According to the docket, on October 20, 2006, the Court entered the Order signed by Judge Ursula Ungaro-Benages granting the motion to lead plaintiff and approve lead counsel. On November 15, 2006, the plaintiffs filed an Amended Class Action Complaint. On December 22, 2006 defendants filed a motion to dismiss the complaint. On May 15, 2007 the judge granted in part the motion to dismiss, providing the plaintiffs an opportunity to amend the complaint, which was promptly filed on May 29, 2007. Again the defendants moved to have the complaint thrown out. After referring the case to mediation the judge ultimately dismissed the complaint with prejudice on September 17, 2007.
The original complaint alleges this securities class action was brought under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. Forward Industries sells carrying cases for consumer electronics products, such as cellular telephones and cameras, and for medical monitoring and diagnostic kits, such as diabetic glucose testing kit cases.
Specifically, the complaint alleges that in violation of GAAP, the Company commingled revenues from the sale of products with revenue from the performance of services and reported these combined revenues as "net sales." The Company also materially overstated the dollar amount of these service fees, and thus: (1) obscured the true nature and profitability of its two separate lines of business; (2) concealed the magnitude by which gross margins on product sales were diminishin ; and (3) failed to disclose key information about the Company's future business prospects. In a partial revelation of the truth, on December 23, 2005, the Company announced sharply reduced revenue and earnings guidance and gave a foreboding disclosure of pricing pressure on key products. The Company's stock price dropped on the adverse revenue and earnings news, closing at $10.05 on December 23, 2005, down from $14.72, the closing price on the day before the news announcement, December 21, 2005. The stock price fell on unusually heavy trading volume for Forward Industries: 4,597,558 shares traded. (Average trading volume for the stock is 257,886 shares).
On February 2, 2006 -- the end of the Class Period -- the Company released its Form 10-QSB for the quarterly period ended December 31, 2005. The full reason for the decline then became apparent. The Company had shifted a significant portion of its business operations from direct sales to serving as a sourcing agent. Insiders sold their shares during the time they were concealing the change in nature and declining profitability of the Company's operations and its shift to relying on sourcing fee revenues. Specifically, defendants the Company’s Chairman and CEO and the Company’s President sold large amounts of their stock just before the stock price drop on December 23, 2005.