Complaint for Violation of the Federal Securities Laws (Nadler v. Clarent Corp., et al., Case No. C BZ)

Transcription

1 Complaint for Violation of the Federal Securities Laws (Nadler v. Clarent Corp., et al., Case No. C BZ Source: Milberg Weiss Date: 09/07/01 Time: 3:57 PM MILBERG WEISS BERSHAD HYNES & LERACH LLP REED R. KATHREIN ( Pine Street, Suite 2600 San Francisco, CA Telephone: 415/ / (fax - and - WILLIAM S. LERACH (68581 DARREN J. ROBBINS ( West Broadway, Suite 1800 San Diego, CA Telephone: 619/ / (fax BERNSTEIN LIEBHARD & LIFSHITZ, LLP MEL E. LIFSHITZ 10 East 40th Street New York, NY Telephone: 212/ / (fax Attorneys for Plaintiff UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA 1 of 9 8/8/02 3:11 PM

2 MIRIAM NADLER, On Behalf of Herself and All Others Similarly Situated, vs. Plaintiff, CLARENT CORPORATION, JERRY SHAW-YAU CHANG and SIMON WONG, Defendants. No. C BZ CLASS ACTION COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS DEMAND FOR JURY TRIAL SUMMARY AND OVERVIEW 1. This is a securities fraud class action on behalf of all purchasers of the publicly traded securities of Clarent Corporation ("Clarent" or the "Company" between April 20, 2001 and August 31, 2001 (the "Class Period", against Clarent and certain of its officers for violations of the Securities Exchange Act of 1934 (the "1934 Act". Clarent designs, develops, markets, and sells integrated Internet Protocol ("IP" telephony systems. The Company's solution is an integrated hardware and software solution that enables telecommunications service providers to rapidly deploy voice, fax, and data services over IP networks. 2. On September 4, 2001, Clarent issued a press release entitled, "Clarent Announces Investigation of Potential Overstatement of Historical Revenues; Places Three Executives On Administrative Leave." The press release stated in part: Clarent Corporation, a leading provider of voice solutions for next generation networks, announced today that it has discovered information suggesting that the Company's previously reported revenues for the first and second quarters of fiscal 2001 may have been materially overstated. The Company's Board of Directors has formed a special committee to investigate a number of transactions that place in question the Company's historical financial results. The Company is being assisted in this review by its outside auditors, Ernst & Young. The Company anticipates that its first quarter 2001 revenues, as released on April 19, 2001, and its second quarter 2001 revenues, as released on July 19, 2001, will be reduced and the related net losses will increase upon conclusion of this review. The related period balance sheets will also be adjusted; in particular, the Company believes that there will be a material reduction in cash and increase in other assets as of June 30, In addition, the Company now believes its revenues for the second half of fiscal 2001 and for fiscal 2002 will be substantially below previously anticipated levels, and that the related losses will be significantly larger than expected. The Company will provide further information following the completion of the investigation. The Board of Directors has placed on administrative leave Jerry Chang, the Company's chief strategist; Matthew Chiang, president of Clarent's Asia/Pacific region; and Kevin Chang, General Manager of Clarent's Northern Asia operations. Frank Lee, President of Clarent's China operations, has been named as acting head of Asia/Pacific operations. The Board of Directors intends to name Michael Vargo as Acting Chairman of the Board, and he will 2 of 9 8/8/02 3:11 PM

3 continue in his role as President and Chief Executive Officer. Because the investigation is ongoing, the Company is unable to make any comment beyond this press release at this time. The Company expects to make additional disclosure at its investigation progresses. 3. On this news, trading in Clarent shares was halted at $5.37 and has not resumed. JURISDICTION AND VENUE 4. 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. Many of the false and misleading statements were made in or issued from this District. 6. The Company's corporate headquarters are in Redwood City, California where the day-to-day operations of the Company are directed and managed. THE PARTIES 7. Plaintiff Miriam Nadler purchased Clarent publicly traded securities as described in the attached certification and was damaged thereby. 8. Defendant Clarent designs, develops, markets, and sells integrated IP telephony systems. The Company's solution is an integrated hardware and software solution that enables telecommunications service providers to rapidly deploy voice, fax, and data services over IP networks. 9. Defendant Jerry Shaw-Yau Chang ("Chang" was, during the Class Period, the Company's Chairman of the Board. 10. Defendant Simon Wong ("Wong" was, during the Class Period, the Company's Chief Financial Officer. 11. The individuals named as defendants in 9-10 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 Clarent 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 at 15-16, as those statements were each "group-published" information, the result of the collective actions of the Individual Defendants. SCIENTER 3 of 9 8/8/02 3:11 PM

4 12. In addition to the above-described involvement, each Individual Defendant had knowledge of Clarent's problems and was motivated to conceal such problems. Wong, as CFO, assumed control over the Company's financial reporting and communications with the market. As CFO, many of the internal reports showing Clarent's forecasted and actual growth were prepared by the finance department under Wong's direction and thus he was aware of the significant downturn in Clarent's actual and forecasted results. Chang, as Chairman, was responsible for the financial results and press releases issued by the Company. Each Individual Defendant sought to demonstrate that he could lead the Company successfully and generate the growth expected by the market. 13. Defendants knew or recklessly disregarded that the misleading statements and omissions complained of herein would adversely affect the integrity of the market for the Company's securities and would cause the prices of the Company's publicly traded securities to become artificially inflated. Defendants acted knowingly or in such a reckless manner as to constitute a fraud and deceit upon plaintiff and other members of the Class. FRAUDULENT SCHEME AND COURSE OF BUSINESS 14. Defendants are liable for (i making false statements, or (ii failing to disclose adverse facts about Clarent's financial results. Defendants' fraudulent scheme and course of business that operated as a fraud or deceit on purchasers of Clarent publicly traded securities was a success, as it: (i deceived the investing public regarding Clarent's prospects and business; (ii artificially inflated the prices of Clarent publicly traded securities; and (iii caused plaintiff and other members of the Class to purchase Clarent publicly traded securities at inflated prices. DEFENDANTS' FALSE AND MISLEADING STATEMENTS ISSUED DURING THE CLASS PERIOD 15. On April 19, 2001 (after the close of the market, Clarent issued a press release entitled, "Clarent Corporation Reports First Quarter Results; Revenue Up 15% to $61.2 Million." The press release stated in part: Clarent Corporation, a leading provider of Internet protocol (IP communications solutions, today reported financial results for the first quarter of Net revenue for the first quarter of 2001 was $61.2 million, representing an increase of 15% from $53.2 million in the fourth quarter of 2000 and an increase of 149% from $24.6 million in the first quarter of Excluding the amortization of deferred compensation and intangible assets, the Company reported a pro forma net loss of $2.1 million or $0.05 per basic and diluted share for the first quarter of 2001, compared to a net loss of $2.1 million or $0.05 per basic and diluted share in the fourth quarter 2000 and net income of $0.9 million or $0.03 per diluted share in the first quarter of Including the amortization of deferred compensation and intangible assets, the Company reported a net loss of $14.0 million or $0.35 per basic and diluted share for the first quarter of 2001, compared to a net loss of $14.1 million or $0.36 per basic and diluted share in the fourth quarter of 2000 and a net loss of $0.7 million or $0.02 per basic and diluted share in the first quarter of "This quarter, Clarent continued to solidify its position as a world leader in the softswitch 4 of 9 8/8/02 3:11 PM

5 market. In total, pure software represented half of our product sales this quarter," said Jerry Chang, Chief Executive Officer, Clarent Corporation. "We are particularly pleased with the initial success of our newly-launched OpenAccess solution. Our solutions enable true premises-to-premises IP communications. We offer service providers capital efficiency and operating cost savings. More important, our solutions give service providers the opportunity for incremental revenues from new enhanced services. These services put the power of communications in the hands of the consumer." 16. On July 20, 2001, Clarent issued a press release entitled, "Clarent Corporation - Second Quarter Revenue of $63.2 Million Increases 123% Year-Over-Year - Growth Driven By Open Access Solution Adoption," and which stated in part: Clarent Corporation, a leading provider of voice solutions for next generation networks, reported financial results for the second quarter of Second Quarter 2001 Performance Net revenues for the second quarter of 2001 were $63.2 million, representing an increase of 123% from the second quarter Revenues related to Clarent's OpenAccess solutions totaled $36 million, up 11% from the first quarter For the second quarter of 2001, excluding the effects of a previously announced $20 million charge for restructuring and inventory write-offs, as well as non-cash charges related to the amortization of developed technology, deferred compensation, goodwill and other intangible assets, the Company reported a pro forma net loss of $9.6 million, or $0.24 per basic and diluted share. The Company's results for the second quarter of 2001 in accordance with generally accepted accounting principles, resulted in a net loss of $41.6 million, or $1.03 per basic and diluted share. "We are pleased with our revenue growth especially in light of current economic considerations," said Mike Vargo, CEO, Clarent Corporation. "This growth is driven primarily by the strong demand for our Clarent OpenAccess solution." 17. On September 4, 2001, Clarent issued a press release entitled, "Clarent Announces Investigation of Potential Overstatement of Historical Revenues; Places Three Executives On Administrative Leave." The press release stated in part: Clarent Corporation, a leading provider of voice solutions for next generation networks, announced today that it has discovered information suggesting that the Company's previously reported revenues for the first and second quarters of fiscal 2001 may have been materially overstated. The Company's Board of Directors has formed a special committee to investigate a number of transactions that place in question the Company's historical financial results. The Company is being assisted in this review by its outside auditors, Ernst & Young. The Company anticipates that its first quarter 2001 revenues, as released on April 19, 2001, and its second quarter 2001 revenues, as released on July 19, 2001, will be reduced and the related net losses will increase upon conclusion of this review. The related period balance sheets will also be adjusted; in particular, the Company believes that there will be a material reduction in cash and increase in other assets as of June 30, In addition, the Company now believes its revenues for the second half of fiscal 2001 and for fiscal 2002 will be substantially below previously anticipated levels, and that the related losses will be significantly larger than expected. The Company will provide further information following 5 of 9 8/8/02 3:11 PM

6 the completion of the investigation. The Board of Directors has placed on administrative leave Jerry Chang, the Company's chief strategist; Matthew Chiang, president of Clarent's Asia/Pacific region; and Kevin Chang, General Manager of Clarent's Northern Asia operations. Frank Lee, President of Clarent's China operations, has been named as acting head of Asia/Pacific operations. The Board of Directors intends to name Michael Vargo as Acting Chairman of the Board, and he will continue in his role as President and Chief Executive Officer. Because the investigation is ongoing, the Company is unable to make any comment beyond this press release at this time. The Company expects to make additional disclosure at its investigation progresses. 18. On this news, trading in Clarent shares was halted at $5.37 and has not resumed. 19. Plaintiff incorporates 1-17 by reference. FIRST CLAIM FOR RELIEF For Violation of 10(b of the 1934 Act and Rule 10b During the Class Period, defendants disseminated or approved the false statements specified above, which they knew or recklessly 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. 21. Defendants violated 10(b of the 1934 Act and Rule 10b-5 in that they: (a Employed devices, schemes, and artifices to defraud; (b 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 Clarent publicly traded securities during the Class Period. 22. Plaintiff and the Class have suffered damages in that, in reliance on the integrity of the market, they paid artificially inflated prices for Clarent publicly traded securities. Plaintiff and the Class would not have purchased Clarent publicly traded 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. 23. As a direct and proximate result of defendants' wrongful conduct, plaintiff and the other members of the Class suffered damages in connection with their purchases of Clarent publicly traded securities during the Class Period. SECOND CLAIM FOR RELIEF For Violation of 20(a of the 1934 Act 6 of 9 8/8/02 3:11 PM

7 24. Plaintiff incorporates 1-23 by reference. 25. By reason of their positions as officers and/or directors of Clarent, the Individual Defendants had the power and authority to cause Clarent to engage in the wrongful conduct complained of herein. Clarent controlled the Individual Defendants and all of its employees. By reason of such conduct, defendants are liable pursuant to 20(a of the 1934 Act. CLASS ACTION ALLEGATIONS 26. 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 Clarent publicly traded securities (the "Class" on the open market during the Class Period. Excluded from the Class are defendants and Clarent's officers and employees. 27. 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. Clarent had more than 40 million shares of stock outstanding, owned by hundreds if not thousands of persons. 28. 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 Whether the 1934 Act was violated by defendants; (b Whether defendants omitted and/or misrepresented material facts; (c 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 recklessly disregarded that their statements were false and misleading; (e Whether the prices of Clarent publicly traded securities were artificially inflated; and (f The extent of damage sustained by Class members and the appropriate measure of damages. 29. Plaintiff's claims are typical of those of the Class because plaintiff and the Class sustained damages from defendants' wrongful conduct. 30. 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. 31. A class action is superior to other available methods for the fair and efficient adjudication of this controversy. PRAYER FOR RELIEF 7 of 9 8/8/02 3:11 PM

8 WHEREFORE, plaintiff prays for judgment as follows: A. Declaring this action to be a proper class action pursuant to Rule 23; B. Awarding plaintiff and the members of the Class damages, interest and costs; and C. Awarding such other relief as the Court may deem just and proper. JURY DEMAND Plaintiff demands a trial by jury. DATED: September 7, 2001 MILBERG WEISS BERSHAD HYNES & LERACH LLP REED R. KATHREIN REED R. KATHREIN 100 Pine Street, Suite 2600 San Francisco, CA Telephone: 415/ / (fax MILBERG WEISS BERSHAD HYNES & LERACH LLP WILLIAM S. LERACH DARREN J. ROBBINS 600 West Broadway, Suite 1800 San Diego, CA Telephone: 619/ / (fax BERNSTEIN LIEBHARD & LIFSHITZ, LLP MEL E. LIFSHITZ 10 East 40th Street New York, NY Telephone: 212/ / (fax Attorneys for Plaintiff CERTIFICATION OF INTERESTED ENTITIES OR PERSONS 8 of 9 8/8/02 3:11 PM

9 Pursuant to Civil L.R. 3-16, the undersigned certifies that as of this date, other than the named parties, there is no such interest to report. ATTORNEY OF RECORD FOR PLAINTIFF MIRIAM NADLER 9 of 9 8/8/02 3:11 PM