lionel z. glancy #134180 robin b. howald … · the investigation includes the thorough review and...

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THIRD AMENDED CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATIONS OF FEDERAL SECURITIES LAWSCase No. C-00-3645 JCS

REDACTED 3RDAMENDED.03 29 2002.wpd

LIONEL Z. GLANCY #134180ROBIN B. HOWALD #110280MICHAEL GOLDBERG #188659GLANCY & BINKOW LLP1801 Avenue of the Stars, Suite 311Los Angeles, CA 90067Telephone: (310) 201-9150Facsimile: (310) 201-9160

JEFFREY H. SQUIREIRA M. PRESSKIRBY MCINERNEY & SQUIRE, LLP830 Third Avenue, 10th FloorNew York, NY 10022Telephone: (212) 371-6600Facsimile: (212) 751-2540

Co-Lead Counsel for Plaintiffs

UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

SAN FRANCISCO DIVISION

In re RAMP NETWORKS, INC.SECURITIES LITIGATION

________________________________

This Document Relates to:All Actions.

Master File No. C-00-3645 JCS

CLASS ACTION

Hon. Joseph Spero

REDACTEDTHIRD AMENDED CONSOLIDATEDCLASS ACTION COMPLAINT FORVIOLATIONS OF FEDERALSECURITIES LAW

JURY TRIAL DEMANDED

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THIRD AMENDED CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATION OF FEDERAL SECURITIES LAWSCase No. C-00-3645 JCS

REDACTED 3RDAMENDED.03 29 2002.wpd Page 1

Plaintiffs, by their attorneys, for their Third Amended Consolidated Class Action

Complaint (the "Complaint") allege the following upon personal knowledge as to themselves and

their own acts, and upon information and belief based upon the investigation of Plaintiffs’

attorneys as to all other matters. The investigation includes the thorough review and analysis of

public statements, publicly-filed documents of Ramp Networks, Inc. ("Ramp" or the

"Company"), press releases, interviews of former Ramp employees and customers, internal Ramp

documents, news articles and the review and analysis of accounting rules and related literature.

SUMMARY OF ACTION

1. This is a securities class action on behalf of public investors who purchased the

common stock of Ramp during the period from November 15, 1999 through September 29, 2000

(the "Class Period"). Pursuant to the Court’s Order Granting Defendants’ Motion to Dismiss

Second Amended Complaint With Limited Leave to Amend, dated March 1, 2002, the claims

remaining in this case are claims on behalf of purchasers of Ramp common stock during the

period from January 24, 2000 through September 29, 2000.

2. During the Class Period, Ramp was headquartered in Santa Clara, California, with

research and development facilities in Hyderabad, India. Ramp, which after commencement of

this action was acquired by Nokia Corp., developed, designed, manufactured and marketed

multiuser Internet access devices for medium to small businesses and homes.

3. Defendants manipulated the Company’s financial and accounting systems and

materially overstated Ramp’s publicly-reported financial results throughout the Class Period,

which material overstatement was admitted by Ramp, with respect to the first and second

quarters of fiscal 2000, by virtue of its later restatement of the Company’s financial results for

those quarters. The restatement was necessary because numerous violations of Generally

Accepted Accounting Principles (“GAAP”) during the first and second quarters of fiscal 2000

caused Ramp to misrepresent to the Securities and Exchange Commission (“SEC”) and the

investing public that Ramp’s financial results for these quarters were stated in accordance with

GAAP, when in fact they were not. In particular, defendants improperly recognized revenues in

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violation of Statement of Financial Accounting Standard ("SFAS") No. 48, which states that

when a buyer has the right to return merchandise purchased, the seller may not recognize income

from the sale, unless all of the following conditions are met: (a) the price between the seller and

the buyer is substantially fixed or determinable; (b) the seller has received full payment, or the

buyer is indebted to the seller and the indebtedness is not contingent on the resale of the

merchandise; (c) physical destruction, damage, or theft of the merchandise would not change the

buyer's obligation to the seller; (d) the buyer has economic substance and is not a front, straw

party or conduit, existing for the benefit of the seller; (e) no significant obligation exists for the

seller to help the buyer resell the merchandise and; (f) a reasonable estimate can be made of the

amount of future returns. With respect to the last requirement, the following factors may impair

a seller’s estimation of product returns: (1) possible technological obsolescence or changes in

demand for the merchandise; (2) the length of the period that the customers have to exercise the

right of return; (3) little or no past experience in determining returns for specific types of

merchandise; (4) little or no past experience in determining returns for similar types of

merchandise; and (5) a good chance that future marketing policies of the seller and/or the

relationship with its customers will change. As defendants admitted when they restated earnings

during the Class Period, defendants improperly booked revenues on “sales” where one or more of

the six requirements of SFAS 48 was not satisfied, wrongfully accruing revenue where the

likelihood of returns made such accrual improper.

4. For example, defendants’ revenue figures for the first and second quarters of 2000

unreasonably failed to take into account expected returns of products:

a. which Ramp dumped on distributors who were paid to accept and store

Company merchandise for revenue recognition purposes and then

instructed to remove the shrink wrap from Ramp products (to convey the

false impression that the products had been “sold through” or used) before

returning them to the Company as defective;

b. shipped to other companies for revenue recognition purposes near the end

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of quarterly or monthly reporting periods with the understanding that the

“buyers” would simply store the merchandise at Ramp’s expense before

returning the merchandise for full credit after the close of the Company’s

reporting period; and

c. temporarily removed from Ramp’s DisCopy Labs (“DCL”) warehouse

facility in Fremont, California by “sweeper” trucks which arrived on the

last day of each quarter to move product off the loading docks in order to

book the “sales” of these products as revenue for the quarter. The

“sweeper” trucks returned the product to the DCL facility after holding it

for about a week.

5. Additionally, in violation of SFAS 48's requirement that a sale cannot be booked

as revenue until the product’s price is substantially fixed or determinable:

a. Ramp shipped product on the “slightest of verbal commitments”;

b. Ramp shipped product before a prospective buyer had tested Company

equipment or agreed to price and payment terms; and

c. In some cases, this merchandise was “sold” to a local distributor who was

paid to store the merchandise for months, pending execution of a deal. If

the deal was not consummated, Ramp either continued to pay the

distributor to store the merchandise or treated the merchandise as returns.

6. In violation of SFAS 48's requirement that contingent sales not be booked as

revenue, Ramp consistently booked revenue on products shipped to distributors such as Ingram

Micro, Tech Data, Merisel, Merit, Synnex and others, even though such distributors, pursuant to

agreements between Ramp and its distributors, had the unfettered right to return such products to

Ramp if not resold and were not obligated to pay Ramp for the product until sold to resellers or

ultimate consumers.

7. In violation of SFAS 48, on at least one large deal with Telsource, a computer

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products distributor, valued at between $900,000 and $1,000,000, Ramp recognized revenues on

a sale where the buyer’s payment obligation was expressly contingent upon resale of the product.

According to Frank Orga, then Telsource’s Vice President of Sales, who participated in

negotiating the transaction with Ramp’s senior management, Telsource’s obligation to pay for

the Ramp products was expressly contingent upon Telsource’s ability to sell the product through

to end users who, according to former Ramp employee, Confidential Witness No. 8, were to be

located pursuant to leads that Ramp was obligated to provide to Telsource. According to Walter

Allen, Ramp’s former Director of Western Region Enterprise Sales, when buyers were not

procured, approximately $900,000 worth of product was returned and Confidential Witness No.

8 was demoted.

8. As reported in Ramp’s Form 10-Q for the Second Quarter of 2000, Ramp

recognized revenue from a transaction with myCIO.com, a Networks Associates company.

However, according to Walter Allen, Confidential Witness No. 10, and Confidential Witness No.

6, defendant Mahesh Veerina (Ramp’s Chief Executive Officer and President during the Class

Period) directly negotiated this deal by himself and, according to Confidential Witness No. 6,

kept the terms of the deal “hush hush.” Confidential Witness No. 6 further indicated that, to his

knowledge, the product was never shipped to myCIO.com. Indeed, a complaint filed against

Network Associates alleges that Ramp paid Network Associates $250,000 to issue purchase

orders for $2 million worth of products it never intended to purchase so that Ramp could book

the revenue.

9. In the Second Quarter of 2000, Ramp also recognized revenue from a transaction

to a Chinese company called Xiao Tong. However, according to Confidential Witness No. 2,

who was responsible for shipping the Xiao Tong order, the products were never sent to Xiao

Tong in the Second Quarter; instead, they were temporarily sent to an “out-source warehouse”

(while Ramp recorded the transaction as revenue) and the entire shipment was then returned to

Ramp.

10. Throughout the Class Period, defendants falsely portrayed Ramp as a booming

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company which was experiencing and would continue to experience rapidly rising product sales.

Thus, the reason that Ramp booked consignment sales as revenues, paid distributors and

“sweepers” to fraudulently store unwanted excess product, undertook resale obligations, and

allowed for generous rights of return, was to convey the impression that substantial sales of

Ramp products were being made to end-users. As a result of the success of this scheme during

the Class Period, defendants led investors to believe, in SEC filings and press releases

announcing record or increasing revenues, that there was expanding market acceptance of

Ramp’s products. However, by representing that Ramp’s revenue figures were calculated in

accordance with GAAP requirements, including SFAS 48, defendants defrauded the investing

public, who were not aware that many of the Company's reported "sales" of Ramp products

including without limitation the Telsource, myCIO.com and Xiao Tong transactions discussed

above, were not actual sales unless and until the product shipped to distributors was purchased by

resellers or ultimate consumers.

11. Defendants' material omissions and their dissemination of materially false and

misleading financial statements and materially false and misleading statements regarding the

demand for and market acceptance of Ramp's products drove Ramp's stock price to an artificial

Class Period high of $25.75 per share on March 10, 2000. By the end of the Class Period -- after

Ramp finally revealed its abysmal financial problems -- Ramp’s stock price plummeted to barely

$2.00 per share. Shortly after close of the Class Period, Ramp issued revised quarterly reports

for the first and second quarters of 2000 in which the Company significantly and materially

restated earnings.

JURISDICTION AND VENUE

12. This Court has jurisdiction over this action pursuant to §27 of the Securities

Exchange Act of 1934 (the "1934 Act"), 28 U.S.C. §§1331 and 1337. The claims asserted herein

arise under, §§10(b) and 20(a) of the 1934 Act, 15 U.S.C. §§78j(b), 78(n), and 78t(a), and Rule

10b-5, 17 C.F.R. §240.10b-5, promulgated thereunder by the SEC.

13. Venue is proper in this District pursuant to §27 of the 1934 Act, 15 U.S.C. §78aa,

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and 28 U.S.C. §1391(b). Defendants reside in this District. Many of the acts giving rise to the

violations complained of, including the dissemination of false and misleading public statements

and financial information, occurred in this District.

14. In connection with the wrongs alleged herein, defendants used the

instrumentalities of interstate commerce, including the United States mails, interstate wire and

telephone facilities, and the facilities of the national securities markets.

THE PARTIES

15. Lead Plaintiffs Intelligent Var Technology, Inc., Darrell Johnson, Douglas J.

Deutsch and Ronald Vincent (“plaintiffs”) purchased shares of Ramp common stock during the

Class Period at artificially inflated prices and were damaged thereby.

16. Defendant Ramp was formerly a Delaware corporation with Headquarters at 3100

De La Cruz Blvd., Santa Clara, California 95054. Throughout the Class Period, Ramp portrayed

itself as a leading provider of shared Internet access solutions for the small-office market. The

Company claimed that its WebRamp product family allowed multiple users in a small office

simultaneously to share the same Internet connection. The Company further asserted that the

WebRamp product family provided software-based routing and bridging functions to deliver

Internet-enabled applications and services.

17. As of October 2, 2000, Ramp had 21.7 million shares of stock outstanding.

During the Class Period, Ramp's shares traded on the NASDAQ National Market System, an

efficient market, under the symbol "RAMP." At all times relevant to this Complaint, Ramp

common stock traded actively in a well-developed and efficient market as that term is construed

under the federal securities laws. In January 2001, Ramp was acquired by Nokia Corporation

and ceased to trade on the NASDAQ.

18. Defendant Ramp, a corporation, acted through its officers, directors and

employees; their knowledge is imputed to Ramp for the purposes of any claims alleged herein

which require plaintiffs to demonstrate that Ramp acted with scienter.

19. Defendant Mahesh Veerina ("Veerina") is and was at all relevant times hereto

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Chief Executive Officer, President, Chairman of the Board and/or a director of Ramp.

20. As an officer, director and/or controlling person of a publicly-held company

whose common stock is registered with the SEC under the Exchange Act and traded on the

NASDAQ, defendant Veerina had a duty promptly to disseminate accurate and truthful

information with respect to the Company's operations, finances, financial conditions, and present

and future business prospects, to correct any previously issued statement from any source that

had become untrue, and to disclose any trends that would materially affect earnings and the

present and future operating results of Ramp, so that the market price of the Company's publicly-

traded securities would be based upon truthful and accurate information.

21. During the Class Period, defendant Veerina was a senior executive and director of

Ramp and was privy to confidential and proprietary information concerning Ramp, its operations,

finances, financial condition, products, and present and future business prospects. Because of his

possession of such information, defendant Veerina knew or, with deliberate recklessness,

disregarded the fact that the adverse facts specified herein had not been disclosed to and were

being concealed from the public. Because of his Board membership and executive and

managerial position with Ramp, defendant Veerina had access to adverse material non-public

information about Ramp's operations, finances, financial condition, products, inventories and

present and future business prospects. He had such access via internal corporate documents,

conversations and connections with other corporate officers and employees, attendance at

management and Board of Directors meetings and committees thereof, and via reports and other

information provided to them in connection therewith. Because of his possession of such

information, defendant Veerina knew or, with deliberate recklessness, disregarded the fact that

the adverse facts specified herein had not been disclosed to and were being concealed from the

public.

22. Defendant Veerina, because of his position of control and authority as an officer

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and director of the Company, was able to and did control the contents of the various quarterly

reports, SEC filings, press releases and presentations to securities analysts pertaining to the

Company.

23. Defendant Veerina was provided with copies of Ramp's management reports,

press releases and SEC filings. Armed with, and in control of such information, Veerina granted

interviews to newspaper reporters. The newspaper articles based on those interviews, as well as

the Company's other publicly disseminated information are alleged herein to have been

materially misleading to the investing public. Significantly, defendant Veerina had the ability

and opportunity to either prevent their issuance in the first place or to have caused them to be

corrected shortly after their issuance. Defendant Veerina, for instance, signed the Company’s

1999 annual report on Form 10-K filed in March of 2000. As a result, defendant Veerina was

responsible for the accuracy of the public reports and releases detailed herein as "group

published" information, and is therefore responsible and liable for the representations contained

therein.

24. Defendant Timothy J. McElwee was, until March 31, 2000, a Vice President of

Worldwide Sales for Ramp. Defendant McElwee reported directly to defendant Veerina. During

the Class Period, defendant McElwee sold approximately 92,000 shares of Ramp common stock

at artificially inflated prices, while in possession of undisclosed, materially adverse information

about the Company. These sales yielded defendant McElwee total proceeds of approximately

$1,346,832.

25. As an officer and/or controlling person of a publicly-held company whose

common stock is registered with the SEC under the Exchange Act and traded on the NASDAQ,

defendant McElwee had a duty to promptly disseminate accurate and truthful information with

respect to the Company's operations, finances, financial conditions, and present and future

business prospects, to correct any previously issued statement from any source that had become

untrue, and to disclose any trends that would materially affect earnings and the present and future

operating results of Ramp, so that the market price of the Company's publicly-traded securities

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would be based upon truthful and accurate information.

26. During the Class Period, defendant McElwee was a senior executive of Ramp and

was privy to confidential and proprietary information concerning Ramp, its operations, finances,

financial condition, products, and present and future business prospects. Because of his

possession of such information, defendant McElwee knew or, with deliberate recklessness,

disregarded the fact that the adverse facts specified herein had not been disclosed to and were

being concealed from the public. Because of his executive and managerial position with Ramp,

defendant McElwee had access to adverse material non-public information about Ramp's

operations, finances, financial condition, products, inventories and present and future business

prospects. He had such access via internal corporate documents, conversations and connections

with other corporate officers and employees, attendance at management and Board of Directors

meetings and committees thereof, and via reports and other information provided to them in

connection therewith. Because of his possession of such information, defendant McElwee knew

or, with deliberate recklessness, disregarded the fact that the adverse facts specified herein had

not been disclosed to and were being concealed from the public. As Vice President of World

Wide Sales, McElwee was further aware or recklessly disregarded that his improper sales

practices as set forth below would result in the improper inclusion of false sales figures into

Company filings and press releases and that these figures would be widely disseminated to

investors.

27. Each of the defendants is liable as a direct participant with respect to the wrongs

complained of herein. In addition, defendants Veerina and McElwee, by reason of their stock

ownership and their status as officers and/or directors of Ramp, were "controlling persons"

within the meaning of Section 20 of the Exchange Act and had the power and influence to cause

Ramp to engage in the unlawful conduct complained of herein. Because of their positions of

control, defendants Veerina and McElwee were able to and did, directly or indirectly, control the

conduct of Ramp's business, the information contained in its filings with the SEC, and the public

statements about its business.

28. Defendants Veerina and McElwee are hereinafter referred to collectively as the

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281 In accordance with the Court’s Opinion and Order, dated March 1, 2002, the revised

Class Period referenced herein is January 24, 2000, through September 29, 2000.



“Individual Defendants.” Ramp, Veerina and McElwee are hereinafter referred to collectively as

the “defendants.”

29. During the Class Period, defendants, individually and in concert, directly and

indirectly, engaged and participated in a continuous course of conduct to misrepresent the results

of Ramp's operations, and to conceal adverse material information regarding the finances,

financial condition, and results of operations of Ramp as specified herein. Defendants employed

devices, schemes, and artifices to defraud, and engaged in acts, practices, and a course of

conduct, as herein alleged, in an effort to increase and maintain an artificially high market price

for Ramp common stock. These activities included the formulating, making, and/or participating

in the making of untrue statements of material facts, and the omission to state material facts

necessary in order to make the statements made, in light of the circumstances under which they

were made, not misleading: such activities operated as a fraud or deceit upon plaintiffs and the

other members of the Class.

CLASS ACTION ALLEGATIONS

30. Plaintiffs bring this action as a class action pursuant to Rules 23(a) and 23(b)(3) of

the Federal Rules of Civil Procedure, individually and on behalf of all other persons or entities

who purchased or acquired Ramp stock during the Class Period (November 15, 1999, through

September 29, 2000)1 and were damaged thereby, excluding the defendants herein, their affiliates

and any officers or directors of Ramp or its affiliates, and any members of their immediate

families and their heirs, successors and assigns (the "Class").

31. The Class is so numerous that joinder of all the members of the Class is

impracticable. Plaintiffs believe there are hundreds of record holders of the Company's common

stock located throughout the United States.

32. Plaintiffs’ claims are typical of the claims of absent Class members. Members of

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the Class have sustained damages arising out of defendants' wrongful conduct in violation of the

federal securities laws in the same way as the plaintiffs have sustained damages from the

unlawful conduct.

33. Plaintiffs will fairly and adequately protect the interests of the Class. They have

retained counsel competent and experienced in class action and securities litigation.

34. A class action is superior to other available methods for the fair and efficient

adjudication of the controversy. The Class is numerous and geographically dispersed. It would

be impracticable for each member of the Class to bring a separate action. The individual

damages of any member of the Class may be relatively small when measured against the

potential costs of bringing this action, and thus make the expense and burden of this litigation

unjustifiable for individual actions. In this class action, the Court can determine the rights of all

members of the Class with judicial economy. Plaintiffs do not anticipate any difficulty in the

management of this suit as a class action.

35. Common questions of law and fact exist as to all members of the Class and

predominate over any questions affecting solely individual members of the Class. These

questions include, but are not limited to, the following:

a. Whether defendants' conduct as alleged herein violated the federal

securities laws;

b. Whether the SEC filings, press releases and statements disseminated to the

investing public during the Class Period misrepresented Ramp's financial

condition and results;

c. Whether defendants acted knowingly or with deliberate recklessness in

omitting and/or misrepresenting material facts;

d. Whether the market price of Ramp common stock during the Class Period

was artificially inflated; and

e. Whether the members of the Class have been damaged, and if so, what is

the proper measure of damages.

36. Plaintiffs will rely, in pertinent part, upon the presumption of reliance established

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by the fraud-on-the-market doctrine. The market for Ramp common stock was at all times an

efficient market for the following reasons, among others:

a. As a regulated issuer, Ramp filed periodic public reports with the SEC;

b. Ramp’s average daily trading volume during the Class Period was in

excess of 100,000 shares and it had market capitalization during the Class

Period in excess of $180 million;

c. Ramp disseminated information on a market-wide basis over various

electronic media services such as the Bloomberg newswires and also

issued press releases over PRNewswire; and

d. The market price of Ramp’s securities reacted efficiently to new

information entering the market;

e. According to the investor relations information available on the

Company’s website, during the Class Period a number of analysts

provided investors with research reports on Ramp, including Banc Boston

Robertson Stephens, Dain Rauscher Wessels, Pacific Crest, Chase H&Q

and Kaufmann Brothers.

FACTUAL BACKGROUND

37. On June 22, 1999, Ramp completed an IPO of 3,853,000 shares at $11.00 per

share. Before its acquisition by Nokia, Ramp primarily marketed and sold products through a

two-tier distribution structure which employed several national distributors who sold products to

a network of resellers, including value-added resellers (“VARs”), selected retail outlets, mail

order catalogs and ISPs, who then sold the products to end-users. As of December 31, 1999, the

Company had 142 employees of which 105 were located in the United States.

38. Prior to and during the Class Period, Ramp sold its products to distributors, such

as Ingram Micro, Tech Data, Merisel, Merit, Multiple Zones, Inc. (“MZI”) and Synnex who then

resold Ramp products to value-added resellers, selected retail outlets, mail order catalogs and

Internet Service Providers (ISPs). Ramp also sold its products to original equipment

manufacturers (OEMs) and companies working directly with Digital Subscriber Line (DSL)

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2 As a result of the decreasing importance of the Company’s analog products, investorreports issued by Kaufman Bros. L.P. during the Class Period reported that the investmentcommunity valued the Company primarily based on its broadband and security business.



service providers or carriers.

39. Ramp’s quarterly report for the quarter ending June 30, 1999 reported that Ramp’s

revenue was derived primarily from its WebRamp family of products. In 1998, according to this

report, sales to Ingram Micro and Tech Data of these products accounted for 26% and 24%,

respectively, of Ramp’s revenues. Ramp recognized revenue from these sales, the report

continued, “upon transfer of title and risks of ownership which generally occurs upon product

shipment.” The quarterly report added that “we defer revenue on sales to certain distributors if

we determine that their inventory exceeds normal stocking levels.”

40. Ramp’s report for the quarter ended September 30, 1999 also reported that

Ramp’s revenue was derived primarily from its WebRamp family of products. For the first 9

months ending September 30, 1999, according to this report, sales to Ingram Micro and Tech

Data of these products accounted for 30% and 20%, respectively, of Ramp’s revenues. Ramp

recognized revenue from these sales, the report continued, “upon transfer of title and risks of

ownership which generally occurs upon product shipment.” The quarterly report added that “we

defer revenue on sales to certain distributors if we determine that their inventory exceeds normal

stocking levels” dependent only on timely and accurate information from distributors to make

such a determination.

41. During and following the introduction of the Company’s second generation of

WebRamp products, broadband technologies like DSL and cable modems began for the first time

to become viable options for small offices. In order to make its broadband technology more

attractive, in late 1999, Ramp began offering broadband platforms that incorporated security

features designed to prevent unauthorized access to small-office networks using shared Internet

connections. During the Class Period, demand for the Company’s analog products began to

soften as end-users turned their attention to the emerging broadband technologies.2 According to

Walter Allen, a former sales executive employed by Ramp for most of the Class Period, at the

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same time as its product line was changing, Ramp’s sales strategy changed, away from inside

sales to smaller customers, the majority of Ramp’s customer base, to broadband sales to larger

customers.

42. As a result of these sea changes, Ramp was required to carefully focus upon the

requirements of SFAS 48 as applied to Ramp’s accrual of revenues, with respect to both sales of

new products and sales to new customers. Specifically, SFAS 48 states that when a buyer has the

right to return merchandise purchased, the seller may not recognize income from the sale, unless

all of the following conditions are met:

a. The price between the seller and the buyer is substantially fixed or

determinable;

b. The seller has received full payment, or the buyer is indebted to the seller

and the indebtedness is not contingent on the resale of the merchandise;

c. Physical destruction, damage, or theft of the merchandise would not

change the buyer’s obligation to the seller;

d. The buyer has economic substance and is not a front, straw party or

conduit, existing for the benefit of the seller;

e. No significant obligation exists for the seller to help the buyer resell the

merchandise; and

f. A reasonable estimate can be made of the amount of future returns.

43. Only if all the above conditions are met, can the seller recognize revenue on a sale

for which a right of return exists subject to an appropriate provision for costs or losses that may

occur in connection with the return of product from the buyer. If all of the conditions of SFAS

48 are not met, a seller cannot recognize sales revenue until the right-of-return privilege has

substantially expired or the provisions of SFAS 48 are subsequently met based on changed

circumstances.

44. Even where all of the above conditions are met, a seller is only entitled to

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3 On July 27, 2000, for instance, Dain Rauscher Wessels issued an investor report onRamp estimating that the Company had little more than two quarters of cash remaining to fundoperations.



recognize sales revenue as long as the seller’s revenue figures take into account a reasonable

estimate of returns. A seller in Ramp’s position in late 1999 – introducing a new product line

and shifting its focus to new, larger customers – needed to take into careful consideration both its

customers and the types of merchandise involved. Under SFAS 48, a number of the following

factors were likely to impair the ability of a seller in Ramp’s position to make the reasonable

estimate of returns necessary to enable Ramp to accrue revenue in accordance with GAAP:

a. Possible technological obsolescence or changes in demand for the

merchandise;

b. The length of the period that the customers have to exercise the right of

return;

c. Little or no past experience in determining returns for specific types of

merchandise;

d. Little or no past experience in determining returns for similar types of

merchandise;

e. A good chance that future marketing policies of the seller and/or the

relationship with its customers will change.

45. Throughout the Class Period, Ramp was dependent upon raising funds through the

sale of equity to fund its operations.3 As of December 31, 1999, the Company had an

accumulated deficit of $47.1 million. To attract desperately needed funds, it was therefore

essential that the Company continue to provide the appearance of a company with increasing

sales and revenues, particularly with regard to new products. Since Ramp had no long-term

customers of significant size except for distributors, it was necessary for Ramp both to convince

distributors to carry its products and to generate sufficient demand among small-office users of

Internet services to enable those distributors to sell Ramp products to resellers and ultimate

consumers. Commencing no later than the third quarter of 1999, defendants embarked on a

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scheme to create the appearance of market acceptance of its broadband products in order to

artificially inflate the price of its common stock. This scheme involved knowing or reckless

disregard of the requirements of GAAP which resulted in false and inflated reporting of revenues

both to the SEC and the investing public.

THE (ORIGINAL) CLASS PERIOD BEGINS

46. In a November 16, 1999 Company press release, entitled "Ramp Networks Survey

Reveals Small Businesses' Strong Demand for DSL Service," defendant Veerina hyped the

prospects for Ramp's forthcoming sales growth by stating:

Small businesses and branch offices depend on Internet-based applications to runtheir businesses and are increasingly choosing DSL as a cost effective, high-speedconnection for bandwidth-intensive needs. . . . This survey confirms theoverwhelming commitment from ISPs, carriers and VARs to bring DSL service totheir small business customers, and validates Ramp's partners, Ramp is solvingthe DSL provisioning puzzle for small businesses worldwide.

47. That same November press release went on to overstate the potential sales growth

related to the analog customer market:

Upgrading the installed base of analog customers to DSL is another virtuallyuntapped market for carriers and ISPs. Survey results indicate that 50 percent ofcustomers are good candidates to upgrade to DSL. Previous surveys conducted byRamp showed that 60 percent of its U.S. small business customers are interestedin adopting DSL service and equipment when it becomes available in their area,putting Ramp in an excellent position to benefit from upgrading the equipment ofa large proportion of its analog and ISDN customers.

48. In the Company's February 9, 2000 press release, entitled "Ramp Networks

Announces Fourth Quarter And Fiscal Year 1999 Results", the defendants stated:

Revenues for the fourth quarter of 1999 were $4.8 million, an increase of 62%over revenues of $3.0 million for the fourth quarter of 1998. For the year endedDecember 31, 1999, Ramp reported revenues of $18.2 million, an 85% increaseover revenues of $9.9 million reported for the year ended December 31, 1998.

49. In that same February press release, defendant Veerina misleadingly commented

on those results:

We are pleased with our year over year growth of 85% and with achieving a greatmilestone for the company in reaching the 100,000th customer mark . . . We alsosaw strong progress in the fourth quarter in expanding our broadband productportfolio, adding the WebRamp 600i ADSL router and the WebRamp 450i IDSLrouter to complement the WebRamp 500i and 510i SDSL products that we beganshipping Q3. This gives Ramp the broadest, most fully-featured family of DSLCPE in the industry, completely interoperable with more than 75% of all deployed

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DSLAMs.

50. On March 30, 2000, Ramp filed its annual report for the year ended December 31,

1999 on Form 10-K. In its 1999 10-K, Ramp again stated that its “revenue increased 85% to

$18.2 million for the year ended December 31, 1999 from $9.9 million for the year ended

December 31, 1998.” According to Ramp, the “increase was primarily due to increased sales of

the Company's WebRamp 200 and 300 series of analog products as well as sales of the new

ISDN WebRamp 410i product and the WebRamp 700 series for security” and “revenue growth

was reported in all geographic regions, with particular strength in North America.” However,

Ramp also reported that sales to Ingram Micro and Tech Data still accounted for 26% and 18%,

respectively, of Ramp’s revenue.

51. Regarding its revenue recognition policy, Ramp’s 1999 Form 10-K assured

investors that Ramp’s revenue accrual was accurate and in compliance with GAAP because the

Company had the ability to make reasonable estimates of returns, specifically stating that:

Ramp's revenue consists principally of amounts earned from the sale ofmanufactured products. Revenue is recognized upon transfer of title and risks ofownership, which generally occurs upon product shipment. Certain agreementswith distributors and retailers provide for rights of return, co-op advertising, priceprotection, and stock rotation rights. Ramp has reviewed the requirements ofSFAS No. 48, "Revenue Recognition When Right of Return Exists", and hasconcluded that they have sufficient history and experience to quantify reservesrequired for these provisions. Accordingly, Ramp provides an allowance forreturns and price adjustments and provides a warranty reserve at the point ofrevenue recognition. Reserves are adjusted periodically based upon historicalexperience and anticipated future returns, price adjustments, and warranty costs.

52. The statements contained in the foregoing press release and Form 10-K, regarding

revenues and increased sales of Ramp’s products were false and materially misleading because

defendants knew or recklessly disregarded that the Company's reported financial statements were

materially overstated. Ramp did not experience year-over-year revenue growth of 85% and the

market was not characterized by increased actual sales of WebRamp products. In fact, Ramp was

engaged in a deliberate and massive scheme involving fake sales, inflated sales, sales that were

incomplete due to unfettered rights of return and other contingencies and sales to distributors for

which no reasonable person would expect the product to “sell-through” to an end-customer.

Plaintiffs contend that Ramp’s results for the third and fourth quarters of 1999 were materially

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overstated and that Ramp should have restated its earnings to reflect the effect of its accounting

irregularities. A number of sources indicate that the true state of affairs in late 1999 was

different than presented by Ramp in the above press releases, such that Ramp’s recognition of

revenue for such sales violated the very GAAP principles Ramp claimed to be in compliance

with:

a. Confidential Witness No. 2, an operations specialist who worked at Ramp

from September 1999 until September 2000, and who was responsible for

shipping orders, indicated that on the last night of each quarter his

supervisor, Frank Ducker, remained at Ramp’s DCL warehouse facility in

Fremont, California ensuring that shipments were moved off the docks by

the end of the quarter. Ducker told Confidential Witness No. 2 that

revenue could only be booked if the product actually left the Company’s

loading docks. At each quarter’s end, so-called “sweeper” trucks would

come to temporarily take the product away from the docks, for about a

week, so that Ramp could book the shipment as revenue. After their

temporary removal by the “sweepers,” the products were returned to Ramp

within a week;

b. Confidential Witness No. 3, a technical support engineer at Ramp from

April 1999 until September 2000, similarly revealed that Ramp had

problems with its numbers because “it had a lot of product at the docks;”

c. Confidential Witness No. 4, who worked in Ramp’s business development

department from January until August 1999, revealed that Ramp’s sales

were “not great” during that time period and that Ramp “did not have any

big customers.” Ramp’s return policy for its sales to distributors during

that period, including Tech Data, Ingram Micro and Merisel , was that

returns were “left to the discretion of the distributor;”

d. Confidential Witness No. 5, a regional sales manager employed by Ramp

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from August 1998 until November 1999 revealed that Ramp’s distributors

during that period included Merisel, Ingram Micro, and Tech Data and that

he also heard that Ramp was sending product to the distributors and that

the distributors were sending it back;

53. In addition to the above facts, which establish that Ramp was aware that highly

questionable accounting practices, rather than actual sales, fueled Company growth in 1999, the

following facts demonstrate that throughout the Class Period both Ramp and the Individual

Defendants either knew that the true facts were different than they represented above or that they

recklessly disregarded the true facts in making their statements.

a. Defendant Timothy McElwee was directly responsible for “sales” to

distributors, with broad rights of return, which should not have been

booked as revenue; McElwee regularly discussed such sales and returns

with other senior executives:

(1) According to Confidential Witness No. 6, a hardware

engineer who worked at Ramp during the first four months

of 2000, Defendant McElwee, who was terminated by

Veerina just one month after the glowing February 2000

press release was issued, had been personally responsible

for “dumping” unwanted product at distributors in

exchange for payment of a fee to the distributors for storing

the merchandise. Confidential Witness No. 6 also said that

McElwee attended weekly executive management meetings

(whenever he was in town) where the subjects of product

returns, product development and product sales were

discussed. After each meeting, a list of returned product,

by product name, was circulated to senior management by

the customer service department. When McElwee was

“nailed” for all of the returns at the executive meetings, he

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tried to deflect the criticism by laughing it off.

Nevertheless, Veerina complained about the high returns

and eventually fired McElwee; and

(2) Walter Allen, a former Regional Sales Director, confirmed

that at weekly meetings between Veerina, Ramp’s Chief

Financial Officer and the Vice Presidents, McElwee

discussed the special deals he made and the various product

returns. Confidential Witness No. 6 indicated that

McElwee’s “bad deals” were with Ingram Micro, Tech

Data, Merisel, and a few other distributors.

b. Defendant Veerina was intimately involved in all aspects of the sales

process, including both sales and returns, and was therefore aware of the

facts which established that large numbers of “sales” did not qualify for

revenue recognition under SFAS 48:

(1) According to Allen, Veerina directly negotiated “many

shady deals,” including two deals which represented 64%

of Ramp’s sales for the second quarter of 2000 (one of the

quarters for which financial results later needed to be

restated);

(2) According to Confidential Witness No. 6, McElwee, as

former Vice President of worldwide sales, reported directly

to Veerina. As stated above, Veerina held weekly

executive meetings to discuss product sales and returns and

the deals made by McElwee;

(3) According to Confidential Witness No. 7, an employee who

worked in Ramp’s marketing department from March to

September 2000 and who reported to Sean Lewis, Ramp’s

chief of distribution, two of Ramp’s distributors, Ingram

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Micro and Tech Data, sent monthly sales reports which

showed their “sell through” figures for each month.

Confidential Witness No. 7 disclosed that Lewis reported

all sales information, such as these “sell through” numbers

directly to Veerina;

c. Defendant Veerina ran the Company as if it were his own small business,

rather than a public company, always manipulating the flow of

information:

(1) Walter Allen said that Veerina was a “micromanager” and

that “nothing happened without [Veerina’s] input;”

(2) Confidential Witness No. 6, indicated that Veerina had

been around the industry for a long time and made deals

with friends in the industry who later returned products.

Allen confirmed that Veerina made deals with his industry

friends whereby inventory would leave the premises, to

enable Ramp to meet its quarterly projections, and be

returned to Ramp after having been stored off-site at

Ramp’s expense;

(3) Confidential Witness No. 6, revealed that Veerina was a

“firm believer of nepotism,” in that Veerina’s wife, Sheila,

was the manager of systems testing, another relative was in

charge of Ramp’s office in India and yet another relative

was a Vice President in charge of new products.

Confidential Witness No. 6 also revealed that Sheila

Veerina who was responsible for quality control, “played

with the records” involving product returns of items from

which the shrink wrap had not been removed. Sheila

Veerina also kept the failure rate a secret, keeping that

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information from senior management;

(4) The weekly “return sheet” never had customer names on it.

When Confidential Witness No. 6 asked about the names of

customers returning products, he was told to stop asking

questions. In his opinion, everything was “super secret” at

Ramp. Consequently, because customer names were not

provided in connection with product returns, Confidential

Witness No. 6 indicated that it was possible that customers

never even existed and that “Ramp could have been

shipping everything to an empty parking lot.”

DEFENDANTS MATERIALLY OVERSTATE RAMP’S FINANCIALRESULTS FOR THE FIRST QUARTER OF FISCAL 2000

54. The first quarter of 2000 was the first quarter that the Company was able to ship

volume production of its complete line of WebRamp product designed for DSL. On January

24, 2000, Ramp issued a release on the PRNewswire touting its newly formed business

relationship with Telsource:

Telsource can take advantage of value-added Internet accesssolutions by offering the WebRamp to its customers.

“As the demand for small office high-speed Internet accesscontinues to grow, the need for single-source DSL installation,support and services has never been greater” said Jerry Jalaba,senior vice president of worldwide sales and support for RampNetworks. “Telsource is an ideal partner for Ramp because of itsstrong nationwide presence and leadership providing turn-keyprovisioning programs to a substantial list of carriers and largecorporate customers. This partnership is part of our continuingstrategy to broaden our channels in the important carrier andservice provider markets.”

“Telsource has built a reputation for reliability and expediency indelivering advanced network integration and support solutions,”said Frank Orga, vice president of sales and marketing forTelsource. “We want to be the nation’s leading DSL installationprovider by the end of this year. After evaluating a number of DSLequipment providers, we chose Ramp for its broad product line andvalue-added software offerings.”

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55. On January 25, 2000, Ramp issued another announcement concerning its

relationship with Telsource. Specifically, Ramp announced that Confidential Witness No. 8,

formerly of Telsource, had joined Ramp as an Area Vice President of Sales and would report to

Jerry Jalaba, Senior Vice President of Worldwide Sales and Support.

56. In an April 25, 2000, press release, entitled "RAMP Networks Announces First

Quarter Fiscal Year 2000 Financial Results" and subtitled "Company Reports Record DSL

Orders and Shipments," the defendants stated the following about the Company' sales

performance:

Revenues for the first quarter of 2000 were $5.6 million, an increase of 44% overrevenues of $3.9 million for the first quarter of 1999. Net loss was $5.5 million or$0.26 per basic and diluted share for the first quarter of 2000, compared to a netloss of $3.0 million or $0.71 per basic and diluted share for the same quarter ofthe prior year.

DSL orders and shipments drove our revenue growth this quarter . . . Orders forour broadband solutions exceeded our expectations and we are increasingproduction to meet the demand.

57. On May 11, 2000, Ramp filed its Form 10-Q for the first quarter of fiscal 2000,

ended March 31, 2000. As in the press release issued the previous month, Ramp reported that:

Revenue increased 44% to $5.6 million in the three months ended March 31,2000 from $3.9 million in the three months ended March 31, 1999. The increasewas primarily due to continued growth in the WebRamp 700 series of securityproducts and the introduction of our DSL products dominated by the Company'snew line of SDSL and ADSL products servicing the "broadband" market.Revenue growth was reported in all geographic regions, with particular strengthin North America reflecting the growth in the security and broadband products.

58. As admitted by defendants on November 14, 2000, after the close of the Class

Period, the foregoing statements were materially false and misleading and Ramp’s results of

operations were not properly reported to investors and the SEC in accordance with GAAP, even

though defendants had expressly claimed that their financial presentation complied with GAAP,

in general, and SFAS 48, in particular:

a. As Ramp later admitted, revenues for the first quarter of fiscal 2000 were

only $3.5 million, thus the May 11, 2000 announcement overstated first

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quarter revenues by an astonishing 60%;

b. Internal documents reveal that Ramp had virtually no POS DSL sales to

end users during the first quarter of 2000. Similarly, Ramp’s DSL sales

for the second quarter were abysmally paltry.

(i) POS DSL sales results reveal that Tech Data sold one (1) unit in

January of 2000; five (5) in February of 2000; seven (7) in March

2000; four (4) in April of 2000; and five (5) units in May of 2000.

The total revenue for these five months from DSL products sold

through Tech Data was $11,000.

(ii) For the month of January of 2000, Ingram Micro sold five (5) DSL

units; for the month of February of 2000 they sold two (2) units;

for the month of March 2000 they sold eleven (11) units; for the

month of April they sold three (3) units; for May of 2000 they sold

two (2) units; and for June of 2000 they sold eighteen (18) units.

The total revenue for the first six months of POS sales for DSL

products from Ingram, Ramp’s largest distributor, was a paltry

$17,000.

(iii) For the week ending May 5, 2000, Ramp had negative sales of one

(1) unit of DSL sales. For the weeks ending May 12th and May

26th, Ramp had dismal POS DSL sales of just two (2) units. In

addition, for the week ending May 19th, Ramp had POS DSL sales

of just four (4) units.

Given these dismal sales results, which Ramp was aware of, Ramp’s

preceding April 25th and May 11th statements regarding DSL markets were

knowingly false and/or consciously reckless, because Ramp was aware

that the Ramp’s DSL sales to distributors who were not obtaining any

meaningful sell-through. Moreover, for Ramp to have recognized virtually

any revenue with respect to DSL sales in the first quarter of 2000, given

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284 This is evidenced, in part, by Ramp’s first-time inclusion in its amended Form 10-

Q/A for the First Quarter, filed November 2000, of $5.214 million in “deferred revenues.”



the dismal sell-through and lack of historical experience in this market,

was consciously reckless.

59. The admitted material misstatements of Ramp’s first quarter revenues were the

product of knowing or deliberately reckless misconduct by defendants. The sheer magnitude of

the admitted overstatement is itself determinative of defendants’ culpable intent herein. Ramp

was engaged in a scheme to artificially inflate its revenues by improperly accruing, in violation of

SFAS 48, fake sales, inflated sales, premature sales, and sales that were incomplete due to

unfettered rights of return and other contingencies and sales to distributors for which no

reasonable person would expect the product to “sell-through” to an end-customer.4 Specifically,

during the first quarter of fiscal 2000, Ramp recorded revenue under circumstances where

compliance with GAAP would not have permitted revenue accrual, including the following:

a. Walter Allen, who joined Ramp in early 2000, immediately noted that

Ramp regularly shipped products before there were signed purchase

orders. Allen revealed that he had never seen a company, other than

Ramp, that would ship product based upon the “slightest of verbal

commitments.” As a result, according to Allen, Ramp received numerous

returns. Similarly, Confidential Witness No. 8, a former Vice President of

sales employed by Ramp from January to August 2000, indicated that

Ramp would announce deals in press releases before there were any

purchase orders. However, because of “the nature of the DSL market,”

deals that initially “looked good often did not go anywhere;”

b. Confidential Witness No. 6, whose employment commenced in January

2000, revealed that McElwee (who was himself terminated at the end of

the quarter) “dumped” unwanted product at several distributors. To

induce them to take the product, McElwee paid a fee to the distributors

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for product storage. Confidential Witness No. 6, recalled that two of these

distributors were located in Seattle, Washington and San Jose, California.

Allen confirmed that Ramp’s distribution chief, Sean Lewis, paid both the

cost of storage and 1.5% interest to distributors ADP, Tech Data, MZI and

Ingram Micro so that they would take excess product;

c. Walter Allen disclosed that to induce them to take vastly more product

than they needed or could sell through to end-users, distributors such as

Ingram Micro, Tech Data, Merisel and others were granted the right to

return merchandise at any time. Allen also stated that Ingram Micro was

granted 100 days to make payment. This is particularly significant

because “sales” to Ingram Micro and Tech Data represented 56% of

Ramp’s sales for the first quarter of 2000, with each company’s sales

generating 28% of Ramp’s sales for the quarter. Allen further revealed

that certain deals with Ingram Micro were backdated. It was Allen's

opinion that Ramp intentionally inflated its numbers for Wall Street so that

the stock price would continue to rise;

d. During the first quarter of fiscal 2000, Confidential Witness No. 6 saw that

Ramp was receiving returns of $40,000 to $70,000 worth of product each

month, much of which was returned as purportedly defective. When

Confidential Witness No. 6 and others in the engineering department

began to test them, there were almost no product failures and there was no

justification for the $40,000-$70,000 return figures;

e. In conjunction with their testing of returned products, Confidential

Witness No. 6 and the other engineers noted that many returned products

had not even been opened. Confidential Witness No. 6 – who had already

become suspicious about the fact that returned merchandise was not

attributed on Ramp’s weekly “return sheets” to particular customers – was

told to stop asking questions about these returns. Both Allen and

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5 Ramp’s original Form 10-Q, filed May 11, 2000, reported the Telsource transactionas 14% of its revenues for the First Quarter. Whereas First Quarter revenues were originallyannounced as $5.6 million, 14% of this figure is approximately $784,000. Without discovery,plaintiffs do not have access to documents indicating the precise amount of the sale. However,plaintiffs can and do allege that Allen -- who did not personally negotiate the sale, but was aware ofboth the sale and the later return of nearly all of the product -- valued the sale at between $900,000and $1,000,000. Additionally, according to its Form 10-Q filed for the Second Quarter, Rampincreased its provision for doubtful accounts in the Second Quarter by $800,000. As acknowledgedin the Court’s March 1, 2002 Opinion at 21, defendants represented in their motion to dismiss theSecond Amended Complaint that the increase in doubtful accounts was related to this transaction.Therefore, in light of the fact that no witness indicated that there were two sales to Telsource – and,indeed, if there were, combined sales would have amounted to more than 14% of revenues –plaintiffs are informed, and believe, that the transaction referenced herein is the one for which Ramprecognized and reported revenues, as set forth in the Form 10-Q.



Confidential Witness No. 6 later discovered that McElwee then devised a

scheme whereby he induced various distributors (such as the distributor in

San Jose who was willing to purchase excess inventory with an unfettered

right of return) to agree to hold inventory for 90 days and instructed them

to remove the shrink wrap from products they were returning to Ramp to

make it appear as if the product had sold through the distribution channels

to an ultimate end-user;

f. Confidential Witness No. 6 stated that Sheila Veerina manipulated the

return data such that Ramp reported a smaller amount of unopened

products had been returned than actually had been returned;

g. A large sale to Telsource, valued by Allen at between $900,000 and

$1,000,000, constituted a material portion of Ramp’s reported accrued

revenues of $5.6 million for the First Quarter of fiscal 2000.5 According

to Allen and Confidential Witness No. 8 (who had just joined Ramp and

had previously worked at Telsource), the terms of the deal required Ramp

to assist in the resale of the merchandise by Telsource. Specifically,

according to Confidential Witness No. 8, Ramp was to provide Telsource

with customer leads. According to Allen, when Ramp was unable to locate

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buyers for Telsource, $900,000 worth of product was returned and

Confidential Witness No. 8 was demoted. Allen’s and Confidential

Witness No. 8’s accounts are confirmed by Frank Orga, who, during the

Class Period, was Vice President of Sales at Telsource (and was quoted in

the Ramp press release of January 24, 2000 announcing the Telsource

transaction). Orga stated that he personally was involved in the

negotiation of Ramp’s First Quarter 2000 contract with Telsource, dealing

directly with Vice President of Business Development Bob Kondamoori

(defendant Veerina’s brother-in-law) and Senior Vice President of Sales,

Jerry Jalaba (who, according to the January 5, 2000, press release

announcing his appointment, reported directly to defendant Veerina).

According to Orga, pursuant to the terms of the deal, Telsource was not

obligated to pay for Ramp products unless Telsource could sell the product

through to end users. Also according to Orga, by the terms of the parties’

agreement, Ramp was obligated to provide sales assistance to Telsource,

in the form of Ramp providing customer leads for Telsource. (In fact,

Telsource had little sales force of its own and any Ramp products sold by

Telsource were sold pursuant to customer leads provided to Telsource

from Ramp.) Ultimately, Telsource sold very little of the Ramp product;

the vast majority was returned; and Telsource did not have to pay for the

returned products.

h. Based upon large distributors’ weekly reports to Ramp of “sell through”

figures, according to figures provided by Allen, Ramp was able to

determine that two of its largest distributors, Tech Data and Ingram Micro,

had, on average, a Class Period high of 24.3 weeks of inventory on hand or

“on order” during the first quarter of fiscal 2000. In light of the rapidly

changing nature of the technology at issue, these distributors would not

reasonably pay for both six months worth of product and the cost of

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storing said product. In addition, balance sheet data on the Company

showed steadily increasing accounts receivable days sales outstanding

(DSOs) from 63 in September of 1999 to 141 in June of 2000.;

i. Confidential Witness No. 2, revealed that on the last night of each quarter

his supervisor, Frank Ducker, remained at Ramp’s DCL warehouse facility

in Fremont, California ensuring that products were moved off the docks by

the end of the quarter. Ducker told Confidential Witness No. 2 that

revenue could only be booked if the product actually left the Company’s

loading docks. At each quarter’s end, so-called “sweeper” trucks would

come to take the product away from the docks temporarily, for about a

week, so that Ramp could book the shipment as revenue. After their

temporary removal by the sweepers, the products were returned to Ramp

within a few days;

j Confidential Witness No. 9, a former Ramp regional sales manager,

employed for five months in mid-2000, revealed that during the first

quarter of fiscal 2000, it was Ramp’s policy to book revenue when the

product left Ramp’s loading docks;

k. Confidential Witness No. 3, similarly revealed that Ramp had problems

with its numbers because “it had a lot of product at the docks;” and

l. Confidential Witness No. 10, a senior sales executive employed by Ramp

during fiscal 2000, disclosed that it was common practice at Ramp to book

shipments to distributors as revenue even though there was no end-user for

the product and the distributor had a right to return the products.

60. Despite these clear violations of GAAP, Ramp’s report for the quarter ended

March 31, 2000 represented that the Company’s financial statements for that period had been

prepared both in compliance with GAAP, generally, and, specifically, in compliance with SFAS

48:

The condensed consolidated financial statements have been prepared by Ramp,

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pursuant to the rules and regulations of the Securities and Exchange Commissionand include the accounts of Ramp Networks, Inc., and its wholly-owned subsidiary (collectively the "Company"). Certain information and footnotedisclosures, normally included in financial statements prepared in accordance withaccounting principles generally accepted in the United States, have beencondensed or omitted pursuant to such rules and regulations. In the opinion of theCompany, the unaudited financial statements reflect all adjustments, consistingonly of normal recurring adjustments, necessary for a fair presentation of thefinancial position at March 31, 2000 and the operating results and cash flows forthe three months ended March 31, 2000 and 1999.


61. Each of these statements was false and materially misleading because defendants

knew or recklessly disregarded that the Company routinely entered into deals with distributors

where the title and risks of ownership did not transfer upon product shipment because Ramp was

paying to store the merchandise with the customer and/or had agreed to ship the merchandise

with knowledge that the “buyer” intended to return the merchandise for full credit following the

end of the quarterly reporting period. Reported financial statements were materially overstated

due to the reasons set forth above. The statement that the Company had reviewed the

requirements of SFAS 48 and had determined that it was appropriate to book revenue on

shipments of Ramp products to such customers was also false and misleading because defendants

knew or recklessly disregarded that revenue recognition on sham transactions entered into solely

to boost quarterly revenue and sales numbers is a clear violation of GAAP. Even for those

customers who had agreed to attempt to resell Ramp’s merchandise to resellers, it was false and

misleading for the Company to represent that revenue recognition on these transactions was

acceptable under GAAP because such transactions were actually consignment sales and cannot

be booked as actual sales under any applicable accounting rules.

62. In addition to the above facts, which establish that Ramp was aware that highly

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questionable revenue recognition/consignment sales, rather than actual sales, fueled Company

growth during the first quarter of 2000, the following facts, in addition to those set forth in ¶¶63-

64, demonstrate that throughout the Class Period both Ramp and the Individual Defendants either

knew that the true facts were different than they represented above or that they recklessly

disregarded the true facts in making their statements:

a. Defendants were either aware or recklessly disregarded the fact that

distributors were carrying unreasonably high levels of Ramp products. By

defendants' own admission in the Company's 1999 10-K, Ramp had highly

automated internal support systems including database tracking

technologies. As set forth above, Ramp also had access to the POS reports

generated by, among others, Ingram Micro, Tech Data, Merisel, Merit and

Synnex which tracked weekly sell-through of Ramp products at these

distributors by dollar amount and unit quantity. Both Ingram Micro and

Tech Data also provided or made available to their vendors real-time

information regarding the sale of their products to resellers. Ingram

Micro, for instance, offered manufacturers like Ramp the opportunity to

receive detailed vendor buyer reports that track the sales of their products

by SKU and warehouse. Ingram Micro also has a scalable, full-featured

information system called IMpulse which enables it to provide worldwide,

real-time information to both suppliers like ramp and to reseller customers.

Through an on-line service, Tech Data customers can also obtain remote

access to Tech Data’s data processing system to check on real-time

product availability.

b. The sales and inventory information available to Ramp executives, as set

forth above, was supplemented by support services provided to resellers

and end-users which enabled the Company to identify purchasers of

WebRamp products. For broadband WebRamp products, as explained on

the Company’s Internet website, the Company required purchasers to

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apply to the Company before authorizing their initial purchase of DSL

routers from a distributor. These support services assisted Ramp in

gathering current information regarding the sales of its products to both

distributors like Ingram Micro, Tech Data, Merisel, Merit and Synnex and

by distributors to VARs and ultimate end-users.

c. Ramp primarily sold its products in North America through Ingram Micro

and Tech Data, which in 1999 accounted for 26% and 18%, respectively,

of the Company’s revenue. The Company’s 1999 S-1's filed with the SEC

attached copies of the distribution agreements between Ramp and Tech

Data and Ingram Micro. Significant terms, such as those relating to the

right of return, however, have been partially redacted from these

agreements on confidentiality grounds, but the terms remaining imply that

each distributors’ right of return is limited by time and/or quantity. The

Company’s publicly filed documents do not disclose that these limitations

have been modified or altered, either in writing or orally. According to

Tech Data’s 1999 Annual Report, however, the contracts between

manufacturers like Ramp and Tech Data generally contain stock rotation

and price protection provisions designed to protect the distributor from

risk of loss due to slow moving inventory, price reductions, product

updates or obsolescence. Tech Data’s 1999 Annual Report further notes

that industry practices regarding vendor relations “are sometimes not

embodied in agreements....” Ingram Micro’s 2000 Annual Report on

Form 10-K also reports that the distributor enters into agreements with

suppliers like Ramp to protect it from risk of loss due to technological

change and price reductions. Ingram Micro’s Annual Report further

discloses that industry practices regarding products and suppliers “are

sometimes not embodied in written agreements....”

d. On its website, Ingram Micro also explains to interested manufacturers the

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process by which it decides which products to carry in its inventory. As

part of that explanation, Ingram Micro states:

The role of a distributor varies, depending onwhether your products target new or establishedmarkets. Overall, our role is to broaden and/oraccelerate penetration into the reseller channel–notto create initial product demand. In establishedmarkets our role is primarily to provide productavailability and quick delivery, assume credit riskand leverage you with our large reseller base.It’s important not to view us as the final sale. The final sale is the transaction between thereseller and the end user. (Emphasis added)

63. Defendant McElwee was directly responsible for “sales” to distributors, with

broad rights of return, which should not have been booked as revenue. McElwee regularly

discussed such sales and returns with other senior executives:

a. According to Confidential Witness No. 6, McElwee, who was terminated

by Veerina in late March 2000, had been responsible for “dumping”

unwanted product at distributors in exchange for payment of a fee to the

distributors for storing the merchandise. Confidential Witness No. 6 also

indicated that McElwee attended weekly executive management meetings

(whenever he was in town) where the subjects of product returns, product

development and product sales were discussed. After each meeting, a list

of returned product, by product name, was circulated to senior

management by the customer service department. When McElwee was

“nailed” for all of the returns at the executive meetings, he tried to deflect

the criticism by laughing it off. Nevertheless, Veerina complained about

the high returns and eventually fired McElwee; and,

b. Walter Allen, a former Regional Sales Director during the first nine

months of 2000, confirmed that at weekly meetings between Veerina,

Ramp’s Chief Financial Officer and the Vice Presidents, McElwee

discussed the special deals he made and the various product returns.

Confidential Witness No. 6 indicated that McElwee’s “bad deals” were

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with Ingram Micro, Tech Data, Merisel, and a few other distributors.

64. Defendant Veerina was intimately involved in all aspects of the sales process,

including both sales and returns, and was therefore aware of the facts which established that large

numbers of “sales” did not qualify for revenue recognition under SFAS 48:

a. According to Allen, Veerina negotiated many of Ramp’s deals, including

many “shady deals”;

b. According to Confidential Witness No. 6, McElwee, as former Vice

President of Worldwide Sales, reported directly to Veerina. As stated

above, Veerina held weekly executive meetings to discuss product sales

and returns and the deals made by McElwee;

c. According to Confidential Witness No. 7, two of Ramp’s distributors,

Ingram Micro and Tech Data, sent monthly sales reports which showed

their “sell through” figures for each month. Confidential Witness No. 7

indicated that Lewis reported all sales information, such as these “sell

through” numbers directly to Veerina;

d. Defendant Veerina ran the Company as if it were his own small business,

rather than a public company, always manipulating the flow of

information:

(1) Allen stated that Veerina was a “micromanager” and that

“nothing happened without [Veerina’s] input;”

(2) Confidential Witness No. 6, indicated that Veerina had

been around the industry for a long time and made deals

with friends in the industry who later returned products.

Allen confirmed that Veerina made deals with his industry

friends whereby inventory would leave the premises, to

enable Ramp to meet its quarterly projections, and be

returned to Ramp after having been stored off-site at

Ramp’s expense;

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(3) Confidential Witness No. 6, indicated that Veerina was a

“firm believer of nepotism,” in that his wife was the

manager of systems testing, another relative was in charge

of Ramp’s office in India and yet another relative was a

Vice President in charge of new products. Confidential

Witness No. 6 also indicated that Veerina’s wife, who was

in charge of quality control, “played with the records”

involving product returns of items from which the shrink

wrap had not been removed. Sheila Veerina also kept the

failure rate a secret, keeping that information from senior

management;

(4) The weekly “return sheet” never had customer names on it.

When Confidential Witness No. 6 asked about the names of

customers returning products, he was told to stop asking

questions. In his opinion, everything was “super secret” at

Ramp. Consequently, because customer names were not

provided in connection with product returns, Confidential

Witness No. 6 indicated that it was possible that customers

never even existed and that “Ramp could have been

shipping everything to an empty parking lot.” Consistent

with this witness’s account, Allen indicated that all returns

were shipped to Ramp’s headquarters, rather than directly

back to the warehouse.

65. Shortly after the close of the Class Period, on November 14, 2000, Ramp filed an

amended quarterly report for the quarter ended March 31, 2000. Although Ramp had originally

reported a revenue increase of 44% from $3.9 million in the first three months of 1999 to $5.6

million in the three months ended March 31, 2000, “primarily due to continued growth in the

WebRamp 700 series of security products and the introduction of our DSL products dominated

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by the Company's new line of SDSL and ADSL products servicing the ‘broadband’ market” and

that “revenue growth was reported in all geographic regions, with particular strength in North

America,” the amended quarterly report showed a revenue decrease of 9% to $3.5 million based

on “lower revenues in U.S. distribution coupled with lower revenue to resellers in the U.S. and

Asia... reflect[ing] the transition in the market place of a move by customers to the purchase of

Broadband /DSL technologies.” The radically revised factual analysis of Ramp’s results for the

first quarter of 2000 shows diametrically opposite results of operations. This demonstrates that

Defendants’ GAAP violations which resulted in false and material misstatements of the

Company’s financial results for the quarter, were not just simple accounting errors. Rather, they

were made with either knowledge that Ramp’s SEC filing would thus be false and materially

misleading or with reckless disregard as to the truth or falsity of the figures contained in the

public filing. In particular, either there was a revenue increase attributable to “the introduction of

. . . DSL products dominated by the Company's new line of SDSL and ADSL products servicing

the ‘broadband’ market,” such that Ramp was required to “increase production to meet the

demand” for these products, as Veerina stated in the April 25, 2000, press release announcing

first quarter results, or, as later admitted, there was a decline in sales due to a period of transition

from analog to broadband products. Either there was “particular strength” in revenue growth in

North America (as initially reported) or there were lower revenues in sales and distribution in the

United States (as later reported). Because the revised figures reveal a drastic difference, between

continued success and a sales slump, defendants’ initial statements cannot be characterized as

mere accounting errors but false and misleading misstatements made with scienter.

66. Further evidence of defendants’ scienter is the manner in which Ramp described

its revised revenue recognition policies. Ramp’s amended quarterly report for the quarter ended

March 31, 2000, stated the following:

The condensed consolidated financial statements as of March 31, 2000 and for thethree months ended March 31, 2000 have been restated to reflect variousadjustments to the Company's previously reported financial statements for thethree month period ended March 31, 2000. These adjustments reflect a cumulativeeffect of accounting change as of January 1, 2000 for a change in the Company'srevenue recognition policy as well as adjustments to revenues previouslyrecorded to reflect the revised accounting policy for revenue recognition.

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In the first quarter of 2000, the Company launched a new sales and marketingcampaign that involved sales of new technology and products to both existing anda variety of new types of customers, including new customers serving therelatively new Digital Subscriber Loop (DSL) market. The DSL marketexperienced significant fluctuations in supply and demand in 2000. As a result,current customers and potential customers experienced delays in the provisioningof this marketplace which delayed demand for the Company's products. During2000, the Company has experienced changing business conditions and demand forproduct from its distributors. Specifically, the Company experienced lowerdemand for both new and existing products and a trend of increasing past dueaccounts receivable from its current distributors as well as from some of theCompany's new customers. The Company has now decided that this increase inpast due accounts receivable from distributors was a result of the distributors notpaying the Company until product was ultimately "sold through" to the customer.Additionally, certain new customers returned a significant portion of previouslysold product in amounts greater than had been estimated by the Company. In2000, the Company continued to apply revenue recognition accounting policies inaccordance with past practices. Revenue recognition was based on historicalexperience with long-term customer payment patterns and returns andconventional industry practices. In the third quarter of 2000, the Companyreassessed its receivable collection history and product returns history with itsmajor distributors as well as new customers, based upon the current marketdemand for the Company's products. As a result of this reassessment, theCompany determined that the negative trends in product sales demand anddelayed collection of receivable amounts was not a temporary trend. Thesesignificant changes in circumstances have necessitated a change in accountingpolicies for its current sales activity. The Company has decided to restate earlierquarters so that the accounting for revenue is consistent for all interim periods in2000.

The Company determined that given the current market, a more preferable methodof revenue recognition would be to defer the recognition of revenue. Under thisnew method, the Company will now record revenue on product shipped todistributors when the product is ultimately "sold through" to the customer.Additionally, the Company will now defer revenues for all other customers wherecollection and returns history is not proven until such activity reflects the "sellthrough" of products by Value Added Resellers ("VAR") and Managed ServiceProviders ("MSP").

The Company has changed its revenue recognition policy retroactive to January 1,2000. The result of the change in the revenue recognition policy was an increasein net loss of $1.3 million and an increase in deferred revenues. This amountrepresents the net amount of gross margin on shipments previously recorded forproduct shipped to the distributors, but not "sold through" to customers, as ofJanuary 1, 2000. This amount is included as a cumulative effect of change inaccounting policy in the accompanying financial statements for the three monthsended March 31, 2000. As such, the Company has restated amounts previouslyrecorded in its Forms 10-Q for the quarterly periods ended March 31, 2000 andJune 30, 2000 to reflect the changes in the revised revenue recognition policy andto properly account for certain third quarter 2000 returns of product that hadpreviously been recognized as revenue under the prior revenue recognition policy.

Previously the Company had reported revenue upon transfer of title and risk ofownership, which generally occurred upon product shipment. In the third quarterof 2000, the Company experienced negative trends of collections for one of its

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newer customers and determined that its past collection history with othercustomers was not a sufficiently reliable indicator of future collections on currentshipments to new customers. In addition, during the third quarter, anothercustomer returned product it had purchased in the first quarter in amountssignificantly greater than the Company had provided for at the time of sale. Ascollectibility could not be reasonably assured, the Company has revised itsrevenue recognition policy for new customers to defer revenue until amounts arecollected and a customer specific collection history has been established.

67. In the original Form 10-Q, filed for the quarter ended March 31, 2000, Ramp

specifically represented that the Company “has reviewed the requirements of SFAS No. 48,

‘Revenue Recognition When Right of Return Exists’, and has concluded that they have sufficient

history and experience to quantify reserves required for these provisions.” This statement was

falsely made even though defendants were fully aware that Ramp was just rolling out its new line

of broadband products and that it was redirecting its sales focus on new, larger customers -- two

major factors which precluded Ramp’s ability to accrue revenue because there was no reasonable

basis for the estimate of product returns when there was neither a history nor experience with

respect to new products and new customers. Thus, defendants’ after-the-fact revision based upon

the fact that they miscalculated the return rate of “new technology and products” sold, in part, to

“a variety of new types of customers,” was not based upon an honest miscalculation in the first

instance but rather an admission that defendants expressly ignored the requirements of SFAS 48

– which they claimed to be applying – when defendants initially reported Ramp’s first quarter

results.

68. Moreover, in the context of expanding sales to new customers, Ramp’s earlier

statement that it had “sufficient history and experience to quantify reserves” represented to the

market and potential investors that Ramp’s calculations took into account its overall past

experience with respect to product returns and collection of amounts due from new customers.

The restated Form 10-Q admitted that Ramp’s “history and experience” did not refer to its past

experience with its new customers but rather its history with established customers.

Consequently, in complete violation of SFAS 48, Ramp admitted that it accrued revenues when it

had no reasonable basis for determining either the payment rate for or the return rates of new

products being sold to new customers.

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69. Similarly, it was inconceivable that a company whose policy, on paper, is a

payment term of 30 days, only “decided” during the third quarter that an increase in past due

accounts during the First Quarter was based upon both existing and new customers withholding

payment until the product sold through. Clearly, at close of the First Quarter, Ramp was aware

of the fact that it had not yet collected payment on products sold in January and February.

Similarly, six weeks later, when it was preparing its Form 10-Q for the First Quarter, filed in

mid-May 2000, before Ramp booked sales, it had a duty to determine the reason why payment

for product which was sold during the First Quarter (with an outside payment date of April 30th,

for sales made on the last day of the quarter) was not yet received.

70. Finally, Ramp’s characterization of deferment of revenue recognition until a

product is sold through to an end-user as “a more preferable method” to the accrue-upon-

shipment method previously employed by Ramp falsely implied that it was proper for Ramp to

select either method. However, because Ramp specifically represented to investors that its

accounting methods complied with GAAP, there was never any such option. In order to comply

with the requirements of SFAS 48, particularly those concerning reasonable estimation of

returns, in a situation where brand new products were being sold to brand new customers, Ramp

was obligated from the outset to defer accrual of revenue until product sold through to end-users.

Given Ramp’s own representation that it understood and complied with the requirements of

SFAS 48, Ramp’s use of an accrual method which did not comply with SFAS 48 was knowingly

or consciously reckless.

DEFENDANTS MATERIALLY OVERSTATE RAMP’S FINANCIALRESULTS FOR THE SECOND QUARTER OF FISCAL 2000

71. On May 8, 2000, the Company issued a press release announcing a partnership

between Ramp and myCIO.com, a Network Associates, Inc. business, specializing in providing

managed network security and availability services for corporate e-business infrastructures. As

reported in Ramp’s Form 10-Q for the Second Quarter of 2000, the myCIO.com deal represented

29% of Ramp’s reported accrued revenues of $5.8 million for the Second Quarter, or $1,682,000.

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72. A May 31, 2000 analyst report prepared by Dain Rauscher Wessels strongly

reflected the distorted projections that the defendants disseminated to the investing public. That

report stated:

We caught up with Ramp's management to discuss the status of the company'sJune quarter along with some of the recently announced product and salesinitiatives. We believe the quarter is tracking ahead of expectations and weremain very comfortable with our June-quarter and fiscal 2000 estimates.

Stock Opinion: We remain optimistic with respect to the opportunities availableto Ramp and believe that the company is executing on its plan of becoming asignificant provider of value-added DSL CPE equipment. We anticipate that thecompany will continue to win business from large enterprise customers andbelieve some announcements will be made public in conjunction with theupcoming SUPERCOMM Conference in early June. We are upgrading RAMPshares to Strong Buy-Aggressive from Buy-Aggressive with a $24 price target,which represents 4.6x our 2001 revenue estimate. This valuation represents asignificant discount compared to other DSL equipment manufacturers and webelieve represents a significant buying opportunity for investors.

73. On July 25, 2000, the Company issued a press release announcing that it would be

postponing its release of its Second Quarter financials from July 25 to July 26. In its July 25,

2000, press release, the Company announced that it would be postponing its announcement of its

Second Quarter 2000 financial results to “allow Ramp's senior management and its auditors

additional time to complete the financials for the quarter ended June 30, 2000.” In its July 26,

2000 press release, entitled “Ramp Networks Announces Second Quarter Fiscal Year 2000

Financial Results” and subtitled “Company Reports Record DSL Orders and Shipments,” the

defendants again misstated the true picture of Ramp's sales performance and prospects by stating:

Ramp shipped a record $8.3 million of product in the second quarter of 2000. Thecompany posted more than 60% sequential growth in broadband/security productrevenue quarter over quarter. Revenues recorded for the second quarter were $5.8million, an increase of 27% over revenues of $4.5 million for the second quarterof 1999, and an increase of 4% over revenues of $5.6 million for the first quarterof 2000. For the six months ended June 30, 2000, Ramp reported revenues of$11.3 million, an increase of 35% over revenues of $8.4 million reported for thesix months ended June 30, 1999. Net loss was $7.1 million or $0.33 per basic anddiluted share for the second quarter of 2000, compared to a net loss of $2.5million or $0.45 per basic and diluted share for the same quarter of the prior year. Net loss for the six months ended June 30, 2000 was $12.6 million or $0.59 perbasic and diluted share, compared to a net loss of $5.4 million or $1.12 per basicand diluted share for the six months ended June 30, 1999.

74. On August 14, 2000, Ramp filed its quarterly report on Form 10-Q for the quarter

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ended June 30, 2000. For the Second Quarter of 2000, Ramp again stated that:

Revenue increased 27% to $5.8 million in the three months ended June 30, 2000from $4.5 million in the three months ended June 30, 1999. The increase wasprimarily due to continued growth in the WebRamp 700 series of securityproducts and growth in our Broadband products dominated by the Company's lineof SDSL and ADSL products servicing the “broadband” market.

Ramp also reported that 35% of its revenues for the Second Quarter were derived from sales to

Xiao Tong Electronics Company, the largest networking products distributor in China.

75. As admitted by defendants on November 14, 2000, after close of the Class Period,

the foregoing statements were materially false and misleading and Ramp’s results of operations

were not properly reported to investors and the market. As Ramp later admitted, revenues for the

Second Quarter of fiscal 2000 only increased approximately 9.8%, even though defendants

originally reported a revenue increase nearly three times greater.

76. The admitted material misstatements of Ramp’s Second Quarter revenues were

the product of knowing or deliberately reckless misconduct by defendants. Ramp was engaged in

a deliberate and massive scheme involving fake sales, inflated sales, premature sales, sales that

were incomplete due to unfettered rights of return and other contingencies and sales to

distributors for which no reasonable person would expect the product to “sell-through” to an end-

customer. Specifically, during the Second Quarter of fiscal 2000, Ramp recorded revenue or

reported “deferred revenue” under circumstances where compliance with GAAP would not have

permitted revenue accrual, including the following:

a. Confidential Witness No. 2 disclosed that a six-figure order was placed in

either April or May 2000 by a customer named Micromatix. The order

was supposed to be shipped from the DCL warehouse to Micromatix. The

order was shipped in two parts. The second part of the order was returned

to Ramp at a later date because Micromatix “had nowhere to hold” the

remaining merchandise. Nevertheless, Confidential Witness No. 2

revealed that the canceled portion of the order was “counted as revenue”

by Ramp. Confidential Witness No. 10, a senior sales executive during

most of the Class Period, confirmed that Micromatix was indeed a small

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company and that a six-figure order was a big order for a company of that

size. According to this witness, the order was placed by Micromatix

because its Chief Executive Officer was a friend of Veerina. This witness

was under the impression that the second portion of the order was shipped

back to Ramp after being held for a period of time which spanned two

different quarters and that Micromatix was given a partial credit for the

portion of the order returned;

b. Confidential Witness No. 9, revealed that agreements with distributors

made during this period included an “RMA” provision, the acronym for

“return merchandise authorized.” Similarly, Confidential Witness No. 10

indicated that it was common practice at Ramp to accrue revenue on

shipments to distributors who had a right of return;

c. Evaluating the situation created by McElwee’s product dumping activities

(which were conducted until his termination at the end of the first quarter

of fiscal 2000), Confidential Witness No. 10 commented to Allen that

McElwee had so “stuffed the channels” with inventory that Ramp may

never recover from it;

d. According to Walter Allen, during the Second Quarter of fiscal 2000,

deals were made with the following distributors which Ramp booked as

revenue even though the products were sent to the distributors’ channels

with rights of return: MZI, myCIO.com, Ingram Micro, Tech Data,

Merisel, Northpoint, and several others. With respect to the MZI and

myCIO.com deal the end-users specifically provided that they did not need

to purchase large quantities all at once and would prefer to purchase

smaller quantities as needed. Because Ramp needed a large revenue

infusion up front to make up for prior returns of product previously

dumped by McElwee, there was pressure brought to bear by Ramp’s senior

management to close deals for larger amounts than the customer desired or

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else Allen would face termination. The Ponzi scheme was kept alive as

long as the witness was able to induce larger purchases by offering free

financing, warehousing space, joint marketing funds and other discounts.

e. Even though Ramp reported that 35% of its $5.8 million in accrued

revenues for the Second Quarter of 2000, ended June 30, 2000, was

attributable to sales to Xiao Tong Electronic Company, had Ramp actually

complied with SFAS 48 – which Ramp falsely claimed to have done –

Ramp could not have properly accrued such revenues in the Second

Quarter. Specifically:

(i) A July 18, 2000, press release issued by Ramp to announce

the deal, stated that the parties had held a private signing

ceremony for the deal in Beijing earlier in the month.

Consequently, Ramp booked revenues from the transaction

in June 2000, before the contract was actually signed;

(ii) Allen revealed that Veerina and his brother-in-law, Vice

President of Business Development, Bob Kondamoori

negotiated this deal. Based upon a meeting Allen attended

with Veerina and Kondamoori where the deal was

discussed, Allen concluded that this deal was one of those

deals where a friend of Veerina’s agreed to hold

merchandise for Ramp so that Ramp could book the

revenue.

(iii) Confidential Witness No. 2 -- who had worked at Ramp

from September 1999 until September 2000 and was

responsible for shipping international orders, including,

specifically, the Xiao Tong order -- indicated that Ramp

products were never scheduled to be shipped to Xiao

Tong’s facility in China during the Second Quarter of 2000.

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According to Confidential Witness No. 2, at midnight on

the last day of that quarter, the equipment was shipped from

Ramp’s facilities with the help of “sweeper” trucks. (As

explained above, according to Confidential Witness No. 2,

“sweepers” were situations in which Ramp would hire an

outside shipping company, usually a San Jose-based

company called Viking, to take the product from Ramp’s

facility on trucks and store it in an “out-source warehouse,”

so that Ramp could recognize revenue from the

transaction.) Confidential Witness No. 2 recalls that

Viking took the Xiao Tong product late at night on the last

night of the Second Quarter in a “sweeping” transaction.

The product was stored at an out-source warehouse that

Ramp used, and the product was never shipped to China

during the Second Quarter of fiscal 2000.

.f. Even though Ramp reported that 29% of its $5.8 million in accrued

revenues for the Second Quarter of 2000, ended June 30, 2000, was

attributable to sales to myCIO.com, a Networks Associates company, had

Ramp actually complied with SFAS 48 – which Ramp falsely claimed to

have done – Ramp could not have properly accrued such revenues in the

Second Quarter. Specifically:

(i) According to both Allen and Confidential Witness No. 10, the

myCIO.com deal was another deal engineered exclusively by

Veerina, who negotiated directly with the myCIO.com

representatives. According to Allen, Veerina “wined and dined”

the myCIO.com executives and excluded senior sales personnel

from the meeting where the deal was closed. According to

Confidential Witness No. 10, Veerina negotiated the deal with one

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of his friends;

(ii) Another Ramp employee, Confidential Witness No. 6, a hardware

engineer who worked at Ramp confirms that Veerina negotiated

the myCIO.com deal by himself and kept all the terms of the deal

“hush hush;”

(iii) Allen revealed that the myCIO.com deal was an instance where the

purchaser “warehoused” Ramp merchandise so that Ramp could

accrue the transaction as revenue. Similarly, Confidential Witness

No. 6 states that to his knowledge the products that were allegedly

“sold” to myCIO.com in the Second Quarter of 2000 were never

actually shipped to the customer. Confidential Witness No. 6

believes, by virtue of his position with Ramp at the time, he would

have known had the product actually been shipped to the customer;

(iv) A class action complaint filed in this Court on or about September

24, 2001, In re Network Associates, Inc. II Securities Litigation,

No. CV-00-4849-MJJ, supports the accounts of the witnesses

referenced above. The allegations contained therein aver:

(A) Network Associates’ officers agreed “to issue purchase

orders for products that Network Associates had no

intention of purchasing in exchange for a substantial fee;”

(B) Details of a meeting between defendant Veerina, and

Prabhat Goyal, Network Associates’ CFO. It is alleged that

“[d]uring the meeting, Veerina asked Goyal if Network

Associates could ‘hold’ $2 million in Ramp Network’s

inventory so that Ramp Networks could book revenue on

such a sale. Veerina further explained that Ramp Networks

would accept a return of the products in a ‘couple of

months.’” The complaint further alleges: “However,

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Goyal insisted that he would only agree to accept Ramp

Network’s inventory if Ramp Networks would pay

$250,000 to Network Associates and $250,000 to its

subsidiary, myCIO.com. Goyal referred to these payments

during this meeting as ‘blood money.’”

(C) The same day, Goyal instructed Network Associates to

issue a purchase order for $2 million in Ramp Networks

product. Goyal also instructed Veerina to have Ramp

Networks issue two separate purchase orders: one to be

delivered to Network Associates and the other to

myCIO.com.

(D) Goyal then instructed Gay Lockwood, a Network

Associates sales representative, and another high ranking

Network Associates employee to pick up the “blood

money” from Ramp; and

(v) Confidential Witness No. 11, former director of marketing for

Ramp, was responsible for setting up a marketing strategy for the

myCIO.com relationship after myCIO.com signed a letter of intent

to enter a joint marketing relationship with Ramp sometime around

April or May 2000. Confidential Witness No. 11 states that her

phone calls and emails to myCIO.com went unreturned and she

formed the opinion that “they had no interest” in finding end users

for Ramp’s products. She said, “you could just tell that

[myCIO.com] had no desire to sell the stuff.”

77. Despite these clear violations of SFAS 48, Ramp’s quarterly report for the period

ended June 30, 2000 represented that the Company’s financial statements for that period had

been prepared both in compliance with GAAP, generally, and, specifically, in compliance with

SFAS 48:

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The condensed consolidated financial statements have been prepared by Ramp,pursuant to the rules and regulations of the Securities and Exchange Commissionand include the accounts of Ramp Networks, Inc., and its wholly-ownedsubsidiary (collectively the "Company"). Certain information and footnotedisclosures, normally included in financial statements prepared in accordance withaccounting principles generally accepted in the United States, have beencondensed or omitted pursuant to such rules and regulations. In the opinion of theCompany, the unaudited financial statements reflect all adjustments, consistingonly of normal recurring adjustments, necessary for a fair presentation of thefinancial position at June 30, 2000 and the operating results and cash flows for thethree months and six months ended June 30, 2000 and 1999.


78. Each of these statements were false and materially misleading because defendants

knew or recklessly disregarded that the Company routinely entered into deals with distributors

where the title and risks of ownership did not transfer upon product shipment because Ramp was

paying to store the merchandise with the customer and/or had agreed to ship the merchandise

with knowledge that the “buyer” intended to return the merchandise for full credit following the

end of the quarterly reporting period. Reported financial statements were materially overstated

due to the reasons set forth above. The statement that the Company had reviewed the

requirements of SFAS 48 and had determined that it was appropriate to book revenue on

shipments of Ramp products to such customers was also false and misleading because defendants

knew or recklessly disregarded that revenue recognition on sham transactions entered into solely

to boost quarterly revenue and sales numbers is a clear violation of GAAP. Even for those

customers who had agreed to attempt to resell Ramp’s merchandise to resellers, it was false and

misleading for the Company to represent that revenue recognition on these transactions was

acceptable under GAAP because many of these transactions were actually contingent sales which

could not be booked as actual sales because there was no historical basis from which to

reasonably estimate returns.

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79. The above facts, as well as those alleged in ¶62, establish that Ramp was aware

that sham transactions, rather than actual sales, fueled Company growth during the Second

Quarter of 2000. In addition to the facts alleged in ¶64, the following facts demonstrate that both

Ramp and Veerina either knew that the true facts regarding Ramp’s Second Quarter revenues and

Ramp’s compliance with GAAP -- or lack thereof -- were different than they represented above

or that they recklessly disregarded the true facts in making their statements:

a. As alleged above, Veerina was the primary negotiator on the myCIO.com

and Xiao Tong deals as to which Ramp recognized 64% of its revenues for

the Second Quarter;

b. According to Allen, Veerina knew that both of these deals were no more

than inventory parking for the purposes of revenue recognition;

80. On November 14, 2000, Ramp filed its amended quarterly report for the quarter

ended June 30, 2000. Although Ramp had originally reported a revenue increase of 27% to $5.8

million from $4.5 million in the three months ended June 30, 1999 “primarily due to continued

growth in the WebRamp 700 series of security products and growth in [Ramp] Broadband

products dominated by the Company’s line of SDSL and ADSL products servicing the

‘broadband’ market,” the amended quarterly report showed a revenue increase of only 9.8% to $5

million in the three months ended June 30, 2000.

81. Evidence of defendants’ scienter with respect to the initial misrepresentation of

revenue is found in Ramp’s curious reporting of customers whose sales represent more than 10%

of Ramp’s revenues for the second quarter. In the Form 10-Q initially filed, Ingram Micro was

listed at 12% of revenues, Tech Data at 9% of revenues, myCIO.com at 29% of revenues and

Xiao Tong at 35% of revenues. In the restated and amended Form 10-Q, no customers are

identified by name. Instead, they are only referred to as “Customers A-C.” Based upon the fact

that Customers A and B represented 31% and 19% of Ramp’s revenues for the six months ended

June 30, 1999, and, as alleged in ¶38 above, Ingram Micro and Tech Data, respectively,

represented 30% and 20% of Ramp’s revenues for the nine months ended September 30, 1999,

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Customers A and B are in fact Ingram Micro and Tech Data. The only conceivable reason that

the identities of the various significant customers is cloaked in secrecy is that only one of the two

largest sources of revenue reported in the initial filing, either Xiao Tong (34%) or myCIO.com

(29%) remained significant, i.e. above 10% after the restatement, and that defendants sought to

hide this fact.

82. Further evidence of defendants’ scienter is the manner in which Ramp described

its revised revenue recognition policies. Ramp’s amended quarterly report for the quarter ended

June 30, 2000 also stated the following:

The condensed consolidated financial statements as of June 30, 2000 and for thethree and six month period ended June 30, 2000 have been restated to reflect various adjustments to the Company's previously reported financial statements forthe three and six month period ended June 30, 2000. These adjustments reflect acumulative effect of accounting change as of January 1, 2000 for a change in the Company's revenue recognition policy as well as adjustments to revenuespreviously recorded to reflect the revised accounting policy for revenuerecognition.

In the first quarter of 2000, the Company launched a new sales and marketingcampaign that involved sales of new technology and products to both existing anda variety of new types of customers, including new customers serving therelatively new Digital Subscriber Loop (DSL) market. The DSL marketexperienced significant fluctuations in supply and demand in 2000. As a result,current customers and potential customers experienced delays in the provisioningof this marketplace which delayed demand for the Company's products. During2000, the Company has experienced changing business conditions and demand forproduct from its distributors. Specifically, the Company experienced lowerdemand for both new and existing products and a trend of increasing past dueaccounts receivable from its current distributors as well as from some of theCompany's new customers. The Company has now decided that this increase inpast due accounts receivable from distributors was a result of the distributors notpaying the Company until product was ultimately "sold through" to the customer.Additionally, certain new customers returned a significant portion of previouslysold product in amounts greater than had been estimated by the Company. In2000, the Company continued to apply revenue recognition accounting policies inaccordance with past practices. Revenue recognition was based on historicalexperience with long-term customer payment patterns and returns andconventional industry practices. In the third quarter of 2000, the Companyreassessed its receivable collection history and product returns history with itsmajor distributors as well as new customers, based upon the current marketdemand for the Company's products. As a result of this reassessment, theCompany determined that the negative trends in product sales demand anddelayed collection of receivable amounts was not a temporary trend. Thesesignificant changes in circumstances have necessitated a change in accountingpolicies for its current sales activity. The Company has decided to restate earlierquarters so that the accounting for revenue is consistent for all interim periods in2000.

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The Company determined that given the current market, a more preferable methodof revenue recognition would be to defer the recognition of revenue. Under thisnew method, the Company will now record revenue on product shipped todistributors when the product is ultimately "sold through" to the customer.Additionally, the Company will now defer revenues for all other customers wherecollection and returns history is not proven until such activity reflects the "sellthrough" of products by Value Added Resellers ("VAR") and Managed ServiceProviders ("MSP").

The Company has changed its revenue recognition policy retroactive to January 1,2000. The result of the change in the revenue recognition policy was an increasein net loss of $1.3 million and an increase in deferred revenues. This amountrepresents the net amount of gross margin on shipments previously recorded forproduct shipped to the distributors, but not "sold through" to customers, as ofJanuary 1, 2000. This amount is included as a cumulative effect of change inaccounting policy in the accompanying financial statements for the six monthsended June 30, 2000. As such, the Company has restated amounts previouslyrecorded in its Forms 10-Q for the quarterly periods ended March 31, 2000 andJune 30, 2000 to reflect the changes in the revised revenue recognition policy andto properly account for certain third quarter 2000 returns of product that hadpreviously been recognized as revenue under the prior revenue recognition policy.

Previously the Company had reported revenue upon transfer of title and risk ofownership, which generally occurred upon product shipment. Provisions were alsomade for estimated normal returns. The adjustment represents the net effect ofchanging the revenue recognition method to a preferable method of recordingrevenue after the distributor has "sold through" the product to the ultimate enduser. The Company believes this method more accurately reflects revenue due tothe changes in market conditions and actual payment patterns of distributioncustomers using the criteria set forth under the SAB No. 101 interpretations andthe requirements of SFAS No. 48.

These adjustments represent the net impact of the Company revising its revenuerecognition policy related to new customers. Previously the Company hadreported revenue upon transfer of title and risk of ownership, which generallyoccurred upon product shipment. In the third quarter of 2000, the Companyexperienced negative trends of collections for one of its newer customers anddetermined that its past collection history with other customers was not asufficiently reliable indicator of future collections on current shipments to newcustomers. In addition, during the third quarter, another customer returned productit had purchased in the first quarter in amounts significantly greater than theCompany had provided for at the time of sale. As collectibility could not bereasonably assured, the Company has revised its revenue recognition policy fornew customers to defer revenue until amounts are collected and a customerspecific collection history has been established.

At June 30, 2000 the Company has recorded deferred revenue of $7.5 million. Thedeferred revenue represents shipments of product to customers where title haspassed and the Company has invoiced the customer. However, to the extent thatproduct is returned to the Company or credits are approved, this deferred revenuewill not result in revenue to the Company. As stated, this deferred revenue willresult in revenue when sold through by the distributors or to the extent VAR's andMSP's pay on their account based on sales to their customers.

83. In the Form 10-Q, initially filed for the second quarter, Ramp specifically

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represented that the Company “has reviewed the requirements of SFAS No. 48, ‘Revenue

Recognition When Right of Return Exists,’ and has concluded that they have sufficient history

and experience to quantify reserves required for these provisions.” This statement was falsely

made even though defendants were fully aware that Ramp had just rolled out its new line of

broadband products and that it was redirecting its sales focus on new, larger customers, two

major factors which impair one’s ability to accrue revenue because there is no reasonable basis

for the estimate of product returns when there is neither history nor experience with respect to

new products and new customers. Thus, defendants’ after-the-fact revision based upon the fact

that they miscalculated return rate of “new technology and products” sold, in part, to “a variety of

new types of customers,” was not based upon an honest miscalculation in the first instance but

rather an admission that defendants expressly ignored the requirements of SFAS 48 – which they

claimed to be applying – when defendants initially reported Ramp’s first quarter results.

84. Moreover, in the context of expanding sales to new customers, Ramp’s earlier

statement that it had “sufficient history and experience to quantify reserves” represented to the

SEC and potential investors that Ramp’s calculations took into account its overall past

experience with respect to product returns and collection of amounts due from new customers.

The restated Form 10-Q shockingly revealed that Ramp’s “history and experience” did not refer

to its past experience with new customers but rather its history with established customers.

Consequently, in complete violation of SFAS 48, Ramp admitted that it accrued revenues when it

had no reasonable basis for determining the either the payment rate for or the return rates of new

products being sold to new customers. This point is made strikingly clear with respect to the

missing “Customer D” whose returns and/or failure to pay for product dropped its percentage as

a source of Ramp’s revenues from either 29% or 34% to less than 10% (the minimum reporting

percentage) of the lower restated earnings figure.

85. Similarly, it is inconceivable that a company whose policy, on paper, is a payment

term of 30 days, only “decided” during the third quarter that an increase in past due accounts

during the first quarter was based upon both existing and new customers withholding payment

until the product sold through. Clearly, at close of the Second Quarter, Ramp was aware of the

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fact that it had not yet collected payment on products sold in April and May. Similarly, six

weeks later, when it was preparing its Form 10-Q for the first quarter, filed in mid-August 2000,

before Ramp booked sales, it had a duty to determine the reason why payment for product which

was sold during the first quarter (with an outside payment date of July 31st), for sales made on

the last day of the quarter) was not yet received.

86. Finally, Ramp’s characterization of deferment of revenue recognition until a

product is sold through to an end-user as “a more preferable method” to the accrue-upon-

shipment method previously employed by Ramp falsely implies that it was proper for Ramp to

select either method. However, because Ramp specifically represented to investors that its

accounting methods complied with GAAP, there was never any such option. In order to comply

with the requirements of SFAS 48, particularly those concerning reasonable estimation of

returns, in a situation where brand new products were being sold to brand new customers, Ramp

was obligated from the outset to defer accrual of revenue until product sold through to end-users.

Given Ramp’s own representation that it understood and complied with the requirements of

SFAS 48, Ramp’s use of an accrual method which did not comply with SFAS 48 was knowing or

consciously reckless.

87. In fact, during the Second Quarter of 2000, defendants were well aware or

recklessly disregarded that Ramp was shipping its products to distributors on a consignment basis

at the time of shipment. Defendants were also aware, as alleged above, that other shipments

were merely sham transactions entered into merely to artificially inflate the Company’s revenues

and share price. As a result, the Company did not suddenly determine, based on subsequent

events, that recent changes in distributor practices and sales trends required a change in

accounting policies; instead, the defendants knew or recklessly disregarded that during the

entirety of the Class Period that its accounting policies were not in accordance with GAAP for

the reasons set forth above. The restatement of the second quarter’s financial results, as set forth

above, resulted not from a failure to make accurate estimates of returns but from an intentional or

reckless misapplication of GAAP.

RAMP’S SEPTEMBER 29, 2000 ANNOUNCEMENT

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88. In its September 29, 2000 press release, entitled "Ramp Expects Significantly

Lower Third Quarter Revenue and Earnings; Announces Restructuring to Support Product

Transition," defendants began to describe the disastrous results that they previously

misrepresented throughout the Class Period:

Ramp Networks (Nasdaq:RAMP) today announced that it expects revenues andearnings for the third quarter ending September 30, 2000 to be significantly lowerthan the revenue and earnings recorded in the prior quarter ended June 30, 2000.The company also announced a restructuring of its operations, including a 21%workforce reduction and a focus on broadband managed security products.

The Company indicated that it expects to report third quarter revenues no higherthan $1 million, and that the final number could be substantially lower. As aresult, the Company expects the third quarter loss per basic and diluted sharebetween $0.50 and $0.53, compared with a loss of $0.33 per basic and dilutedshare in the quarter ended June 30, 2000.

89. The expected loss announced in the Company's September 29 press release greatly

exceeded the consensus analyst estimate compiled by First Call which was for a 30

cents-per-share loss for the third quarter 2000.

90. In that same September press release, defendant Veerina failed to disclose the fact

that these disastrous results were due to the Company's misrepresentation of financial results,

instead, wrongly attributing them to ". . . DSL deployment delays and slower than expected

rollouts in enterprise remote offices."

91. An October 2, 2000 analyst report prepared by Dain Rauscher Wessels stated:

Ramp pre-announced another disappointing quarter. The company announced onFriday that they expect revenues and earnings to be substantially below June-quarter levels. Revenues are expected to come in below $1 million, which issignificantly below our recently reduced expectation of $5.7 million. Earnings areexpected to come in between a loss of $0.50-$0.53 per share.

Stock Opinion: Ramp Networks has continually disappointed Wall Street and thispoor performance is reflected in the company's depressed stock price.

92. As a result of the Company's shocking late September 29th announcement of a

substantial shortfall in third quarter 2000 earnings, Ramp's stock price plummeted from its

Friday, September 29th close of $3.5312 to open on Monday, October 2nd at $2.375 and to close

even lower that day at $2.0625, on massive trading volume of 918,800 shares.

DEFENDANTS' FALSE AND MISLEADING STATEMENTS

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93. During the Class Period, defendants materially misled the investing public,

thereby inflating the price of Ramp securities, by publicly issuing false and misleading

statements and omitting to disclose material facts necessary to make defendants' statements, as

set forth herein, not false and misleading. Said statements and omissions were materially false

and misleading in that they failed to disclose material adverse information and misrepresented

the truth about the Company.

94. Throughout the Class Period, the Company falsely booked revenue on sham

transactions, such as set forth in ¶¶ 53, 63-64, 76 and 79, where friends of defendant Veerina or

other companies purchased Ramp products simply to falsely inflate the Company’s quarterly

revenue with the expectation on both sides that the product would be returned following the close

of the quarter for full credit.

95. Pursuant to SFAS 48, it was not appropriate for the Company to book revenue on

transactions, such as set forth in ¶ 76, where the buyer and Ramp had not agreed to price and

other payment terms in that the price was not fixed or determinable and the product was not

shipped to the customer during the fiscal quarter in which the revenue was accrued.

96. Pursuant to SFAS 48, it was not appropriate for the Company to book revenue on

transactions, such as set forth in ¶¶ 59 and 76, where the buyer had the unfettered right to return

products to Ramp if they did not sell through to ultimate users and did not have an obligation to

pay Ramp until and only to the extent that product had been sold by the distributor to ultimate

consumers or resellers.

97. Even where the customers’ right to return product may have been limited in some

significant way, it was not appropriate to recognize revenue on sales of the Company’s DSL

products because, according to the Company’s initial quarterly report for the period ended March

31, 2000, the First Quarter of 2000 was the first quarter that the Company had shipped volume

production units of all its new DSL products, namely: ADSL - WebRamp 600I , SDSL

WebRamp 500I and WebRamp 510I, and IDSL - WebRamp 450i. The same document referred

to DSL technology as an “emerging access technology.” In addition, the Company was aware of

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aggressive pricing by competitors in the market for the more costly DSL-based products. Finally,

in the Company’s own Third Quarter report, it stated that, in the First Quarter of 2000, it had

“launched a new sales and marketing campaign that involved sales of new technology to both

existing and a variety of new types of customer, including new customers serving the relatively

new Digital Subscriber Loop (DSL) market.” These factors, among others, prevented Ramp

from making a reasonable estimate of returns for DSL products under SFAS 48 and dictated, at

shipment, that the Company only recognized revenue as the product was sold to resellers and

end-users.

98. The statements in the Company’s financial reports regarding net sales and

revenues were false and misleading in that the Company entered into material transactions solely

for revenue recognition purposes and with the knowledge that the products purportedly “sold”

would be returned for full credit in subsequent quarters by the buyer. Even where the agreement

to ship product was not entirely a sham transaction for revenue recognition purposes, Ramp also

consistently and improperly recognized revenue on sales subject to broad rights of return in

violation of GAAP as set forth above or in circumstances where the Company knew that no sale

had yet been consummated on agreed pricing or terms.

99. The statements contained in the Form 10-Qs filed for the First and Second

Quarters of 2000, claiming that Ramp only recognized revenue “upon transfer of title and risks of

ownership which generally occurs upon product shipment,” were false and materially misleading

because defendants knew or recklessly disregarded that the Company routinely entered into deals

with distributors where the title and risks of ownership did not occur upon product shipment

because Ramp was paying to store the merchandise with the customer and/or had agreed to ship

the merchandise with knowledge that the “buyer” intended to return the merchandise for full

credit following the end of the quarterly reporting period. Reported financial statements were

materially overstated due to the reasons set forth above. The statement that the Company had

reviewed the requirements of SFAS 48 and had determined that it was appropriate to book

revenue on shipments of Ramp products to such customers was also false and misleading

because defendants knew or recklessly disregarded that sham transactions had been entered into

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solely to boost quarterly revenues. Even for those customers who had agreed to attempt to resell

Ramp’s merchandise to resellers, it was false and misleading for the Company to represent that

revenue recognition on these transactions was acceptable under GAAP because such transactions

were actually consignment sales and could not be booked as actual sales under any applicable

accounting rules.

POST-CLASS PERIOD REVELATIONS RELEVANT TO THE COMPLAINT

100. Ramp’s report for the quarter ended September 30, 2000 represented the

following:

The condensed consolidated financial statements have been prepared by Ramp,pursuant to the rules and regulations of the Securities and Exchange Commissionand include the accounts of Ramp Networks, Inc., and its wholly-ownedsubsidiary (collectively the "Company"). Certain information and footnotedisclosures, normally included in financial statements prepared in accordancewith accounting principles generally accepted in the United States, have beencondensed or omitted pursuant to such rules and regulations. In the opinion of theCompany, the unaudited financial statements reflect all adjustments, consisting ofnormal recurring adjustments, and adjustments to reflect the restatement ofamounts for changes in revenue recognition accounting as noted below which arenecessary for a fair presentation of the financial position at September 30, 2000,and the operating results and cash flows for the three months and nine monthsended September 30, 2000 and 1999.

101. Ramp’s report for the quarter ended September 30, 2000 also stated the following:

Ramp's revenue consists principally of amounts earned from the sale ofmanufactured products. Historically, revenue has been recognized by theCompany upon transfer of title and risks of ownership, which generally occurredupon product shipment. Certain agreements with distributors and retailers providefor rights of return, co-op advertising, price protection, and stock rotation rights.Under the guidelines and requirements of Statement of Financial AccountingStandards ("SFAS") No. 48, "Revenue Recognition When Right of ReturnExists", the Company concluded that it had sufficient history and experience toquantify reserves required for these provisions. Accordingly, Ramp provided anallowance for returns and price adjustments and provided a warranty reserve at thepoint of revenue recognition. These reserves have been adjusted periodicallybased upon historical experience and anticipated future returns, price adjustments,and warranty costs.

In the first quarter of 2000, the Company launched a new sales and marketingcampaign that involved sales of new technology and products to both existing anda variety of new types of customers, including new customers serving therelatively new Digital Subscriber Loop (DSL) market. The DSL market

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experienced significant fluctuations in supply and demand in 2000. As a result,current customers and potential customers experienced delays in the provisioningof this marketplace which delayed demand for the Company's products. During2000, the Company has experienced changing business conditions and demand forproduct from its distributors. Specifically, the Company experienced lowerdemand for both new and existing products and a trend of increasing past dueaccounts receivable from its current distributors as well as from some of theCompany's new customers. The Company has now decided that this increase inpast due accounts receivable from distributors was a result of the distributors notpaying the Company until product was ultimately "sold through" to the customer.Additionally, certain new customers returned a significant portion of previouslysold product in amounts greater than had been estimated by the Company. In2000, the Company continued to apply revenue recognition accounting policies inaccordance with past practices. Revenue recognition was based on historicalexperience with long-term customer payment patterns and returns andconventional industry practices. In the third quarter of 2000, the Companyreassessed its receivable collection history and product returns history with itsmajor distributors as well as new customers, based upon the current marketdemand for the Company's products. As a result of this reassessment, theCompany determined that the negative trends in product sales demand anddelayed collection of receivable amounts was not a temporary trend. Thesesignificant changes in circumstances have necessitated a change in accountingpolicies for its current sales activity. The Company has decided to restate earlierquarters so that the accounting for revenue is consistent for all interim periods in2000.

102. The initial complaint in this matter was filed on or about October 3, 2000.

Although the Company’s September 29, 2000 press release had stated that Ramp expected to

report Third Quarter revenues no higher than $1 million, and perhaps substantially lower,

Ramp’s report for the quarter ended September 30, 2000, issued just little more than six weeks

later on November 14, 2000, represented that the Company had revenues of $3 million in the

three months ended September 30, 2000. Although this figure was down 41% from $5 million in

the three months ended September 30, 1999, it was significantly higher than the numbers

reported in the Company’s September 29, 2000 press release. The reason that defendants made

lower earnings estimates on September 29, 2000, was that they knew they were going to have to

restate their earnings downward for the first and second quarters. Consequently, when all three

Form 10-Qs were filed on November 14, 2000, Ramp attempted to “soften the blow” of the

restatements by announcing that revenues for the Third Quarter were much higher than Ramp’s

initial predictions.

ADDITIONAL ALLEGATIONS OF SCIENTER

103. As alleged above, defendants' false representations and material omissions were

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made with scienter in that defendants: (1) knew or, with deliberate recklessness, disregarded that

the public documents and statements issued or disseminated by Ramp were materially false and

misleading as described above; (2) knew or were deliberately reckless in not knowing that the

false financial results would be issued or disseminated to the investing public; and (3) knowingly

and substantially participated in the preparation and/or issuance or dissemination of such

statements or documents.

104. By restating its revenues for the quarterly periods ended March 31, 2000 and June

30, 2000, Ramp admitted that it had:

a. Recorded revenues for shipments of products to the distributors identified

above that did not meet the recognition criteria set forth in SFAS 48 and

therefore had made an error in the application of accounting rules or

principles that required restatement of prior quarters;

b. The shipments on which Ramp should not have recorded revenue were

material to the prior quarterly results as of March 31, 2000 and June 30,

2000; and

c. The correction of the error in prior quarterly periods would materially

affect a trend in earnings between both prior periods and following

periods.

105. The reasons given publicly for the restatement of revenues for the first two

quarters of 2000 did not comport with the true facts in that defendants were aware, well before

the Third Quarter of 2000, that its distributors only had to pay for Ramp products as they were

sold to ultimate consumers or resellers and that Ramp products were not selling through to such

buyers. In fact, defendants were aware that the distributors listed above had only agreed to take

large levels of Ramp products because Ramp had offered to defray storage costs or offered other

consideration designed to insure that the distributors would not return the merchandise to Ramp.

As a result, defendants were aware or recklessly disregarded that, no later than the first quarter of

2000, that stocking levels at Ramp distributors grossly exceeded the level of inventory necessary

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to service normal customer needs.

106. Defendants also intentionally or recklessly entered into transactions near the end

of quarterly reporting periods simply to manipulate the accounting rules relating to revenue

recognition. The Company’s own SEC filings indicate that Ramp’s executives were well-aware

of the revenue recognition requirements of SFAS 48 but intentionally or recklessly disregarded

its provisions.

107. Defendant McElwee sold over 90,000 shares of Company stock at inflated prices

during the Class Period, at a time when he knew or recklessly disregarded the fact that the price

of Company stock was inflated due to his own efforts to falsely inflate the sales of Ramp

products as set forth above.

108. According to Confidential Witness No. 6, Veerina continually told Ramp

employees that Cisco Systems was planning to buy the Company. Veerina kept a high level of

intensity and “pumped things up” at the Company by telling people that Ramp would eventually

be purchased by another company. In fact, Ramp was purchased by Nokia in January of 2001.

109. Terry Gibson served as Vice President of Finance and Chief Financial Officer of

Ramp from March of 1999. According to Confidential Witness No. 6, Gibson and Veerina

disagreed over what the Company could and could not do in its financial reporting and, after

hours, Gibson and Veerina could be heard arguing in Gibson’s office. On June 1, 2000, the

Company issued a press release announcing that, effective immediately, Terry Gibson had

resigned as Chief Financial Officer of Ramp and had been replaced by Perry Grace, acting head

of finance.

110. Veerina’s salary of $140,000 in 1998 and 1999 was relatively modest for the

President and Chief Executive Officer of a publicly-traded company. A number of executives at

Ramp, in fact, had higher salaries than Veerina during 1998 and 1999. Veerina’s main

compensation was stock, and Veerina’s bonuses and stock option award were therefore

dependent on increasing revenues for the Company. In 1998, Veerina did not receive a bonus or

stock options. In 1999, Veerina was awarded a bonus of $39,000 and 96,000 stock options as a

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result of the artificially inflated revenues and stock prices described above.

111. As a sales executive, McElwee’s compensation was heavily dependant on the

sales of Company products. During 1999, as a result of the artificially inflated revenues and

stock prices described above, McElwee was awarded a bonus of $78,000 and 119,000 stock

options. Moreover, and despite the improper sales practices set forth above, the Company

entered into an agreement with McElwee, dated February 1, 2000, in which the Company agreed

to pay McElwee his monthly base salary and benefits for a period of six months following his

termination by the Company without cause. Pursuant to the same agreement, the Company

agreed that any unvested stock options or shares of restricted stock held by McElwee as of the

date of his termination would become immediately vested and exercisable as though he had

maintained his employment or consulting relationship with the Company for a year following his

termination. The Company’s April 24, 2000 Proxy Statement on Form 14A notes that, as of

March 31, 2000, McElwee was no longer an employee of the Company without noting whether

the circumstances of his termination permitted McElwee to claim the benefit of his February 1,

2000 agreement. Plaintiffs are informed that the Company purported to terminate him without

cause because McElwee subsequently sold over 92,000 shares of Company stock as alleged

above during May and July of 2000.

COUNT I

VIOLATIONS OF §10(b) OF THE EXCHANGE ACTAND RULE 10b-5 PROMULGATED THEREUNDER

AGAINST ALL DEFENDANTS

112. Plaintiffs repeat and reallege each and every allegation contained in the

paragraphs above as if fully set forth herein.

113. At all relevant times, defendants, individually and in concert, directly and

indirectly, by the use and means of instrumentalities of interstate commerce and/or of the mails,

engaged and participated in a continuous course of conduct whereby they knowingly and/or with

deliberate recklessness made and/or failed to correct public representations which were or had

become materially false and misleading regarding Ramp's financial results and operations. This

continuous course of conduct resulted in the defendants causing Ramp to publish public

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statements which they knew, or were deliberately reckless in not knowing, were materially false

and misleading, in order to artificially inflate the market price of Ramp stock and which operated

as a fraud and deceit upon plaintiffs and the members of the Class.

114. Defendant Ramp was a direct participant in the wrongs complained of herein.

The Individual Defendants are liable for the wrongs complained of herein as a direct participant

in and as controlling persons of the Company. By virtue of their position of control and authority

as senior officers and/or directors of Ramp, the Individual Defendants were able to and did,

directly or indirectly, control the preparation, issuance and/or content of the aforesaid public

statements relating to the Company, the Individual Defendants’ failure to correct those

statements in timely fashion once they knew, or was deliberately reckless in not knowing that

those statements were no longer true or accurate, renders them liable for those statements.

115. The Individual Defendants had actual knowledge of the facts making the material

statements false and misleading, or deliberately acted with reckless disregard for the truth in that

they failed to ascertain and to disclose such facts, even though same were available to them.

116. In ignorance of the adverse facts concerning Ramp's business operations and

earnings, and in reliance on the integrity of the market, plaintiffs and the members of the Class

acquired Ramp common stock at artificially inflated prices and were damaged thereby.

117. Had plaintiffs and the members of the Class known of the materially adverse

information not disclosed by the defendants, they would not have purchased Ramp common

stock at all or not at the inflated prices paid.

118. By virtue of the foregoing, defendants, and each of them, have violated §10(b) of

the 1934 Act and Rule 10b-5 promulgated thereunder.

COUNT II

VIOLATION OF §20(a) OF THE EXCHANGEACT AGAINST THE INDIVIDUAL DEFENDANTS

119. Plaintiffs repeat and reallege each and every allegation contained in the

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paragraphs above as if fully set forth herein.

120. This count is asserted against the Individual Defendants and is based upon Section

20(a) of the 1934 Act.

121. The Individual Defendants, by virtue of their office, directorship, and/or specific

acts were, at the time of the wrongs alleged herein and as set forth in Count I, each a controlling

person of Ramp within the meaning of §20(a) of the 1934 Act. The Individual Defendants had

the power and influence and exercised the same to cause Ramp to engage in the illegal conduct

and practices complained of herein by causing the Company to disseminate the false and

misleading information referred to above. Moreover, during the Class Period, the Individual

Defendants owned or controlled substantial amounts of the Company's stock.

122. The Individual Defendants’ positions made them privy to and provided them with

actual knowledge of the material facts concealed from plaintiffs and the Class.

123. By virtue of the conduct alleged in Count I, the Individual Defendants are liable

for the aforesaid wrongful conduct and are liable to plaintiffs and the Class for damages suffered.

PRAYER FOR RELIEF

WHEREFORE, Plaintiffs demand judgment:

1. Determining that the instant action is a proper class action maintainable under

Rule 23 of the Federal Rules of Civil Procedure;

2. Awarding compensatory damages and/or rescission as appropriate against

defendants, in favor of plaintiffs and all members of the Class for damages sustained as a result

of defendants' wrongdoing;

3. Awarding plaintiffs and members of the Class the costs and disbursements of this

suit, including reasonable attorneys’, accountants’ and experts’ fees; and

4. Awarding such other and further relief as the Court may deem just and proper.

Dated: March ____, 2002 GLANCY & BINKOW LLP

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________________________________Lionel Z. GlancyRobin B. HowaldMichael Goldberg

1801 Avenue of the Stars, Suite 311Los Angeles, California 90067Telephone: (310) 201-9150Facsimile: (310) 201-9160

JEFFREY H. SQUIRE IRA M. PRESS

KIRBY MCINERNEY & SQUIRE, LLP830 Third Avenue, 10th FloorNew York, NY 10022Telephone: (212) 371-6600Facsimile: (212) 751-2540


MICHAEL D. BRAUNSTULL, STULL & BRODY10940 Wilshire Blvd, Suite 2300Los Angeles, California 90024Telephone: (310) 209-2468Facsimile: (310) 209-2087

KEVIN YOURMANWEISS & YOURMAN10940 Wilshire Blvd 24th FloorLos Angeles, California 90024Telephone: (310) 208-2800Facsimile: (310) 209-2348

Attorneys for Plaintiffs

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JURY DEMAND

Plaintiffs hereby demand a trial by jury.

Dated: March __, 2002 GLANCY & BINKOW LLP

________________________________Lionel Z. GlancyRobin B. HowaldMichael Goldberg

1801 Avenue of the Stars, Suite 311Los Angeles, California 90067Telephone: (310) 201-9150Facsimile: (310) 201-9160

JEFFREY H. SQUIREIRA M. PRESSKIRBY MCINERNEY & SQUIRE, LLP830 Third Avenue, 10th FloorNew York, NY 10022Telephone: (212) 371-6600Facsimile: (212) 751-2540


MICHAEL D. BRAUNSTULL, STULL & BRODY10940 Wilshire Blvd, Suite 2300Los Angeles, California 90024Telephone: (310) 209-2468Facsimile: (310) 209-2087

KEVIN YOURMANWEISS & YOURMAN10940 Wilshire Blvd 24th FloorLos Angeles, California 90024Telephone: (310) 208-2800Facsimile: (310) 209-2348

Attorneys for Plaintiffs

lionel z. glancy #134180 robin b. howald … · the investigation includes the thorough review and...

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