218644 MARC M. SELTZER (54534) SUSMAN GODFREY L.L.P. 1880 Century Park East, Suite 950 Los Angeles, CA 900674606 Telephone (310) 789-3100 Attorneys for Lead Plaintiff Francine Ehrlich and Lead Counsel for the Class UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA WESTERN DIVISION In re MOTORCAR PARTS & ) Master File No. ACCESSORIES, INC. SECURITIES ) CV 99-07971R (Mcx) LITIGATION ) ) CLASS ACTION ) This Document Relates To: ) CONSOLIDATED AMENDED ) CLASS ACTION COMPLAINT ALL ACTIONS ) FOR VIOLATIONS OF THE ) FEDERAL SECURITIES LAWS Plaintiff Demands Trial By Jury This consolidated amended class action complaint is filed in the above-entitled litigation by Lead Plaintiff Francine Ehrlich pursuant to the Court s Order, filed on November 8, 1999. Plaintiff, for her complaint, alleges as follows: NATURE OF THE ACTION 1. Defendant Motorcar Parts & Accessories, Inc. ("Motorcar" or the "Company") is a company that sells reconditioned automobile starter motors and alternators. This is a relatively simple business and the financial accounting for that business is also relatively straightforward. According to the Company s public filings, it books revenues when it ships product to customers. The expenses of the business include the reconditioning process, the sales and marketing of its products and, of particular significance to this action, the cost of the credits for used starter motors and alternators received from customers. According to the Company s public filings, the Company booked the expenses for these credits when the used parts (or trade-ins) were received by the Company. As set forth below, the Company deliberately did not do this. For eleven quarters in a row it inflated its earnings by eliminating from its publiclyissued financial statements the expenses for the used parts that were received during each quarter. 2. During the Class Period in this action, August 1, 1996 through July 30, 1999, the Company appeared to be prospering. It publicly reported growing revenues and improved
earnings during this time period and its stock price performed accordingly. 3. On August 1, 1999, in a press release carried over PRNewswire at 11:51 p.m. that Sunday evening, the Company announced that its previously-issued financial results dating back to Fiscal 1996 had been grossly inflated due to accounting irregularities. An "accounting irregularity," according to generally accepted accounting principles ("GAAP"), means an intentional misstatement or omission in financial statements. In its August 1, 1999 announcement, the Company admitted that the results had been manipulated through the expedient of failing for eleven quarters to book a significant amount of the expense of used parts or trade-ins. In an egregious case of cooking the books, the Company reported a lower expense amount than was actually the case. By lowering its expenses, it increased its earnings. And the amounts are monumental for Motorcar. 4. On August 1, 1999, when the Company publicly admitted its wrongdoing, it stated that financial results were improperly inflated as follows: Net Income For Year Ended March 31, 1997 (Fiscal 1997) As Reported As Restated Overstatement $5,534,000 $2,851,000 $2,683,000 Net Income For Year Ended March 31. 1998 (Fiscal 1998) As Reported As Restated Overstatement $6,602,000 $6,017,000 $585,000 Net Income For Nine Months Ended December 31. 1998 (Fiscal 1999) As Reported As Restated Overstatement $4,520,000 $2,169,000 $2,351,000 5. On August 2, 1999, after the foregoing information was released, and prior to the opening of the market, the Nasdaq Stock Market halted trading of Motorcar s stock. Prior to the halt, Motorcar shares had closed on July 30, 1999 at 55.156 per share. On September 2. 1999, Motorcar shares were delisted from Nasdaq and began trading on the pink sheets at a price of $1.50 per share. Since the Company s August 1, 1999 announcement, Motorcar has not issued any financial statements. Besides its August 1, 1999 announcement of its "expected restatement" on a year end basis, the Company as not provided any further information about the natute of the restatement, Motorcar shares are currently trading at $ 1.125 per share. The market capitalization of the Company has dropped from $70.59 million to $7.25. As a result, investors in the Company have lost virtually their entire investment in the Company. JURISDICTION AND VENUE 6. This Court has jurisdiction over the subject matter of this action under Section 27 of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. 78aa, and 28 U.S.C. 1331 and 1337. The claims alleged herein arise under Sections 10(b)
and 20(a) of the Exchange Act, 15 U.S.C. 78j(b) and 78t(a), and Rule lob-5, 17 C.F.R. 240.l0b-5, promulgated thereunder by the Securities and Exchange Commission ("SEC"). 7. Venue is proper in this district pursuant to Section 27 of the Exchange Act and 28 U.S.C. 1391(b). Many of the acts and transactions giving rise to the violations of law complained of herein, including the preparation and dissemination to the investing public of false and misleading financial statements, occurred in this district. In addition, defendant Motorcar maintains its principal executive offices in this district at 2727 Maricopa Street, Torrance, California 90503. 8. In connection with the acts, conduct and other wrongs complained of herein, 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 9. Court-appointed Lead Plaintiff Francine Ehrlich, as Trustee, purchased shares of Motorcar common stock during the Class Period, as detailed in her filed certification, and suffered damages as a result of the violations of the federal securities laws alleged herein. 10. Defendant Motorcar is a remanufacturer of replacement alternators and starters for imported and domestic cars and light trucks in the United States and Canada. The Company s products are sold throughout the United States to many of the nation s largest chains of retail automotive stores, including AutoZone, Csk Auto and The Pep Boys. The Company also supplies remanufactured alternators and starters for imported vehicles to Delphi, a division of General Motors. 11. Defendant Mel Marks ("M. Marks") was, at all relevant times, the Company s founder, Chairman of the Board of the Directors (the"board") and Chief Executive Officer since 1968. Defendant Marks is also the Company s largest shareholder exercising ownership or control over 649,431 shares, or approximately 10.1% of the Company s common stock issued and outstanding. 12. Defendant Richard Marks ("Marks"), the son of M. Marks, was, at all relevant times, President, Chief Operating Officer and a member of the Board. Defendant Marks is also one of the Company s largest shareholders exercising ownership or control over 436,176 shares, or approximately 6.7% of the Company s co on stock issued and outstanding. 13. Defendant Peter Bromberg ("Bromberg") has been the Company s Chief Financial Officer since March 1994. Defendant Bromberg also exercises ownership or control over 33,400 shares of Motorcar s common stock. 14. Defendants M. Marks, Marks and Bromberg (collectively, the "Individual Defendants") reviewed or were aware of the false and misleading SEC filings, press releases,
and other statements complained of herein at or about the time they were issued or circulated, knew or were deliberately reckless in disregarding their false and misleading nature, and were in a position to control or influence their contents or otherwise cause corrective or accurate disclosures to have been made. Defendants engaged in the common course of conduct complained of herein from at least August 1, 1996 to July 30, 1999, the last trading day before the Company announced that it would restate its previously reported financial results for Fiscal 1997, Fiscal 1998 and for the first three quarters of the Company s fiscal year ended March 31, 1999 ("Fiscal 19991). 15. The Individual Defendants were each controlling persons of Motorcar within the meaning of Section 20 of the Exchange Act by reason of their management positions in Motorcar, their membership on the Company s Board, and/or their equity interest in the Company. Because of their positions in the Company and/or their stock ownership, the Individual Defendants had the power and influence to cause Motorcar to engage in the unlawful acts and conduct alleged herein. CLASS ALLEGATIONS 16. Plaintiff brings this action on its own behalf and as a class action pursuant to Rule 23(b)(3) of the Federal Rules of Civil Procedure on behalf of a class (the "Class") consisting of all persons who purchased Motorcar common stock from August 1, 1996 through July 30, 1999 inclusive (the "Class Period"). Excluded from the Class are the defendants, members of the immediate family of each of the Individual Defendants, officers and directors of the Company, parents, subsidiaries and affiliates of the corporate defendant, and the legal representatives, heirs successors or assigns of any such excluded party. 17. Motorcar common stock shares were actively traded on the Nasdaq National Market system, which is an efficient market, throughout the Class Period. The members of the Class, as purchasers on that 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, plaintiff believes that class members number in the hundreds. As of February 9,1999, Motorcar had more than 6.4 million shares of common stock issued and outstanding. 18. Plaintiffs claims are typical of the claims of the members of the Class. Plaintiff and all other members of the Class sustained damages as a result of defendants wrongful conduct complained of herein. 19. Plaintiff will fairly and adequately protect the interests of the other members of the Class and has retained counsel competent and experienced in class and securities litigation. 20. 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 make it virtually impossible for the class members individually to seek redress for the wrongful conduct alleged herein. 21. 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 defendants misstated the financial results of the Company for Fiscal 1997, Fiscal 1998 and the first three quarters of Fiscal 1999, in documents, releases, public statements, and filings with the SEC, in contravention of GAAP; c. whether the documents, releases and public statements made by defendants omitted to state and/or misrepresented material facts concerning the business and finances of Motorcar; d. whether defendants acted knowingly or were deliberately reckless in omitting and/or misrepresenting material facts; e. whether the market price of Motorcar common stock during the Class Period was artificially inflated due to the material omissions and/or misrepresentations complained of herein; and f. whether the members of the Class have sustained damages and, if so, the appropriate measure thereof. 22. Plaintiff knows of no difficulty that will be encountered in the management of this litigation that would preclude its maintenance as a class action, 23. The names and addresses of the record owners of Motorcar common stock purchased during the Class Period are available from the Company s transfer agent. Notice can be provided to such record owners via first class mail using techniques and a form of notice similar to those customarily used in securities class actions. FACTUAL ALLEGATIONS Motorcar and Reconditioning Industry Background 24. The Company sells replacement alternators and starters for automobiles. It acquires used alternators and starter motors, reconditions them and then sells them. 25. The Company obtains used alternators and starters, known as "cores," which are sorted by make and model and stored until needed, reconditioned and then sold. False and Misleading Statements First Quarter Fiscal 1997 26. On August 1, 1996 -- the first day of the Class Period -- Motorcar, in a press release carried over PRNewswire, announced its results for the first quarter ended June 30, 1996. According to the announcement, among other things, "[t]he Company generated record net income for the quarter ended June 30, 1996
of $1,037,000, a 97% increase as compared with net income of $526,000 in the comparable quarter of the prior year." Second Quarter Fiscal 1997 27. On November 13, 1996, the Company, in a press release carried over PRNewswire, announced its results for the second quarter ended September 30, 1996. According to the announcement, "[tlhe Company realized record net income for the six months ended September 30, 1996 of $2,431,000, 1 79% increase as compared with net income ofsl,360,000 in the same period a year earlier." The press release also stated that "[t]he Company realized record net income for the three months ended September 30, 1996 ofsl,394,000, a 67~ o increase as compared with the net income of $834,000 in the same period a year earlier." Third Quarter Fiscal 1997 28. On February 4, 1997, Motorcar announced record sales and earnings figures for the nine months and the third quarter ended December 31, 1996. In a press release carried over PRNewsire, the Company reported: The Company realized record net income for the nine months ended December 31, 1996 of $3,893,000, a 63% increase over the net income of $2,385,000 in the same period a year earlier.... The Company realized record net income for the three months ended December 31, 1996 of $1,462,000, a 43% increase over net income of $1,025,000 in the same period a year earlier. 29. These results were confirmed in the Company s Form 10-Q ("1997 Third Quarter 10-Q") filed with the SEC on or about February 13, 1997, and which was signed by defendant Bromberg. Fourth Quarter and Year End Fiscal 1997 30. On May 22, 1997, the Company, in a press release carried over PRNewswire, announced its results for the fourth quarter ended March 31, 1997 and Fiscal 1997. According to the announcement, for the year ended March 31, 1997, net income increased 520o to S5.5 million, or $1.11 per share, compared to net income of 3.6 million, or $0.93 per share, during Fiscal 1996. Net sales increased 35% to 86.9 million, compared to $64.4 million for the same period last year. Commenting on these results, defendant Marks stated: For the sixth year in a row, we are able to grow revenues and increase sales to record levels. This year, we significantly expanded our product offerings by adding domestic alternators and starters to our existing product line for imported cars, This presents a major expansion opportunity for our company as the market for starters and alternators of domestic manufacture is $2.4 billion, well in excess of the $800 million market for imported parts, where we are already a market leader. Marks continued: Fourth quarter results include initial shipments of domestic parts, as well as continued strength in sales of imported alternators and starters. From our current indications, we expect the strength we experienced in sales of both new and existing programs to continue into the coming year.
31. On June 26, 1997, the Company filed with the SEC its Form 10-K for the year ended March 31, 1997 (the "1997 Form 104K"). The 1997 Form 10-K was signed by defendants M. Marks, Marks and Bromberg. The results for Fiscal 1997, as reported in the Company s May ~2, 1997, announcement were confirmed by the 1997 Form 10-K. The 1997 Form 10-K included the Company s audited financial statements for the year ending March 31, 1997. Publicly Disclosed Accounting Policies On Revenue Recognition and Accounting for Expenses of Used Parts 32. The 1997 Form 10-K also stated the Company s revenue recognition policy. particular, with respect to the issue of customer credits on trade-ins, the 1997 Form 10-K represented that: The company recognizes sales when products are shipped. The Company obtains used alternator and starter units, commonly known as cores, from its customers as trade-ins and by purchasing them from vendors. Cores are an essential material needed for remanufacturing operations... [Nlet sales are reduced by product trade-ins and other deductions and allowances only and core trade-ins are included in cost of goods sold. Trade-ins are recorded upon receipt of cores from customers. Credits for core and product trade-ins are allowed only against future purchases of similar remanufactured products and are generally used by the customer within sixty days of issuance. Due to this unique trade-in policy, the Company does not provide a reserve for trade-ins. In addition since it is remote that a customer will not utilize its trade-in credits. the credit is recorded when the core is returned as opposed to when the customer purchases new products. (Emphasis added). Violations Of Accounting Policies 33. As ultimately revealed on August I, 1999, the statements set forth above regarding the first, second, third and fourth quarters and the year end for Fiscal 1997 were materially false and misleading when mad& In reality, as detailed below, Motorcar s Fiscal 1997 financial statements contained "accounting irregularities," through an intentional failure to book expenses for credits on used parts when the parts were received. The Company thereby understated its cost of goods sold and overstated its profits. The Company has announced that it 2 will be restating its Fiscal 1997 financial statements. As explained below Motorcar s forthcoming restatement of its previously issued financial statements based on "accounting irregularities" is an admission that defendants knew that those financial statements were false and misleading at the time they were issued. 34. Following the filing of the Company s 1997 Form 10- K, Motorcar stock closed at $l7 pershare. First Quarter Fiscal 1998 35. On August 12, 1997, the Company, in a press release carried over PRNewswire,
announced its results for the first quarter ended June 30, 1997 ("1998 first Quarter"). According to the announcement, net sales for the 1998 First Quarter increased 18.6% to S21.8 million, from $18.4 million during the comparable period last year. Net income increased 12.9% to $1.17 million, or $0.23 per share, compared to net income of$ 1.04 million, or $0.21 per share, during the same period last year. Commenting on the results, defendant Marks stated that: We are pleased with our results for the first quarter, which were in line with our internal plan. Initial shipments for our new line of domestic alternators and starters were on track. We also maintained our position in the imported parts market, despite this being seasonally our smallest quarter. Order levels in our imported parts business indicate that second quarter performance should be strong. As well, second quarter should be the largest selling season for our new domestic parts business. Both trends lead us to maintain an optimistic outlook on the core of our business. 36. These results were confirmed in the Company s Form 10-Q ("1998 First Quarter l0-q") filed with the SEC on or about August 14, 1997, and which was signed by defendant Bromberg. The 1998 First Quarter l0-q also contained the Company s assurances that "in the opinion of management," the Company s publicly reported results for the first quarter of 1998 include "all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation." The 1998 First Quarter l0-q also noted that "Eflor further information, refer to the financial statements and footnotes thereto included in the Company s Annual Report on Form 10-K for the year ended March 31, 1997." Secondary Offering 37. On October 15, 1997, defendants, taking advantage of the Company s rising stock price, filed a registration statement (the "Registration Statement") with the SEC for a secondary public offering of 1.55 million shares of Motorcar common stock, including 250,000 shares being offered by certain selling shareholders. The Registration Statement, which was signed by defendants M. Marks, Marks and Bromberg, incorporated by reference the Company s 1997 Form 10-K and the 1998 first Quarter 10-Q. The Registration Statement also included the unqualified audit opinion by the Company s independent certified public accountants, dated May 16, 1997, which stated that the Company s financial statements had been prepared in conformity with GAAP. 38. Significantly, pursuant to the Registration Statement, defendant M. Marks sold 100,000 shares of Motorcar common stock, and defendant Marks sold 150,000 shares of Motorcar common stock. Defendant M. Marks and Marks sold these shares at a price of $l6.63 per share for total proceeds of $4.15 million, Second Quartet Fiscal 1998
39. On October 29, 1997, the Company, in a press release carried over ERNw~ir. announced its results for the second quarter of Fiscal 1998, ended September 30, 1997 (the 1998 Second Quarter"). According to the announcement, for the 1998 Second Quarter, net sales increased 34.2% to $28.7 million from $21.4 million during the comparable period last year. et income increased 32,0% to $1.8 million, or $0.35 per share, over $1.4 million, or $0.28 per share, during the same period last year. 40. These results were confirmed in the Company s Form 10-Q ("1998 Second Quarter 10-Q") filed with the SEC on or about October 29, 1997, and which was signed by defendant Bromberg. The 1998 Second Quarter l0-q also contained the Company s assurances that "in the opinion of management," the Company s publicly reported results for the first quarter of 1998 include "all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation." The 1998 Second Quarter 10-Q also noted that "[for further information, refer to the financial statements and footnotes thereto included in the Company s Annual Report on Form 10-K for the year ended March 31, 1997." Third Quarter Fiscal 1998 41. On January 26, 1998, the Company issued a press release, carried over Business Wire, announcing its results for the third quarter of Fiscal 1998 ended December 3 1, 1998 (the "1998 Third Quarter"). According to the announcement, for the three months ended December 31, 1997, net sales increased 35.3% to 30.5 million, from $22.5 million during the comparable period last year. Net income increased 17.8% to $1.7 million, or $0.29 per share, compared to $1.5 million, or $0.29 per share, during the same period last year. 42. Commenting on the 1998 third quarter results, defendant Marks stated: We are pleased to report healthy top line growth in excess of 35% for the third quarter. Our efforts to penetrate the domestic alternator and starter market is being well received by our customers. We feel we are well-positioned to gain additional market share going forward. 43. The reported 1998 Third Quarter results were confirmed in the Company s Form 10-Q ("1998 Third Quarter l0-q") filed with the SEC on or about February 13, 1998, which was signed by defendant Bromberg. The 1998 Third Quarter 10-Q also contained the Company s assurances that "in the opinion of management," the Company s publicly reported results for the first quarter of 1998 include "all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation." The 1998 Third Quarter 10-Q also noted that "[for further information, refer to the financial statements and footnotes thereto included in the Company s Annual Report on Form 10-K for the year ended March 31, 1997." Fourth Quarter and Year End Fiscal 1998
44. On June 3, 1998, the Company, in a press release carried over PRNewswire announced that it reported its results for the fourth quarter of Fiscal 1998, ended March 31, 1998 (the "1998 Fourth Quarter") and for Fiscal 1998. According to the announcement, for the 1998 Fourth Quarter, net sales increased 30% to $32.0 million from $24.6 million during the comparable period last year. Net income increased 14% to $1.9 million, or $0.29 per share, over $1.6 million, or $0.33 per share, during the same period last year. In addition, for Fiscal 1998, the Company reported that net income increased 19% to $6.6 million, or $1.16 per share, compared to $5.5 million, or $1.11 per share, during the same period last year. 45. These results were confirmed in the Company s Form 10-K (the "1998 Form 10-K") filed with the SEC on or about June 29, 1998, and which was signed by defendants M. Marks, Marks and Bromberg. The 1998 Form 10-K included the Company s audited financial statements for the year ending March 31, 1998. The 1997 Form 10-K also contained an unqualified audit opinion by the Company s independent certified public accountants, dated May 19, 1998, which stated that the Company s financial statements had been prepared in conformity with GAAP. 46. The 1998 Form 10-K also stated the Company s revenue recognition policy. In particular, with respect to the issue of customer credits on core and product trade-ins, the 1998 Form 10-K represented that: Trade-ins are recorded upon receipt of cores from customers. Credits for core and product trade-ins are allowed only against future purchases of similar remanufactured products and are generally used by the customer within sixty days of issuance. Due to this unique trade-in policy, the Company does not provide a reserve for trade-ins. In addition since it is remote that a customer will not utilize its trade-in credits. the credit is recorded when the core is returned as opposed to when the customer purchases new products. (Emphasis added). 47. As ultimately revealed on August 2, 1999, the statements set forth above regarding the first, second, third and fourth quarters and the year end for Fiscal 1998 were materially false and misleading when made. In reality, as detailed below, Motorcar s Fiscal 1998 financial statements contained accounting irregularities, because Motorcar intentionally failed to book expenses for credits due when trade-in product was received. First Quarter Fiscal 1999 48. On August 10, 1998, the Company issued a press release, carried over BusinessWire, announcing its results for the first quarter of Fiscal 1999 ended June 30, 1998 (the "1999 First Quarter"). According to the announcement, for the three months ended June 30, 1998, net sales increased 42% to $31.0 million, from 21.8 million during the comparable period last year. Net income increased 38% to $1.6 million, or $0.25 per share, compared to $1.2 million, or $0.23 per share, during the same period last year.
49. The reported 1999 First Quarter results were confirmed in the Company s Form 10-Q ("1999 First Quarter l0-q") filed with the SEC on or about August 14, 1998, which was signed by defendant Bromberg. The 1999 First Quarter 10-Q also contained the Company s assurances that "in the opinion of management," the Company s publicly reported results for the first quarter of 1998 include "all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation." The 1999 First Quarter 10-Q also noted that "[for further information, refer to the financial statements and footnotes thereto included in the Company s Annual Report on Form 10-K for the year ended March 31, 1998." Second Quarter Fiscal 1999 50. On November 10, 1998, the Company issued a press release, carried over PRNewswire, announcing its results for the second quarter of Fiscal 1999 ended September 30, 1998 (the "1999 Second Quarter"). According to the announcement, for the three months ended September 30, 1998, net sales increased 25.4% to $36.0 million, from $28.7 million during the comparable period last year. Net income increased 5.9% to $1.9 million, or $0.30 per share, compared to 1.8 million, or $0.5 per share, during the same period last year. Net income decreased increased 5.9% to $1.9 million, or $0.30 per share, over $1.8 million, or $0.35 per share, during the same period last year. 51. Commenting on the 1999 Second Quarter results, defendant Marks stated: The increase in net sales in the recent periods is a function of the rapid growth and increased market share in the Company s domestic vehicles business, even though that business represents lower margins as compared with the Company s traditional imported vehicle business. The decrease in earnings per share resulted from the Company s underwritten public offering of common stock in November 1997. 52. The reported 1999 Second Quarter results were confirmed in the Company s Form 10-Q ("1999 Second Quarter 10-Q") filed with the SEC on or about November 13, 1998, which was signed by defendant Bromberg. The 1999 Second Quarter l0-q also contained the Company s assurances that "in the opinion of management," the Company s publicly reported results for the first quarter of 1998 include "all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation." The 1999 Second Quarter 10-Q also noted that "[for further information, refer to the financial statements and footnotes thereto included in the Company s Annual Report on Form 10-K for the year ended March31, 1998." Third Quarter Fiscal 1999 53. On February 3, 1999, the Company issued a press release, carried over BusinessWire, announcing its results for the third quarter of Fiscal 1999 ended December 31, 1998 (the "1999 Third Quarter"). According to the announcement, for the
three months ended December 31, 1998, net sales were relatively unchanged at $30.5 million. Net income decreased 44.7% to $1.0 million, or $0.15 per share, as compared to $1.7 million, or $0.29 per share, during the same period last year. 54. The reported 1999 Third Quarter results were confirmed in the Company s Form l0-q ("1999 Third Quarter 10-Q") filed with the SEC on or about February 16, 1999, which was signed by defendant Bromberg. The 1999 Third Quarter 10-Q also contained the Company s assurances that "in the opinion of management," the Company s publicly reported results for the first quarter of 1998 include "all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation." The 1999 Third Quarter 10-Q also noted that "[f]or further information, refer to the financial statements and footnotes thereto included in the Company s Annual Report on Form 10-K for the year ended March 31, 1998." The Fraud Begins To Unravel 55. On May 18, 1999, in a press release carried over PRNewswire, the Company announced that David Chaimowitz had been named as Chief Financial Officer of the Company. The Company s press release did not mention defendant Bromberg, the Company s former Chief Financial Officer, nor provide any details concerning his status at the Company. Defendant Bromberg had served as the Company s Chief Financial Officer since March 1994. 56. On May 24, 1999, in a press release carried over 2~~s~ire, Motorcar announced that: it expects to report a significant loss for the fourth quarter of its fiscal year ended March 31, 1999. The Company anticipates that it may report a loss for the entire fiscal year. The Company s independent auditors are continuing their year-end audit. 57. Following the Company s May 24, 1999 announcement, the price of Motorcar stock dropped over 36% from $11 to $7 per share. 58. On June 29, 1999, the Company filed a Form 12B-25, Notification of Late Filing, with the SEC. In the Form 12B-25, the Company stated that, as a result of"a significant change in results of operations" from the Company s prior fiscal year, it will not be able to file its 1999 Form 10-K on a timely basis. 59. On August 1, 1999, the Company then stunned investors by issuing a press release announcing that it would restate its previously reported financial results for Fiscal 1997, Fiscal 1998 and the first three quarters of Fiscal 1999 as "a result of certain accounting irregularities, principally with respect to the timing of product returns, and other accounting adjustments." According to the announcement, the Company stated that: in the course of preparing for the reporting of financial results for the fiscal year ended March 31, 1999, certain accounting concerns came to the attention of senior management of the Company and the Board of Directors. The Audit Committee
immediately commenced an investigation of th~ matter and promptly contacted the Company s independent auditors, Richard A. Eisner & Company, LLP, instructing them to conduct, in conjunction with their year-end audit, a comprehensive investigation. Following a preliminary assessment by the Audit Committee and Eisner of the results of operations for fiscal 1999, the Company announced on May 24, 1999 that it expected to report a significant loss for the fourth quarter of fiscal 1999 and that it anticipated reporting a loss for the entire year. On July 29, 1999, Eisner submitted- their report on the investigation to the Audit Committee. As a result of certain accounting irregularities, principally with respect to the timing of product returns, and other accounting adjustments the Company expects to restate its previously reported financial results for fiscal 1998 and 1997, as well as for the nine-month period ended December 31 1998. The Audit Committee has retained Hughes the investigation commenced by Eisner. The Company reported unaudited results, subject to adjustment, for the fiscal year ended March 31, 1999. The Company had net sales of approximately $136,244,000 and incurred a net loss of approximately $5,038,000. The fiscal 1999 results include the expected cumulative restatement of net income for the nine months ended December 31, 1998 to approximately $2,169,000 from $4,520,000 as originally reported and the expected restatement to net income for fiscal 1998 and 1997 to approximately $6,017,000 net income of $6,602,000 and $5,534,000 in fiscal 1998 and 1997 respectively. All of the above amounts are unaudited and subject (Emphasis added). 60. In that same announcement, the Company reported that the Company s independent auditor had "withdrawn their opinion on the Company s financial statements for the three years ended March 31, 1998, which opinion should not be relied upon." The Company also announced that defendant M. Marks had stepped down as the Company s Chief Executive Officer. Finally, the Company reported that the "net loss for Fiscal 1999 results in a violation of certain financial compliance covenants contained in the Company s revolving credit facility." 61. The Company s announcement that it will restate prior reported financial results due to "accounting irregularities" was an admission that Motorcar s publicly reported financial results had been intentionally misstated throughout the Class Period. Under GAAP, restatement is a most serious step, reserved only for situations in which no lesser remedy is available. Indeed, under Statement of Financial Accounting Standard No. 16, Prior Period Adjustments, and Accounting Principles Board Opinion No. 20, Accounting Changes, restatements are only permitted -- and are required -- for material accounting errors or irregularities that existed at the time the financial statements were prepared. In addition, according to GAAP, irregularities refer to intentional misstatements or omissions of amounts or disclosures in financial
statements to deceive financial statement users, and includes misrepresentation or intentional omission of events or transactions or intentional misapplication of accounting principles relating to amounts, manner of presentation, or disclosure. See SAS No. 82, Consideration of Fraud In A Financial Statement Audit. (AU 316.02 and 316.03) and SAS Section 53, The Auditor s Responsibility To Detect And Report Errors and Irregularities (AU 316.02-316.04). 62. On August 2, 1999, following these disclosures and before the opening of the market, the Nasdaq Stock Market halted trading of Motorcar s stock, seeking additional information, Prior to the halt, Motorcar shares had closed on July 30, 1999 at $5156 per share. Motorcar shares were delisted from Nasdaq on September 2, 1999 and, on that same day, began trading on the pink sheets and currently trade at $ 1.125 per share. To this date, Motorcar has not published any financial statements, including any statements further detailing the nature of the restatement. Thus, as a result of the accounting irregularities and the need to restate its financial results, the market capitalization of the Company prior to these announcements has plunged and is currently approximately $7 million. FIRST CLAIM FOR RELIEF (Against All Defendants For Violations of Section 10(b) of the Exchange Act And Rule lob-s Promulgated Thereunder) 63. Plaintiff repeats and realleges each of the allegations set forth in paragraphs 1 through 62. 64. Throughout the Class Period, defendants individually and in concert, directly and indirectly, by the use and means of instrumentalities of interstate commerce and/or of the mails, engaged and participated in a continuous course of conduct to conceal adverse material information about Motorcar, including its true financial results, as specified herein. Defendants employed devices, schemes, and artifices to defraud while in possession of material, adverse non-public information and engaged in acts, practices, and a course of conduct that included the making of, or participation in the making of, untrue and/or misleading statements of material facts and/or omitting to state material facts necessary in order to make the statements made about Motorcar not misleading. Specifically, defendants knew or were deliberately reckless in ignoring that the Company s reported financial results throughout the Class Period as filed with the SEC and disseminated to the investing public were materially overstated and were not presented in accordance with GAAP. 65. The Individual Defendants, as the directors and/or top executive officers of the Company, are liable as direct participants in the wrongs complained of herein. Through their positions of control and authority as officers and/or directors of the Company, and/or through their extensive stock ownership,
the Individual Defendants were able to and did control the content of the public statements disseminated by Motorcar. With knowledge of the falsity and/or misleading nature of the statements contained therein and with deliberate reckless disregard of the true financial results of the Company, the Individual Defendants caused the heretofore complained of public statements to contain misstatements and omissions of material facts as alleged herein. 66. Defendants acted with scienter throughout the Class Period, in that they either had actual knowledge of the misrepresentations and/or omissions of material facts set forth herein, or acted with deliberate recklessness in that they failed to ascertain and to disclose the true facts, even though such facts were available to them. The Individual Defendants constituted the senior management of the Company, and were therefore directly responsible for the false and misleading statements and/or omissions disseminated to the public through press releases, news repo s, and filings with the SEC. Bromberg, as Chief Financial Officer of the Company, directed the accounting irregularities described above, including the intentional failure to account properly for credits which were due when trade-in products were received. Indeed, for eleven quarters in a row the expense amount for the credit for returned parts was deliberately reduced. The remaining Individual Defendants, M. Marks and Marks, as Chief Executive Officer and Chief Operating Officer, respectively, either knew or acted with deliberate recklessness with regard to ~.he "accounting irregularities" described above. During the Class Period, the two Marks conducted a stock offering and collectively sold approximately 250,000 shares of Motorcar common stock at an inflated price of $16.63 per share for total proceeds of 34.15 million. 67. Defendants misrepresentations and/or omissions were intentional and done for the purpose of enriching themselves at the expense of plaintiff and the Class and to conceal the Company s true operating condition from the investing public. Defendants engaged in this scheme to inflate the Company s reported net income in order to create the illusion that Motorcar was a successful, strong and profitable company. This scheme allowed defendants to complete a secondary public offering in which defendants M. Marks and Marks sold a significant portion of their holdings of Motorcar common stock. 68. As a result of these deceptive practices and false and misleading statements and/or omissions, the market price of Motorcar common stock was artificially inflated during the Class Period. In ignorance of the false and misleading nature of the representations and/or omissions described above and the deceptive and manipulative devices employed by defendants, plaintiff and the other members of the Class, in reliance on the integrity of the market, purchased Motorcar common stock at artificially inflated prices.
69. Had plaintiff and the other members of the Class known of the material adverse information not disclosed by defendants, or been aware of the truth behind defendants material misstatements, they would not have purchased Motorcar common stock at artificially inflated prices. 70. By virtue of the foregoing, defendants have violated Section 10(b) of the Exchange Act and Rule I Ob-5 promulgated thereunder. SECOND CLAIM FOR RELIEF (Against The Individual Defendants For Liability Under Section 20 Of The Exchange Act) 71. Plaintiff repeats and realleges each of the allegations set forth in paragraphs I through 70, above. 72. Each of the Individual Defendants was a controlling person of the Company within the meaning of Section 20 of the Exchange Act during the Class Period. Specifically, defendant M. Marks had the power and authority to cause the Company to engage in the wrongful conduct complained of herein, by virtue of his position as Chief Executive Officer and Chairman of the Board. Defendant M. Marks was also the Company s largest shareholder. Defendant Marks also had the power and authority to cause the Company to engage in the wrongful conduct complained of herein, by virtue of ~s position as President, Chief Operating Officer and Director. Further, defendant Bromberg had the power and authority to cause the Company to engage in the conduct alleged herein by virtue of his position as Chief Financial Officer. These defendants were each in a position to control or influence the contents of, or otherwise cause corrective disclosures to have been made in the Company s SEC filings, along with the Company s other public statements that contained materially false and misleading statements that were disseminated during the Class Period. 73. By reason of the wrongful conduct alleged herein, the Individual Defendants are liable pursuant to Section 20(a) of the Exchange Act. As a direct and proximate result of their wrongful conduct, plaintiffs and the other members of the Class suffered damages in connection with their purchases of Motorcar common stock during the Class Period. PRAYERS FOR RELIEF WHEREFORE, plaintiff, on behalf of herself and the other members of the Class, prays for judgment as follows: 1. Declaring this action to be a proper class action maintainable pursuant to Rule 23 of the Federal Rules of Civil Procedure and declaring plaintiff to be a proper Class representative; 2. Awarding plaintiff and the other members of the Class compensatory damages as a result of the wrongs alleged in the first and second claims for relief alleged herein; 3. Awarding plaintiff and the other members of the Class their costs and expenses in this litigation, including
reasonable attorneys fees and experts fees and other costs and disbursements; and 4. Awarding plaintiff and the other members of the Class such other and further relief as the Court may deem just and proper. Dated: December 23, 1999 By: MARC M. SELTZER SUSMAN GODFREY L.L.P. Marc M. Seltzer Attorneys for Lead Plaintiff Francine Ehrlich and Lead Counsel for the Class