received jul 28 2000 - class actionsecurities.stanford.edu/filings-documents/1013/...dataonthese...
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The Honorable Marsha J. Pechman
I
Received
JUL 28 20004berg Weiss
UNITED STATES DISTRICT COURTWESTERN DISTRICT OF WASHINGTON
AT SEATTLE
IN RENo. C-00-0298-P
UPGRADE INTERNATIONAL CORP.SECURITIES LITIGATION,
CONSOLIDATED AND AMENDEDCLASS ACTION COMPLAINT
This Document Relates To:
ALL ACTIONS
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I. SUMMARY AND OVERVIEW
A. Summary
r
1. This is a class action on behalf of purchasers of the common stock of Upgrade
International Corporation ("Upgrade" or the "Company") between November 29, 1999 to
February 24, 2000 (the "Class Period"). Upgrade and Daniel Bland represented during the Class
Period that Upgrade had created and was in possession of a "revolutionary smart-card" which had
1 20,000 times the data storage capacity of a contemporary credit card.
2. This action arises out of a scheme implemented by Upgrade and Daniel Bland,
Upgrade's Chief Executive Officer, to inflate the value of the Company's stock in order, inter alia,
to: (i) allow Bland to protect his extensive Upgrade holdings, preserve his executive and director
positions and the substantial compensation and benefits obtained thereby; and (ii) finance Company
operations through stock transactions with individuals and/or entities that provided services to the
Company including issuing positive research reports.
3. Defendants' inflation of Upgrade shares and use of such inflated shares as currency
was necessary because Upgrade had no reported revenue or cash flow to finance the Company's
transactions, operations and executive compensation, and needed to use its stock in order to finance
the Company' s acquisition program.
4. As a result of this scheme, defendants artificially inflated Upgrade's stock from $10%2
per share at the outset of the Class Period to as high as $82'/2 per share during the Class Period by
repeatedly making false public statements that the Company was in possession of a revolutionary
piece of technology which consisted of a credit card with 5 megabytes of data storage capacity and
was virtually indestructible. Defendants claimed that this card, which it called the UltraCard, would
alter the landscape of modem business and consumerism and allow for people to carry all types of
data on these wallet-size cards, including x-rays, complete financial records, and electronic money.
These statements catapulted Upgrade's stock skyward from the Fall of 1999 to January 2000. To put
this in perspective, just a year earlier, on November 30, 1998, Upgrade's stock traded at $0.25 per
Allorneysat Lair
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share. By January 2000, the stock traded at $89, and Upgrade, a company trading on the NASDAQ
Bulleting Board, had a market capitalization of over $1.4 billion.
5. The spectacular rise in Upgrade's stock was reversed when, on February 14, 2000,
BARRON'S published a story that questioned the veracity of Upgrade's CEO Daniel Bland and
statements he had made to the media about Upgrade and UltraCard. BARRON'S raised questions, for
the first time, as to whether Upgrade's UltraCard was market ready as it had claimed. The
Company's stock value plummeted more than 45% to $34 per share after these revelations, and it
now trades below $20 per share despite continued false claims about the UltraCard and its alleged
I revolutionary abilities.
B. Overview
6. Starting in 1998, Upgrade went on an acquisition spree in its quest to become' the
majority shareholder in a number of high-tech companies.
7. During this acquisition period, Upgrade continued to offer additional sales of stock in
order to raise capital to stay afloat. However, by late 1999, with an already substantial number of its
shares on the market (over 19 million), Upgrade could not offer any more stock without risking a
serious devaluation of both the shares currently trading on the market and the shares it proposed to
sell in the future. To compound problems, the Company's stock value had stagnated in the $3-$4
range with no prospects for any increase in price.
8. It was at this time, in early November 1999, that Daniel Bland announced at a
Comdex meeting that Upgrade had acquired the "revolutionary UltraCard" through its subsidiary,
UltraCard Incorporated ("UltraCard Inc."). Bland falsely stated in no uncertain terms that Upgrade
was in possession of a revolutionary device the size of a credit card with the data storage capacity of
a desktop computer. Upgrade claimed the UltraCard was fully read-write capable - that is, it was
fully editable and could have new information downloaded onto it, as well as transferring data which
it already contained to another medium. The UltraCard was touted as being able to contain the
complete works of Shakespeare.
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9. In order to inflate the price of Upgrade stock, however, it was not enough for
Upgrade to purportedly possess a card with the ability to store more data than conventional cards as
Upgrade's stock had plateaued at less than $10 per share. To boost Upgrade's stock price and to
provide fuel for his financing plans, on or about November 29, 1999, Upgrade and Bland issued a
press release announcing that Upgrade had signed an exclusive licensing agreement with the Ampex
Corporation for use of Ampex's Keepered Media technology. Upgrade claimed that the Keepered
Media would "virtually eliminate accidental erasure and corrosion of data stored on the card due to
exposure in the harsh consumer credit card environment, as well as prevents [sic] fraudulent
duplication of information contained on the card. Keepered Media, a patented, special magnetic
conductor material, is designed to protect information magnetically storeif on the UltraCard."
The reality was that the Keepered Media technology had been used by Ampex to prevent accidental
erasures or corruption on computer hard drive disks. It had never been used or tested for use on a
credit-card device intended to be carried around in a wallet or purse.
10. Upgrade's false representations had their intended effect as the stock value
quadrupled in value and shot up to $45 per share by December 10, 1999.
11. Upgrade's stock continued to rise in value throughout December and January as
defendants continued to make false representations that they were in possession of the virtually
indestructible, fully editable "revolutionary" UltraCard. On January 10, 2000, defendants went even
further and made the false claims that estimates of the memory capacity for the UltraCard now
exceeded 1 gigabyte (1,000,000,000 bytes of memory, or 4,000,000 times the storage capacity of
conventional cards). Upgrade's stock shot up to more than $82.
12. Upgrade's stock continued to hover at this unprecedented level until the truth began
to leak out in mid-February about Upgrade and its UltraCard. On February 14, 2000, a BARRON'S
article exposed the past about Daniel Bland and how he had driven up the price of his previous
company's stock, Empyrean Diagnostics, through the issuance of misrepresentations and falsehoods.
Most importantly, though, the article revealed that there would be no UltraCard product, even to
CONSOLIDATED AMENDED COMPLAINT
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license, until thefirst quarter of2001. Upon these revelations, Upgrade's stock fell more than 45%
to $34 per share and, in the ensuing months, it fell below $10 per share.
13. In response, Bland attempted once more to bolster Upgrade's stock by issuing
additional false and misleading statements. Bland publicly denounced the BARRON'S article and
stated that Upgrade was in full compliance with the SEC and would file with the SEC well before
the May deadline. Furthermore, Bland stressed that "Upgrade's success is based upon ownership of
proprietary, cutting-edge technology in smart cards, which has been labeled revolutionary by many
industry experts. As a leader in the rapidly expanding smart card industry, Upgrade is well
positioned to capitalize on a market that is expected to triple sales to $30 billion within the next few
years."
14. These statements were made despite the fact that Upgrade did not have in its
possession the UltraCard in the form as it claimed. In fact, Upgrade was not in possession of a
working, fully editable, virtually indestructible credit card with 5 megabytes of data storage capacity.
15. Bland's remarks had their intended effect and they have kept Upgrade's stock above
$10 per share.
II. JURISDICTION AND VENUE
16. The claims asserted arise under §§ 10(b) and 20(a) of the Securities Exchange Act of
1934 (the "Exchange Act"), 15 U.S.C. §§ 78j(b) and 78t(a), and Rule lOb-5 promulgated there under
by the Securities and Exchange Commission ("SEC"), 17 C.F.R. § 240.1 Ob-5. Jurisdiction is further
conferred upon this Court by § 27 of the Exchange Act, 15 U.S.C. § 78aa, 28 U.S.C. § 1331 and
supplemental juri sdiction.
17. Many of the acts and transactions constituting the violations of laws described in this
complaint occurred within this judicial district. In addition, Upgrade has its principal place of
business in this district at 435 Martin Street, Suite 1010, Blaine, Washington.
18. In connection with the acts alleged herein, the defendants, directly or indirectly, used
the means and instrumentalities of interstate commerce, including the United States mails.
AttorneYs at Law
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III. THE PARTIES
19. Lead Plaintiff Wayne Byrne purchased 2,348 shares of Upgrade common stock,
during the Class Period and was damaged thereby.
20. Lead Plaintiff Gerald Gartner purchased 2,250 shares of Upgrade common stock
during the Class Period and was damaged thereby.
21. Lead Plaintiff Helmut Jarmalavicius purchased 3,500 shares of Upgrade common
stock during the Class Period and was damaged thereby.
22. Lead Plaintiff James Saitch purchased 2,500 shares of Upgrade common stock during
the Class Period and was damaged thereby.
23. Lead Plaintiff Wolfgang Schmidt purchased 1,820 shares of Upgrade common stock
during the Class Period and was damaged thereby.
24. Lead Plaintiff Dorthy Shelton purchased 2,000 shares of Upgrade common stock
during the Class Period and was damaged thereby.
25. Defendant Upgrade International is headquartered in Blaine, Washington.
26. Defendant Daniel Bland was, at all relevant times, Upgrade's Chairman of the Board,
Chief Executive Officer and President. By virtue of his position as an officer and director and his
large stock holdings in Upgrade, Bland was a control person of the Company under § 20(a) of the
Exchange Act. Defendant Bland, because of his position of control and authority as an executive
officer, director and controlling shareholder of Upgrade, was able to and did directly and/or
indirectly, control the contents of the various financial reports and statements, reports to
shareholders, and press releases of Upgrade. As an officer, director and large individual shareholder
of Upgrade, defendant Bland had a duty to promptly disseminate accurate and truthful information
with respect to Upgrade's business practices and financial condition so that the market price of the
Company's stock would be based on truthful and accurate information.
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IV. STATEMENT OF FACTS
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A. Bland's History of Artificially Inflating the Stock of His Previous Company I
27. The story of Upgrade ' s conduct during the Class Period begins with Daniel Bland
when he was the president of Empyrean Diagnostics in the early 1990s . Empyrean Diagnostics was
a biotechnology company located in Vancouver, Canada with Bland as its President. Under Bland,
Empyrean Diagnostic's stock had a meteoric rise and fall parallel to that of Upgrade's. Specifically,
while at Empyrean Diagnostics, Bland announced to the public that Empyrean had created a
"revolutionary"1 quick diagnosis AIDS kit that would indicate within seven minutes whether a
person was HIV-positive. The purported kits worked without the benefit of a laboratory or
electricity. "This technology belongs in every village in the world," Bland told the VANCOUVER
SUN. "This is going to be like Coke or Pepsi."
28. Bland soon announced huge orders for the kits. From its 1994 low to its high in
September 1995, shares of Empyrean Diagnostics appreciated tenfold. But out of the blue, the
Vancouver Stock Exchange halted trading in the stock and, on November 10, 1995, compelled Bland
to issue a clarifying press release. Of 24 million employee and director stock options given to 44
individuals, Bland disclosed that only nine of the latter were bona fide directors or employees. As to
Empyrean's announcement in January 1994 that a marketing partner had obtained an order for one
million test kits, Bland later confessed, "There was no commitment or promise to purchase one
million of these kits."
29. In like vein, Bland admitted that when the company declared in March 1994 that its
U.S. subsidiary was on schedule to distribute eight million test kits in fiscal 1994, it "did not at that
time have a purchase order." And even if it had one, the company "was not capable of producing
such quantities of kits." Moreover, as to a purported agreement with Jin-Greene Biotechnology to
distribute 18 million kits to the Minister of Health of the United Arab Emirates for expected
revenues of $35 million , it was, in plain language, bogus - nothing more than "a letter of inquiry."
` The exact same word Bland later used to describe the UltraCard.
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B. Upgrade Needed to Raise Funds to Pay For Its Debt Accumulated During ItsAcquisition Spree - Thus There Was a Motive For the Hype
30. The saga of Upgrade, the rags-to-riches stock, began appropriately amid similar
humble circumstances. Upgrade was incorporated in 1997 as a computer repair company that also
installed software upgrades. Upgrade produced no product of its own. On November 30, 1998,
Upgrade had 12.5 million shares, total assets of less than $2 million and an accumulated deficit of
$500,000.
31. When Upgrade formed in 1997, it had no product of its own. It was simply a service
business, providing repairs, installations and upgrades of computer hardware and software systems.
When Daniel Bland took over the company in 1997, Upgrade's business plan changed and became
based on growing and feeding upon other companies which had or were in the process of developing
products and technology. Specifically, Upgrade's business plan was to acquire and/or develop and
commercialize proprietary technology in the information technology industry.
32. Historically, Upgrade's stock traded at a very low value, sometimes as little as
25 cents per share. The low value of Upgrade's stock during the time ofthese acquisitions forced
Upgrade to pay cash for its majority position in these companies, resulting in a massive debt by the
end of 1999.
33. Listed below are Upgrade' s acquisitions since Bland ' s involvement:
• 20% of UltraCard Inc. in 1998
• Efornet Corporation - acquired in February 23, 1999
• Global Cyberstems S.A. (Switzerland)
• Centurion Technologies Incorporated - acquired June 9, 1999
• Acquired more than 50% of UltraCard Inc. in 1999
34. During its three years of existence, Upgrade had never recorded a penny of revenue,
let alone profit. Losses for the past three years totaled $14.7 million. Thus, the money to fund
Bland's acquisition drive came either from debt or the sale of stock.
II
Attorneys at Low
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35. Due to the low value of Upgrade stock prior to the Class Period, stock placements
were risky in that they required a substantial number of shares of stock to raise adequate capital,
thereby diluting the already minimal value of the stock. Debt was the other answer. For example, in
late 1998, Upgrade acquired 18.5% of UltraCard for $450,000. At the time of the acquisition,
Upgrade's stock traded at a mere 25 cents per share. Upgrade completed the acquisition of
UltraCard Incorporated on October 12, 1999 for a total amount of $7,950,000. Upgrade had reached
a $10 million financing agreement with European institutions in September 1998 in order to acquire
UltraCard Incorporated.
36. The acquisitions made Upgrade low on cash. Stock placements at inflated values
were the only means to keep the Company operating. As of May 2000, Upgrade announced that it
had only enough cash to continue operating for a few more months.
37. From its inception in 1997 to September of 1999, Upgrade had no less than six stock
offerings. These offerings, however, failed to raise as much money as hoped for, as Upgrade's stock
traded at a very low value. For instance, when Upgrade had an 800,000 share placement on
November 8, 1999, it raised only $2 million due to the fact that its stock was trading at only $2.50.
By contrast, when Upgrade had its eighth placement of stock in January 2000, during the Class
Period when the stock value was artificially inflated,. Upgrade raised more that $4 million dollars, or
twice as much money on half the amount of stock as it did in November.
38. The inflated price allowed Upgrade to accomplish the important goal of raising more
money on less stock . This was important because Upgrade was in serious jeopardy of diluting the
value of its already lowly priced stock because of the numerous placements it had in less than three
years since the Company' s incorporation in February 1997. Consequently, Upgrade needed to do
more with less and had to artificially inflate its stock in order to accomplish this.
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1 C. Upgrade ' s Three-Year Existence Without a Single Product to its Name and the Need toRaise Money Pressured Upgrade and Bland to Tout the UltraCard Prematurely
239. Upgrade's history was one of tremendous capitalization with nothing to show for it.
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4As discussed above, Upgrade raised millions of dollars through numerous stock offering and ,loan
5agreements. Yet, as of September 1999, Upgrade still had no product to show for all of its capital-
raising endeavors.6
40. Furthermore, in its three years of existence, Upgrade has never recorded a penny of7
revenue, let alone profit. Losses total $14.7 million for the past three years. This explains why8
9Upgrade's stock continued to trade at low prices well under $10 prior to the Class Period.
41. To defeat this stagnation, Upgrade grabbed onto and started to promote its one10
11potential product - the UltraCard. Starting in November 1999, Upgrade and Bland represented that
12they had a product to show. At a technology trade show in November, Upgrade, through its
13subsidiary UltraCard Inc., announced that it had a revolutionary device - a credit card-sized product
with the ability to store over 500,000 bytes of information, which Upgrade called the "UltraCard."14
15Upgrade claimed that the UltraCard had 20,000 times the storage of conventional cards and would
16allow for storage of medical records, financial information, and electronic money.
42. Unbeknownst to the public, Upgrade did not have a "revolutionary" credit card at the17
time. In fact, Upgrade was, at a minimum, over a year away from possessing the "revolutionary"18
19UltraCard. Though Upgrade possibly possessed pieces of the technology that would point in the
direction of a credit card with higher data storage potential than conventional cards, most of this20
technology was untested and several pieces of it were non-existent at the time Upgrade made these21
claims. Nonetheless, in order to inflate its stock, Upgrade made these false representations to the22
public that it already possessed this "revolutionary" credit card.23
43. The announcement had the intended effect as Upgrade's stock increased to around24
$10. However, this rise in stock was not large or fast enough to meet either the needs of Upgrade25
and its debt demands or the machinations of CEO Bland. Consequently, on November 29, 1999,26
II
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Bland announced through a press release that Upgrade had recently reached a licensing deal with
Ampex for its Keepered Media technology. Bland claimed that the Keepered Media technology
would make the UltraCard virtually indestructible. The release stated that the agreement was for use
ofthe Keepered Media technology on magnetic cards, not hard drive disks:
The agreement positions UltraCard as the sole provider of credit cardstorage technology that offers 5 megabytes of storage (20,000 timesthe storage capacity of magnetic stripe cards) in a secure, rugged, readwrite format.
UltraCard's adoption of Keepered Media will virtually eliminateaccidental erasure and corrosion of data stored on the card due toexposure in the harsh consumer credit card environment, as well asprevents [sic] fraudulent duplication of information contained on thecard. Keepered Media, a patented, special magnetic conductormaterial, is designed to protect information magnetically stored on theUltraCard. Combined with UltraCard's credit card storageformfactor, the technology package represents a significant advance inthe way consumers and businesses will utilize portable data in thenearfuture.
According to UltraCard's Chief Technical Officer Don Mann, theagreement to license the Ampex Keepered Media technology signifiesthe most comprehensive suite of intellectual property for credit cardtechnology today. "The credit card has not evolved at the same paceof other technologies, it is basically the original technology that was inuse 30 years ago. Our agreement with Ampex rounds out thetechnology needed to complete our revolutionary storage medium, ahard drive in a credit card format," explained Mann.
Upgrade International Corp., through its 50% ownership interest inUltraCard Inc., is engaged in the development and commercializationof a patented, revolutionary data storage technology. The UltraCardtechnology is a combination of proprietary magnetic and non-magneticlayers deposited on the card's surface in place of or in addition to themagstripe. The card consists of a specially formulated base material,followed by magnetics and topped off by a cohesion of extremelydurable protective layers, including the addition of the AmpexKeepered Media. The resulting UltraCard product has a mechanicaldurability many times greater than any other card storage device.Additionally, the card is between eight and ten times more resistanceto demagnetization than ordinary magstripe cards. (Emphasis added.)
44. In response to these statements, Upgrade stock rocketed from $10'V2 per share on
November 29, 1999 to $45 per share on December 10, 1999.
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45. Ampex in turn did not issue a press release regarding the Upgrade transaction.
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Ampex felt the transaction was immaterial because (1) Ampex had discontinued its use of Keepered
Media Technology because it was too costly for commercial manufacturing, and (2) Ampex did not
believe the technology had any real value. Thus, Bland's statement that Keepered Media "will
eliminate accidental exposure" was false and without reasonable basis as it had never been tested by
Ampex in a credit-card format but had only been proven to work on hard disks. Further, there was
no basis to represent that this "technology package represents a significant advance," as the
technology was untested and not commercially feasible at the time this representation was made.
46. Through the next few months, Upgrade and Bland continued to represent to the public
that it possessed a revolutionary, virtually indestructible credit card. For example, Upgrade's
Internet Website maintained, under the headline "UltraCard's Proprietary Technology Will
Revolutionize the IT Industry," that the UltraCard "is positioned for immediate acceptance in the
existing and rapidly growing smart card market" and pegged the global market to be worth $30
billion. In fact, representation that the UltraCard was positioned for "immediate acceptance"-was
false and misleading for the reasons stated in paragraphs 42 and 45 above.
47. On January 10, 2000, Upgrade announced the addition of David Nordemann to the
EforNet (a subsidiary of Upgrade) Board of Directors and in the release continued to issue
misleading statements regarding the UltraCard:
Following the appointment of Mr. Nordemann to the board of EforNet,the President of Upgrade International Corp., Daniel Bland, stated,"Mr. Nordemann's appointment strengthens the effort of EforNet inbecoming a market leader in monetary transaction software, forconsumer-to-business and business-to-business solutions. In addition,based on proprietary software which we are currently developing atEforNet to be used in conjunction with UltraCard, the dream ofafeature-rich credit card is now rapidly becoming a reality. Over thenext few years, ATM networks, telephone booths, credit card accesspoints, mobile phones, etc. will all become Internet access points.E-commerce is what EforNet is about and the UltraCard technologyprovides us with a substantial transportation platform to enhancee-commerce, both in the developed and developing world."
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The release also stated:
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Upgrade International Corp. ... is focused on the development andacquisition of state-of-the-art information technology. In addition toEforNet Corp., one of the companies in which Upgrade holds asubstantial stake, Ultra Card Inc., ... has developed a revolutionarysystem for high capacity data storage. The management of UltraCard,Inc. believes that their developed and patented product represents asignificant advance in the method [sic] consumers and businesses willutilize portable data, integrating UltraCard products into everyday life.
Utilizing existing hard disk storage technology, UltraCardprovides aunique and highly durable media in a common credit cardformat, tosatisfy the next generation in personal portable data storage for a broadrange of existing and new market sectors. UltraCard currentlyprovides 5 megabytes ofmemory and isfully editable. Managementestimates that more than 1 gigabyte ofrecordable data, on a singlecredit cardformat, can be achieved without the needfor compressiontechnology. (Emphasis added.)
48. For the reasons stated in paragraphs 42 and 45 above, this statement was false and
misleading.
49. Fueled by these statements , Upgrade' s stock surged to unprecedented heights,
culminating at a Class Period high of $82'/2 on January 19, 2000.
50. Again, unbeknownst to the public, Upgrade did not possess nor had it developed a
revolutionary credit card at the time. In fact, the product was far from being finished and could not
be marketed until 2001 or later.
51. Additionally, the Keepered Media technology, which Upgrade touted as making its
card virtually indestructible, had never been proven to work on a credit card-type medium. Sources
at Ampex Corporation state that the Keepered Media technology had been used only on hard-drive
disks and never on a credit card-typeformat. Keepered Media had never been tested by Ampex in
the rough and tumble environment (e.g., a wallet or the bottom of a woman's purse) to which the
UltraCard, whenever it actually came into existence, would be subjected. In fact, Ampex believed
the Keepered Media technology to be too costly and lacked any real material value. This explains
why Ampex has never issued a press release regarding the licensing of the Keepered Media
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technology, despite Upgrade's claims that the Keepered Media technology was the last step in
rounding out its "revolutionary" UltraCard.
D. Upgrade Never Filed Financial Documents With the SEC as it Promised Investors
52. Upgrade did not file financial documents regarding the Company as it promised
investors it would do so. In a press release issued September 27, 1999 announcing its sixth sale of
stock in less than three years, Upgrade stated through CEO Bland that "[a]ll shares sold are currently
restricted securities as defined by Rule 144 promulgated under the Securities Act of 1933, as
amended. However, Upgrade has agreed tofile a registration statement with the Securities and
Exchange Commission within 90 days after closing ofthe placement covering the shares sold in
the private placement " (Emphasis added.) This statement was made to assuage investors
concerned by the fact that Upgrade had not filed any financial reports or statements with the SEC.
Despite this statement, Upgrade did not file any financial documents with the SEC by this December
1999 deadline.
53. On January 28, 2000, Upgrade again made false and misleading statements in an
attempt to calm investors worried about the Company's lack of accountability with the SEC. Yorgo
Katsanos of Cyber Capital Ltd. (a European stock promoter firm retained by Upgrade) appeared at
an Upgrade conference in Hertfordshire, England. Based on information provided to him by
defendant Bland, in a formal presentation and break-out session, Katsanos told the assembled
analysts, money and portfolio managers , institutional investors , brokers and stock traders that:
• Upgrade would be an SEC-reporting company by February 24, 2000.
• Upgrade had applied for NASDAQ National Market System listing.
• He was convinced Upgrade's share price would reach $500 to $700 per share
by 3Q 2000.
54. These statements were false in that Upgrade had not filed for NASDAQ listing and it
did not, nor ever intended to, file financial documents with the SEC by February 24, 2000.
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V. SUMMARY OF FALSE STATEMENTS
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55. Starting in November of 1999 at a trade show and continuing throughout the Class
Period, Upgrade stated that it was in possession, through its subsidiary UltraCard Inc., of a
"revolutionary" type of credit card, which it called the UltraCard. Upgrade claimed that the
UltraCard had 20,000 times the storage capacity of conventional credit cards and would allow users
to store information such as x-rays, complete financial records, and electronic money. Importantly,
Upgrade represented that the card was ready for market at that time. More specifically, at the
Comdex show in November 1999, Bland represented that the "UltraCard has made it possible to
adapt the data storage capacity of a hard disc drive onto a credit card format. In this regard, the
UltraCard technology is not an evolutionary technology, it is a revolutionarytechnology ." For the
reasons identified in paragraph 57 below, this statement was false and misleading.
56. On November 29, 1999, in announcing its agreement with Ampex for use of the
Keepered Media technology, Upgrade again made the false representation and misleading statement
that it possessed the "revolutionary" UltraCard in a form ready for market. Specifically, the
announcement stated:
The agreement positioned UltraCard as the sole provider of credit cardstorage technology that offers 5 megabytes ofstorage (20,000 timesthe storage capacity ofmagnetic stripe cards) in a secure, rugged,read writeformat.
UltraCard's adoption of Keepered Media will virtually eliminateaccidental erasure and corrosion of data stored on the card due toexposure in the harsh consumer credit card environment, as well asprevents [sic] fraudulent duplication of information contained on thecard. Keepered Media, a patented, special magnetic conductormaterial, is designed to protect information magnetically stored onthe UltraCard. Combined with UltraCard's credit card storage formfactor, the technology package represents a significant advance in theway consumers and businesses will utilize portable data in the nearfuture.
According to UltraCard's Chief Technical Officer Don Mann, theagreement to license the Ampex Keepered Media technology signifiesthe most comprehensive suite of intellectual property for credit cardtechnology today. "The credit card has not evolved at the same paceof other technologies, it is basically the original technology that was in
AttorneYs at Law
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use 30 years ago. Our agreement with Ampex rounds out thetechnology needed to complete our revolutionary storage medium, ahard drive in a credit cardformat," explained Mann.
Upgrade International Corp., through its 50% ownership interest inUltraCard Inc., is engaged in the development and commercializationof a patented, revolutionary data storage technology. The UltraCardtechnology is a combination of proprietary magnetic and non-magneticlayers deposited on the card's surface in place of or in addition to themagstripe. The card consists of a specially formulated base material,followed by magnetics and topped off by a cohesion of extremelydurable protective layers, including the addition of the AmpexKeepered Media. The resulting UltraCard product has a mechanicaldurability many times greater than any other card storage device.Additionally, the card is between eight and ten times more resistanceto demagnetization than ordinary magstripe cards. (Emphasis added.)
57. The statements in paragraphs 55-56 were materially false and misleading when made
and/or omitted material facts. The true but concealed facts at the time were:
(a) Upgrade did not have in its possession at that time the card device with 5
mega-bytes of data-storage capacity. At most, Upgrade was working on technology to achieve such
a card much later, at a minimum, and more likely several years down the road, if ever.
(b) The Keepered Media technology was unproven as to its use and effectiveness
on a credit card or similar device. The Keepered Media technology had been used solely for
computer hard drive disks and not for credit cards. The Keepered Media technology had never been
used or tested for an environment to which a credit card or similar device would be subjected.
(c) The representation that the UltraCard has a mechanical durability many times
greater than any other storage device was without foundation in that UltraCard had not been tested
and proven to support such a claim.
(d) The Keepered technology upon which UltraCard was based is not
commercially feasible and had been abandoned by Ampex and did not represent a "significant,
advance";
(e) Keepered Media was not "designed to protect information magnetically stored
on the UltraCard," in fact, it was not devised for use with the UltraCard as represented;
Atto,rneys at Law
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(f) The agreement with Keepered did not "round out" the technology required to
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complete "our revolutionary storage medium ... in a credit card format" and, in fact, Keepered,did
little to advance the commercial feasibility of UltraCard, which was not commercially feasible;
(g) The statement that "UltraCard has made it possible to adapt the data storage
capacity of a hard disc drive onto a credit card format" was misleading by virtue of the facts alleged
in (a)-(f) above and by virtue of the fact UltraCard had not demonstrated in a real unit the ability to
store information on a credit card and was far from being able to do so.
(h) The statement that UltraCard was "revolutionary" was misleading for failure
to disclose that facts set forth in (a)-(f) above, as well as by virtue of the fact that UltraCard was far
from developed to the point anyone could represent it was "revolutionary," which implies that it
works, which was not the case. As Bland later admitted after this lawsuit, the UltraCard needed "to
put it in a like setting, through a beta, and then evaluate the results." Bland did not include this
caveat when he was making representations during the Class Period and this caveat was required in
order to render the statements accurate.
58. Throughout the class period, Upgrade also represented on its Website the
following:
UltraCard Inc.'s proprietary technology, will result in a new sector inthe information technology industry. UltraCard Inc., a privateCalifornia based corporation has developed, patented and is currentlycommercializing a revolutionary system for ultra high capacity datastorage and retrieval in a credit card format expected to become a newindustry platform. In addition to existing applications, the UltraCardtechnology will facilitate the development of new, more powerful,user-friendly software applications to the information technologyindustry. UltraCard's proprietary technology is scheduled to completethe beta testing phase of commercialization by the end of the secondquarter of the year 2000.
The development of the UltraCard technology was completed in July1998. At that time, the Company conducted a proof of conceptdemonstration for a panel of independent engineers and technicaladvisors. Having achieved this milestone, the Company hasimplemented the commercialization stage of the technology scheduled
•J 1
Attorue.vs at Law
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for launch by mid-year 2000. The product and technology held by theCompany will offer the consumer a combination of features notcurrently available in any existing data storage medium:
SIGNIFICANTLY HIGHER MEMORY CAPACITY.The UltraCard currently provides 5 million bytes (Mb)of data on a single credit card format . Enhancements tothe technology currently under development areexpected to increase the storage capacity substantially.Management estimate that 1 Gigabyte of recordabledata on a single credit card format can be achieved. Bycomparison , the popular smart card holds only 2thousand bytes (2k) of data.
59. The representations contained therein are misleading for the reasons set forth in
1142, 45, 50, 51 and 57 . In addition, this statement is misleading as the technology was not
"completed" as set forth above in paragraph 57.
60. On January 10, 2000, in announcing the appointment of David Nordemann to the
board of EforNet (an Upgrade subsidiary), Upgrade again represented that it possessed a
revolutionary card. Specifically, it stated:
Following the appointment of Mr. Nordemann to the board of EforNet,the President of Upgrade International Corp., Daniel Bland, stated,"Mr. Nordemann's appointment strengthens the effort of EforNet inbecoming a market leader in monetary transaction software, forconsumer-to-business and business-to-business solutions. In addition,based on proprietary software which we are currently developing atEforNet to be used in conjunction with UltraCard, the dream of afeature-rich credit card in now rapidly becoming a reality. Over thenext few years, ATM networks, telephone booths, credit card accesspoints, mobile phones, etc. will all become Internet access points.E-commerce is what EforNet is about and the UltraCard technologyprovides us with a substantial transportation platform to enhancee-commerce, both in the developed and developing world.
Upgrade International Corp. ... is focused on the development andacquisition of state-of-the-art information technology. In addition toEforNet Corp., one of the companies in which Upgrade holds asubstantial stake, UltraCard Inc., ... has developed a revolutionarysystem for high capacity data storage. The management of UltraCard,Inc. believes that their developed and patented product represents asignificant advance in the method [sic] consumers and businesses willutilize portable data, integrating UltraCard products into everyday life.
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Utilizing existing hard disk storage technology, UltraCard provides aunique and highly durable media in a common credit card format, tosatisfy the next generation in personal portable data storage for a broadrange of existing and new market sectors. UltraCard currentlyprovides 5 megabytes ofmemory and isfully editable. Managementestimates that more than 1 gigabyte ofrecordable data, on a singlecredit cardformat, can be achieved without the needfor compressiontechnology. (Emphasis added.)
61. The above statement was materially false and misleading when made. The true but
concealed facts at the time were that Upgrade did not have in its possession at the time a card device
with 5 megabytes of data storage capacity. At most, Upgrade was working on technology to achieve
such a card, at a point in the future. In fact, at the time this statement was made, Upgrade had not
even completed a demonstration unit and did not expect to do so until June 2000 at the earliest. (See
¶ 57.)
62. Additionally, during the Class Period, Upgrade published several statements on its
Website regarding the UltraCard. Specifically, the Website told the investing public that:
UltraCard is availablefor market introduction now at 5 MB[megabytes]... The typical magstripe card today holds only a tinyamount of data. Nearly all of the smart cards on the market today holdonly about one page of text. The UltraCard, readyfor marketintroduction now, can accommodate up to 2,500 pages of text.(Emphasis added.)
63. The above statement was materially false and misleading for the reasons stated in
paragraphs 42, 45, 51, 57 and 61 above.
64. On January 28, 2000, Upgrade again made false and misleading statements. On that
date, Yorgo Katsanos of Cyber Capital Ltd. (a European stock promoter firm retained by Upgrade)
appeared at an Upgrade conference in Hertfordshire, England. Based on information provided to
him by defendant Bland, Katsanos told the assembled analysts, money and portfolio managers,
institutional investors, brokers and stock traders that:
• Upgrade would be an SEC-reporting Company by February 24, 2000.
• Upgrade had applied for NASDAQ National Market System listing.
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He was convinced Upgrade's share price would reach $500 to $700 per share
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by 3Q 2000.
65. The above statement was materially false and misleading when made. The true but
concealed facts at the time were that:
(a) Upgrade would not, nor did it ever intend to, file with the SEC by
February 24, 2000; and
(b) Upgrade had not applied for NASDAQ listing.
66. On February 8, 2000, Upgrade announced the appointment of Andy Seybold to the
UltraCard Board of Directors and, in so doing, repeated previous misleading statements about
UltraCard:
As I mentioned at COMDEX last November, the UltraCard has madeit possible to adapt the data storage capacity of a hard disc drive on toa credit card format. In this regard, the UltraCard technology is not anevolutionary technology; it is a revolutionary technology. In myexperience, the UltraCard represents a new technological platform,itself a rare scientific discovery, which will provide a new tool tovarious industries, such as portable computers, PDAs, mobile phones,ATMs, banking, digital photography, entertainment, etc. From thenarrow perspective of mobile communications, the UltraCard solvessubstantial current problems in that it provides for significant datastorage capacity thereby lending itself to the design of powerfulsoftware applications. Until now, mobile communications have beenhampered by the high cost of data storage. There is no doubt in mymind that the UltraCard will lead the way in giving the mobilecommunications industry an inexpensive, robust and powerfultechnology which will open up the gates to e-commerce.
67. The February 8, 2000 statement was misleading for the reasons set forth in
paragraphs 42, 45, 50, 51, 57 and 61.
68. In response to the BARRON'S February 14, 2000 article which began to reveal the
truth about Upgrade and the subsequent fall of the Company's stock, the Company again made false
representations and misleading statements. Specifically, Upgrade stated:
The solid underlying fundamentals of our company that have attractedstrong market support are unchanged and it is obvious that the declinewas precipitated by a story in the financial press.
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We take strong exception to the inferences and conclusions made inthe article. Upgrade is in full compliance with all Securities andExchange Commission (SEC) regulations and, in fact, will filenecessary filings with the SEC well before this year's May deadline.
While it is true that the Company is not required to file l OK and I OQ'sat this time, Upgrade and its three subsidiaries have undertaken anexpansive audit with a nationally recognized accounting firm.Furthermore, the Company has been diligently pursuing all reportingobligations under federal and state securities laws.
Upgrade's success is based upon its ownership of proprietary, cutting-edge technology in smart cards, which has been labeled revolutionaryby many industry experts. As a leader in the rapidly expanding smartcard industry, Upgrade is well positioned to capitalize on a market thatis expected to triple sales to $30 billion within the next few years.
69. The above statement was materially false and misleading when made. The true but
concealed facts at the time were that
(a) Upgrade did not have in its possession at the time a card device with 5
megabytes of data storage capacity. At most, Upgrade was working on technology to achieve such a
card later in time and more likely a year down the road, if ever.
(b) As discussed in 1152, 53, and 64, Upgrade had promised investors that it
would file with the SEC as early as December 1999 and by February 24, 2000.
VI. APPLICABILITY OF FRAUD-ON-THE-MARKETPRESUMPTION OF RELIANCE
70. At all relevant times, the market for Upgrade common stock was an efficient market
for the following reasons:
(a) Upgrade common stock met the requirements for listing and was listed on the
NASDAQ Bulletin Board;
(b) Upgrade communicated with public investors and market professionals
regarding the release of current information, and generally assured that information was released
over major newswire services on a current basis;
(c) During the Class Period, Upgrade traded on the Over'-the-Counter-Bulletin
Board ("OTCBB"). In 1999, about 5,500 securities traded on the OTCBB, generating total dollar
Attorneys at lan,
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trading volume of more that $63 billion. The OTCBB includes both actively traded securities and
securities that trade infrequently. During the Class Period, Upgrade was an actively traded stock. In
fact, during the Class Period, Upgrade had a reported trading volume of more than 12 million shares
with a total dollar trading volume of more than $500 million. The average weekly reported Upgrade
trading volume was more than one million during the Class Period, or more than 5 percent of the
more than 19 million shares outstanding. Cammer v. Bloom, 711 F. Supp. 1264 (D.N.J. 1989). This
clearly demonstrates that Upgrade, during the Class Period, traded in an open and well-developed
market and that there were sufficient economic incentives for investors to monitor and evaluate the
new information that became available regarding the Company.
(d) An analysis of the price movements in Upgrade's common stock also reveals
that new, material positive or negative information quickly became reflected in the Company's stock
price. For example, on November 30, 1999, Upgrade announced that its 50 percent-owned
subsidiary UltraCard had signed an exclusive agreement with Ampex Corporation, another publicly
traded company. Following this announcement, Upgrade's stock price closed at $15 per share on
November 30, an increase of more than 42 percent from the prior trading day. Conversely, on
February 14, 2000, BARRON'S published a negative article on Upgrade. In response to the article,
Upgrade's common stock declined more than 44 percent to a closing price of about $35 per share.
This demonstrates that Upgrade traded in an open, well-developed and efficient market in which
new material information quickly became incorporated into the Company's stock price.
71. Throughout the Class Period, the market price for Upgrade common stock reflected
publicly available information about the Company, its results, and its potential products and
development of those products. Thus, all Upgrade common stock purchasers during the Class Period
are entitled to rely on the "fraud-on-the-market" doctrine, which presumes reliance on the fraudulent
statements alleged herein. The market price for Upgrade shares, established in an open, developed
and efficient market, reflected those false and misleading statements. Accordingly, reliance on the
false and misleading statements alleged herein is presumed.
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VII. STATUTORY SAFE HARBOR
72. The statutory safe harbor provided for forward-looking statements does not apply to
the false forward-looking statements pleaded. To the extent any of these statements are deemed
"forward looking," the "forward-looking statements" pleaded herein were not specifically identified
as "forward-looking statements" when made, it was not stated that actual results "could differ
materially from those projected," nor did meaningful cautionary statements identifying important
factors that could cause actual results to differ materially from those in the forward-looking
statements accompany those forward-looking statements. None of Upgrade's particular oral
forward-looking statements were so identified as required. The defendants are liable for the false
forward-looking statements pleaded because, at the time each forward-looking statement was made,
the speaker knew the forward-looking statement was false and the forward-looking statement was
authorized and/or approved by defendants who knew that the forward-looking statement was false.
None of the historic or present-tense statements made by defendants were assumptions underlying or
relating to any plan, projection or statement of future economic performance, as they were not stated
to be such assumptions underlying or relating to any projection or statement of future economic
performance when made, nor were any of the projections or forecasts made by defendants expressly
related to or stated to be dependent on those historic or present-tense statements when made.
VIII. CLASS ACTION ALLEGATIONS
73. This action is brought by plaintiffs as a class action pursuant to Rule 23(a) and (b)(3)
of the Federal Rules of Civil Procedure.
74. Plaintiffs seek relief on behalf of themselves and all other persons who purchased
Upgrade common stock between November 29, 1999 and February 24, 2000, inclusive (the "Class").
Excluded from the Class are the defendants herein, members of the immediate family of the
individual defendant, and affiliates, successors and assigns of the defendants.
75. There are thousands of persons who are members of the Class. As a result, joinder of
all Class members in a single action is impracticable.
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0
76. Common questions of law and fact predominate and include whether defendants:
(i) violated the 1934 Act; (ii) omitted and/or misrepresented material facts; (iii) knew or recklessly
disregarded that their statements were false; and (iv) artificially inflated Upgrade's stock price and
the extent of and appropriate damages.
77. Plaintiffs' claims are typical of those of the Class. Prosecution of individual actions
would create a risk of inconsistent adjudications. Plaintiffs will adequately protect the interests of
the Class. A class action is superior to other available methods for the fair and efficient adjudication
of this controversy.
FIRST CLAIM FOR RELIEF
(For Violation of Section 10(b) of the Exchange Actand Rule 10b-5 Against All Defendants)
78. Plaintiffs repeat and reallege the above paragraphs as fully set forth herein.
1. Actionable Misstatements
79. Throughout the Class Period, defendants, in pursuit of their scheme and continuous
course of conduct to inflate the market price of Upgrade common stock, knowingly or recklessly
made materially misleading statements, or failed to disclose material facts necessary to make the
statements made, in light of the circumstances under which they were made, not misleading.
80. During the Class Period, defendants, and each of them, carried out a plan, scheme and
course of conduct to inflate which was intended to and, throughout the Class Period, did: (i) deceive
the investing public, including plaintiffs and other Class members, as alleged herein; (ii) artificially
inflate and maintain the market price of Upgrade common stock; and (iii) cause plaintiffs and other
members of the Class to purchase Upgrade common stock at inflated prices. In furtherance of this
unlawful scheme, plan and course of conduct, defendants, and each of them, took the actions set
forth herein.
81. Defendants (a) employed devices, schemes, and artifices to defraud; (b) made untrue
statements of material fact and/or failed to state material facts necessary to make the statements
HAGENs .
ys at Lawi Attorne
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made not misleading; and (c) engaged in acts, practices and a course of business which operated as a
fraud and deceit upon the purchasers of the Company's stock in an effort to maintain artificially high
market prices for Upgrade common stock in violation of § 10(b) of the Exchange Act and Rule
IOb-5. All defendants are sued either as primary participants in the wrongful and illegal conduct
charged herein or as controlling persons as alleged below.
82. In addition to the duties of full disclosure imposed on defendants as a result of their
affirmative statements and reports, or participation in the making of affirmative statements and
reports to the investing public, defendants had a duty to disseminate promptly truthful information
that would be material to investors in compliance with the integrated disclosure provisions of the
SEC as embodied in SEC Regulation S-X (17 C.F.R. § 210.01 etseq.) and S-K (17 C.F.R. § 229.10
et seq.) and other SEC regulations, including accurate and truthful information with respect to the
Company's operations and performance so that the market price of the Company's common stock
would be based on truthful, complete and accurate information.
83. Defendants, individually and in concert, directly and indirectly, by the use of means
and instrumentalities of interstate commerce and/or of the mails, engaged and participated in a
continuous course of conduct to conceal adverse material information about the Company's
business, operations, and future outlook as specified herein. Defendants employed devices, schemes
and artifices to defraud, while in possession of material adverse non-public information, and
engaged in acts, practices, and a course of conduct as alleged herein, in an effort to assure investors
of Upgrade's management, value and performance and continued substantial growth, which included
the making of, or the participation in the making of, untrue statements of material facts and failing to
state material facts necessary in order to make the statements made about the Company's operations,
in light of the circumstances under which they were made, not misleading, as set forth more
particularly herein, and engaged in transactions, practices and a course of business which operated as
a fraud during the Class Period.
CONSOLIDATED AMENDED COMPLAINT
1364.10 0010 BSC. DOC
-24-OFFICES IN SEATTLE PH0ENIE Los ANGELES
1301 Flm1 AVENm SUITE 2900 • SMTTLE, WA 99101
TELEPHONE ( 206) 623 -7292 • FACSIMILE ( 206) 623-0594
84. Defendants had actual knowledge of the misrepresentations and omissions of material
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facts set forth herein, or acted with reckless disregard for the truth in that they failed to ascertain and
to disclose such facts, even though such facts were available to them. Such defendants' material
misrepresentations and/or omissions were done knowingly or recklessly and for the purpose and
effect of concealing Upgrade's operations and business affairs from the investing public and
supporting the artificially inflated price of its stock. As demonstrated by defendants' statements
throughout the Class Period, if they did not have actual knowledge of the misrepresentations and
omissions alleged, defendants were reckless in failing to obtain such knowledge by deliberately
refraining from taking those steps necessary to discover whether those statements were false or
misleading.
85. As a result of the dissemination of the materially false and misleading information
and failure to disclose material facts, as set forth above, the market price of Upgrade common stock
was artificially inflated during the Class Period. In ignorance of the fact that the market price of
Upgrade's publicly traded common stock was artificially inflated, an relying directly or indirectly on
the false and misleading statements made by defendants, or upon the integrity of the market in which
the securities traded and the truth of any representations made to appropriate agencies as to the
investing public at the times at which any statements were made, and/or on the absence of material
adverse information that was known to or recklessly disregarded by defendants but not disclosed in
public statements by defendants during the Class Period, plaintiffs and the other members of the
Class purchased Upgrade common stock during the Class Period at artificially high prices and were
damaged thereby.
86. Had plaintiffs and the other members of the Class and the marketplace known of the
true facts, which were not disclosed by defendants, plaintiffs and the other members of the Class
would not have purchased or otherwise acquired their Upgrade common stock during the Class
Period or, if they had acquired such common stock during the Class Period, they would not have
done so at the artificially inflated prices which they paid.
Altorneys at Law
CONSOLIDATED AMENDED COMPLAINT -25- OFFICES IN SEATTLE PHOENIX Los ANGELES
1301 FIPTN AVEOUE, SUITE 2900 • SEATnE. WA 90101
1364.10 0010 BSC .DOCTELEPHONE (206) 623-7292 • FACSIMILE ( 206) 623-0394
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87. By virtue of the foregoing, defendants have violated § 10(b) of the Exchange Act, and
Rule IOb-5 promulgated there under.
2. Defendants Acts With Scienter
88. At all relevant times, Upgrade and the Individual Defendant Bland had actual
knowledge that the statements and documents complained of herein were materially false and
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misleading as set forth herein and intended to deceive plaintiffs and the other § 10(b) Class
members. In the alternative, those defendants acted in reckless disregard for the truth in that they
failed or refused to ascertain and disclose such facts as would have revealed the materially false and
misleading nature of the statements and documents complained of herein although such facts were
readily available to defendants. Said facts and omissions of defendants were committed willfully or
with reckless disregard for the truth. In addition, Upgrade and the Individual Defendant knew or
recklessly disregarded that material facts were being misrepresented or omitted as alleged herein.
89. Information showing that the defendants acted knowingly or with reckless disregard
for the truth is peculiarly within defendants' knowledge and control. As the senior corporate officer
of Upgrade, Bland had knowledge of the details of the Company's financial affairs and results.
Plaintiffs, who purchased Upgrade common stock on the open market, did not have knowledge of
the details of the Company's internal corporate affairs. However, the following facts, among others,
indicate a strong inference that Upgrade and the Individual Defendant acted with scienter:
(a) They had knowledge of the reports and information concerning the true status
of UltraCard and knew at the time the statements were issued that they were false;
(b) Management, including the Individual Defendant, was responsible for filings
with the SEC. Thus, the Individual Defendant must have known or recklessly disregarded the fact
the company would not file with the SEC as promised;
(c) Bland owned Upgrade shares while they were artificially inflated. He thus
obviously had a motive to artificially inflate the market price of Upgrade's common stock;
CONSOLIDATED AMENDED COMPLAINT
1364.100010 BSC.DOC
-26-0 P P ICB6 IN SEATTLE PHOENIX Los ANGELES
1301 FIFTH AVENUE, SUITE 2900 . SEATTLE, WA 98101
TELEPHONE (206) 623-7292 FACSIMILE (206) 623-0594
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(d) Upgrade and Bland had a strong incentive to conceal problems in order to
I achieve the Company's strategy of gaining market share and the technology needed at virtually any
short term cost;
(e) Upgrade and the Individual Defendant had a strong incentive to keep
Upgrade's share price as high as possible because Upgrade would not have been able to pursue its
growth strategy if its stock values had not been maintained at artificially high levels and had the
prospects for the Company not been misrepresented. For example, as part of its represented effort to
acquire three companies to commercialize the technology, Upgrade needed to purchase Second
CMA ("CMA"), a Colorado corporation . Upgrade did not have the cash to do so . It was able to
accomplish the purchase of CMA by exchanging 45,000 shares of Upgrade stock. If Upgrade's
stock was not trading at its inflated levels, this purchase would have been impossible. This provided
Bland and Upgrade with an incentive to continue to issue statements to inflate the price of Upgrade
stock;
(f) Defendants sold shares to Infusion Capital at $0.25 per share with the
expectation that Infusion would issue favorable research reports in return. Infusion did so, helping
to pump up Upgrade's stock price. Infusion registered to sell 100,000 shares at Upgrade's high in
January 2000, thus pocketing millions in profits. Bland was aware of and encouraged this tradeoff-
the sale of Upgrade shares for Infusion's assistance in pumping up Upgrade's stock price;
(g) Defendant Bland's prior actions with respect to the sale of Empyrean
Diagnostic's stock also provide evidence of motive and intent. In similar circumstances Bland
issued statements that were false and strikingly similar to those issued here, including claiming that
Empyrean's product was "revolutionary" and that Empyrean was poised to sell its product when
neither was true. Bland has engaged in similar misleading conduct to boost the price of Upgrade
stock; and
(h) Cumulatively, these facts taken together, create an inference of scienter.
CONSOLIDATED AMENDED COMPLAINT -27- OFFICES IN SEATTLE PHOENIX Los ANGELES
1301 FIFTH AVENUE, SUITE 2900 • SEATTLE. WA 98101
1364.10 0010 BSC.DOCTELEPHONE ( 206) 623-7292 FACSIMILE ( 206) 623-0394
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SECOND CLAIM FOR RELIEF
(For Violation of Section 20(a) of theExchange Act Against Defendant Bland)
90. Plaintiffs repeat and reallege the above paragraphs as though fully set forth herein.
91. Defendant Bland acted as a controlling person of Upgrade within the meaning of
§ 20(a) of the Exchange Act as alleged herein . By virtue of his executive positions, Board
membership and stock ownership , as alleged above , defendant Bland had the power to influence and
control and did influence and control , directly or indirectly, the decision making of the Company,
including the content and dissemination of the various statements which plaintiffs contend are false
and misleading. Defendant Bland was provided with or had unlimited access to the Company's
internal reports, press releases, public filings and other statements alleged by plaintiff to be
misleading prior to and/or shortly after these statements were issued and had the ability to prevent
the issuance of the statements to be corrected.
92. In particular, defendant Bland had direct involvement in the day-to-day operations of
the Company and, therefore , is presumed to have had the power to control or influence the particular
transactions giving rise to the securities violations as alleged herein , and exercised the same.
93. As set forth above, Upgrade violated § 10(b) and Rule 1 Ob-5 by its acts and omissions
as alleged in this Complaint . By virtue of his position as a controlling person of Upgrade, defendant
Bland is liable pursuant to § 20(a) of the Exchange Act. As a direct and proximate result of
defendant Bland ' s wrongful conduct, plaintiffs and the other members of the Class suffered damages
in connection with their purchases of the Company' s common stock during the Class Period.
THIRD CLAIM FOR RELIEF
(For Violation of RCW 21.20.020)
94. Plaintiffs repeat and reallege the above paragraphs as if fully set forth herein.
CONSOLIDATED AMENDED COMPLAINT -28- OPPICES IN SEATTLE PHOENIE Los ANGELS1301 FIFTH A00NU6, SUITE 2900 . SEArn1, WA 99101
1364.10 0010 DSCDOC TELEPHONE (206) 623-7292 • FACSIMILE ( 206) 6234394
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95. This Count is asserted against all defendants for primary and secondary liability and
is asserted against Bland in his capacity as control person and as each was a substantial factor in the
sale of Upgrade common stock, on behalf of plaintiffs themselves and not as a class.
96. Upgrade and Bland were negligent in failing to know of the material facts set forth
above, which were misrepresented or omitted. Because of Bland's board membership, he (1) knew
or had access to information concerning the unlawful practices described hereinabove, which
information material to Upgrade was not disclosed; (2) rendered substantial assistance in drafting,
reviewing and/or approving the statements, advertisements, releases, response to media and
shareholder inquiries, reports and other public representations of Upgrade which omitted to describe
or falsely described Upgrade's condition and prospects; and (3) was a seller of Upgrade stock by
virtue of his key role in establishing the market price of Upgrade stock.
97. Throughout the Class Period, Bland negligently disseminated releases, statements and
reports, referred to herein, that misrepresented or were misleading regarding Upgrade's business, or
which failed to disclose material facts necessary to make the statements made, in light of the
circumstances under which they were made, not misleading in that they failed to disclose or
misrepresented the material adverse facts described herein.
98. By reason of the conduct alleged herein, Bland has violated RCW 21 .10.010 et seq.,
in that he made untrue statements of material facts or failed to state material facts necessary in order
to make the statements made, in light of the circumstances under which they were made, not .
misleading for, inter alia, the following reasons which are set forth fully in the preceding
paragraphs.
99. Plaintiffs have suffered damages in that, without knowledge of defendants' unlawful
conduct and in reliance on the integrity of the market, they paid artificially inflated prices for
Upgrade stock or otherwise acquired Upgrade stock at artificially inflated prices as a result of
defendants' violations of RCW 21.20.010 et seq. Plaintiffs would not have acquired Upgrade stock
or purchased Upgrade stock at the prices they paid, or at all, if they had been aware of the material
Attorneys at Law
CONSOLIDATED AMENDED COMPLAINT -29- OFFICES IN SEATTLE PHOENIX Los ANGELES
1301 FIFTH AVENUE , SUITE 2900 • SEATrIE, WA 98101
1364 .10 0010 BSC . DOCTELEPHONE ( 206) 623-7292 • FACSIMILE ( 206) 623.0594
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information concealed by defendants as alleged hereinabove . At the time plaintiffs purchased or
I otherwise acquired Upgrade common stock, the fair market value of said securities was substantially
less than their acquisition costs.
100. At all relevant times, the misrepresentations and omissions particularized in this
Complaint directly or proximately caused or were a substantial contributing cause of the damages
sustained by plaintiffs.
101. As a direct and proximate result of defendants' aforesaid wrongful conduct during the
Class Period, plaintiffs and the other State-Law Class members have suffered substantial damages in
connection with their purchase or acquisition of Upgrade common stock.
102. Defendant Upgrade is liable for aforesaid misrepresentations and omissions as a seller
pursuant to RCW 20.21.430(1). Bland, as an officer and/or director and/or employee. is liable for
the aforesaid misrepresentations and omissions pursuant to RCW 21.20.430(3).
103. Each of the defendants participated in and/or materially aided in the acts alleged
herein and are liable for the aforesaid omissions and misrepresentations pursuant to RCW 21 .20.010
and 21.20.430.
FOURTH CLAIM FOR RELIEF
(Against All Defendants For Violations of theWashington Consumer Protection Act)
104. Plaintiffs incorporate by reference and reallege the allegations contained in the
preceding paragraphs as if fully set forth in this paragraph, except as to prior allegations of scienter
and intent . Under the Washington Consumer Protection Act, plaintiffs allege that defendants'
representations and omissions had a capacity or tendency to deceive the plaintiffs.
105. This Count is based on the Washington Consumer Protection Act, RCW 19.86.020
and 19.86.090, and is asserted on behalf of the plaintiffs.
106. Defendants engaged in unfair and deceptive acts and practices in the conduct of trade
or commerce in violation of RCW 19. 86.090 . This conduct implicates a public interest in investors
CONSOLIDATED AMENDED COMPLAINT -30-OFFICES IN SEATTLE PHOENIX Los ANGELES
1301 FO-rn AVENUE. SUITE 2900 • SEATT E. WA 90101
1364 .10 0010 BSC . DOCTELEPHONE (206) 623.7292 . FACSIMILE (206) 623-0594
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not being deceived while investing in publicly-traded companies headquartered in Washington.
Further, this conduct is capable of repetition.
107. Plaintiffs are entitled to recover their damages, prejudgment interest, attorneys' fees
and three times their actual damages sustained pursuant to RCW 19.86.090.
IX. PRAYER FOR RELIEF
WHEREFORE, plaintiffs, on their own behalf and on behalf of the Class, pray for relief as
follows:
A. Declaring this action to be a proper class action pursuant to Rule 23(a) and (b)(3) of
the Federal Rules of Civil Procedure on behalf of the class defined herein;
B. Awarding plaintiffs and all other member of the Class compensatory damages;
C. Awarding plaintiffs and members to the Class prejudgment and postjudgment
interest, as well as reasonable attorneys' fees, expert witness fees and other costs;
D. Awarding extraordinary, equitable and/or injunctive relief as permitted by law, equity
and the federal statutory provisions sued hereunder, including Rules 64 and 65, and any appropriate
state law remedies; and
E. For such other relief as this Court deems proper and just.
X. JURY DEMAND
Plaintiffs demand a trial by jury.
DATED: July 24, 2000.HAGENS BERMAN LLP
BySe W. Berman, WSBA #12536
Karl P. Barth, WSBA #22780
1301 Fifth Avenue, Suite 2900Seattle, WA 98101
(206) 623-7292
CONSOLIDATED AMENDED COMPLAINT - 31-OFFICES IN SaATTLE PHOENIX Los ANGELES
1301 FIFTH AVENUE. SUITE 2900 • SE nZ . WA 98101
1364 .10 0010 BSC. DOCTELEPHONE (206) 623-7292 • FACSIMILE (206) 623.0394
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CONSOLIDATED AMENDED COMPLAINT
1764.10 0010 BSC.DOC
William S. LerachMILBERG WEISS BERSHADHYNES & LERACH LLP
600 West Broadway, Suite 1800San Diego, CA 92101(619) 231-1058
Randi D. BandmanMichael R. ReeseMILBERG WEISS BERSHADHYNES & LERACH LLP100 Pine Street, Suite 2600San Francisco, CA 94111(415) 288-4545
Co-Lead Counsel for Plaintiffs
-32-OFF I C66 IN SEATTLE PHOENIX Los ANGELES
1701 FIFTH AVEMJE, SUITE 2900 • SE mF, WA 98101
TELEPHONE ( 206) 623-7292 • FACSIMILE (206) 627-0594