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momsu. S. DiSTR/CT COURT
NORTHERN DISTRICT OF TEXAS
FILED3
I 1998
I i
UNITED STATES DISTRICT COURT 'N !ERTY LERK•
NORTHERN DISTRICT OF TEXAS EYDALLAS DIVISION MP" Deputy
FREDERICK HOECK, On Behalf of)) N°'
3 - • 8 0 VO 9 9 8 GHimself and All Others SimilarlySituated, ) COMPLAINT - CLASS ACTION
)Plaintiff, )
) COMPLAINT FOR VIOLATIONS OFvs. ) THE SECURITIES EXCHANGE ACT
) OF 1934COMPUSA, INC., JAMES F. HALPIN, )ROBERT S. SEAY, LAWRENCE N. MONDRY, )LESLIE C. MARSHALL, HAROLD D. )GREENBERG, RICK L. FOUNTAIN, PAUL )F. EWERT, ROBYN GATCH-PRIEST and )JAMES E. SKINNER, )
)Defendants. ) Plaintiff Demands A ) Trial By Jury
-
,
SUMMARY AND OVERVIEW
1. This is a class action on behalf of all purchasers of the
common stock and publicly traded options of CompUSA, Inc.
("CompUSA" or the "Company") between 12/31/97 and 3/5/98, against
CompUSA and certain of its top insiders. CompUSA's stock declined
sharply from $38 on 12/1/97 to $25-3/4 on 12/29/97 -- 32% -- due to
investor concerns that CompUSA and other computer retailers were
encountering slowing sales growth and suffering profit margin
pressure due to price cutting and increased sales of lower priced
PCs. This sharp price decline eliminated millions of dollars in
value of the CompUSA stock owned and options to purchase CompUSA
stock held by its insiders.
2. In order to halt this decline in CompUSA stock and to
artificially inflate it back up to higher levels so that they could
sell off large amounts of their CompUSA stock, CompUSA's top
insiders falsely told the securities markets that CompUSA was
encountering very strong sales of its more expensive higher margin
PCs, that its profit margins were intact, the industry's trend
toward lower priced PCs was "healthy" for CompUSA i s business and
CompUSA expected to achieve strong revenue and EPS growth during
98, with 98 earnings per share ("EPS") of at least $1.35. As a
result of these assurances, CompUSA i s stock rebounded strongly
during early 98, climbing to a high of $35-3/8 by 3/2/98. As
CompUSA stock climbed to these artificially inflated levels, the
CompUSA executives named as defendants unloaded 564,790 shares of
their CompUSA stock at prices as high as $33.15, selling off 41% of
the CompUSA stock they actually owned and 100% of the stock they
-1-
,
dcquired via option exercise during the Class Period, pocketing
$17.6 million in illegal insider-trading proceeds.
3. On 3/4/98, CompUSA traded as high as $33-7/16. On
3/5/98, lust eight trading days after CompUSA's insiders had
completed their insider selling spree, CompUSA stock was twice
halted from trading and ultimately plunged to $26 on volume of over
9 million shares (the largest one-day volume in CompUSA's history
as a public company up to that point) as it leaked into the market
that CompUSA was about to make a negative announcement about its
3rdQ F98 results. After the close, CompUSA revealed that it
expected much lower 3rdQ F98 sales than earlier forecast. Then on
4/1/98, CompUSA revealed that its 3rdQ F98 sales fell from the
prior quarter, due in large part to a decline in sales per
superstore, which would result in a lower than expected 3rdQ F98
BPS. CompUSA revealed that gross margins would be approximately
14.1%, lower than in any quarter in the past year. CompUSA also
indicated that these adverse conditions would continue during 4thQ
F98, resulting in lower margins and EPS at least one-third lower
than earlier forecast for the 3rdQ and 4thQ of F98. CompUSA stock
plunged from $26-7/16 on 3/31/98 to $20-1/2 on 4/1/98 on 10.1
million shares volume -- the largest one-day stock volume in
CompUSA's history as a public company. These events are evidenced
by the following stock chart:
//
//
//
//
//
-2-
CompLISA, Inc.
December 1, 1997 - April 17, 1998
Daily Stock Prices vs S&P Retail Composite Index40
S&P Retail Composite
35—,
. .. •
CompUSA-c 3O—(13
a)a.co
-5 25 — Feb 2-23, 19980 Insiders sell 605,322 shares
for $19,175,559
20 —
15 I12/01/97 12/26/97 01/23/98 02/19198 03/17/98 04/13/98
12/12/97 01/09/98 02/05/98 03/04/98 03/30/98
4. Defendants' insider trading was unusual in timing and
amount, as shown below:
%. of Shares
Shares Actually OwnedDefendants Sold Proceeds Sold
Fwert 20,000 $ 639,397 21%.Fountain 21,123 $ 654,790 33%Catch-Priest 8,484 $ 271,488 55%.Greenberg 16,546 $ 529,472 7996Halpin 360,000 $11,173,780 5696Marshall 34,166 $ 1,132,603 919gMondry 100,000 $ 3,133,200 2096-Seay 4,471 $ 141,418 68%
TOTALS: 564 790 $17,676,148 419g
1/
1/
—3-
t,
CompUSAI Inc.Quarterly Stock Sales By Defendants - Dollar Volume
March 1997 - March 1998$20 $40
Class Period: I
12131f97 - 315198
$15 - - - - $30
IT)
2-- a
E $10 - - $20 3,3o 0)
$5
$10
Pre ClassPeliod Sales
$0 $0
MAMJJASONDJ F M A
1997 1998
JURISDICTION AND VENUE
5. Jurisdiction is conferred by §27 of the Securities
Exchange Act of 1934 ("1934 Act"). The claims asserted herein
arise under S§10(b) and 20(a) of the 1934 Act and Rule 10b-5.
6. Venue is proper in this District pursuant to §27 of the
1934 Act. CompUSA is headquartered in this District. The false
and misleading statements were made or issued from this District.
THE PARTIES
7. Plaintiff Frederick Hoeck purchased shares of CompUSA
common stock as described in the attached certification and was
damaged thereby.
8. Defendant CompUSA, Inc. ("CompUSA") is a large retailer
of personal computers and related products and services. CompUSA
operates 150+ Computer Superstores in the United States. The
-4-
,
Company's executive offices are in Dallas, Texas. CompUSA's common
stock trades in an efficient market on the New York Stock Exchange.
9. (a) Defendant James F. Halpin ("Halpin") is President,
Chief Executive Officer and a director of the Company. During the
Class Period and as part of the fraudulent scheme, Halpin sold
360,000 shares of CompUSA stock at prices as high as $31.31 per
share based on inside information, pocketing over $11.1 million.
These sales constituted 56% of the CompUSA stock Halpin actually
owned. Halpin's stock sales during the Class Period were unusual
in timing and amount, as set forth below:
CompUSA, Inc.J. Halpin, Pres. CEO - Quarterly Stock Sales - Dollar Volume
March 1997 - March 1998$12 Class Penod: $40
12/31197 - 3/519:
$10
$30
c $8 0
CD $6 - - $20 -43
7-
>No Pre Class Period Sales
Fe'
75 $4_
0 I$10
$2
$0 $0M A M J J A SO ND J F M A
1997 1998
•
-5-
- —
(b) Defendant Lawrence N. Mondry ("Mondry") is Executive
Vice President-Merchandising of the Company. During the Class
Period and as part of the fraudulent scheme, Mondry sold 100,000
shares of CompUSA stock at prices as high as $31.63 per share based
on inside information, pocketing over $3.1 million. These sales
constituted 20% of the CompUSA stock Mondry actually owned.
Mondry's stock sales during the Class Period were unusual in timing
and amount, as set forth below:
CompUSA, Inc.L. Mondry, V.P. Merch. - Quarterly Stock Sales - Dollar Volume
March 1997 - March 1998$3500 $40
Class Period
12/31197 - 3/5198
$3000 - - - - - -
$30$2500 - - -
37a.
0
69' $2000 - - - - _a
No Pre Class Period Sales $20 13
-> $1500 - - _ _ _
$1000$lo
$500f
so $0M A M J J A SO NDJ F M A
1997 1998
—6-
f
(c) Defendant Paul F. Ewert ("Ewert") is Senior Vice
President-Merchandising of the Company. During the Class Period
and as part of the fraudulent scheme, Ewert sold 20,000 shares of
CompUSA stock at prices as high as $32 per share based on inside
information, pocketing $639,397. These sales constituted 21% of
the CompUSA stock Ewert actually owned. Ewert's stock sales during
the Class Period were unusual in timing and amount, as set forth
below:
CompUSA, inc.P. Ewert, S.V. P. Merchandising - Quarterly Stock Sales - Dollar Volume
March 1997 - March 1998$700 $10
Class Period12/31197- 315/98
$600 - -
$30$500
- a$20 SI;
CD> $300 -aNo Pre Class Period Sales0
$200
I$10
5100- L1
$01
M AM J J A SO NDJ F M A1997 1998
-
—7-
• (d) Defendant James E. Skinner ("Skinner") was, during
the Class Period, Executive Vice President, Chief Financial
Officer, Treasurer and Assistant Secretary of the Company. Because
of his unique position at CompUSA and his sophisticated financial
knowledge, Skinner knew CompUSA's business was deteriorating during
• the 2ndQ F98 -- he sold off 15,000 shares of CompUSA stock on
11/21/97 at $35-3/4 per share;
(e) Defendant Harold D. Greenberg ("Greenberg") is
Senior Vice President-Inventory Management of the Company. During
the Class Period and as part of the fraudulent scheme, Greenberg
sold 16,546 shares of CompUSA stock at $32 per share based on
inside information, pocketing $592,472. These sales constituted
79 9.- of the CompUSA stock Greenberg actually owned. Greenberg's
stock sales during the Class Period were unusual in timing and
amount, as set forth below:
CompUSA, Inc.H. Greenberg, Sr. V.P. Inv. Mgmt - Quarterly Stock Sales - Dollar Volume
March 1997 - March 1998$800 $40
Class Penod I
12/31197 - 3/5/99
$600 • - - $30
000 0
,E $400 $20 I)
No Pre Class Period Salesa
$200 - - - - - - - - $10
I
$0 I 1$0
MAM JJ A SO NDJ FM A
1997
-8-_
(f) Defendant Rick L. Fountain ("Fountain") is Vice
President-Technical Services of the Company. During the Class
Period and as part of the fraudulent scheme, Fountain sold 21,123
shares of CompUSA stock at prices as high as $31 per share based on
inside information, pocketing $654,790. These sales constituted
33% of the CompUSA stock Fountain actually owned. Fountain's stock
sales during the Class Period were unusual in timing and amount, as
set forth below:
CompUSA Inc.R. Fountain, V.P. Tech. Services - Quarterly Stock Sales - Dollar Volume
March 1997 - March 1998$700 $40
Class:
12/31197 -W5A*
5600
; $305500 - - - - -
o4o.).- ---
1 U)$20 13
g),
> $300 - _ _ =cti
No Pre Class Period Sales1
5200 -510
5100
I50 50M AM J J A SO NDJ F M A
11997 998
-9--
(g) Defendant Robyn Gatch-Priest ("Gatch-Priest") is
Vice President, Controller and Assistant Treasurer of the Company.
During the Class Period and as part of the fraudulent scheme,
Gatch-Priest sold 8,484 shares of CompUSA stock at $32 per share
based on inside information, pocketing over $271,000. These sales
constituted 55% of the CompUSA stock Gatch-Priest actually owned.
Gatch-Priest's stock sales during the Class Period were unusual in
timing and amount, as set forth below:
CompUSA, Inc.R. Gatch, V.P. - Quarterly Stock Sales - Dollar Volume
March 1997 - March 1998
$300 $40Class Period
12/31/97 - 3/5/98
$250 - -
$30
1-,-)$200 - -0
$1543 --- $20 1341).
No Pre Class Period Sales to
0 $l00
$50 - -
I
$0 $0
M AM J J A SO NE),1 F M A
1997 1998
— 10 —
(h) Defendant Leslie C. Marshall ("Marshall") is Vice
President-Loss Prevention of the Company. During the Class Period
and as part of the fraudulent scheme, Marshall sold 34,166 shares
of CompUSA stock at $33.15 per share based on inside information,
pocketing over $1.1 million. These sales constituted 91% of the
CompUSA stock Marshall actually owned. Marshall's stock sales
during the Class Period were unusual in timing and amount, as set
forth below:
CompUSA, Inc.L. Marshall, V.P. - Quarterly Stock Sales - Dollar Volume
March 1997 - March 1998
$1200 $40
I
31000 - - - -
330
1,7,- $800Class Period. a12/31197 - 315/98
sea
E $600 --------- $20 -43,70
No Pre Class Period Sales
z uclo$10
$200
$0 $0MA M J J A SO NDJ F M A
1997 1998
- 11 -
•
(i) Defendant Robert S. Seay ("Seay") is Vice President-
Technological Training of the Company. During the Class Period and
as part of the fraudulent scheme, Seay sold 4,471 shares of CompUSA
stock at $31.63 per share based on inside information, pocketing
$141,418. These sales constituted 68% of the CompUSA stock Seay
actually owned. Seay's stock sales during the Class Period were
unusual in timing and amount, as set forth below:
CompUSAI Inc.R. Seay, V.P. Tech. - Quarterly Stock Sales - Dollar Volume
March 1997 - March 1998
$160 $40Chns Period
12131197-315196
$140
$120 • - - $30
vooQ 0No Pre Class Period Sales
g $80 up -13
7,—$60 r -
$40 $10$20
$0M A M J J A SO NDJ FMA
1997 1998
- 12 -
10. The individuals named as defendants in ¶9(a)-(i) are
referred to herein as the "Individual Defendants." The Individual
Defendants, because of their positions with the Company, controlled
and/or possessed the power and authority to control the contents of
its quarterly and annual reports, press releases and presentations
to securities analysts, which information was conveyed through the
analysts to the investing public. Each defendant was provided with
copies of the Company's reports and press releases alleged herein
to be misleading prior to or shortly after their issuance and had
the ability and opportunity to prevent their issuance or cause them
to be corrected. Because of their positions and access to material
non-public information available to them but not to the public,
each of these defendants knew that the adverse facts specified
herein had not been disclosed to and were being concealed from the
public and that the positive representations which were being made
were then materially false and misleading. Despite their duty not
to sell their CompUSA stock under such circumstances, defendants
nonetheless did so. The Individual Defendants are liable for the
false statements pleaded herein at ¶1126 and 34, as those statements
were each "group-published" information, the result of the
collective action of the Individual Defendants.
DEFENDANTS FRAUDULENT SCHEMEAND SCIENTER ALLEGATIONS
11. Each defendant is liable for making false statements, for
failing to disclose adverse facts while selling CompUSA stock and
for participating in a fraudulent scheme which permitted defendants
to sell or dispose of 564,790 million shares of CompUSA stock at
- 13 -
artificially inflated prices, for $17.6 million in insider-trading
profits.
12. Halpin, Seay, Mondry, Marshall, Greenberg, Fountain,
Ewert, Gatch-Priest and Skinner were the top executives of CompUSA.
They had daily contact while running CompUSA as "hands-on"
managers, dealing with the most important issues facing CompUSA's
business, i.e., its sales growth, average selling prices of its PC
products, its profit margins and its financial performance compared
to budgeted or forecasted levels.
13. Because sharply increased sales of the proper mix of PC
products at strong profit margins were indispensable elements to
CompUSA meeting its internally budgeted and publicly disseminated
98 revenue and EPS forecasts, defendants constantly monitored each
of these key factors affecting CompUSA's business.
14. Because of their top executive positions with CompUSA,
their involvement in the day-to-day management of its business,
conversations with other corporate officers and employees and their
attendance at management meetings, each defendant had access to
internal corporate documents concerning the adverse non-public
information about the slowing sales of CompUSA's PC products, its
declining profit margins and its accumulation of excessive inven-
tories. Thus, each defendant actually knew or recklessly
disregarded that the public statements about CompUSA pleaded herein
were false or misleading when made.
15. CompUSA has a highly automated "point-of-sale" computer
management information system which provides instant and detailed
information with respect to each store's daily, weekly and monthly
performance to CompUSA's top executives in Dallas, Texas.
- 14 -•
CompUSA's management information system accumulates data on a per-
store basis each time a sale is made of any product, identifying
the product and sales price, thus enabling CompUSA's managers to
track sales on a per-store basis, as well as for the entire
corporation on a daily and weekly basis including the precise
products which are sold, the amount of remaining inventory of each
product and the actual sales price of each product sold, all
compared to budgeted and forecasted amounts.
16. CompUSA's top executives utilize this instantaneously
available data to constantly and closely monitor the performance of
each CompUSA store and the overall corporate entity. This is done
in part by tracking the sales of each product and the average sales
price of the product to determine sales rates, inventory turnover
and gross margin. In addition, this data is used to ascertain
"product mix" of sales and compare individual store performance and
overall corporate performance to budgeted or internally forecasted
levels so that CompUSA's top executives can determine whether or
not individual stores and the corporation are falling behind,
meeting or exceeding budgeted levels of sales and profits and
whether average selling prices of key products are holding to
expected levels or falling below expected levels due to weak
demand, price competition or other factors.
17. As a result of this sophisticated management information
system, unlike some other corporations, CompUSA's top executives
have unusually rapid access to information about its business,
including changes in trends such as changes in "product mix,"
slowing sales, declining average selling prices, increasing
inventories and individual store, regional or corporate performance
- 15 -
below budgeted or internally forecasted levels. For instance, and
as a result of this ultra-sophisticated management information
system, even though CompUSA has over 150 retail stores located
throughout the United States selling hundreds if not thousands of
separate products, it is able to announce its corporate-wide sales
(including detailed data about sales compared to budget) and
comparative same store sales (individually and collectively) for a
quarter within lust 72 hours of the end of the quarter.
18. The defendants closely monitored the performance of
CompUSA's business via reports which CompUSA's Finance Department
(under Skinner) generated on a weekly and monthly basis. There
were product sales reports, inventory reports, "product mix"
reports and average selling prices reports. The Finance Department
also distributed monthly financial reports comparing CompUSA's
actual financial results to proiected results. Thus, each
defendant was apprised of the status of sales of every CompUSA
product and store, as well as inventories, so that they knew where
CompUSA stood in terms of the sale of and demand for its products
as well as CompUSA's actual results compared to budget. Thus, the
defendants were constantly aware of the current sales rates for
CompUSA products, its product mix and its inventories and knew that
sales were weakening and CompUSA had accumulated excessive
inventories, that CompUSA was achieving sales and profit margins
under internal budget and thus CompUSA's F98 EPS forecasts could
not and would not be achieved.
19. Because of CompUSA's sophisticated management information
system, the Individual Defendants each knew by 12/31/97 that
CompUSA's 3rdQ F98 results would be worse than internally budgeted
- 16 -
And forecasted, a below-trend-line performance they knew was
continuing in 1/98. As a result, by no later than 12/31/97, the
Individual Defendants each knew that CompUSA 4 s sales growth was
deteriorating significantly, in large part due to a decline in
average selling prices of personal computers which, in fact, was
significantly worse than CompUSA had publicly disclosed and that as
a result, CompUSA's profit margin, net income and EPS performance
during the second half of F98 would be far worse than CompUSA had
been forecasting. This, in turn, they knew would result in a
substantial decline in CompUSA's stock price when these adverse
conditions inside CompUSA's business became publicly known. Thus,
shortly after the announcement of CompUSA's financial results for
the 2ndQ F98 on 2/1/98, the Individual Defendants took advantage of
CompUSA's artificially inflated stock price to sell off 564,790
shares of their CompUSA stock at as high as $33.15 per share,
pocketing $17.6 million in insider-trading proceeds.
20. Defendants also had the motive and the opportunity to
make the false statements and perpetrate the scheme described
herein. Each of the defendants is liable for making false
statements and as a participant in a fraudulent scheme and course
of business that operated as a fraud or deceit on purchasers of
CompUSA stock, including false and misleading statements and/or
concealed material adverse facts. The fraudulent scheme and course
of business: (i) deceived the investing public regarding CompUSA's
products and business; (ii) artificially inflated the price of
CompUSA's stock and publicly traded options; (iii) caused plaintiff
and other members of the Class to purchase CompUSA stock and
options at inflated prices; and (iv) permitted the defendants to
- 17 -
sell off 564,790 shares of their CompUSA stock, pocketing $17.6
million in insider-trading proceeds. Thus, defendants' fraudulent
scheme was a success -- for them. The Individual Defendants sold
564,790 shares of their CompUSA stock at artificially inflated
prices, pocketing $17.6 million in illegal insider-trading
proceeds.
BACKGROUND TO THE CLASS PERIOD
21. In late 1996, Monorail, a competitor of CompUSA, intro-
duced a "full-featured" computer priced at less than $1,000. In
early 97, CompUSA and other manufacturers and retailers began to
follow Monorail's lead -- offering stripped down, yet still
powerful PCs at prices less than $1,000.
22. By mid-97, lower priced PCs began to gain substantial
market share. In 8/97, a month popular for back-to-school
purchases, PCs costing less than $1,000 accounted for 38.7% of all
PCs sold in the industry. During 11/97, the average price of a PC
sold at computer retailers and superstores throughout the industry
was $1,329, an all-time low, according to a survey done by Computer
Intelligence.
23. During the holiday shopping season in 12/97, PCs costing
less than $1,000 represented over 40% of all PCs sold. Only one
year earlier, lower priced PCs accounted for less than 10% of the
PC sales in the industry.
24. In 12/97, CompUSA's stock declined sharply from $38 on
12/1/97 to as low as $25-3/4 on 12/29/97, due to investor concerns
that CompUSA and other computer retailers were encountering slowing
sales growth of their products and suffering profit margin pressure
due to price cutting and increasing sales of lower priced PCs.
- 18 -
This sharp price decline eliminated millions of dollars in value of
the CompUSA stock owned and stock options held by its insiders.
25. In order to halt the decline in CompUSA stock and to
artificially inflate it back up to higher levels so that they could
sell off large amounts of their CompUSA stock, CompUSA's top
insiders falsely reassured the securities markets that CompUSA was
encountering very strong sales, that its profit margins were
intact, the industry's trend toward lower priced PCs was "healthy"
for CompUSA's business and that it expected to achieve strong
revenue and EPS growth during 98.
FALSE AND MISLEADING STATEMENTSISSUED DURING THE CLASS PERIOD
26. On 12/31/97, CompUSA reported "record sales" for its 2ndQ
F98, ended 12/27/97 in a release stating:
"We reached a milestone in this quarter -- over $5billion in sales for calendar year 1997, in addition toachieving strong second quarter sales, led by asubstantial comparable store sales increase," said JamesF. Halpin, president and chief executive officer. "Theseaccomplishments are a result of our ongoing investment inCompUSA, including opening 14 Computer Superstores (SM),opening five small market stores, and premiering our newApple® product, 'store within a store' concept."
27. In early 1/98, subsequent to the release of CompUSA's
2ndQ F98 sales, Halpin and Skinner talked to securities analysts to
discuss CompUSA's business and its prospects. During these
discussions, Halpin (the CEO) and Skinner (the CFO) disseminated
important information to the market by stating:
• CompUSA's business was very strong and it was achievingstrong sales not only of newer, below $1,000 PCs, but alsocontinuing strong sales of more expensive PCs which carriedhigher margins.
• CompUSA's financial results were not being harmed by theincrease in sales of cheaper PCs largely because it was
- 19 -
continuing to sell substantial numbers of more expensive PCswhich carried higher profit margins.
• CompUSA was more insulated from adverse impact on profitmargins due to increased sales of $1,000 and under PCs thanother PC retailers because CompUSA's business was unique inattracting a larger number of sophisticated computer users andupscale customers who purchased more expensive PCs andassociated equipment than unsophisticated users and/or first-time buyers.
• CompUSA's inventories were under tight control and withinbudgeted and forecasted levels and thus CompUSA would not haveto engage in promotional pricing or price cutting to moveexcess inventory which would otherwise have a negative impacton its margins.
• CompUSA's superstore format was doing especially wellwith strong sales of higher end PCs and inventories undertight control.
• While some computer retailers were finding their profitmargins hurt by the upsurge in the sale of $1,000 and underPCs, this was not the case with CompUSA and in fact this trendwas healthy for CompUSA's business because it was continuingto sell high-end, more expensive PCs while the interest in$1,000 and under PCs was bringing many more shoppers into itsstores leading to excitement, revenue increases and purchasesof peripheral equipment.
• As a result of the foregoing, CompUSA's business wasperforming on track and in line with internally forecasted andbudgeted levels; CompUSA expected 2ndQ EPS of $.32-$.37, 3rdQEPS of $.42-$.43, 4thQ EPS of $.29-$.31 leading to 98 EPS ofapproximately $1.30-$1.35.
28. On 12/31/97, Gerard Klauer Mattison issued a report on
CompUSA, written by Ciccarelli, which was based on and repeated
information provided Ciccarelli in conversations with Halpin and
Skinner. The report forecast F98 and F99 EPS of $1.35 and $1.70,
respectively, for CompUSA and the following quarterly F98 EPS:
Q1 $ .25A
Q2 $ .37
Q3 $ .43
Q4 $ .30
Year $1.35
- 20 -
The report also stated:
Despite investor concerns over the last few weeksregarding CompUSA's business in December, the companyposted better-than-expected comps of 8.8%. Although thequestion still remains how much promotional activity wasneeded to achieve these results, we do not believe thepromotional environment was much greater than originallyanticipated. Corporate sales were somewhat better thanretail, however, which puts some pressure on grossmargin. As a result, we are maintaining our 2Q EPSestimate of $0.37 vs. $0.25
• CompUSA is less affected by declining ASPs than many of its peers. The precipitous decline in ASPs hashindered the sales growth of most PC manufacturers andretailers as more unites need to be sold just to equalprior year dollar totals. However, we believe CompUSA ismore insulated from the decline in ASPs than its consumer electronic counterparts as it still tends to attract moresophisticated PC customers than CE retailers (we believe that the CE retailers still have a greater mix of first time or less sophisticated buyers than CompUSA and have, as a result, been more affected by the strong sales in the sub-$1,000 category).
• Excess inventory fears appear unfounded. In ouropinion, fears of excess inventory were a primary factorin the recent decline in CPU shares. However, we believeCompUSA manages its inventory as well as any company inthe PC distribution industry and CPU would likely onlytake extra product from vendors if it were given a -compelling enough opportunity, in terms of pricing andextended payment terms
INVESTMENT CONCLUSION
* * *
• . . Given the company's momentum and ourexpectation for continued margin expansion, we remainconvinced that CompUSA is a compelling, long term, retailgrowth company. In addition, we believe the company'srelatively new BTO business (which got off to a very strong start) could, over time, add Substantialincremental revenue and profits. We further believe thestock's pullback in December provides investors with anexcellent buying opportunity, especially given thedissipation of fears that the company's fundamentals hadsoftened.
29. On 12/31/97, DLJ Securities issued a report on CompUSA,
written by Balter, which was based on and repeated information
- 21 -
provided him in conversations with Halpin and Skinner. The report
forecast F98 and F99 EPS of $1.30 and $1.60, respectively for
CompUSA, and the following quarterly F98 EPS:
Q1 $ .25
Q2 $ .35
Q3 $ .42
Q4 $ .29
Year $1.30
The report also stated:
We continue to believe that CPU is [sic] taken the stepsnecessary to maintain its position as the leading purecomputer retailer and has built a reputable servicebusiness that will continue to be a major factor indriving the company's earnings. . . .
Although CompUSA will not break out the sales, sub-$1000 computers sales continue to be strong and representby our estimates 35-40% of total PC sales. While thishardware does not carry as high margins as the higher-endcomputers, it does invite more first time buyers into thestores and creates excitement. In addition, sales forthe Pentium II picked up as they moved through thequarter which is an excellent sign heading into 1998.Overall, after what appears now to be an overstated scarein December, the PC industry at the retail level isrelatively healthy.
Margins should be in line, with several itemskeeping them harnessed. One the business mix wasweighted heavier toward corporate business which hastighter margins than retail. While this keeps marginslower for the quarter, it is essential as the companycontinues to make headway in the corporate world so as tobuild their service business down the road. Two, thecompany did use this quarter to make some significantinvestments including new stores and the infrastructurefor the new smaller format that is going in some rurallocations.
30. On 12/31/97, Credit Suisse First Boston issued a report
on CompUSA, written by Yarchover, which was based on and repeated
information provided her in conversations with Halpin and Skinner.
The report forecast F98 and F99 EPS of $1.34 and $1.65,
respectively, for CompUSA, and the following quarterly F98 EPS:
- 22 -
Q1 $ .25A
Q2 $ .36
Q3 $ .43
Q4 $ .31Year $1.34
The report also stated:
We believe sales continue to be strong for high-endmachines, the low-end $1,000 PC's, software andperipherals. Services, training, and corporate salesalso remain strong, increasing CompUSA's position as asignificant competitor in these segments. Going into the next quarter, we think CPU's inventory is in good shape, and we do not think that the company has a materialamount of clearance-type merchandise. . .
While competitors continue to scale back their PCefforts, we think CompUSA is in an excellent position tocontinue growing and improving its return on capital.
31. On 1/2/98, UBS Securities issued a report on CompUSA,
written by Erner, which was based on and repeated information
provided her in conversations with Halpin and Skinner. The report
forecast F98 and F99 EPS of $1.35 and $1.75, respectively, for
CompUSA, and the following quarterly F98 EPS:
QI $ .25A
Q2 $ .37E
Q3 $ .43E
Q4 $ .30EYear $1.35
The report also stated:
CompUSA reported almost a 9% same-store sales gainfor its second quarter, allaying concerns regarding theimpact of sub-$1,000 PCs on total sales dollar volume.We believe this lower-price point is attracting first-time buyers that would not previously have shopped in itsstores. Furthermore, lower price points may also beworking towards shortening the replacement cycle, andencouraging the purchase of more than one computer perhousehold. Since CompUSA is still experiencing stronghigh-end sales, we do not see sub-$1,000 PCs asdetrimental to its business.
* * *
. . , CompUSA continued to report strength at boththe high end and at the iow end of PCs. Sales of the
- 23 -
sub-$1,000 PC were strong at the start of the quarter.Pentium 11 sales picked up later in the period. Whiledeclining average selling prices were a factor at the lowend, PC _prices excluding the sub-$1,000 category seem tobe holding up.
32. Based on the extremely positive information defendants
disseminated to the markets on and after 12/31/97, the precipitous
12/97 decline in CompUSA's stock was halted, and CompUSA stock
jumped from $25-3/4 on 12/29/97 to $31-1/2 by 1/5/98.
33. The positive statements about CompUSA's business made in
late 12/97 and early 1/98, as set forth in 1[526-31, were materially
false and misleading when issued, and failed to disclose, inter
alia, the following true facts which were then known only to
defendants due to their access to internal CompUSA data:
(a) CompUSA's revenue growth was slowing dramatically
due to softening demand for PC products generally combined with an
increasing percentage of its sales being composed of much lower
priced and therefore much lower margin PC products;
(b) Due to price cutting of higher priced PCs and
increasing sales of much lower priced PC products, including under
$1,000 PCs, CompUSA's profit margins were below internally
forecasted or budgeted levels, a negative trend defendants knew was
accelerating and would continue for the foreseeable future;
(c) The increasing popularity and sales of under $1,000
PCs was not a healthy development for CompUSA's business but in
fact a negative development which was adversely affecting CompUSA's
revenue growth, profitability and EPS due to the much lower profit
margins on the sale of these much less expensive products;
(d) CompUSA's sales of cheap, under $1,000 PC units was
accelerating at the expense of sales of its more expensive and much
- 24 -
_
,
more profitable PCs which was having an adverse impact on CompUSA's
business, revenue growth, profitability and EPS;
(e) CompUSA's business was performing with revenues, net
income and EPS below internally budgeted or forecasted levels, a
negative trend in condition defendants knew was accelerating and
would continue for the next several months;
(f) CompUSA had accumulated excessive levels of slow-
moving PC products and accessory items that it would have to sell
at highly promotional, i.e., discounted prices, which would hurt
its profit margins in the second half of F98;
(g) CompUSA's inventories were more heavily weighted
• with higher end Pentium II products, which were not selling nearly
as well as the lower end sub-$1000 PCs, leading to an imbalance
between the Company's inventory and market demand, which would lead
to margin reductions in the future as the Company had to engage in
price cutting to move its inventory; and
(h) As a result of the foregoing negative factors and
conditions impacting CompUSA's business, the Individual Defendants
each actually knew the forecasts being made by and on behalf of
CompUSA for significantly increased revenue, net income and EPS
during the second half of F98 were false and misleading when made
as they could not and would not be achieved.
34. On 1/28/98, CompUSA reported its 2ndQ F98 results in a
release headlined and stating:
CompUSA Inc. Reports Record Financial Results for theSecond Quarter of Fiscal 1998
CompUSA Inc. America's Largest Computersuperstore(R) retailer, today announced record financialresults for the second quarter of fiscal 1998.
- 25 -
* * *
"This was another outstanding quarter for compUSApunctuated by excellent results which we achieved whilecontinuing to make significant investments in all of ourbusinesses," said James F. Halpin, CompUSA president andchief executive officer.
35. On 1/28/98, subsequent to the release of its 2ndQ F98
results, CompUSA held a conference call for securities analysts,
money and portfolio managers, institutional investors, large
CompUSA shareholders, brokers and stock traders to discuss
CompUSA's business and its prospects. During these calls, Halpin
(the CEO) and Skinner (the CFO) made presentations and answered
questions. During the call -- and in follow-up conversations with
participants (including Ciccarelli of Gerard Klauer Mattison,
Yarchover of Credit Suisse First Boston, Baiter of DLJ Securities,
Erner of UBS securities and Lawrence of Morgan Keegan) -- they
directly disseminated important information to the market by
stating:
• CompUSA's business was very strong and it was achievingstrong sales not only of newer, below $1,000 PCs, but alsocontinuing strong sales of more expensive PCs which carriedhigher margins.
• CompUSA's financial results were not being harmed by theincrease in sales of cheaper PCs largely because it wascontinuing to sell substantial numbers of more expensive PCswhich carried higher profit margins.
• CompUSA was more insulated from adverse impact on profitmargins due to increased sales of $1,000 and under PCs thanother PC retailers because CompUSA's business was unique inattracting a larger number of sophisticated computer users andupscale customers who purchased more expensive PCs andassociated equipment than unsophisticated users and/or first-time buyers.
• CompUSA's inventories were under tight control and withinbudgeted and forecasted levels and thus CompUSA would not haveto engage in promotional pricing or price cutting to moveexcess inventory which would otherwise have a negative impacton its margins.
- 26 -
• CompUSA's superstore format was doing especially wellwith strong sales of higher end PCs and inventories undertight control.
• While some computer retailers were finding their profitmargins hurt by the upsurge in sale of $1,000 and under PCs,this was not the case with CompUSA and in fact this trend washealthy for CompUSA's business because it was continuing tosell high-end, more expensive PCs while the interest in $1,000and under PCs was bringing many more shoppers into its storesleading to excitement, revenue increases and purchases ofperipheral equipment.
• As a result of the foregoing CompUSA's business wasperforming on track and in line with internally forecasted andbudgeted levels; CompUSA expected 3rdQ FPS of $.42-$.43, 4thQEPS of $.29-$. ,31 leading to 98 EPS of approximately $1.30-$1.35.
36. After the issuance of CompUSA's 1/28/98 release and
conference call, the positive information presented by defendants
was reinforced by a statement made by Halpin which appeared in the
Pittsburgh Post-Gazette on 2/1/98. Halpin described the effect
that the industry trend toward lower priced PCs was having on
CompUSA as follows:
"We believe it's healthy for our business. . . •"
37. On 1/28/98, Gerard Klauer Mattison issued a report on
CompUSA, written by Ciccarelli, which was based on and repeated
information provided him in the 1/28/98 conference call and in
follow-up conversations with Halpin and Skinner. The report
forecast F98 and F99 EPS of $1.35 and $1.70, respectively, for
CompUSA, and the following quarterly F98 EPS:
QI $ .25A
Q2 $ .36A
Q3 $ .43
Q4 $ .31
Year $1.35
The report also stated:
• Sales trends continue to track recent history.Corporate sales continue to outpace retail sales and
- 27 -
services continue to be the fastest growing part of thebusiness. For actual CPUs, the company is stillexperiencing a barbell pattern for pricing with thestrength coming from both the high-end and the sub-$1,000category, while sales of mid-level machines arerelatively softer.
• Gross margin continues to expand. Gross marginequaled 1Q's level at 14.7% and up 80 basis points year-over-year. We expect to see continued gross marginexpansion due to the strength CompUSA's high-marginservices as well as a generally less competitive environment (promotional activity has softened dramatically, as expected, now that the holiday selling season is over).
* * *
INVESTMENT CONCLUSION
In our opinion, CompUSA is an excellent long terminvestment and offers investors a very favorablerisk/reward opportunity at current levels. We believethe company continues to gain market share at the retaillevel and increase its penetration into the directchannel, while its growing service businesses continue todrive margin expansion. We further believe that thecompany will continue to experience additional grossmargin expansion from a decreasingly competitiveenvironment . . . .
38. On 1/28/98, Credit Suisse First Boston issued a report on
CompUSA, written by Yarchover, which was based on and repeated
information provided her in conversations with Halpin and Skinner.
The report forecast F98 and F99 EPS of $1.34 and $1.65,
respectively, for CompUSA, and the following quarterly F98 EPS:
QI $ .25A
Q2 $ .36A
03 $ .43
Q4 $ .31
Year $1.34
The report also stated:
The big question on everyone's mind has been settledCompUSA managed to grow sales and earnings. This
quarter's results are particularly impressive in aselling season that was marked by big promotions at theend of the quarter, strong sales of the lower margin$1000 PC's, and significant reinvestments in the
- 28
business. We think CPU's strong sales growth of 22% andearnings growth of 44% should give investors comfort thatthe company has found a way to do what few other computerretailers (and especially mass merchants and consumerelectronics chains) have been able to do -- make moneyselling computers.
While competitors continue to scale back their PCefforts, we think CompUSA is in an excellent position tocontinue growing and improving its return on capital.. . . All-in-all, CompUSA's future looks bright.
* * *
Highlights
* * *
Going into the next quarter, we think CPU'sinventory is in good shape, and we do not think that thecompany has a material amount of clearance-typemerchandise. . .
For the year, we project sales growth of 23% drivenby 6.5% comparable store sales growth and the opening of32 large format stores and 5 small format stores. Froma product mix standpoint, we expect the sub-$1000 PC'sand theverhihemsto continue strong . . .
* * *
The build-to-order CompUSA branded PC appears to beselling well. After some initial challenges, managementbelieves it has a strong business model and a workableinfrastructure.
39. On 1/29/98, DLJ Securities issued a report on CompUSA,
written by Balter, which was based on and repeated information
provided him in the 1/28/98 conference call and in follow-up
conversations with Halpin and Skinner. The report forecast F98 and
F99 EPS of $1.30 and $1.60, respectively, for CompUSA, and the
following quarterly F98 EPS:
QI$ .25
Q2 $ .36
Q 3$ .42
Q4 $ .29
Year $1.30
- 29 -
,
The report also stated:
In the face of all the concerns of a difficultChristmas, CompUSA put up strong earnings for its secondquarter. . . We continue to believe that CPU is takingthe steps necessary to maintain its position as theleading computer retailer and has built a reputableservice business that will continue to be a major factorin driving the company's earnings.
* * *
The company also made considerable investment in itsBTO business. After coming out of the gate perhaps toofast, CPU used this quarter to catch the infrastructureup to the burgeoning demand. It plans to increase itsadvertising over the next year to continue to bolsterthis business. . .
Sub-$1000 computers sales continue to be strong andrepresent by our estimates 35-40% of the total PC sales.While this hardware does not carry as high margins as thehigher-end computers, it does invite more first timebuyers into the stores and creates excitement. Inaddition, sales for •the Pentium II picked up as theymoved through the quarter which is an excellent signheading into 1998. Overall, after what appears now to bean overrated scare in December, the PC industry at theretail level is relatively healthy.
40. On 1/29/98, UBS Securities issued a report on CompUSA,
written by Erner, which was based on and repeated information
provided her in the 1/28/98 conference call and in follow-up
conversations with Halpin and Skinner. The report forecast F98 and
F99 EPS of $1.35 and $1.75, respectively, for CompUSA, and the
following quarterly F98 EPS:
Q1 $ .25A
Q2 $ .36A
Q3 $ .42E
Q4 $ .32E
Year $1.35
The report also stated:
Earnings growth outpaced sales growth for the 13thconsecutive quarter. . . . PC sales were strong at thehigh and low end and average selling prices declined lessthan last quarter. . . .
- 30 -
. . . Inventory is current with Pentium IIs makingup a large part of the high-end inventory.
* * *
Product outlook is exciting. High-end Pentium IIPCs have been selling very well in the last five weeks.We expect sub-$1000 PCs and bundled systems to continueto attract new customers. . . .
41. On 1/29/98, Morgan Keegan issued a report on CompUSA,
written by Lawrence, which was based on and repeated information
provided him in the 1/28/98 conference call and in follow-up
conversations with Halpin and Skinner. The report forecast F98 EPS
of $1.32 for CompUSA, and the following quarterly •F98 EPS:
QI $ .25A
Q2 $ .36A
Q3 $ .42E
Q4 $ .30E
Year $1.32
The report also stated:
Although average selling pric‘s have been comingdown margins should not be affected. Most sub $1,000units bring in shoppers who tend to be first time buyers.These same individuals often purchase several hundreddollars of high margin accessories. CompUSA's superiorselection and value added service capabilities keep thesecustomers coming back to purchase new software andaccessories. . .
Nineteen new stores have been opened in the firsthalf bringing total store count to 148.
42. On 2/12/98, Salomon Smith Barney issued a report on
CompUSA, written by McGrath. This report was written after McGrath
had extensive discussions with Halpin and Skinner and was based on
and repeated information provided her by them. Halpin and skinner
reviewed this report before it was issued and assured McGrath it
was substantially accurate, knowing it would be publicly issued and
affect the total mix of information impacting CompUSA's stock
price. Subsequent to the release of this report, CompUSA copied
- 31 -
and distributed it, thus adopting it as its own. The report
forecast F98 and F99 EPS of $1.33 and $1.65, respectively, for
CompUSA, a 28% five-year EPS growth rate and the following F98
quarterly results:
EPS/I998A
Q1 $ .25
Q2 $ .36
Q3 $ .43
Q4 $ .29
Year $1.33
The report also stated:
Built-to-suit business is still in early stages; thecompany will spend more to market private-label productsin the second half of fiscal 1998. Otherwise, corporateis still stronger than retail, and services remains thefastest-growing segment. Hardware product pricing isdown, but significantly less so than for the industry, overall. Sub-$1,000 PC sales are good, and so isconsumer upgrade business.
43. On 2/24/98, Prudential Securities issued a report on
CompUSA, written by Katica. As this was Prudential's first report
on CompUSA, this report was written only after Katica had extensive
detailed discussions with Halpin and Skinner and was based on and
repeated information provided him by them. Halpin and Skinner
reviewed this report before it was issued and assured Katica it was
substantially accurate, knowing it would be publicly issued and
affect the total mix of information impacting CompUSA's stock
price. Subsequent to the release of this report, CompUSA copied
and distributed it, thus adopting it as its own. The report
forecast F98 and F99 EPS of $1.32 and $1.65, respectively, for
compUsA, a 20%-25% five-year growth rate and the following F98
quarterly results:
- 32 -
-
EPS/1998
Ql $ .25E
Q2 $ .36E
Q3 $ .42E
Q4 $ .30E
Year $1.32E
The report designated CompUSA as Prudential's "Single Best Idea"
("SBI") and stated:
Multi-Channel Strategy Creates High Productivity AndReturn On Investment. CompUSA. has become the largest andmost highly profitable dedicated personal computerretailer by expanding its target market beyond thetraditional retail store. Today, retail represents about60% of total sales while non-retail markets (corporate,government and education), training, technical service,and mail-order account for about 40% of sales. Thiscombination allows CompUSA to generate impressive salesper foot of $1,400 and an unleveraged return on equity of27% for the last twelve months.
Industry Expansion And Higher Non-Retail SalesDriving Earnings Growth. We expect total sales andearnings to grow 20%-25% annually over the next fiveyears, fueled by ongoing store expansion and 5%-6%increases in same store sales. . . .
Demand For Personal Computers And Related ProductsRemains Strong.
44. During 2/98, CompUSA stock moved higher, reaching $35-1/8
on 2/27/98 and its Class Period high of $35-3/8 on 3/2/98, the next
trading day. During 2/2/98-2/23/98 -- just 16 trading days -- the
top CompUSA executives named as defendants sold 564,790 shares of
CompUSA stock at as high as $33.15 per share pocketing $17.6
million in illegal insider-trading proceeds.
45. Each of the positive statements about CompUSA's business
during the Class Period between 1/28/98-2/24/98, as set forth in
¶1134-43, was materially false and misleading when issued, and
failed to disclose, inter alia, the following adverse information
- 33 -
which was then known only to defendants due to their access to
internal CompUSA data:
(a) CompUSA's revenue growth was slowing dramatically
due to softening demand for PC products generally combined with an
increasing percentage of its sales being composed of much lower
priced and therefore much lower margin PC products;
(b) Due to increasing sales of much lower priced PC
products, including under $1,000 PCs, CompUSA's profit margins were
below internally forecasted or budgeted levels, a negative trend
defendants knew was accelerating and would continue for the
foreseeable future;
(c) The increasing popularity and sales of under $1,000
PCs was not a healthy development for CompUSA's business but in
fact a negative development which was adversely affecting CompUSA's
revenue growth, profitability and EPS due to the much lower profit
margins on the sale of these much less expensive products;
(d) CompUSA's sales of cheap, under $1,000 PC units was
accelerating at the expense of sales of its more expensive and much
more profitable PCs which was having an adverse impact on CompUSA's
business, revenue growth, profitability and EPS;
(e) CompUSA's business was performing with revenues, net
income and EPS below internally budgeted or forecasted levels, a
negative trend in condition defendants knew was accelerating and
would continue for the next several months;
(f) CompUSA had accumulated excessive levels of slow-
moving PC products and accessory items that it would have to sell
at highly promotional, 1,e., discounted prices, which would hurt
its profit margins in the second half of F98;
- 34 -
(g) CompUSA's inventories were more heavily weighted
with higher end Pentium II products, which were not selling nearly•
as well as the lower end sub-$1000 PCs, leading to an imbalance
between the Company's inventory and market demand, which would lead
to margin reductions in the future as the Company had to engage in
price cutting to move its inventory; and
(h) As a result of the foregoing negative factors and
conditions impacting CompUSA's business, the Individual Defendants
each actually knew the forecasts being made by and on behalf of
CompUSA for significantly increased revenue, net income and EPS
during the second half of 98 were false and misleading when made as
they could not and would not be achieved.
46. On 3/4/98, CompUSA traded as high as $33-7/16. On
3/5/98, just eight trading days after CompUSA's insiders had
completed their insider selling spree, CompUSA stock was twice
halted from trading and ultimately plunged to $26 per share on
volume of over 9 million shares (the largest one-day volume in
CompUSA's history as a public company up to that date) as it leaked
into the market that CompUSA was about to make a negative
announcement about its 3rdQ F98 results. After the close, CompUSA
revealed that it expected lower 3rdQ F98 sales than earlier
forecast. Then on 4/1/98, CompUSA revealed that its 3rdQ F98 sales
fell from the prior quarter, due in part to a 6% decline in sales
per superstore, which would lead to a lower than expected 3rdQ F98
EPS. CompUSA revealed that gross margins would be approximately
14.1%, lower than in any quarter in the past year CompUSA also
indicated that these adverse conditions would continue during the
4thQ F98 resulting in lower margins and EPS at least one-third
- 35 -
_
lower than earlier forecast for the 3rdQ and 4thQ of F98. CompUSA
stock plunged from $26-7/16 on 3/31/98 to $20-1/2 on 4/1/98 on 10.1
million shares volume -- the largest one-day stock volume in
CompUSA's history as a public company.
INSIDER SELLING
47. While CompUSA's top insiders were issuing favorable
statements about CompUSA, the Individual Defendants sold 564,790
shares of CompUSA stock, for more than $17.6 million -- 41% of
their collective holdings of CompUSA stock -- to personally profit
from the artificial inflation in CompUSA's stock price which their
fraudulent scheme had created. Notwithstanding their access to
confidential information as a result of their status as directors,
officers and/or insiders of the Company, and their corresponding
duty to disclose adverse material facts before trading in CompUSA
stock, the Individual Defendants sold significant amounts of
CompUSA shares at artificially inflated prices in order to profit
from the fraud, and did so while in possession of material non-
public information. Defendants' insider selling during the Class
Period is detailed below:
t OFPRICE SHARES
DATE SHARES PER PROCEEDS OWNED OPTIONNAME SOLD SOLD SHARE FROM SALE SOLD SHARES PRICE
Ewert 02/06/98 6,700 $31.91 $ 213,797
02/09/98 3,300 $32.00 105,600
02/18/98 5,000 $32.00 160,000
02/19/98 5,000 $32.00 $ 160,000
2Q,000 $ 639,397 2196-
Fountain 01/28/98 11,104 $3.19
02/02/98 73 $30.68 $ 2,240
02/02/98 21,050 $31.00 $ 652,550
21,123 $ 654,790 33%- 11 104
Gatch- 02/19/98 8,484 $32.00 $ 271,488Priest 02/26/98 1,723 $8.84
02/26/98 4,000 $3.19
02/26/98 1,880 $6.19
02/26/98 881 $20.50
8,484 $ 271,488 55t 8,484
- 36 -
Greenberg 02/06/98 16,546 $32.00 $ 529,472 79%
Halpin 02/01/98 120,000 $3.1902/04/98 160,000 $4.9102/04/98 280,000 $31,00 $8,680,00002/05/98 54,500 $31.25 1,703,12502/05/98 25,000 $31.00 775,00002/05/98 500 $31.31 $ 15,655
360,000 11,173,780 56% 280,000
Marshall 02/17/98 2,668 $4.9102/17/98 28,832 $3.1902/17/98 2,666 $8.8402/23/98 34,165 $33.15 $1,132,603 91%
34, 166 $1,132,603 34,165
Mondry 02/04/98 10,000 $30.63 $ 306.30002/09/98 20,000 $31.00 620,00002/09/98 10,000 $31u63 316,30002/09/98 10,000 $31.56 315,60002/09/98 15,000 $3150 472,50002/10/98 35 000 $31.50 .$1,102,500
100,000 $3_,133,200 20%
Seay 02/03/98 1,335 $4.0302/03/98 1,803 $3.1902/03/98 1,333 $8.8202/21/98 4,471 g 141,418
4 471 $31.63 $ 141,418 68% 4,471
TOTALS: 564,790 $17,676,148
48. Each Individual Defendant who exercised options to
purchase CompUSA stock during the Class Period sold 100% of the
CompUSA stock acquired by option exercise. During 2/2/98-2/23/98
-- just 16 trading days -- the top CompUSA executives named as
defendants sold 564,790 shares of CompUSA stock at as high as
$33.15 per share pocketing $17.6 million in illegal insider-trading
proceeds. On 3/4/98, CompUSA traded as high as $33-7/16. On
3/5/98, lust eight trading days after CompUSA's insiders had
completed their insider selling spree, CompUSA stock was twice
halted from trading and ultimately plunged to $26 on volume of over
9 million shares (the largest one-day volume in CompUSA's history
as a public company up to that point) as it leaked into the market
that CompUSA was about to make a negative announcement about its
3rdQ F98 results. After the close, CompUSA revealed that it
expected much lower 3rdQ F98 sales than earlier forecast.
- 37 -
49. Defendants' insider selling during the Class Period is
summarized below:
96. of Shares
Shares Actually OwnedDefendants Sold Proceeds Sold
Ewert 20,000 $ 639,397 21%Fountain 21,123 $ 654,790 33%Gatch-Priest 8,484 $ 271,488 55%Greenberg 16,546 $ 529,472 79%Halpin 360,000 $11,173,780 5696Marshall 34,166 $ 1,132,603 91%Mondry 100,000 $ 3,133,200 20%Seay 4 471 $ 141,418 68%
TOTALS: 564 '790 $.17,676,148 419-
50. During 2/98, while CompUSA's top insiders were unloading
564,790 shares of their CompUSA stock at prices as high as $33.15,
they were using millions of dollars of CompUSA's own funds to
repurchase shares of CompUSA stock on the open market to help
artificially inflate the stock while they were unloading their own
shares, thus boosting their illegal insider-trading profits. It
was manipulative and deceptive for CompUSA's insiders to do this as
they were engaging in conduct as fiduciaries for CompUSA which was
inconsistent with their conduct on their own behalf and for their
own account, i.e., they were selling their own CompUSA stook
knowing the stock was artificially inflated and would soon collapse
in price when they were forced to reveal the deteriorating
condition of CompUSA's business and yet were causing CompUSA to
purchase thousands of shares of its own stock on the open market
which they knew would result in CompUSA suffering a substantial
loss on those purchases but which they caused CompUSA to do because
those purchases helped to keep CompUSA stock artificially inflated
in the open market while they unloaded their own shares. Thus,
while the CompUSA insiders named as defendants in this action were
unloading 564,790 shares of their CompUSA stock at as high as
- 38 -
$33.15 per share, pocketing over $17.6 million in illegal insider-
trading profits, they caused CompUSA to purchase over 150,000
shares of its common stock on the open market, causing CompUSA to
suffer millions in losses on those stock repurchases, but helping
themselves pocket millions in insider-trading profits.
FIRST CLAIM FOR RELIEF
For Violation Of §10(b) Of The1934 Act And Rule 10b-5 Against All Defendants
51. Plaintiff incorporates 111-50 by reference.
52. Each of the defendants: (a) knew the material, adverse,
non-public information about CompUSA's financial results and then-
existing business conditions, which was not disclosed; and
(b) participated in drafting, reviewing, and/or approving the
misleading statements, releases, reports, and other public
representations of and about CompUSA.
53. During the Class Period, defendants disseminated or
approved the false statements specified above, which they knew were
misleading in that they contained misrepresentations and failed to
disclose material facts necessary in order to make the statements
made, in light of the circumstances under which they were made, not
misleading.
54. Defendants violated S10(b) of the 1934 Act and Rule 10b-5
in that they:
(a) Employed devices, schemes, and artifices to defraud;
(b) Made untrue statements of material facts or omitted
to state material facts necessary in order to make statements made,
in light of the circumstances under which they were made, not
misleading; or
-39--
(c) Engaged in acts, practices, and a course of business
that operated as a fraud or deceit upon plaintiff and others
similarly situated in connection with their purchases of CompUSA
common stock and publicly traded options during the Class Period.
55. Plaintiff and the Class have suffered damages in that, in
reliance on the integrity of the market, they paid artificially
inflated prices for CompUSA stock. Plaintiff and the Class would
not have purchased CompUSA stock at the prices they paid, or at
all, if they had been aware that the market prices had been
artificially and falsely inflated by defendants' misleading
statements.
SECOND CLAIM FOR RELIEF
For Violation Of §20(a) Of The 1934 ActAgainst Defendants Halpin and CompUSA
56. Plaintiff incorporates 111[1-55 by reference.
57. Defendant Halpin acted as a controlling person of CompUSA
within the meaning of §20(a) of the 1934 Act. By reason of his
positions as President, Chief Executive Officer and a director of
CompUSA and general partner in CompUSA's largest partner, he had
the power and authority to cause CompUSA to engage in the wrongful
conduct complained of herein. CompUSA controlled each of the
Individual Defendants and all of its employees.
58. By reason of such wrongful conduct, Halpin and CompUSA
are liable pursuant to §20(a) of the 1934 Act. As a direct and
proximate result of these defendants' wrongful conduct, plaintiff
and the other members of the Class suffered damages in connection
with their purchases of CompUSA common stock and publicly traded
options during the Class Period.
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_
CLASS ACTION ALLEGATIONS
59. Plaintiff brings this action as a class action pursuant
to Federal Rule of Civil Procedure 23(a) and (b)(3) on behalf of
all persons who purchased CompUSA stock and options (the "Class")
on the open market during the Class Period. Excluded from the
Class are defendants herein, members of their immediate families,
any entity in which a defendant has a controlling interest, and the
legal representatives, heirs, successors-in-interest, or assigns of
any excluded party.
60. The members of the Class are so numerous that joinder of
all members is impracticable. The disposition of their claims in
a class action will provide substantial benefits to the parties and
the Court. During the Class Period, CompUSA had more than 25
million shares of stock outstanding as well as publicly traded
options, owned by hundreds if not thousands of persons.
61. There is a well-defined commonality of interest in the
questions of law and fact involved in this case. The questions of
law and fact common to the members of the Class which predominate
over questions which may affect individual Class members include
the following:
(a) Whether the federal securities laws were violated by
defendants;
(b) Whether defendants omitted and/or misrepresented
material facts;
(c) Whether defendants' statements omitted material
facts necessary to make the statements made, in light of the
circumstances under which they were made, not misleading;
- 41 -
,
(d) Whether defendants knew or had reasonable grounds to
believe that their statements were false and misleading;
(e) Whether the price of CompUSA stock was artificially
inflated during the Class Period; and
(f) The extent of damage sustained by Class members and
the appropriate measure of damages.
62. Plaintiff's claims are typical of those of the Class
because plaintiff and the Class sustained damages from defendants'
wrongful conduct.
63. Plaintiff will adequately protect the interests of the
Class and has retained counsel who are experienced in class action
securities litigation. Plaintiff has no interests which conflict
with those of the Class.
64. A class action is superior to other available methods for
the fair and efficient adjudication of this controversy.
65. The prosecution of separate actions by individual Class
members would create a risk of inconsistent and varying
adjudications.
STATUTORY SAFE HARBOR
66. The statutory safe harbor provided for forward-looking
statements under certain circumstances does not apply to any of the
allegedly false forward-looking statements pleaded in this
Complaint because the statutory safe harbor does not apply to
CompUSA's financial statements and because none of the particular
oral forward-looking statements pleaded herein were identified as
"forward-looking statements" when made. None of the written
forward-looking statements made were identified as forward-looking
- 42 -
statements. Nor was it stated as to either type of forward-looking
statement that actual results "could differ materially from those
projected." Nor did meaningful cautionary statements identifying
important factors that could cause actual results to differ
materially from those in the forward-looking statements accompany
those forward-looking statements. In any event, each of the
forward-looking statements alleged herein was authorized by an
executive officer of CompUSA and was actually known by each of the
Individual Defendants to be false when made.
BASIS OF ALLEGATIONS
67. Because the PSLRA, §21D(c) of the Exchange Act [15 U.S.C.
§78u-4(c)1, requires complaints to be pleaded in conformance with
Federal Rule of Civil Procedure 11, plaintiff has alleged the
foregoing based upon the investigation of his counsel, which
included a review of CompUSA's SEC filings, securities analysts'
reports and advisories about the Company, press releases issued by
the Company, media reports about the Company, private investi-
gations and discussions with consultants, and, pursuant to Rule
11(b)(3), believes that after reasonable opportunity for discovery,
substantial evidentiary support will likely exist for the
allegations set forth at If2, 33 and 45.
PRAYER FOR RELIEF
WHEREFORE, plaintiff prays for judgment as follows:
1. Declaring this action to be a proper class action
pursuant to Rule 23(a) and (b)(3) of the Federal Rules of Civil
Procedure on behalf of the Class defined herein;
2. Awarding plaintiff and the members of the Class compen-
satory damages, including rescissory damages, where applicable;
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_
3. Awarding plaintiff and the members of the Class
pre-judgment and post-judgment interest, as well as reasonable
attorneys' fees, expert witness fees, and other costs;
4. Awarding extraordinary, equitable, and/or injunctive
relief as permitted by law, equity, and federal statutory provi-
sions sued hereunder, including rescission, the imposition of a
constructive trust upon the proceeds of defendants' insider
trading, pursuant to Rules 64, 65, and any appropriate state law
remedies; and
5. Awarding such other relief as this Court may deem just
and proper.
JURY DEMAND
Plaintiff demands a trial by jury.
2DATED: April 3, 1998STANLEY, MANDEL & IOLA, L.L.P.MARC R. STANLEYTexas State Bar No. 19046500ROGER L. MANDELTexas State Bar No. 12891750
1
A / MARC R. STANLEY
3100 Monticello AvenueSuite 750Dallas, TX 75205Telephone: 214/443-4301
Of Counsel:
MILBERG WEISS BERSHADHYNES & LERACH LLP
WILLIAM S. LERACHCalifornia Bar No. 68581ALAN SCHULMANCalifornia Bar No. 128661DARREN J. ROBBINSCalifornia Bar No. 168593600 West Broadway, Suite 1800San Diego, CA 92101Telephone: 619/231-1058
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_
SCHIFFRIN CRAIG & BARROWAY, LLPRICHARD S. SCHIFFRINPennsylvania Bar No. 61872ANDREW L. BARROWAYPennsylvania Bar No. 64477Three Bala Plaza EastSuite 400Bala Cynwyd, PA 19004Telephone: 610/667-7706
Attorneys for Plaintiff
compLNTs\ccm pusA CPT
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CERTIFICATION OF NAME]) PLAINTIFFPURSUANT TO FEDERAL SECUR/TXES LAWS
,
FREDERICK HOECK ("Plaintiff") declares, as to the claims
asserted under the federal securities laws, that
1. Plaintiff has reviewed tlie Omplaint and authorized its1
filing.
2. Plaintiff did not purchase : the security that is the
subject of this action at the direCtiOn of Plaintiff's counsel orJin order to participate in any priVate action.
3. Plaintiff is willing to serkre as a representative party1 ,
on behalf of the class, including providing testimony at deposition
and trial, if necessary.
4. Plaintiff's transaction inl the security that is the1, Isubject of this action during the claps Period is as follows:. 1
: I PriceSecurity Transaction Date Per Share.
1Common Stock Purchased 300 shares 02/27/98 $35.00
5. During the three years ior, to the date of this,
Certification, Plaintiff has sought to serve or served as a
representative party for a class in the following actions filed
under the federal securities laws:: NA,
?I6. Plaintiff will not accept
n, y payment for serving as a
[representative party on behalf of the class beyond the Plaintiff's
pro rata share of any recovery, except such reasonable costs and
expenses (including lost wages) directly relating to therepresentation of the class as ordered or approved by the Court.
,
LHH1b EIHNKUwHT Lt.Hum - rNivHit NU.dro rioutvialb
‘.,.
I declare under penalty of perjury that the foregoing ie true
and correct. Executed this Pr day ofiltpril, 1998.
, ttri4t,FREDERirex!fliOECK
compusa‘Hogag.an
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