UNITED STATES DISTRICT COURT. Plaintiff, Defendants. CLASS ACTION COMPLAINT FOR VIOLATIONS OF FEDERAL SECURITIES LAWS

Transcription

1 UNITED STATES DISTRICT COURT DISTRICT OF ARIZONA GEORGE WOOD, On Behalf of Himself and All Others Similarly Situated, vs. Plaintiff, IONATRON INC., ROBERT HOWARD, THOMAS C. DEARMIN, JOSEPH HAYDEN, AND STEPHEN W. MCCAHON, Defendants. Civil Action No. JURY TRIAL DEMANDED CLASS ACTION COMPLAINT FOR VIOLATIONS OF FEDERAL SECURITIES LAWS

2 Plaintiff, individually and on behalf of all other persons similarly situated, by plaintiff s undersigned attorneys, for plaintiff s complaint against defendants, alleges the following based upon personal knowledge as to plaintiff and plaintiff s own acts, and upon information and belief as to all other matters, based on, inter alia, the investigation conducted by and through plaintiff s attorneys, which included, amongst other things, a review of the defendants press releases, Securities and Exchange Commission ( SEC ) filings by Ionatron Inc. ( Ionatron or the Company ) and media reports about the Company. Plaintiff believes that substantial evidentiary support will exist for the allegations set forth herein after a reasonable opportunity for discovery. NATURE OF THE CASE 1. This is a securities class action on behalf of plaintiff and all other persons or entities, except for defendants, who purchased or otherwise acquired Ionatron securities during the period June 27, 2005 and through May 10, 2006, inclusive (the Class Period ), seeking to pursue remedies under the Securities Exchange Act of 1934 (the Exchange Act ). 2. Ionatron is a developer and manufacturer of Directed Energy Weapon technology products and other products based on its Laser Induced Plasma Channel (LIPC) for the agencies of the U.S. Government focused on national security. 3. On June 27, 2005, the Company heralded its development of a fielddeployable vehicle incorporating its counter-improved Explosive Device (IED) technology, also known as the Joint IED Neutralizer or JIN, which it planned to sell to the U.S. Government. However, in spite of its claimed development of field-deployable technology, the Company concealed the fact its much-heralded vehicle was at best an improvisation, incapable of meeting U.S. Government specifications for successful field testing

3 4. On March 24, 2006, while the Company continued to actively conceal setbacks in its purportedly promising efforts to successfully complete field demonstration of its deployment-ready vehicle, Robert Howard resigned his post as Chairman of Ionatron. Moreover, during the Class Period, Company insiders, including Howard and Dearmin, sold over 3.2 million shares of Ionatron stock for proceeds of $33.6 million. 5. The truth was revealed on May 10, 2006, when the Company finally revealed to investors the shocking fact that the deployment-ready JIN vehicle actually lacked ruggedness in the field, rendering it unacceptable to the Government. Ionatron is now faced with the need to revisit the initial stages of its development efforts, including the development of new vehicle platforms. As a result of the shocking news, the price of Ionatron stock plummeted, losing $1.58 or 12.3%, to close on May 11, 2006, at $ JURISDICTION AND VENUE 6. Jurisdiction is conferred by 27 of the 1934 Act. The claims asserted herein arise under 10(b) and 20(a) of the 1934 Act and Rule 10b Venue is proper in this District pursuant to 27 of the 1934 Act. The Defendants transact business in this District and its headquarters are located in this District. 8. In connection with the acts and conduct alleged herein, 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 9. Plaintiff, as set forth in the accompanying certification, incorporated by reference herein, purchased shares of Ionatron stock at artificially inflated prices during the Class Period and was damaged thereby

4 10. Defendant Ionatron and its subsidiaries engage in the development and marketing of Directed Energy Weapon technology products and other products based on the Company s Laser Induced Plasma Channel (LIPC) for the agencies of the U.S. Government focused on national security. The LIPC technology is designed as a line of sight weapon, which enables the propagation of various forms and quantities of electrical energy to be aimed and directed at a target or between two points. The Company also provides a counter-improved Explosive Device (IED) vehicle, known as Joint IED Neutralizer. The principal offices of the Company are located at 3590 East Columbia Street, Tucson, Arizona Defendant Robert Howard ( Howard ) was at all relevant times Chairman of the Board of Ionatron until March 24, 2006, when he resigned. During the Class Period, defendant Howard sold at least one million shares of his Ionatron stock, for proceeds of $13.5 million. 12. Defendant Thomas C. Dearmin ( Dearmin ) was at all relevant times President, CEO and a director of Ionatron since the Company s inception in Defendant Dearmin was also Chief Financial Officer of Ionatron until March During the Class Period, defendant Dearmin sold at least 175,000 shares of his Ionatron stock, for proceeds of $1.6 million. 13. Defendant Joseph C. Hayden ( Hayden ) was at all relevant times Executive Vice President of Programs at Ionatron. Prior to December 2004, defendant Hayden was the Executive Vice President of Business Operations from 2003 to During the Class Period, defendant Hayden sold at least 175,000 shares of his Ionatron stock, for proceeds of $1.6 million. 14. Defendant Stephen W. McCahon ( McCahon ) was at all relevant times Executive Vice President of Engineering at Ionatron, having occupied the position in During the Class Period, defendant McCahon sold at least 195,700 shares of his Ionatron stock, for proceeds of $1.9 million

5 15. The individuals named as defendants in are referred to herein as the Individual Defendants. The Individual Defendants, because of their positions with the Company, possessed the power and authority to control the contents of Ionatron quarterly reports, press releases and presentations to securities analysts, money and portfolio managers and institutional investors, i.e., the market. Each defendant was provided with copies of the Company s reports and press releases alleged herein to be misleading prior to or shortly after their issuance and had the ability and opportunity to prevent their issuance or cause them to be corrected. Because of their positions and access to material non-public information available to them but not to the public, each of these defendants knew that the adverse facts specified herein had not been disclosed to and were being concealed from the public and that the positive representations which were being made were then materially false and misleading. The Individual Defendants are liable for the false statements pleaded herein, as those statements were each grouppublished information, the result of the collective actions of the Individual Defendants. SCIENTER 16. In addition to the above-described involvement, each Individual Defendant had knowledge of Ionatron s problems. Each defendant was motivated to conceal such problems. Defendants Howard and Dearmin, as Chairman and CEO respectively, provided for financial reporting and communications with the market. Communications with the market, including conference calls, as well as internal reports showing Ionatron s forecasted and actual growth were prepared under her direction. Defendant Dearmin, in his additional role as CFO, also provided for communications with the market, including conference calls, as well as reports on Company operations, financing and press releases issued by the Company. Each Individual Defendant sought to demonstrate that he could lead the Company successfully and generate the growth - 5 -

6 expected by the market. Each individual defendant also owed a duty to the Company and its shareholders not to trade on inside information. FRAUDULENT SCHEME AND COURSE OF BUSINESS 17. Each defendant is liable for (a) making false statements, or (b) failing to disclose adverse facts known to him about Ionatron. Defendants fraudulent scheme and course of business that operated as a fraud or deceit on purchasers of Ionatron publicly traded securities was a success, as it (a) deceived the investing public regarding Ionatron s prospects and business; (b) artificially inflated the prices of Ionatron s publicly traded securities; (c) allowed defendants to sell over 1.5 million shares of Ionatron stock, for proceeds of $18.4 million; and (d) caused plaintiff and other members of the Class to purchase Ionatron s publicly traded securities at inflated prices. SUBSTANTIVE ALLEGATIONS 18. From a time prior to the beginning of the Class Period, the Company conditioned the market for a major product development milestone, specifically the development of a field-deployable vehicle incorporating its counter-improved Explosive Device (IED) technology, also known as the Joint IED Neutralizer or JIN, which it planned to sell to the U.S. Government. On June 27, 2005, defendants issued a press release entitled, Ionatron Announces the Introduction of the First Deployable JIN Counter IED System. The press release stated in part: Tucson, AZ, June 27, 2005 Ionatron, Inc., (Nasdaq: IOTN) a next generation controlled directed energy weapon technology company, today announced that the introduction of the first field deployable JIN Counter IED system will occur on July 7th at the NASA Stennis Space Center on the Gulf Coast of Mississippi. Ionatron established its production facility at the NASA Stennis Space Center on April 1st of this year. The Honorable Haley Barbour, Governor of Mississippi, will host the event. Attendees will include members of the Federal, State, and Local - 6 -

7 Government, representatives of the military, military families, as well as representatives of local and national media. Ionatron expects to deliver 12 JIN Counter IED systems to the Government over the next 60 days from its Stennis manufacturing facility in Mississippi. Additionally, the Government has asked Ionatron, as part of the response to the Government's statement of work, to provide a price for a minimum of 90 days of support in Iraq for these systems. The Iraq operational support, upon contract finalization, will be priced to also include equipment spares, ongoing training of military personnel and continued development and improvements of the JIN technology based on feedback from Department of Defense testing and field operations. The Company anticipates that recommended improvements will be incorporated into future production versions of the JIN technology. Ionatron is presently performing the development and production activities under a U.S. Government letter contract, pending finalization of the formal contract for this effort. Ionatron's pricing for the initial 12 JIN units is approximately $10 million. Spares, testing services, training and 90 days of in Iraq support are anticipated to be approximately an additional $13 million. Ionatron and the U.S. Government Joint Team continue to work in conjunction to deliver the JIN Counter IED systems to Iraq as rapidly as possible in order to help protect our troops and Iraqi civilians and to support the Global War on Terrorism. *** 19. Defendants press release of June 27, 2005 was false and misleading. In spite of the Company s purported development of field-deployable technology, the Company had concealed the fact their much-heralded vehicle was at best an improvisation of off the shelf platforms and components, incapable of meeting U.S. Government specifications for successful field testing. As such, its purported efforts to demonstrate the vehicle as a prototype for a large order from the government would inevitably fail, leaving the Company with a major setback and a return to the earliest stages of vehicle development

8 THE TRUTH UNFOLDS 20. On March 24, 2006, defendants issued a press release entitled, IONATRON ANNOUNCES RESIGNATION OF CHAIRMAN ROBERT HOWARD. The press release stated in part: Tucson, AZ, Ionatron, Inc., (Nasdaq: IOTN) a next generation Directed Energy Weapon technology company, today announced that Robert Howard, co-founder of the Company, has resigned his positions of Chairman of the Board and a director of the Company. I am very proud of the contributions and accomplishments of the very professional executive leadership team that has made all of the technical and business accomplishments over these 4 years, Robert Howard said. Because of my age and health concerns, my ability to travel is becoming restricted and I can no longer devote the time and attention to company matters that Ionatron deserves. I believe this team possesses all of the skills to continue to move Ionatron forward long into the future. I am proud of Ionatron's exceptional people whose hard work over the years turned our vision into a business reality and created a company whose technology and applications are advancing on some of the most important programs in its history. I sincerely wish the Company's executives, employees and associates a long continued success. Since I remain the largest shareholder and biggest believer in Ionatron's future, I am always available to help in any way that I can and believe the best years are still to come for Ionatron. I plan to focus an increasing portion of my energies on my long-standing interest in numerous health, educational and charitable organizations through the Robert Howard Philanthropic Foundation. Thomas Dearmin, CEO of Ionatron, commented, The board would like to thank Bob, for his many contributions to Ionatron and for his vision and leadership during these past 4 years. Bob has provided Ionatron with strong creative leadership during his tenure on the board and he will be missed. We understand that Bob's resignation will allow him to devote more time to his other affairs. His wisdom, advice and counsel have been invaluable to the Company. 21. While defendants press release appeared to signal to investors that a transition involving defendant Howard and the Company was underway, in reality the Company was grappling with the truth about the failure of its deployment-ready technology. Worse, following his resignation but prior to defendants shocking disclosure, Howard had engaged in highly suspicious sales of over one million of his - 8 -

9 shares of Ionatron, for proceeds of $13.5 million, while in possession of non-public material information about the program setbacks and failures. 22. Finally, on May 10, 2006, defendants issued a press release entitled, Ionatron Reports First Quarter 2006 Financial Results. The press release stated in part: TUCSON, Ariz.--(BUSINESS WIRE)--May 10, Ionatron, Inc., (Nasdaq: IOTN) a Laser Guided Energy (LGE(TM)) company developing next generation Directed Energy Weapons, today reported financial results for the fourth quarter and full year ended March 31, The Company will host a live conference call Wednesday, May 10, 2006 at 4:30 p.m. ET. First Quarter 2006 Results Revenue for the first quarter of 2006 was $5.1 million, compared to $2.6 million for the same period last year. The increase of approximately $2.5 million in revenue for the first quarter of 2006 compared to the prior-comparable quarter in 2005 was derived from work on existing contracts with agencies of the U.S. Government, revenue from the Company's Joint IED Neutralizer (JIN) counter-ied system pre-production contract and revenue from a new contract awarded in January Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123R, "Share-Based Payment," ("SFAS 123R") which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors, based on estimated fair values. The Company elected to adopt the modified prospective transition method as provided by SFAS 123R and, accordingly, prior year results have not been restated. Stock-based compensation expense recognized under SFAS 123R for the three months ended March 31, 2006 was $1.1 million, whereas there was no stock-based compensation expense recognized in the first quarter of Net loss attributable to common shareholders for the first quarter of 2006 was $3.7 million, or $0.05 per basic and diluted share compared to prior-comparable period net loss of $1.6 million or $0.02 per basic and diluted share. As noted above, since the Company adopted the provisions of SFAS 123R on a prospective basis, we did not adjust prior year reported results. If compensation expense was recorded for share based payments in the first quarter of 2005, adjusted net loss, including stock based compensation, would have been $3.7 million, or $0.05 per basic and diluted share. Adjusted net loss is considered non-gaap financial information and a reconciliation of reported net loss to adjusted net loss is included in the attached financial tables. Business Update - 9 -

10 -- The Company has concluded its 12 unit preproduction contract for its JIN counter IED technology. Under this program, Ionatron delivered 12 preproduction units in less than nine months. The preproduction units successfully concluded a Military Utility Assessment (MUA) program and then completed other various "In-Theatre" user assessments. Ionatron provided training, In-Theatre operators, maintenance and security. The U.S. Government customer concluded that the JIN counter IED technology performed well and offers great promise, but determined that the current vehicle platform should be changed. The platforms for these preproduction JIN counter IED units were selected due to their off-the-shelf availability. Ionatron is in the process of identifying potentially more rugged and capable platforms and may also offer its counter IED technology as a modification to existing military vehicles. Ionatron expects to work with its Government customer to identify the most suitable platforms for its counter-ied technology. Ionatron is continuing to seek to develop and improve the integration of its technology to insure the Department of Defense fields state-of-the art products to the U.S. war fighter. Thomas Dearmin, CEO of Ionatron, commented, "We are extremely pleased with the strategic progress we have made in our business during the first quarter. We have expanded our capabilities, deepened our relationship with the Department of Defense, and believe we are well positioned to benefit from a highly favorable procurement trend across many categories of directed energy weapons and force-protection systems. We also continued to build and effectively utilize our large and growing staff of engineers and scientists to develop market-leading products and to make advances in the technology of LGE and LIPC directed-energy weapons. Our recent relocation of our North Star Power Engineering subsidiary to Tucson, AZ is expected to further support our research and development team. Mr. Dearmin continued, "In the LGE and LIPC segment, we believe that we have excellent opportunities to continue to broaden the applications of the technology and to identify new areas for growth. Our recent long-term strategic agreement with DRS Technologies is just the first example of how we intend to integrate our LIPC systems into existing and new mission-specific platforms. We believe this collaboration clearly demonstrates the value of our platform technology and represents the achievement of a significant milestone for the Company. As to our JIN counter-ied systems, we recently concluded the preproduction contract for our U.S. Government customer. We are now in the process of identifying potentially more rugged and capable platforms. We intend to utilize all options, including our new partners, to insure our customer's platform choice is developed and manufactured to their requirements." At March 31, 2006, the Company had approximately $10.8 million in cash and cash equivalents and securities available-for-sale as compared to $12.4 million in cash and cash equivalents and securities available-forsale at December 31, ***

11 As of March 31, 2006 the Company had a backlog of $3.7 million, which is expected to be completed within the next twelve months. This backlog does not include proposals and contracts under negotiation. *** 23. On the shocking news of May 10, 2006, including the fact that the Company had done little more than improvise off-the-shelf vehicle platforms and components to develop a deployment-ready prototype IED vehicle, the price of Ionatron shares plunged 12.3%, falling from $12.83 per share on May 10, 2006 to close at $11.25 per share on May 11, 2006, for a one-day drop of $1.58 per share, on volume of 2.0 million shares, more than three times the average daily trading volume. DEFENDANTS CLASS PERIOD STOCK SALES 24. During the Class Period, Company insiders, including defendants, sold their shares in accordance with the following schedule: Date Defendant Shares Price Proceeds 12/16/2005 DEARMIN THOMAS C $9.37 $1,194,879 12/15/2005 DEARMIN THOMAS C $9.62 $216,450 12/14/2005 DEARMIN THOMAS C $9.63 $240,750 12/16/2005 HAYDEN JOSEPH $9.40 $1,198,373 12/15/2005 HAYDEN JOSEPH $9.62 $216,450 12/14/2005 HAYDEN JOSEPH $9.63 $240,750 3/31/2006 HOWARD ROBERT $13.05 $5,024,250 3/30/2006 HOWARD ROBERT $13.17 $5,465,467 3/29/2006 HOWARD ROBERT $13.39 $2,678,500 3/30/2006 MCCAHON STEPHEN WILLIAM $13.27 $274,782 12/16/2005 MCCAHON STEPHEN WILLIAM $9.40 $1,198,373 12/15/2005 MCCAHON STEPHEN WILLIAM $9.62 $216,450 12/14/2005 MCCAHON STEPHEN WILLIAM $9.63 $240,750 Totals $18,406,

12 CLASS ACTION ALLEGATIONS 25. Plaintiff brings this action as a class action pursuant to Rule 23 of the Federal Rules of Civil Procedure on behalf of all persons who purchased Ionatron publicly traded securities on the open market during the Class Period (the Class ). Excluded from the Class are defendants. 26. The members of the Class are so numerous that joinder of all members is impracticable. The disposition of their claims in a class action will provide substantial benefits to the parties and the Court. Ionatron had more than 72 million shares of stock outstanding, owned by hundreds if not thousands of persons. 27. There is a well-defined community of interest in the questions of law and fact involved in this case. Questions of law and fact common to the members of the Class which predominate over questions which may affect individual Class members include: (a) (b) (c) Whether the Exchange Act was violated by defendants; Whether defendants omitted and/or misrepresented material facts; Whether defendants statements omitted material facts necessary to make the statements made, in light of the circumstances under which they were made, not misleading; (d) Whether defendants knew or deliberately disregarded that their statements were false and misleading; (e) Whether the prices of Ionatron s publicly traded securities were artificially inflated; and (f) The extent of damage sustained by Class members and the appropriate measure of damages. 28. Plaintiff s claims are typical of those of the Class because plaintiff and the Class sustained damages from defendants wrongful conduct

13 29. Plaintiff will adequately protect the interests of the Class and has retained counsel who are experienced in class action securities litigation. Plaintiff has no interests which conflict with those of the Class. 30. A class action is superior to other available methods for the fair and efficient adjudication of this controversy. COUNT I For Violation of 10(b) of the Exchange Act and Rule 10b-5 Against All Defendants 31. Plaintiff incorporates 1-30 by reference. 32. During the Class Period, defendants disseminated or approved the false statements specified above, which they knew or deliberately disregarded were misleading in that they contained misrepresentations and failed to disclose material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading. 33. Defendants violated 10(b) of the Exchange Act and Rule 10b-5 in that they: (a) (b) Employed devices, schemes, and artifices to defraud; Made untrue statements of material facts or omitted to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or (c) Engaged in acts, practices, and a course of business that operated as a fraud or deceit upon plaintiff and others similarly situated in connection with their purchases of Ionatron publicly traded securities during the Class Period. 34. Plaintiff and the Class have suffered damages in that, in reliance on the integrity of the market, they paid artificially inflated prices for Ionatron publicly traded securities. Plaintiff and the Class would not have purchased Ionatron publicly traded

14 securities at the prices they paid, or at all, if they had been aware that the market prices had been artificially and falsely inflated by defendants misleading statements. 35. As a direct and proximate result of these defendants wrongful conduct, plaintiff and the other members of the Class suffered damages in connection with their purchases of Ionatron publicly traded securities during the Class Period. COUNT II For Violation of 20(a) of the Exchange Act Against All Defendants 36. Plaintiff incorporates 1-35 by reference. 37. The Individual Defendants acted as controlling persons of Ionatron within the meaning of 20(a) of the Exchange Act. By reason of their positions as officers and/or directors of Ionatron, and their ownership of Ionatron stock, the Individual Defendants had the power and authority to cause Ionatron to engage in the wrongful conduct complained of herein. Ionatron controlled each of the Individual Defendants and all of its employees. By reason of such conduct, the Individual Defendants and Ionatron are liable pursuant to 20(a) of the Exchange Act. PRAYER FOR RELIEF WHEREFORE, plaintiff prays for judgment as follows: A. Declaring this action to be a proper class action pursuant to FRCP 23; B. Awarding plaintiff and the members of the Class damages, interest and costs; and C. Awarding such equitable/injunctive or other relief as the Court may deem just and proper

15 Plaintiff demands a trial by jury. JURY DEMAND