michael d. braun (167416) marc l. godino (182689) braun law...
TRANSCRIPT
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Michael D . Braun (167416)Marc L. Godino (182689)BRAUN LAW GROUP, P .C.12400 Wilshire Blvd., Suite 920Los Angeles, CA 9002 5Tel: (310) 442-7755Fax: (310) 442-775 6
Liaison Counsel for Lead Plaintiffs
Andrew M. Schatz (Admitted Pro Hac Vice)Jeffrey S . Nobel (Admitted Pro Hac Vice)Justin S . Kudler (Admitted Pro Hac Vice)SCHATZ & NOBEL, P .C .One Corporate Center20 Church Street, Suite 1700Hartford, Connecticut 06103Tel : (860) 493-6292Fax: (860) 493-6290
Lead Counsel for Lead Plaintiffs
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF CALIFORNI A
SAN JOSE DIVISION
IN RE NETOPIA, INC. SECURITIESLITIGATION
CASE NO.: C 04-3364 RMWAnd Related Case s
CLASS ACTION
CONSOLIDATED AMENDEDCOMPLAINT
JURY TRIAL DEMANDED
This Document Relates to :
All Actions
CONSOLIDATED AMENDED COMPLAIN T
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Lead Plaintiffs James P . Levy and David M . Simon ("Plaintiffs"), on behalf of themselve s
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and all others similarly situated, allege the following facts for their Consolidated Amended Class
Action Complaint (the "Complaint"), which are based upon the investigation conducted by
Plaintiffs' Counsel. The investigation conducted by Plaintiffs' Counsel included (I) the review and
analysis of testimony provided to the United States Securities and Exchange Commission (the
"SEC") by Peter Frankl and John Deckard, former Netopia employees, in connection with the
SEC's formal investigation of Defendant Netopia, Inc . ("Netopia"), (ii) the review and analysis of
internal Netopia documents and communications (including e-mail communications, faxes, and
letters), (iii) interviews of Peter Frankl and John Deckard, (iv) interviews with counsel for a former
Netopia customer, (iv) the review and analysis of documents obtained from the Chicago Public
Schools and the School District of Philadelphia, (v) the review and analysis of the contents of
Netopia press releases and SEC filings, (vi) the review and analysis of the transcripts of conference
calls conducted by Defendants Netopia, Alan Lefkof, and William Baker, (vii) the review and
analysis of the contents of various Court filings and affidavits submitted in the litigation entitled,
Peter Frankl & John Deckard v. Netopia, Inc., Case No. 3 :05CV386-B (N.D. Tex.), and (viii) the
review and analysis of the submissions by Defendants' counsel and counsel for Peter Frankl and
John Deckard in connection with the Sarbanes-Oxley whistleblower case presently pending before
the U.S . Occupational Safety and Health Administration ("OSHA") against Netopia, Inc . and its
Officers and Board of Directors, Case No . 6-1730-05-904 .
NATURE OF THE ACTION
1 . This is a class action on behalf of all persons who purchased the common stock (th e
"Shares") of Netopia from November 6, 2003 through and including August 16, 2004 (the "Class
Period" and the "Class") . Excluded from the Class are Defendants, members of Defendants'
immediate families, any entity in which any Defendant has a controlling interest, and the legal
representatives, heirs, successors or assigns of any such excluded person .
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JURISDICTION AND VENUE
2. This Court has jurisdiction over this action pursuant to (I) Section 27 of the
Securities Exchange Act of 1934, 15 U.S.C. § 78aa et seq . (the "Exchange Act") ; and/or (ii) 28
U.S .C. §§ 1331 and 1337 . The claims asserted in the Complaint arise under and pursuant t o
Sections 10(b) and 20(a) of the Exchange Act (15 U .S.C. §§78j(b), 78t(a)) and Rule 1Ob-5 (1 7
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C.F.R. § 240.1 Ob-5) promulgated by the SEC .
3 . Venue is proper in this District pursuant to Section 27 of the Exchange Act and 28
U.S.C. § 1391(b) . Netopia's principal executive office was located at all relevant times at 6001
Shellmound Street, 4th Floor, Emeryville, California, 94608, and a substantial part of the events or
omissions giving rise to the claims complained of herein occurred in this District .
4. 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
5. Lead Plaintiff James P. Levy purchased Shares during the Class Period, as set fort h
in a Certification of Named Plaintiff previously filed with the Court, and has suffered losses as a
result of the wrongdoing more particularly described herein .
6. Lead Plaintiff David M. Simon purchased Shares during the Class Period, as set fort h
in a Certification of Named Plaintiff previously filed with the Court, and has suffered losses as a
result of the wrongdoing more particularly described herein .
7. Defendant Netopia is a Delaware corporation with its executive offices and principal
place of business located at 6001 Shellmound Street, 4th Floor, Emeryville, California, 94608 .
8. During the Class Period, Defendant Alan B . Lefkof ("Lefkof') was the President and
Chief Executive Officer ("CEO") of Netopia, and was a member of the Company's Board o f
Directors .
9. During the Class Period, Defendant William D. Baker ("Baker") was the Senior Vice
President and Chief Financial Officer ("CFO") of Netopia . As more particularly alleged below,
Baker was forced to "resign" from the Company on or about October 21, 2004 .
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10. During the Class Period, Defendant David A . Kadish ("Kadish") was the Senior Vice
President, General Counsel, and Secretary of Netopia.
11 . During the Class Period, Defendant Thomas A. Skoulis ("Skoulis") was the Senior
Vice President and General Manager of Netopia . During the Class Period, Skoulis reported to
Defendants Lefkof and Kadish, and was the head of all hardware and software sales at Netopia . As
more particularly alleged below, Skoulis was terminated by Netopia on or about September 20 ,
2004.
12. Defendants Lefkof, Baker , Kadish , and Skoulis are collectively referred to herein a s
the "Individual Defendants ."
CLASS ACTION ALLEGATIONS
13 . Plaintiffs bring this action as a class action pursuant to Rule 23(a) and (b)(3) of the
Federal Rules of Civil Procedure on behalf of a class consisting of all persons and entities who
purchased the common stock of Netopia between November 6, 2003 and August 16, 2004, inclusive
(the "Class") . Excluded from the Class are Defendants, members of Defendants' immediate
families, any entity in which any Defendant has a controlling interest, and the legal representatives,
heirs, successors or assigns of any such excluded person .
14. The members of the Class are so numerous that joinder of all members is
impracticable . Although the exact number of Class members is unknown to Plaintiffs at this time
and can only be ascertained through appropriate discovery, Plaintiffs believe there are, at a
minimum, thousands of members of the Class who purchased Netopia common stock during th e
Class Period. As set forth in the Company's annual report for the year ended September 30, 2003,
filed with the SEC on Form 10-K on December 19, 2003 (the "2003 10-K"), the Company had over
22 million shares of its common stock outstanding, and traded on the NASDAQ National Marke t
under the symbol "NTPA."
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15 . 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 . Among the
questions of law and fact common to the Class are :
(a) whether the federal securities laws were violated by Defendants' acts asalleged herein;
(b) whether Defendants issued false and misleading statements during the ClassPeriod;
(c) whether Defendants acted knowingly and/or recklessly in issuing false andmisleading statements ;
(d) whether the market price of Netopia common stock during the Class Periodwas artificially inflated because of Defendants' conduct complained of herein ;and
(e) whether the members of the Class have sustained damages and, if so, what isthe proper measure of damages .
16. Plaintiffs' claims are typical of the claims of the members of the Class, as Plaintiffs
and members of the Class sustained damages arising out of Defendants' wrongful conduct in
violation of federal law as complained of herein .
17 . Plaintiffs will fairly and adequately protect the interests of the members of the Class
and have retained counsel competent and experienced in class actions and securities litigation .
Plaintiffs have no interests antagonistic to or in conflict with those of the Class .
18. A class action is superior to other available methods for the fair and efficient
I adjudication of the controversy since joinder of all members of the Class is impracticable .
Furthermore, because the damages suffered by the individual Class members may be relatively
small, the expense and burden of individual litigation makes it impracticable for the Class members
individually to redress the wrongs done to them . There will be no difficulty in the management o f
this action as a class action.
19. Plaintiffs will rely, in part, upon the presumption of reliance established by the fraud-
on-the-market doctrine in that :
(a) Defendants made public misrepresentations or failed to disclose material factsduring the Class Period ;
(b) the omissions and misrepresentations were material ;
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(c) the stock of the Company traded in an efficient market, as it traded at a highweekly volume, was followed and reported on by securities analysts, hadnumerous market makers, was eligible to file SEC registration form S-3, andthere are empirical facts showing a cause and effect relationship betweenunexpected corporate events or financial news and an immediate response inthe stock price ;
(d) the misrepresentations and omissions alleged would tend to mislead areasonable investor concerning Netopia's business and/or financial condition ;and
(e) Plaintiffs and members of the Class purchased their Netopia stock at pricesthat were artificially inflated due to Defendants' material misrepresentationsand omissions .
SUBSTANTIVE ALLEGATION S
Factual Backgroun d
20. Netopia is a company that sells computer software and hardware products . During
the Class Period, the Company's software products consisted primarily of the "netOctopus" and
"Timbuktu" software product line . Netopia's netOctopus software products were designed to allow
Information Technology ("IT") administrators to provide remote network-wide support and
centralized management of computer networks, including managing all workstations on the
network, and distributing software and software updates . The Company's "Timbuktu" software
product line enabled IT administrators to provide support on a remote basis when computer users
experience problems with their desktop or laptop computers ("peer to peer administration") . As a
result, the Company's software product were well-suited for school systems . Netopia's hardware
business consisted of sales related to broadband and wireless (Wi-Fi) products and services, such as
broadband Internet modems, routers, and gateways, primarily to telecommunication carriers,
distributors, and end-users .
21 . Some of the transactions at issue in this litigation relate to Netopia's busines s
relationship with Interface Computer Communications, Inc . ("ICC"), a corporation with offices in
Chicago, Illinois and Philadelphia, Pennsylvania. According to ICC's website, ( www.iccfone.com),
ICC maintains that Netopia is one of its "partners," and the website provides a direct "hyperlink" to
Netopia's website (www.netopia.com). During the Class Period, ICC was owned by Mr . David
Andalcio, who also served as ICC's President and Chief Executive Officer . Mr. Andalcio was
appointed in 2003 by then-Illinois Governor Rod Blagojevich to the Illinois State Toll Highway
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Authority . In 2002 and 2003, ICC was certified as a "Minority Business Enterprise" by the State of
Illinois under the Business Enterprise Program for Minorities, Females and Person with Disabilities
Act (which officially provided ICC with the opportunity to participate in the State of Illinois '
procurement process), and was certified by the City of Chicago as a "Disadvantaged Business
Enterprise" and as a company permitted and certified to do business with Chicago with respect to
"sales and service for computer systems and software ." Similarly, on December 18, 2002, ICC was
certified by the Minority Business Enterprise Council of the City of Philadelphia, Pennsylvania,
which, among other things, permitted ICC to do business with the City of Philadelphia as a
Disadvantaged Business Enterprise .
22. In the Summer of 2001, Dovid Coplan, a Netopia marketing employee, met a
representative of ICC at a National Education Computing Conference Trade Show (Netopia was one
of the exhibitors), and discussed the possibility of beginning a business relationship in which,
among other things, ICC and Netopia could work together to do business with the Chicago Public
Schools . Thereafter, and continuing until approximately February 2002, several meetings and
product demonstrations took place in Chicago at the headquarters of the Chicago Public Schools
between Netopia sales and engineering employees, ICC, and various technical (i .e., IT
infrastructure) and budgeting employees of the Chicago Public Schools .
23 . In approximately February 2002, ICC informed Netopia that funds had bee n
allocated to the IT department of the Chicago Public Schools which could potentially be used for the
products and services that Netopia, ICC and Chicago had discussed . In this regard, by an e-mail
dated February 6, 2002, Mr . Frankl sent ICC a detailed proposal for the Chicago Public Schools for
a total of $1,593,000, consisting of $650,000 for a Timbuktu Pro Enterprise Mac Site License (and
$52,000 for one year of related maintenance), and $825,000 for a netOctopus Enterprise Mac Site
License (and $66,000 for related maintenance) .
24. In May 2002, the Chicago Public Schools (Anthony McPherson, an IT manager at th e
Chicago Public Schools) notified Mr . Andalcio and Mr. Jose Flores (ICC's Vice President) that the
Chicago Public Schools had approved a decision to do business with ICC with respect to the
Netopia products. After receiving that information, Mr . Andalcio called Mr. Frank] to inform him
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of that decision; and Mr. Frankl then informed Defendant Skoulis by telephone . During that
telephone conversation, Mr. Frankl told Defendant Skoulis about this development, and Defendant
Skoulis informed Mr. Frankl that he (Defendant Skoulis) would inform the attendees at Netopia's
next "Executive Staff' meeting (which were conducted every Monday at Netopia's Alameda, and
then Emeryville, California headquarters, and attended by Defendants Lefkof, Kadish, Baker and
Skoulis, as well as Brooke Hauch (Netopia's Chief Information Officer) and Cathy Diffenbaugh
(Netopia's Controller)) . Defendant Skoulis had told Mr. Frankl that he had previously discussed (at
Executive Staff meetings) the fact that the Chicago Public Schools was considering the purchase of
Netopia's products, had kept the attendees informed of the progress, and had provided the attendees
with forecasts of the size of any such software order - likely to be the largest single software order
in Netopia's history .
25 . In mid-May 2002, Mr. Frankl received a telephone call from Mr . Flores, during
which Mr. Flores told Mr . Frankl that the Chicago Public Schools had decided to purchase
netOctopus and Timbuktu from ICC, that ICC wanted to give Netopia a purchase order for those
products, but that Netopia would have to agree that Netopia would not be entitled to any payments
from ICC unless and until ICC was paid by the Chicago Public Schools, but that ICC would pay
Netopia immediately after it (ICC) received payments from the Chicago Public Schools . Mr. Flores
also stated that "I'm not paying you [Netopia] if I [ICC] am not paid ." Mr. Frankl responded that he
would first have to speak with Defendant Skoulis to see if that would be acceptable to Netopia .
After completing the call with Mr . Andalcio, Mr. Frankl immediately called Defendant Skoulis,
repeated to Defendant Skoulis the contents of the cell phone call with Mr . Flores, and asked
Defendant Skoulis whether the terms proposed by ICC (i.e ., that payment to Netopia was
conditional upon payment to ICC by the Chicago Public Schools) would be acceptable to Netopia .
Defendant Skoulis responded that the terms proposed by ICC were "fine ."
26. On May 23, 2002, immediately after the Chicago Purchase Order was received, Mr .
Frankl called Defendant Skoulis and told Defendant Skoulis that he had just received the Chicago
Purchase Order. (The call was placed on "speaker phone") . After congratulating Mr. Frankl ,
Defendant Skoulis told Mr. Frankl to immediately fax the Chicago Purchase Order directly to him
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and Defendant Lefkof (to Netopia's executive fax in its headquarters, then located in Alameda) and
that he was going to put him on "hold" for a moment until he and Defendant Lefkof received the fax
of the Chicago Purchase Order . A few moments later, Defendant Skoulis got back onto the call,
stated that he and Defendant Lefkof had received the fax of the Chicago Purchase Order, and stated
that "I'm going to transfer you to Alan" Lefkof. After Defendant Lefkofjoined the conference call,
Defendant Lefkof said "congratulations," "good job" and that this is a "great deal ."
27. With the Chicago Purchase Order "in hand," Defendant Lefkof asked Mr . Frankl ,
"how is the payment going to work?" Mr. Frankl responded to Defendant Lefkof and Defendant
Skoulis that Netopia had agreed that ICC would not have to pay Netopia unless and until ICC
received payments from the Chicago Public Schools, and that ICC was supposed to receive two
payments from Chicago (the first half of the payment to ICC in approximately thirty (30) days from
the date of the Chicago Purchase Order, and the final half of the payment to ICC in approximately
90 days from the date of the Chicago Purchase Order) .
28. On May 23, 2002, pursuant to Defendant Lefkof's instructions, Mr . Deckard entered
the Chicago Purchase Order into Netopia's "Cache Creek" order entry system, and faxed the
Chicago Purchase Order to Ms . Barbara Medina in the office of Netopia's Controller, Ms . Cathy
Diffenbaugh. Shortly thereafter, Ms . Medina called Mr. Deckard and indicated that Netopia would
not be able to recognize revenue because the Chicago Purchase Order contained language
conditioning payment to Netopia upon payments to ICC by Chicago ("we can't recognize revenue
with this in it") . Ms. Medina instructed Mr. Deckard that he needed to take out the payment
conditions described at the bottom of the Chicago Purchase Order because Ms . Diffenbaugh did not
want those conditions. Mr. Deckard responded, "I will check with the customer [ICC] to see if I can
do it ." Mr. Frankl then called ICC, and ICC agreed that Mr . Frankl and Mr . Deckard could remove
the payment conditions from the Chicago Purchase Order, as long as Netopia agreed that ICC
"would pay this when Chicago paid [ICC] ." Thereafter, based upon specific agreement with ICC
that the condition could be deleted from the document but remain as a part of the agreement
between Netopia and ICC, Mr. Deckard "whited-out" the conditional payment language from the
Chicago Purchase Order. Mr. Deckard specifically told Defendant Skoulis and Ms . Medina on May
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24, 2002 that he had "whited-out" the language conditioning payment to Netopia upon payments to
ICC by Chicago with the permission of ICC, and confirmed to them that payment to Netopia would
remained conditioned upon payment to ICC by Chicago . Ms. Medina responded that she did not
care "as long as the language is gone ." Thereafter, the "whited-out" version of the Chicago
Purchase Order was faxed to Ms . Medina .
29. In a Netopia press release dated July 23, 2002, Netopia reported its financial result s
for the third quarter ended June 30, 2002 . The press release reported software revenue of $5 .468
million, and total revenue of $15 .564 million for the quarter . The quarterly revenue reported on July
23, 2002 included the $1 .593 million attributable to the Chicago Purchase Order (which constituted
the single largest software order ever at Netopia), and accounted for over 29 percent of the
Company's software revenue and more than 10 percent of the Company's total quarterly revenue .
In addition, during a July 23, 2002 conference call with investors and analysts to discuss the
Company's financial results, Defendant Lefkof referred to the Company's software revenue as "the
real highlight of the quarter." In a Netopia press release dated July 30, 2002, which quoted
Defendant Skoulis and Mr . Flores from ICC, Netopia boasted about its addition of the Chicago
Public Schools as a customer.
30 . In a September 2002 interview given by Defendant Lefkof to "The Wall Stree t
Transcript" ("TWST"), Lefkof talked about his involvement in the deal with Chicago, and referred
to Chicago as Netopia' s "customer":
TWST: You've also added several large school systems to your list of customers .
LEFKOF: School systems have been important customers for a long time and, of course ,a school system looks very much like a small business, where they mighthave a computer lab of 50 computers attached to the Internet, or they mighthave individual computers in individual classrooms attached to the Internet .There, the broadband connection and once again, the central managementsoftware capability, might be coming from the district level or the regionallevel, so it has very similar attributes, actually, to the distributed enterpriseapplication .
TWST : Is the Chicago Public School System among your customers ?
LEFKOF: Yes.
TWST: That strikes me as being a very big assignment .
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LEFKOF: That represents a recent win that we worked on for a long time with a verysuccessful outcome .
31 . As alleged below, on February 1, 2005, after Netopia's internal investigation showed
that payment from ICC to Netopia in connection with the Chicago Purchase Order constituted a
"contingent sale," Netopia restated the $1,593,000 in revenue recognized for the quarter ended June
30, 2002. On or about September 20, 2004, Defendant Skoulis told Mr . Frankl that Mr. Deckard
had been fired by Netopia because he had "whited-out" the conditional payment language in the
Chicago Purchase Order. When Mr. Frankl responded, "that is ridiculous, because everyone knew,"
Defendant Skoulis said, "I know."
The Philadelphia Transaction
32. Beginning in approximately the Spring of 2003, Mr . Frankl and ICC began working
on another possible deal, utilizing Netopia's software for the School District of Philadelphia,
Pennsylvania. The possibility of doing business with Philadelphia was prompted by the fact that
Mr. Paul Vallas (a friend of Mr . Andalcio, and previously the CEO for the Chicago Public Schools
from 1995 to 2001), had obtained a new position as CEO for the School District of Philadelphia
("Philadelphia") in July 2002 . ICC opened a Philadelphia office, and by December 18, 2002, ICC
had been granted "Minority-Owned Disadvantaged Business" status, permitting ICC to bid on or
propose projects as a Disadvantaged Business Enterprise .
33 . On July 23, 2003, Mr . Frankl sent Defendant Skoulis the following e-mail regardin g
a potential sale to Philadelphia :
Well, I just got off the phone with Jose and he asked me to head to Philly on Tuesday for ahigh level negotiation. Philadelphia wants the software but does not have the 7 figurebudget up front. It might just work out that we could set ourselves up with a nice quarterlybuffer for the next several quarters .
34. By September 2003, several successful meetings had taken place between ICC (Mr.
Andalcio and Mr. Flores), Netopia (Mr . Frankl, Netopia sales representative John Cannon, and a
Netopia systems engineer), and Philadelphia IT employees concerning Netopia's Timbuktu and
netOctopus software . There were two potential scenarios: a transaction that involved the purchase
of software for all Philadelphia computers, including student computers and lab computers, at a cost
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of approximately $4.6 million to ICC ; and a smaller purchase of software for only the administrative
computers in Philadelphia, which would be valued at approximately $750,000 for Netopia. Mr .
Frankl regularly informed Defendant Skoulis of the progress of these meetings, and Defendant
Skoulis told Mr. Frankl that he regularly discussed with the attendees at Netopia's Executive Staff
meeting the information provided to him by Mr . Frankl, and as a result, Defendants repeatedly asked
Mr. Frankl about the status of those negotiations with Philadelphia. For example, at a September
2003 Netopia sales meeting at Netopia's Billerica, Massachusetts offices attended by Defendant
Baker and Defendant Kadish, Defendant Baker asked "when is that Philly deal going to come in?"
On another occasion in 2003, Mr . Frankl was walking down the hallway of Netopia's Emeryville,
California offices with Defendant Skoulis, and came upon Defendants Lefkof, Baker and Kadish
sitting in Defendant Kadish's office ; Defendant Lefkof asked Mr . Frankl, "when are you getting
Philly?" By mid-September 2003, the possibility of a significant business transaction with
Philadelphia was becoming greater, and Defendant Skoulis had forecast a possible order with
respect to Philadelphia of at least between $500,000 and $1 million for the quarter ended September
30, 2003 .
35 . On Thursday, September 25, 2003, Mr . Frankl received a telephone call from
Defendants Lefkof and Skoulis, which began with Defendant Skoulis stating that Defendant Lefkof
wanted to talk about the potential deal with Philadelphia. Defendant Lefkof first said that he knew
that Mr. Frankl had been forecasting a deal with Philadelphia through ICC . Defendant Lefkof then
stated that an order from Philadelphia would be very important for Netopia's quarterly "numbers"
and would help Netopia "hit" Wall Street earnings estimates, and asked Mr . Frankl whether there
"is any way you can get this deal before Tuesday [September 30, 2003]?" In response, Mr . Frankl
stated to Defendant Lefkof that Philadelphia was not ready to place an order with ICC, tha t
Philadelphia did not yet have money available in its budget to purchase the Netopia products, and
that Philadelphia might not be able to place an order with ICC for the Netopia products until
approximately March 2004 . Defendant Lefkof then asked, in response, "do you think the guys at
ICC would be willing to place the order?" Mr . Frankl responded that he did not think that ICC
would be willing to purchase the products from Netopia without an order from Philadelphia, but that
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ICC might be willing to make a "purchase" as long as it did not have to pay for it until Philadelphia
paid ICC. Defendant Lefkof responded that Netopia would agree to accept an order from ICC under
those conditions, and then asked Mr. Frankl to call Mr. Andalcio to find out whether ICC would
give Netopia a purchase order .
36. At Defendant Lefkof' s request, Mr . Frankl then called ICC and spoke with Mr .
Andalcio on Mr . Andalcio's cell phone . Mr. Frank! stated to Mr. Andalcio that he had just spoken
with Defendant Lefkof, explained that an order from Philadelphia was crucial for Netopia to "hit its
numbers for the quarter," and that Defendant Lefkof wanted to know whether ICC would place an
order "now." Mr. Andalcio responded that he was "uncomfortable" giving Netopia a purchase order
given the fact that Philadelphia had not given ICC a purchase order, but would be willing to give
Netopia a purchase order by that time (by September 30, 2003) as long as Netopia agreed that ICC
would not have to pay Netopia unless and until Philadelphia gave ICC an order and paid ICC for the
Netopia products and allowed ICC an additional discount (which would increase ICC's profit if it
later obtained the Philadelphia business). In response, Mr. Frank! told Mr . Andalcio that he would
speak with Defendant Lefkof, and call him back .
37. On September 25, 2003, after completing his call with Mr . Andalcio, Mr . Frankl
called Defendant Skoulis, and Defendant Skoulis set up a "conference call" between Defendants
Lefkof and Skoulis and Mr. Frankl . During this conference call, Mr . Frankl reported to Defendants
Lefkof and Skoulis that Mr. Andalcio said that ICC would issue a purchase order to Netopia, but
that ICC would only do so if Netopia agreed that ICC would not have to pay Netopia for the
products unless and until Philadelphia gave ICC an order for the products and paid ICC for the
products and Netopia would provide the additional discount . Defendant Lefkof responded, "Well
Peter, that's fine . Get the order ." Defendant Lefkof also told Mr. Frank! to get information to
Defendant Kadish.
38. Shortly thereafter, Mr . Frankl called Mr . Andalcio and told him that Defendan t
Lefkof had agreed to the conditions required by Mr . Andalcio .
39. Subsequently, Defendant Skoulis sent Mr . Frank! the following e-mail, dated
September 26, 2003, which read as follows:
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Peter,
Please email or call me with the breakdown of both license and maintenance pricing to usein the proposal for ICC .
Essentially, we're going to quote the following :
Timbuktu Enterprise LicenseTimbuktu Enterprise MaintenancenetOctopus Enterprise LicensenetOctopus Enterprise Maintenanc e
Sub-Total License Amount will be $670KSub-Total Maintenance Amount will be $80KTotal of Purchase Order will be $750K
The quantity for each product and maintenance will reflect a unit of 1
Therefore, please break out the appropriate split between TB2 and netO as you've proposedto ICC and Philly.
David [Kadish] has a lunch meeting, so if you could do over the next two hours that wouldbe great.
Thanks/Tom
After sending this e-mail, Defend ant Skoulis called Mr. Frankl to ask him whether he had received
the e-mail, and told Mr. Frankl that he needed the information in the next couple of hours because
Defendant Kadish wanted to draft a purchase order for ICC before he went to lunch .
40. Shortly thereafter, before Defendant Kadish's lunch, Mr. Frankl sent Defendant
Skoulis the following e-mail, dated September 26, 2003, which read as follows :
Tom,
Here is the original total price quote :
SW300SP-ENT Timbuktu Pro Enterprise $1,800,000 .00SRV100-RC Premier Corporate Care Maintenance - 1 Year $ 144,000 .00TN800SP netOctopus $2,400,000.00SRV800SP Premier Corporate Care Maintenance -1 Year $ 192,000 .00
Broken down by the same percentages into $750K we have the following :
SW300SP-ENT Timbuktu Pro Enterprise $287,430 .00SRV100-RC Premier Corporate Care Maintenance - 1 Year $ 34,320 .00TN800SP netOctopus $382,570.00SRV800SP Premier Corporate Care Maintenance -1 Year $ 45,680 .00
Let me know if you have any questions .
Peter
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41 . Shortly thereafter, Defendant Skoulis sent Mr. Frankl the following e-mail, dated
September 26, 2003, which read as follows:
Perfect . Exactly what I was looking for .
Thanks/Tom
42. After receiving this information from Defendant Skoulis, Defendant Kadish began
creating a purchase order on his word processing system (Microsoft Word) that purported to come
from ICC. While he was creating the ICC purchase order, Defendant Kadish called Mr . Frankl and
asked Mr. Frankl to provide him information from the Chicago Purchase Order to assist Defendant
Kadish in creating an purchase order that looked like an authentic ICC purchase order . During this
telephone call with Defendant Kadish, Mr. Frankl asked Defendant Kadish what he was going to
write down as payment terms in the purchase order ; Kadish abruptly responded: "Nothing."
However, Netopia's internal accounting policy required all purchase orders received from customers
to set forth the payment terms in order for the Company to recognize revenue, and Netopia's
standard payment terms were "net 30 . "
43 . Shortly thereafter, Defendant Kadish sent Defendant Lefkof, Defendant Skoulis, and
Mr. Frankl an e-mail, dated September 26, 2003, that read, "Here is the form of PO we will
receive." Attached to this e-mail from Defendant Kadish was a Purchase Order, dated September
29, 2003, from ICC to Netopia, in the amount of $750,400 (the "Philadelphia Purchase Order"),
broken down as follows :
Item No. Quantity Description Unit TOTAL
SW300SP-ENT 1 Timbuktu Pro Enterprise EditionVolume License $270,000 $270,000
SRV 100-RC 1 Timbuktu Pro Premier CorporateCare Maintenance 32,400 32,400
TN800SP 1 netOctopus Volume License 400,000 400,000SRV800SP 1 netOctopus Premier Corporate
Care Maintenance 48,000 48,000
As Defendant Kadish had told Mr. Frankl, the Philadelphia Purchase Order did not contain any
payment terms .
44 . Defendant Kadish instructed Mr . Frankl to e-mail this purchase order to ICC instead
of faxing it . As a result, on Monday, September 29, 2003, Mr . Frankl sent an e-mail to Mr .
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Andalcio and Mr. Flores, which attached the Philadelphia Purchase Order prepared by Defendan t
Kadish, and which stated as follows :
Hello Gentlemen,
I have put together the final numbers for Philadelphia based upon our conversation onFriday . I have reduced the total price of the software to ICC from $4 .6 million to $4.2million . The numbers now are as follows :
SW300SP-ENT Timbuktu Pro Enterprise $ 1,512,000 .00SRV100-RC Premier Corporate Care Maintenance - 1 Year $ 210 ,000.00TN800SP netOctopus $2,226 ,000.00SRV800SP Premier Corporate Care Maintenance - 1 Year $ 252 ,000.00TOTAL $4 ,200,000.00
Also, I have attached a document with the information and price breakdown for the first POfrom ICC to Netopia .
Once again, thank you for working with us on this project and do not hesitate to contact mewith any questions .
Regards,
Peter Frankl
45 . On Tuesday, September 30, 2003 (the final day of Netopia's fourth quarter and fiscal
year), ICC signed the Philadelphia Purchase Order and faxed it directly to Mr . Frankl (at Netopia's
Addison, Texas office) . On September 30, 2003, immediately thereafter, Mr . Frankl called
Defendant Skoulis and informed him that he had just received the signed Philadelphia Purchase
Order from ICC. In that telephone conversation, Defendant Skoulis instructed Mr . Frankl that, in
accordance with Defendant Lefkof's instructions, Mr . Frankl should immediately fax the signed
Philadelphia Purchase Order directly to Defendant Skoulis (at Netopia's headquarters in Emeryville,
California), and to not enter the Philadelphia Purchase Order in the Cache Creek order management
system in Netopia's Addison, Texas office, and that he (Defendant Skoulis) would (after he received
the fax) take the signed Philadelphia Purchase Order to Barbara Medina (which was contrary to
Netopia's standard procedure, which required purchase orders to be entered in the location of the
sales office handling the transaction) and have her enter the Philadelphia Purchase Order into
Netopia's Cache Creek order management system at Company headquarters in Emeryville,
California. On September 30, 2003, pursuant to these instructions from Defendant Skoulis an d
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Defendant Lefkof, Mr. Frank! faxed Defendant Skoulis the signed Philadelphia Purchase Order fo r
11 entry.
46. A few days later , ICC received a letter from Netopia dated October 1, 2003 ( signed
by Tim Noel, Netopia's Controller in October 2003). The October 1, 2003 letter, inter alia, made
reference to the $750,4000 purportedly due Netopia from ICC, requested that ICC confirm (within
the body of that letter) whether ICC owed Netopia the $750,400, and requested that ICC send the
(completed) letter back to KPMG LLP (Netopia's outside auditors, who later resigned on September
10, 2004, as more particularly alleged below) . Immediately after receiving this October 1, 2003
letter, Mr. Andalcio called Mr . Frank! and told him that ICC had just received the October 1, 2003
letter, and indicated that he was upset because ICC did not owe Netopia the $750,400 . Mr. Frank!
responded that he did not know anything about the letter, and told Mr. Andalcio that he would call
Defendant Skoulis to find out why it had been sent to ICC . Mr. Frank! then immediately called
Defendant Skoulis, and asked what the October 1, 2003 letter was for and why it had been sent to
ICC. Defendant Skoulis responded that it was an audit letter and "standard procedure," told Mr .
Frankel to "placate" Mr. Andalcio by telling Mr . Andalcio that "everyone knows" (i.e ., Lefkof,
Kadish and Baker) the terms of the deal, and to tell Mr . Andalcio to sign the October 1, 2003 letter
confirming the $750,400 order and send it back to KPMG .
47. Immediately after speaking with Defendant Skoulis, Mr . Frank! called Mr . Andalcio
back and repeated what Defendant Skoulis had said . Mr. Andalcio responded that he had talked to
an advisor and, based on the advisor's advice, he was going to fax to Mr . Frank! a letter of
understanding between ICC and Netopia indicating that ICC did not owe Netopia any money, and
that ICC did not have to pay Netopia any money until Philadelphia ordered the products and paid
ICC .
48 . Mr. Frank! then called Defendant Skoulis and told him about his call with Mr.
Andalcio and the letter of understanding that Andalcio said he was going to fax to Mr . Frank! .
Defendant Skoulis responded that he would discuss the upcoming fax from ICC with Defendants
Lefkof and Kadish .
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49. On October 7, 2003, Frankl received the letter of understanding from ICC, which
was signed by Mr. Andalcio (the "October 7 Letter") . Among other things, the October 7 Letter
stated that the Philadelphia Purchase Order was "only valid upon ICC's receipt of a Purchase Order
from the Philadelphia Public Schools ." When Mr. Frankl received the October 7 Letter, he
immediately called Defendant Skoulis to discuss it with him, and while he was on the telephone
with Defendant Skoulis, Mr. Frank! faxed it to Defendant Skoulis (who put his call with Mr . Frank!
on hold to stand over the fax machine, to wait for the fax) . Once Defendant Skoulis received the fax
of the October 7 Letter from Frank!, Defendant Skoulis instructed Mr . Frank! to not sign the
October 7 Letter. Defendant Skoulis then told Mr. Frank! to call Mr. Andalcio and to reiterate that
the October 1, 2003 letter was just "standard," that Netopia understood the real terms of the deal,
and that Mr. Frank! could not sign the October 7 Letter.
50. At Defendant Skoulis' direction. Mr. Frank! called Mr . Andalcio, told him that th e
letter requesting information for KPMG was "standard," that Netopia understood the terms of th e
deal, and that he (Mr. Frank!) could not sign the October 7 Letter . As a result, Mr. Andalcio did not
require Netopia to sign the letter .
51 . In approximately late-October 2003, Mr. Andalcio told Mr. Frank! that Mr. Paul
Vallas (now employed as Philadelphia's CEO) had informed Mr. Andalcio that Philadelphia was not
going to purchase any of Netopia's products at the present time, and had instructed Mr. Andalcio
that ICC and Netopia should conduct meetings directly with Vince Detolla, Philadelphia's Director
of Educational Technology, to determine whether Mr . Detolla was interested in purchasing any of
Netopia's products and had funding available in his department's budget for any such purchase . Mr .
Frank! informed Defendant Skoulis of these facts immediately upon learning this information from
Mr. Andalcio ; Defendant Skoulis told Mr. Frank! that he (Defendant Skoulis) then informed
Defendant Lefkof of the fact that Mr . Vallas of Philadelphia had decided that Philadelphia was not
going to purchase the $750,400 of Netopia's products referenced in the Philadelphia Purchas e
Order, and that the only way for Netopia to get any business from Philadelphia would be to start
new sales efforts to convince Mr. Detolla and employees in his department to purchase Netopia's
products from ICC .
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52. As a result of learning that Philadelphia was not even willing to purchase Netopia' s
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products, and that ICC and Netopia needed to convince Mr. Detolla to purchase Netopia's products
in order for ICC to get any orders from Philadelphia with respect to Netopia's products, Defendant
Lefkof ordered Defendant Skoulis (Netopia's Senior Vice President and General Manager, a n
Officer of the Company, and Netopia's highest ranking salesperson) and Defendant Baker
(Netopia's Chief Financial Officer) to personally devote their time and effort to convince
Philadelphia to purchase Netopia products at least equal to the $750,400 referenced in the
Philadelphia Purchase Order, including making personal visits to Philadelphia .
53 . On November 4, 2003, based upon Defendant Lefkofs directive, Defendant Skouli s
traveled to Philadelphia and met with John Benante, an employee in Philadelphia's Office o f
Information Technology in furtherance of the new sales efforts to convince Philadelphia to purchas e
Netopia's products . However, Philadelphia did not agree to purchase Netopia's products .
54. In early November 2003 (upon learning that Netopia had not received payment of the
$750,400 from ICC within 30 days of the Philadelphia Purchase Order), representatives of KPM G
questioned Defendants Baker, Kadish and Lefkof about whether it was appropriate to recognize th e
$750,400 attributable to the Philadelphia Purchase Order .
55 . In November 2003, Percy Sanders (Netopia's Collections Manager) called Mr .
Frankl, and indicated that Netopia had not yet received any payment from ICC in connection with
the Philadelphia Purchase Order . Mr. Frankl responded that Mr. Sanders should speak with
Defendant Baker (Mr . Sanders' boss) concerning the transaction because there was "nothing due ."
Shortly after the completion of the call with Mr . Sanders, Defendant Baker called Mr . Frankl to ask
for contact information for ICC, and Mr . Frankl reminded Defendant Baker that Netopia was not
entitled to be "paid a penny" by ICC until Philadelphia paid ICC . Defendant Baker also told Mr .
Frankl that he wanted to be included in upcoming visits to Philadelphia in order to gauge whether
Philadelphia would move forward with a purchase .
56. On Monday, November 3, 2003 or Tuesday, November 4, 2003 (i.e., prior to the
issuance on November 5, 2003 of the Company's financial results for the quarter ended Septembe r
30, 2003, more particularly alleged below), Defendant Lefkof conducted a Company-wid e
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conference call with all Netopia employees . During this conference call, Defendant Lefko f
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discussed how Netopia had lost money in the past, that many Netopia employees had not received
raises, and stated that he had always considered Company stock to be part of the employees'
compensation. Defendant Lefkof then told the employees that when the Company's financial result s
were issued on Wednesday, November 5, 2003, he expected a sharp increase in the Company's
stock price, and instructed the Netopia employees that they should not "run to the altar" and sell
their stock after the end of the "blackout" period because large numbers of stock sales would cause
the price of Netopia's stock to decrease and return to low price levels (stock sales "would take away
all of the momentum and the stock will go down") . Instead, Defendant Lefkof told employees that
they should buy more Netopia stock and hold onto their shares of Netopia stock to "help build long-
term momentum" for Netopia's stock .
57 . The price of Netopia significantly increased from October 31, 2003 to November 5 ,
2003, increasing from $8.34 on October 30, 2003 (on volume of 126,044 shares) to $10.22 per share
on October 31, 2003 (on volume of 1,169,418 shares), to $11 .19 per share on November 3, 2003 (on
volume of 1 ,249,277 shares ), and again increasing to $12 .10 per share on November 5, 2003 (on
volume of 939 ,518 shares) .
58. In a Company press release dated November 5, 2003, issued after the close of tradin g
on November 5, 2003, Netopia reported its financial results for the fourth quarter and year ended
September 30, 2003 (the "November Press Release"). The November Press Release reported net
income of $222,000 (or $0.01 per share) for the fourth quarter - the Company' s first report of net
income since the quarter ended June 30, 2000 . As discussed below, these financial results were
overstated in violation of generally accepted accounting principles ("GAAP"), because they
improperly included $750 ,400 of revenue from the "contingent sale" between Netopia and ICC, in
connection with the Philadelphia Purchase Order . Due to the very high profit margins of over 95
percent on software sales, the "sale " accounted for approximately $700,000 in income - much more
than the entire $222,000 in net income for the quarter .
59. On November 5, 2003, the price of Netopia stock closed at $12.10, and the Company
announced its financial results after the market closed . The following day, Netopia stock closed at
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$13.48 per share (on heavy trading volume of 2,292,947 shares), a $1 .38 increase from the previous
day. The price of Netopia stock continued to climb thereafter, reaching a high of $19 .90 by January
11 20, 2004 .
60. Because Netopia met and exceeded analysts' revenue estimates for the September
2003 Quarter (based on the fraudulently recognized Philadelphia transaction), analysts increase d
their estimates for future quarters .
61 . For example, the two analysts (W .R. Hambrecht + Co. and Brean Murray & Co . ,
Inc.) who published reports on November 5 and 6, 2003 (immediately before and immediately after
the November 5 announcement of Netopia's financial results) changed their revenue and earning s
per share estimates as follows :
Date Hambrecht Hambrecht Brean Murray Brean MurrayEarnings Revenue Earn ings Per RevenuePer Share estimates Share estimates (inestimates (in $ mil .) estimates (in $ mil . )(in $) $)
11/05 /03 Q1-04 0.02 Q1-04 25 .277 Q1-04 0 .01 Q1-04 25 . 0Q2-04 0.03 Q2-04 25 .909 Q2-04 0 .05 Q2-04 26 . 8Q3-04 0 .06 Q3-04 28 .128 Q3-04 0 .05 Q3-04 26 . 6Q4-04 0 .08 Q4-04 30 .378 Q4-04 0 .12 Q4-04 29 . 3
11/06/03 Q1-04 0 .04 Q1-04 27 .280 Q1-04 0 .04 Q1-04 27 . 1Q2-04 0 .05 Q2-04 27 .962 Q2-04 0 .07 Q2-04 29 . 0Q3-04 0 .08 Q3-04 30 .199 Q3-04 0 .07 Q3-04 28 . 8Q4-04 0 .12 Q4-04 33 .218 Q4-04 0 .12 Q4-04 31 .7
62. The Hambrecht analyst wrote on November 5, 2003, prior to the announcement o f
Netopia's fourth quarter financial results :
Today after the market close , Netopia will report its FQ4:03 results, which we believe willmeet or exceed our estimates of $23 . 3 million in revenues and break-even EPS . Weencourage investors to buy shares of Netopia (NTPA) ahead of the Company' s Septemberquarter results .
63 . On November 6, 2003, after the announcement of Netopia's fourth quarter financial
results, the Hambrecht analyst wrote that "[b]ased on Netopia's upside earnings report, we believe
that shares of Netopia are inexpensive," that Hambrecht was "increasing our [revenue and earnings]
estimates for FY:04 and FY:05," and increased its price target to $18 .00 per share . Similarly,
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analysts at Brean Murray wrote that it was raising its 2004 earnings estimates by more than thirty-
three (33%) percent and raising its target price to $17 .00 per share .
64. On Monday, November 10, 2003 (only the third trading day after the issuance of the
false financial results on November 5, 2003, and just days after Defendant Lefkof instructe d
Company employees to buy and hold - and not to sell - Company stock), an avalanche of inside r
selling began. In all, in the 30 trading days after the news was released, Company insiders sold
over 473,000 shares for over $6.94 million in proceeds . In those 30 trading days, the Individual
IDefendants sold over 228,000 Company shares for over $3.33 million in proceeds, as follows :
NAME TITLE DATE SHARESSOLD
APPROX.PROCEEDS
Alan B. Lefkof CEO, President 11/20/03 55,000 $799,953
William D. Baker CFO, Senior Vice President 11/10/03 24,984 $327,596
12/05/03 15,000 $225,450
David A. Kadish General Counsel, SeniorVice President, Secretary
11/18/03 26,819 $390,546
11/20/03 10,531 $154,45 5
11/21/03 4,000 $58,800
12/02/03 22,300 $347,184
12/03/03 27,700 $439,89 5
Thomas A. Skoulis Senior Vice President,General Manager
12/10/03 42,500 $587,01 1
228,834 $3,330,890
65 . Knowing that Philadelphia had not agreed to purchase any Netopia products by
November 5, 2003, the Defendants spent approximately six months, beginning with Defendant
Skoulis' November 4, 2003 meeting with Philadelphia, trying to convince Philadelphia to purchas e
Netopia's products .
(a) On January 27, 2004, a meeting took place with Detolla at the John F .
Kennedy administration building located at 734 Schuylkill Avenue in Philadelphia, and included
Mr. Frankl, Defendant Skoulis, and salesperson John Cannon representing Netopia, with Herman
Andalcio (brother of ICC head David Andalcio) and engineer Anders Seaman representing ICC .
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After that meeting, Netopia and ICC sent a joint letter to Mr. Detolla, which, inter alia, proposed an
approximately $4.6 million purchase by Philadelphia of Netopia's products from ICC, and which
would allow Philadelphia to pay for those products over three fiscal years (i.e ., out of monies that
might become available in Philadelphia's FY 2004, 2005 and 2006 budgets) .
(b) Another meeting took place between ICC, Netopia and Philadelphia i n
February 2004, attended by Mr. Frankl, Defendant Skoulis, and others concerning the potential
purchase by Philadelphia of Netopia's products . However, by March 8, 2004, that proposed deal
had been rejected, and at a March 8, 2004 meeting with Philadelphia at the John F. Kennedy
administration building (attended by, inter alia, Mr. Detolla, Defendant Baker, Defendant Skoulis,
and Mr . Frankl), Netopia and ICC requested that Philadelphia consider a smaller purchase of
Netopia products that would be used for three Philadelphia administrative sites, nine regional
offices, and 52 high school offices .
66. On or about March 19, 2004, Defendant Skoulis and Mr . Frankl had a meeting with
Mr. Detolla, in which Mr . Detolla indicated that his department had approximately $400,000 in its
budget for the purchase of Gateway Inc. ("Gateway") computers, and that Philadelphia could make
an approximately $375,000 purchase of Netopia's products if the transaction went through Gateway
(in other words, Philadelphia would purchase Netopia's products from Gateway for $375,000 ,
which Gateway would purchase from ICC, and which ICC would purchase from Netopia) .
However, there was an additional "catch" - in order for Gateway to agree to participate in this
"transaction," Netopia and ICC would have to agree to allow Gateway to receive a "fee" of ten
percent (10%) of the $375,000 (i.e., $37,500.00) out of the $375,000 .
67. By April 2004, Defendant Lefkof and Defendant Kadish were becoming extremely
concerned about the fact that Netopia was still carrying the $750,400 as part of its reported accounts
receivables, especially because Philadelphia had not yet given ICC any order for Netopia's products
(as March 31, 2004 was the end of Netopia's second quarter) . Indeed, by March 31, 2004 ,
Netopia's Days Sales Outstanding ("DSO") (which measures the amount of time taken by Netopia
to collect its outstanding accounts receivables) had materially increased from 58 to 63 (at least
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partly as a result of the failure to receive payment of the $750,400 attributable to the Philadelphi a
11 Purchase Order) .
68. As a result, in order to purportedly justify Netopia's decision to continue carrying th e
$750,400 in accounts receivable attributable to the Philadelphia Purchase Order, Defendants Kadish,
Lefkof and Baker devised a plan designed to convince Mr . Andalcio and ICC to provide Netopia
with a writing that purported to confirm that ICC had agreed to enter into a "payment plan" with
respect to the $750,400 attributable to the Philadelphia Purchase Order .
69. In furtherance of this plan, in early April 2004, Defendant Baker traveled to Miam i
(where Mr. Andalcio had a residence) and met with Mr. Andalcio . During this meeting in Miami,
Defendant Baker requested that, given the likely upcoming payment from Gateway to ICC of
$337,500 (discussed above), ICC provide Netopia with a $25,000 payment immediately, and
something in writing to Netopia purportedly confirming that ICC would pay Netopia the full amount
of the Philadelphia Purchase Order by September 1, 2004 .
70. Following the meeting, Defendant Baker sent Mr. Andalcio an e-mail on April 11 ,
2004, which, inter alia, asked Mr. Andalcio to call him to answer some questions that Defendant
Baker had .
71 . On Tuesday, April 20, 2004, Defendant Baker traveled to Philadelphia for a meetin g
with Philadelphia to attempt to convince Philadelphia to purchase Netopia's products through ICC
(and now Gateway), which was scheduled to begin at 10 :00 a.m. EDT. By an e-mail from
Defendant Baker to Mr. Frankl, dated April 16, 2004, Defendant Baker asked Mr . Frankl to meet
with him before the meeting . On April 20, 2004, prior to the 10 :00 a.m. meeting, Defendant Baker
met Mr. Frankl . Mr. Frankl expressed his concerns to Defendant Baker about asking for the
payment and "payment plan" from ICC, because ICC had agreed to pay Netopia only if Philadelphia
gave ICC an order and had paid ICC . Baker responded, "This is what they're making me do," and
said, "David Kadish is f&*%king this account up ."
72 . By Sunday, April 25, 2004, Mr. Andalcio and ICC had not called Defendant Baker
back in response to his April 11, 2004 e-mail , and Defendant Baker sent an e-mail to Defendant
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Skoulis which, inter alia, asked Defendant Skoulis and Mr . Frankl to "Please help with David" with
respect to one of the two proposed "sample payment schedule[s] :"
Here is a sample payment schedule on the past due amount.
Please help with David .
1 . an $25,000 payment immediately .2. a payment of $375,000 on June 15, 20043 . a final payment of $350,000 on September 1, 2004 .
Alternatively :
1 . a payment of $400,000 on June 15, 200 42 . a final payment of $350,000 on September 1, 2004 .
We also need the promised recent Balance Shee t
I need them by Wednesday of this week .
Thanks for any help . I still have [no] respon[s]es from either voice messages left on the celland with people at the company nor from a couple of e-mails that have gone through .
Call me on my cell phone (510-599-9068) tomorrow as I will be out of the office in themorning.
Bil l
73. On April 26, 2004, Mr . Frankl called Defendant Skoulis the next morning to tell hi m
that he thought that ICC would not agree to payment proposals because the e-mail did not set forth
the agreement between ICC and Netopia, and that ICC would not agree to pay Netopia until
Philadelphia paid ICC. Defendant Skoulis agreed, and told Mr. Frankl that he would talk to
Defendant Baker about how ICC was unlikely to agree because ICC had not been paid by
Philadelphia (and had not even received a purchase order), but told Mr. Frankl that the driving force
behind the proposals was Defendants Lefkof and Kadish, and not Defendant Baker .
74. Mr. Frankl also had a telephone conversation with Defendant Baker about the e-mail,
and asked Defendant Baker why he used the phrase "past due amount" in the above e-mail, when
the money was not "past due" because Philadelphia had not yet ordered the product or paid ICC . In
response, Defendant Baker said, "I know, but I have to word it that way . "
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75. Mr. Andalcio responded in an e-mail dated April 27, 2004 (at 11 :14 a.m.) to
Defendant Baker and Mr. Frankl :
Dear Mr . Baker, As per our discussions it is confirmed that the P.O. that was issued fromICC to Netopia in the amount of 750k will be paid in the following terms .
As you know this order from Philadelphia Public Schools finally came to life .
Payment of our P .O. to netopia will be subject to the receipt of payments from Gateway andPhiladelphia Public Schools .
Our First Payment to Netopia will be around the 15th of June upon receipt of such saidpayment from Gateway/Philadelphia Public School s
This Payment should be in the amount of $300K
The balance should be paid by late end of September 2004 again when payment are receivedfrom Gateway/Philadelphia. If we received payments early we will forward to NetopiaASAP
Thank You
David Andalci o
76. At 11 :31 am, just minutes later, Defendant Baker forwarded the April 27, 2004 e-
mail to Mr. Frankl :
I need to have this cleaned up per the suggestion I sent you this weekend .
No reference to Philadelphia, specific amounts and dates . Can you help?
Bil l
77. Following his receipt of the April 27, 2004 e-mail from Defendant Baker, Mr . Frankl
spoke with Defendant Baker in a telephone call . During the telephone call, Defendant Baker told
Mr. Frankl that Defendant Kadish insisted that the "payment plan" contain no language indicating
that it was contingent upon Philadelphia paying ICC .
78 . Subsequently, on April 27, 2004, Mr . Frankl sent Defendant Baker an e-mail, which
stated as follows :
I just spoke with David [Andalcio] . He promised to send you a revised e-mail with thechanges requested . Let me know if/when you get it .
Peter
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During the phone call between Mr. Andalcio and Mr . Frankl, Mr. Frankl told Mr . Andalcio that
Defendant Baker needed the language deleted at the request of Defendant Kadish .
79. On April 27, 2004, Mr. Andalcio sent Defendant Baker a "cleaned up" e-mail that ,
inter alia, deleted the language in his earlier April 27, 2004 e-mail indicating that the "payment
plan" was contingent upon Philadelphia paying ICC. (Mr. Andalcio did not change the payment
terms of the transaction, as expressed in his 11 :14 am e-mail on April 27, 2004 .)
80. Subsequently, on April 27, 2004, Defendant Baker sent Mr . Frankl an e-mail (in
reply to the April 27, 2004 e-mail alleged in paragraph 78, above ), which stated as follows :
I received it . I believe it is OK . I'll confirm with Alan and David tomorrow.
Bill
81 . On or about May 6, 2004, Gateway received a purchase order from Philadelphia in
the amount of $375,000 for Netopia products . On June 8, 2004, Gateway issued a purchase order in
the amount of $337,500 to ICC for delivery to Philadelphia of Netopia's Systems Managemen t
Console License .
82. On June 7, 2004, Defendant Baker sent Mr . Andalcio an e-mail that read as follows :
I have not heard from you on a suggested new payment schedule . I hope everything is goingwell . I propose the following payment schedule .
1 . $100,000 on June 15, 2004 . I know this is a little early (I believe approximately 2-3weeks) relative to your receiving payment from your customer, but it will clearlyshow your intent to pay our $750,000 billing from September 2003 .
2. Another $125,000 on July 15, 2004 .3 . Another $200,000 on August 15, 2004 .4. And the balance of $325,000 on September 30, 2004 .
Please respond.
83 . On the morning of June 16, 2004, Mr . Frankl talked to Mr. Andalcio by telephone .
Mr. Andalcio said that he had received the purchase order from Gateway, and therefore he would
send $50,000 to Netopia by the end of June . Mr. Frank! then sent an e-mail on June 16, 2004 to
Defendants Lefkof, Kadish, Skoulis and Baker informing them of this conversation.
///
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84. On June 16, 2004, Defendant Lefkof sent the following e-mail to Defendant Kadis h
and Mr . Frankl :
Peter
Bill expected payment ($50-100K) this Friday-not by the end of June . Sounds like DavidAndalcio is taking advantage of the verbal confusion again .
I will reach out to Tom Skoulis today to get his help editing a letter that David is draftingand we need to send to ICC from HQ today. Its goal will be to stimulate the receipt of initialpayments by Friday and also stimulate the proposed revisions to the payment schedule alsoby Friday .
Alan
85. On June 16, 2004, Defendant Baker sent the following e-mail to Defendants Lefkof
and Kadish:
I created the confusion (I don't think there should have been any) after he couldn't pay onthe 15th. I went to the "accounting" answer of needing the cash payment by June 30 an[d]hopefully the balance of the 337,000by July 15 .
Bill
86. On June 16, 2004, Defendant Lefkof sent the following e-mail to Mr. Frankl :
Peter
In preparation for sending a letter to David A . this afternoon, do you have a current faxnumber for him? If so, please send to me .
I presume that would be in Chicago . If better in Miami, send that also .
As I send earlier Tom will help me edit the letter and I suggested to Tom that he can place acall to David A . "explaining" the letter.
Alan
87. Subsequently, on June 17, 2004, Defendant Lefkof sent an e-mail to Defendants
Baker and Skoulis, which read, "bill and tom, this is the letter we want to send tonight to ICC under
Imelda's signature . The letter attached to the e-mail read as follows :
///
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Via Facsimile - 1-312-588-597 0
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June 17, 2004
Mr. David R. AndalcioPresident/CEOInterface Computer Communications, Inc .633 S . Plymouth Ct.Suite IAChicago, IL 6060 5
Re: Outstanding Receivable for Netopia Software
Dear Mr. Andalcio :
I am writing because Bill Baker, Netopia's Chief Financial Officer, is overseas this week onbusiness. Because Interface Computer Communications, Inc . ("ICC") has not made anypayments to date with respect to the purchase of Netopia software pursuant to your PurchaseOrder No. 5769, in this letter I will summarize our understandings in writing. The totaloutstanding receivable is $750,400 .
I understand that you have had a number of meetings and discussions regarding theoutstanding receivable with Bill Baker. Given the ongoing business relationship betweenICC and Netopia, Netopia has agreed to extend payment terms . In fact, Netopia agreed tothe terms outlined in your April 27, 2004 e-mail to Bill Baker in which ICC agreed to makean initial payment in the amount of $400,000 on June 15, 2004 and to pay the $350,400remaining balance on September 15, 2004 .
I further understand that you have had discussions with Mr . Baker in early June duringwhich you proposed to Mr . Baker that ICC would make the $400,000 payment in a series ofinstallments beginning no later than June 28, 2004, with the $400,000 paid no later than July15, 2004 . However, we have not received your specific proposed revised payment plan .
If my understanding of your discussions with Bill Baker is correct, please confirm to me inwriting that ICC will make payment in accordance with the following payment schedule : (a)$75,000 [10% of the outstanding receivable] paid and received by Netopia no later than June28, 2004; (b) $325,000 [the remaining portion of the previously agreed initial payment] paidand received by Netopia no later than July 15, 2004 ; and c) the remaining $350,400 paid andreceived by Netopia no later than September 15, 2004 [consistent with your April 27, 2004email] . Please send your confirmation to me by fax at 1-510-420-7608 no later than Mondaymorning, June 21 .
Of course, Netopia values its relationship with ICC and we hope to resolve this matter in amutually satisfactory manner. If you have any questions or wish to discuss this matter,please do not hesitate to contact me directly .
Very truly yours,
Imelda FarrellCorporate Controller
88 . On June 18, 2004, Mr. Andalcio called Ms . Farrell concerning the June 17, 2004 fa x
letter, stated to her that he had received the June 17, 2004 letter, that the contents of the letter wer e
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incorrect, and that ICC had not agreed to the payment plan discussed therein . Ms. Farrell then
placed Mr . Andalcio on hold, and told Defendant Lefkof that Mr . Andalcio was on the phone .
Defendant Kadish then came to Ms. Farrell's desk, stood over Ms. Farrell and put the phone to his
ear as well, and whispered answers into Ms . Farrell's ear for her to say in response to Mr.
Andalcio's remarks .
89. On June 25, 2004, Defendant Lefkof sent an e-mail to Defendants Baker and Skoulis ,
which read as follows :
Any rumblings of the first $50 k check or wire? You can bet that Pete Wills will be callingme Tuesday morning and thinking of you both .
Harold S . "Pete" Wills is a member of Netopia's Board of Directors, was a member of the Audi t
Committee at that time, and was elected as Chairman of the Board just a few months after June
2004 .
90. On June 18, 2004, Defendant Skoulis sent the following e-mail to Defendant Lefkof:
He did not have a check for me when we met last night . David apologized, said he was outof the office all day and would get to the money to us next week .
Tom Skouli s
91 . On June 25, 2004, Mr. Andalcio sent the following e-mail to Defendant Baker :
Dear Mr. Baker as per our conversation regarding my request to cancel the P .O. that wasoriginally issued upon your request in the amount of 750K last September .
I have not changed any part of our original agreement since you and I had a discussion aboutmaking a 50k payment to this new and recent transaction, I agreed to this .
Since the receipt of your fax letter, which we discussed in detail, I am very uncomfortablewith this whole transaction .
from a business prospect, I need to protect my company from and any and all exposedliabilities .
I have taken your fax letter to our legal council, they have advised us not to make anypayments on the original P .o. and create a new p .o. for work in progress and the amount ofdollars committed .
If for your recording keeping and accounting matters, you need to keep the original p .o., Iwill need a full agreement in writing for all the terms and conditions that was originallyagreed upon, with that I will have our legal council review .
It was always the original agreement that ICC pays Netopia only when we get paid from theclient, that is how we did the Chicago Public Schools .
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I sincerely want to work this out but not at the expense of legal exposure for ICC .
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I look forward to your reply . Please forward this to Tom as well, I spoke to our legal councilthis morning whom advised us not to make the 50k payment, I do apologize for anyinconvenience this may have caused Tom. I will return to Chicago next Wednesday and bein Philly next Thursday and Friday .
P.S . we cannot once again rush the progress on the install in Philly to meet your fiscal yearend, I think we need to focus on a successful install .
I was told by Andy our vp of operations in Philadelphia if netopia sends 50 guys to assist itwill not matter, the sites are just not ready .
We are working to the best of our ability, we feel this will be all completed in the next twoweeks .
I really do not want to make the same mistakes(a request to issues a P .O. with no P .o in handfrom the client) we did this only by trying to meet your company's year end matters,
David Andalci o
92. On June 29, 2004, Mr. Andalcio sent the following e-mail to Defendant Baker :
Mr. Baker you and I had a phone conversation later part of last week of my concerns on theoriginal purchase order, you stated from a business perspective you understood my position,you then stated that you were going to talk to some folks and get back to me .
Since our discussions I sent you and Peter an Email after I had our legal counsel review thefax you sent me .
To date I have not heard a response from you on our phone discussion and the email I sent,where do we go from here to make this comfortable for all .
I again look forward to your reply .
David Andalci o
93 . On July 1, 2004, Defendant Kadish sent an e-mail to Mr. Andalcio, attaching a
proposed "Agreement" (backdated to June 30, 2004, the final day of Netopia's fiscal quarter),
which, inter alia, provided that ICC's only liability to Netopia with respect to Philadelphia and the
Philadelphia Purchase Order was the $337,500 due ICC from Gateway. The e-mail attached to the
proposed agreement read as follows :
Dear Mr . Andalcio ,
Bill Baker asked me to send you this revised Agreement that has been changed to reflect theunderstandings that you reached with Bill earlier today .
As you discussed with Bill, it is very important that we complete this matter before the endof the week. Please be assured that I am available to discuss any proposed changes wit h
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either you or your attorney so that we are able to reach a definitive, mutually satisfactoryagreement quickly. For that reason, please understand that if we are unable to exchangesignatures on the agreement before the close of business on Friday, July 2, 2004, Netopia'soffer to compromise as set forth in the Agreement will be deemed withdrawn .
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I look forward to hearing from you . Thank you very much for your continuing cooperation .
David A. Kadish
94. On July 2, 2004, Mr . Andalcio sent the following e-mail to Defendants Kadish an d
Baker :
Dear All : I had my legal council review this and I was advised not to enter into anyagreement, we did nothing wrong we have not breached our relationship .
The P.O that was requested by Netopia in September of 2003 was done at the request ofNetopia even though ICC had no P.O. in hand from Philadelphia Public schools .
This was discussed in detail of us not wanting to issues this p .o we agreed to issue the p .o .under terms and conditions which we sent with the p .o . . in writing
we had no idea that product was going to be shipped, once we received product to oursurprise we immediately call to send it back.
we were told not to worry that Netopia will hold this until we get the actual p .o. fromPhiladelphia .
This is our position and it is the true facts of this matter . The Email you are referring that Isent in your agreement was not drafted by me it was drafted by netopia for me to send, theone I originally sent that I drafted is the one which states conditions of payment .
Thank You
David Andalci o
95 . On July 2, 2004, Defendant Lefkof sent the following e-mail to Mr . Frankl and Sue
Smith (another Netopia employee) :
Peter and Sue
Today we had a conference call with David Andalcio and his lawyers . We decided not to tryto finish a settlement today .
Instead we agree to jointly focus on the singular shared goal :
Finish the Philly installs of 2000 units so that everyone can get paid .
David Andalcio asserted that he believes this can be finished in 2 weeks. He also agreed thatNetopia can help and our help is appreciated .
Along those lines we both agreed that all installation communications should take placeexclusively on a daily basis between Andy Seaman and Sue Smith, the 2 people who controlthe resources .
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Sue; please call Andy ASAP at 847-219-4762 .
On behalf of Netopia for the next 2 weeks, please consider this the highest priority for yourtimbuktu and neto enterprise SE team!!! !
The Termination Of The Employment Of Baker, Skoulis, Frankl and Deckard
96. On July 22, 2004, Netopia announced that the Audit Committee of the Company' s
Board of Directors was conducting an internal investigation concerning the circumstances
surrounding the Company's transactions with ICC . As part of that investigation, lawyers at
Morrison and Foerster LLP (purportedly on behalf of the Audit Committee) interviewed Mr. Frank l
and Mr . Deckard concerning, inter alia, ICC, the Philadelphia Purchase Order, the Chicago
Purchase Order and October 7 Letter, as well as the knowledge and participation of the Individual
Defendants with respect to those matters .
97. Netopia also terminated the employment of Defendant Skoulis, Mr . Frank! and Mr .
Deckard on September 20, 2004 . Shortly thereafter, Defendant Skoulis told Mr. Frankel that
Defendant Skoulis and Mr. Frank! were fired because of the October 7 Letter, which, according to
Defendant Skoulis, was "BS" because "they" (Defendants Lefkof, Kadish and Baker) "always
knew" about the October 7 Letter . Shortly after Netopia's firing of Mr. Frank! (in September 2004),
Mr. Frankl had a telephone conversation with Defendant Lefkof in which Mr . Frank! asked
Defendant Lefkof why Netopia had fired him . In response, Defendant Lefkof said that : Mr. Frankl
and Defendant Skoulis had been fired because of the October 7 Letter ; "some of us are `pack rats'
and keep too many documents," and that "these kind of things can be misinterpreted ;" and that the
decision to fire Mr. Frank! was not Defendant Lefkof s decision (but was the decision of the Board
and Audit Committee) . Also, shortly after September 20, 2004, Mr . Frank! received a telephone call
from Mark Coumans (employed by Netopia in its Netherlands office), who told Mr. Frank! that
Jerome Anastase (Netopia's Senior Vice-President of European Sales, and a close friend of
Defendant Kadish) had told him (Mr . Coumans) that he had spoken with Defendant Kadish about
the termination of the employment of Mr. Frank! and Defendant Skoulis . According to Mr .
Anastase's remarks to Mr. Coumans, Defendant Kadish indicated to Mr. Anastase that Mr. Frank!
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11 and Defendant Skoulis were used as a "shield" for the conduct of Defendants Lefkof and Kadish
11 with respect to the problems with Swisscom .
98. On or about October 21, 2004, Netopia announced that Defendant Baker had
resigned from the Company. However, contrary to this announcement, Defendant Baker was
actually forced to resign. Upon the announcement of his purported "resignation," Defendant Baker
called a meeting of his staff, and told them, inter alia, that he had been forced to resign from
Netopia, and that Netopia had fired "innocent people" when it fired Mr . Frankl and Mr. Deckard .
99. On December 17, 2004, Mr . Frankl and Mr . Deckard filed a "whistleblower "
protection complaint with the Occupational Safety and Health Administration ("OSHA") under the
Sarbanes-Oxley Act of 2002 against Netopia, Lefkof, and other officers and directors . According to
this complaint, Netopia terminated Mr. Frankl and Mr. Deckard in retaliation for providing
information to Netopia's Audit Committee during its investigation that implicated Defendant Lefkof
and other officers and directors of Netopia in the improper manipulation of Netopia stock prices
described above. On or about January 20, 2005, Mr . Frankl and Mr . Deckard also commenced
litigation against Netopia and Defendant Lefkof; in a March 23, 2005 affidavit filed in connection
with that litigation, Mr . Frankl stated that "Mr . Deckard and I provided information to the
investigators that implicated Alan Lefkof and other officers and directors of Netopia, Inc . in the
improper manipulation of Netopia stock prices ."
Defendants' Overstatement Of Netopia's Financial Result s
100. During the Class Period, Defendants reported the following false an d misleading
financial results concerning Netopia, which, as evidenced by the facts alleged above, as well as
Netopia's February 1, 2005 restatement of its financial results, were false and misleading because
they reported (i) overstated Netopia's revenue and net income for the fourth quarter and year ended
September 30, 2003 through the inclusion of $750,400 in revenue from the "contingent sale" with
ICC with respect to Philadelphia and the Philadelphia Purchase Order and/or (ii) overstate d
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Netopia's accounts receivable for the quarters ended September 30, 2003, December 31, 2003, and
March 31, 2004, as a result of the improper inclusion of the improperly recognized (and
uncollectible) $750,400 attributable to the Philadelphia Purchase Order :
(a) On November 5, 2003, Netopia issued a press release reporting the
Company's financial results for the fourth fiscal quarter ended September 30, 2003 (the "November
Press Release") . In the November Press Release, Defendants reported, inter alia, revenue of $25 .5
million, net income of $221,000, or $0 .01 per diluted share for the quarter, and "trade receivables,
net" of $16.755 million. Each of the Individual Defendants directly participated in the drafting of
the November Press Release, and the November Press Release listed Defendant Baker as th e
"contact" and quoted Defendant Lefkof.
(b) On or about December 19, 2003, the Company filed its annual report for the
fiscal year ended September 30, 2003 on Form 10-K with the SEC (the "2003 10-K"), which, inter
alia, repeated the revenue, net income and accounts receivable reported for the fourth fiscal quarter
contained in the 2003 10-K . Each of the Individual Defendants directly participated in the drafting
of the 2003 10-K, and the 2003 10-K was signed by, inter alia, Defendants Lefkof and Baker .
(c) On January 20, 2004, Defendants issued a press release (the "January Pres s
Release") concerning the Company's business and financial results for the first fiscal quarter ended
December 31, 2003 (the "December 2003 Quarter"), which reported net income of $1 .1 million, or
$0.04 per diluted share for the first fiscal quarter, as well as "trade receivables, net" of $18 .148
million. Each of the Individual Defendants directly participated in the drafting of the January Press
Release, and the January Press Release listed Defendant Baker as the "contact" person and quoted
Defendant Lefkof. Also, on January 20, 2004, following the issuance of the January Press Release,
Defendants Lefkof and Baker conducted a conference call (the "January Conference Call") with
securities analysts and investors, in which Defendants, inter alia, repeated the net income, revenue
and accounts receivable results reported in the January Press Release . Each of the Individual
Defendants participated in the drafting of the prepared remarks stated at the outset of the January
Conference Call .
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(d) On or about February 17, 2004, the Company filed its report for th e
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December 31, 2003 Quarter on Form 10-Q (the "December 2003 10-Q") with the SEC, which was
signed by Defendants Lefkof and Baker. In the December 2003 10-Q, Defendants, inter alia,
repeated the net income, revenue, and trade receivable results reported in the January Press Release
and January Conference Call . Each of the Individual Defendants directly participated in the drafting
of the December 2003 10-Q .
(e) On April 19, 2004, after the close of trading in the market, Netopia issued a
press release (the "April Press Release"). The April Press Release (which listed Defendant Baker as
the "contact" person and quoted Defendant Lefkof), inter alia, reported a net loss for the second
fiscal quarter of $1 .6 million, or a loss of $0 .07 per share and "trade receivables, net" of $15 .185
million. Each of the Individual Defendants directly participated in the drafting of the April Press
Release . On April 19, 2004, following the issuance of the April Press Release, Defendants Lefkof
and Baker conducted a conference call (the "April Conference Call") with securities analysts and
investors, in which Defendants, inter alia, repeated the net income, revenue and accounts receivable
results reported in the April Press Release . Each of the Individual Defendants participated in the
drafting of the prepared remarks stated at the outset of the April Conference Call .
Defendants' Misrepresentations Were Material
101 . The Defendants' misrepresentations concerning the Company's financial results fo r
the quarter ended September 30, 2003 were material . As alleged above, for the fourth quarter of
Netopia's 2003 fiscal year, the Company announced net income on a GAAP basis of $222,000 (or
$0.01 per share) - the first report of positive net income since the quarter ending June 30, 2000
(over three years earlier) . The Philadelphia transaction accounted for fraudulently recognized
revenue of $750,400 . Due to the high margins on software products - approximately 95 percent -
the fraudulently recognized revenue translated into over $700,000 of earnings (over $0 .03 per share)
and represented significantly more than the difference between a profit and a loss for the quarter . In
addition, the amount of the overstatement ($750,400) was an enormous percentage of Netopia's
earnings (over 300%) . As alleged in paragraphs 59-63 above, and as analysts predicted breakeven
results for the quarter (i.e ., neither a profit nor a loss), the revenue and earnings recognized fro m
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Philadelphia transaction alone enabled Netopia to meet and exceed analysts' estimates . Finally, in
the November 5, 2003 Conference Call with analysts and investors, Defendant Lefkof touted th e
importance of the software division for both the revenue that it generated and its impact o n
hardware sales, and praised the Timbuktu netOctopus product underlying the Philadelphi a
II transaction :
Our software and services revenue rebounded in the September quarter to $4 .7 million . Aswe have discussed before, our entire portfolio of software is a tremendous asset for bothclosing new broadband equipment business as well as providing unique differentiation fordistributing enterprise applications . ECare and Timbuktu continue to be a great one-twopunch for support and help desk operation .
102 . On November 6, 2003, the price of Netopia stock closed at $13 .48 per share (on
heavy trading volume of 2,292,947 shares ), a $1 .3 8 increase from the closing price of $12 .10 on
November 5, 2003. The price of Netopia stock continued to climb thereafter, reaching a high o f
$19.90 by January 20, 2004 .
The Losses Caused By The Defendants' Financial Statement Misrepresentations
103 . As alleged above , the overstatement of revenues , earn ings and accounts receivable in
connection with the Philadelphia Purchase Order caused the price of Netopia common stock to b e
artificially inflated beginning in November 2003 .
104. Plaintiffs and other Class Members who purchased Netopia stock suffered losses
caused by Defendants' overstatement of Netopia's financial results attributable to the Philadelphia
Purchase Order . Through a series of reports and statements by Defendants beginning in January
2004, information was issued to the public that decreased and ultimately eliminated the artificial
inflation caused by Defendants' overstatement of Netopia's financial results for the quarter ended
September 30, 2003 in violation of GAAP due to the inclusion of the $750,400 fraudulently
recognized as revenue from the "contingent sale" with ICC .
105. As discussed above, as a result of the financial results first reported by Defendants o n
November 5, 2003, securities analysts increased their estimates and stock price targets for Netopia,
and the price of Netopia stock reached a Class Period high of $19 .90 on January 20, 2004 .
Following Netopia's January 20, 2004 conference call, the price of Netopia stock dropped from
$19 .90 to close at $16 .75 on January 21, 2004, when it became apparent that revenue expectation s
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of analysts (set based upon predictions from the results announced on November 5, 2003) would not
be met. For example, in its Equity Research Note, dated January 21, 2004, analyst Needham & Co .
attributed the stock price drop to "revenue expectations [that] very recently have reached warped
levels near the stratosphere ."
106 . In the Company's quarterly report for the first quarter ended December 31, 2003 ,
filed on or about February 17, 2004 with the SEC on Form 10-Q (the "February 2004 10-Q"),
Defendants repeated the financial results reported in the Company's January 20, 2004 press release
and conference call . Following the filing of the February 2004 10-Q, the price of Netopia stock
dropped (from $13 .10 per share on February 17, 2004) to $12 .81 on February 18, 2004, and to
$11 .45 on February 19, 2004 .
107. In Netopia 's press release dated April 19, 2004 and during Netopia's April 19, 200 4
conference call with securities analysts and investors, Defendants reported financial results for the
quarter ended March 31, 2004, including a $0 .07 per share loss on revenues of $21 .9 million, which
were (again) significantly below the consensus quarterly earnings estimates (of $0 .05 per share) and
revenue estimates (of $28 million) that had been based, in part, on the financial results reported by
Defendants on November 5, 2003 . In response to the information reported by Defendants, the price
of Netopia stock dropped significantly from $11 .35 per share on April 19, 2004 to $7 .17 per share
on April 20, 2004 .
108. On July 6, 2004, Netopia issued a press release which "pre-announced" abysmal
financial results for the third quarter ending June 30, 2004, warning of a quarterly net loss of $0 .13 -
$0.15 per share. In the press release, the Company stated :
Netopia also currently expects operating expenses for the third fiscal quarter to include aspecific bad debt charge of approximately $750,000 relating to non-payment from a softwarereseller. The Company continues to work with the reseller to resolve the matter .
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During a July 7, 2004 conference call with analysts and investors (the "July 7 Conference Call"),
Defendants represented that one reason for these poor results was caused by the fact Netopia had to
write off a bad debt of $750,400 owed by a software reseller :
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[I]n the past they have come through, and it is just that their balance sheet has worsened, andtherefore the conservative accounting was to take the bad-debt charge in June . As Imentioned to an earlier questioner, they are not in the Chapter 11 . I do not expect them to gothat route, and as a result, we continue to work with them .
In response to these comments by Defendants, the price of Netopia stock dropped over 15% from
$5 .83 per share on July 6, 2004 to $4 .95 per share on July 7, 2004 on volume of 1,138,921 share s
(over 3 .9 times the trading volume of the previous trading day) .
109. On July 22, 2004, Defendants disclosed that Netopia's Audit Committee was
conducting an investigation of Netopia's accounting and reporting practices, including with respect
to the revenue recognition of software licenses and fees in two transactions with a software reseller .
In response, the price of Netopia stock dropped over 16% from $4 .31 per share on July 22, 2004 to
$3.60 per share on July 23, 2004 on volume of 440,401 shares (over 2 .6 times the trading volume of
the previous trading day) .
110 . On August 17, 2004, Netopia disclosed that an SEC investigation had bee n
commenced and that Netopia would not be able to file its 10-Q until the completion of the Audit
Committee investigation. In response, the price of Netopia stock dropped over 20% from $2 .92 per
share on August 16, 2004 to $2 .33 per share on August 17, 2004 on volume of 1,296,390 shares
(over 4.9 times the trading volume of the previous trading day) .
111 . On September 10, 2004, KPMG resigned as Netopia's independent auditors, advisin g
that Netopia's audited financial statements for the fiscal year ended September 30, 2003 should no
longer be relied upon. When Netopia subsequently actually announced the resignation, Netopia
disclosed that it had declined to provide KPMG with documents that it had requested, which were
necessary for KPMG to perform its duties as outside auditors . According to KPMG, if it had
remained as auditor (and Netopia had continued to withhold information from KPMG), then KPMG
would have issued an audit scope limitation. In addition, prior to its resignation, KPMG informed
Netopia's Audit Committee that if the information had been provided to KPMG, it (i) might hav e
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materially impacted the fairness or reliability of its previously issued audit reports and the
underlying financial statements, and (ii) might have caused KPMG to be unwilling to rely on
management's representations . On September 16, 2004, Netopia announced, inter alia, that KPMG,
its independent auditors, had resigned because Netopia's Audit Committee had refused to provide
KPMG with requested information and documentation, and that KPMG had advised Netopia that its
audited financial statements for the year ended September 30, 2003 should not be relied upon. In
response, the price of Netopia stock dropped over 31 % from $2 .84 per share on September 15, 2004
to $1 .95 per share on September 16, 2004 on volume of 3,410,095 shares (over 53 .9 times the
trading volume of the previous trading day of 63,230 shares) .
112. On February 1, 2005, Netopia issued a restatement of its financial results for the te n
quarters ended December 31, 2001 through March 31 , 2004 . In issuing the restatement, Netopia
disclosed that the $1 ,593,000 attributable to the Chicago Purchase Order, and the $750,400
attributable to the Philadelphia Purchaser Order had been repo rted in violation of GAAP, as they
were both "contingent sales," and as a consequence , the Company historical financial results had to
be restated under GAAP .' Specifically, with respect to the previously repo rted financial results
attributable to the Philadelphia Purchase Order , Netopia admitted that none of the $750 ,400 should
have been recognized and repo rted in the quarter ended September 30, 2003 (because ICC had no
obligation to pay Netopia the $750 ,400 as of September 30, 2003 ) .2 Similarly, with respect to the
' As part of the restatement announced on February 1, 2005 , Netopia further disclosed thatthe Company' s historical financial results were overstated due to other GAAP violations, including(i) the overstatement of the Company's 2002, 2003, and first and second quarters of 2004 revenues,through the improper inclusion of rebates , credits and discounts to customers that were subsequentlypaid to customers, (ii) the overstatement of Netopia 's 2002, 2003, an d first and second quarters of2004 repo rted inventory amounts (and understatement of cost of revenues for those periods), due tothe improper application of m anufacturing overhead to costs of sales and ending inventory, ( iii) theunderstatement of the cost of revenues in 2003 and first and second quarters of 2004 through the useof inadequate reserves for excess and obsolete inventory "based on information that was known atthe end of these periods," and (iv) the understatement of the operating expenses and costs of
revenues in 2002 , 2003 and the first quarter of 2004, due to the improper amort ization of intangible
assets acquired as part of the acquisitions of Cayman and JadeSail .
2 Defendants also admitted that it was improper under GAAP for Netopia to haverecognized $64,000 in maintenance with respect to the Philadelphia Purchase Order in the quarte r
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previously reported financial results attributable to the Chicago Purchase Order, Netopia admitted
that the entire $1,593,000 should not have been recognized and reported for the quarter ended June
30, 2002 (because ICC had no obligation to pay Netopia the $1,593,000 as of the May 23, 2002
Chicago Purchase Order) and $632,000 of that revenue should have been recognized and reported in
the quarter ended September 30, 2002 (when Chicago paid ICC, and ICC paid Netopia) . In
response to this disclosure, the price of Netopia stock dropped over 12% from $4 .29 per share on
January 31, 2005 to $3 .75 per share on February 1, 2005 on volume of 302,114 shares (over 2 .3
times the trading volume of the previous trading day) .
Material Misrepresentations During The Class Period Regarding Swisscom Revenue s
113 . On January 20, 2004, the Defendants reported Netopia's financial results for the first
quarter ended December 31, 2003 . For the December 31, 2003 Quarter, Netopia reported net
income of $1 .1 million and revenues of $28 .6 million, which the Defendants represented was
primarily attributable to Netopia's $8 .232 million in sales to Swisscom AG, Netopia's largest
customer. In a conference call with analysts and investors on January 20, 2004 (the "January 20
Conference Call"), Defendant Lefkof represented that Netopia's Swisscom revenue for the quarter
ended March 31, 2004 would be approximately the same as the $8 .232 million reported from
Swisscom in the December 31, 2003 quarter . Defendant Lefkof further stated during the January 20
Conference Call that "Swisscom had a very, very good year-end, as [Swisscom] ran a number of
year-end promotions . I think they're going to have an extremely successful 2004," and, in response
to a question from an analyst, stated :
what we observe Swisscom doing is finishing year-end strong . Maybe running forJanuary/February - whatever - a few months without the aggressive promotions, you know,without the free modem here or the free Wi-Fi gateway there . And so, because we areconservative here at Netopia, we believe the rational thing to do is similar to what happenedlast year between December and March - we did not have sequential increase. We would atleast - at today's date, expect a similar thing, but then a very nice rebound for June,September and December, accordingly .
114. In the Company's quarterly report for the first quarter ended December 31, 2003 ,
filed on or about February 17, 2004 with the SEC on Form 10-Q (the "February 2004 10-Q") ,
ended September 30, 2003 .
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Defendants reiterated the financial results reported in the January Press Release, and made th e
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following representations conce rning the reasons for the Company's excellent quarterly revenue
results and the demand from Swisscom :
Broadband Internet equipment revenues increased for the three months ended December 31,2003 from the three months ended December 31, 2002 primarily due to increasedinternational volumes of our ADSL Internet equipment to Swisscom, and sales to Eircom,which was not a customer during the three months ended December 31, 2002 . Volumes toSwisscom increased as their demand for our Internet equipment products increasedfor their residential broadband Internet services . (emphasis added)
115. Defendants' misrepresentations about Company's revenue attributable to Swissco m
during the January Conference Call and in the February 2004 10-Q artificially inflated the price of
Netopia stock. On January 21, 2004, analyst W.R. Hambrecht + Co. again increased its price target
for Netopia (to $23 .00 per share), and in its January 21, 2004 report stated that it expected Netopia
to remain profitable based, in part, on the expected level of revenues from Swisscom: "Given
Netopia's current growth momentum, we continue to believe that shares of Netopia represent the
best value in the broadband access universe . . . We are extremely optimistic regarding the outlook
for Netopia." Similarly, in its January 21, 2004 report, analyst Brean Murray reiterated its "Buy"
rating and $22 .00 per share target price, noting that "[u]pside surprise was due to better-than-
anticipated revenues of $28 .6 million versus our $27 .1 million forecast . These revenues were
driven by a 41% sequential increase in revenues from Swisscom . "
116. Defendants' misrepresentations concerning Swisscom caused Class Members t o
suffer losses. Just three months later, Defendants disclosed the true nature of the Swisscom revenue
included in the Company's December 31, 2003 financial results . On April 19, 2004, Defendants
reported disastrous financial results for the quarter ended March 31, 2004, consisting of a $0 .07 per
share loss on revenues of $21 .9 million (as compared to consensus earnings estimates of $0 .05 per
share and revenue of $28 million) . Defendants represented that these poor results were due, in part,
to the fact that Netopia's Swisscom revenues had plummeted by $4 .8 million to $3 .431 million - a
decline of over 58 percent from Swisscom revenues for the quarter ended December 31, 2003 .
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Moreover, during the April Conference Call, Defendants acknowledged that the excellent revenue
results attributable to Swisscom reported on January 20, 2004 (for the quarter ended December 31,
2003) had not been the result of "increased demand" from Swisscom, or a "very, very good year-
end," but had instead only been realized through early shipments by Netopia of product that were
not needed by Swisscom . Specifically, Defendants disclosed that the excellent revenue results for
Swisscom reported for the December 31, 2003 quarter included revenue from millions of dollars of
"excess" product that had been placed on a "boat" for delivery to Swisscom in the final days of
December 2003 (and booked as revenue for the December 31, 2003 quarter), stating :
[T]hey did take some shipments in December by airplane and they took some by boat . Youcan argue the ones they took by boat could have been at that point in time excess but they areFOB origin, which is the way they pay the freight for themselves and so that was thei rdecision. We didn't have a choice, if it shipped FOB origin in December we have to recordthe revenue .
Defendants further reported in the April Conference Call that Netopia's DSO "increased to 63 days
from 58 days last quarter, primarily reflecting longer payment terms for certain international
customers ." Following the April Conference Call, the price of Netopia stock dropped significantly
from $11 .35 per share on April 19, 2004 to $7 .17 per share on April 20, 2004 .
117. Defendants' statements regarding Swisscom revenue for the December 2003 Quarter
were materially false and misleading because they knew as of January 20, 2004 (the date of the
January Conference Call) that the results reported for the December 2003 Quarter were artificially
increased by the excess shipments made and booked as revenue in December 2003, and that those
shipments would likely lead to decreased orders from Swisscom in the March 2004 Quarter . In fact,
the Netopia salesperson that was responsible for Swisscom (and also for Belgacom, another large
Netopia customer), Karl-Heinz Mumm, who worked out of Netopia's Germany office, was
terminated by Netopia in the early part of the first quarter of 2004 (i . e., the quarter ended December
31, 2003) (Mr . Mumm is now suing Netopia GmbH in the German courts) . Immediately following
the termination of Mr . Mumm, Defendant Lefkof assigned Defendant Kadish - Netopia's General
Counsel who helped engineer the accounting fraud with respect to ICC and the Philadelphia
Purchase Order - to act as the "salesperson" with respect to Swisscom .
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118 . As a result of this fiasco and Swisscom's dissatisfaction with Defendant Kadish,
Swisscom threatened to cease doing business with Netopia unless Netopia took Defendant Kadish
off of the account ; as a result, in 2004, the Swisscom account was reassigned by Netopia to another
employees .
Additional Scienter Allegation s
119. Beginning on Monday, November 10, 2003, an avalanche of insider selling took
place by the Individual Defendants and Netopia insiders :
Name Title Shares Proceeds Shares Proceeds total Totalsold from Shares sold from Shares shares proceed s11/06/03- sold 01/23/04- sold sold12/10/03 11/06/03- 04/19/04 01/23/04-
12/10/03 04/19/04
Defendant CEO, President 55,000 $799,953 40,000 $583,242 95,000 $1,383,19 5AlanLefkof
Defendant former Senior 39,984 $553,046 28,000 $391,857 67,984 $944,90 3William Vice President ,Baker CFO
Defendant General Counsel, 91,350 $1,390,880 27,500 $413,689 118,850 $1,804,56 9David Senior ViceKadish President,
Secretary
Defendant former Senior 42,500 $587,011 5,000 $81,379 47,500 $668,39 0Thomas Vice President ,Skoulis General Manager
All other 244,824 $3,613,593 94,150 $1,340,780 338,974 $4,954,37 3insiders
TOTALS 473,658 $6,944,483 194,650 $2,810,947 668,308 $9,755,43 0
120. Individual Defendant Lefkof, the CEO and President of Netopia during the entire
Class Period, sold a total of 95, 000 shares during the Class Period, and he reaped a benefit of over
$1.38 million . And after the Class Period sales, Lefkof held no shares in the Company (except for
59,575 shares in trust) . By contrast, Lefkof sold no shares for 23 months prior to the
commencement of the Class Period . Defendant Lefkof's sales are suspicious in amount and timing,
and are out of line with his prior sales of Netopia stock .
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121 . Individual Defendant Baker, the Netopia CFO and Senior Vice President, who hel d
those positions during the entire Class Period, sold a total of 67,984 shares during the Class Period,
and he reaped a benefit of over $944,000 . After the Class Period sales, Baker held only 1,516
shares in the Company. By contrast, Baker sold no shares in over 16 months prior to the
commencement of the Class Period . Defendant Baker's sales are suspicious in amount and timing,
and are out of line with his prior sales of Netopia stock .
122. Individual Defendant Kadish, the Netopia General Counsel, Senior Vice President,
and Secretary, sold a total of 118, 850 shares during the Class Period, and he reaped a benefit of
over $1 . 80 million . After the Class Period sales, Kadish held only 24, 015 shares in the Company.
By contrast, Kadish sold no shares in over 44 months prior to the commencement of the Class
Period. Defendant Kadish' s sales are suspicious in amount and timing, and are out of line with his
prior sales of Netopia stock .
123 . Individual Defendant Skoulis, the Netopia Senior Vice President and Genera l
Manager, sold a total of 47, 500 shares during the Class Period, and he reaped a benefit of over
$668,000 . After the Class Period sales, Skoulis held only 2,015 shares in the Company. By
contrast, Skoulis sold no shares in over 45 months prior to the commencement of the Class Period .
Defendant Skoulis's sales are suspicious in amount and timing, and are out of line with his prior
sales of Netopia stock .
124 . On October 29, 2004, Netopia was advised by the Securities and Exchange
Commission that the informal investigation previously commenced by the Securities and Exchange
Commission had become the subject of a formal order of investigation ; the stated purpose of the
formal investigation is to determine whether the federal securities laws have been violated . On May
10, 2005, Netopia disclosed that the United States Attorney's office commenced an investigation
following a referral by the SEC as a result of its formal investigation . The SEC's referral of the
investigation to the United States Attorney's office occurred after Netopia, Lefkof, Kadish, Baker,
ICC, Frankl and Deckard provided documents and interviews to the SEC .
125 . As evidenced by a July 2, 2001 series of e -mails between Defendant Lefkof and Mr.
Frankl, Defendant Lefkofwill engage in fraudulent activity, such as back-dating of contracts, in
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order to reported false financial results . In that series of e-mails, Mr. Frankl informed Defendant
Lefkof that an approximately $100,000 purchase order from (which Defendant Lefkof had expected
would be received by June 30, 2001) had not been received by Netopia by June 30, 2001, and
informed Defendant Lefkof that he believed that a purchase order from Hasbro would be received
shortly. In response, Defendant Lefkof requested that Mr . Frankl ask the Hasbro employee (its
Senior Vice President of IS) whether that Hasbro employee would be willing to issue a "backdated"
purchase order (i.e ., dated June 30, 2001) to enable Netopia to (improperly) include that revenue in
its publicly reported financial results for the quarter ended June 30, 2001 .
CLAIMS FOR RELIE F
COUNT I
(Against All Defendants For Violations of Section10(b) And Rule 10b-5 Promulgated Thereunder)
126. Plaintiffs repeat and re-allege each and every allegation contained in the foregoin g
paragraphs as if fully set forth herein .
127. This Count is asserted against all Defendants and is based upon Section 10(b) of the
Exchange Act, 15 U.S.C. § 78j(b), and Rule IOb -5 promulgated thereunder by the SEC .
128. As more particularly alleged above, Netopia and the Individual Defendants acte d
with scienter in that they knew that the public statements were materially false and misleading when
made; Netopia and the Individual Defendants knew that such statements or documents would be
issued or disseminated to the investing public ; and knowingly and substantially participated in the
issuance or dissemination of such statements or documents as primary violations of the federal
securities laws .
129. It is appropriate to treat the Individual Defendants as a group for pleading purpose s
and to presume that the false, misleading and incomplete information conveyed in Netopia's public
filings, press releases and other publications as alleged herein are the collective actions of the
Individual Defendants . Each of the Individual Defendants, by virtue of his high-level position with
Netopia, directly participated in the management of Netopia, and was directly involved in the day-
to-day operations of Netopia at the highest level. Each of the Individual Defendants was involved i n
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drafting, producing, reviewing, approving and/or disseminating the materially false and misleading
statements and information alleged herein, including SEC filings, press releases, and other
publications . Each of the Individual Defendants had the ability and/or opportunity to prevent their
issuance or cause them to be corrected . Accordingly, each of the Individual Defendants is
responsible for the accuracy of the public reports, releases, and statements detailed herein and is
therefore primarily liable for the representations contained therein .
130. As officers, directors, and controlling persons of a publicly held company whos e
common stock was, and is , registered with the SEC , traded on the National Association of Securities
Dealers Automated Quotation System ("NASDAQ") National Market during the Class Period, and
gove rned by the provisions of the federal securities laws, the Individual Defendants each had a duty
to disseminate accurate and truthful information promptly with respect to, and to correct any
previously issued statements that had become materially misleading or untrue, so that the market
price of Netopia 's publicly traded securities would be based upon truthful and accurate information .
The Individual Defendants ' misrepresentations and omissions during the Class Period violated these
specific requirements and obligations .
131 . The Individual Defendants were able to and did control the content of the variou s
SEC filings, press releases and other public statements pertaining to Netopia during the Clas s
Period .
132. Each of the Individual Defendants had possession of the undisclosed adverse
information concerning Netopia and its business and financial results alleged herein . Each of the
Individual Defendants was aware of or recklessly disregarded the fact that materially false or
misleading statements were being issued to the public regarding Netopia, and made, approved
and/or ratified these statements in violation of the federal securities laws . The Individual
Defendants caused, allowed and/or participated in the wrongdoing complained of herein .
133. During the Class Period, Defendants engaged in a plan, scheme, conspiracy, and
course of conduct, pursuant to which they knowingly or recklessly engaged in acts, transactions ,
practices and courses of business which operated as a fraud and deceit upon Plaintiffs and the othe r
members of the Class ; made various untrue statements of material facts and omitted to state materia l
CONSOLIDATED AMENDED COMPLAIN TCASE NO . : C 04-3364 RMW -47-\\Filese rver\shareddocs \ BLG\N ETOP IA\PLD-W PD\CAC.wpd
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facts necessary in order to make the statements made, in light of the circumstances under which they
were made, not misleading ; and employed devices, schemes and artifices to defraud in connectio n
11 with the purchase and sale of securities .
134 . Pursuant to the above plan, scheme, conspiracy and course of conduct, each o f
Defendants participated directly or indirectly in the preparation and/or issuance of the quarterly
reports, SEC filings, press releases and other statements and documents described above, all of
which were designed to and did influence the market for Netopia common stock . Such reports,
filings, releases, and statements were materially false and misleading in that they failed to disclose
material adverse information and misrepresented the truth about Netopia's finances and business .
135. Defendants had actual knowledge of the materially false and misleading statement s
and material omissions alleged herein and intended thereby to deceive Plaintiffs and the other
members of the Class, or, in the alternative, Defendants acted with reckless disregard for the truth in
that they failed or refused to ascertain and disclose such facts as would reveal the materially false
and misleading nature of the statements made, although such facts were readily available to
defendants . Said acts and omissions of Defendants were committed willfully or with reckless
disregard for the truth . In addition, each Defendant knew or recklessly disregarded that material
facts were being misrepresented or omitted as described above .
136. As a result of the dissemination of the aforementioned false and misleading reports,
releases and public statements, the market price of Netopia common stock was artificially inflated
throughout the Class Period. In ignorance of the adverse facts concerning Netopia's business and
financial condition that were concealed by Defendants, Plaintiffs and the other members of the Class
purchased Netopia common stock at artificially inflated prices and relied upon the price of the stock,
the integrity of the market for the stock and/or upon statements disseminated by Defendants and
were damaged thereby .
137. As more particularly alleged above, Defendants' misrepresentations and misconduc t
directly and proximately caused injury and damages to Plaintiffs and the Class . Plaintiffs and the
Class purchased their Netopia stock when the price of that stock was artifically inflated, and hel d
stock at the time of the disclosures of the true facts . The loss suffered by Plainitffs and the Class
CONSOLIDATED AMENDED COMPLAINT
CASE NO.: C 04-3364 RMW _48_\\Fileserver\shareddocs\B LG\N ETOP IA\PLD-W PD\CAC .wpd
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was caused by the misrepresentations by Defendants . Had Plaintiffs and the other members of the
Class known the truth, they would not have purchased said shares or would not have purchased
them at the inflated prices that were paid . At the time of the purchases by Plaintiffs and the Class,
the true value of Netopia stock was substantially lower than the prices paid by Plaintiffs and the
other members of the Class .
138. By reason of the conduct alleged herein, Defendants knowingly or recklessly, directl y
or indirectly, have violated Section 10(b) of the Exchange Act and Rule I Ob-5 promulgate d
thereunder and caused injury and damages to Plaintiffs and the other members of the Class .
COUNT II
(Violations of Section 20(a) of theExchange Act Against The Individual Defendants)
139 . Plaintiffs repeat and re-alleges each and every allegation contained in the foregoing
paragraphs as if fully set forth herein .
140. During the Class Period, the Individual Defendants participated in the operation an d
I management of the Company, and conducted and participated, directly and indirectly, in the conduc t
of Netopia's business affairs . Because of the Individual Defendants' senior positions, they knew the
adverse non-public information about Netopia.
141 . As officers and directors of a publicly owned company, the Individual Defendant s
had a duty to disseminate accurate and truthful information with respect to Netopia's financia l
condition and results of operations, and to correct promptly any public statements issued by Netopi a
that had become materially false or misleading .
142 . Because of their position of control and authority as senior officers and directors o f
Netopia, the Individual Defendants were able to, and did, control the contents of the various reports,
press releases and public filings that Netopia disseminated in the marketplace during the Class
Period concerning the Company's results of operations . Throughout the Class Period, the Individual
Defendants exercised their power and authority to cause Netopia to engage in the wrongful acts
complained herein . Therefore, the Individual Defendants were "controlling persons" of Netopi a
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within the meaning of Section 20(a) of the Exchange Act . In this capacity, they participated in the
unlawful conduct alleged that artificially inflated the market price of Netopia common stock .
143. As controlling persons of Netopia, the Individual Defendants are liable pursuant to
Section 20 of the Exchange Act for the violations of Netopia.
WHEREFORE, Plaintiffs demand judgment against Defendants as follows :
A. Determining that the instant action may be maintained as a class action under Rule
23, Federal Rules of Civil Procedure, and certifying the named class plaintiffs ;
B. Requiring Defendants to pay damages sustained by Plaintiffs and the Class by reason
of the acts and transactions alleged herein;
C . Awarding Plaintiffs and the other members of the Class prejudgment and post-
judgment interest, as well as their reasonable attorneys' fees, expert fees and other costs ; and
D. Awarding such other and further relief as this Court may deem just and proper .
JURY DEMAND
Plaintiffs demand a trial by jury .
Dated: June 29, 2005 Andrew M. SchatzJeffrey S . NobelJustin S . KudlerSCHATZ & NOBEL, P .C .
By : /S/ JEFFREY S. NOBELJeffrey S . NobelOne Corporate Center20 Church Street, Suite 1700Hartford, Connecticut 06103Tel: (860) 493-6292Fax: (860) 493-6290
Lead Counsel for Lead Plaintiffs
Michael D . BraunMarc L. GodinoBRAUN LAW GROUP, P .C.12400 Wilshire Blvd ., Suite 920Los Angeles, CA 90025Tel: (310) 442-7755Fax: (310) 442-7756
Liaison Counsel for Lead Plaintiffs
CONSOLIDATED AMENDED COMPLAIN T
CASE NO . : C 04-3364 RM W\\Fi leserver\shareddocs\BLG\N ETOP IA\P LD-W P D\CAC.wpd -50-
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CONSOLIDATED AMENDED COMPLAINT
CASE NO . : C 04-3364 RMW\\F i Ieserver\shareddocs\B LG\N ETO P IA\PLD-W PD\CAC .wpd
Reed R. KathreinJames W. OliverLERACH COUGHLIN STOIA GELLER
RUDMAN & ROBBINS LLP100 Pine Street , Suite 2600San Francisco , CA 94111
Tel : (415) 288-4545Fax : (415) 288-4534
-and-
William S . LerachLERACH COUGHLIN STOIA GELLER
RUDMAN & ROBBINS LLP401 B Street , Suite 1700San Diego , CA 92101Tel: (619) 231-1058Fax : (619) 231-7423
Additional Counsel for Plaintiffs
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PROOF OF SERVICE
STATE OF CALIFORNIA ))ss . :
COUNTY OF LOS ANGELES )
I am employed in the county of Los Angeles, State of Califo rn ia, I am over the age of 18 andnot a party to the within action; my business address is 12400 Wilshire Boulevard , Suite 920, LosAngeles, CA 90025 .
On June 29 , 2005 , using the Northern District of California ' s Electronic Case Filing System,with the ECF ID registered to Marc L . Godino , I fi led and served the document(s) described as :
CONSOLIDATED AMENDED COMPLAINT
The ECF System is designed to automatically generate an e-mail message to all part ies in thecase , which constitutes service . According to the ECF/PACER system, for this case , the parties servedare as follows :
Andrew M. Schatz, Esq .
Jeffrey S. Nobel, Esq.
Justin S . Kudler, Esq .
Timothy J . Burke, Esq .
Patrice L. Bishop, Esq.
Robert S . Green, Esq.
Stanley S. Mallison, Esq .
Tricia L . McCormick, Esq .
Sean M. Handler, Esq .
Darren J . Check, Esq .
Attorneys for Plaintiffs
cand.uscourts@classcounsel .com
stanm@mwbhl [email protected] file [email protected]
[email protected] file_sd@lerachlaw .come-file-sf@lerachlaw .com
[email protected]@sbclasslaw.com
Sara B. Brody, Esq .
Attorneys for Defendants
On June 29, 2005, I served the document(s) described as :
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CONSOLIDATED AMENDED COMPLAIN T
by placing a true copy(ies) thereof enclosed in a sealed envelope(s) addressed as follows :
Jules Brody, Esq.Aaron Brody, Esq .Tzivia Brody, Esq .STULL, STULL & BRODY6 East 45th StreetNew York, NY 10017Tel.: (212) 687-7230Fax: (212 ) 490-2022
Marc A. Topaz, Esq.Richard A . Maniskas, Esq .Tamara Skvirky, Esq.SCHIFFRIN & BARROWAYThree Bala Plaza East, Suite 400Bala Cynwyd, PA 19004Tel: (610) 667-7706Fax: (610) 667-7056
Attorneys for Plaintiffs
Anthony Pacheco, Esq .PROSKAUER ROSE LLP2049 Century Park East, 32nd FloorLos Angeles, CA 9006 7Tel: (310) 557-2900Fax: (310) 557-2193
Attorneys for DefendantThomas A. Skouli s
I served the above document(s) as follows :
BY MAIL. I am familiar with the firm 's practice of collection and processing correspondencefor mailing. Under that practice it would be deposited with U . S. postal service on that same day withpostage thereon fully prepaid at Los Angeles , Califo rnia in the ordinary course of business . I am awarethat on motion of the party served , service is presumed invalid if postal cancellation date or postagemeter date is more than one day after date of deposit for mailing in an affidavit .
///
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I further declare, pursuant to Civil L .R. 23-2, that on the date hereof I served a copy of theabove-listed document(s) on the Securities Class Action Clearinghouse by electronic mail through thefollowing electronic mail address provided by the Securities Class Action Clearinghouse :
[email protected] .edu
I declare that I am employed in the office of a member of the bar of this Court at whose directionthe service was made.
Executed on June 29, 2005, at Los Angeles, California 90025 .
S/ LEITZA MOLINARLeitza Molinar