1 BERNSTEIN LITOWITZ BERGER 2 & GROSSMANN …securities.stanford.edu/.../201049_r01c_09CV01304.pdfCase 8:09-cv-01304-JVS-MLG Document 83 Filed 04/09/10 Page 1 of 42 1 BERNSTEIN LITOWITZ

Case 8:09-cv-01304-JVS-MLG Document 83 Filed 04/09/10 Page 1 of 42

1 BERNSTEIN LITOWITZ BERGER2 & GROSSMANN LLP

Blair A. Nicholas (Bar No. 178428)3 [email protected]

Timothy A. DeLange (Bar No. 190768)4 [email protected]

Niki L. Mendoza (Bar No. 214646)5 [email protected] Takeo A. Kellar (Bar No. 234470) r

[email protected] -7 12481 High Bluff Drive, Suite 300

San Diego, CA 921308 Tel: (858) 793-0070 ` r9 Fax: (858) 793-0323 M

KAHN SWICK & FOTI, LLCs

10 Kim E. Miller (Bar No. 178370){

_11 [email protected]

Melissa Ryan Clark (Pro Hac Vice)12 [email protected]

Michael A. McGuane (Pro Hac Vice)13 [email protected] 500 5th Ave., Suite 1810

New York, NY 1011015 Tel: (212) 696-3730

Fax: (504) 455-14981617 [additional counsel on signature page]

18 Co-Lead Counsel for Lead Plaintiffs

19 UNITED STATES DISTRICT COURT20 CENTRAL DISTRICT OF CALIFORNIA21 SOUTHERN DIVISION22

IN RE STEC, INC. SECURITIES Lead Case No.23 LITIGATION SACV 09-01304-JVS (MLGx)

24 CLASS ACTION

25 This Document Relates To: CONSOLIDATED COMPLAINT FORVIOLATIONS.OF THE FEDERAL

26 SECURITIES LAWS

27 ALL ACTIONSDEMAND FOR JURY TRIAL

28

CONSOLIDATED COMPLAINTLead Case No. SACV 09-01304-JVS (MLGx)


1 TABLE OF CONTENTS

2 Page

3 I. NATURE AND SUMMARY OF THE ACTION 1

4 II. JURISDICTION AND VENUE 4

5 III. THE PARTIES 5

6 A. Lead Plaintiffs 5

7 B. Defendants 5

8 IV. CONFIDENTIAL WITNESSES 7

9 V. THE FRAUDULENT CONDUCT 10

10 A. Background 10

11 B. STEC Concealed Its Agreements With Its LargestCustomer 11

12C. Defendants' Fraudulent Practices 14

13

141 . Defendants

d And ProductSh ip ped Empty Containers 14

15 2. Defendants Lied To Customers About STEC'sProduct Quality And Altered Reports To

16 Improperly Record Revenue 15

17 D. Defendants Increase Guidance, Citing PurportedlySuccessful Zeus Sales 19

18

E. After Artificially Inflating The Price Of STEC Stock,19 Defendants Manouch And Mark Moshayedi Engaged In

20Massive Insider Selling 21

F. The Aftermath 2421

VI. DEFENDANTS' FALSE AND MISLEADING22 STATEMENTS 25

23 A. STEC's Revenues From Zeus 25

24 B. The $120 Million Supply Agreement For Zeus 29

25 C. STEC's Customer Base And Growth 30

26 D. STEC's Product Quality 36

27 E. STEC's Competition 37

28

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F. STEC's Internal Controls And Compliance With GAAP1 And SEC 41

2 G. Materially False And Misleading Statements And

3Omissions Made As The Truth Began To Be Revealed 43

VII. THE TRUTH EMERGES 454

5A. The September 17, 2009 Partial Corrective Disclosure 46

B. The November 3, 2009 Partial Corrective Disclosure 486

7C. The February 23, 2010 Corrective Disclosure 56

8D. Post-Class Period Developments 60

VIII. DEFENDANTS' GAAP VIOLATIONS 619

IX. APPLICABILITY OF PRESUMPTION OF RELIANCE:10 FRAUD ON THE MARKET DOCTRINE 66

11 X. NO SAFE HARBOR 67

12 XI. CLASS ACTION ALLEGATIONS 68

13 XII. CLAIMS FOR RELIEF 70

14 COUNT I For Violation Of §, 10(b) Of The Exchange Act AndRule l Ob-5 Against S4 EC, Manouch Moshayedi, Mark

15 Moshayedi, And Raymond D. Cook 70

16 COUNT II For Violation Of § 20(a) Of The Exchange ActAgainst Manouch Moshayedi, Mark Moshayedi, And

17 Raymond D. Cook 73

18 XIII. PRAYER FOR RELIEF 74

19 XIV. JURY DEMAND 75

20

21

22

23

24

25

26

27

28

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CONSOLIDATED COMPLAINT-Lead Case No. SACV 09-01304-JVS (MLGx)


1 The allegations contained herein are based upon information and belief with

2 information obtained through the investigation made by and through Lead Counsel.

3 Lead Counsel's investigation has included, among other things: (i) interviews of

4 confidential witnesses, including former employees of Defendant STEC, Inc.

5 ("STEC" or the "Company"), as well as third-parties, with specific and first-hand

6 knowledge of the events and practices alleged herein; (ii) review and analyses of

7 STEC's filings with the United States Securities and Exchange Commission

8 ("SEC"), press releases and other public statements; and (iii) review and analyses

9 of news, media and analyst research reports.

10 I. NATURE AND SUMMARY OF THE ACTION

11 1. Lead Plaintiffs, Keith A. Ovitt and Arman Rashtchi, bring this action

12 on their own behalf and on behalf of all persons and entities who purchased or

13 otherwise acquired STEC common stock between June 16, 2009 and

14 February 23, 2010 (the "Class Period"), and were damaged thereby. This action is

15 brought against STEC and its top executive officers, the Company's Chairman and

16 Chief Executive Officer ("CEO"), Manouch Moshayedi; its President, Chief

17 Operating Officer ("COO"), and Chief Technology Officer ("CTO"), Mark

18 Moshayedi; and its Chief Financial Officer ("CFO"), Raymond D. Cook

19 (collectively, the "Individual Defendants"), for violations of the Securities

20 Exchange Act of 1934 (the "Exchange Act").

21 2. The facts alleged herein are currently the subject of an ongoing

22 investigation by the SEC. STEC has revealed that certain of STEC's officers and

23 employees, including Defendants Manouch and Mark Moshayedi, have received

24 subpoenas in connection with the SEC's investigation.

25 3. STEC purports to be a leading global provider of memory and storage

26 solutions tailored to meet the high-performance, high-reliability needs of original

27 equipment manufacturers ("OEMs") like Sun Microsystems, EMC Corporation,

28 IBM, and Dell. During the Class Period, STEC's core business was its enterprise

-1-



1 scale solid-state drives ("SSD"), such as its flagship product, the ZeusIOPS SSD

2 ("Zeus").

3 4. Throughout the brief eight month Class Period, Defendants knowingly

4 engaged in various fraudulent practices to dramatically increase STEC's stock

5 price and create a window for the Company's two most senior executives to sell

6 more than 9 million shares of stock, approximately 50% of their holdings, for

7 proceeds in excess of $267 million. These fraudulent practices centered on

8 Defendants' manipulation of the Company's revenue and revenue guidance to

9 investors and the market — key metrics that determined STEC's financial health.

10 5. On June 16, 2009, the first day of the Class Period, and again just one

11 month later in July 2009, Defendants announced a huge increase in STEC's

12 revenue guidance. This news was a departure from STEC's prior guidance, and the

13 stock price soared. Defendants explained that the guidance increases resulted from

14 growth in the Company's sales of its flagship product, Zeus, and a $120 million

15 deal with the Company's largest customer, EMC Corporation ("EMC") for third

16 and fourth quarters of 2009. Defendants highlighted that the increased revenue

17 growth and EMC deal were indicative of future sales and growth.

18 6. As the stock price rose to unprecedented levels, STEC's two top

19 executive officers — its CEO and Chairman, Defendant Manouch Moshayedi, and

20 his brother, STEC's President and COO, Defendant Mark Moshayedi — cancelled

21 . their newly-adopted Rule lOb5-1 trading plans and sold 9 million shares of STEC

22 stock through a "secondary offering."

23 7. Defendants Manouch and Mark Moshayedi completed their sale at

24 $31 per share — nearly double STEC's stock price just two months earlier at the

25 beginning of the Class Period. Defendant Manouch Moshayedi founded STEC in

26 1990, and Defendant Mark Moshayedi joined the Company shortly thereafter in

27 1992. Prior to this secondary offering, they had never previously sold such

28 massive amounts of their STEC stock. In fact, the shares sold by the Moshayedis

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1 were, collectively, more than 11 times the number of shares they sold in the six

2 months before the Class Period and 20 times the number of shares they sold in all

3 of 2008. That was the largest insider selling in the history of the Company.

4 8. Defendants' manipulation of the Company's revenue and revenue

5 guidance ended following the massive insider sales. As would be revealed through

6 multiple partial disclosures beginning on September 17, 2009, STEC's purported

7 increased revenue was derived from a single customer, in a one-time deal that —

8 contrary to Defendants' misrepresentations — was not indicative of continuing

9 demand for STEC's products. Following each of these announcements, STEC's

10 stock price plummeted. STEC's stock price currently trades at $11.76, below its

11 price at the beginning of the Class Period, and 72% below the Class Period high.

12 9. As illustrated below, while STEC's stock price rose in just two

13 months, the top executive officers unloaded their personally held shares near the

14 all-time high, just one month before the truth began to emerge:

15 Class PeriodJun. 16, 2009 - Feb. 23, 2010 ►:

1$45

6-

• i 59•tember 17.2009

^. August 11. 2009 Partial disclosure regarding$40

• Moshayedis Complete STEC's SSD Competition.•"'— secondary often

n' for

17 5267.8M in personal profits.•

18

$35 )un. 37-Jul. b. zan `

A AV, November 3.2009under

Co-fo of STEC,Par[ial disclosure regarding STEC'sMasoud Moshayed, y inventory overhang at EMC.$30 sells 1.07M shares for

1 n proceeds of $25.1M

7 dam& February 23.2010

20$Z5 o b r Disclosure that the inventory overhang at EMC4 would affect revenues in additional quarters

and drastic reduction in revenue guidance.

$20 r ,

21 L 7 Juh 16.2009STEC annour ces EMC

22$ 15 supply agreement worth

^. $120M for supply of Zeus.•

June 16.2009

23

$10 STEC revises Q2

J • evenue8uidance

Mav 29.2009 • upwards by -20%.

Defendantsannounce v •

2 1 $5 adoption of Rule

`F•

WWI Trading Plans. ^ •

1 •

25 so I

May'09 Jun'09 Jul'09 Aug'09 Sep'09 Oct 109 Nov'09 Dec'09 Jan'10 Feb'10 Mar'30

26

27 10. Thirteen confidential witnesses — including former STEC employees

28 and customers with first-hand knowledge — confirm the existence of Defendants'

-3- CONSOLIDATED COMPLAINTLead Case No. SACV 09-01304-NS (MLGx)


1 deceptive business practices which were specifically designed to inflate STEC's

2 financial results and artificially inflate its stock price. The confidential witnesses

3 confirm that Defendants engaged in the following fraudulent practices to inflate

4 STEC's stock price:

5 • "Shipping bricks": a term utilized internally at STEC to describe its

6 common practice in which the Company ships empty packages or

7 packages containing the wrong product, allowing STEC to immediately

8 record revenue at the end of a fiscal reporting period for product that was

9 not actually shipped;

10 • Demanding that customers accept inventory by a fiscal quarter's deadline

11 for recording revenue regardless of that customer's actual need for

12 STEC's products at that time;

13 • Shipping defective or untested product and immediately recording

14 revenue upon shipment despite knowledge that the product was defective

15 and untested;

16 • Selling product as "new" even though it contained refurbished or rejected

17 parts;

18 • Lying to customers about product quality, features, certifications, testing,

19 and failure rates;

20 • Altering error reports before sending them to customers; and

21 • Manipulating accounting for revenue from the EMC contract, including

22 by violating generally accepted accounting principles ("GAAP").

23 II. JURISDICTION AND VENUE

24 11. This action arises under Sections 10(b) and 20(a) of the Exchange Act,

25 15 U.S.C. §§ 78j(b) and 78t(a), and Rule lOb-5 promulgated thereunder by the

26 SEC, 17 C.F.R. § 240.1Ob-5.

27 12. This Court has jurisdiction over the subject matter of this action

28 pursuant to 28 U.S.C. § 1331 and § 27 of the Exchange Act, 15 U.S.C. § 78aa.

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1 Venue is proper in this District pursuant to Section 27 of the Exchange Act, 15

2 U.S.C. § 78aa, and 28 U.S.C. § 1391(b). Defendant STEC maintains its principal

3 place of business within this District, the Individual Defendants conduct business

4 in this District, and many of the acts giving rise to the violations alleged herein,

5 including the preparation and dissemination of materially false and misleading

6 information and omissions, occurred in substantial part in this District.

7 13. In connection with the acts alleged in this Complaint, Defendants,

8 directly or indirectly, used the means and instrumentalities of interstate commerce

9 including, but not limited to, mail, interstate telephone communications, and the

10 facilities of the national securities markets.

11 III. THE PARTIES

12 A. Lead Plaintiffs

13 14. Lead Plaintiff Keith A. Ovitt purchased STEC common stock during

14 the Class Period. As a result of the unlawful conduct alleged herein, Mr. Ovitt

15 suffered damages in connection with his purchases of STEC common stock.

16 Attached hereto is a certification setting forth Mr. Ovitt's transactions in STEC

17 securities during the Class Period.

18 15. Lead Plaintiff Arman Rashtchi purchased shares of STEC common

19 stock during the Class Period. As a result of the unlawful conduct alleged herein,

20 Mr. Rashtchi suffered damages in connection with his purchases of STEC common

21 stock. Attached hereto is a certification setting forth Mr. Rashtchi's transactions in

22 STEC common stock during the Class Period.

23 16. Collectively, Mr. Ovitt and Mr. Rashtchi are referred to herein as the

24 "Lead Plaintiffs."

25 B. Defendants

26 17. Defendant STEC is a California corporation with its principal place of

27 business located at 3001 Daimler Street, Santa Ana, California. According to the

28 Company's profile, STEC purports to be a leading global provider of solid-state

-5- CONSOLIDATED COMPLAINTLead Case No. SACV 09-01304-JVS (MLGx)


1 computer memory drive technologies and solutions tailored to meet the high-

2 performance, high-reliability needs of OEMs. The Company claims to

3 manufacture the industry's "most comprehensive line" of SSDs in the storage

4 industry. Throughout the Class Period, the Company traded in an efficient market

5 on the NASDAQ under the ticker symbol "STEC." As of February 23, 2010, the

6 Company had nearly 50 million shares issued and outstanding.

7 18. Defendant Manouch Moshayedi, co-founder of STEC, is, and at all

8 relevant times was, Chairman of the Board and CEO of STEC. During the Class

9 Period, Defendant Manouch Moshayedi signed and certified the Company's SEC

10 filings pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002

11 ("SOX"). During the Class Period, Defendant Manouch Moshayedi sold 4.5

12 million shares of his personally-held STEC stock, collecting nearly $134 million in

13 insider trading proceeds.

14 19. Defendant Merhdad "Mark" Moshayedi, is, and at all relevant times

15 was, President, COO, CTO, Secretary and a Director of STEC. Mark Moshayedi

16 and Manouch Moshayedi are brothers (a third brother, Masoud "Mike" Moshayedi,

17 co-founded the Company, retiring in 2007 and remaining beneficial owner of 8.9%

18 of the total shares of STEC's common stock). During the Class Period, Defendant

19 Mark Moshayedi signed Company SEC statements, including the Company's

20 August 2009 Registration Statement and Prospectus. During the Class Period,

21 Defendant Mark Moshayedi sold 4.5 million shares of his personally-held STEC

22 stock, collecting nearly $134 million in insider trading proceeds.

23 20. Defendant Raymond D. Cook is, and at all relevant times was, the

24 CFO and Principal Accounting Officer of the Company. During the Class Period,

25 Defendant Cook signed and certified the Company's SEC filings pursuant to

26 Sections 302 and 906 of SOX.

27 21. Defendants Manouch Moshayedi, Mark Moshayedi, and Cook,

28 because of their positions with the Company, possessed the power and authority to



1 control the contents of STEC's quarterly reports, press releases, and presentations

2 to securities analysts, money and portfolio managers, and institutional investors,

3 i.e., the market. They were provided with copies of the Company's reports and

4 press releases alleged herein to be misleading prior to or shortly after their issuance

5 and had the ability and opportunity to prevent their issuance or cause them to be

6 corrected. Because of their positions with the Company, and their access to

7 material non-public information, the Individual Defendants knew or with

8 deliberate recklessness disregarded that the adverse facts specified herein were

9 being concealed from the public and that the positive representations being made

10 were then materially false and misleading. The Individual Defendants are liable

11 for the false and misleading statements pleaded herein.

12 IV. CONFIDENTIAL WITNESSES

13 22. The allegations herein are supported in part by first-hand accounts of

14 thirteen confidential witnesses, including former STEC employees and customers.

15 As set forth below, the confidential witnesses were each in a position to know the

16 information alleged, and many corroborate the allegations of one another. The

17 confidential witnesses have been identified with particularity but without

18 disclosing identities in order to address concerns about retaliation or career injury:

19 (a) Confidential Witness 1 ("CW 1 ") was an STEC Sales and Field

20 Applications Engineer from September 2007 through November 2009. CWl

21 worked with top tier Network and Enterprise Storage OEM customers to provide

22 pre- and post-technical sales support for SSDs and other products and coordinated

23 internal engineering, manufacturing, testing and failure analysis to resolve product

24 design-in, customer qualification and field related issues. CW1 reported to Field

25 Applications Manager Robert Lopez. As detailed below, CW1 described first-hand

26 accounts of STEC shipping empty containers of products to customers in order to

27 report false revenue, and corroborated the information provided by other

28 confidential witnesses of the direct involvement and knowledge of the fraudulent



1 practices by Manouch and Mark Moshayedi, and of STEC's dependence on one

2 large customer.

3 (b) Confidential Witness 2 ("CW2") was STEC's Hewlett-Packard

4 ("HP") Inside Sales Representative in Santa Ana, California from June 2004

5 through July 2009 and, prior to that time, was a marketing specialist for STEC's

6 predecessor, SimpleTech, from June 2000 to June 2004. As detailed below, CW2

7 explained that Defendant Manouch Moshayedi was directly involved in ordering

8 STEC's sales force to pressure customers to move sales into third quarter 2009.

9 CW2 also described STEC shipping products with high failures rates in order to

10 meet sales.

11 (c) Confidential Witness 3 ("CW3") was a Quality Failure Analysis

12 Technician from November 2007 through November 2008, who worked on

13 products including Zeus. As detailed below, CW3 corroborated the information

14 provided by other confidential witnesses regarding the defectiveness and high

15 failure rates of STEC SSDs and detailed STEC's practice of lying to customers

16 about problems with the products.

17 (d) Confidential Witness 4 ("CW4") was a Regional Sales Manager

18 for the San Francisco Bay Area territory who worked for STEC from February

19 2006 through September 2009. As detailed below, CW4 corroborated that there

20 was a lot of "collaboration" between STEC and EMC, an early adopter of Zeus.

21 (e) Confidential Witness 5 ("CW5") was a Sales Coordinator for

22 STEC from late 2007 until July 2009, whose sales included Zeus products. As

23 detailed below, CW5 detailed the importance of EMC's business, including that

24 STEC management directed that EMC's orders were top priority and that they be

25 filled before orders from other customers.

26 (f) Confidential Witness 6 ("CW6") was a Technical Solutions

27 Architect with EMC from 1996 to mid-2009. As detailed below, CW6

28



1 corroborated the information provided by other confidential witnesses regarding

2 defective STEC SSD products and high failure rates with the Zeus drive.

3 (g) Confidential Witness 7 ("CW7") is a former HP Engineer who

4 worked for HP between August 2007 through May 2009. In that position at HP,

5 CW7 worked with SSDs from STEC. As detailed below, CW7 corroborated the

6 information provided by other confidential witnesses regarding the defective and

7 high failure rates of STEC SSDs.

8 (h) Confidential Witness 8 ("CW8") was a Sales and Field

9 Application Engineer for STEC in the San Francisco Bay Area and Pacific

10 Northwest from September 2008 through March 2009 whose work included the

11 Zeus SSD. CW8 reported to Field Applications Manager Robert Lopez. As

12 detailed below, CW8 corroborated the information provided by other confidential

13 witnesses that, among other things, Defendants Manouch and Mark Moshayedi

14 were directly and personally involved in all aspects of the business with EMC and

15 that STEC management had weekly sales meetings at which time they would talk

16 specifically about SSD revenue.

17 (i) Confidential Witness 9 ("CW9") was an Engineer for STEC in

18 Santa Ana, California from February 2005 through December 2008. As detailed

19 below, CW9 corroborated the information provided by other confidential witnesses

20 regarding the defective and high failure rates of STEC SSDs, and detailed STEC's

21 practice to ship untested product in order to recognize quarterly revenue on the

22 transaction.

23 (j) Confidential Witness 10 ("CW10") was a Test Engineer for

24 STEC for 13 years until July 2009. CW10 provided production test solutions for

25 STEC's flash products and SSD products. As detailed below, CW 10 described

26 STEC's production and projections process, including that STEC based its

27 projections on purchase orders by customers such as EMC, and then purchased the

28 components to build the SSDs.

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1 (k) Confidential Witness 11 ("CW 11 ") was a Process Engineer for

2 STEC from December 2006 through July 2009, who worked on all of STEC's SSD

3 products. As detailed below, CW11 corroborated the information provided by

4 other confidential witnesses that Defendants Manouch and Mark Moshayedi were

5 directly and personally involved in all aspects of the business with EMC.

6 (1) Confidential Witness 12 ("CW12") was a Chief Technologist of

7 Storage and Data Management at Sun Microsystems from .1999 to April 2009, and

8 currently works for Pillar Data Systems as a Network Attached Storage

9 Technologist. CW12 worked with STEC SSDs. As detailed below, CW12

10 corroborated the information provided by other confidential witnesses regarding

11 the defective and high failure rates of STEC SSDs.

12 (m) Confidential Witness 13 ("CW13") was a Product Marketing

13 Specialist for STEC from June 2002 through October 2008, whose job included

14 marketing for the ZeusIOPS, among other products. As detailed below, CW13

15 corroborated the information provided by other confidential witnesses that

16 Defendants Manouch and Mark Moshayedi were directly and personally involved

17 in all aspects of the business with EMC.

18 V. THE FRAUDULENT CONDUCT

19 A. Background

20 23. STEC purports to be a leading global provider of memory and storage

21 solutions tailored to meet the high-performance, high-reliability needs of OEMs

22 like Sun Microsystems, EMC, IBM, and Dell. During the Class Period, STEC's

23 core business was its enterprise scale SSDs, such as its flagship product, Zeus.

24 24. STEC, then named Simple Technology, Inc. ("SimpleTech"), was

25 founded in 1990 by Manouch Moshayedi and his brother, Masoud "Mike"

26 Moshayedi. At that time, they introduced a line of memory products for PCs,

27 notebooks, servers, printers and devices.

28

-10- CONSOLIDATED COMPLAINTLead Case No. SACV 09-01304-JVS (MLGx) -


1 25. Throughout the 1990s, the Company grew rapidly, expanding its

2 manufacturing facilities, acquiring a Flash controller design team from Cirrus

3 Logic, establishing an OEM Sales Division, acquiring Kelly Microsystems and

4 Silicon Tech, and opening European offices. In 1995, the Company was

5 recognized on the Inc 500 list as one of the 50 fastest-growing businesses in the

6 United States. The Company completed its initial public offering in September

7 2000, trading on the NASDAQ under the ticker symbol STEC.

8 26. As the Company continued to expand through acquisitions, in 2005, it

9 introduced its high-end Zeus SSD product. Two years later, STEC introduced its

10 flagship product, the ZeusIOPS SSD, with Enterprise grade storage systems.

11 27. During the Class Period, Defendants touted STEC as the only

12 manufacturer of enterprise-scale SSDs, with promises of extraordinary revenue

13 growth. As illustrated below, Defendants repeatedly announced increasingly

14 higher earnings per share (`BPS") and revenue guidance as a result of its purported

15 monopoly of the SSD market and, in particular, its flagship product, Zeus:

16STEC Quarterly Earnings Guidance

17 Class Period$110M : Er

Jun. 16, 2009 -Feb. 23, 2010 18 $loom 101-103

19 $90m

a

20 .s:58oM

^ ^^ •

F$70m

Ep

21 560M ^ se•6o ^ _ ^^ ^

$50M

F

g22 ^ ^

$40M a £ 7"a r

23 $30Myr

24$20m u_ ... ^_.

3/12/2009 5/11/2009 6/16/2009 8/3/2009 11/3/2009 2/23/2010

25(1Q09) (2009) (2009 revised) (3Q09) (4009) (1410)

26 B. STEC Concealed ItsAgreements With Its Largest Customer

27 28. Throughout its history, STEC heavily aligned itself with one large

28 customer to purchase its SSDs. CWl explained that STEC was a "one customer

-1 i- CONSOLIDATED COMPLAINTLead Case No. SACV 09-01304-JVS (MLGx)


1 dog" that would "get in bed" with one customer at a time. CW 1 elaborated that

2 Cisco was STEC's primary customer for SSDs in 2006, 2007, and 2008, until

3 Cisco "turned off their faucet, so to speak, and no longer was STEC's `top dog."'

4 29. Throughout the Class Period, STEC's "top dog" was EMC. EMC was

5 STEC's largest customer overall and its largest account in its core business of

6 SSDs, and, in particular, Zeus. CW5 reported that once EMC became STEC's key

7 customer, STEC relied heavily on EMC to generate business through its

8 acceptance of STEC's products. The focus on EMC was so great that CW5

9 reported that other, smaller customers were forced to wait increased lag time —

10 sometimes double that of EMC — for product orders.

11 30. As corroborated by several confidential witnesses, including CW8,

12 CW11, and CW13, Defendants Manouch and Mark Moshayedi were directly and

13 heavily involved in all aspects of the business with EMC, including, but not limited

14 to, working with the Company's marketing efforts toward EMC and EMC's

15 purchasing and selling of STEC's products.

16 31. As STEC's largest customer, EMC regularly communicated with the

17 Company, and, in particular, with Defendant Manouch Moshayedi, who was

18 heavily involved with the EMC account. For example, as explained by CW4, there

19 was a lot of "collaboration" between STEC and EMC. CW8 further confirmed that

20 STEC management had weekly sales meetings at which time they would talk

21 specifically about SSD revenue, and that Manouch and Mark Moshayedi would

22 have weekly conversations with EMC.

23 32. Further, as stated by an analyst during a November 3, 2009 analyst

24 conference call, STEC had "engineers co-located with EMC," and thus STEC had

25 "good insight" into what amount of inventory was actually pulled off of EMC's

26 shelf.

27 33. As admitted by Defendant Manouch Moshayedi, STEC's customers,

28 including EMC, provided STEC with "very solid forecasts" in advance of STEC

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1 agreeing to commit to supply the customer with products. (August 3, 2009

2 earnings call.)

3 34. Even before the truth about STEC's sales and demand began to be

4 revealed, STEC's relationship with EMC caught the attention of the SEC.

5 Following the unusually fast rise of STEC's stock price after announcements about

6 deals with EMC, and the massive insider selling by the Moshayedis, the SEC

7 questioned whether STEC had been forthcoming with investors, in particular with

8 respect to its dependence on EMC.

9 35. For example, the SEC inquired on August 28, 2009, why, despite the

10 fact that the Company depends on EMC for a significant portion of its revenue, the

11 Company has not disclosed any agreements with EMC. The Company responded

12 by letter dated September 10, 2009, that the EMC agreements are not ones upon

13 which the Company is substantially dependent. The SEC then followed up by

14 letter dated September 30, 2009, inquiring why the Company believed it is not

15 substantially dependent upon its agreements with EMC and another top customer,

16 and requested that STEC advise, in quantitative terms, whether sales to these

17 customers were based on a few large purchase orders or multiple small ones.

18 STEC responded by letter dated October 13, 2009, and continued to maintain that

19 the Company is not substantially dependent upon its agreements with EMC.

20 36. As a result of STEC's refusal to disclose STEC's agreements with its

21 largest customers, or even disclose the identity and percentage of revenue from

22 such customers, analysts and investors were forced to rely during the Class Period

23 on management's statements to gauge the strength of STEC's current and

24 forecasted sales and demand. In particular, analysts and investors focused on

25 management's increased revenue guidance and statements regarding demand for

26 Zeus, including stating, for example, "We are adjusting our estimates to reflect the

27 improved guidance ffrom Zeus]," (Thomas Weisel Partners, June 16, 2009); "STEC

28 Announces Supply Contract [for Zeus], Improving Visibility: Reiterate Strong Buy,

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1 Raising Target to $40" (Needham, July 16, 2009); and "STEC reported solid

2 results and gave upbeat outlooks as the growth acceleration driven by the

3 enterprise-SSD ZeusIOPS segment continues to ramp." (Thomas Weisel Partners,4 August 3, 2009).

5 C. Defendants' Fraudulent Practices

6 37. Defendants were only able to meet their increasing guidance through

7 fraudulent practices. Numerous confidential witnesses have confirmed that

8 STEC's standard practice was to force sales so that revenue could be immediately

9 recorded. As detailed below, Defendants did so by, among other things: (i)

10 "shipping bricks"; (ii) sending defective or untested products; (iii) lying to

11 customers and altering error reports; and (iv) announcing an extraordinary deal

12 with EMC which purported to represent continued growth and demand. In

13 addition, as detailed in Section VIII below, Defendants engaged in accounting

14 manipulations with respect to the EMC contract in order to improperly record

15 revenue.

16 38. As detailed below, the Company's top officers, Manouch and Mark

17 Moshayedi, themselves were directly involved in these fraudulent practices.

18 Defendant Manouch Moshayedi ordered the practices because Defendants wanted

19 the quarterly revenue numbers to "look grand," and Defendant Mark Moshayedi

20 declared such practices were Defendants' "business decision."

21 1. Defendants Knowingly Shipped Empty22

Containers And De Knowingly

Product

23 39. Numerous confidential witnesses corroborate that STEC frequently

24 and knowingly shipped empty containers and defective and untested products in

25 order to report false quarterly revenue and boost STEC's stock price.

26 40. For example, CW1 stated that STEC would regularly engage in

27 "shipping bricks." CW1's supervisor explained that "shipping bricks" is the28 process of shipping boxes — which, unbeknownst to the recipient, were empty or

-14- CONSOLIDATED COMPLAINTLead Case No. SACV 09-01304JVS (MLGx)


1 contained the wrong product — just before the quarter ends, allowing STEC to

2 receive a Federal Express notification that purported inventory had been shipped so

3 that STEC could record it on the books for that quarter. It then would take a few

4 days before the customer realized that the package did not contain the product it

5 ordered, at which time the customer would call STEC sales people, including

6 CW1, to complain. When CW1 directly questioned his supervisor about this

7 recurring problem, CW1's supervisor explained what "shipping bricks" was and

8 stated that STEC had been "shipping bricks" "for years."

9 41. CW9 further noted that, at the end of each quarter, STEC would ship

10 products that had not been tested in order to recognize revenue on the transaction.

11 For example, CW9 detailed that, in the fourth quarter of 2008, STEC's Vice

12 President of Operations shipped product that was not even working — to someone

13 other than the customer — in order to include the shipment of products as a "sale."

14 CW9 reported that this type of attempt to move sales into a quarter was "some sort

15 of tradition" at STEC, and that this particular transaction was for "huge money."

16 2. Defendants Lied To CustomersAbout STEC's Product Quality And Altered

17 Reports To Improperly Record Revenue

18 42. With respect to Zeus in particular, CW6 explained that this core

19 product had an "unusually high failure rate." Several confidential witnesses,

20 including CW7, CW3, CW12, and CW9, corroborated that the unusually high

21 failure rate for STEC SSDs was a result of, for example, the drive burning out,

22 bugs, software issues, hardware wear leveling, the small computer systems

23 interface, thermal problems, and poor coding.

24 43. Numerous confidential witnesses reported that Defendants, having

25 knowingly manufactured defective products, falsified fail rate numbers for SSDs

26 (and Zeus in particular) and withheld other relevant information from STEC's

27 customers.

28

-15-



1 44. For example, CW9 detailed how STEC "cheated a lot of customers."

2 Specifically regarding Zeus, CW9 confirmed that it performed poorly and the

3 quality of the product was poor. STEC nevertheless promised customers a certain

4 level of performance, but hid information about the integrity of the product. CW9

5 explained that tests showed that the product did not meet the performance level

6 STEC purported to sell, but STEC continued to falsely represent that it met certain

7 performance standards. Further, with respect to Zeus specifically, CW9 reported

8 that STEC's biggest customer, EMC, was "asking a lot of questions" because Zeus

9 was not meeting basic customer expectations. According to CW9, EMC also

10 returned thousands of Zeus products because of errors, the inability to keep up with

11 the systems, and the product continuously failing.

12 45. CW3 also confirmed that STEC's practice was to lie to customers.

13 Many times after an analysis of a product's problem was performed, "it would be

14 decided to not tell the customer." CW3 provided the following example: STEC

15 experienced a "black pad issue" during the time he was with the Company.

16 According to CW3, this is a very serious problem that affects memory and flash

17 products. He described the problem as a "process issue" which is caused during

18 the chemical cleaning process. A black film forming prevents solder from adhering

19 to the pad and, over time, the pad opens up and the connectivity between the

20 memory chip and the pad is broken. The result is that the memory or flash

21 becomes unreliable. CW3 found that this problem occurred in many cases and

22 even wrote reports documenting the problem. STEC management, however,

23 altered the reports because it did not want the customer to know the truth about the

24 problems. As described by CW3, STEC management went as far as doctoring

25 reports with pictures from another case.

26 46. CW10 confirmed that when CW10 was assisting STEC's quality

27 department, failed devices were given to CW10 to test and determine the failure

28 mode. CW10 would relay the information to STEC's quality group and the quality



1 group would say: "We can't tell the customer that; we have to say something

2 different." As confirmed by CW10, the pressure to lie to customers came directly

3 from Defendants Manouch and Mark Moshayedi.

4 47. CW1 corroborates that STEC management expressly told STEC

5 employees to lie, explaining that in one particular situation involving sales to

6 Cisco, CW1 received emails and directives from STEC management, directors and

7 STEC's quality assurance representatives, ordering as follows: "Don't tell them

8 we have these many failures. Tell them whatever you want [but don't tell them

9 the truth]."

10 48. CW10 explained that STEC's corporate policy of lying to customers

11 about STEC's products was said by Defendants to be their "business decision."

12 For example, CW10 experienced quality concerns with STEC's industry-grade

13 Flash products. Those Flash products that were bought by customers for industrial

14 use were required to go through a screening process that involved testing at

15 extreme temperatures and a guarantee that the product would work under those

16 extreme conditions. The products that would pass would be sold as industrial

17 grade and those that did not would be sold as commercial grade. STEC

18 disseminated information to customers through specification sheets that extreme

19 temperature testing was done 100 percent of the time when, in truth, STEC had

20 stopped doing the extreme temperature testing. CW10 brought this wrongful

21 practice to the direct attention of Defendant Mark Moshayedi towards the end of

22 2008. In response Mark Moshayedi said, "It's a business decision and that's what

23 we're going to do." As a result of Defendant Mark Moshayedi's response, CW10

24 then spoke with Dan Moses (STEC's CFO until November 2008), who at the time

25 was on the Ethics Committee. Dan Moses responded that he would speak to Mark

26 Moshayedi about the issue.

27 49. CW 1 also corroborated that Defendant Mark Moshayedi was directly

28 involved and had actual knowledge of the failures with Zeus. CW1 explained that

-17-



1 STEC led at least one of its customers, Sun Microsystems, to believe that Zeus was

2 programmed to check the battery voltage of the super capacitors once or twice per

3 day, which was important to Sun Microsystems because it used Zeus in

4 applications that ran twenty-four hours per day. In truth, STEC's super capacitors

5 in Zeus were notorious for going bad. CW1 learned through two independent

6 sources (an STEC failure analysis engineer who dealt directly with Sun

7 Microsystems, and an STEC sales person who dealt directly with Sun

8 Microsystems) that in 2009 while Defendant Mark Moshayedi was having lunch

9 with Sun Microsystems representatives, a conversation took place specifically

10 regarding the monitoring of the super capacitors in Zeus. During the conversation,

11 Mark Moshayedi revealed for the first time to Sun Microsystems that Zeus would

12 check the super capacitors only when the units were actually powered on, not

13 automatically throughout the day as previously represented by STEC to Sun. This

14 reportedly caused a huge blowup between Mark Moshayedi and Sun, which

15 resulted in Sun Microsystems cancelling all orders with STEC. Sun Microsystems

16 expressly told Defendant Mark Moshayedi that Sun Microsystems would no longer

17 accept STEC SSDs because they were not what Sun Microsystems believed it had

18 purchased.

19 50. By way of further example, CW2 described an incident in February

20 2009 wherein STEC falsified fail rate numbers on a shipment to its customer HP.

21 STEC shipped an order to HP of DRAM modules, STEC part #hpgd2-1gd00-667-

22 eba, HP part #405476-051, in late 2008 or early 2009. A certain percentage of the

23 units failed and HP shipped the entire order back to STEC for retesting and put

24 STEC on "worldwide stop ship." The retesting process took two weeks and

25 revealed that 45 units out of the 402 failed. However, STEC, under the direction of

26 STEC's Vice President of Sales, informed HP that only 2 units of the 402 had

27 failed under retesting. Despite the "stop ship" order, STEC replaced the 45 failed

28 units and shipped them back to HP. When CW2 inquired by e-mail, copying

18-

CONSOLIDATED COMPLAINTLead Case No-. SACV 09-01304-JVS (MLGx)


1 numerous STEC employees regarding why HP was not being told the truth about

2 the failed units, CW2 was told not to "broadcast" this type of information by

3 e-mail. CW2 later received an e-mail from an HP employee confirming that the

4 original 402 modules had "failed miserably" and should not have been shipped

5 back to HP as STEC had been put on stop ship at that point.

6 51. Defendant Manouch Moshayedi was directly involved in ordering

7 STEC's sales force to move sales into third quarter 2009 — the same quarter in

8 which Defendants Manouch and Mark Moshayedi unloaded 9 million shares at a

9 near all-time high price. For example, CW2 explains that Manouch Moshayedi

10 directly told STEC's Vice President of Sales to pull all of Cisco's sales from the

11 fourth quarter 2009 into third quarter 2009 to make the third quarter sales look

12 better. As discussed at one weekly Monday meeting, Defendant Manouch

13 Moshayedi told the Vice President of Sales: "You go to Cisco and tell them they

14 have to take everything this quarter." As explained by CW2, if Manouch

15 Moshayedi needed the sales, he would pull the sales to that quarter. Defendant

16 Manouch Moshayedi gave this instruction because he wanted the third quarter

17 2009 revenue numbers to "look grand. "

18 D. Defendants Increase Guidance,

19Citing Purportedly Successful Zeus Sales

20 52. Also in the third quarter 2009, the same quarter in which Defendant

21 Manouch Moshayedi ordered that sales be accelerated so that STEC's revenue

22 would "look grand," STEC announced a $120 million deal with its largest

23 customer, EMC. The artificial inflation of stock price associated with the

24 incomplete and misleading announcement of this deal allowed Defendants

25 Manouch and Mark Moshayedi to dump 9 million shares of their personally held

26 STEC stock in a rushed secondary offering at a near all-time high price.

27 53. Although Defendants claimed that the $120 million deal would cover

28 EMC's product needs for the third and fourth quarters of 2009, Defendants knew

-19- CONSOLIDATED COMPLAINT

Lead Case No. SACV 09-01304-JVS (MLGx) -


1 or deliberately disregarded that the contract would oversupply EMC and meet its

2 inventory needs well into 2010.

3 54. Before the open of the stock market on June 16, 2009 (the beginning

4 of the Class Period), STEC issued a press release announcing increased earnings

5 and revenue guidance for second quarter 2009. As detailed further below, the press

6 release explained that the increased earnings and revenue are "primarily the result

7 of increases in the Company's Zeus IOPS sales which now are estimated to

8 exceed $SS million during the second quarter of 2009."

9 155. On STEC's announcement, the price of STEC stock increased 27% in

10 a single day to close at $22.88 per share on June 16, 2009, a $4.86 increase from

11 the prior day's closing price of $18.02, on extraordinarily high trading volume of

12 10.4 million shares. At the time, STEC's stock price represented an all-time high.

13 56. Just one month later, on July 16, 2009, STEC issued another press

14 release announcing an agreement with its largest customer, EMC, to purchase $120

15 million of Zeus in the second half of 2009, resulting in an increase in the

16 Company's forecast for Zeus sales to more than $220 million in the second half of

17 2009. In the press release STEC represented that "this agreement reflects [EMC's]

18 continued commitment to integrate STEC's SSD technology ...."

19 57. Following STEC's announcement, the price of STEC stock rose

20 another 15.2%, or $4.20 per share in a single day, over the previous day's closing

21 price to close at $31.79 per share on July 16, 2009, on extraordinarily high trading

22 volume. STEC's stock price thus reached another all-time high.

23 58. In the following weeks, the price of STEC stock continued to climb.

24 On August 3, 2009, the price of STEC stock closed at yet another new all-time

25 high of $35.50 per share. After the market closed that day, STEC issued a press

26 release announcing the Company's financial results for the second quarter of 2009.

27 Defendants highlighted the reported revenue growth from Zeus. As detailed below

28



1 in Section VIII, such reported revenue growth was only obtained through

2 accounting manipulations and GAAP violations.

3 59. Also on August 3, 2009, Defendant Manouch Moshayedi assured the

4 market of continued growth from Zeus, emphasizing that the $120 million

5 agreement with EMC "is a further indication of future SSD growth and

6 customers' acceptance of SSDs into this growing market," and that the chances of

7 emerging competition was "zero. "

8 E. After Artificially Inflating The Price OfSTEC Stock Defendants Manouch And Mark

9 Moshayedi Kngaged In Massive Insider Selling

10 60. After falsely fueling an extraordinary rise in the price of STEC stock

11 from $4 per share in December 2008 to $35.50 per share on August 3, 2009 — an

12 increase of over 850% — Defendants Manouch and Mark Moshayedi timely

13 unloaded 9 million of their own STEC shares. Specifically, on August 3, 2009,

14 Defendants announced that they would conduct a "Secondary Offering" of at least

15 7.5 million shares, all for the personal profit of Defendants Manouch and Mark

16 Moshayedi, with no proceeds going to the Company.

17 61. With this announcement, Defendants also announced that Defendants

18 Manouch and Mark Moshayedi had cancelled their 10h5-1 trading plans which

19 they had adopted just two months earlier. The lOb5-1 trading plan program

20 enables insiders to set predetermined contractual sales of stock in advance

21 regardless of the knowledge of material information. Here, because the insiders

22 (Defendants Manouch and Mark Moshayedi) urgently wanted to take advantage of

23 the newly inflated stock price before the truth was revealed, they promptly

24 cancelled their new 10b-5 plans and quickly unloaded their stock in massive

25 quantities in an offering.

26 62. Just three days after announcing the secondary offering, STEC

27 announced on August 6, 2009, the price of the price of the offering, $31 per share.

28



1 STEC also announced that the amount of the secondary offering would be raised to

2 9 million shares.

3 63. Manouch and Mark Moshayedi sold their 9 million shares of STEC

4 stock in the secondary offering on August 11, 2009, reaping $267.8 million in a

5 single day. These sales dramatically reduced the Moshayedis' insider holdings in

6 STEC. On that day, the Moshayedis went from collectively owning 35.5% of the

7 Company's stock, down to owning just 17.4%. Defendant Manouch Moshayedi

8 reduced his STEC holdings from 14.8% of the Company to 6.5% and Defendant

9 Mark Moshayedi reduced his STEC holdings from 20.7% to 10.9%. This was by

10 far the historically largest sale of their personally held STEC stock.

11 64. This sale was in addition to the more than $25 million in shares that

12 Manouch and Mark Moshayedi's third brother and STEC co-founder, Masoud

13 ("Mike") Moshayedi, had sold in June and July, beginning the day after STEC's

14 June 16, 2009 announcement. According to Mike Moshayedi's Form 4s, he sold

15 over one million shares at that time.

16 65. Conveniently for Defendants, as the full truth was later revealed in

17 STEC's February 23, 2010 Form 10-K and the Company stock plummeted, STEC

18 reported that its board of directors had authorized a stock repurchase program

19 effective November 10, 2009 — just three months after Defendants Mark and

20 Manouch Moshayedi's massive secondary offering. This repurchase program

21 allows STEC to repurchase up to $75 million of its shares at their now devastated

22 price.

23 66. A commentator at Seeking Alpha later explained the suspicious and

24 unusual trading preceding the eventual announcement that the EMC deal was only

25 a one time deal, as follows: "Whether management knew about the

26 demandlinventory issue in advance or not, the market found it too coincidental

27 that top management made such a substantial sale of stock in the very quarter

28 they blew up."

-22-

CONSOLIDATED COMPLAINT-- Lead Case No. SACV 09-01304-JVS (MLGx)


1 67. Following STEC's November 3 announcement, the SEC instituted a

2 formal investigation into insider trading at STEC. The Company's

3 February 23, 2010 Form 10-K announced for the first time: "The [SEC] is

4 conducting a formal investigation involving trading in our securities. Certain of

5 our officers and employees, including our CEO and President, have received

6 subpoenas in connection with the SEC's investigation."

7 68. Indeed, the Moshayedis were remarkably successful in timing their

8 offering, selling at a near all-time high of $31 per share. There are only two

9 months in the Company's entire history in which its stock price traded higher, just

10 before the truth began to be revealed.

11 69. In the prior calendar year, 2008, Defendant Manouch Moshayedi did

12 not sell any stock, and sold only 400,000 shares in March 2009 for proceeds of $3

13 million. Defendant Mark Moshayedi sold only 466,292 shares in June 2008 and

14 another 400,000 shares in March 2009, for proceeds of $6.5 million and $3 million,

15 respectively. The number of shares sold by the Moshayedis in the August 2009

16 secondary offering were collectively more than H times the number of shares they

17 sold in the six months before the Class Period and nearly 20 times the number of

18 shares they sold in all of 2008. Thus, as demonstrated in the chart below, the

19 Moshayedis' trading was highly suspicious in volume and timing:! Class Period •

20Jun. 16, 2009 - Feb. 23, 2010

21$45 $300M$40 —

22 $35$250M o

23 $30 $200M E

24$25

y $20$150M A

25 $15 $100M m

26 $10

$5$50M

27$0 t . ®. $0m

2811101 411116%\0 100 40.y00 11410 410 0101101640 10d, 11,\0 41\10 ed, 001 441 IQ-01 1-01 10 14P 401111-10 -op



1 70. In sum, the Moshayedis' Class Period stock sell-off was the biggest

2 insider stock liquidation in the history of STEC.

3 71. This, however, was not the first time that the Moshayedis were, as

4 one commentator characterized it, "spot-on" for the timing of an extraordinary

5 offering of their own personal shares. For example, on October 1, 2003, STEC

6 (then-called SimpleTech, with Manouch Moshayedi serving as the CEO, Mark

7 Moshayedi serving as the COO and CTO, and their brother, Masoud Moshayedi,

8 serving as the President) announced the Company's third quarter 2003 guidance as

9 a result of a purported increased demand for the Company's products. The

10 Company raised revenue guidance to $57 to $58, from the earlier guidance of $48

11 to $50, and raised the EPS to $0.01 from its previous guidance of $-0.01.

12 72. The very same day, the Company announced a secondary offering of

13 10 million shares, including 2.5 million shares personally held by the three

14 Moshayedi brothers and other insiders. The Company disclosed that the proposed

15 offering would allow the three Moshayedi brothers to go from 78.6% ownership to

16 51.5% ownership. When they made the announcement, STEC shares were near

17 their then all-time high. As with Defendants Manouch and Mark Moshayedi's

18 most recent offering of their own personal STEC shares, within just months after

19 the Moshayedis cashed in their shares of STEC at inflated prices, the stock price

20 plummeted back to what its price had been before the Moshayedis increased

21 guidance. Not surprisingly, the stock price chart for that 2003 time period looks

22 nearly identical to the stock price chart related to the Moshayedis' most recent sell-

23 off.

24 F. The Aftermath

25 73. As detailed below, only after the three Moshayedi brothers reaped the

26 benefits of the artificially inflated stock price by selling their stock at

27 unprecedented high prices, did the truth about STEC's business and operations

28 begin to be revealed. The Company eventually admitted that, contrary to

-24-



1 Defendants' prior representations that the $120 million EMC deal was indicative of

2 future Zeus revenue growth, it was merely a one-time deal for excess inventory

3 with a single customer, and there were no prospects for a future commitment from

4 EMC.

5 74. EMC, itself, later openly stated to analysts that the order to STEC

6 intentionally included excess inventory, not just for 2009, but also into 2010. For

7 example, EMC explained during its January 26, 2010 earnings conference call that

8 "[w]e have good relationships with all of our suppliers," and the order with STEC

9 for excess inventory "was designed to protect ourselves going into first quarter

10 against what we knew would be a tight supply environment."

11 75. STEC's stock price currently trades at $11.76, below the stock price at

12 the beginning of the Class Period, and 72% below the Class Period high just seven

13 months ago. The 9 million shares that Defendants Manouch and Mark Moshayedi

14 unloaded to shareholders in the market at $31 per share are now worth only one-

15 third of that.

16 VI. DEFENDANTS' FALSE AND MISLEADING STATEMENTS

17 76. As set forth below, Defendants made repeated materially false and

18 misleading statements to investors and the market throughout the Class Period

19 regarding STEC's revenues, demand, and competition. Specifically, Defendants

20 made false and misleading statements and omissions regarding: (i) STEC's

21 revenues from Zeus; (ii) the $120 million supply agreement with EMC; (iii)

22 STEC's customer base and future growth; (iv) STEC's product quality; (v) STEC's

23 competition; and (vi) STEC's internal controls and compliance with GAAP and

24 SEC regulations.

25 A. STEC's Revenues From Zeus 26 77. Before the open of the stock market on June 16, 2009, the first day of

27 the Class Period, STEC issued a press release entitled "STEC Increases Its

28 Guidance for the Second Quarter of 2009." The release highlighted the purported



1 increase in demand for the Company's ZeusIOPS SSD. Specifically, the release

2 stated, in part:

3 The Company expects to report Non-GAAP diluted earnings per share

4 in the range of $0.32 to $0.36, versus the previous guidance of $0.20

5 to $0.22 per diluted share announced on May 11, 2009.

6 The Company also expects to report revenue in the range of $82

7 million to $84 million, versus the previous estimate of $68 million to

8 $70 million.

9 The increased Non-GAAP diluted earnings per share and revenue

10 guidance are primarily the result of increases in the Company's

11 ZeusIOPS sales which are now estimated to exceed $55 million

12 during the second quarter of 2009.

13 The Company previously estimated revenue from ZeusIOPS SSDs to

14 surpass $65 million during the first half of 2009. With this increase in

15 revenue, the Company now expects ZeusIOPS SSD sales to exceed

16 $80 million during the first half of 2009.1

17 78. Defendants' June 16, 2009 statements had a direct effect on STEC's

18 stock price, which immediately increased more than 27%, to $22.80 per share on

19 unusually high trading volume.

20 79. Thereafter, on August 3, 2009, STEC issued a press release

21 announcing final results for the second quarter of 2009, entitled "Revenue, Gross

22 Profit Margin and EPS Higher On Faster-Than-Expected Adoption of Its Enterprise

23 Class Solid State Drives." This release stated, in part, as follows:

24 Revenue for the second quarter of 2009 was $86.4 million, an increase

25 of 53.7% from $56.2 million for the second quarter of 2008, and an

26 increase of 35.9% from $63.5 million for the first quarter of 2009.

27

28 1 Unless otherwise noted, all emphasis is added.



1 Shipments of our ZeusIOPS Solid-State drives ("SSD") into the

2 Enterprise-Storage market grew to $57.7 million for the second

3 quarter of 2009, an increase of approximately 375% from $12.1

4 million for the second quarter of 2008, and an increase of

5 approximately 125% from $25.7 million for the first quarter of 2009.

6

7 GAAP gross profit margin was 50.0% for the second quarter of 2009,

8 compared to 32.3% for the second quarter of 2008 and 36.3% for the

9 first quarter of 2009. GAAP diluted earnings per share from

10 continuing operations was $0.38 for the second quarter of 2009,

11 compared to $0.03 for the second quarter of 2008, and $0.07 for the

12 first quarter of 2009.

13 80. The press release also provided the following guidance to analysts and

14 investors: "[w]e currently expect third quarter of 2009 revenue to range from $95

15 million to $97 million with diluted non-GAAP earnings per share to range from

16 $0.45 to $0.47."

17 81. The foregoing statements regarding increased second quarter revenue

18 and second and third quarter guidance were materially false and misleading when

19 made because Defendants knew or deliberately disregarded, but failed disclose,

20 inter alia, that:

21 (a) STEC was "shipping bricks," allowing it to record sales for

22 goods that had not actually been shipped;

23 (b) STEC's sales could not be sustained because some of the

24 Company's customers, including IBM and Sun Microsystems,

25 were having significant difficulties integrating STEC's products

26 such that the Zeus was not being adopted by these important

27 OEMs;

28

-27-

CONSOLIDATED COMPLAINTLead Case No. SACV-09-01304-JVS (MLGx)


1 (c) STEC pressured customers to accept orders before the quarter's

2 end, regardless of the customers' need for that product at that

3 time;

4 (d) STEC reported revenues for products that were often rushed out

5 prematurely without sufficient testing, and were later found to

6 be faulty, causing frequent returns; and

7 (e) STEC's revenues were based on products that were being

8 shipped and paid for as new,. despite having refurbished or

9 damaged parts.

10 82. The August 3, 2009 release quoted Defendant Manouch Moshayedi,

11 in part, as follows:

12 "It is exciting to share such outstanding results today and to deliver

13 significant revenue, gross profit margin and EPS growth for the

14 second quarter of 2009," said Manouch Moshayedi, STEC's

15 Chairman and Chief Executive Officer. "We have shown a

16 significant improvement in our already strong balance sheet —

17 particularly in the generation of cash and effective management of

18 inventory — added four more major Enterprise-Storage OEMs to our

19 blue chip customer list, and surpassed our stated year-end 2009 non-

20 GAAP gross profit margin goal of 40%, expanding it to 50% in the

21 second quarter of 2009."

22 83. These statements were materially false and misleading when made

23 because Defendant Manouch Moshayedi knew or deliberately disregarded that the

24 "generation of cash" and purported "effective management of inventory" were a

25 result of STEC oversupplying customers, "shipping bricks," and accelerating sales

26 to show increased revenue by quarter's end.

27

28



1 84. Further, Defendants failed to disclose that it did not have the ability to

2 develop quality products for or integrate its products with the four new "major

3 Enterprise-Storage OEMs."

4 B. The $120 Million Supply Agreement For Zeus

5 85. On July 16, 2009, STEC issued a press release entitled "STEC Signs a

6 $120 Million Supply Agreement for ZeusIOPS SSDs for 2H 2009 and Now

7 Forecasts Sales of ZeusIOPS SSDs to Exceed $220 Million in 2009 — STEC and

8 Its Major Enterprise Storage Customers Continue Collaboration to Drive Adoption

9 of SSD Technology Into High-Performance Enterprise Storage Systems," which

10 stated, in part:

11 STEC, Inc. (Nasdaq: STEC), announced today that it has signed an

12 agreement with one of its largest enterprise storage customers for

13 sales of $120 million of ZeusIOPS SSDs in the second half of 2009.

14 STEC believes that this agreement reflects the enterprise storage

15 manufacturer's continued commitment to integrate STEC's SSD

16 technology into the manufacturer's systems and validates significant

17 storage system performance improvements enabled by STEC's

18 ZeusIOPS SSDs in these enterprise systems. With this agreement

19 signed, STEC now forecasts revenue from the sale of its ZeusIOPS20 drives will exceed $220 million in 2009.

21 86. Further, the Company's August 3, 2009 press release emphasized the

22 $120 million contract as a "highlight[] for the second quarter of 2009": "[STEC]

23 signed a recently-announced $120 million contract to supply ZeusIOPS SSDs to a

24 major Enterprise-Storage customer for the second half of 2009."

25 87. Each of these statements regarding STEC's $120 million supply

26 agreement for Zeus was materially false and misleading because, as detailed

27 herein, Defendants knew or deliberately disregarded, but failed to disclose, that:

28



1 (a) Such significant shipments would over-supply EMC — STEC's

2 largest customer accounting for more than 90% of its Zeus sales

3 — with several quarters' worth of excess inventory;

4 (b) This increased revenue could not continue because EMC

5 intended this $120 million order to cover its inventory needs

6 until at least the middle of 2010, such that STEC's revenue

7 would decline dramatically if it did not find additional large

8 customers for the first half of 2010. As EMC stated in its

9 January 26, 2010 earnings conference call, its $120 million

10 build up of inventory in the fourth quarter "was designed to

11 protect" EMC going into 2010 against a "tight supply

12 environment." A February 23, 2010 Thomas Weisel Partners'

13 report also noted that "EMC has repeatedly indicated that the

14 SSD inventory build-up reflected a management choice to

15 protect EMC against potential tightness of supply in 1H10";

16 (c) The agreement did not validate significant storage system

17 performance improvements because STEC supplied EMC with

18 faulty products with high rates of failure; and

19 (d) STEC's major commitment to EMC and other large customers

20 meant that smaller customers suffered and were forced to wait

21 double the lead time for products.

22 C. STEC's Customer Base And Growth

23 88. The July 16, 2009 release also quoted Defendant Manouch Moshayedi

24 as follows:

25 "We are pleased to see that sales of our customer's enterprise storage

26 systems utilizing our ZeusIOPS drives have grown significantly over

27 the past few years," said Manouch Moshayedi, Chairman and Chief

28 Executive Officer of STEC. "Our customers have helped evangelize



1 this technology and we are glad to be partnered with them as we

2 expect that they will help drive further innovation in SSD usage in

3 the highest-end of the enterprise storage markets. "

4 89. Defendant Manouch Moshayedi's foregoing statement was materially

5 false and misleading because Defendants knew or deliberately disregarded that the

6 expectation that STEC's customers would "help drive further innovation in SSD

7 usage" was unrealistic because STEC was shipping "bricks" and faulty products to

8 its customers. Defendants' statements regarding STEC's customers' help in

9 "evangeliz[ing] this technology" omitted the truth that STEC's customers were

10 having difficulty integrating its products and were frequently returning products as

11 a result of failures. Undisclosed to investors, STEC was lying to customers about

12 failure rates and the steps the Company was taking to fix products and remedy

13 customers' concerns. In fact, other major OEM's chose not to adopt STEC's

14 products because they heard of the high failure rates.

15 90. STEC's August 3, 2009 press release also stated, in part:

16 In our prior quarter's earnings announcement we had estimated that

17 ZeusIOPS revenue for the first half of 2009 would surpass $53

18 million. I am pleased to report that we have actually achieved $83

19 million in ZeusIOPS revenue for this period. Although we are still

20 early in the process of the adoption of SSDs into the Enterprise-

21 Storage market, I believe that the $120 million supply agreement that

22 we signed for the second half of 2009 is a further indication of the

23 future SSD growth and customers' acceptance of SSDs into this

24 growing market. I am very excited about our product road map —

25 specific to the Enterprise-Storage, Enterprise-Server and related

26 markets.

27 91. Also on August 3, 2009, Defendants filed STEC's quarterly report

28 with the SEC on Form 10-Q for the second quarter 2009 ("2Q09 Form 10-Q").

-31- CONSOLIDATED COMPLAINTLeask Case No. SACV 09-01304-JVS (MLGx)


1 Defendants Manouch Moshayedi and Cook signed the Company's 2QO9 Form

2 l OQ, affirming the financial results and stating, in part:

3 We expect continued growth in the sales of our Flash-based SSD

4 ZeusIOPS products through 2009 based on the accelerated adoption

5 of our ZeusIOPS SSDs by most of our major enterprise-storage and

6 enterprise-server OEM customers into their systems. As part of this

7 expected growth, on July 16, 2009 we announced an agreement with

8 one of our largest enterprise storage customers for sales of $120

9 million of ZeusIOPS SSDs in the second half of 2009.

10 92. Defendants' statements in the August 3, 2009 press release and

11 STEC's 2QO9 Form 10-Q were materially false and misleading when made. The

12 statements that the $120 million supply agreement "is a further indication of the

13 future SSD growth and customers' acceptance of SSDs into this growing market"

14 and touting "accelerated adoption" failed to disclose that customer "acceptance"

15 and "continued growth" would not continue once customers realized the poor

16 product quality they were receiving from STEC. Further, Defendants knew or

17 deliberately disregarded that the EMC deal was a "one-off' (i.e., one time) deal

18 that would supply EMC for several months, was not an "indication of future SSD

19 growth," and, in accordance with GAAP, the EMC deal could not be recognized in

20 full during 2009.

21 93. The same day, August 3, 2009, Defendants hosted a conference call

22 with analysts and investors to discuss STEC's second quarter 2009 financial results

23 and guidance. Defendants Manouch Moshayedi and Cook participated in the call.

24 On that call, Defendants stated, in part:

25 [ANALYST:] If I'm looking at the math right, with the 39% of

26 revenue that you got from your largest customer, be it maybe EMC,

27 we'll assume, and what you're guiding, I guess still reiterating the 220

28 in terms of Zeus revenue for the full year, it seems to me that you're —

-32- CONSOLIDATED COMPLAINTLead Case No. SACV 09-01304-JVS (MLGx) -


1 are you being relatively pretty conservative with regard to the ramp to

2 the other customer opportunities, which I think last quarter you said

3 would reach into full production in Q3?

4 [MANOUCH MOSHAYEDI:] Yes, so I think other customers are

5 taking a little bit longer than expected in terms of full production.

6 They're introducing the systems into the market. It looks like

7 everybody is going through the same trials and tribulations that our

8 first customer went through in terms of sales and marketing side.

9 So, it's still a, I would say, maybe a quarter or two away from full

10 ramping production.

11

12 [ANALYST:] Quick question on EMC, your largest customer. They

13 made a comment about, on their earnings call about shipping close to

14 a petabyte [or] actually over a petabyte of Flash related storage year to

15 date. And that conference call took place three weeks into the month

16 of July. Obviously there's been a fairly steep ramp, particularly in

17 light of, if we're guessing correctly, to that large supply contract you

18 signed for second half of the year involved, but how much of — if

19 we're thinking about that petabyte shift, was July a fairly big month

20 for you guys in terms of shipments so far? Just want to get my hands

21 around the steepness of the ramp going into the second half of the

22 year.

23 [MANOUCH MOSHAYEDI:] [W]e think that ZeusIOPS sales from

24 Q to Q is going to go up about $10 million from Q2 to Q3. So the

25 ramp right now about 20% rate on a quarterly basis. That's

26 basically based on one customer in production, four customers are

27 still in preproduction type of stage. So I think we will start seeing a

28 ramp on a few things. One of our customers is in the middle of



1 discussions in terms of M&A discussions. I think once that gets

2 resolved, the customer will kick back in and start buying at its original

3 rate. The other three customers are very large, and it takes them a

4 little longer to get all the parts right. So I think once they start

5 kicking in, we will see huge ramps in sales of ZeusIOPS going

6 forward I don't know if it's going to be next quarter, the quarter

7 after, but it will come sooner or later.

8 94. Defendants' statements that STEC's new customers were "going

9 through the same trials and tribulations that our first customer went through in

10 terms of sales and marketing side" and that these customers were "very large, and

11 it takes them a little longer to get the parts right" were materially false and

12 misleading when made because Defendants knew or deliberately disregarded that

13 these customers were actually facing significant problems integrating STEC's

14 products. In particular, Defendants knew or deliberately disregarded, but failed to

15 disclose that:

16 (a) STEC promised customers features that the products lacked,

17 and that could not be added without the Company taking a

18 complete loss on its existing version of the product;

19 (b) STEC pressured its major customers to design their products to

20 suit STEC's offerings, rather than tailoring its products to suit

21 its customers' needs;

22 (c) Prior customers, including Sun Microsystems, refused to

23 continue to do SSD business with STEC due to a lack of

24 product quality; and

25 (d) Similar product quality issues and STEC's misrepresentations

26 regarding failure rates and reasons for failure strained STEC's

27 relationship with Cisco — its biggest customer before EMC.

28



1 95. On September 10, 2009, STEC issued a letter responding to an

2 August 28, 2009 comment letter from the SEC that inquired, in part, regarding

3 whether STEC was "substantially dependent" on EMC. In that letter, which was

4 publicly filed with the SEC, STEC stated, in part:

5 [I]n the unlikely event a customer should default under a purchase

6 order or other sales agreement, STEC generally believes it could find

7 a replacement customer for the relevant product. STEC additionally

8 could enter into a sales agreement with a new customer which would,

9 in turn, reduce the corresponding percentage of revenues attributable

10 to ongoing customers during a specific period.

11 STEC recognizes the loss of a customer or a significant reduction in

12 purchases by a customer could impact revenues. STEC does not

13 believe, however, that its business would be fundamentally altered

14 without a specific customer sales agreement to suggest the Company's

15 business is substantially dependent upon that agreement.

16 96. STEC reiterated this contention in a second letter to the SEC, dated

17 October 13, 2009. In that publicly filed letter, STEC stated again that: "STEC does

18 not believe that it was substantially dependent upon the underlying agreements in

19 place with these customers ...."

20 97. In truth, EMC accounted for 90% of STEC's sales of Zeus and

21 approximately half of STEC's overall revenue. However, by the time STEC sent

22 this October letter to the SEC, still undisclosed to investors, the Company had

23 already accrued $1.5 million in expenses for a joint marketing project designed to

24 assist EMC in selling its excessive inventory of STEC products. At the time these

25 statements were made, Defendants knew or deliberately disregarded that EMC

26 would have an inventory carryover in 2010 that would reduce STEC's sales and

27 would force STEC's revenues to suffer significantly for at least the first quarter of

28 2010. In fact, STEC eventually announced that its 1 Q 10 revenue would be as

-35- CONSOLIDATED COMPLAINT-- Lead Case No. SACV 09-01304-JVS (MLGx)


1 much as 53% lower than Wall Street's expectations as a result of oversupplying

2 inventory to EMC.

3 D. STEC's Product Quality

4 98. In STEC's July 16, 2009 press release, STEC stated:

5 The STEC ZeusIOPS SSD product family offers a comprehensive

6 array of options for enterprise system architects. ZeusIOPS SSD

7 provides a wide range of interface options, spanning Fibre Channel to

8 SAS to SATA, as well as the widest range of capacity options,

9 spanning 73GB to 1TB. Fundamental to the ZeusIOPS product

10 family is the proprietary SSD architecture which renders an

11 enterprise-optimized storage device with an unprecedented

12 combination of performance and energy efficiency.

13 99. In addition, STEC's 2Q09 Form 10-Q stated:

14 Our products are designed specifically for storage systems and servers

15 that run applications requiring a high level of input/output operations

16 per second, or IOPs, performance, capacity, reliability and a low

17 amount of latency.

18 100. The foregoing statements touting the quality and reliability of STEC's

19 products were materially false and misleading when made because, as detailed

20 herein, Zeus was not an "enterprise-optimized storage device with an

21 unprecedented combination of performance and energy efficiency" nor was it

22 "reliab[le]." In truth, Defendants knew or deliberately disregarded that STEC's

23 customers had trouble integrating Zeus with their systems. Moreover, STEC's

24 products, including Zeus, had material problems including, inter alia, unusually

25 high failure rates, bugs, software issues, hardware wear leveling, thermal problems,

26 poor coding, problems with the controllers, and battery problems.

27

28

-36- CONSOLIDATED COMPLAINTLead Case No. SACV 09-01304 JVS (MLGx)


1 E. STEC's Competition

2 101. During STEC's August 3, 2009 earnings conference call, Defendants

3 emphasized that STEC had no competition. Specifically, Defendants represented

4 the following:

5 [MANOUCH MOSHAYEDI:] We think that go forward — on a go-

b forward basis, our margins business I think will remain in the 50 to

7 60% area. As you know, we have no competition at this stage. In

8 addition to that, the current hard drive manufacturers in the enterprise

9 area are still making upwards of 40% margin in that business. So we

10 feel that even going forward, if we have competition in the area of

11 enterprise, with moving to Malaysia, with combination of changing

12 our FPGAs to ASIC next year, and also the capacity that we've built

13 in Malaysia and being able to build all of these — streamline all of the

14 buildings of the SSDs, I think we will be able to maintain about 50%

15 margin for ZeusIOPS. And as ZeusIOPS grows to be the biggest part

16 of our sales, I think we'll maintain the same type margins.

17 102. Also on the August 3, 2009 call, Defendant Manouch Moshayedi

18 stated that the probability of another company coming out with a product like

19 ZeusIOPS was "zero."

20 103. On August 3, 2009, pursuant to Form S-3ASR, STEC filed a

21 Registration Statement with the SEC for the offering of the Moshayedis' personally

22 held shares of STEC. The Registration Statement was signed by Defendants

23 Manouch Moshayedi, Mark Moshayedi, and Cook, and certain directors.

24 104. The Company filed a Prospectus for the offering with the SEC on

25 August 7, 2009, which was incorporated into the Registration Statement filed on

26 August 3, 2009. The Prospectus also incorporated by reference the 2Q09 Form

27 10-Q, in addition to other SEC filings. The Prospectus included the following

28 representations that it would be difficult for competitors to catch up with STEC:



1 We believe that we are a technology leader in solid-state storage due

2 to our nearly 20 years of focus on advanced memory solutions.

3 Throughout our history, we have delivered advanced memory and

4 storage solutions to a wide range of customers in various market

5 segments, and we continue to develop products to meet the need of

6 enterprises to constantly improve the retention of, and access to,

7 critical data at high performance levels.

8 Our solutions

9 The key features of our products include:

10 • Proprietary controller IC technology. In order to be first-to-

11 market with innovative storage technologies, we design the

12 fundamental logic for our SSD products. The controllers

13 within our various SSD products are the key to enabling

14 high levels of performance and reliability.

15 • High degree of customization. Products sold to our

16 customers are typically customized by our design and

17 engineering teams to meet our customers' specific design

18 requirements.

19 ***

20 • High reliability. Our products are built utilizing

21 sophisticated error detection and correction processes to

22 provide high data reliability and integrity. In addition, our

23 products are designed to withstand high levels of shock and

24 vibration as well as extreme temperature fluctuations.

25 105. These statements were materially false and misleading when made.

26 STEC's products did not have "high levels of performance and reliability" or

27 "meet ... customers' specific design requirements." In truth, Defendants knew

28 and/or deliberately disregarded that STEC'S customers had difficulty integrating



1 STEC's products, received faulty products with high failure rates, were promised

2 product features that STEC never delivered, and were expected to adjust their

3 products and test STEC's products by trial and error, rather than receiving products

4 that met those customers' design requirements.

5 106. Furthermore, STEC's products did not "utilize[] sophisticated error

6 detection and correction processes" or "provide high data reliability and integrity."

7 In truth, Defendants knew and/or deliberately disregarded that STEC's products

8 were unreliable and entire orders frequently had to be shipped back to STEC for

9 error detection, after which STEC would lie about the quantity and type of errors.

10 Further, certain STEC customers were expected to test out several versions of a

11 product to see what worked when STEC lacked the ability to do a failure analysis.

12 107. Nor did STEC's products "withstand . . . extreme temperature

13 fluctuations." In truth, Defendants knew and/or deliberately disregarded that

14 STEC's products failed environmental tests, failing immediately under any high

15 temperature, and Defendants lied to customers about the products' certification.

16 108. In truth, Defendants knew and/or deliberately disregarded that

17 competition would likely enter the market within the next six months. For

18 example, Defendants knew and/or deliberately disregarded that STEC's

19 competitor, Pliant Technology, had begun sampling an enterprise SSD with

20 customers and expected an initial qualification in the fourth quarter. They also

21 knew and/or deliberately disregarded that other competitors, such as Hitachi, were

22 on track to qualify its SSD in early 2010. Defendants knew this and other

23 information showing actual competition at least as early as July 2, 2009, when an

24 industry-specific website, Enterprise Storage Forum, published an article entitled

25 "Solid State Drive Developers Try To Catch STEC."

26 109. Defendants also knew or deliberately disregarded that STEC faced the

27 risk that its customers would seek new vendors to develop and qualify better

28 products, and not continue its relationship with STEC if it continued to "ship


Case 8:09-cv-01304-JVS-MLG Document 83-1 Filed 04/09/10 Page 1 of 42

1 bricks"; send faulty, untested, refurbished, and damaged products as new; fail to

2 deliver promised product features; lie to customers; and continue to be unable to

3 integrate its products with its key OEMs or generate sufficient demand from end-

4 user customers, as described above.

5 110. Indeed, Defendant Manouch Moshayedi later admitted in a

6 September 21, 2009 interview (after the Moshayedis had unloaded their stock),

7 STEC "never expected to be a single source in this market forever," and

8 Defendants knew that "[i]t's perfectly inevitable that people will have second or

9 third qualified vendors in this market."

10 111. Defendants' August 3, 2009 statements and omissions regarding

11 competition were also materially false and misleading because Defendants failed to

12 disclose the significant negative financial impact that STEC would face once

13 competitors entered the market. While STEC was oversupplying its largest

14 customer, EMC, other customers were having trouble integrating STEC products

15 and routinely rejecting faulty products. As new competition would be entering the

16 market at the end of 2009 and beginning of 2010, STEC's largest customer would

17 have no need for its products (and certainly not at the prices STEC was able to

18 charge without competition), while other customers would lack desire for its

19 products after learning of STEC's practice of shipping bricks, sending faulty

20 products, selling refurbished products as new, selling products made with parts

21 rejected by other manufacturers, and lying about failure rates and steps taken to

22 remedy product problems.

23 112. Also in the Prospectus, Defendants claimed that Defendant Manouch

24 Moshayedi would be selling approximately 4.1 million shares in the offering –

25 which would reduce his holdings in STEC by more than half. In truth, Defendant

26 Manouch Moshayedi, the Company's CEO, sold 4.5 million shares—reducing his

27 holdings in STEC by more than 60%.

28



1 F. STEC's Internal Controls AndCompliance With GAAP And SEC

2 113. Regarding the Company's compliance with GAAP, STEC's 2Q09

3 Form 10-Q and 3Q09 Form 10-Q stated, in part, the following:

4 Note 1— Basis of Presentation

5 The accompanying interim condensed consolidated financial

6 statements of STEC, Inc., a California corporation (the "Company"),

7 are unaudited and have been prepared in accordance with accounting

8 principles generally accepted in the United States of America

9 ("GAAP") for interim financial information and with the instructions

10 to Form 10-Q and Article 10 of Regulation S-X.

11 114. The Form 10-Qs also contained statements concerning the Company's12 controls and procedures, stating in part:

13 Evaluation of Disclosure Controls and Procedures.

14 An evaluation as of the end of the period covered by this report was

15 carried out under the supervision and with the participation of our

16 management, including our principal executive officer and principal

17 financial officer, of the effectiveness of our disclosure controls and

18 procedures, as such term is defined under Rule 13a-15(e) and Rule

19 15d-15(e) promulgated under the Securities Exchange Act of 1934, as

20 amended (the "Exchange Act"). Based on their evaluation, our

21 principal executive officer and principal financial officer concluded

22 that our disclosure controls and procedures were effective as of the

23 end of the period.

24 115. In accordance with Sections 302 and 906 of SOX, Defendants25 Manouch Moshayedi and Cook signed certifications which were included in the26 Company's 2Q09 Form 10-Q and 3Q09 Form 10-Q. These certifications

27 represented, inter alia, that: (a) the respective Form 10-Q fairly represented28 STEC's financial condition; (b) the respective Form 10-Q did not contain "any



1 untrue statement of a material fact or omit to state a material fact necessary to

2 make the statements made, in light of the circumstances under which such

3 statements were made, not misleading"; (c) the financial statements and other

4 financial information included with the Form 10-Q, fairly present in all material

5 respects STEC's financial condition, results of operations and cash flows; (d)

6 Defendants were "responsible for establishing and maintaining disclosure controls

7 and procedures"; and (e) Defendants had inspected the Company's disclosure

8 controls and procedures prior to the filing of the Form 10-Q and found them to be

9 effective.

10 116. The foregoing statements were materially false and misleading and

11 were known by Defendants to be materially false and misleading at that time, or

12 were deliberately disregarded as such, because STEC was not in compliance with

13 GAAP or SEC rules, did not have "effective disclosure controls and procedures,"

14 nor did Defendants ensure that the respective Form 10-Q did not contain "any

15 untrue statement of material fact or omit to state a material fact."

16 117. In truth, Defendants' revenue recognition violated GAAP as detailed

17 below in Section VIII.

18 118. In addition, Defendants' disclosure controls were grossly inadequate

19 as evidenced by the inclusion of the materially false and misleading statements

20 discussed herein in the Company's press releases and SEC filings. Defendants also

21 knew and or deliberately disregarded that the Company lacked adequate internal

22 controls — which would have precluded the Company from making materially false

23 and misleading statements, violating GAAP and SEC rules, and engaging in

24 practices to sell faulty, low quality products. Further, Defendants violated GAAP

25 by "shipping bricks," i.e., recording shipments as revenue even though Defendants

26 knew or deliberately disregarded those shipments included empty boxes or

27 packages including the wrong product.

28

-42- CONSOLIDATED COMPLAINT-- Lead Case No. SACV 09-01304-JVS (MLGx)


G. Materially False And Misleading Statements

1 And Omissions Made As The Truth Began To Be Revealed

2 119. On November 3, 2009, STEC issued a press release that revealed for

3 the first time that the Company's largest customer, EMC, had excess inventory that

4 it might carry into 2010. STEC reassured investors, however, that the issue was

5 being remedied, as follows:

6 In light of this development, we have jointly initiated a strategic sales

7 and marketing incentive program designed to promote the integration

8 of STEC's SSDs into their systems. As of September 30, 2009, we

9 have accrued $1.5 million of estimated costs for this marketing

10 incentive program. Both companies believe that we will be successful

11 in increasing the pace of the replacement of HDDs with SSDs.

12 120. That same day, November 3, 2009, Defendants hosted an analyst

13 conference call. On that call, Defendant Manouch Moshayedi represented that

14 "EMC still remains our top customer. And I would say that most of our ZeusIOPS

15 is done through EMC. The rest of the customers are pretty small, so in terms of the

16 ZeusIOPS sales, 90% EMC, 10% the rest of the customers, I would say."

17 121. The foregoing statements regarding STEC's relationship with EMC

18 were materially false and misleading and tempered the impact of the disclosure

19 that EMC, in fact, had excess inventory. At that time, Defendants knew or

20 deliberately disregarded, but failed to disclose to investors and the market, that

21 EMC was unlikely to commit to another deal with STEC because STEC had

22 oversupplied EMC with faulty products that were riddled with errors and that new

23 competitors were entering the market, creating price competition and allowing

24. EMC to demand higher quality.

25 122. Also in the November 3, 2009 press release, the Company stated:

26 Business Outlook

27 "I am very pleased to share with you, our exceptional results for the

28 third quarter of 2009," said Manouch Moshayedi, STEC's Chairman



1 and Chief Executive Officer. "Our solid operating results, the

2 strengthening of our balance sheet and the further integration of

3 our SSDs into our customers' platforms leave us in a great position

4 to address the growth opportunities and challenges that lie ahead.

5 Despite a sluggish economy, we believe our growth through the end

6 of the year will continue."

7 *^*

8 We are also working on implementing sales and marketing incentive

9 programs at our other major customers to further proliferate the use of

10 our SSDs in their systems. We believe that it is just a matter of time

11 before these customers become more significant to our overall sales

12 of SSDs. In addition, we continue to qualify our ZeusIOPS into new

13 platforms at our customers and are working closely with them to

14 promote integration of SSDs into their systems by participating in

15 sales conferences and end-user training programs both in the U.S.

16 and in Europe. We believe these activities will help accelerate the

17 adoption of our SSDs over the course of 2010.

18 Longer-term, we believe that SSDs in the Enterprise market are here

19 to stay and will grow to become a very significant market within the

20 next five years. Further, we believe that as this market grows, there

21 will be room for a few additional players and that STEC will remain

22 the dominate player in Enterprise-class SSDs.

23 Guidance

24 We currently expect fourth quarter of 2009 revenue to range from

25 $101 million to $103 million (net of $2.4 million of estimated reserves

26 related to sales and marketing incentive programs) with diluted non-

27 GAAP earnings per share to range from $0.51 to $0.53.

28

-44-

CONSOLIDATED COMPLAINT-- Lead Case No. SACV 09-01304-JVS (MLGx)


1 123. In the November 3, 2009 analyst conference call, Manouch

2 Moshayedi reassured investors that the new "extensive product marketing

3 program" entered into with EMC "will push through any sort of inventory issues

4 and it will, in the future quarters, will pick up any sort of sales that they might

5 have in this product line."

6 124. Manouch Moshayedi continued:

7 So, this program, by the way ... it's extremely significant for us. It if does

8 become successful, we could tremendously move our revenues up because

9 what it does in a sense, it educates every single salesperson at our customer

10 about SSDs. And incentivize them to go sell SSDs.... So I think on a go-

11 forward basis, even at this cost of the marketing program for us, it's — if it's

12 really successful, it could really change our revenue model as a whole for

13 2010 and beyond.

14 125. The foregoing statements were each materially false and misleading

15 when made because STEC was not in a "great position" to address purported

16 "growth opportunities" nor was STEC's joint marketing program likely to

17 "tremendously move [STEC's] revenues up." In truth, as detailed herein, STEC's

18 customers were dissatisfied with STEC's faulty products and Defendants knew or

19 deliberately disregarded that its other customers would not rush in to take EMC's

20 place once its inventory overhang was eliminated.

21 VII. THE TRUTH EMERGES

22 126. Just one month after the Moshayedis unloaded their stock at an

23 inflated price through a secondary offering, the truth began to be revealed through

24 a series of partial disclosures. The stock price immediately plunged following each

25 disclosure and now trades at prices below where it traded at the beginning of the

26 Class Period and before the Moshayedis had unloaded their shares.

27

28



1 127. As discussed herein, however, even as the market began to learn the

2 truth about STEC's sales, demand for its products and actual competition,

3 Defendants continued making false statements and omissions.

4 A. The September 17, 2009Partial 'Corrective Disclosure

5

6 128. The first partial disclosure occurred on September 17, 2009. On that

7 day, WedBush Morgan published an analyst report on STEC that identified

8 important new adverse information regarding competition for STEC's Zeus, which

9 Defendants had adamantly and repeatedly denied could exist.

10 129. The report, entitled "Checks Indicate Q3 Beat Likely in Cards; but

11 Expect Changing Competitive Landscape to Pressure Shares Downward,"

12 disclosed for the first time that the "competitive landscape" was "intensifying,"

13 and that STEC's "`window of opportunity' to maintain a market leadership position

14 and secure design wins at Tier I OEMS in the SATA/SAS SSD enterprise market

15 ahead of the competition may be closing."

16 130. The report explained in part:

17 • Our industry checks indicate that one of STEC's Tier I OEM

18 enterprise customers is in final qualification stages with

19 Toshiba for its Single Level Cell (SLC) NAND-based serial

20 attached SCSI (SAS) interface SSD. While we had expected

21 STEC's competitors to gain design wins at its OEMs, we

22 believed this would likely not occur until [the first half of

23 2010].

24 • Industry checks lead us to believe a leading Hard Disk Drive

25 (HDD) OEM is likely set to introduce a SLC SATA/SAS SSD

26 and possibly a Multi-Level-Cell (MLC) SSD drive in Q4.

27 131. Thus, it was revealed for the first time that, contrary to Defendants'

28 statements (including just a month earlier during the August 3, 2009 earnings



1 conference call) that there is "no competition" for STEC's enterprise-scale

2 products and "the probability of someone coming out with a ... ZeusIOPS-like

3 SSD" is "zero," at least one competitor, Toshiba, was in the process of qualifying a

4 competitive SSD product with one of STEC's top tier customers. Wedbush

5 Morgan thus cut its 12-month price target from $45 to $39.

6 132. Not only did this report disclose that new competitors were entering

7 the market with products that would threaten STEC's business, but it also revealed

8 that one such competitor, Toshiba, was in the final qualification stage with one of

9 STEC's own customers. Thus, the market learned that the undisclosed risk, that

10 STEC's bad business practices could result in its own customers seeking other

11 vendors for product development, was beginning to materialize.

12 133. This news of increased competition and a defecting Tier I customer

13 came in the shadow of the August announcement that the Moshayedis would be

14 dumping $267.8 million of their personally held stock following the $120 million

15 deal with EMC and amidst SEC inquiries regarding, inter alia, STEC's dependence

16 on two key customers, one of them being EMC.

17 134. In reaction to this news, STEC's stock collapsed $6.37 per share to

18 close at $31.53 per share on September 17, 2009 — a one-day decline of over 16%,

19 on volume of more than 21.3 million shares.

20 135. Barron's noted immediately the impact of the new negative

21 information on the stock price. In a September 17, 2009 article entitled "STEC:

22 New Competition Coming In Enterprise SSDs, Wedbush Says," Barron's reported

23 that "STEC shares are under pressure this morning from a cautious note by

24 Wedbush Morgan analyst Betsy Van Hees."

25 136. Defendants quickly responded to counteract this negative news. Two

26 business days after the Wedbush Morgan report, on September 21, 2009, STEC

27 published a "whitepaper" entitled "STEC Addresses Advantages, Key

28 Differentiators and Competitive Aspects of Enterprise Solid State Drives" and

-47-



1 Defendant Manouch Moshayedi conducted an interview in an attempt to reassure

2 investors that STEC did not, in fact, face competition. During that interview he

3 reassured investors: "You don't snap your fingers and get there. Just because

4 Pliant announced (a new line of products), doesn't mean competition."

5 137. In a September 25, 2009 analyst report, B. Riley & Co. recognized

6 that "investors have sheared nearly 32% off STEC's market cap, spurred by

7 recognition of encroaching competition from both established SSD players and

8 new entrants to the market." B. Riley & Co. nevertheless raised STEC to a "Buy,"

9 citing STEC's representations that the Company "is shipping enviable volumes of

10 ZeusIOPS drives to EMC, and has yet to see the production ramp from IBM,

11 Hitachi and Sun, let alone newer customers."

12 B. The November 3, 2009Partial Corrective Disclosure

13

14 138. After the market closed on November 3, 2009, STEC disclosed for the

15 first time that the $120 million EMC deal that Defendants announced just four

16 months earlier had supplied EMC with excess inventory into first quarter 2010.

17 Defendants also disclosed that the EMC deal was only a one-time deal, and,

18 contrary to Defendants' prior representations, was not indicative of strong demand

19 and future revenue growth for STEC SSDs. STEC's press release quoted

20 Defendant Manouch Moshayedi, in part:

21 One of our customers entered into a $120 million supply agreement

22 with us for shipments covering the second half of 2009. We recently

23 received preliminary indications that our customer might carry

24 inventory of our ZeusIOPS at the end of 2009 which they will use in

25 2010.

26 139. During the related November 3, 2009 analyst conference call,

27 Defendant Manouch Moshayedi was asked by an analyst: "With the supply

28



i agreement, I guess even when the inventory eventually runs out, do you expect to

2 have the supply agreement renewed?" Manouch Moshayedi responded:

3 It is possible. It depends on where we are at that point in terms of the

4 whole supply that's out there.... I don't think that we need at this

5 point to sign another supply agreement with a customer who is buying

6 exclusively from us and doing everything that they can to promote our

7 SSDs. So when we did sign the last supply agreement, we did — this

8 was a one-off type of a deal. It was a very big deal for us and we had

9 to go buy the products. Once we bought the products and we've got

10 chips coming into us, and since the rest of the customers haven't

11 picked up yet, I don't think we're going to be asking our customer for

12 another commitment on — I don't think we are going to need a

13 commitment.

14 140. This was the first time that STEC had acknowledged that, contrary to

15 Defendants' prior statements that the $120 million EMC deal was for third and

16 fourth quarter 2009, it had supplied EMC with inventory into first quarter 2010.

17 Likewise, it was the first time that STEC had acknowledged that, contrary to

18 STEC's prior statements that the $120 million EMC deal was indicative of future

19 revenue from STEC's SSDs (and analysts' echoing of Defendants' statements, such

20 as the October 28, 2009 statement by Rothman Research just days earlier that the

21 agreement "is a further indication of future SSD growth and customers' acceptance

22 of SSDs into this growing market"), the EMC deal was not indicative of future

23 SSD growth, but rather was a "one-off type of deal," i.e., a one-time deal, with no

24 commitment for future deals.

25 141. CEO Manouch Moshayedi also indicated during the related

26 November 3, 2009 analyst conference call that sales of the Zeus line in the latest

27 quarter were $60.7 million, below previous guidance of $67 million to $68 million.

28 He also indicated that sales of Zeus to IBM had also been disappointing because

-49- CONSOLIDATED COMPLAINTLead Case No. SACV- 09-013 04-JVS (MLGx)


1 "IBM has not found a way of going and implementing SSDs into the market yet,"

2 and that demand from Sun Microsystems also is "a little bit slow for us."

3 142. Several analysts took note of the Company's "changed" visibility. For

4 example, during the conference call, analyst Jeffrey Schreiner questioned the

5 accuracy of Manouch Moshayedi's prior statements that there was no real

6 competitive threat. Mr. Schreiner also noted that "Your visibility seems to have

7 changed. I don't want to, I guess, use any adjectives. Let's just say it's changed,

8 but when do you believe the prior visibility returns?"

9 143. Another analyst, Kevin Vassily, questioned why Defendants Manouch

10 and Mark Moshayedi had sold a majority of their position in STEC stock at just the

11 right time. Mr. Vassily also questioned whether Defendants had any knowledge

12 then that EMC was not pushing through as much inventory as STEC might have

13 thought. Rather than respond to the analyst's question of whether he had any

14 knowledge regarding EMC's build-up of inventory at the time of his insider sales,

15 Defendant Manouch Moshayedi responded only that, at the time the Moshayedis

16 sold their stock, EMC had just placed that purchase order, "so I don't think at that

17 time that they knew that three months down the road, their sales flow wasn't going

18 to be as good as they had thought." He further explained — while avoiding a

19 response to the question of whether he had any knowledge of the excess inventory

20 — that "[t]he reason why they put that sale, that PO in place was to make sure that

21 they have secured amount [sic] of flash and we can build enough for the demand."

22 144. In the November 3, 2009 announcement, Defendants attempted to

23 reassure investors of customer acceptance and future revenue growth from STEC

24 SSDs, explaining that STEC and EMC had initiated a joint "marketing program" to

25 promote the integration of STEC's SSDs. Defendant Manouch Moshayedi

26 explained:

27 In light of this development, we have jointly initiated a strategic sales

28 and marketing incentive program designed to promote the integration



of STEC's SSDs into their systems. As of September 30, 2009, we

2 have accrued $1.5 million of estimated costs for this marketing

3 incentive program. Both companies believe that we will be successful

4 in increasing the pace of the replacement of HDDs with SSDs. If our

5 marketing program is not successful in increasing the demand flow of

6 SSDs, our first quarter of 2010 orders from this customer will be

7 negatively affected; however, the actual impact cannot be quantified

8 at this time.

9 145. In response to a direct question of whether the "excess inventory"

10 would impact only STEC's first quarter, or both its first and second quarter revenue

11 numbers, Manouch Moshayedi reassured investors that the issue would not "be

12 that huge," and that the excess inventory issue would not impact STEC's second

13 quarter revenue numbers.

14 146. In further reassuring investors of prospects for acceptance by

15 customers and resulting revenue from STEC's SSDs, Manouch Moshayedi

16 explained as follows:

17 We are also working on implementing sales and marketing incentive

18 programs at our other major customers to further proliferate the use of

19 our SSDs in their systems. We believe that it is just a matter of time

20 before these customers become more significant to our overall sales of

21 SSDs. In addition, we continue to qualify our ZeusIOPS into new

22 platforms at our customers and are working closely with them to

23 promote integration of SSDs into their systems by participating in

24 sales conferences and end-user training programs both in the U.S. and

25 in Europe. We believe these activities will help accelerate the

26 adoption of our SSDs over the course of 2010.

27

28



1 Longer-term, we believe that SSDs in the Enterprise market are here

2 to stay and will grow to become a very significant market within the

3 next five years. Further, we believe that as this market grows, there

4 will be room for a few additional players and that STEC will remain

5 the dominate player in Enterprise-class SSDs.

6 147. Defendant Manouch Moshayedi also began to disclose STEC's

7 reliance on EMC, revealing to investors that "EMC still remains our top customer,"

8 and that "most of our ZeusIOPS is done through EMC," with 90% coming from

9 EMC.

10 148. Defendant Manouch Moshayedi further explained that:

11 SSD as a whole is here to stay. It's going to grow quarter-after-

12 quarter, year-after-year, and we'll be a big part of it going

13 forward.... EMC is very much in line with our thought process that

14 SSD is extremely important in the enterprise storage markets. So are

15 the rest of the customers. It's just a matter of training and doing

16 enough marketing to get the sales departments of everybody on board.

17 149. Also during the related November 3, 2009 analyst conference call,

18 Defendant Manouch Moshayedi stated that the problem with SSD sales was the

19 lack of sales force efforts and consumer knowledge about SSDs. He assured

20 investors that the joint marketing program "will push through any sort of inventory

21 issues and it will, in the future quarters, will pick up any sort of sales that they

22 might have in this product line," and that "on a go-forward basis ... if it's really

23 successful, it could really change our revenue model as a whole for 2010 and

24 beyond." He detailed that the program would include, for example, "incentives"

25 for sales personnel to push Zeus to customers and offering rebates to customers.

26 150. Defendant Manouch Moshayedi remained adamant during the call that

27 STEC has no competition for Zeus. For example, an Oppenheimer analyst

28 commented that "there's just a lot of skepticism right now around your company



1 and its ability to compete." The analyst asked Defendant Manouch Moshayedi "if

2 there is anything you can say or do here to convince us that it's not competition

3 that it really is a problem with end demand in terms of SSD adoption." Manouch

4 Moshayedi responded as follows:

5 What I can tell you is there is absolutely no competition. To this date,

6 we have not seen and nor has [EMC] seen, a product that competes

7 with our ZeusIOPS. So we are the only supplier of ZeusIOPS or

8 ZeusIOPS-like SSD into enterprise storage markets today. There is

9 not one single competitor out there. If there were competitors coming

10 in, we would estimate that they would come in somewhere around

11 mid-2010. And if they were to go qualify with a product that actually

12 does qualify, it would be somewhere around first or second quarter of

13 2011. We do not foresee a competitor coming in anytime soon into

14 this market and all of this — these reports that competition has come in

15 are absolutely false. None of our customers are going with a

16 competitor, and there is absolutely no competition today for our

17 ZeusIOPS product line in any of our customers.

18 151. Despite Defendants' attempted reassurances, in reaction to STEC's

19 November 3, 2009 disclosure, shares of STEC stock plunged $9.01 per share to

20 close at $14.14 per share on November 4, 2009, a one-day decline of 39% on

21 volume of 32.0 million.

22 152. A Tech Trader report late in the day on November 3, 2009, reported

23 that STEC's stock price was being "whacked" as a result of the announcement

24 regarding EMC's excess inventory of STEC's Zeus product.

25 153. As a result of the November 3, 2009 announcement, on November 4,

26 2009, several analysts who had previously been bullish on STEC downgraded

27 STEC stock.

28

-53- CONSOLIDATED COMPLAINTLead-Case No. SACV 09-01304-JVS (MLGx)


1 154. For example, Oppenheimer & Co. downgraded the stock to "Perform"

2 from "Outperform," slashing its price target in half to $21 from $45, explaining

3 that it had been "pistol-whipped." Oppenheimer pointed to STEC's newly

4 disclosed problems with selling-through Zeus at EMC and with developing new

5 customers for Zeus, such as HP and IBM.

6 155. J.P. Morgan, too, lowered its estimates and lowered its price target to

7 $42 from $50, citing the excessive inventory and competition concerns as follows:

8 "Excess inventory at EMC and the establishment of a new marketing incentive

9 program to educate EMC sales personnel stands to fuel investors' concerns of

10 competitive shifts in the making."

11 156. ThinkEquity LLC also cut its rating to "Hold" from "Buy," explaining

12 "We got this one wrong" and pointing in part to "competitive pressures" and

13 "inventory risk."

14 157. Deutsche Bank cut its revenue, EPS estimates and price target in order

15 to reflect the slower adoption of SSDs into the enterprise market. It reported that

16 the "big announcement" on the STEC conference call was that EMC may not be

17 able to sell the entire $120 million it has committed in purchasing the second half

18 of 2009, creating the potential for lower sales in first quarter 2010.

19 158. Wedbush Morgan cut its rating to "Neutral" from "Outperform" and

20 reduced its price target to $18 from $39 per share in a report entitled "Down for the

21 Count After Last Night's Blindsided Knock Out Punch." Wedbush Morgan noted

22 that although the analyst had prior concerns about STEC's competition, she was

23 "completely caught off guard" by the stall in the adoption rates of SSDs and the

24 excess inventory at EMC which STEC said could be carried into first quarter 2010.

25 Just hours earlier on that same day, but prior to STEC's startling disclosure,

26 Wedbush had reiterated its "Outperform" rating for STEC and $39 price target,

27 emphasizing STEC's "strong demand for ZeusIOPS at its leading Tier 1 customer

28 EMC."

-54-



1 159. Needham likewise lowered its price target to $30 from $46, citing the

2 "EMC inventory overhang." Echoing the assurances by Manouch Moshayedi

3 during the earnings conference call, however, Needham indicated that the

4 inventory issue was only "temporary" and would impact only first quarter 2010.

5 160. B. Riley & Co., LLC, too, focused on the disclosed "inventory

6 concerns." But echoing Defendant Manouch Moshayedi's reassurances during the

7 November 3, 2009 conference call, B. Riley & Co., LLC stated that it expected

8 only first quarter 2010 would be impacted and that EMC is not giving up on STEC.

9 161. On November 16, 2009, Seeking Alpha published an article entitled

10 "STEC Revisited: Will It Go From Good To Great?" The article noted that the

11 stock price has plummeted after the November 3 disclosure as a result of:

12 Concern over management integrity and credibility. Whether

13 management knew about the demand/inventory issue in advance or

14 not, the market found it too coincidental that top management made

15 such a substantial sale of stock in the very quarter they blew up. At

16 the same time the potential question of integrity was being debated,

17 they made it worse in the earnings conference call by not appearing to

18 have concrete answers about the inventory at their largest customer

19 who will generate over 60% of the revenues in the second half.

20 162. On November 17, 2009, STEC hosted an Analyst Day in New York.

21 As reiterated by analysts such as Needham, STEC reassured analysts (and

22 investors) of the competitive landscape purportedly favoring STEC and that the

23 EMC issue was only "short-term inventory noise."

24 163. Shortly thereafter, on December 3, 2009, STEC presented at the J.P.

25 Morgan SMid Cap Conference in New York. Following STEC's representations at

26 the Conference, analysts such as J.P. Morgan again reiterated that the excess

27 inventory was expected to impact only first quarter 2010.

28



C. The February 23, 20101 Corrective Disclosure

2 164. The final corrective disclosure occurred on February 23, 2010. On

3 that day, STEC further shocked the market when it stated in a press release issued

4 after the close of market trading that the inventory carry-over at EMC would not

5 only hurt STEC's first quarter 2010 revenues as previously announced in

6 November, but that it would also negatively impact STEC's sales for the entire first

7 half of 2010, stating:

8 We believe that the first half of 2010 will be a trough period for our

9 business due to an inventory carryover by our largest customer

10 [EMC]. Although we believe the marketing programs that we

I 1 implemented last quarter have had a positive effect on the sell-through

12 of SSDs, based on our best estimates we now anticipate this inventory

13 carryover to continue to negatively impact our sales to [EMC] during

14 the first half of 2010, as we do not expect any meaningful production

15 orders from [EMC] during that time.

16 165. The Company also announced that it expected first quarter of 2010

17 revenue of $33 million to $35 million, contrasting sharply with the projections of

18 $79.73 million by analysts — who had relied on Defendants' prior representations —

19 and vastly lower than the $106 million reported for the fourth quarter of 2009.

20 166. During the related February 23, 2010 earnings call, Manouch

21 Moshayedi explained that the products that STEC sold to EMC in the second half

22 of 2009 would not cover EMC's inventory needs for just six months, but for an

23 entire year, until mid-2010. Also during the conference call, Defendants disclosed

24 that EMC had accounted for 62% of STEC's overall revenue for the fourth quarter,

25 but it would plummet to 0% of STEC's revenue for the first half of 2010.

26 167. STEC's negative disclosure on February 23, 2010, related not only to

27 EMC, but to the adoption of STEC's enterprise-scale SSDs by other customers as

28

-56-



1 well. Following an analyst's question regarding revenue guidance from Zeus

2 customers other than EMC, Manouch Moshayedi responded:

3 "On the rest of the customers, everyone is growing very slowly,

4 however. We are starting to implement marketing programs with

5 everyone. However, those things take at least three to six months to

6 take hold. So, again, that is why we put second half of this year as the

7 time to see growth again in this market."

8 Manouch Moshayedi also finally admitted that, contrary to his prior

9 representations during the November 3, 2009 earnings call, the joint marketing

10 program had not actually been adopted by any customer other than EMC.

11 168. This was the first time that STEC had admitted that, contrary to

12 Defendants' prior reassurances that the EMC inventory overhang would impact

13 only first quarter, it would, in fact, impact the entire first half of 2010.

14 169. This was also the first time investors learned that STEC was so

15 substantially dependent on EMC that STEC's revenues would plummet without

16 EMC's business. This news revealed that STEC could not "find a replacement

17 customer for the relevant product," as it had previously, represented to the SEC and

18 that, also contrary to its representations to the SEC, its business would be

19 "fundamentally altered without a specific customer sales agreement" with EMC.

20 As STEC's other customers remained dissatisfied with STEC's products and

21 unable to integrate STEC's products with their own, they could not compensate for

22 the revenue gap created by EMC's inventory overhang, and STEC was forced to

23 issue guidance for 1 Q 10 for a mere third of the prior quarter's revenue.

24 170. These disclosures also revealed the essential failure of the joint

25 marketing program. Manouch Moshayedi admitted during the earnings call that

26 STEC's incremental effort for sales beyond its initial customers who use short-

27 stroking techniques on HDDs had been more difficult than originally expected.

28 The market realized that it was not sales force incentives or education that were


-- Lead Case No. SACV 09-01304-JVS (MLGx)


1 needed, but rather that the product simply did not fit end users' needs and did not

2 provide efficient and reliable performance sufficient to justify the high price tag.

3 As discussed during the earnings call, future iterations of the product, now being

4 worked up, might better address the market's needs. Indeed, Manouch Moshayedi

5 admitted during the earnings call that "in terms of payout [the joint marketing

6 program] is a bit less than what we had expected."

7 171. In the Company's Form 10-K for the year ended December 31, 2009,

8 filed with the SEC on February 23, 2010, Defendants announced for the first time

9 that that they were under investigation for insider trading, stating in part:

10 The United States Securities and Exchange Commission ("SEC") is

11 conducting a formal investigation involving trading in our securities.

12 Certain of our officers and employees, including our CEO and

13 President, have received subpoenas in connection with this

14 investigation.

15 172. In reaction to this news revealed on February 23, 2010, STEC shares

16 dropped over 23% in trading on February 24, 2010, a decline of $3.15, on

17 extraordinary volume of over 36 million shares.

18 173. Analysts immediately further reduced their ratings and price targets,

19 and expressed a "loss of confidence in STEC management."

20 174. For example, following STEC's February 23, 2010 disclosure, on

21 February 24, 2010, Wedbush reduced its 12-month price target to $10 from $14,

22 which it had set just two days earlier on February 22, 2010. Wedbush cited the

23 "significant magnitude of the inventory over-hang" coupled with uncertain

24 adoption rates of SSDs in enterprise applications.

25 175. Thomas Weisel Partners, too, lowered its rating on STEC to "market

26 weight," noting the inventory overhang at EMC and slower adoption rate of

27 enterprise SSDs. The analyst also expressed "our loss of confidence in STEC

28 management."



1 176. Oppenheimer, too, reset its estimates, noting that STEC had hit "rock

2 bottom," and explaining that whereas the market understood the $120 million

3 EMC deal to be indicative of a half-year run rate, it had now been disclosed that it

4 was indicative of a full-year run rate. Oppenheimer further explained that "EMC

5 completely turned-off the spigot with STEC in IQ," going from a 62% customer to

6 0% over one quarter. Oppenheimer therefore explained that "[a]s a result, our `10

7 estimate falls to its knees to $0.15 vs. our prior estimate of $2.00."

8 177. Deutsche Bank, too, noted that, while the market had known since

9 November that EMC had extra inventory of SSDs, it had understood that EMC's

10 demand for SSDs was higher than the Company now reports in February.

11 Specifically regarding the $120 million deal that Defendants had touted back in

12 July 2009 just prior to their stock offering, Deutsche Bank stated that "In

13 retrospect, the EMC volume purchase agreement did more harm than good, as a

14 clearer read on EMC's sales would have given a better sense of where the market

15 was trending."

16 178. J.P. Morgan also downgraded the stock, citing the market's belief that

17 STEC's greater-than-expected revenue miss also stems from new competition and

18 stating that "[w]e had been too optimistic, thinking the EMC inventory overhang

19 would be a one-quarter issue."

20 179. ThinkEquity LLC too recognized that the Company's most recent

21 announcement raised questions, including the facts that Zeus had not been able to

22 sell through and competition was increasing. Needham also lowered its estimates,

23 citing the Company's lowered guidance as "a clear result of excess inventory and

24 slower adoption."

25 180. In sum, as detailed above, STEC's share price reacted negatively to

26 the disclosures of the truth regarding Defendants' materially false and misleading

27 statements and omissions, as the artificial inflation was removed from the share

28 price. As a result of their purchases of STEC shares during the Class Period, Lead

-59-



1 Plaintiffs and the Class suffered economic loss. These losses were a direct result of

2 the fraudulent conduct that artificially inflated the price of STEC's common stock.

3 D. Post-Class Period Developments

4 181. Just a few days after the Company announced the formal SEC

5 investigation, it announced on February 26, 2010, that it had "terminated its

6 existing Severance and Change in Control Agreements and entered into new

7 Severance and Change in Control Agreements." These new agreements provided

8 additional benefits for the Individual Defendants should they be "terminated

9 without cause" or "terminate [their own] employment for good reason" after a

10 "change in control" at STEC. In addition to the benefits that the Individual

11 Defendants had in their previous agreements filed in 2008, which allowed certain

12 payments if they left within 18 months of a change in control, they now have

13 additional benefits if they leave even sooner (within 12 months of a change of

14 control) including a prorated annual bonus and accelerated vesting of stock

15 options. The new agreements also apparently delete the requirement that the

16 Individual Defendants wait to receive these benefits until "as soon as reasonably

17 practicable after six (6) months and one (1) day following the Date of

18 Termination."

19 182. Curiously, although STEC's February 26, 2010 Form 8-K admits that

20 the new agreements were entered into before February 23, 2010, when STEC filed

21 its annual Form 10-K, the Form 10-K incorporated only the old agreements. Thus,

22 to date STEC has disclosed only a general summary of the new agreements, not

23 their exact terms.

24 183. On March 14, 2010, The Register published an article by Chris Mellor

25 entitled "Is EMC looking away from STEC?" containing quotes from EMC's PR

26 Director, Rick Lacroix, stating: "We have a multiple supplier strategy for

27 components [and] we've never positioned our relationship with STEC as

28 exclusive.... we prefer a multiple supplier arrangement."



1 184. When asked whether EMC is qualifying a second supplier for its

2 SSDs, EMC responded: "We can't provide any details about this [but] we prefer a

3 multiple supplier arrangement."

4 185. The March 14, 2010 article further explained as follows:

5 Second-sourcing [by EMC] would be a lever to force STEC's prices

6 down, as well as ensuring continuity of supply if one vendor

7 experienced production difficulties. If, by the mid-year point, EMC

8 orders had still not picked up, STEC would be desperate to get an

9 EMC order. Then let EMC drop the bombshell that, er, yes, it actually

10 had a second source whose product was 30 per cent cheaper and,

11 unless STEC adjusted its pricing, EMC would prefer to order product

12 from the second vendor.

13 If this happens, and the other STEC Zeus customers follow suit - and

14 why wouldn't they, second-sourcing being normal - then Zeus

15 revenues take a heavy hit.

16 Join these dots up and the picture revealed is that STEC's good times

17 with its Zeus SSD product are over. Other vendors are not taking up

18 the Zeus slack from EMC, and indeed, two of them have rejected Zeus

19 all together. EMC itself is highly-likely to find a second source, and

20 Zeus prices will then just have to come down.

21 VIII. DEFENDANTS' GAAP VIOLATIONS

22 186. SEC Regulation S-X (17 C.F.R. § 210.4-01(a)(1)) provides that

23 financial statements filed with the SEC which are not prepared in compliance with

24 GAAP are presumed to be misleading and inaccurate. The responsibility for

25 preparing financial statements that conform to GAAP rests with corporate

26 management as set forth in the Sarbanes-Oxley Act of 2002. Pursuant to these

27 requirements, STEC's financial reports filed with the SEC during the Class Period

28



1 assured investors that its financial statements were prepared in compliance with

2 GAAP.

3 187. STEC's revenue recognition during the Class Period violated GAAP

4 because it included revenues from shipments of defective or unordered products as

5 detailed above in Section V.C.

6 188. STEC's revenue recognition for the third and fourth quarters and the

7 year ended December 31, 2009, also violated GAAP due to STEC's improper

8 revenue recognition of the EMC deal in the third and fourth quarters of 2009.

9 189. Under GAAP, SEC SAB No. 104 ("SAB 104"), Revenue Recognition,

10 revenue should not be recorded until it is both earned and realizable, which

11 requires each and all of the following criteria to be met:

12 (i) Persuasive evidence of an arrangement exists.

13 (ii) Delivery has occurred or services have been rendered.

14 (iii) The seller's price to the buyer is fixed or determinable.

15 (iv) Collectability is reasonable assured.

16 190. STEC violated at least three out of four of the SAB 104 criteria

17 because at the time it recognized revenue from the EMC deal:

18 (i) There was not "persuasive evidence of an arrangement";

19 (ii) STEC had not provided all of the required services; and

20 . (iii) STEC's price to the buyer was not fixed or determinable.

21 191. For example, during the third and fourth quarters of 2009 — during

22 which it recorded substantially all of the $120 million in revenue from the EMC

23 deal — STEC had significant obligations to EMC with respect to Zeus. As admitted

24 by STEC at the end of the Class Period, STEC was still delivering required

25 services to EMC to bring about the resale of STEC's products, including: (i)

26 helping build market demand for Zeus drives by educating EMC's customers about

27 the advantages of Zeus; (ii) training and incentivizing EMC's sales personnel to

28

-62- CONSOLIDATED COMPLAINTLead Case No: SACV 09-01304-JVS (MLGx)


1 sell Zeus products; and (iii) providing market development funds and services for

2 EMC.

3 192. Indeed, Defendant Manouch Moshayedi's statements about the EMC

4 deal on the November 3, 2009 analyst call confirm STEC's blatant violations of

5 SAB 104:

6 (i) "We proposed the MDF [manufacturer's development funds] to them

7 [EMC] about five, six days ago."

8 (ii) "[W]e never had a contract based on number of units. Our contract

9 was $120 million. So it was dollar volume .... We don't know exactly

10 how many [units] they shipped across each system in Q3."

11 (iii) "[J]ust starting yesterday, we implemented a new marketing fund with

12 our customer, and everyone thinks, including our customer, thinks that this is

13 going to be extremely successful."

14 (iv) "[W]e're investing money and incentivizing people to go sell it. And

15 then the second part of it, which is extremely important, is for our customer

16 to really incentivize their customers to buy SSD based systems.

17 (v) "[I]f it doesn't take effect this week, it will eventually take effect

18 because it's a big, huge program that we have put in place."

19 (vi) "So we are hoping that this program will help out to get our inventory

20 levels at our customer to a natural level of inventory where Q1 would be a

21 normal Q."

22 193. STEC's revenue recognition for third and fourth quarters and 2009

23 also violated Financial Standards Accounting Board ("FASB") Codification § 605-

24 25-25, Revenue Recognition; Multiple-Element Arrangements; Recognition ("§

25 605-25-25") and § 605-25-30, Revenue Recognition; Multiple Element

26 Arrangements; Initial Measurement ("§ 605-25-30"). Because the EMC deal was

27 the first deal of its kind in the Company's history and because the EMC deal

28 continued to change and evolve through the end of the Class Period, STEC did not



1 have "vendor-specific objective evidence" about the product and service elements

2 of the EMC deal. Pursuant to § 605-25, STEC therefore could not recognize

3 revenue from the EMC deal until, at the earliest, EMC resold the product to an end

4 user (called "sell through").


6 also violated FASB Codification § 605-15-25, Revenue Recognition; Products;

7 Recognition ("§ 605-15-25"). Pursuant to § 605-15-25, STEC could be required to

8 recognize revenue on a cash basis because it had: (i) increased levels of inventory

9 in a distribution channel; (ii) a lack of visibility into a distribution channel; (iii) a

10 new distribution channel or method; (iv) changes in marketing policies, (v)

11 changes in customer relationships; and (vi) new technology.


13 also violated FASB Codification § 605-50, Customer Payments and Incentives,

14 including subtopics § 605-50-25 (Vendor's Accounting for Consideration Given to

15 a Customer); § 605-50-45 (Vendor's Income Statement Characterization of

16 Consideration Given to a Customer (Including a Reseller); and § 605-50-50

17 (Service Provider's Accounting for Consideration Given to a Manufacturer or

18 Reseller of Equipment) because, according to STEC, during 2010, in connection

19 with the EMC arrangement, STEC plans to offer customer rebates and sales-related

20 services, but STEC does not know the extent of customer rebates.

21 196. Under GAAP, STEC was required to record revenue from the EMC

22 deal on sell through — as EMC resold STEC's products — or when EMC paid STEC

23 with non-refundable funds, or when STEC completed all of its obligations.

24 Nevertheless, STEC admits that in the third and fourth quarters of 2009, it recorded

25 the $120 million in EMC revenue on an accrual (when shipped) basis, and failed to

26 record it on sell through, or a more conservative basis. Based on the available

27 information, STEC's accounting manipulations and failure to comply with GAAP

28 resulted in at least the following overstatements:

-64-



1 STEC Overstatements Q3 2009 Q4 2009 Fiscal 2009

2Revenue

3 Reported $ 983M $106.OM $354.2MActual 90.OM 753M 315.1M

4 Overstatement $ 8.3M $ 30.7M $ 39.1MOverstated Revenue (%) 9% 41% 12%

5Operating Income

6 Reported $ 30AM $ 30.5M $ 89.2MActual 25.OM 10.6M 63.8M

7 Overstatement $ 5AM $ 20.OM $ 25AM

8 Overstated Operating Income (%) 22% 189% 40%

9 Earnings Per ShareReported $0.47 $0.50 $1.43

10 Actual 0.39 0.19 1.03Overstatement $0.08 $0.31 $0.39

11 Overstated Earnings Per Share (%) 22% 165% 38%

12 197. STEC's accounting violated GAAP revenue recognition criteria

13 established by the SEC and FASB. In violating this criteria, STEC materially14 overstated its revenue, operating income and EPS, as shown above.15 198. As the graph below demonstrates, STEC also misrepresented its Sales16 to EMC:

17 STEC's Sales To EMC

18 $70,000

19 $60,000

20r,

$50,00021

22 $40,000.§

23 = $30,000M ;

24 $20,000

25

$10,000b e

27 $0Fkmnold Repor" Pa Q1 2009 Q2 2009 032009 Q4 2009

28 n Saba to EMC, reported n Sales to EMC, corrected

-65- CONSOLIDATED COMPLAINTLead Case No. SACV 09-01304-IVS (MLGx)


1 199. As further demonstrated below, STEC also misrepresented its

2 Accounts Receivable from EMC:

3 STEC's Accounts Receivable From EMC

4$70,000

5$60,000

6f.

7 $50,000

8 $40,000

9 $30,000C

10$20,000

11

12$10,000

13 $0Financial Roporanp Period Q1 2009 Q2 2009 Q3 2009 Q4 2009

14 n Accounts receivable from EMC, reportedn Accounts receivable from EMC, corrected

15

16 200. STEC also failed to make certain specific material disclosures

17 required by GAAP under the circumstances, including the following: (i)

18 Disclosure of Contingencies at an interim date (see, e.g., § 270-10-50, Interim

19 Reporting); (ii) Disclosure of Current Vulnerability Due to Certain Concentrations

20 (see, e.g., § 275-10-50, Risks and Uncertainties); (ii) Disclosure of Certain

21 Significant Events (id.); and Disclosure of Significant Estimates (see, e.g., § 330-

22 10-55, Inventory).

23 IX. APPLICABILITY OF PRESUMPTION OF

24RELIANCE: FRAUD ON THE MARKET DOCTRINE

25 201. At all relevant times, the market for STEC's common stock was an

26 efficient market that promptly digested current information with respect to the

27 Company from all publicly available sources and reflected such information in the

28 prices of the Company's common stock. Throughout the Class Period:

-66- CONSOLIDATED COMPLAINTLead Case No. SACV 09-01304-JVS (NILGx)


1 (a) STEC's stock met the requirements for listing, and was listed

2 and actively traded on the NASDAQ national market exchange, a highly efficient

3 and automated market;

4 (b) As a regulated issuer, STEC filed periodic public reports with

5 the SEC and the NASDAQ;

6 (c) STEC regularly communicated with public investors via

7 established market communication mechanisms, including through regular

8 disseminations of press releases on the national circuits of major newswire services

9 and through other wide-ranging public disclosures, such as communications with

10 the financial press and other similar reporting services; and

11 (d) STEC was followed by several securities analysts employed by

12 major brokerage firms who wrote reports which were distributed to the sales force

13 and certain customers of their respective brokerage firms. Each of these reports

14 was publicly available and entered the public marketplace.

15 202. Accordingly, Lead Plaintiffs and other members of the Class did rely

16 upon the integrity of the market price for STEC's common stock and are entitled to

17 a presumption of reliance on Defendants' materially false and misleading

18 statements and omissions during the Class Period. Additionally, Lead Plaintiffs

19 and the Class are entitled to a presumption of reliance because the claims asserted

20 herein against Defendants also are predicated upon omissions of material fact

21 which there was a duty to disclose.

22 X. NO SAFE HARBOR

23 203. The statutory safe harbor provided for forward-looking statements

24 under certain circumstances does not apply to any of the allegedly false or

25 misleading statements pleaded in this Complaint. The statements alleged to be

26 false or misleading herein all relate to then-existing facts and conditions. In

27 addition, to the extent certain of the statements alleged to be false or misleading

28 may be characterized as forward-looking, they were not adequately identified as

-67-



1 forward-looking statements when made, and there were no meaningful cautionary

2 statements identifying important facts that could cause actual results to differ

3 materially from those in the purportedly forward-looking statements. To the extent

4 that the statutory safe harbor is intended to apply to any forward-looking

5 statements pleaded herein, Defendants are liable for those false forward-looking

6 statements because at the time each of those forward-looking statements was made,

7 the particular speaker knew that the particular forward-looking statement was false,

8 and/or the forward-looking statement was authorized and/or approved by an

9 executive officer of STEC who knew that those statements were false when made.

10 XI. CLASS ACTION ALLEGATIONS

11 204. Lead Plaintiffs bring this action as a class action pursuant to Rule 23

12 of the Federal Rules of Civil Procedure on behalf of all persons who purchased or

13 otherwise acquired STEC common stock between June 16, 2009, and

14 February 23, 2010, inclusive, and who were damaged thereby (the "Class").

15 Excluded from the Class are Defendant Manouch Moshayedi, Defendant Merhdad

16 "Mark" Moshayedi, Defendant Raymond D. Cook, the officers and directors of

17 STEC, at all relevant times, members of their immediate families and their legal

18 representatives, heirs, successors, or assigns and any entity in which Defendants

19 have or had a controlling interest.

20 205. The members of the Class are so numerous that joinder of all

21 members is impracticable. Throughout the Class Period, STEC common shares

22 were actively traded on the NASDAQ. STEC has nearly 50 million shares of

23 STEC common stock issued and outstanding. While the exact number of Class

24 members is unknown to Lead Plaintiffs at this time and can only be ascertained

25 through appropriate discovery, Lead Plaintiffs believe that there are hundreds or

26 thousands of members in the Class. Record owners and other members of the

27 Class may be identified from records maintained by STEC or its transfer agent and

28

-68-



1 may be notified of the pendency of this action by mail, using the form of notice

2 similar to that customarily used in securities class actions.

3 206. There is a well-defined community of interest in the questions of law

4 and fact involved in this case. Questions of law and fact common to the members

5 of the Class which predominate over questions which may affect individual Class

6 members include:

7 (a) Whether the Exchange Act was violated by Defendants;

8 (b) Whether Defendants omitted or misrepresented material facts;

9 (c) Whether Defendants' statements omitted material facts

10 necessary to make the statements made, in light of the circumstances under which

11 they were made, not misleading;

12 (d) Whether Defendants knew or deliberately disregarded that their

13 statements were materially false and misleading when made;

14 (e) Whether the price of STEC common stock was artificially

15 inflated; and

16 (f) The extent of damage sustained by Class members and the

17 appropriate measure of damages.

18 207. Lead Plaintiffs' claims are typical of those of the Class because Lead

19 Plaintiffs and the Class sustained damages from Defendants' wrongful conduct in

20 violation of federal law that is complained of herein.

21 208. Lead Plaintiffs will adequately protect the interests of the Class and

22 have retained counsel who are experienced in class action securities litigation.

23 Lead Plaintiffs have no interests which conflict with those of the Class.

24 209. A class action is superior to other available methods for the fair and

25 efficient adjudication of this controversy since joinder of all members of the Class

26 is impracticable. Furthermore, as the damages suffered by individual Class

27 members may be relatively small, the expense and burden of individual litigation

28 make it impossible for members of the Class to individually redress the wrongs



1 done to them. There will be no difficulty in the management of this action as a

2 class action.

3 XII. CLAIMS FOR RELIEF

4 COUNTI

5 For Violation Of 10(b) Of The ExchangeAct And Rule l Ob-5 Against STEC, Manouch

6 Moshayedi, Mark Moshayedi, And Raymond D. Cook

7 210. Lead Plaintiffs incorporate by reference each and every allegation

8 contained above, as if set forth herein.

9 211. This claim is brought pursuant to Section 10(b) of the Exchange Act

10 and Rule IOb-5 promulgated thereunder, on behalf of Lead Plaintiffs and members

11 of the Class against Defendants STEC, Manouch Moshayedi, Mark Moshayedi and

12 Cook.

13 212. During the Class Period, Defendants carried out a plan and course of

14 conduct which was intended to and, throughout the Class Period, did: (i) deceive

15 the investing public regarding STEC's business and operations, and the intrinsic

16 value of STEC common stock; (ii) enable STEC insiders to sell over 9 million

17 shares of their privately held STEC stock while in possession of material adverse

18 non-public information about the Company; and (iii) cause Lead Plaintiffs and

19 other members of the Class to purchase STEC common stock at artificially inflated

20 prices. In furtherance of this unlawful plan and course of conduct, Defendants,

21 jointly and individually (and each of them) took the actions set forth herein.

22 213. Defendants STEC, Manouch Moshayedi, Mark Moshayedi and Cook:

23 (a) employed devices, schemes, and artifices to defraud; (b) made untrue

24 statements of material fact or omitted to state material facts necessary to make the

25 statements not misleading; and (c) engaged in acts, practices, and a course of

26 business which operated as a fraud and deceit upon the purchasers of the

27 Company's common stock in an effort to maintain artificially high market prices

28 for STEC's common stock in violation of Section 10(b) of the Exchange Act and

-70-



1 Rule lOb-5. All Defendants are legally responsible as primary participants in the

2 wrongful and illegal conduct charged herein, and the Individual Defendants are

3 also legally responsible as controlling persons as set forth in Count II below.

4 214. Defendants STEC, Manouch Moshayedi, Mark Moshayedi and Cook,

5 individually and in concert, directly and indirectly, by the use, means, or

6 instrumentalities of interstate commerce and/or mail, engaged and participated in a

7 continuous course of conduct to conceal adverse material information about the

8 business, operations and future prospects of STEC as specified herein.

9 215. These Defendants employed devices, schemes, and artifices to

10 defraud, while in possession of material adverse non-public information and

11 engaged in acts, practices, and a course of conduct as alleged herein in an effort to

12 assure investors of STEC's value and performance and continued substantial

13 growth, which included the making of, or the participation in the making of, untrue

14 statements of material facts and omitting to state material facts necessary in order

15 to make the statements made about STEC and its business operations and future

16 prospects, in the light of the circumstances under which they were made, not

17 misleading, as set forth more particularly herein, and engaged in transactions,

18 practices, and a course of business which operated as a fraud and deceit upon the

19 purchasers of STEC common stock during the Class Period.

20 216. Each of the Individual Defendants' primary liability, and controlling

21 person liability, arises from the following facts: (i) the Individual Defendants were

22 high-level executives and directors at the Company during the Class Period and

23 members of the Company's management team or had control thereof; (ii) each of

24 these Individual Defendants, by virtue of his responsibilities and activities as a

25 senior officer and director of the Company, was privy to and participated in the

26 creation, development and reporting of the Company's internal budgets, plans,

27 projections and/or reports; (iii) each of these Individual Defendants enjoyed

28 significant personal contact and familiarity with the other Individual Defendants

-71-



1 and was advised of and had access to other members of the Company's

2 management team, internal reports, and other data and information about the

3 Company's finances, operations, and sales at all relevant times; and (iv) each of

4 these Individual Defendants was aware of the Company's dissemination of

5 information to the investing public which they knew or deliberately disregarded

6 was materially false and misleading.

7 217. The Defendants had actual knowledge of the misrepresentations and

8 omissions of material facts set forth herein, or acted with deliberate disregard for

9 the truth in that they failed to ascertain and to disclose such facts. Such

10 Defendants' material misrepresentations and omissions were done knowingly or

11 with deliberate disregard for the purpose and effect of concealing STEC's

12 operating condition and future business prospects from the investing public and

13 supporting the artificially inflated price of its common stock. As demonstrated by

14 Defendants' overstatements and misstatements of the Company's business,

15 operations, and earnings throughout the Class Period, Defendants, if they did not

16 have actual knowledge of the misrepresentations and omissions alleged, were

17 reckless in failing to obtain such knowledge by recklessly refraining from taking

18 those steps necessary to discover whether those statements were false or misleading.

19 218. As a result of the dissemination of the materially false and misleading

20 information and failure to disclose material facts, as set forth above, the market

21 price of STEC was artificially inflated during the Class Period. In ignorance of the

22 fact that market prices of STEC's publicly traded common stock were artificially

23 inflated, and relying directly or indirectly on the false and misleading statements

24 made by Defendants, or upon the integrity of the market in which the securities

25 trade, and/or on the absence of material adverse information that was known to or

26 deliberately disregarded by Defendants but not disclosed in public statements by

27 Defendants during the Class Period, Lead Plaintiffs and the other members of the

28


Lead Case No. SACV 09-01304-JVS (MLGx) -


i Class acquired STEC common stock during the Class Period at artificially high

2 prices and were damaged thereby.

3 219. At the time of said misrepresentations and omissions, Lead Plaintiffs

4 and other members of the Class were ignorant of their falsity, and believed them to

5 be true. Had Lead Plaintiffs and the other members of the Class and the

6 marketplace known the truth regarding STEC, which was not disclosed by

7 Defendants, Lead Plaintiffs and other members of the Class would not have

8 purchased or otherwise acquired their STEC common stock, or, if they had

9 acquired such common stock during the Class Period, they would not have done so

10 at the artificially inflated prices which they paid.

11 220. By virtue of the foregoing, Defendants have violated Section 10(b) of

12 the Exchange Act, and Rule I Ob-5 promulgated thereunder.

13 221. As a direct and proximate result of Defendants' wrongful conduct,

14 Lead Plaintiffs and the other members of the Class suffered damages in connection

15 with their respective purchases and sales of the Company's common stock during

16 the Class Period.

1 7 COUNT II

18 For Violation Of § 20(a) Of TheExchange Act Against Manouch Moshayedi,

19 Mark Moshayedi, And Raymond D. Cook

20 222. Lead Plaintiffs repeat and re-allege each and every allegation

21 contained above as if fully set forth herein.

22 223. Defendants Manouch Moshayedi, Mark Moshayedi and Cook acted as

23 controlling persons of STEC within the meaning of Section 20(a) of the Exchange

24 Act as alleged herein. By virtue of their high-level positions, their ownership and

25 contractual rights, participation in and awareness of the Company's operations, and

26 intimate knowledge of the fraudulent scheme and the false financial statements

27 filed by the Company with the SEC and disseminated to the investing public, the

28 Individual Defendants had the power to influence and control, and did influence

-73-



1 and control, directly or indirectly, the decision-making of the Company, including

2 the content and dissemination of the various statements which Lead Plaintiffs

3 contend are false and misleading. Defendants Manouch Moshayedi, Mark

4 Moshayedi and Cook were provided with, or had unlimited access to, copies of the

5 Company's reports, press releases, public filings, and other statements alleged by

6 Lead Plaintiffs to be misleading prior to and shortly after these statements were

7 issued and had the ability to prevent the issuance of the statements or cause the

8 statements to be corrected.

9 224. In particular, each of these Defendants had direct and supervisory

10 involvement in the day-to-day operations of the Company and, therefore, is

11 presumed to have had the power to control or influence the particular transactions

12 giving rise to the securities violations as alleged herein, and exercised the same.

13 225. As set forth above, STEC and the Individual Defendants each violated

14 Section 10(b) and Rule lOb-5 by their acts and omissions as alleged in this

15 Complaint. By virtue of their positions as controlling persons, the Individual

16 Defendants are liable pursuant to Section 20(a) of the Exchange Act. As a direct

17 and proximate result of Defendants' wrongful conduct, Lead Plaintiffs and other

18 members of the Class suffered damages in connection with their purchases of the

19 Company's common stock during the Class Period.

20 XIII. PRAYER FOR RELIEF

21 WHEREFORE, Lead Plaintiffs pray for judgment as follows:

22 A. Determining that this action is a proper class action pursuant to Rule

23 23 of the Federal Rules of Civil Procedure and certifying Lead Plaintiffs as class

24 representatives and Lead Counsel as Class Counsel;

25 B. Awarding compensatory damages in favor of Lead Plaintiffs and the

26 other Class members against all Defendants, jointly and severally, for all damages

27 sustained as a result of Defendants' wrongdoing, in an amount to be proven at trial,

28 including interest thereon;

-74-



1 C. Awarding Lead Plaintiffs and the Class their reasonable costs and

2 expenses incurred in this action, including counsel fees and expert fees; and

3 D. Awarding such other and further relief as the Court may deem just and

4 proper.

5 XIV. JURY DEMAND

6 Lead Plaintiffs demand a trial by jury.

7 Dated: April 9, 2010 Respectfully submitted,

8 BERNSTEIN LITOWITZ BERGER

9 & GROSSMANN LLP

10K-Zd.By ' Az4

11 Blair A. Nicholas

12Blair A. Nicholas (Bar No. 178428)

13 [email protected] A. DeLange (Bar No. 190768)

14 [email protected] L. Mendoza (Bar No. 214646)

15 [email protected]

16 Takeo A. Kellar (Bar No. 234470)[email protected]

17 12481 High Bluff Drive, Suite 300San Diego, CA 92130

18 Tel: (858) 793-0070

19 Fax: (858) 793-0323

20 KAHN SWICK & FOTI, LLCKim E. Miller (Bar No. 178370)

21 [email protected] Ryan Clark (Pro Hac Vice)

22 [email protected]

23 Michael A. McGuane (Pro Hac Vice)[email protected]

24 500 5th Ave., Suite 1810New York, NY 10110

25 Tel: (212) 696-3730

26 Fax: (504) 455-1498-and-

27 Lewis S. Kahn (Pro Hac Vice)[email protected]

28 Paul Balanon (Pro Hac Vice)



1 [email protected] C. Boone (Bar No. 268813)

2 [email protected] Poydras Street, Suite 2150

3 New Orleans, LA 70130Tel: (504) 455-1400

4 Fax: (504) 455-1498

5 Co-Lead Counsel for Lead Plaintiffs and6 the Class

7

8

9

10

11

12

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14

15

16

17

18

19

20

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-76- CONSOLIDATED COMPLAINTLead Case No. SACV 09-01304-JVS (MLGx}-


CERTIFICATION PURSUANT TOTHE FEDERAL SECURITIES LAWS

I, Keith A. Ovitt, hereby certify, as to the claims asserted under the federalsecurities laws, that:

1. As Lead Plaintiff, I have selected Bernstein Litowitz Berger & Grossmann LLP asLead Counsel for the Class, and authorized that firm to file a consolidatedcomplaint, which I have reviewed.

2. I did not purchase the securities that are the subject of this action at the directionof counsel or in order to participate in any action arising under the federalsecurities laws.

3. I am willing to serve as a lead plaintiff and representative party on behalf of theClass, including providing testimony at deposition and trial, if necessary. I fullyunderstand the duties and responsibilities of the lead plaintiff under the PrivateSecurities Litigation Reform Act, including the selection and retention of counseland overseeing the prosecution of the action for the Class.

4. My transactions in the STEC securities that are the subject of this action are setforth in the chart attached hereto.

5. I have not sought to serve as a lead plaintiff and representative parry on behalf ofa class in any action under the federal securities laws filed during the three-yearperiod preceding the date of this Certification

6. I will not accept any payment for serving as a representative party on behalf of theClass beyond my pro rata share of any recovery, except such reasonable costs andexpenses (including lost wages) directly relating to the representation of the Class,as ordered or approved by the court.

I declare under penalty of perjury that the foregoing is true and correct. Executedthis S— day of April, 2010. -^

h.

-- Keith A. O^^


Keith Ovitt Account A

Type Date Shares Price

Purchase 08/03/09 1,000 33.28

Purchase 08/03/09 1,000 33.26

Purchase 08/03/09 1,000 33.01

Purchase 08/03/09 1,000 32.53

Purchase 08/03/09 1,000 32.24

Purchase 08/03/09 1,000 32.18

Purchase 08/03/09 1,000 31.97

Purchase 08/03/09 1,000 31.80

Purchase 08/03/09 1,000 31.87

Purchase 08/03/09 1,000 31.70

Purchase 08/03/09 1,000 31.77

Purchase 08/03/09 1,000 31.55

Purchase 08/03/09 1,000 31.66

Purchase 08/04/09 2,500 32.00

Purchase 08/06/09 2,000 31.80

Purchase 08/06109 2,000 31.75

Purchase 08106/09 2,000 31.50

Purchase 08/06/09 2,000 31.25

Purchase 08106/09 2,000 31.14

Purchase 08/06/09 2,000 31.00

Purchase 08/06/09 2,000 30.99

Purchase 08/06/09 500 31.00

Purchase 08/06/09 2,000 31.00

Purchase 09/17/09 5,000 31.72

Purchase 09/17/09 5,000 31.40

Purchase 09/17/09 690 31.60

Purchase 09/17/09 1,000 31.50

Purchase 09/17/09 310 31.50

Purchase 09/21/09 5,000 28.75

Purchase 09/25/09 1,000 29.29

Purchase 10/01/09 5,000 28.75

Purchase 10/01/09 5,000 28.50

Purchase 10/13/09 5,000 23.75


Keith Ovitt Account B

Type Date Shares Price

Purchase 08/06/09 30 30.87

Purchase 08/06/09 200 30.80

Purchase 08/06/09 1,945 30.78

Purchase 08/06/09 1,000 30.78Purchase 08/06/09 400 30.80Purchase 08/06/09 2,233 30.82Purchase 08/06/09 327 30.81Purchase 08/06/09 2,465 30.83

Purchase 08/06/09 250 30.84

Purchase 08/06/09 150 30.85

Purchase 08/06/09 1,000 30.77

Purchase 08/06/09 3,500 30.38

Purchase 08/06/09 700 30.40

Purchase 08106/09 100 30.42

Purchase 08/06/09 300 30.41

Purchase 08/06/09 200 30.44

Purchase 08/06/09 100 30.50

Purchase 08/06/09 100 30.49

Purchase 08/06/09 300 29.39

Purchase 08/06/09 4,700 29.39

Purchase 09/17/09 5,000 31.50

Purchase 09118/09 5,000 30.00

Purchase 09/21/09 5,000 28.75


CERTIMATION MMSUANT TOTHE 1PmmaL SEC'I1I2ITIES L,ANVS

I, Armen Rashtahi, hereby cwtff~y, as tq the claims amerted under the Ncralsecurities laws, that:

1. As lAad plaintiff, t have selected Kahn Swick & Foti, LLC as Lead Counsel forthe Class, and authorised that fyxrn to file an amended complalit4 whinh I havereviewed.

2. 1 did not pmohase the seattrldos that are the subject of this action at tho diwotio uof counsel or in order to partloipate in any action arising under tho fed"securities laws.

3. 1 am willing to swe as a lead plaintiff ad represmtedve pM on behalf oftheClass, including providing testimony at deposition and tkK if neommy. I fullyunderstand the duties and raspons: Uities of the lead plaintiff unit the PrivateSecurldes Lltlgatlon Refom Act, including the selection and reftdon of counseland overseeing the prosecution of the action for the Class.

4. My transactions in the MC securities that are the subjeot of this ac don are setforth in the chart attached hereto.

S. I have not sought to am as a lead plalatif and representative pa* vn behalf ofa class In any action under the federal eacurldes lmzvs tiled during the throe-yearperiod preceding the date ofthis Certification

6. 1 will not accept any payuteut for servWg as a representative PaM on behalf of theClass beyond my Vvo rata shake of any recovery, wept saah reasonable costs andexpenses (including lost wages) dh%tly miating to the reptoseatation of the Class,as ordered or approved by the court.

I deal under penalty ofperjwy that the foregoing is ft •ue and eon=t. Executediltxs Slay offApttl, 2010.

nRaslttchi


Stock Name Onto Bou :_ t # of shara6 Data Sold of shares rlts shareSTEC 9/2212009 59,948 $29.50 9/2S 2009 59948 $29.51STEC 9 22/2009 38 822 $2940 10 /2009 38,822 $26.60STEC 9/2317009 50 000 $31.65 10/29009 50 000 • $26.60STEC 10 6/2009 100,U00 $28.50 I%/9/2009 100,000 $13,00

Documents

1 BERNSTEIN LITOWITZ BERGER 2 & GROSSMANN …securities.stanford.edu/.../201049_r01c_09CV01304.pdfCase 8:09-cv-01304-JVS-MLG Document 83 Filed 04/09/10 Page 1 of 42 1 BERNSTEIN LITOWITZ