Several, purported class action complaints have been filed in the U.S. District Courts for the Southern District of New York and the Central District of California. In September 2007, the first action originally filed in the U.S. District Court for the Southern District of New York was transferred to the U.S. District Court for the Central District of California.
Specifically, the complaint charges Netlist, its underwriters, and certain of the Company's officers and directors with including, or allowing the inclusion of, materially false and misleading statements in the Registration Statement and Prospectus issued in connection with the IPO, in violation of the Securities Act of 1933.
The Complaint charges defendants with failing to conduct an adequate due diligence investigation into the Company prior to the IPO. In particular, the Complaint charges defendants with failing to reveal to shareholders, at the time of the IPO, that Netlist was already witnessing adverse effects of an oversaturated computer memory market. This, despite the fact that defendants knew or should have known that the Company had no strategy to allow it to minimize adverse market conditions, contrary to prior representations in road-show presentations to analysts and investors prior to the IPO, and media interviews immediately following the IPO.
On April 16, 2007, after the close of trading, the truth about Netlist was revealed, including the fact that the problems which existed at the time of the IPO would result in extremely disappointing results for the first quarter of 2007. Defendants admitted that the Company was performing well below guidance, that earnings would be almost 75% lower than previous forecasts, and that expenses were higher than expected. This, after defendants and other Company insiders liquidated over $6.5625 million of their personally held shares in connection with the IPO.
The complaint further alleges that as a result of this news, Netlist's stock price collapsed the following trading day. Shares of Netlist fell almost 30% in a single trading day on huge volume of 1.783 million shares -- falling to approximately $4.29 per share -- and amounting to a decline of almost 40% compared to the November 2006 IPO Offering price, and a decline of almost 70% compared to Netlist's trading period high of more than $12.00 per share.
As summarized by the Company’s FORM 10-K or the fiscal year ended January 2, 2010, beginning in May 2007, the Company, certain of its officers and directors, and the Company's underwriters were named as defendants in four purported class action shareholder complaints, two of which were filed in the U.S. District Court for the Southern District of New York, and two of which were filed in the U.S. District Court for the Central District of California. These purported class action lawsuits were filed on behalf of persons and entities who purchased or otherwise acquired the Company's common stock pursuant or traceable to the Company's November 30, 2006 initial public offering (the "IPO"). The lawsuits were consolidated into a single action—Belodoff v. Netlist, Inc., Lead Case No. SACV07-677 DOC (MLGx)—which is currently pending in the Central District of California. Lead Plaintiff filed the Consolidated Complaint in November 2007. Defendants filed their motions to dismiss the Consolidated Complaint in January 2008. The motions to dismiss were taken under submission in April 2008 and on May 30, 2008, the court granted the defendants' motions. However, plaintiffs were granted the right to amend their complaint and subsequently filed their First Amended Consolidated Class Action Complaint ("Amended Complaint") in July 2008. The defendants filed motions to dismiss the Amended Complaint in January 2009, and on April 17, 2009, the court granted defendants' motions to dismiss. However, plaintiffs were again granted the right to amend their complaint. Plaintiffs' filed their Second Amended Consolidated Class Action Complaint ("Second Amended Complaint") in May 2009. Generally, the Second Amended Complaint, like the preceding complaints, alleged that the Registration Statement filed by the Company in connection with the IPO contained untrue statements of material fact or omissions of material fact in violation of Sections 11 and 15 of Securities Act of 1933. Defendants filed motions to dismiss the Second Amended Complaint in June 2009. The motions to dismiss were taken under submission in August 2009 and on September 1, 2009, the Court granted the defendants' motions. However, plaintiffs again were granted the right to amend their complaint. In October 2009, following a voluntary mediation of the matter, which took place in December 2008, and subsequent good-faith settlement negotiations, the parties reached a tentative agreement in principle to settle the class action. In February 2010, the parties executed a Stipulation and Agreement of Settlement documenting the essential terms of the proposed settlement, informed the court of their proposed settlement, and currently are drafting a joint motion to submit to the court for preliminary approval of the proposed settlement. Under the settlement agreement to be presented to the court for approval, plaintiffs and the class will dismiss all claims, with prejudice, in exchange for a cash payment of $2.6 million. The Company's directors' and officers' liability insurers will pay the settlement amount in accordance with the Company's insurance policies. The court, upon the parties' stipulation, has stayed all proceedings in the action, except as necessary to consummate the proposed settlement.
According to a press release dated May 6, 2010, pursuant to an Order of the United States District Court for the Central District of California, Southern Division, that a hearing will be held on September 30, 2010, at 8:30 a.m., before the Honorable David O. Carter, United States District Judge, at the United States District Court, Central District of California, Southern Division, Ronald Reagan Federal Building and United States Courthouse, 411 West Fourth Street, Santa Ana, California 92701, for the purpose of determining: (1) whether the proposed settlement of the claims in the Litigation against the Defendants for the sum of $2,600,000 in cash, plus accrued interest, should be approved by the Court as fair, reasonable, and adequate; (2) whether, thereafter, this Litigation should be dismissed with prejudice as set forth in the Stipulation of Settlement dated February 16, 2010 (the "Stipulation"); (3) whether the Plan of Allocation is fair, reasonable, and adequate and therefore should be approved; and (4) whether the application of Lead Counsel for the payment of attorneys' fees and expenses incurred in connection with this Litigation should be approved.