CONSOLIDATED AMENDED CLASS ACTION COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS DEMAND FOR TRIAL BY JURY

Transcription

1 CONSOLIDATED AMENDED CLASS ACTION COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS DEMAND FOR TRIAL BY JURY

2 NATURE OF THE CLAIM 1. This is a securities class action brought on behalf of all purchasers of the common stock of 3Com Corporation ("3Com" or the "Company") during the period from April 23, 1997 through November 5, 1997, inclusive (the "Class Period"), to remedy violations of the Securities Exchange Act of 1934 (the "Exchange Act"). Defendants are (i) 3Com, (ii) U.S. Robotics Corp. ("U.S. Robotics" or "USR"), and (iii) certain of their present and former officers and directors This action concerns a scheme among defendants 3Com, U.S. Robotics, and certain members of their top management to mislead the investing public, including purchasers of 3Com common stock, in order to effectuate a merger between 3Com and USR and to permit key insiders to sell material amounts of their 3Com stock In essence, defendants misled the investing public as to the revenues and earnings of 3Com and USR and created the impression that these companies, and, in particular, their modem and adapter card businesses, were performing materially better than they were. 4. Before the merger between USR and 3Com, USR's fiscal year ended on September 30; 3Com's fiscal year ended on May 31. USR and 1 The "Individual Defendants," who are identified in paragraphs -, are: Eric A. Benhamou, Casey G. Cowell, Christopher B. Paisley, John McCartney, Michael S. Seedman, Ross W. Manire, Richard L. Edson, Ralph B. Godfrey, Richard W. Joyce, Alan J. Kessler and Janice M. Roberts. 2 The market reacted negatively to the February 26, 1997 announcement of the proposed merger between 3Com and USR and the price of their stocks declined. To increase the price of their stocks, defendants did what is alleged herein.

3 3Com announced on February 26, 1997 that they would merge. However, they intentionally deferred the closing of the merger until June 12, 1997, after the end of 3Com's fiscal year and before the conclusion of USR's June 30, 1997 quarter. This enabled them to disclose to the public USR's falsely inflated March 30, 1997 results (which violated Generally Accepted Accounting Principles ("GAAP")), while hiding until almost the end of the Class Period the material fact that USR's results for April and May 1997 were disastrous. 5. During the week of February 24, 1997, the same week that defendants announced the merger, USR rushed out shipments of its new x2, 56 kilobit-per-second ("56k") higher speed modem, even before modem manufacturers could agree on a standard for the new 56k technology. Since there was no standard, the x2 modem only operated at the higher speed if its technology was compatible with the 56k technology used by the internet service provider with whom the user was connecting. 6. In order to prevail upon customers to take this new product, USR agreed with customers that they could return the x2 modems if ultimately they could not be utilized or resold, but in violation of GAAP USR recorded these transactions as sales. In addition, USR's customers had substantial inventories of older versions of USR modems, and USR agreed in March 1997 that material amounts of the older versions could be returned to it after the conclusion of the March 30, 1997 quarter. Also, the older versions of USR's modems had been sold subject to price protection, whereby, for modems in a customer's inventory, USR was required to give the

4 customer a rebate for the difference between the higher purchase price of the older modems in inventory and any new, lower current price. After USR released its new x2 (56k) modems, it reduced substantially the prices of its older modems thereby triggering its price protection obligations. Moreover, the release of the x2 (56k) modems made the older modems technologically obsolete, and defendants knew that USR would incur losses on its inventory of older models and that customers would be returning significant amounts of older models in inventory that would have little or no value to USR. 7. To inflate its March 30, 1997 revenues, USR induced its customers to take quantities of modems substantially in excess of their needs. To induce customers to take unwanted modems, the USR Defendants 3 gave during March 1997 substantial incentives including promised rebates, which would not be paid until after March 30, 1997, and for which USR failed to accrue the cost as of March 30, As a result, USR's purported revenue for the month of March 1997 alone was $541.7 million or approximately 80% of its total reported revenues of $690 million for the quarter. 4 In addition, USR failed to record until after the end of the March 30, 1997 quarter substantial amounts of expenses including price protection obligations and expenses that related to sales purportedly made during the March 30, 1997 quarter. The "USR Defendants" are: U.S. Robotics, Cowell, McCartney, Seedman, Manire and Edson. 3 4 The facts about the month of March revenues were not disclosed until after the end of the Class Period.

5 8. On April 23, 1997, USR announced purported "record" revenues and earnings for its fiscal second quarter ended March 30, 1997, which USR represented reflected the "success" of its new high-speed modems. USR stated that revenues had increased 52% over the $454.5 million recorded for the second quarter of fiscal 1996 and that net earnings for the quarter were a record $91.5 million, an increase of 77% over the $51.6 million recorded for the prior year's second fiscal quarter. However, investors did not know that for the month of March 1997 alone, USR's purported revenues were $541.7 million and its purported net income for the month of March 1997 was $113 million Also, defendants failed to disclose until near the end of the Class Period, that, as a result of USR's GAAP violations, including the recognition of revenue on shipments which were subject to unlimited return privileges (and which should not have been recognized and/or timely and adequate reserves for returns should have been accrued) and the failure to record price protection obligations and other expenses, and inventory write-downs. USR's results for April and May 1997 were disastrous. Indeed, during the months of April and May 1997 combined, USR's gross sales were only approximately $200.3 million, but, after provisions primarily for product returns of $143 million and price protection of $33 million, its net sales were only approximately $15.3 million. As a result, in April and May 1997, USR suffered a net loss for the two months of $160.3 million, a loss which 5 This meant that unbeknownst to the investing public, USR had a substantial loss for January and February 1997.

6 eliminated USR's publicly reported net income for the entire six-month period ended March 30, Defendants hid USR's April and May poor revenues and material losses until near the end of the Class Period when in October 1997 they made a partial disclosure. 10. As a result of the failure to disclose USR's April and May 1997 results and of the false positive statements made by defendants as detailed hereafter, the price of 3Com stock increased substantially prior to and after the merger, and defendants were able to close the merger and sell substantial amounts of their personal 3Com holdings at inflated prices. 11. Not only did defendants fail to disclose USR's negative results for April and May 1997, but they also included in 3Com's Report on Form 10-K (filed on August 27, 1997) for its fiscal year ended May 31, 1997 pro forma results that included results for USR, but misleadingly excluded USR's results for April and May The 3Com report on 10-K contained the following false and misleading chart showing pro forma results for 3Com and USR Sales: 3Com U.S. Robotics Reclassifications to conform accounting policies $1,593, ,347 (3,056) $2,327,101 1,977,512 (20,105) $3,147,106 2,493,791 (36,751) Combined: $2,479,760 $4,284,508 $5,604,146 Net income: 3Com US Robotics Adjustments to conform accounting policies $144,559 65,951 (6,954) $177, ,021 (7,259) $373, ,258 (13,585) Combined $203,556 $340,616 $597,623

7 Net income per share (on basis): a fully diluted 3Com U.S. Robotics Adjustments to conform accounting policies (0.02) $ (0.02) $ (0.04) Combined $ 0.63 $ 0.99 $ 1.69 After the end of the Class Period, in a restated Report on Form 10- Q (filed on March 19, 1998) defendants restated these results as follows: Sales: 3Com U.S. Robotics Reclassifications to conform financial statement presentation $1,593, ,347 (3,056) $2,327,101 1,977,512 (20,105) $3,147,106 2,503,945 (44,974) Combined: $2,479,760 $4,284,508 $5,606,077 Net income: 3Com US Robotics $144,559 65,951 $177, ,021 $373, ,583 Combined $210,510 $347,875 $500,533 Net income per share (on a fully diluted basis): 3Com U.S. Robotics Combined $ $ 0.65 $ $ 1.01 $ $ 1.41

8 12. Therefore, instead of reporting increased net income for USR of $237,258,000 for 1997 (before adjustments to conform accounting policies), the restated financials reported net income for USR for 1997 of only $126,583,000 (a difference of 47 percent) and a 25 percent decline from the $170,021,000 net income USR had reported for Instead of an increase in net income per share for USR from $1.02 for 1996 to $1.41 for 1997, the restated financials reported net income for USR for 1997 of only $0.75 per share, a substantial decline from 1996 net income per share. For the combined companies, the net income was reduced by almost $100 million or 16 percent, and net income per share which had been reported in the pro forma financial statements contained in the original Report on Form 10-K as $1.69 was materially reduced to $ However, even these restated financials overstated USR's results by a material amount since the restated fiscal 1997 results for USR included the false and misleading results for the month of March 1997 twice Moreover, 3Com's financial statements for the fiscal year ended May 31, 1997 were misleading because of the misleading presentation of pro forma results of the merger with USR contained therein, and 3Com's financial statements for the three months ended August 31, 1997 overstated revenues and earnings by material 6 The restated financials are comprised of a fiscal nine months for USR of July 1996 through March 1997 and a fiscal fourth quarter for USR of March 1997 through May If the false financials for the month of March of 1997 had not been included twice, USR's and the combined company's results as reported in the restated financials would have been materially worse.

9 amounts in violation of GAAP. Among other things, during that fiscal quarter, 3Com increased its sales of adapter cards (network interface cards ("NICs")) by giving special incentives and future rebates without recording adequate provision therefor. 15. In addition to these false financials, during the Class Period, defendants made many other false statements, including, among others, statements about levels of inventory in the distribution channels and that modem shipments would increase in fiscal Despite what defendants knew or recklessly disregarded about USR's and 3Com's modem business, throughout the Class Period, defendants repeatedly represented that modem sales were "strong," "healthy" and "continuing to gain momentum." When securities analysts and investors questioned USR's or the Company's financial results and voiced concerns that those results were achieved only because defendants had stuffed the distribution channel in a deliberate attempt to make the modem business appear successful, defendants emphatically denied that USR's or 3Com's channels were stuffed and assured investors that inventory levels were within USR's and 3Com's normal range and were actually decreasing. 16. Defendants' positive false statements caused the price of 3Com common stock to more than double during the Class Period, from a price of approximately $27 per share at the close on April 22, 1997 to a Class Period high of $59 11/16 in July, and also enabled defendants to complete the merger. Thus, the market was stunned when, after the market closed on November 5, 1997, defendants announced that distribution channels were so filled with excess

10 inventory that the Company had been forced to dramatically curtail modem and adapter card shipments beginning September 1, Following these disclosures, the price of 3Com common stock declined precipitously, falling from a price of $45 per share on November 5, 1997 to $28 ½ per share within one week, a decline of 37 percent on extraordinarily heavy volume of 99 million shares traded. 18. During the Class Period, while in possession of the material adverse undisclosed information particularized herein, the Individual Defendants sold more than 4 million shares of 3Com common stock at prices as high as $58 3/8 per share, realizing gross proceeds from these sales of more than $200 million. The following chart shows the daily stock price for 3Com stock during the Class Period and highlights the times when the Individual Defendants engaged in trading while in possession of material adverse undisclosed information: [PREPARE AND INSERT CHART] JURISDICTION AND VENUE 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 The claims alleged herein arise under Sections 10(b), 20(a) and 20A of the Exchange Act, 15 U.S.C. 78j(b), 78t(a) and 78t-1, and Rule 10b-5 promulgated thereunder by the SEC, 17 C.F.R (b) Venue is proper in this District pursuant to Section 27 of the Exchange Act, 15 U.S.C. 78aa, and 28 U.S.C. 1391(b). Many of the acts and transactions giving rise to the violations of law

11 complained of herein, including the preparation and dissemination to the investing public of materially false and misleading information, occurred in this District. In addition, defendant 3Com maintains its principal place of business in this District at 5400 Bayfront Plaza, Santa Clara, California In connection with the acts, conduct and other wrongs complained of herein, the defendants, directly or indirectly, used the means and instrumentalities of interstate commerce, the United States mails, and the facilities of a national securities market. THE PARTIES 22. [INSERT PLAINTIFFS' INFORMATION] 23. Defendant 3Com is primarily in the business of delivering networking solutions to customers worldwide, including remote access systems, adapter cards or NICs, hubs, switches, routers and modems, and is one of the world's largest suppliers of data, voice and video communications technology. 3Com stock trades in an efficient market on the NASDAQ National Market System. 3Com's fiscal year ended May 31 for the years prior to and including May 31, For the fiscal year that ended May 31, 1997, 3Com reported revenues of approximately $3.1 billion and net earnings of $274 million. 24. Defendant U.S. Robotics was primarily engaged in the business of supplying products and systems that provided access to information, including remote access servers and concentrators, enterprise communications systems, desktop/mobile client products and modems. U.S. Robotics' customers included internet service providers, regional Bell operating companies, inter-exchange

12 carriers and other businesses, institutions and individuals. As a separate company, USR operated on a week fiscal year ending on the Sunday nearest to September 30. For fiscal year 1996, ended September 29, 1996, USR reported revenues of approximately $2 billion and net earnings of $170 million. 25. On June 12, 1997, defendant 3Com merged with defendant U.S. Robotics in a transaction valued at $8.5 billion. Under the terms of the merger agreement announced February 26, 1997, shareholders of U.S. Robotics received 1.75 shares of 3Com common stock for each share of U.S. Robotics stock they held. 26. (a) (i) At all relevant times, defendant Eric A. Benhamou ("Benhamou") was President, Chief Executive Officer and Chairman of the Board of Directors (the "Board") of 3Com. As President, Chief Executive Officer and Chairman, Benhamou participated in the day-to-day control of the Company and in the preparation of the statements alleged to be false herein, except for the USR financial statements for the fiscal quarter ended March 30, 1997 (the "March Quarter"); however, in connection with the merger between 3Com and USR, he became aware or recklessly disregarded that these financial results were false. Also, he was primarily responsible for 3Com's communications with securities analysts and was actively involved in 3Com's sales and marketing efforts, including sales via distributors in the United States, Europe and Asia. Benhamou was actively involved in preparing, reviewing and authorizing 3Com's publicly reported financial statements for the fiscal year ended May 31, 1997 ("Fiscal 1997") and for the fiscal quarter ended August 31, 1997 (the "August

13 Quarter"), 3Com's Reports on Form 10-K for Fiscal 1997 and Form 10- Q for the August Quarter, the 3Com/USR Joint Proxy Statement/Prospectus (the "Proxy Statement"), the 3Com and USR Registration Statement on Form S-4 and amendments (the "Registration Statement") and 3Com's Annual Report, financial press releases and other group-published corporate reports. Benhamou signed the 3Com Report on Form 10-K for Fiscal 1997 and the Proxy Statement. (ii) During the Class Period, defendant Benhamou sold 140,000 shares of 3Com common stock in the open market at prices as high as $52 per share, realizing proceeds from these sales of approximately $7.0 million. These sales constituted 25 percent of defendant Benhamou's holdings in 3Com. Defendant Benhamou acquired all of these shares by exercising stock options at prices ranging from $2.59 to $3 per share (except for 2,000 shares acquired at a price of $30 per share), which he then sold immediately, realizing profits on these sales in excess of $6.4 million. For the fiscal year ended May 31, 1997, defendant Benhamou received cash compensation from the Company approaching $850,000. (iii) By reason of his executive positions with 3Com, Board membership and ownership of 3Com stock, Benhamou was a controlling person of 3Com and had the power and influence, and exercised the same, to cause 3Com to engage in the conduct complained of herein.

14 (b) As part of, and in furtherance of, defendants' scheme to manipulate the market price of 3Com common stock, defendant Benhamou: (i) caused misleading pro forma financial statements for 3Com, including U.S. Robotics, to be disseminated as part of involvement in Joint Prospectus for Merger which included false USR results for March 30, 1997; (ii) caused revenue to be recorded in the Company's financial statements for the August Quarter in violation of GAAP; (iii) made false statements in press releases, speeches and conference calls announcing or discussing 3Com's quarterly or yearly revenues and earnings and sales of NICs and modems and discussing the merger between 3Com and USR (see,, infra); and (iv) participated in preparing, reviewing and falsely endorsing as accurate the Company's Reports on Forms 10-K for Fiscal 1997 and 10-Q for the August Quarter filed with the SEC, which contained falsely inflated pro forma or actual financial statements. 27. (a) At all relevant times until June 12, 1997, defendant Casey G. Cowell ("Cowell") was Chairman and Chief Executive Officer of defendant U.S. Robotics, a company he co-founded in As Chairman and Chief Executive Officer, Cowell participated in the day-to-day control of U.S. Robotics and in the preparation of statements alleged to be false herein. He was primarily responsible for U.S. Robotics' communications with securities analysts and was actively involved in U.S. Robotics' sales and

15 marketing efforts, including sales via distributors of modems in the United States and worldwide. Cowell was actively involved in preparing, reviewing and authorizing U.S. Robotics' publicly reported financial statements for the March Quarter 1997, U.S. Robotics' Report on Form 10-Q for the March Quarter, the Proxy Statement, the Registration Statement, and U.S. Robotics' financial press releases and other group-published corporate reports. Cowell signed the Proxy Statement for the merger. As of May 1, 1997, Cowell owned 1,819,154 shares of USR common stock, including options exercisable within 60 days. By reason of his executive positions with U.S. Robotics and stock ownership in U.S. Robotics, Cowell was a controlling person of U.S. Robotics and had the power and influence, and exercised the same, to cause U.S. Robotics to engage in the conduct complained of herein. (b) (i) Since the merger between 3Com and USR on June 12, 1997, Cowell has been Vice Chairman of the Board of Directors of 3Com and on June 12, 1997 became the largest private shareholder of 3Com. As Vice Chairman of the Company, Cowell participated in the day-to-day control of the Company and the preparation of the statements alleged to be false herein. He also had responsibility for 3Com's communications with securities analysts. Cowell was actively involved in preparing, reviewing and authorizing 3Com's publicly reported financial statements for Fiscal 1997 and for the August 1997 Quarter, the Company's Reports on Forms 10-K for Fiscal 1997 and 10-Q for the August 1997 Quarter, and its Annual Report, financial press releases and other group-published reports. Cowell signed the 3Com Report on Form 10-K for Fiscal 1997.

16 (ii) During the Class Period, defendant Cowell sold 1,165,000 shares of 3Com common stock in the open market at prices as high as $52.21 per share, realizing proceeds from these sales of more than $57.8 million. These sales constituted 33 percent of defendant Cowell's holdings in 3Com. Defendant Cowell acquired all of these shares by exercising stock options at prices ranging from $2.50 to $4.86 per share, which he then immediately sold, realizing profits on these sales in excess of $53.6 million. (iii) By reason of his position with 3Com, Board membership and ownership of 3Com stock, Cowell was a controlling person of 3Com and had the power and influence, and exercised the same, to cause 3Com to engage in the conduct complained of herein. (c) As part of, and in furtherance of, defendants' scheme to manipulate the market price of 3Com common stock, defendant Cowell: (i) caused revenue to be recorded in USR's financial statements for the March 1997 Quarter in violation of GAAP; (ii) caused misleading pro forma financial statements for 3Com, including U.S. Robotics, to be disseminated; (iii) made false statements in press releases, speeches and conference calls announcing or discussing USR's quarterly revenues and earnings and sales of modems, the merger between USR and 3Com, and 3Com's quarterly or yearly revenues and earnings and sales of NICs and modems (see,, infra); and (iv) participated in preparing and reviewing USR's Report on Form 10-Q for the March Quarter, 3Com's Report on Form

17 10-K for Fiscal 1997 and 3Com's Report on Form 10-Q for the August Quarter filed with the SEC, which contained falsely inflated pro forma or actual financial statements. 28. (a) (i) At all relevant times, defendant Christopher B. Paisley ("Paisley") was Senior Vice President, Finance and Chief Financial Officer of 3Com, a member of 3Com's Executive Committee, and an Executive Officer of the Company. As Chief Financial Officer, Paisley participated in the day-to-day control of the Company and in the preparation of the statements alleged to be false herein, except for the USR financial statements for the March Quarter; however, in connection with the merger between 3Com and USR, he became aware or reckless disregarded that those financial results were false. Paisley had responsibility for 3Com's communications with securities analysts. He also was actively involved in preparing, reviewing and authorizing 3Com's publicly reported financial statements for Fiscal 1997 and for the August 1997 Quarter, the Company's Reports on Forms 10-K for Fiscal 1997 and 10-Q for the August 1997 Quarter, the Proxy Statement, the Registration Statement and 3Com's Annual Report, financial press releases and other group-published corporate reports. Paisley signed the 3Com Report on Form 10-K for Fiscal 1997 and Report on Form 10-Q for the August Quarter. (ii) During the Class Period, defendant Paisley sold 40,000 shares of 3Com common stock in the open market at prices as high as $54.76 per share, realizing proceeds from these sales in excess of $2.1 million. These sales constituted 35 percent of defendant Paisley's holdings in 3Com. Defendant Paisley acquired

18 all of these shares by exercising stock options at a price of $1.97 per share, which he then immediately sold, realizing profits from these sales in excess of $2 million. (iii) By reason of his executive position with 3Com and ownership of 3Com stock, Paisley was a controlling person of 3Com and had the power and influence, and exercised the same, to cause 3Com to engage in the conduct complained of herein. (b) As part of, and in furtherance of, defendants' scheme to manipulate the market price of 3Com common stock, defendant Paisley: (i) caused misleading pro forma financial statements for 3Com including U.S. Robotics to be disseminated; (ii) caused revenue to be recorded in the Company's financial statements for the August Quarter in violation of GAAP; (iii) made false statements in conference calls announcing or discussing 3Com's quarterly or yearly revenues and earnings (See,, infra); and (iv) participated in preparing, reviewing and falsely endorsing as accurate the Company's Reports on Forms 10-K for Fiscal 1997 and 10-Q for the August 1997 Quarter filed with the SEC, which contained falsely inflated pro forma or actual financial statements. 29. (a) At all relevant times until June 12, 1997, defendant John McCartney ("McCartney") was President and Chief Operating Officer of defendant U.S. Robotics. As President and Chief Operating Officer, McCartney participated in the day-to-day control of U.S. Robotics and in the preparation of statements alleged to be

19 false herein. He was responsible for U.S. Robotics' communications with securities analysts and was actively involved in U.S. Robotics' sales and marketing efforts, including sales via distributors of modems in the United States and worldwide. McCartney was actively involved in preparing, reviewing and authorizing U.S. Robotics' publicly reported financial statements for the March Quarter, U.S. Robotics' Report on Form 10-Q for the March Quarter, the Proxy Statement, the Registration Statement, and U.S. Robotics' financial press releases and other group-published corporate reports. As of May 1, 1997, McCartney owned 1,443,570 shares of USR common stock, including options exercisable within 60 days. By reason of his executive positions with U.S. Robotics and stock ownership in U.S. Robotics, McCartney was a controlling person of U.S. Robotics and had the power and influence, and exercised the same, to cause U.S. Robotics to engage in the conduct complained of herein. (b) (i) From the time of the merger between 3Com and USR on June 12, 1997 until he resigned on March 20, 1998, defendant McCartney was President, Client Access, at 3Com (which business unit designed, marketed, manufactured and sold NICs and modems), a member of 3Com's Executive Committee, and an Executive Officer of the Company. As a member of the Executive Committee of the Company, McCartney participated in the day-to-day control of the Company and the preparation of the statements alleged to be false herein. He had communications with securities analysts and was also actively involved in 3Com's sales and marketing efforts for modems and adapter cards. McCartney authored, prepared and

20 reviewed reports and information which became part of the pro forma consolidated statement of 3Com's and USR's operations for Fiscal 1997 included in the notes to 3Com's publicly reported financial statements for Fiscal 1997 in the Company's Report on Form 10-K, the financial statements for the August 1997 Quarter, the Company's Report on Form 10-Q for the August 1997 Quarter, and its financial press releases and other group-published reports. (ii) During the Class Period, defendant McCartney sold 1,025,000 shares of 3Com common stock in the open market at prices as high as $55.75 per share, realizing proceeds in excess of $51.4 million. These sales constituted 45 percent of defendant McCartney's holdings in 3Com. Defendant McCartney acquired all of these shares by exercising stock options at prices ranging from $1.50 to $3.58 per share (except for 100,000 shares acquired at a price of $7.50 per share), which he then immediately sold, realizing profits on these sales in excess of $50.9 million. (iii) By reason of his position with 3Com and ownership of 3Com stock, McCartney was a controlling person of 3Com and had the power and influence, and exercised the same, to cause 3Com to engage in the conduct complained of herein. (c) As part of, and in furtherance of, defendants' scheme to manipulate the market price of 3Com common stock, defendant McCartney: (i) caused revenue to be recorded in USR's financial statements in violation of GAAP; (ii) caused misleading pro forma financial statements for 3Com including U.S. Robotics to be disseminated;

21 (iii) made false statements in press releases, speeches and conference calls announcing or discussing USR's quarterly revenues and earnings and sales of modems, and the merger between USR and 3Com, and 3Com's quarterly or yearly revenues and earnings and sales of NICs and modems (see,, infra.); and (iv) participated in preparing and reviewing USR's Report on Form 10-Q for the March Quarter, 3Com's Report on Form 10-K for Fiscal 1997 and 3Com's Report on Form 10-Q for the August Quarter filed with the SEC, which contained falsely inflated pro forma or actual financial statements. 30. (a) From April 9, 1997 until June 12, 1997, defendant Michael Seedman ("Seedman") was Senior Vice President and General Manager, Personal Communications Division of defendant U.S. Robotics. At all prior relevant times, he was Vice President and General Manager, Personal Communications Division of USR. As Senior Vice President or Vice President and General Manager, Seedman had global responsibility for product management, engineering, sales, marketing and technical support for all USR desktop product lines, including modems, and was actively involved in U.S. Robotics' sales and marketing efforts, including sales via distributors of modems in the United States and worldwide. Seedman participated in the day-to-day control of U.S. Robotics and in the preparation of statements alleged to be false herein. Seedman authored, prepared and reviewed reports and information regarding sales which became part of U.S. Robotics' publicly reported financial statements for the March Quarter, U.S. Robotics' Report on Form 10-Q for the March Quarter, the Proxy Statement, the

22 Registration Statement, and U.S. Robotics' financial press releases and other group-published corporate reports. As of May 1, 1997, Seedman owned 79,669 shares of USR common stock, including options exercisable within 60 days. By reason of his executive positions with U.S. Robotics and stock ownership in U.S. Robotics, Seedman was a controlling person of U.S. Robotics and had the power and influence, and exercised the same, to cause U.S. Robotics to engage in the conduct complained of herein. (b) (i) From the time of the merger between 3Com and USR on June 12, 1997, until he left 3Com in or around October 1997, defendant Seedman was Senior Vice President, Client Access, Personal Communications Division at 3Com, the head of 3Com's modem business, including its marketing and sales efforts, a member of 3Com's Executive Committee, and an Executive Officer of the Company. As a member of the Executive Committee of the Company, Seedman participated in the day-to-day control of the Company and the preparation of the statements alleged to be false herein. Seedman authored, prepared and reviewed reports and information regarding sales which became part of the pro forma consolidated statement of 3Com's and USR's operations for Fiscal 1997 included in the notes to 3Com's publicly reported financial statements for Fiscal 1997 in the Company's Report on Form 10-K for Fiscal 1997 and had responsibility for 3Com's financial press releases and other group-published reports. (ii) During the Class Period, defendant Seedman sold 1,267,588 shares of 3Com common stock in the open market at prices as high as $50.91 per share, realizing proceeds in excess of $63.6

23 million. These sales constituted 99 percent of defendant Seedman's holdings in 3Com. Defendant Seedman acquired all of these shares by exercising stock options at prices ranging from $4.72 to $37.58 per share, which he then immediately sold, realizing profits on his sales in excess of $43.5 million. (iii) By reason of his position with 3Com and ownership of 3Com stock, Seedman was a controlling person of 3Com and had the power and influence, and exercised the same, to cause 3Com to engage in the conduct complained of herein. (c) As part of, and in furtherance of, defendants' scheme to manipulate the market price of 3Com common stock, defendant Seedman: (i) caused revenue to be recorded in USR's financial statements in violation of GAAP; (ii) caused misleading pro forma financial statements for 3Com including U.S. Robotics to be disseminated; and (iii) participated in preparing and reviewing USR's Report on Form 10-Q for the March Quarter and 3Com's Report on Form 10-K for Fiscal 1997 filed with the SEC, which contained falsely inflated pro forma or actual financial statements. 31. (a) At all relevant times until June 12, 1997, defendant Ross W. Manire ("Manire") was Senior Vice President and General Manager, U.S. Robotics' Network Systems Division. From March 1992 until April 1995, Manire was Vice President, Finance and Chief Financial Officer of U.S. Robotics. As head of USR's systems business and former CFO, he participated in the day-to-day control of U.S. Robotics and in the preparation of statements alleged to be

24 false herein. He also had communications with securities analysts. Manire authored, prepared and reviewed reports and information regarding sales which became part of U.S. Robotics' publicly reported financial statements for the March Quarter, U.S. Robotics' Report on Form 10-Q for the March Quarter, the Proxy Statement, the Registration Statement and U.S. Robotics' financial press releases and other group-published corporate reports. As of May 1, 1997, Manire owned 657,697 shares of USR common stock, including options exercisable within 60 days. By reason of his executive position with U.S. Robotics and stock ownership in U.S. Robotics, Manire was a controlling person of U.S. Robotics and had the power and influence, and exercised the same, to cause U.S. Robotics to engage in the conduct complained of herein. (b) (i) Since the merger between 3Com and USR on June 12, 1997, defendant Manire has been Senior Vice President, Carrier Systems at 3Com, a member of 3Com's Executive Committee, and an Executive Officer of the Company. As a member of the Executive Committee of the Company and head of one of its three business units, Manire participated in the day-to-day control of the Company and the preparation of the statements alleged to be false herein. He also had communications with securities analysts. Manire authored, prepared and reviewed reports and information which became part of 3Com's publicly reported financial statements including the Report on Form 10-Q for the August Quarter and had responsibility for the false and misleading pro forma consolidated statement of 3Com's and USR's operations for Fiscal 1997 included in the notes to 3Com's publicly reported financial statements for

25 Fiscal 1997 in the Company Report on Form 10-K for Fiscal 1997 as well as for financial press releases and other group-published reports. (ii) During the Class Period, defendant Manire sold more than 291,000 shares of 3Com common stock in the open market at prices as high as $53.88 per share, realizing proceeds in excess of $15.3 million. These sales constituted 88 percent of defendant Manire's holdings in 3Com. Defendant Manire acquired all of these shares by exercising stock options at prices ranging from $0.96 per share to $2.50 per share, which he then immediately sold, realizing profits on his sales of approximately $15 million. (iii) By reason of his position with 3Com and ownership of 3Com stock, Manire was a controlling person of 3Com and had the power and influence, and exercised the same, to cause 3Com to engage in the conduct complained of herein. (c) As part of, and in furtherance of, defendants' scheme to manipulate the market price of 3Com common stock, defendant Manire: (i) caused revenue to be recorded in USR's financial statements in violation of GAAP; (ii) caused misleading pro forma financial statements for 3Com including U.S. Robotics to be disseminated; (iii) made false statements in press releases, speeches and conference calls announcing or discussing USR's revenues and earnings and sales of modems, the merger between USR and 3Com, and 3Com's revenues and earnings and sales of NICs and modems; and

26 (iv) participated in preparing and reviewing USR's Report on Form 10-Q for the March Quarter, 3Com's Report on Form 10-K for Fiscal 1997 and 3Com's Report on Form 10-Q for the August Quarter filed with the SEC, which contained falsely inflated pro forma or actual financial statements. 32. (a) At all relevant times until June 12, 1997, defendant Richard L. Edson ("Edson") was Vice President and General Manager, Manufacturing at U.S. Robotics. As Vice President and General Manager, Edson was actively involved in the preparation of statements alleged to be false herein. By reason of his executive position with U.S. Robotics, Edson was a controlling person of U.S. Robotics and had the power and influence, and exercised the same, to cause U.S. Robotics to engage in the conduct complained of herein. (b) (i) Since the merger between 3Com and USR on June 12, 1997, defendant Edson has been Senior Vice President, Client Access Products, New Business Initiatives at 3Com, a member of 3Com's Executive Committee and an Executive Officer of the Company. As a member of the Executive Committee of the Company, Edson participated in the day-to-day control of the Company and the preparation of the statements alleged to be false herein. (ii) During the Class Period, defendant Edson sold 140,000 shares of 3Com common stock in the open market at prices as high as $54 per share, realizing proceeds of approximately $7.2 million. These sales constituted 100 percent of defendant Edson's holdings in 3Com. Defendant Edson acquired all of these shares by exercising stock options at prices ranging from $17.50 to $37.58

27 per share, which he then immediately sold, realizing profits on his sales in excess of $3.6 million. (iii) By reason of his position with 3Com and ownership of 3Com stock, Edson was a controlling person of 3Com and had the power and influence, and exercised the same, to cause 3Com to engage in the conduct complained of herein. (c) As part of, and in furtherance of, defendants' scheme to manipulate the market price of 3Com common stock, defendant Edson participated in preparing or reviewing 3Com's Report on Form 10-K for Fiscal 1997 and 3Com's Report on Form 10-Q for the August Quarter filed with the SEC, which contained falsely inflated pro forma or actual financial statements. 33. (a) (i) At all relevant times until the merger between 3Com and USR on June 12, 1997, defendant Ralph B. Godfrey ("Godfrey") was Senior Vice President, Global Channel Sales at 3Com, and thereafter has been Senior Vice President, Client Access Products, American Sales at 3Com, a member of 3Com's Executive Committee, and an Executive Officer of the Company. As a member of the Executive Committee, Godfrey participated in the day-to-day control of the Company and in the preparation of the statements alleged to be false herein, except for the USR financial statements for the March Quarter; however, in connection with the merger between 3Com and USR, he became aware or recklessly disregarded that these financial results were false. (ii) During the Class Period, defendant Godfrey sold 77,500 shares of 3Com common stock in the open market at prices as high as $56.50 per share, realizing proceeds of $4.2 million.

28 These sales constituted 67 percent of defendant Godfrey's holdings in 3Com. Defendant Godfrey acquired all of these shares by exercising stock options at prices ranging from $6.47 to $15.78 per share, which he then sold immediately, realizing profits on his sales of approximately $3.1 million. (iii) By reason of his position with 3Com and ownership of 3Com stock, Godfrey was a controlling person of 3Com and had the power and influence, and exercised the same, to cause 3Com to engage in the conduct complained of herein. (b) As part of, and in furtherance of, defendants' scheme to manipulate the market price of 3Com common stock, defendant Godfrey participated in preparing or reviewing the Company's Reports on Forms 10-K for Fiscal 1997 and 10-Q for the August Quarter filed with the SEC, which contained falsely inflated pro forma or actual financial statements. 34. (a) (i) At all relevant times until the merger between 3Com and USR on June 12, 1997, defendant Richard W. Joyce ("Joyce") was Senior Vice President, New Business Operations at 3Com, and thereafter has been Senior Vice President, Remote Access Products Division at 3Com, a member of 3Com's Executive Committee, and an Executive Officer of the Company. As a member of the Executive Committee, Joyce participated in the day-to-day control of the Company and in the preparation of the statements alleged to be false herein, except for the USR financial statements for the March Quarter; however, in connection with the merger between 3Com and USR, he became aware or recklessly disregarded that these financial results were false.

29 (ii) During the Class Period, defendant Joyce sold 70,000 shares of 3Com common stock in the open market at prices as high as $55.94 per share, realizing proceeds in excess of $3.8 million. These sales constituted 93 percent of defendant Joyce's holdings in 3Com. Defendant Joyce acquired all of these shares by exercising stock options at prices ranging from $6.47 to $13.21 per share, which he then sold immediately, realizing profits on his sales in excess of $3 million. (iii) By reason of his position with 3Com and ownership of 3Com stock, Joyce was a controlling person of 3Com and had the power and influence, and exercised the same, to cause 3Com to engage in the conduct complained of herein. (b) As part of, and in furtherance of, defendants' scheme to manipulate the market price of 3Com common stock, defendant Joyce participated in preparing or reviewing the Company's Reports on Forms 10-K for Fiscal 1997 and 10-Q for the August Quarter filed with the SEC, which contained falsely inflated pro forma or actual financial statements. 35. (a) (i) At all relevant times until the merger between 3Com and USR on June 12, 1997, defendant Alan J. Kessler ("Kessler") was Senior Vice President, Global Systems Sales and Services at 3Com, and thereafter has been Senior Vice President, Enterprise Systems Business Unit, Global Sales at 3Com, a member of 3Com's Executive Committee, and an Executive Officer of the Company. As a member of the Executive Committee, Kessler participated in the day-to-day control of the Company and in the preparation of the statements alleged to be false herein, except

30 for the USR financial statements for the March 1997 Quarter; however, in connection with the merger between 3Com and USR, he became aware or recklessly disregarded that these financial results were false. (ii) During the Class Period, defendant Kessler sold 70,840 shares of 3Com common stock in the open market at prices as high as $51.52 per share, realizing proceeds in excess of $3.5 million. These sales constituted 100 percent of defendant Kessler's holdings in 3Com. Defendant Kessler acquired all of these shares by exercising stock options at prices ranging from $6.47 to $13.21 per share, which he then sold immediately, realizing profits on his sales of approximately $3 million. (iii) By reason of his position with 3Com and ownership of 3Com stock, Kessler was a controlling person of 3Com and had the power and influence, and exercised the same, to cause 3Com to engage in the conduct complained of herein. (b) As part of, and in furtherance of, defendants' scheme to manipulate the market price of 3Com common stock, defendant Kessler participated in preparing or reviewing the Company's Reports on Forms 10-K for Fiscal 1997 and 10-Q for the August 1997 Quarter filed with the SEC, which contained falsely inflated pro forma or actual financial statements. 36. (a) (i) At all times relevant hereto, defendant Janice M. Roberts ("Roberts") was Senior Vice President, Marketing and Business Development at 3Com, a member of 3Com's Executive Committee, and an Executive Officer of the Company. As a member of the Executive Committee, Roberts participated in the day-to-day

31 control of the Company and in the preparation of the statements alleged to be false herein, except for the USR financial statements for the March Quarter; however, in connection with the merger between 3Com and USR, he became aware or recklessly disregarded that these financial results were false. She had communications with securities analysts. (ii) During the Class Period, defendant Roberts sold 30,000 shares of 3Com common stock in the open market at prices as high as $58.38 per share, realizing proceeds in excess of $1.6 million. These sales constituted 88 percent of defendant Roberts' holdings in 3Com. Defendant Roberts acquired all of these shares by exercising stock options at a price of $6.47 per share, which she then immediately sold, realizing profits on her sales in excess of $1.4 million. (iii) By reason of her position with 3Com and ownership of 3Com stock, Roberts was a controlling person of 3Com and had the power and influence, and exercised the same, to cause 3Com to engage in the conduct complained of herein. (b) As part of, and in furtherance of, defendants' scheme to manipulate the market price of 3Com common stock, defendant Roberts: (i) made false statements in press releases, speeches and conference calls announcing or discussing USR's revenues and earnings and sales of modems, the merger between USR and 3Com, and 3Com's revenues and earnings and sales of NICs and modems (see,, infra.); and

32 (ii) participated in preparing or reviewing the Company's Reports on Forms 10-K for Fiscal 1997 and 10-Q for the August 1997 Quarter filed with the SEC, which contained falsely inflated pro forma or actual financial statements. [add motive and opportunity section here] PLAINTIFFS' CLASS ALLEGATIONS 37. Plaintiffs bring this action on their own behalf and as a class action pursuant to Rule 23(a) and Rule 23(b)(3) of the Federal Rules of Civil Procedure on behalf of a class (the "Class") of all persons or entities who purchased 3Com common stock on the open market from April 23, 1997, through November 5, 1997, inclusive (the Class Period). Excluded from the Class are the defendants herein, members of the immediate families of each of the Individual Defendants, parents, subsidiaries, officers, directors and affiliates of the corporate defendants, any entity in which a defendant has a controlling interest and the legal representatives, heirs, successors or assigns of any such excluded party. 38. The members of the Class, as purchasers of 3Com common stock on the NASDAQ market, are so numerous that joinder of all members is impracticable. While the exact number of Class members can only be determined by appropriate discovery, plaintiffs believe that Class members number in the thousands. As of August 31, 1997, 3Com had 345,948,876 shares of common stock issued and outstanding. 39. Plaintiffs' claims are typical of the claims of the members of the Class. Plaintiffs and all members of the Class sustained damages as a result of defendants' wrongful conduct complained of herein.

33 40. Plaintiffs will fairly and adequately protect the interests of the members of the Class, and have retained counsel competent and experienced in class and securities litigation. Plaintiffs have no interests that are in conflict with those of the Class. 41. A class action is superior to other available methods for the fair and efficient adjudication of this controversy. Because the damages suffered by individual Class members may be relatively small, the expense and burden of individual litigation makes it virtually impossible for them to seek redress for the wrongful conduct alleged. 42. Common questions of law and fact exist as to all members of the Class and predominate over any questions affecting solely individual members of the Class. Among the questions of law and fact common to the Class are: (a) whether the federal securities laws were violated by defendants' acts as alleged herein; (b) whether the documents, releases and public statements made by defendants omitted to state and misrepresented material facts concerning the business of 3Com and USR; (c) whether defendants pursued the fraudulent scheme and course of business alleged herein; (d) whether defendants acted knowingly and/or recklessly; (e) whether defendants sold personal holdings of 3Com common stock while in possession of material, non-public information concerning the Company; (f) whether the market price of 3Com common stock during the Class Period was manipulated and/or artificially inflated due to the activities complained of herein; and