Case 1:12-cv Document 1 Filed 06/18/12 Page 1 of 84 UNITED STATES DISTRICT COURT DISTRICT OF MASSACHUSETTS

Transcription

1 Case 1:12-cv Document 1 Filed 06/18/12 Page 1 of 84 UNITED STATES DISTRICT COURT DISTRICT OF MASSACHUSETTS ALEXANDER SHNERER, Individually And On Behalf Of All Others Similarly Situated, Plaintiff, CLASS ACTION COMPLAINT v. JURY TRIAL DEMANDED JOSEPH C. LAWLER, STEVEN G. CRANE, and MODUSLINK GLOBAL SOLUTIONS, INC., Defendants. INTRODUCTION 1. Plaintiff Alexander Shnerer, individually and on behalf of all other persons similarly situated, by his undersigned attorneys, alleges in this Class Action Complaint (the Complaint ) the following upon knowledge with respect to his own acts, and upon facts obtained through an investigation conducted by his counsel, which included, inter alia: (a) review and analysis of relevant filings made by ModusLink Global Solutions, Inc. ( ModusLink or the Company ) with the United States Securities and Exchange Commission (the SEC ); (b) review and analysis of Defendants public documents, conference calls and press releases; (c) review and analysis of securities analysts reports and advisories concerning the Company; and (d) information readily obtainable on the Internet. 2. Plaintiff believes that further substantial evidentiary support will exist for the allegations set forth herein after a reasonable opportunity for discovery. Most of the facts supporting the allegations contained herein are known only to Defendants or are exclusively within their control.

2 Case 1:12-cv Document 1 Filed 06/18/12 Page 2 of 84 I. NATURE OF THE ACTION 3. This is a federal securities class action on behalf of a class consisting of all persons and entities other than Defendants, who purchased the common stock of ModusLink between September 26, 2007 and through and including June 8, 2012 (the Class Period ), seeking to recover damages caused by Defendants violations of federal securities laws (the Class ). II. BACKGROUND 4. The Company was founded in 1986 as CMG Information Services, Inc. ( CMGI ) and officially changed its name to ModusLink Global Solutions, Inc. during the Class Period, on September 29, 2008, reflecting the Company s transformation from an Internet concern into a provider of global supply chain business process management solutions. 5. ModusLink currently provides supply chain management solutions to drive revenue growth and reduce cost for its clients. The Company offers factory supply, warehousing and fulfillment, postponement and configuration, returns management, repair and recovery, e- commerce, customer care, and digital rights management. 6. ModusLink has more than 3,500 employees and its common stock currently trades under the ticker MLNK on the NASDAQ. 7. On the morning of June 11, 2012, the Company disclosed through a press release that Company President and Chief Executive Officer Joseph C. Lawler would be stepping down and also relinquishing his seat on the Board of Directors, effective immediately. The press release also announced the departure of William R. McLennan ( McLennan ), President of Global Operations. The Company had not yet found replacements to fill these positions. 2

3 Case 1:12-cv Document 1 Filed 06/18/12 Page 3 of The Press Release also revealed that, in response to an inquiry from the SEC regarding the Company s treatment of rebates associated with volume discounts provided by vendors, the Audit Committee of the Company s Board of Directors initiated an internal investigation, which determined that certain client contracts have not been aligned consistently with ModusLink s practice of retaining volume discounts. The Audit Committee also identified limited instances where vendor costs incurred were marked-up to clients in a manner not consistent with client contracts. 9. The press release further stated that the Company believes it is no longer able to conclude that amounts from such volume discounts and mark-ups, where now found to be inconsistent with client contracts, were correctly accounted for as revenue. Therefore, the Company expects to restate its audited financial statements from fiscal years 2009 through 2011, as well as the first two quarters of fiscal 2012 and its unaudited selected financial data for fiscal years 2007 and 2008, stating that the previously issued financial statements should no longer be relied upon. 10. According to the press release, as a result of the restatement, the Company expects to report downward adjustments to revenue of approximately $20 million to $30 million over a period in which aggregate reported revenue was $5.4 billion and aggregate reported net loss was $213 million, inclusive of $232 million of impairments related to goodwill and intangible assets. In addition, the Company expects that the restatement will negatively impact net income. 11. Finally, the press release disclosed that while the Company is continuing to assess the situation, it expects to conclude that the Company has a material weakness in its internal control over financial reporting. 3

4 Case 1:12-cv Document 1 Filed 06/18/12 Page 4 of Due to the time required to review its current and historical financial data, ModusLink stated it was delaying the filing of its Form 10-Q for the third quarter of fiscal 2012 ended April 30, 2012 and, as a result, the Company expects to receive a letter from NASDAQ that it is not in compliance with NASDAQ listing rules. 13. All of the press releases and Form 10-Ks and Form 10-Qs issued by the Company and the Individual Defendants during the Class Period were materially false and misleading because they did not accurately reflect the Company s treatment of rebates associated with volume discounts by vendors. 14. Specifically, the Company s scheme was to aggregate its business in order to acquire volume discounts from vendors, and then mark up the discounts to clients without their knowledge, inconsistent with their contracts. 15. The final phase of the scheme involved the Company incorrectly accounting for these discounts and mark-ups as revenue, thereby over-stating the Company s revenue and net income on its financial statements during the Class Period. 16. As a result of the unanticipated disclosures related in the Press Release, ModusLink common stock declined by $1.48 per share to close at $2.78 on June 11, 2012 a one-day decline of approximately 35% on unusually heavy trading volume. 17. In light of the foregoing background, Plaintiff alleges that, throughout the Class Period, Defendants disseminated materially false and misleading information and failed to disclose material facts and, as a result, the market price for ModusLink s common stock was artificially inflated during the Class Period. Plaintiff and the other members of the Class acquired ModusLink common stock during the Class Period at artificially high prices and were damaged thereby. 4

5 Case 1:12-cv Document 1 Filed 06/18/12 Page 5 of 84 III. JURISDICTION AND VENUE 18. The claims asserted herein arise under and pursuant to Sections 10(b) and 20(a) of the Exchange Act (15 U.S.C. 78j(b) and 78t(a)) and Rule 10b-5 promulgated thereunder (17 C.F.R b-5). 19. This Court has jurisdiction over the subject matter of this action pursuant to Section 27 of the Exchange Act (15 U.S.C. 78aa) and 28 U.S.C Venue is proper in this Judicial District pursuant to Section 27 of the Exchange Act (15 U.S.C. 78aa) and 28 U.S.C. 1391(b) as a substantial part of the conduct complained of herein occurred in this District. 21. In connection with the acts, conduct and other wrongs alleged herein, Defendants either directly or indirectly used the means and instrumentalities of interstate commerce, including but not limited to the United States mails, interstate telephone communications and the facilities of the national securities exchange. IV. PARTIES 22. Plaintiff Alexander Shnerer purchased ModusLink common stock during the Class Period and has suffered damages as a result as evidenced by his annexed certification. 23. Defendant ModusLink is a Delaware corporation with its principal executive offices located at 1601 Trapelo Road Waltham, Massachusetts. The Company s common stock was listed on the NASDAQ under the ticker symbol CMGI from the beginning of the Class Period through September 29, 2008, and then under the ticker symbol MLNK from September 30, 2008 to date. 24. Defendant Joseph C. Lawler joined the Company in August of 2004 and served as the Company s President, CEO, and as a Director at all relevant times. 5

6 Case 1:12-cv Document 1 Filed 06/18/12 Page 6 of Defendant Steven C. Crane ( Crane ) joined the Company in April of 2007 and served as the Company s Chief Financial Officer ( CFO ) at all relevant times. 26. Lawler and Crane are together referred to hereinafter as the Individual Defendants. 27. Each of the Individual Defendants: (a) was directly involved in the day-to-day operations of the Company at the highest levels; (b) was privy to confidential proprietary information concerning the Company and its business and operations; (c) was involved in drafting, producing, reviewing and/or disseminating the false and misleading statements and information alleged herein; (d) was aware of or recklessly disregarded the fact that the false and misleading statements were being issued concerning the Company; and (e) approved or ratified these statements in violation of the federal securities laws. 28. As officers, directors and controlling persons of a publicly-held company whose common stock is and was registered with the SEC pursuant to the Exchange Act, and was traded on the NASDAQ and governed 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 the Company's financial condition and to correct any previously-issued statements that had become materially misleading or untrue to allow the market price of the Company's publicly-traded stock to reflect truthful and accurate information. 6

7 Case 1:12-cv Document 1 Filed 06/18/12 Page 7 of ModusLink is liable for the acts of the Individual Defendants and its employees under the doctrine of respondeat superior and common law principles of agency as all of the wrongful acts complained of herein were carried out within the scope of their employment with authorization. 30. The scienter of the Individual Defendants and other employees and agents of the Company is similarly imputed to ModusLink under respondeat superior and agency principles. V. SUBSTANTIVE FACTUAL ALLEGATIONS OF FRAUD A. The Company Issued Materially False and Misleading Statements Concerning its Financial Results During the Class Period False and Misleading 2007 Statements 31. The Class Period begins on September 26, 2007, the day after the Company filed an intentionally false and misleading press release with the SEC, concerning its financial results for the 2007 fourth quarter and fiscal year, ended July 31, The September 25, 2007 press release (published after the market closed for trading that day) states, in pertinent part certain information concerning the Company s reported revenues and net income: Waltham, Mass. September 25, 2007 CMGI, Inc. (Nasdaq: CMGI) today reported financial results for its fiscal 2007 fourth quarter and full year ended July 31, Fourth Quarter Financial Summary Net revenue of $252.6 million, a decrease of 3.6% from the fourth quarter of the prior year Gross margin, as a percentage of revenue, increased to 12.1% from 10.7% last year Operating loss of $2.4 million compared with operating income of $1.7 million in the prior year 7

8 Case 1:12-cv Document 1 Filed 06/18/12 Page 8 of 84 Net loss of $6.2 million or $0.01 per diluted share compared to net loss of $2.5 million or $0.01 per diluted share in the same period last year Non-GAAP operating income of $7.2 million compared with $7.6 million in the fourth quarter of 2006 Cash, cash equivalents and marketable securities at July 31, 2007 increased to $282.3 million from $228.7 million at July 31, 2006 CMGI reported net revenue of $252.6 million for the fourth quarter of fiscal 2007, 3.6% lower than net revenue of $261.9 million reported for the same period one year ago. The decline in revenue primarily related to previously announced program changes for certain clients, partially offset by revenue growth from other client engagements. Gross margin was $30.5 million in the fourth quarter of fiscal 2007, an increase of 9.0% compared with $28.0 million in the fourth quarter of fiscal As a percentage of revenue, gross margin increased to 12.1% in the fourth quarter of fiscal 2007 from 10.7% in the fourth quarter of the prior year. The improved gross margin percentage was attributed to revenue from engagements in target vertical markets, revenue from higher margin services and the continued realization of operating efficiencies. For the fourth quarter, we reported financial performance that was in line with our expectations, concluding a good fiscal year in which we made significant progress executing our strategic initiatives, said Joseph C. Lawler, Chairman, President and Chief Executive Officer of CMGI. As anticipated, revenue for the fourth quarter was affected by specific client programs that were discontinued, but were partially offset by growth from other client engagements. Compared with the fourth quarter of last year, gross margin percentage increased to 12.1% of revenue compared with 10.7% as a result of the progress we are making with our strategies to increase revenue from targeted vertical markets and higher margin services, while improving efficiencies in our business. For the fourth quarter, CMGI reported a net loss of $6.2 million, or $0.01 per diluted share, compared to net loss of $2.5 million, or $0.01 per diluted share, for the same period in the prior fiscal year. The increase in net loss for the fourth quarter of 2007 was primarily due to the increase in restructuring and compensation expenses. The results for the fourth quarter of 2006 included a gain 8

9 Case 1:12-cv Document 1 Filed 06/18/12 Page 9 of 84 of $4.6 million, related to the acquisition by a third party of Alibris, portfolio company. There were no material gains or losses attributed during in the fourth quarter of Fiscal Year 2007 Financial Summary Net revenue of $252.6 million, a decrease of 3.6% from the fourth quarter of the prior year Gross margin, as a percentage of revenue, increased to 12.1% from 10.7% last year Operating loss of $2.4 million compared with operating income of $1.7 million in the prior year Net loss of $6.2 million or $0.01 per diluted share compared net loss of $2.5 million or $0.01 per diluted share in the period last year to same Non-GAAP operating income of $7.2 million compared with $7.6 million in the fourth quarter of 2006 Cash, cash equivalents and marketable securities at July 31, 2007 increased to $282.3 million from $228.7 million at July 31, 2006 ModusLink: Secured 118 new engagements, including multiple engagements for some clients, with 52 coming from new target markets of Storage, Communications and Consumer Electronics Achieved significant progress implementing a shared services model and investing in ERP system Strengthened footprint with the acquisition of remaining stake of joint venture in Japan Made key hires to the leadership team for the CFO, President of Sales and Marketing and CIO positions Created an executive position dedicated to reviewing and pursuing possible acquisition and strategic partnership opportunities Fiscal Year Consolidated Financial Results 9

10 Case 1:12-cv Document 1 Filed 06/18/12 Page 10 of 84 During fiscal 2007, we continued to make significant change in our business to transform the company into a leader in supply chain services and I m pleased with the progress. During the year, we executed our strategy of increasing revenue from higher growth and higher margin target vertical markets. During fiscal 2007, 118 new engagements were secured, including multiple engagements for some clients, with 52 of those coming from our new markets of storage, communications and consumer electronics. In addition, we made progress strengthening our sales and marketing programs, implementing a shared services model and investing in our infrastructure with the implementation of an ERP platform, which is on track with our plans. Importantly, we have assembled a strong and highly experienced leadership team by making key hires for the President of Sales and Marketing, CFO and CIO positions, said Lawler. CMGI reported net revenue of $1.14 billion for the fiscal year ended July 31, 2007, comparable to $1.15 billion reported for the 2006 fiscal year. Gross margin was $131.1 million or 11.5% of revenue for fiscal 2007, compared with $118.2 million, or 10.3% of revenue in fiscal As a percentage of revenue, gross margin improvement was attributed to revenue from engagements in target vertical markets and higher margin services, as well as the realization of operating efficiencies. Operating income for the fiscal year was $14.8 million compared to operating income of $0.6 million for the 2006 fiscal year. Compared with the prior year, operating results were positively affected by improved gross margin performance and a reduction in restructuring expenses. For the 2007 fiscal year, CMGI reported net income of $49.4 million or $0.10 per diluted share compared to net income of $14.9 million or $0.03 per diluted share for the same period in the prior fiscal year. Net income for fiscal 2007 included $35.0 million of investment proceeds from liquidity events compared to proceeds of $27.3 million in fiscal The gains for fiscal 2007 included a gain of $28.7 million from the acquisition by a third party of Avamar, a company in portfolio, during the year. Excluding the effects of charges related to depreciation, amortization of intangibles, stock-based compensation and restructuring, CMGI reported non-gaap operating income of $44.4 million for the 2007 fiscal year compared with non-gaap operating income of $32.4 million for the prior fiscal year. 10

11 Case 1:12-cv Document 1 Filed 06/18/12 Page 11 of 84 Outlook The company currently expects revenue of approximately $1.10 billion to $1.15 billion and operating income to be approximately 2.0% to 2.5% of revenue in fiscal 2008, before any restructuring. Restructuring for fiscal 2008 is expected to be $5 million to $8 million. 32. On October 15, 2007 the Company filed an intentionally false and misleading Annual Report on Form 10-K with the SEC, for the 2007 fourth quarter and fiscal year, ended July 31, 2007, affirming its September 25, 2007 press release in greater detail. 33. The October 15, 2007 filing contained certifications pursuant to Exchange Act Rule 13a-14(a)/15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, signed by Defendants Lawler and Crane. The signed certifications state, in pertinent part: 1. I have reviewed this annual report on Form 10-K of CMGI, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d- 15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known 11

12 Case 1:12-cv Document 1 Filed 06/18/12 Page 12 of 84 to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant s internal control over financial reporting that occurred during the registrant s most recent fiscal quarter (the registrant s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant s internal control over financial reporting; and 5. The registrant s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant s auditors and the audit committee of the registrant s board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant s ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant s internal control over financial reporting. 34. Also contained in the Company s October 15, 2007 filing were certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley act of 2002, signed by Defendants Lawler and Crane, which state, in pertinent part: In connection with the Annual Report on Form 10-K of CMGI, Inc. (the Company ) for the fiscal year ended July 31, 2007 as 12

13 Case 1:12-cv Document 1 Filed 06/18/12 Page 13 of 84 filed with the Securities and Exchange Commission on the date hereof (the Report ), the undersigned, Joseph C. Lawler, hereby certifies, pursuant to 18 U.S.C. 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. 35. Defendants Lawler and Crane each signed substantially similar Section 302 and Section 906 certifications for each Form 10-K and Form 10-Q filed with the SEC, by the Company, during the Class Period (together Sarbanes-Oxley Certifications ). 36. On December 3, 2007, the Company filed an intentionally false and misleading press release with the SEC, concerning its financial results for the first quarter of fiscal year 2008, ended October 31, The press release states, in pertinent part: Waltham, Mass. December 3, 2007 CMGI, Inc. (Nasdaq: CMGI) today reported financial results for its first quarter of fiscal year 2008, ended October 31, Financial Summary Net revenue of $274.7, a decrease of 3.1% compared to the first quarter of fiscal 2007 Operating income of $9.1 million, an increase of 80.9% compared to operating income in the year ago period Income from continuing operations of $9.2 million, 5.1% lower than income from continuing operations in the same period last year Net income of $8.6 million, 16.6% lower than net income in the same period last year Non-GAAP operating income of $17.1 million, an increase of 66.4% from non-gaap operating income in the first quarter of the prior year 13

14 Case 1:12-cv Document 1 Filed 06/18/12 Page 14 of 84 Diluted earnings per share from continuing operations of $0.19, compared to diluted earnings per share from continuing operations of $0.20 for the same period in the prior fiscal year (in each case, adjusted for the recent reverse stock split) Diluted earnings per share including discontinued operations of $0.18, compared to diluted earnings per share including discontinued operations of $0.21 for the same period in the prior fiscal year (in each case, adjusted for the recent reverse stock split) Cash, cash equivalents and marketable securities at October 31, 2007 increased to $261.2 million from $222.2 million at October 31, 2006 First Quarter Consolidated Financial Results We reported good financial results in the quarter with revenue and profitability in line with or better than our expectations, said Joseph C. Lawler, Chairman, President and Chief Executive Officer of CMGI. Revenue was expectedly lower compared with last year due to two specific previously announced client programs that were discontinued, however we are very pleased with the growth we are seeing from other client engagements. Excluding those discontinued programs, revenue grew by approximately 15% compared to the year ago period. Gross margin performance was higher than expected, driven by work mix, continuous improvement initiatives and higher volumes for certain client programs. In addition, we continued to make operational progress this quarter, added Lawler. Our sales and marketing efforts are progressing, our shared services model is having an impact and the implementation of our IT platform is on track. We continued to make planned investments in our business that should enable us to reach our long-term objectives. CMGI reported net revenue of $274.7 million for the first quarter of fiscal 2007, a 3.1% decrease compared to net revenue of $283.6 million for the same period one year ago. Gross profit for the quarter increased 30.0% to $39.1 million from $30.0 million in the first quarter of fiscal 2007, primarily due to favorable product mix especially within the company s Europe and Asia operations as well as efficiencies from continuous improvement initiatives and higher volumes for certain client programs. Gross margin increased to 14.2% in the first quarter of fiscal 2008, compared to 10.6% in the first quarter of fiscal Selling, General and 14

15 Case 1:12-cv Document 1 Filed 06/18/12 Page 15 of 84 Administrative expense, including restructuring and amortization of stock compensation for the first quarter was $29.9 million compared to $25.0 million in the first quarter of the prior period. The increase in SG&A was primarily due to planned investment in the company s IT infrastructure and restructuring related expense of $1.6 million in the quarter associated with a restructuring action taken in North America. Operating income was $9.1 million for the first quarter of fiscal 2008 compared to operating income of $5.1 million in the prior period, an improvement of 80.9%. The operating income improvement for the first quarter of 2008 was a result of improved gross margins during the quarter. For the first quarter, CMGI reported income from continuing operations of $9.2 million, or $0.19 diluted earnings per share, compared to income from continuing operations of $9.7 million, or $0.20 diluted earnings per share, for the same period in the prior fiscal year (in each case, adjusted for the recent reverse stock split). Including income (losses) from discontinued operations, CMGI reported net income of $8.6 million or $0.18 diluted earnings per share (after giving effect to the recent reverse stock split), compared to net income of $10.3 million or $0.21 diluted earnings per share (after giving effect to the recent reverse stock split) for the same period in the prior fiscal year. Net income for the quarter reflects improved operating income performance primarily offset by an increase in income tax expense. Income tax expense for the first quarter of 2008 was $2.1 million. This compares to a tax benefit of $1.4 million in the first quarter of 2007, which was primarily a result of a reduction in valuation allowance for certain net operating losses in Europe. Outlook The Company continues to expect revenue of $1.10 billion to $1.15 billion and operating income to be approximately 2.0% to 2.5% of revenue in fiscal 2008, before any restructuring. Restructuring for fiscal 2008 is expected to be $5 million to $8 million. 37. On December 10, 2007 the Company filed an intentionally false and misleading Form 10-Q quarterly report with the SEC, for the first quarter of fiscal year 2008, ended October 15

16 Case 1:12-cv Document 1 Filed 06/18/12 Page 16 of 84 31, 2007, containing Sarbanes-Oxley Certifications signed by Defendants Lawler and Crane, affirming its December 3, 2007 press release in greater detail. False and Misleading 2008 Statements 38. On March 10, 2008, the Company filed an intentionally false and misleading press release with the SEC, concerning its financial results for the second quarter of fiscal year 2008, ended January 31, The press release states, in pertinent part: WALTHAM, Mass. March 10, 2008 CMGI, Inc. (NASDAQ: CMGI) today reported financial results for its second quarter of fiscal year 2008, ended January 31, Financial Summary Net revenue of $278.0 million, a decrease of 14.4% compared to the second quarter of fiscal 2007 Gross margins improved to 14.0% compared with 12.5% in the prior year period Operating income of $8.6 million, a decrease of 23.7% compared to operating income in the period one year ago, primarily due to higher SG&A costs associated with the Company s planned IT investments Net income of $27.8 million, or $0.58 per share, 22.5% lower than net income in the same period last year Non-GAAP operating income of $15.3 million, a decrease of 21.5% from non-gaap operating income of $19.5 million in the second quarter of the prior year Second Quarter Consolidated Financial Results We are pleased with the ongoing progress we are making transforming our company into a global supply chain services business, said Joseph C. Lawler, Chairman, President and Chief Executive Officer of CMGI. Of particular note, we remain on track with our goal for completing our Enterprise Resource Planning project, which together with our shared services model will enable our company to run optimally and improve financial performance. 16

17 Case 1:12-cv Document 1 Filed 06/18/12 Page 17 of 84 Revenue for the second quarter, adjusted for two discontinued programs, was approximately the same as one year ago, due to timing of new business start ups and the effects of the U.S. economy, added Lawler. Looking forward, we are cautiously optimistic about our revenue performance for the remainder of the year, as our sales and marketing efforts have resulted in the best pipeline of new business I ve seen at CMGI. The challenging economic environment requires lower cost supply chains, faster time to market and swifter response to promotions and liquidations to reduce excess inventory. These factors play to the strengths of our business model and are contributing to our growing sales pipeline. Based on the strength of that pipeline, we are maintaining our full year financial guidance. CMGI reported net revenue of $278.0 million for the second quarter of fiscal 2008, a 14.4% decrease compared to net revenue of $324.8 million for the same period one year ago. Adjusted for two previously announced discontinued programs, net revenue of $278.0 million would have compared with net revenue of $279.0 million in the prior year period on the same basis. As a percentage of revenue, gross margin improved to 14.0% for the second quarter of 2008, from 12.5% in the second quarter of fiscal The improvement in gross margin was attributed to work mix and continuous improvement initiatives. Operating income was $8.6 million for the second quarter of fiscal 2008, 23.7% lower than $11.3 million for the prior year period. Compared with the prior year period, the lower operating income for the second quarter of 2008 was primarily due to higher selling, general and administrative costs related to the implementation of the new ERP system. Net income for the second quarter of 2008 was $27.8 million, or $0.58 diluted earnings per share, compared to net income of $35.9 million, or $0.74 diluted earnings per share, for the same period in the prior fiscal year. The Company s per share data for prior year periods has been adjusted to reflect the 1-for-10 reverse stock split of the Company s common stock, effective October 31, Net income for the second quarter of fiscal 2008 includes an $18.5 million gain primarily from its venture capital This gain includes a $12.9 million gain from the acquisition of The Generations Network by a third party. Net income from the second quarter of 2007 included a gain of $28.7 million from the acquisition by a third party of Avamar Technologies, a company in held an investment. 17

18 Case 1:12-cv Document 1 Filed 06/18/12 Page 18 of 84 Excluding net charges related to depreciation, restructuring and amortization of intangibles and stock-based compensation, non- GAAP operating income was $15.3 million for the second quarter of fiscal 2008, compared with non-gaap operating income of $19.5 million for the same period in fiscal Outlook The Company continues to expect revenue of $1.10 billion to $1.15 billion and operating income, before any restructuring expenses, to be approximately 2.0% to 2.5% of revenue in fiscal Restructuring expenses for fiscal 2008 are expected to be $5 million to $8 million. 39. On March 11, 2008, the Company filed an intentionally false and misleading Form 10-Q quarterly report with the SEC, for the second quarter of fiscal year 2008, ended January 31, 2008, containing Sarbanes-Oxley Certifications signed by Defendants Lawler and Crane, affirming its March 10, 2008 press release in greater detail. 40. On June 9, 2008, the Company filed an intentionally false and misleading press release with the SEC, concerning its financial results for the third quarter of fiscal year 2008, ended April 30, The press release states, in pertinent part: WALTHAM, Mass. June 9, 2008 CMGI, Inc. (NASDAQ: CMGI) today reported financial results for its third quarter of fiscal year 2008, ended April 30, Financial Summary Net revenue of $239.2 million, a decrease of 15.2% compared to the third quarter of fiscal 2007 Gross margins improved 230 basis points to 12.9% of revenue compared with 10.6% in the prior year period Operating income of $10 thousand compared to operating income of $877 thousand in the third quarter of 2007 Operating income of $9.1 million, an increase of 80.9% compared to operating income in the year ago period Income from continuing operations of $9.2 million, 5.1% lower than income from continuing operations in the same period last year 18

19 Case 1:12-cv Document 1 Filed 06/18/12 Page 19 of 84 Non-GAAP operating income of $7.6 million, an increase of 1.5% from non-gaap operating income in the third quarter of the prior year Consolidated Financial Results During the third quarter, we continued to execute our strategy and position our business for growth, said Joseph C. Lawler, Chairman, President and Chief Executive Officer of CMGI. We made very good progress with our sales and marketing initiatives, which are enabling us to introduce new solutions, secure new engagements and build our sales pipeline. In addition, we made progress with the implementation of our ERP platform and continued to execute our acquisition strategy. The recently announced acquisitions of Open Channel Solutions and PTS Electronics strengthen our market position and will also help improve the growth and profitability of our company. We expected revenue for the third quarter of fiscal 2008 to be lower than the third quarter of fiscal 2007 due to two previously announced discontinued programs, continued Lawler. In addition, we experienced volume declines in some client programs and delays in the startup of some new engagements. As a percentage of revenue, gross margins improved by 230 basis points, which resulted in an increase in non-gaap operating income despite the lower revenue in the quarter. The continuous improvement we ve been showing in gross margins is the result of executing our long-term strategy, added Lawler. CMGI reported net revenue of $239.2 million for the third quarter of fiscal 2008, a 15.2% decrease compared to net revenue of $282.1 million for the same period one year ago. As a percentage of revenue, gross margins improved to 12.9% for the third quarter of fiscal 2008, from 10.6% in the third quarter of fiscal The improvement in gross margin was attributed to work and geography mix as well as continuous improvement initiatives. Net loss for the third quarter of 2008 was $2.6 million, or ($0.05) per share, compared to net income of $9.4 million, or $0.19 earnings per share, for the same period in the prior fiscal year. Net results include a change in other income (loss) from $7.8 million in the third quarter of fiscal 2007 to a loss of $70 thousand in the third quarter of fiscal This change was primarily due to a decline in interest income of approximately $1.1 million and a decline of $4.6 million related liquidity events. Net loss for the third quarter of 2008 also includes a tax expense of 19

20 Case 1:12-cv Document 1 Filed 06/18/12 Page 20 of 84 $3.2 million, compared with a tax benefit of $900 thousand in the prior year period due to a shift in the geographic distribution of income, an increase in the tax rate in China and some discrete taxrelated items. Excluding net charges related to depreciation, restructuring and amortization of intangibles and stock-based compensation, non- GAAP operating income was $7.6 million for the third quarter of fiscal 2008, a 1.5% increase compared with non-gaap operating income of $7.5 million for the same period in fiscal As we enter the fourth quarter of fiscal 2008, we are encouraged with the amount of new engagements we have secured and the size and make-up of our sales pipeline. We do remain cognizant of the effects of the uncertain economic environment on our existing business and the expenses needed for the startup of the new business secured over the past few months. Based on these factors, we are revising our financial guidance ranges for fiscal 2008, concluded Crane. Outlook The Company now expects revenue of approximately $1.05 billion to $1.10 billion, compared with its previous range of $1.10 billion to $1.15 billion and operating income, before any restructuring expenses, to be at the low end of its previous guidance of 2.0% to 2.5% of revenue in fiscal Restructuring expenses for fiscal 2008 are expected to be $5 million to $8 million. 41. On June 9, 2008, the Company filed an intentionally false and misleading Form 10-Q quarterly report with the SEC, for third quarter of fiscal year 2008, ended April 30, 2008, containing Sarbanes-Oxley Certifications signed by Defendants Lawler and Crane, affirming its June 9, 2008 press release in greater detail. 42. On September 29, 2008, the Company filed an intentionally false and misleading press release with the SEC, concerning its financial results for the 2008 fourth quarter and fiscal year ended July 31, The press release states, in pertinent part: WALTHAM, Mass. September 29, 2008 ModusLink Global Solutions, Inc. (formerly known as CMGI, Inc.) (NASDAQ: 20

21 Case 1:12-cv Document 1 Filed 06/18/12 Page 21 of 84 CMGI) today reported preliminary financial results for its 2008 fourth quarter and fiscal year ended July 31, Results for the fourth quarter and full fiscal year are preliminary based on the inclusion of an estimated non-cash goodwill impairment charge of $12 million related to its European segment. The amount of the non-cash charge will be finalized in conjunction with the completion of the Company s Form 10-K filing. As announced in a separate press release issued today, the Company has changed its name from CMGI, Inc. to ModusLink Global Solutions, Inc. Its common stock will trade under the Nasdaq Global Select Market symbol MLNK effective at the opening of trading on September 30, Preliminary Fourth Quarter Financial Summary Net revenue of $276.3 million, an increase of 9.4% from the fourth quarter of fiscal 2007 Gross margin, as a percentage of revenue, of 10.4% compared with 12.1% in the same period during the prior year Selling, General and Administrative expense of $44.1 million. Excluding the estimated goodwill impairment charge, SG&A expense was $32.1 million or 11.6% of revenue, compared to SG&A expense of $33.0 million or 13.1% of revenue in the fourth quarter of the prior year Operating loss of $15.4 million, compared with an operating loss of $2.4 million in the fourth quarter of fiscal 2007 Net loss from continuing operations of $18.6 million or $0.39 per share, compared to a net loss from continuing operations of $6.2 million, or $0.13 per share, in the same period last year Net loss of $22.7 million, or $0.48 per share, compared to a net loss of $6.2 million, or $0.13 per share, in the same period last year Non-GAAP operating income of $6.3 million compared with $7.2 million in the fourth quarter of 2007 Preliminary Fourth Quarter Consolidated Financial Results During the fourth quarter, we grew our business and concluded a challenging but successful year in the transformation of our company, said Joseph C. Lawler, Chairman, President and Chief 21

22 Case 1:12-cv Document 1 Filed 06/18/12 Page 22 of 84 Executive Officer of CMGI, now ModusLink Global Solutions. In the fourth quarter, we continued to build the Company s sales pipeline, driven by the introduction of new solutions, implementation of targeted lead generation programs and improved penetration of our targeted vertical markets. Despite the challenges of the current economic environment that resulted in lower volumes in some existing accounts, ModusLink Global Solutions is very well positioned for long-term growth as we continue to execute our strategy and fulfill the vision of the company. The Company reported net revenue of $276.3 million for the fourth quarter of fiscal 2008, an increase of 9.4% compared with net revenue of $252.6 million reported for the same period one year ago. The increase in revenue was attributed to organic growth, primarily driven by new client engagements, and contributions of $13.7 million from the recently acquired companies Open Channel Solutions and PTS Electronics. Adjusted for two previously announced discontinued programs, net revenue of $276.3 million would have compared with net revenue of $240.2 million in the prior year period. Gross margin was $28.7 million, or 10.4% of revenue, in the fourth quarter of fiscal 2008, compared with $30.5 million, or 12.1% of revenue, in the fourth quarter of fiscal The decrease in gross margin as a percentage of revenue was due to increased start-up costs related to new business engagements and lower volumes from some existing clients. Selling, General and Administrative expense for the fourth quarter was $44.1 million. Excluding the goodwill impairment charge, SG&A expense was $32.1 million, or 11.6% of revenue, compared to $33.0 million, or 13.1% of revenue, in the fourth quarter of the prior year. The decrease in SG&A expenses excluding the goodwill impairment charge was primarily due to lower restructuring and lower compensation related costs, partially offset by increases attributable to the inclusion of the selling, general and administrative costs of the recently acquired companies. Net loss from continuing operations for the fourth quarter was $18.6 million, or $0.39 per share, compared to net loss from continuing operations of $6.2 million, or $0.13 per share, for the same period in fiscal Net loss for the fourth quarter of 2008 was $22.7 million or $0.48 per share, compared to net loss of $6.2 million or $0.13 per share for the same period in the prior year. 22

23 Case 1:12-cv Document 1 Filed 06/18/12 Page 23 of 84 Fiscal 2008 fourth quarter results included a loss from discontinued operations of $4.2 million, or $0.09 per share, primarily due to updated sublease assumptions for a facility no longer being utilized for operations by the Company. Preliminary Fiscal Year 2008 Financial Summary Net revenue of $1,068 million, compared to net revenue of $1,143 million in fiscal 2007 Gross margin, as a percentage of revenue, increased to 12.9% from 11.5% in the previous year Selling, General and Administrative expense of $135.2 million. Excluding the estimated goodwill impairment charge, SG&A expense was $123.2 million, or 11.5% of revenue, compared to $116.3 million, or 10.2% of revenue, in fiscal 2007 Operating income of $2.4 million, compared to operating income of $14.8 million in the prior fiscal year Net income from continuing operations of $15.3 million, or $0.32 per diluted share, compared to net income from continuing operations of $49.1 million, or $1.00 per diluted share, in fiscal 2007 Net income was $11.1 million, or $0.23 per diluted share, compared to $49.4 million, or $1.01 per diluted share, in fiscal 2007 Non-GAAP operating income was $46.2 million compared with non-gaap operating income of $44.4 million for the prior fiscal year Preliminary Fiscal Year Consolidated Financial Results The Company reported net revenue of $1,068 million for the fiscal year ended July 31, 2008, compared to $1,143 million reported for the 2007 fiscal year. Adjusted for two previously announced discontinued programs, net revenue of $1,068 million would have compared with net revenue of $1,005 million in the prior year period on the same basis. Gross margin was $137.6 million, or 12.9% of revenue for fiscal 2008, compared with $131.1 million, or 11.5% of revenue for fiscal As a percentage of revenue, gross margin improvement was attributed to revenue from engagements in target 23

24 Case 1:12-cv Document 1 Filed 06/18/12 Page 24 of 84 vertical markets and higher margin services, as well as the realization of operating efficiencies. Net income from continuing operations for fiscal 2008 was $15.3 million, or $0.32 per diluted share, compared to net income from continuing operations of $49.1 million, or $1.00 per diluted share, for fiscal Net income for fiscal 2008 was $11.1 million, or $0.23 per diluted share, compared to net income of $49.4 million, or $1.01 per diluted share, for the prior year. Fiscal 2008 results included a loss from discontinued operations of $4.2 million, or $0.09 per share, compared with income from discontinued operations of $0.3 million, or $0.01 per diluted share, in fiscal Net income for fiscal 2008 included $19.1 million of investment gains from liquidity events compared with gains of $35.0 million in fiscal We are positioned for growth in fiscal 2009, continued Lawler. Our sales pipeline is the strongest we have seen at the company. However, we remain cognizant of the uncertain global economic condition and its impact on consumer demand in the technology markets we serve. As we enter the new fiscal year, we continue to be focused on revenue growth, expanding existing client relationships through the introduction of new solutions and improving operational efficiencies. We are optimistic that our strategy will create significant long-term value for our shareholders. Outlook Based on the strength of its sales pipeline and expectations for increasing demand for the Company s services, and given the uncertain economic environment, the Company currently expects revenue in fiscal 2009 to grow in the range of 10% to 12% over fiscal year 2008 revenue. The Company expects this revenue growth to be weighted toward the second, third and fourth quarters of fiscal On October 14, 2008 the Company filed an intentionally false and misleading Form 10-K annual report with the SEC, for the 2008 fourth quarter and fiscal year ended July 31, 2008, containing Sarbanes-Oxley Certifications signed by Defendants Lawler and Crane, affirming its September 29, 2008 press release in greater detail. 24

25 Case 1:12-cv Document 1 Filed 06/18/12 Page 25 of On December 4, 2008, the Company filed an intentionally false and misleading press release with the SEC, concerning its financial results for the first quarter of fiscal year 2009, ended October 31, The press release states, in pertinent part: WALTHAM, Mass. December 4, 2008 ModusLink Global Solutions, Inc. (NASDAQ: MLNK) today reported financial results for its first quarter of fiscal year 2009, ended October 31, Financial Summary Net revenue of $291.4 million, an increase of 6.1% from the first quarter of fiscal 2008 Gross margin as a percentage of revenue of 9.6% compared to 14.2% in the same period during the prior year; excluding the impact of $3.7 million of deferred revenue, gross margin as a percentage of revenue would have been 10.8% Operating loss of $10.8 million compared to operating income of $9.1 million in the first quarter of fiscal 2008 Net loss of $18.6 million, or ($0.41) per share, compared with net income of $8.6 million, or $0.18 per diluted share, in the same period last year Non-GAAP operating income of $3.3 million compared with $17.1 million in the first quarter of fiscal 2008 Consolidated Financial Results In the first quarter, we saw lower volumes in our existing engagements and delayed start of new engagements based on weak consumer spending in the Americas and Europe, said Joseph C. Lawler, Chairman, President and Chief Executive Officer of ModusLink Global Solutions. Given the extreme sense of uncertainty regarding the economy, we have been aggressively taking action to reduce costs across the organization and restructure areas where we can gain efficiencies, while continuing to execute our overall business strategy. We expect the result of our actions will be more than $40 million of annualized cost reductions resulting in a leaner, more focused and efficient company as we move forward. 25