, 2008, InfoSonics Corporation (NASDAQ:IFON), announced that the Company reached a settlement in both the securities class action lawsuit entitled In Re: InfoSonics Corporation Securities Litigation, Lead Case No. 06 CV 1231, and the derivative lawsuit entitled In Re: InfoSonics Corporation Derivative Litigation, Lead Case No. 06 CV 1336; both cases pending in the United States District Court for the Southern District of California.
The parties in these cases entered into Memorandums of Understanding (which will be followed by Stipulations of Settlement) regarding the settlement terms. These settlements, which are subject to among other things preliminary and final Court approval after appropriate notice, would resolve all the claims in both lawsuits. The Company settled these lawsuits to avoid the expense and continued disruption to the business of protracted litigation and the Company and its current and former officers and directors deny any liability or responsibility for the claims made and make no admission of any wrongdoing. As part of the settlements, and in exchange for dismissals of the lawsuits and releases, in the securities class action the Company has agreed to authorize payment of $3.8 million (said sum to be inclusive of plaintiffs' attorneys' fees, in an amount to be determined by the Court) and in the derivative action the Company has agreed to make certain corporate governance changes and to authorize payment of up to $350,000 for plaintiffs' attorneys' fees. It is anticipated that these settlement payments will be funded entirely by the Company's insurer.
On January 20, 2009, District Court Judge Janis L. Sammartino signed the Order certifying the class, preliminarily approving the settlement and providing for notice to the class. On May 5, 2009, Judge Sammartino approved the plan of allocation, granted lead counsel’s motion for attorneys' fees and reimbursement of expenses, approved the settlement and dismissed the action with prejudice. According to the order, the Court grants the motion for attorneys' fees in the amount of $950,000.00 and expense reimbursement in the amount of $79,672.07.