UNITED STATES DISTRICT COURT WESTERN DISTRICT OF VIRGINIA PLAINTIFF S COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAW NATURE OF THE ACTION

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1 UNITED STATES DISTRICT COURT WESTERN DISTRICT OF VIRGINIA CHARLES H. YEATTS, on behalf of ) himself and all others similarly situated, ) ) Plaintiff, ) v. ) Case No.: ) OPTICAL CABLE CORPORATION, ) ROBERT KOPSTEIN, and various JOHN ) DOES, ) ) Defendants. ) PLAINTIFF S COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAW NATURE OF THE ACTION 1. The plaintiff, Charles H. Yeatts (hereinafter Yeatts ), individually and on behalf of himself and all others similarly situated, who purchased the common stock of Optical Cable Corporation (hereinafter Optical Cable ) during the period from July 31, 2000 to October 8, 2001, inclusive (hereinafter the Class Period ), brings this class action to recover damages caused to the class by the defendants, Optical Cable, Robert Kopstein (hereinafter Kopstein ), and various John Does, violations of the federal securities law and fraudulent and/or negligent misrepresentations and/or omissions. 2. The defendants violated the federal securities law by engaging in a conspiracy and/or course of conduct pursuant to which they made a series of materially false and misleading statements and failed to make and/or omitted necessary, required, accurate, and material statements concerning the business and financial operations of Optical Cable, Optical Cable common stock, and the holdings of Kopstein, with the intent and having the 1

2 effect of substantially inflating the price of Optical Cable common stock. Specifically, the defendants made numerous positive statements as to the business and financial health of Optical Cable prior to and during the Class Period yet failed to make any statement to the investing public concerning the significant risk and likely potential loss due to Kopstein s unusually large percentage of ownership of Optical Cable common stock and his concurrent use of the stock as collateral for margin loans with various brokerage accounts held by Kopstein. In fact, Kopstein had been cautioned by at least one brokerage firm to not speculate by borrowing money against his Optical Cable stock to invest in other tech securities. Kopstein s speculation in other tech companies securities led to the margin calls which then resulted in significant losses to the plaintiffs when the brokerage firms seized the loan collateral, Kopstein s Optical Cable stock, and dumped millions of shares on the market at the same time. JURISDICTION AND VENUE 3. This action arises under Sections 10(b) and 20(a) of the Exchange Act, 15 U.S.C. 78j(b), 78t(a) and SEC Rule 10b-5, 17 C.F.R b-5. The jurisdiction of this Court is based on Section 27 of the Exchange Act, 15 U.S.C. 78aa and on 28 U.S.C. 1331, Venue is proper in this District under Section 27 of the Exchange Act, 15 U.S.C. 78aa and under 28 U.S.C. 1391(b). The wrongs alleged herein occurred in substantial part in this District, including the preparation and dissemination to the investing public of false and misleading information and the failure to reveal material information to the investing public. 2

3 5. In connection with the acts and conduct alleged herein, the defendants, directly and indirectly, used the means and instrumentalities of interstate commerce, including the United States mails and the facilities of the national securities exchanges. PARTIES 6. The plaintiff, Charles H. Yeatts, purchased shares of Optical Cable common stock during the Class Period, as set forth in the certification accompanying the original Complaint, and was damaged as a result of the wrongful conduct complained of herein. 7. The defendant, Optical Cable, is a Virginia corporation, with its principal corporate offices located at 5290 Concourse Drive, Roanoke, Virginia, Optical Cable is listed on NASDAQ under the symbol OCCF. 8. The defendant, Robert Kopstein was, at all times relevant hereto, Director, President, Chief Executive Officer, Chief Financial Officer, and/or Beneficial Officer of Optical Cable and the principal and controlling shareholder of Optical Cable. 9. Defendants, John Does, were at all times relevant hereto, directors and/or officers of Optical Cable. FACTUAL ALLEGATIONS 10. The common stock of Optical Cable, at all times relevant hereto, was publicly traded on NASDAQ. As of August 28, 2001, 55,996,279 shares of Optical Cable common stock were outstanding. 11. The defendant, Kopstein, during the relevant times relating to this cause of action, owned approximately 96% of the Optical Cable common stock (53,660,000 shares). Kopstein had pledged a significant portion of his holdings in Optical Cable common stock 3

4 as collateral for his margin loan securities with various brokerage firms This margining required that, upon certain occurrences, all or at least a large amount of Kopstein s Optical Cable common stock could be sold by the brokerage firms to account for any shortfalls as a result of any margin calls. 12. Margining stock generally entails a much greater degree of risk than merely purchasing the stock for the full price as margining is a secured loan against the purchase of stock. Further, mass sales of a large percent of a corporation s common stock will generally result in a depression of that corporation s common stock s price. Accordingly, the public sale or offer of sale of a significant percentage of any publicly traded corporation s common stock on the public market pursuant to margin calls, without any prior warning, announcement, and/or explanation, would, generally, have a significant negative impact on the price of that corporation s common stock. Compounding the problem of unexpected dumping of the stock with such sales being on the behalf of the corporation s executive officer leads to even further erosion in the stock s market price. 13. The defendant s, Kopstein s, ownership of almost all of Optical Cable s common stock and his pledging of said stock as collateral for margin loans, created a significant risk and constituted material, adverse, non-public information concerning Optical Cable s common stock, especially as Kopstein was a control person, Director, Chief Executive Officer, and/or President of Optical Cable. 14. Upon information and belief, none of the defendants made any public statement, release, announcement, or filing advising the investing public of the fact of 4

5 Kopstein s use of the Optical Cable common stock he owned as collateral on his margin accounts and the attendant risks. 15. The defendant, Kopstein, by virtue of his positions as Director, President, Chief Executive Officer, Chief Financial Officer, and/or Beneficial Officer of Optical Cable and as the principal and vast majority shareholder, had access to the material, adverse, nonpublic information about Optical Cable s business, stock, operations, finances, products, markets, and present and future business prospects via access to corporate documents (including Optical Cable s operating plans, budgets, forecasts, and reports of actual operations), conversations, and connections with other corporate directors, officers, and employees, attendance at management and Board of Directors meetings and committees thereof and via reports and other information provided in connection therewith. 16. The defendants, John Does, by virtue of their positions as directors and/or officers of Optical Cable, had access to the material, adverse, non-public information about Optical Cable s business, stock, operations, finances, products, markets, and present and future business prospects via access to corporate documents (including Optical Cable s operating plans, budgets, forecasts, and reports of actual operations), conversations, and connections with other corporate officers and employees, attendance at management and Board of Directors meetings and committees thereof and via reports and other information provided in connection therewith. 17. The defendant, Kopstein, by reason of his positions with Optical Cable and vast majority common stock ownership, was a controlling person of Optical Cable and had the power and influence, and exercised or failed to exercise the same, to cause Optical 5

6 Cable to engage in the conduct complained of herein. Further, Kopstein controlled and/or possessed the power and/or authority to control the contents of Optical Cable s quarterly and year end reports, press releases, and presentations to securities analysts and, thereby, the investing public. 18. The defendants, John Does, by reason of their positions with Optical Cable, were controlling persons of Optical Cable and had the power and influence, and exercised or failed to exercise the same, to cause Optical Cable to engage in the conduct complained of herein. Further, the John Does controlled and/or possessed the power and/or authority to control the contents of Optical Cable s quarterly and year end reports, press releases, and presentations to securities analysts and, thereby, the investing public. 19. The defendant, Kopstein, because of his positions and as a vast majority shareholder and because of the attendant risks and potential effects on the price of Optical Cable s common stock in the event of margin calls, had a duty to advise and/or notify the owners of Optical Cable common stock of the circumstances involving his ownership and pledging of said shares as collateral for his personal margin trading accounts. 20. The defendants, Optical Cable and John Does, had a duty to know of the circumstances involving Kopstein s ownership of Optical Cable s common stock and his use of said stock as collateral for personal margin trading accounts, due to, inter alia, the attendant risks and potential devastating effects of margin calls. 21. The defendants, Optical Cable and John Does, knew, should have known, and/or recklessly disregarded the circumstances involving Kopstein s ownership and use 6

7 of Optical Cable s common stock as collateral for his personal speculative stock trading. 22. Prior to and during the Class Period, the defendant, Kopstein, by virtue of his positions and access to the material, adverse, non-public information about Optical Cable, knew, should have known, and/or recklessly disregarded that the material, adverse, nonpublic information specified herein was being concealed from the public. 23. Prior to and during the Class Period, the defendants, John Does, by virtue of their positions and access to the material, adverse, non-public information about Optical Cable, knew, should have known, and/or recklessly disregarded that the material, adverse, non-public information specified herein was being concealed from the public. 24. Prior to and during the Class Period, the defendant, Kopstein, participated in, made, caused to be made, announced, and/or disseminated a number of positive public statements concerning Optical Cable s business, stock, operations, finances, products, markets, and present and future business prospects. 25. Prior to and during the Class Period, the defendants, John Does, participated in, made, caused to be made, announced, and/or disseminated a number of positive public statements concerning Optical Cable s business, stock, operations, finances, products, markets, and present and future business prospects. 26. Prior to and during the Class Period, the defendant, Optical Cable, participated in, made, caused to be made, announced, and/or disseminated a number of positive public statements concerning Optical Cable s business, stock, operations, finances, products, markets, and present and future business prospects. 7

8 27. During the Class Period, the defendants, via, inter alia, PRNEWSWIRE.COM made numerous positive announcements concerning the anticipated economic success and financial return of Optical Cable: a. On January 3, 2000, the defendants reported that net income jumped 76%; b. On March 13, 2000, Kopstein reported that Optical Cable was particularly well positioned for future growth; c. On March 16, 2000, the defendants reported record net income; d. On April 4, 2000, the defendants reported record orders for March; e. On May 3, 2000, the defendants reported record orders for the third quarter; f. On June 6, 2000, the defendants reported record orders for May; g. On August 2, 2000, Kopstein reported revenues were expected to grow 30% for the third quarter of 2000; h. On September 6, 2000, the defendants reported net income was up 25% and Kopstein reported that Optical Cable will continue to see double digit growth; i. On October 4, 2000, the defendants reported orders were up 60%; k. On November 2, 2000, the defendants reported record orders for October; l. On December 4, 2000, the defendants reported orders were up 130% and Kopstein reported that a strong fiscal year 2001 was expected; m. On January 4, 2001, the defendants reported 73% increase in orders; n. On January 25, 2001, Kopstein reported an expectation of increased profit in 2001; 8

9 o. On February 1, 2001, the defendants reported orders were up 95%; p. On February 13, 2001, the defendants reported sales were expected to rise 50% and that the first quarter of 2001 was expected to be the strongest in the history of Optical Cable; q. On March 19, 2001, the defendants reported net sales were up 49.8% to record levels; r. On April 2, 2001, the defendants reported record orders for March; s. On May 17, 2001, Kopstein reported record net sales and operating income for the second quarter, orders were up 95% and any losses were due to investments owned by the company; and t. On February 1, 2001, the defendants reported orders were up 37%. 28. On January 27, 2000, the defendants, via Optical Cable s Form 10K for the year ending October 31, 1999, announced that Net Income for 1998 and 1999, respectively, was $7.3 million and $8.3 million and that losses charged to allowances for bad debts for 1998 and 1999, respectively, were approximately $90,000 and $84,000. The defendants also announced that the various claims and legal actions incurred in the ordinary course of business would not have a material or adverse effect on Optical Cable. 29. On September 11, 2000, the defendants, via Optical Cable s Form 8K, announced that Optical Cable was declaring a three for two stock split, a 32% increase of revenues from the previous year, a 25% increase in income, and the company was on pace for a banner year. Kopstein announced that he expected to continue to see strong double digit growth. 9

10 30. On September 27, 2000, the defendants, via Optical Cable s Form 8K, announced that Optical Cable was a defendant in an EEOC lawsuit but that it would have no material effect on Optical Cable. 31. On March 19, 2001, the defendants, via Optical Cable s Form 10Q for the quarterly period ending January 31, 2001, announced that: net sales increased 49.8% but there was a net loss due in part to the bankruptcy of one of Optical Cable s major distributors. The defendants also announced that they foresaw a trend of accelerated development for Optical cable s products which would continue into the future. 32. On June 29, 2001, the defendants, via Optical Cable s Form 10K for the year ending October 31, 2000, announced that Optical Cable had an excellent reputation for product excellence, net sales increased 14.8% for fiscal year 2000 and would continue to increase, and total assets increased 40% from the previous year. The defendants also announced that: Optical Cable had margin loans equal to $5.6 million, Optical Cable had set aside approximately $453,000 for uncollectible accounts in fiscal year 2000, and recognized the bankruptcy of one of its major distributors. Optical Cable set aside over $1 million for estimated uncollectible debts due to the bankruptcy. However, the defendants announced that the credit risks for the fiscal year 2000 had been adequately provided for and that any other claims and legal actions would not have a material or adverse effect on Optical Cable. 33. On September 14, 2001, the defendants, via Optical Cable s Form 10Q for the quarterly period ending April 30, 2001, announced that: net sales increased 41% but there was a net loss of $3.8 million and there was a 6.3% decline in the value of Optical Cable securities. The defendants also announced that additional claims of discrimination 10

11 had been filed against Optical Cable and that the lawsuit could be substantial and have a material and adverse effect on Optical Cable. 34. On September 14, 2001, the defendants, via Optical Cable s Form 10Q for the quarterly period ending July 31, 2001, announced that it incurred approximately $2,271,419 in allowances for uncollectible accounts for the nine month period ending July 31, 2001, yet had incurred only $260,657 in allowances for uncollectible accounts for the nine month period ending July 31, Upon information and belief, during the period from July 31, 2000 to October 8, 2001, the defendants failed to timely and fully disclose the ongoing business and financial difficulties of Optical Cable which, inter alia, resulted in the excessive allowances for uncollectible accounts for the period ending July 31, 2001, which contributed to the precipitous fall of the price of Optical Cable s common stock. 36. Upon information and belief, during the period from July 31, 2000 to October 8, 2001, the defendants failed to timely and fully disclose the ongoing difficulties and problems confronting Optical Cable which, inter alia, resulted in the precipitous fall of the price of Optical Cable s common stock. 37. On September 14, 2001, the defendants, via Optical Cable s Form 10Q for the quarterly period ending July 31, 2001, announced that its net income decreased from $7.1 million for the nine months ending July 31, 2000, to a net loss of $2.9 million for the nine months ending July 31, Further, the defendants announced that from July 31, 2001, to August 28, 2001, the value of its trading securities held had decreased by approximately 8.7%. 11

12 38. During the Class Period, the defendant, Kopstein, failed to and/or failed to cause to be released, announced, and/or disseminated the material, adverse, non-public information specified herein. 39. During the Class Period, the defendants, John Does, failed to and/or failed to cause to be released, announced, and/or disseminated the material, adverse, non-public information specified herein. 40. During the Class Period, the defendant, Optical Cable, failed to and/or failed to cause to be released, announced, and/or disseminated the material, adverse, non-public information specified herein. 41. As officers, directors, owners, and/or controlling persons of a publicly held company whose common stock was actively traded on NASDAQ, the defendants had a duty to disseminate accurate and truthful material information promptly with regard to Optical Cable s business and financial operations and legal difficulties, to correct any previously issued statements that had become inaccurate or misleading, and to disclose any material, adverse, non-public information that would materially affect the present and future operating results of Optical Cable so that the market price of Optical Cable s stock would be based on truthful and accurate information. Each of the defendants are responsible and liable for the results of their actions and/or omissions. 42. The defendant, Optical Cable, had a duty to disseminate accurate and truthful material information promptly with regard to Optical Cable s business and financial operations and legal difficulties, to correct any previously issued statements that had become inaccurate or misleading, and to disclose any material, adverse, non-public 12

13 information that would materially affect the present and future operating results of Optical Cable so that the market price of Optical Cable s stock would be based on truthful and accurate information. 43. On September 14, 2001, the defendants, via Optical Cable s Form 10Q for the quarterly period ending July 31, 2001, announced that Optical Cable had margin loans on some of the common stock it owned, in the amount of $2,512,557 and previously had margin loans on some its common stock as of October 31, in the amount of $5,658,574 and that these margin loans could result in margin calls. 44. Upon information and belief, on September 14, 2001, the defendants, via Optical Cable s Form 10Q for the quarterly period ending July 31, 2001, did not make any mention of Kopstein s margining of the Optical Cable common stock he owned nor the attendant risks to shareholders. Upon information and belief, the defendants failed to make any mention of Kopstein s margining of the Optical Cable common stock he owned nor the attendant risks to shareholders in any other required filing or public announcement. 45. Upon information and belief, the defendants, Kopstein and various John Does, concurrently and in concert, engaged in various activities relating to the acts and omissions alleged herein. 46. Upon information and belief, prior to and after August, 2001, the defendant, Kopstein, received margin calls on the Optical Cable common stock he owned. Kopstein was unable to meet these margin calls. 47. Subsequently, upon information and belief, Kopstein and/or Kopstein s brokers, pursuant to the margin calls, instituted mass sales of Kopstein s Optical Cable 13

14 common stock in a very short period of time, resulting in the swift, sharp and significant drop in the price of Optical Cable s common stock from $13.15 per share in May, 2001 to $9.00 per share on July 27, 2001 to $1.86 per share on September 26, Upon information and belief, no public statement, release, announcement, or filing was made to the investing public prior to the mass sales of Kopstein s Optical Cable common stock. 49. Prior to August, 2001, and during the immediately preceding months, trading volume in Optical Cable s common stock ranged from approximately 75,000 shares per day to approximately 280,000 shares per day. In contrast, on September 28, 2001, 4,913,400 shares of Optical Cable common stock had been traded. 50. From August 1, 2001 to August 29, 2001, sales of Kopstein s Optical Cable common stock ranged from 10,400 shares per day to 70,000 shares per day at prices ranging from $8.00 per share to $9.10 per share. Upon information and belief, Kopstein continued to sell shares of Optical Cable common stock in September, On September 26, 2001, in a public statement acknowledging the recent substantial increase in trading in Optical Cable common stock and concurrent lower price, Optical Cable announced that, in August, Kopstein had sold 358,100 shares, 288,100 of which were for margin calls. The dumping of Optical Cable stock by Kopstein continued throughout September. In effect, Kopstein was dumping mass quantities of his Optical Cable stock on the market for no known reason and without notice to shareholders in an offering and to meet his personal margin calls. 14

15 51. The defendant, Kopstein, on or about October 2, 2001, obtained a temporary restraining order halting the trading of shares of Optical Cable common stock. On the same date, Optical Cable announced for the very first time, that nearly all of Kopstein s shares of Optical Cable common stock had been pledged to secure margin loans. On the same date, Optical Cable, announced that it had formed an independent committee to initiate an investigation into the conduct of Kopstein, the mass sales of Kopstein s Optical Cable common stock, and the resulting implosion in the price of Optical Cable s common stock. 52. On October 8, 2001, Optical Cable announced for the first time that Kopstein had pledged his Optical Cable stock to various brokerage firms including Saloman Smith Barney, Merrill Lynch, UBS Warburg, Bear Stearns, A.G. Edwards, and Scott & Stringfellow. His pledge of Optical Cable securities to each of these firms ranged from 1.5 million shares to 14 million shares and these firms had previously notified Kopstein that they intended to dump these shares on the market for immediate liquidation of his personal margin debt. 53. Based upon these specific allegations, the plaintiff alleges that sufficient direct and circumstantial evidence exists to show a causal connection between the fraudulent acts and omissions of the defendants and the subsequent precipitous decline of the price of Optical Cable s common stock, resulting in losses to the plaintiff. SCIENTER 54. As alleged herein, the defendants acted with scienter in that the defendants had actual knowledge of the misrepresentations and omissions of the material 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 15

16 material misrepresentations and/or omissions were done knowingly and/or recklessly and for the purpose and effect of concealing Optical Cable s operations and business affairs and legal difficulties from the investing public, concealing the circumstances concerning Kopstein s margining of his Optical Cable common stock and the attendant risks, and supporting the artificially inflated price of Optical Cable common stock. Defendants knew and/or were reckless in not knowing that the public documents and statements issued or disseminated in the name of Optical Cable were materially false and misleading; knew or were reckless in not knowing that such statements or documents would be issued or disseminated to the investing public; knowingly and substantially participated or acquiesced in the issuance or dissemination of such statements or documents; and knew and/or were reckless in failing to disclose the adverse material facts as specified herein, all as primary violations of the federal securities laws. As demonstrated by the defendants statements and/or missions throughout the Class Period, if they did not have actual knowledge of the misrepresentations and/or omissions alleged, the defendants were reckless in failing to obtain such knowledge by deliberately refraining from taking those steps necessary to discover whether those statements were false and/or misleading. As set forth elsewhere herein in detail, the defendants, by virtue of their receipt of information reflecting the true facts regarding Optical Cable, their control over, and/or receipt and/or modification of Optical Cable s allegedly materially misleading mis-statements and/or associations with Optical Cable which made them privy to confidential proprietary information concerning Optical Cable and its securities, participated in the fraudulent scheme alleged herein. PLAINTIFF S CLASS ACTION ALLEGATIONS 16

17 55. Plaintiff brings this action as a class action pursuant to Federal Rule of Civil Procedure 23(a) and (b)(3) on behalf of a Class, which consists of all persons who purchased or otherwise acquired shares of Optical Cable common stock during the Class Period. Excluded from the Class are: the defendants, members of the immediate family of the defendants, individual defendants, and any entity in which any defendant has or had a controlling interest, and the legal representatives, heirs, successors, or assigns of any defendant. 56. As of August 28, 2001, there were 55,996,279 shares of Optical Cable common stock outstanding in an actively traded and efficient market in which millions of shares were traded during the Class Period. The members of the Class are so numerous that joinder of all members is impracticable. Class members are located throughout the United States. While the exact number of Class members is unknown to the plaintiff at this time, the plaintiff believes that there are hundreds of members of the Class. Record owners and members of the Class may be identified from records maintained by Optical cable or its transfer agent and may be notified by the pendency of this action by mail, using the form of notice similar to that customarily used in securities actions. 57. The plaintiff s claims are typical of the claims of the members of the Class in that the plaintiff and each Class member purchased or otherwise obtained shares of Optical Cable common stock during the Class Period in an artificially inflated market and sustained injury as a result. The plaintiff and each Class member relied on the integrity of the market for Optical Cable common stock and on the statements, releases, announcements, and filings of Optical Cable and its officers and/or directors in making these purchases. 17

18 58. The plaintiff will fairly and adequately protect the interests of the members of the Class and has retained counsel competent and experienced in class action and securities litigation. 59. A class action is superior to other available methods for the fair and efficient adjudication of this controversy as joinder of all class members is impracticable. Furthermore, as the damages suffered by individual Class members may be relatively small, the expense and burden of individual litigation makes it impossible for the Class members to seek redress individually for the wrongs done to them. There will no difficulty in the management of this action as a class action. 60. Common questions of law and fact exist as to all members of the Class and predominate over any questions affecting solely individual members of the Class. Among the questions of law and fact common to the Class are: a. whether federal securities laws were violated by the defendants acts and/or omissions; b. whether statements made by the defendants to the investing public and the shareholders during the Class Period omitted and/or misrepresented material facts; c. whether the defendants participated in and pursued a fraudulent scheme and the common course of conduct complained of herein; d. whether the defendants acted willfully or recklessly in omitting to state and/or misrepresenting material facts; 18

19 e. whether statements made by the defendants to the investing public during the Class Period were negligently made about the business, operations, finances, value, stock, and prospects of Optical Cable; f. whether the market price of Optical Cable common stock during the Class Period was artificially inflated due to non-disclosures and/or misrepresentations complained of herein; and g. whether the plaintiff and the other members of the Class were damaged and, if so, the proper measures thereof. APPLICABILITY OF PRESUMPTION OF RELIANCE: FRAUD ON THE MARKET DOCTRINE 61. At all relevant time, the market for Optical Cable common stock was an efficient market for, inter alia, the following reasons: a. Optical Cable s common stock met the requirements for listing and was listed and actively traded on the NASDAQ, an efficient market; b. as a regulated issuer, Optical Cable filed periodic reports with the United States Securities and Exchange Commission; c. upon information and belief, the defendants regularly issued press releases which were carried by the news wires and publicly available, and which entered the public marketplace; d. upon information and belief, throughout the Class Period, the defendants actively solicited press coverage and attention from securities brokerage firms and distributed or caused to be distributed, information and reports 19

20 to shareholders, securities firms, analysts, and customers to reinforce the press releases and the materially false information contained therein; e. upon information and belief, throughout the Class Period, the defendants met with representatives of securities and financing firms, investors and potential investors, including shareholders, and continuously disseminated false and/or negligent statements about prospects for Optical Cable, which statements were relied upon by the third parties; f. upon information and belief, throughout the Class Period, the defendants failed to disclose the material, adverse, non-public information presented herein which improperly influenced the price of Optical Cable s common stock, to the detriment of the plaintiff and the members of the Class; and g. as planned, the defendants positive statements and omissions concerning Optical Cable continued to support and increase the price of Optical Cable s common stock. FIRST CLAIM Section 10(b) of the Exchange Act and Rule 10b The plaintiff incorporates paragraphs 1 through 61 as if fully set forth herein. 63. Each defendant: (a) knew or had access to the material adverse non-public information about Optical Cable s financial results and then existing business conditions and legal difficulties, which were not disclosed, and (b) made or participated in drafting, reviewing, and/or approving or had knowledge of the misleading statements, releases, reports, filings, and/or other public representations and/or omissions about Optical Cable. 20

21 64. In addition to the duties of full disclosure imposed on the defendants as a result of their making of affirmative statements and/or reports, or participation in the making of affirmative statements and/or reports to the investing public, the defendants had a duty to promptly disseminate truthful information that would be material to investors. The undisclosed adverse information concealed by defendants during the Class Period is the type of information which, because of SEC regulations, regulations of the national stock exchanges, and customary business practice, is expected by investors and securities analysts to be disclosed and is known by corporate officials and their legal and financial advisors to be the type of information which is expected to be and must be disclosed. For example: a. Under Item 303 of Regulation S-K, promulgated by the SEC under the Exchange Act, there is a duty to disclose in periodic reports filed with the SEC known trends or any known demands, commitments, events or uncertainties that are reasonably likely to have a material impact on a company s sales revenues, income, or liquidity, or cause previously reported financial information not to be indicative of future operating results. 17 C.F.R (a)(1)-(3) and Instruction 3. In addition to the under the Exchange Act, management of a public periodic reports required company has a duty promptly to make full and prompt announcements of material facts regarding the company s financial condition. SEC Release No , 3 Fed. Sec. L. Rep. (CCH) 23,120A, at 17,095, repeatedly 17 C.F.R (October 15, 1970). The SEC has stated that the anti-fraud provisions of the federal securities laws, which 21

22 are intended to ensure that the investing public is provided with complete and accurate information about companies whose securities are publicly traded, apply to all public statements by persons speaking on behalf of publicly traded companies that can reasonably be expected to reach investors and the trading markets, whoever the intended primary audience. SEC Release No , 3 Fed. Sec. L. Rep. (CCH) 23,120B, at 17,096, 17 C.F.R (January 13, 1984). The SEC has emphasized that [i]nvestors have legitimate expectations that public companies are making, and will continue to make, prompt disclosure of significant corporate developments. Sharon Steel Corp., SEC Release No , [ Transfer Binder] Fed. Sec. L. Rep. (CCH) 83,049, at (November 19, 1981); and b. Schedule D of the NASD Manual, which governs companies whose securities are included in the NASDAQ, requires a NASDAQ company to make prompt disclosure to the public through the press of any material information that may affect the value of its securities or influence investors decisions. NASD Manual, Schedule D, Part II, 1(c)(13) [ 1803(c)(13)]. 65. Defendants, individually and in concert, directly and indirectly, by the use, means, or instrumentalities of interstate commerce and/or the mails, engaged and participated in a continuous course of conduct to conceal adverse material information about the business, operations, and future prospects of Optical Cable as specified herein. 22

23 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 Optical Cable s 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 omitting to state material facts necessary in order to make the statements made about Optical Cable and its business operations and future prospects in the 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 and deceit upon the purchasers of Optical Cable securities during the Class Period. 66. Defendants had actual knowledge of the misrepresentations and omissions of material 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. Defendants material misrepresentations and/or omissions were done knowingly or recklessly and for the purpose and effect of concealing Optical Cable s operating condition and future business prospects from the investing public and supporting the artificially inflated price of its securities. As demonstrated by the defendants overstatements and misstatements of Optical Cable s business, operations, and earnings throughout the Class period, the defendants, if they did not have actual knowledge of the misrepresentations and omissions alleged, were reckless in failing to obtain such knowledge by deliberately refraining from taking those steps necessary to discover whether those statements were materially false or misleading. 23

24 67. 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 prices of Optical Cable securities were artificially inflated during the Class period. In ignorance of the fact that market prices of Optical Cable s publicly traded securities were artificially inflated, and relying, directly and/or indirectly, on the materially false and misleading statements made by the defendants and/or upon the integrity of the market in which the securities were traded, and/or in the absence of material adverse information that was known to or recklessly disregarded by the defendants, but not disclosed in public statements by defendants during the Class Period, the plaintiff and the other members of the Class acquired Optical Cable securities during the Class Period at artificially high prices and were damaged thereby. 68. At the time of said misrepresentations and/or omissions, the plaintiff and other members of the Class were ignorant of their falsity and believed them to be complete and true. Had the plaintiffs and other members of the Class and the marketplace known of the true financial condition and business prospects of Optical Cable, which were not disclosed by the defendants, the plaintiff and other members of the Class would not have purchased or otherwise acquired their Optical Cable securities during the Class Period or, if they had acquired such securities during the Class Period, they would not have done so at the artificially inflated prices which they paid. 69. During the Class Period, the defendants, with knowledge of or reckless disregard for the truth, disseminated or approved those false statements specified above, which were misleading in that they contained misrepresentations and/or failed to disclose 24

25 material facts necessary in order for the statements made in the circumstances in which they were made, not misleading. 70. Each of these false and misleading statements caused the price at which Optical Cable common stock traded to be artificially inflated above where it would have traded had the false statements not been made or had the defendants not omitted to state facts necessary in order for those statements that were made not to be misleading. 71. The stock was traded in an open and efficient market. In reliance on the integrity of the market for the stock of Optical Cable, the plaintiff and the other members of the Class purchased the stock of Optical Cable at prices that were artificially inflated by the defendants statements and omissions. 72. As a direct and proximate result of such wrongful conduct, the plaintiff and other members of the Class were damaged in connection with their purchase of Optical Cable common stock during the Class Period. 73. By reason of the foregoing, the defendants violated Section 10(b) of the Exchange Act, 15 U.S.C. 78j(b) and SEC Rule 10b-5, promulgated pursuant thereto and accordingly, are liable. SECOND CLAIM Section 10(b) of the Exchange Act and Rule 10b The plaintiff incorporates paragraphs 1 through 72 as if fully set forth herein. 75. Each defendant knew, should have known, and/ or had access to the material adverse non-public information about Kopstein s margining of the Optical Cable common 25

26 stock he owned and the potentially devastating risks which were entailed thereof, which were not disclosed. 76. Each defendant had a duty to disclose to the investing public the material adverse non-public information about Kopstein s margining of the Optical Cable common stock he owned and the potentially devastating risks which were entailed therein. 77. Each defendant failed to disclose to the investing public the material adverse non-public information about Kopstein s margining of the Optical Cable common stock he owned and the potentially devastating risks which were entailed therein. 78. As a direct and proximate result of such wrongful conduct, the plaintiff and other members of the Class were damaged in connection with their purchase of Optical Cable common stock during the Class Period. 79. By reason of the foregoing, the defendants violated Section 10(b) of the Exchange Act, 15 U.S.C. 78j(b) and SEC Rule 10b-5, promulgated pursuant thereto and accordingly, are liable. THIRD CLAIM Section 20(a) of the Exchange Act 80. The plaintiff incorporates paragraphs 1 through 78 as if fully set forth herein. 81. This claim is asserted against the individual defendants and is based on Section 20(a) of the Exchange Act, 15 U.S.C. 78t(a). 82. The individual defendants acted as controlling persons of Optical Cable within the meaning of Section 20(a) of the Exchange Act. By reasons of their positions and stock ownership, the individual defendants had the power and authority to direct, or cause the 26

27 direction of, the management and policies of Optical Cable and, therefore, to cause or to prevent the wrongful conduct complained of herein. 83. As a direct and proximate result of such wrongful conduct, the plaintiff and other members of the Class were damaged in connection with their purchase of Optical Cable common stock during the Class Period. 84. By reason of the foregoing, the individual defendants violated Section 20(a) of the Exchange Act, 15 U.S.C. 78t(a), promulgated pursuant thereto and accordingly, are liable. Further, by reason of the foregoing, the individual defendants are liable jointly and severally with and to the same extent as Optical Cable for Optical Cable s violations of Section 10(b) of the Exchange Act and SEC rule 10b-5. FOURTH CLAIM Negligence 85. The plaintiff incorporates paragraphs 1 through 83 as if fully set forth herein. 86. In connection with the offer and sale of Optical Cable common stock to the plaintiff and the members of the Class, the defendants made false and/or misleading statements of material fact, failed to disclose adverse material facts, and/or concealed adverse material facts concerning Optical Cable common stock as set forth in paragraphs 1 through 84 above. 87. The defendants negligently made false and/or misleading statements as alleged herein, and either knew or should have known that the plaintiff and each member of the Class would rely on the false and/or misleading statements to their detriment. 27

28 88. The defendants negligently failed to disclose adverse material facts and negligently concealed adverse material facts, as alleged herein, and either knew or should have known that plaintiff and each member of the Class would have relied on the adverse material information had it been disclosed, and would have either: a) not purchased Optical Cable common stock had they known the true facts or b) sold their Optical Cable common stock as soon as they had known the true facts, thereby mitigating their damages. 89. As a result, and in reasonable reliance upon the false and/or misleading statements alleged herein, or without being able to rely on the adverse material facts which were not disclosed or were negligently concealed, the plaintiff and each member of the Class purchased Optical Cable common stock or subsequently were induced to hold Optical Cable common stock to their detriment. 90. The defendants are therefore responsible for the false statements of material facts, the non-disclosure of adverse material facts, and/or the negligent concealment of adverse material facts as alleged herein, and are liable to the plaintiff and to each member of the Class for negligence, negligent misrepresentation, and negligent non-disclosure, and for all of the damages the plaintiff and each member of the Class sustained as a result of the negligence as specified herein. WHEREFORE, the plaintiff, Charles H. Yeatts, prays for relief and judgment as follows: A. Determining that this action is a proper class action, designating the plaintiff as Lead Plaintiff and certifying the plaintiff as Class Representative under Federal Rule of Civil Procedure 23 and their counsel as Lead Counsel; 28

29 B. Awarding compensatory and exemplary damages in favor of the plaintiff and the other Class members against all defendants, jointly and severally, for all damages sustained as a result of the defendants wrongdoing, in an amount to be proven at trial, including interest thereon; C. Awarding the plaintiff and the Class their reasonable costs and expenses incurred in this cause of action, including attorneys fees and expert fees; and D. Any and all other relief to which the plaintiff may be entitled and the Court may deem just and proper. DEMAND FOR JURY TRIAL The plaintiff hereby demands a trial by jury. DATED: February, Respectfully submitted, Jeffrey H. Krasnow, Esquire Jeffrey H. Krasnow & Associates, P.C. 301 W. Campbell Avenue P.O. Box 120 Roanoke, VA /Fax Krasnow@aol.com Fred Taylor Isquith, Esquire Gregory Mark Nespole, Esquire Wolf Heldenstein Adler Freeman & Herz LLP 270 Madison Avenue New York, New York (212) Brian M. Felgoise, Esquire Law Offices of Brian M. Felgoise 29

30 1494 Old York Road Abington, PA (215) and- Evan Smith, Esquire Brodsky & Smith, LLC 11 Bala Avenue, Suite 39 Bala Cynwyd, PA (610) Attorneys for the Plaintiff 30