Kevin Pound, et al. v. Stereotaxis, Inc., et al. 11-CV-01752-First …securities.stanford.edu/filings-documents/1047/STXS00_01/... · 2012. 3. 20. · Exchange Act, 15 U.S.C. §78j(b)

Case: 4:11-cv-01752-HEA Doc. #: 18 Filed: 03/19/12 Page: 1 of 62 PageID #: 209

UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF MISSOURI

EASTERN DIVISION

KEVIN POUND, on Behalf of Himself and All Lead Case No. 4:11-cv-01752-HEA Others Similarly Situated,

CLASS ACTION Plaintiff,

v.

STEREOTAXIS, INC., MICHAEL P. KAMINSKI, and DANIEL J. JOHNSTON,

Defendants.

FIRST CONSOLIDATED AMENDED CLASS ACTION COMPLAINT FOR VIOLATION OF SECTIONS 10(b) AND 20(a) OF THE SECURITIES EXCHANGE ACT OF 1934

NATURE AND SUMMARY OF THE ACTION

COMES NOW Lead Plaintiff Local 522 Pension Fund ("Plaintiff"), by and through counsel,

and for its First Amended Consolidated Class Action Complaint for Violations of sections 10(b) and

20(a) of the Securities Exchange Act of 1934 (the "Exchange Act"), states and alleges based upon

personal knowledge, the investigation of its counsel, information and belief, and publically available

information, as follows:

1. Plaintiff brings this action under the federal securities laws on behalf of itself and all

other persons who purchased or otherwise acquired the publicly traded securities of Stereotaxis, Inc.

("Stereotaxis" or the "Company") between February 28, 2011 and August 8, 2011, inclusive (the

"Class Period"), and were damaged by the conduct asserted herein (the "Class"). Plaintiff asserts

claims against Stereotaxis, its Chief Executive Officer ("CEO"), defendant Michael P. Kaminski

("Kaminski") and its former Chief Financial Officer ("CFO"), defendant Daniel J. Johnston

("Johnston") (collectively, "Defendants"), for violations of sections 10(b) and 20(a) of the Exchange

Act, and U.S. Securities and Exchange Commission ("SEC") Rule 10b-5.

2. Defendant Stereotaxis designs, manufactures, and markets robotic devices used in the

treatment of coronary artery disease and arrhythmias. Stereotaxis' flagship product during the Class

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Period was the Niobe Magnetic Navigation System ("Niobe System"). The Niobe System is a

robotically-controlled catheter ablation device that provides image guided delivery of catheters and

guidewires through the blood vessels and chambers of the heart to treatment sites.

3. During the Class Period, Defendants misled investors by claiming that the Niobe

System had made substantial progress towards " setting a new standard of care " for interventional

cardiology instruments, and had gained broad acceptance in the medical community that would

support a "predictable ramp to [Niobe System] usage and clinical adoption " in the "robust market "

for robotic cardiac ablation solutions. Defendants told investors that the Niobe System had entered a

new phase of accelerating clinical adoption, evidenced by the " strength in global new capital

orders " and increasing "backlog," which they claimed consisted of "outstanding purchase orders and

other commitments that management believes will result in recognition of revenue upon delivery or

installation of [the] systems." Defendants touted " $43 million of backlog, consisting ofoutstanding

purchase orders and other commitments for these systems " as of December 31, 2010. Defendants

repeatedly acknowledged that investors considered the Niobe System backlog a " significant

indicator of future performance " for the Company. Based on these claims of broad acceptance in

the medical community, a rapid and predictable ramp to broad clinical adoption, and growing order

backlog, Defendants published hopelessly aggressive 2011 financial guidance, projecting that new

capital orders would grow in the mid-30% range; total revenue would grow in the mid-20% range;

and gross margins would reach the high-60% range. Defendants re-confirmed this guidance three

months later with the May 2, 2011 announcement of first quarter 2011 results.

4. Unbeknownst to investors, Defendants knew that, far from setting a "new standard for

care" that would ensure a predictable ramp to broad clinical adoption, medical professionals were

increasingly abandoning the Niobe System before becoming clinically proficient due to well-

understood problems in navigating the catheter with the Niobe System's complex magnetic guidance

system. Feedback for the Niobe System was never better than "mixed." These challenges, the

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tremendous investment of time required for physicians to become proficient in using the Niobe

System in real world clinical settings, and the Niobe System's tremendous cost (over $1 million per

unit) resulted in weakening demand for the Niobe System throughout the Class Period. Clinical

adoption and actual sales (as opposed to the "capital orders" Defendants reported on the basis of

mere letters of intent) were declining, not increasing. As negative customer feedback mounted,

stalled accounts rose, and costly training initiatives implemented to reverse these trends failed.

Defendants knew that the Niobe System would never achieve broad clinical adoption because most

customers were demanding "fundamental product improvements."

These undisclosed fundamental flaws in the Niobe System technology undermined

broad clinical adoption and led end-users to hedge their bets. The backlog Defendants touted did not

represent revenues the Company could reasonably expect to realize. The truth was that most of the

"capital orders" in the reported backlog were nothing more than letters of intent that carried no

obligation to actually complete the purchase of a Niobe System. As resistance to the Niobe System

grew, the backlog began to soften – a trend Defendants knew or recklessly disregarded would be

accelerated by their strategy to address the Niobe System's fundamental problems. When

Defendants could no longer hide the truth about declining interest in the Niobe System, they were

forced to take over 62% of purported "capital orders" out of the active backlog. Two Niobe Systems

were removed from backlog in the first quarter of 2011, seven Niobe Systems were removed from

backlog in the second quarter of 2011, three Niobe Systems were removed from backlog in the third

quarter of 2011, and five Niobe Systems were removed from backlog in the fourth quarter of 2011.

The removal of these systems out of backlog was not caused by the completion of any purchases,

but, on the contrary, the Defendants' acknowledgment that they were unlikely to lead to revenue

recognition within a reasonable time period, if at all.

6. Even as Defendants claimed that the Niobe Systems set a new standard for care and

had turned the corner towards a predictable ramp to broad clinical adoption, they were investing

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enormous monetary and engineering resources in a substantially upgraded system, the "Epoch

Platform." The Epoch Platform was designed to address the fundamental deficiencies that had

plagued the Niobe System from inception and had stalled its clinical adoption and completed sales.

Defendants knew but failed to disclose that, against the backdrop of the Niobe System's well-

understood problems, the introduction of the Epoch Platform would be the death-knell for the Niobe

System, undercutting orders in the backlog, stymying future sales, and producing a material three-

quarter revenue gap before sales of the Epoch Platform could even begin to fill the gap. Defendants

knew or recklessly disregarded the fact that the 2011 financial guidance they had provided to the

market could not be achieved because Stereotaxis was on the verge of a critical transition to a "new

standard of care" that would have an immediate and materially negative impact on the Company's

earnings until the Epoch Platform sales ramped in volume.

7. The truth began to emerge on August 8, 2011, when Stereotaxis announced after the

close of trading that second quarter 2011 revenue had declined over 22%, and that the Company's

net loss of $9.7 million doubled the losses reported for the second quarter of 2010. Defendants

withdrew their previous financial guidance and told investors that the Company would provide no

further guidance for 2011. Defendant Kaminski revealed that the Company's financial performance

had been negatively impacted by " a slowdown in Niobe II momentum ." He admitted that " [tJhe

slowdown in Niobe is due to the market's demand for a more efficient solution for complex

ablation procedures ." "Market feedback from users" of the Niobe System was "mixed [,]" and the

Niobe System needed "fundamental product improvements ," including changes in user interface

and navigation technology that would reduce the " long learning curve " to clinical proficiency.

Kaminski also admitted that "[tJhe significant interest in Epoch's dramatically enhanced efficiency

in electrophysiology procedures has intensified the market shift away from the current Niobe II ."

8. The release of disappointing financial results and discontinued guidance only three

months after re-confirming Defendants' bullish financial guidance and claims of a predictable ramp

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to broad clinical acceptance for the Niobe System was accompanied by the announcement that

Stereotaxis' CFO, defendant Johnston, was resigning. Stereotaxis' Chief Technology and Operations

Officer ("CTO"), Doug Bruce ("Bruce") announced his resignation on March 9, 2012 (effective

March 31, 2012), seven months after Johnston resigned. This announcement came just four days

after Kaminski effectively admitted that the Company's backlog was unreliable.

9. The market reacted immediately to these material revelations. On August 9, 2011,

Stereotaxis' stock price immediately plunged over 58% on unprecedented trading volume of

5,462,296 shares, nearly double the Company's previous record daily trading volume, and over

1,600% greater than the average daily trading volume up to that point in 2011, and closed at $1.19.

Defendants' false and misleading statements and material omissions had artificially inflated

Stereotaxis' stock price throughout the Class Period, during which it reached prices as high as $4.24

per share – 256% higher than the August 9, 2011 closing price. As the ramifications for Stereotaxis'

2011 performance became clearer in the weeks following the announcement, Stereotaxis' stock price

continued to decline and sustained losses in the range of another 23%.

JURISDICTION AND VENUE

10. The claims asserted herein arise under section 10(b) and section 20(a) of the

Exchange Act, 15 U.S.C. §78j(b) and §78t(a), and Rule 10b-5 promulgated thereunder by the SEC,

17 C.F.R. §240.10b-5.

11. This Court has subject matter jurisdiction over this action pursuant to 28 U.S.C.

§1331 and section 27 of the Exchange Act.

12. This Court has jurisdiction over each defendant named herein because each defendant

is an individual who has sufficient minimum contacts with this District so as to render the exercise of

jurisdiction by the District Court permissible under traditional notions of fair play and substantial

justice.

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13. Venue is proper in this Court pursuant to 28 U.S.C. §1391(a) and section 27 of the

Exchange Act because: (i) one or more of the Defendants resides in this District; (ii) a substantial

portion of the transactions and wrongs complained of herein, including the Defendants' primary

participation in the wrongful acts detailed herein, and aiding and abetting and conspiracy in violation

of fiduciary duties owed to Stereotaxis, occurred in this District; and (iii) Defendants have received

substantial compensation in this District by doing business here and engaging in numerous activities

that had an effect on this District.

PARTIES

14. Plaintiff, as set forth in the accompanying certification and incorporated by reference

herein, purchased securities of Stereotaxis during the Class Period and has been damaged thereby.

15. Defendant Stereotaxis is a Delaware corporation that designs, manufactures, and

markets advanced cardiology instruments for use in hospitals, interventional surgical labs, and

electrophysiology labs to treat arrhythmias and other coronary artery disease. The Company's main

product, the Niobe System, is designed to enable physicians to complete more complex

interventional procedures by providing image guided delivery of catheters and guidewires through

the blood vessels and chambers of the heart to treatment sites. The Company also manufactures and

markets the Odyssey System, 1 which consolidates all lab information from multiple sources enabling

doctors to focus on the patient for optimal procedure efficiency. The principal executive offices of

Stereotaxis are located at 4320 Forest Park Avenue, Suite 100, St. Louis, Missouri.

1 Stereotaxis’ Odyssey portfolio of products provides a solution for integrating, recording, and networking interventional lab information within hospitals around the world. Odyssey Vision integrates data for magnetic and standard interventional labs. The Odyssey Cinema Studio then captures a complete record of synchronized procedure data that can be viewed live or from a comprehensive archive of cases performed. The Odyssey solution then enables hospitals to share live and recorded clinical data.

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16. Defendant Kaminski is CEO of Stereotaxis and has been since January 2009,

President and has been since February 2007, and a director and has been since August 2008.

Kaminski was also Chief Operating Officer of Stereotaxis from April 2002 to January 2009.

Kaminski acted as a controlling person of Stereotaxis within the meaning of Section 20(a) of the

Exchange Act as alleged herein. Based on the Company's own Code of Ethics, Kaminski was

required to be familiar with and comply with the Company’s disclosure controls and procedures so

that the Company’s public reports and documents filed with the SEC comply in all material respects

with the applicable federal securities laws and SEC rules. In addition, because Kaminski had direct

or supervisory authority regarding these SEC filings or the Company’s other public communications

concerning its general business, results, financial condition, and prospects, he was required to

consult with other Company officers and employees and take other appropriate steps regarding these

disclosures with the goal of making full, fair, accurate, timely, and understandable disclosure.

17. Defendant Johnston was CFO of Stereotaxis from November 2009 to August 2011,

and a Senior Vice President from September 2009 to August 2011 when he resigned from the

Company. Johnston provided consulting services to Stereotaxis until December 2011. Johnston

acted as a controlling person of Stereotaxis within the meaning of Section 20(a) of the Exchange Act

as alleged herein. The Company's Code of Ethics required Johnston to be familiar with and comply

with the Company’s disclosure controls and procedures so that the Company’s public reports and

documents filed with the SEC comply in all material respects with the applicable federal securities

laws and SEC rules. In addition, because Johnston had direct or supervisory authority regarding

these SEC filings or the Company’s other public communications concerning its general business,

results, financial condition, and prospects, he was required to consult with other Company officers

and employees and take other appropriate steps regarding these disclosures with the goal of making

full, fair, accurate, timely, and understandable disclosure.

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18. The defendants named above in ¶¶16-17 are sometimes collectively referred to herein

as the "Individual Defendants."

19. The Individual Defendants, because of their positions as the top executive officers

responsible for day-to-day management, decision-making, and public disclosures regarding

Stereotaxis' core Niobe System and Epoch Platform products, possessed the power and authority to

control the contents of Stereotaxis' quarterly reports, press releases, and presentations to securities

analysts, money and portfolio managers, and institutional investors. They were directly involved in

determining the content of the Company's reports and press releases alleged herein to be misleading

and were provided with copies of them prior to their issuance. They had the power, opportunity, and

indeed the responsibility to prevent their issuance or cause them to be corrected. Because of their

positions with the Company, and their access to material, non-public information available to them

but not to the public, the Individual Defendants knew that the adverse facts specified herein had not

been disclosed and were being concealed from the public and that the positive representations being

made were materially false and misleading. The Individual Defendants are liable for the false

statements pleaded herein.

20. The Individual Defendants are liable as participants in a fraudulent scheme and

course of conduct that operated as a fraud or deceit on purchasers of Stereotaxis common stock by

disseminating false and misleading statements and/or concealing material adverse facts. Defendants

deceived the investing public as to Stereotaxis' business, operations, and management and the

intrinsic value of Stereotaxis common stock, causing plaintiff and members of the Class to purchase

Stereotaxis common stock at artificially inflated prices and then to lose millions of dollars when

information was later released correcting Defendants' false and misleading statements.

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NON-PARTY WITNESSES WITH PERSONAL KNOWLEDGE OF RELEVANT INFORMATION ABOUT DEFENDANTS' WRONGDOING

21. Confidential Witness 1 ("CW1") was the Director of Clinical Training and

Development at Stereotaxis from February 2010 until approximately September 2011. In her/his

official capacity, CW1 was responsible for designing and implementing a new global clinical

training pathway program for teaching and training clinicians, doctors, and/or electrophysiologists

on how to use the Company's Niobe System. By virtue of CW1's position and responsibilities at the

Company, she/he was privy to customer feedback regarding the Niobe System. CW1was hired by

the Company to address the product deficiencies and long learning curve associated with the Niobe

System. Based on customer feedback she/he received while in the field, CW1 confirmed that the

Niobe System's serious product deficiencies, including difficulty in navigating the catheter

robotically using the Niobe System's complex magnetic guidance system, were well understood by

executives throughout the Company during the Class Period, and had resulted in the slow clinical

adoption of the Niobe System, including many stalled accounts. CW1 reported directly to Paul

Khait ("Khait"), the Vice President of Global Training and Development, who in turn reported

directly to Bruce, CTO and Senior Vice President of Research and Development. Bruce reported

directly to Defendant Kaminski, and is currently (and was during the Class Period) a member of the

Company's executive management team 2 with Defendants Kaminski and Johnston. As Stereotaxis'

CTO, Bruce was responsible for communicating critical issues impacting development and sales of

the Company's core products' (Niobe System and Odyssey System) technical issues to the rest of the

executive management team. Bruce attended executive meetings on a weekly basis with Kaminski

2 In addition to Bruce, whose resignation will be effective March 31, 2012, current members of the Executive Management Team include: defendant Kaminski, CEO; Samuel W. Duggan II ("Duggan"), the Company's new CFO after defendant Johnston resigned; Frank J. Cheng, Senior Vice President, Marketing and Business Development, General Manager, Odyssey Business; David A. Giffin, Vice President, Human Resources; and Karen W. Duros, Senior Vice President, General Counsel and Secretary.

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and Johnston, in which they discussed the Company's core operations, including the performance

and sales of the Niobe System, and the development, trials, and plans for rolling out the Epoch

Platform.

22. Confidential Witness 2 ("CW2") was a Global Director of Sales Training for

Stereotaxis from July 17, 2010 to February 10, 2012. In her/his official capacity, CW2 was

responsible for leading the global sales training efforts for all internal employees and distributors in

order to drive clinical adoption and capital sales of the Niobe System and Odyssey System

equipment. By virtue of her/his position at Stereotaxis, CW2 confirmed that she/he interacted and

collaborated with various departments employees, including sales, marketing, clinical affairs,

engineering, and research and development. CW2 trained Regional Sales Managers (f/k/a Account

Executives) and Account Managers – those with primary responsibility for interfacing with

customers – on how to use the Niobe System (and software) for the various procedures involved in

treating cardiac arrhythmias (such as mapping and ablation to address atrial fibrillation, ventricular

tachycardia, and other similar maladies). 3 Specifically, CW2 taught the staff how to use the

technology to navigate and operate in all four chambers of the heart. CW2 was also responsible for

training Biosense Webster representatives, one of Stereotaxis' collaborative partners, on all software

updates. In addition to training responsibilities, CW2 supervised the team responsible for handling

customer calls in Stereotaxis' customer call center, among the primary sources of physician feedback

regarding the Niobe System. By virtue of CW2's position and her/his job responsibilities of fielding

customer inquiries and complaints, she/he came to understand the Niobe System's fundamental

deficiencies that stymied broad clinical adoption. With only around 150 Niobe Systems in the field,

CW2 was able to gain a firm understanding of the broad-based resistance to the Niobe System

3 Regional Sales Managers were responsible for selling Stereotaxis systems to hospitals. Once sales were completed, Account Managers were assigned to specific accounts and were responsible for training and supporting physicians "on-site" i.e., at the hospital, to increase clinical adoption.

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adoption. CW2 explained that it was extremely frustrating fielding complaints from customers.

She/he would directly report this customer feedback to her/his direct supervisor, Khait, Stereotaxis'

Vice President of Global Training, who, in turn reported directly to Bruce. CW2 confirmed that

Stereotaxis used a software system provided by Salesforce.com to track all information related to

customer accounts, including: System sales, recurring revenue (i.e., disposables sales), service

contracts, warranties, and the like. CW2 confirmed that the information in the system was up-to-

date, available anytime, and accessible by the executive management team. According to CW2,

Kaminski and Johnson were intimately involved in the Company's operations. CW2 stated that

Kaminski "knew every customer, every sale, and was acutely aware of the status of purchase

orders." CW2 also confirmed that Stereotaxis was a small company, and while they had

approximately 200 employees worldwide, she/he estimated that only about 100 associates actually

worked at the corporate headquarters.

23. Confidential Witness 3 ("CW3") was a Director of Installations at Stereotaxis for

nearly six years, from 2004 until June 2010. Though CW3 was employed at the Company before the

Class Period, she/he was able to confirm the Defendants' knowledge of the problems with the Niobe

System. CW3's responsibilities, which generally concerned the installation and support for the

Niobe System at multiple sites in the United States, included: (i) participating in the sale of the

product by providing support to account executives; (ii) contacting customers to coordinate and plan

the installation process; (iii) working with engineers, architects, and contractors to ensure the

electrophysiology lab met required room specifications (e.g., making sure the magnets did not

interfere with room equipment, overseeing the construction/building process); (iv) coordinating

system delivery and installation; and (v) familiarizing physicians with the device and introducing

them to the technology. By virtue of her/his position, CW3 interacted on a daily basis with Regional

Sales Managers and Account Executives representing many of the approximately 150 Niobe

Systems actually in the field. Based on these interactions, CW3 learned of the Company's

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misleading backlog system. CW3 confirmed that sales associates would have conversations with

potential customers about purchasing the Niobe System and the Company would request that the

customer sign a "letter of intent" confirming interest. Most customers signed the letter of intent

because the document contained no commitment from the customer to actually buy the equipment.

In fact, hospitals signed letters of intent when they were interested in the product, but did not or

could not obtain the funds to purchase the technology. CW3 estimated that less than 50% of the

orders in backlog actually amounted to a completed purchase order. CW3 further confirmed that

once customers signed the letter of intent, Stereotaxis used that letter to justify putting the potential

sale into the Company's backlog. CW3 reported this improper behavior to her/his supervisor Ed

Henderson, Director of Installation Operations at Stereotaxis, who in turn reported directly to Frank

Kloiber ("Kloiber"), Vice President of Worldwide Sales until 2009. According to CW3, Kloiber was

defendant Kaminski's "right hand man" and communicated all sales and backlog issues to Kaminski.

24. Confidential Witness 4 ("CW4") was an Account Manager from July 2009 until

February 2010, and similar to CW3, confirmed that the fundamental problems preventing broad

clinical adoption of the Niobe System were well-understood throughout Stereotaxis' management

before the Class Period. CW4 was responsible for increasing clinical adoption and product

utilization by training cardiac electrophysiologists and physicians on how to use Stereotaxis products

in electrophysiology labs to treat cardiac arrhythmias. CW4 provided clinical support and case

coverage to accounts in Delaware, New York, New Jersey, Ohio, Indiana, Kentucky, Michigan, and

Massachusetts. At the onset of CW4's employment, she/he reported to Joshua Stewart ("Stewart")

Director of Clinical Adoption & Utilization until Stewart was replaced by Paige Hargrove, Vice

President of Worldwide Clinical Sales and Training. CW4 confirmed that training customers on the

Niobe System was very time-consuming and difficult, equating to a "courting process." Prior to

system installation, potential customers came to Stereotaxis and were trained to become proficient

with the system. CW4 was responsible for training physicians on simulated cardiac surgery using

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3D Phantom Heart in an electrophysiology lab. Once a Niobe System was purchased and installed

(the "go-live" date), training continued at the customer's on-site location. The majority of CW4's

responsibilities commenced on the "go-live" date and involved on-site training and feedback from

the Niobe System's intended users. CW4 confirmed that the Niobe System suffered from

fundamental product deficiencies that generated significant resistance, including long procedure

times and a steep learning curve. CW4 confirmed that these product flaws led physicians to use the

system "passively," and were preventing broad clinical adoption – problems Defendants admitted

only after the Class Period had plagued the Niobe System from its inception and had prevented

wide-scale acceptance.

SUBSTANTIVE ALLEGATIONS

I. BACKGROUND

A. Ablation Therapies for Cardiac Arrhythmia

25. An arrhythmia is an abnormal rhythm of the heart that occurs as a result of the

disruption of the electrical signals responsible for the normal pumping of the heart muscle.

Arrhythmias result in disturbances of the heart's contractile patterns, either pumping too fast, too

slow, or irregularly, causing the heart to pump less effectively, and resulting in inadequate blood

flow to the body.

26. The most common interventional treatment for arrhythmias involving heart rates that

are too high or are irregular is an electrophysiology ablation, during which diseased tissue is isolated

or destroyed. Prior to performing an electrophysiology ablation, a physician typically performs a

diagnostic procedure in which the electrical signal patterns of the heart wall are "mapped" to identify

the heart tissue generating the aberrant electrical signals.

27. Electrophysiological cardiac mapping studies are invasive tests in which a small

electrode catheter (thin wire) is inserted through the groin or neck of the patient into the heart.

Cardiac mapping may be performed to locate cardiac arrhythmias and directly measure the electrical

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activity from various regions in the heart. The physician stimulates the atria or ventricles of the

heart electrically to determine response. These studies are performed for both diagnostic and

therapeutic purposes. Determining the exact location of an arrhythmia is a pre-requisite for

understanding the pathophysiological mechanisms that underlie the arrhythmia and allows for the

evaluation of the effect of drugs, as well as facilitating surgical catheter-ablation procedures.

28. During an ablation procedure, a catheter is positioned inside one's heart near the

pulmonary veins. Radio energy applied to the tip of this catheter is used to ablate (cauterize) the

heart tissue causing an "electrical disconnection." As a result, the abnormal electrical signals from

the pulmonary veins can no longer reach the rest of the heart. Ablation procedures can be performed

by doctors who perform catheterizations by hand, and by robotically-controlled catheter ablation

devices. Robotics systems, such as Stereotaxis' Niobe System, are meant to accomplish with greater

accuracy what the physicians used to do by hand. Manually controlled catheters and guide wires

used in conventional electrophysiological studies of patients with cardiac arrhythmias may have

inherent functional limitations. According to those involved in the robotically-controlled catheter

ablation device business, the primary advantage is that robotic control provides very precise catheter

navigation. Furthermore, it has been suggested that manual control of the distal tip becomes

increasingly difficult as blood vessels become smaller and less accessible, emphasizing the need for

a robotic system. The difficulty of navigating the catheter with the complex Niobe System's

magnetically driven navigational system became the product's Achilles' Heel.

B. The Niobe System

29. Stereotaxis' robotically-controlled catheter ablation technology was called the Niobe

System. The Niobe System was designed to enable physicians to complete more complex

interventional procedures by providing image guided delivery of catheters and guidewires through

the blood vessels and chambers of the heart to treatment sites using magnets to steer the catheters

and guidewires. Stereotaxis received initial U.S. Food and Drug Administration approval for its

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Niobe System in 2003.

30. The Niobe System employs an array of magnets that create a 360 degree magnetic

field around the patient to orient the tip of a magnetic device in the desired direction. Magnets are

placed at the tip of the catheters and guide wires, which are inserted into the arteries. The opposing

magnetic field immediately surrounding the patient on the catheterization table is used to align the

catheter's magnet. The physician then uses the device to pinpoint the affected area and guide the

catheter to the location. This new way of "steering" catheters differs from the more traditional

method of manually twisting, turning, and pushing the catheter through the arteries. Stereotaxis

claims that this magnetic method of directing movement permits the guidewire or catheter to make

sharp turns, as the movement of the device is not limited by physician dexterity.

31. A physician performing cardiac procedures with the Niobe System is not in the room

with the patient. The procedure is conducted remotely, at a control panel, which provides the

physician with a three dimensional image of the patient's heart during the procedure without being

exposed to radiation.

32. Installing the Niobe System was time-consuming, costly, and disruptive. Each Niobe

System cost approximately $1 million. In addition, a hospital would spend between $250,000 and

$500,000 to build an onsite lab to house the Niobe System. According to CW1, it took at least six

months from the time of sale to actually install the Niobe System. Most of this time was spent

building the onsite lab and shielding the Niobe System, as its intense magnetic field had the tendency

to disrupt surrounding medical machinery.

33. CW1 described the process involved in the sale of a Niobe System. Once a machine

was assembled, Stereotaxis would ship the machine from their site to an offsite warehouse where the

machine was stored until the hospital lab being built was ready. Once the hospital lab was ready, the

machine was taken out of storage and brought to the lab for installation. CW1 confirmed that

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representatives from Stereotaxis were required to be present, monitor, and assist the installation

process.

34. Since 2003, Stereotaxis claims to have sold approximately 150 Niobe Systems

worldwide. Revenue from sales of the Niobe System made up a significant portion of the

Company's overall revenue prior to the Class Period. During 2010, Niobe System sales represented

40% of the Company's revenue. Given the novelty of Stereotaxis' product line, the Company puts a

large premium on maintaining a strong sales force to market its products in the United States and

internationally. Out of 204 individuals employed by the Company as of December 31, 2010, nearly

half (92) were in sales and marketing positions. The Company separated its sales efforts into two

fronts: (i) a direct sales force of senior sales specialists, distributors, and sales agents, supported by

account managers and clinical specialists who provide training, clinical support, and other services to

customers; and (ii) strategic alliances with the sales forces of the Company's imaging partners to co-

market integrated systems on a worldwide basis.

C. The Niobe System's Fundamental Deficiencies

35. Throughout the Class Period, Defendants were aware of the fact that the Niobe

System had fundamental deficiencies that prompted significant adverse feedback from customers.

These fundamental deficiencies included that: (i) the Niobe System's user interface was not user-

friendly; (ii) catheter navigation was very difficult for doctors to master; (ii) physicians took much

longer to complete procedures with the Niobe System than conducting manual procedures; (iii) there

was a steep learning curve associated with the technical aspects of the Niobe System, which caused a

lack of long-term commitment to the product; (iv) many doctors were not willing to complete the

extensive training process associated with becoming proficient in using the Niobe System, a process

that took as long as six months; (v) efficacy of the Niobe System was questionable due to unresolved

issues in controlling catheter contact force; and (vi) there was a low level of technical support from

Stereotaxis. These problems stymied broad clinical adoption by physicians, even in hospitals that

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had installed Niobe Systems. These were not sudden new developments that arose during the Class

Period. Defendants belatedly admitted that they were aware of these problems from the Niobe

System's inception, facts confirmed by former Stereotaxis employees.

36. For example, according to CW1, who worked in the Clinical Training and

Development department at Stereotaxis, it was well understood by Stereotaxis executives that the

Niobe System was not being broadly adopted because of the significant difficulties and time required

to become trained and proficient in its operation. In fact, CW1 stated that she/he was specifically

hired in February 2010 to design and implement a new training program because the Niobe System

was not being adopted by the clinicians, doctors, and electrophysiologists. According to CW1,

based on feedback from clinicians, doctors, and electrophysiologists prior to and during the Class

Period, the Niobe System was not being clinically adopted primarily because there was a very steep

learning curve associated with the technical aspects of implementing and operating the machinery.

This produced a large number of what the Company internally called "stalled accounts." Stalled

accounts were accounts in which the customer acquired the technology (anywhere from one to five

years ago), but the technology was not being used at all or was being used in a very limited way,

such as only having five cases performed per year, "if that." CW1 personally witnessed a large

number of stalled accounts. CW1 confirmed that in 2010, shortly after she/he was hired, stalled

accounts in the United States were already topping 30%. In addition, CW1 stated that there were

very few accounts that: (i) were actually using the technology; (ii) were proficient in the technology;

and (iii) had clinically adopted the technology to perform procedures on a regular basis. CW1

explained that the Company would see usage during the first month of a new client purchasing the

Niobe System, and then usage would completely stop.

37. To address the learning curve, the Company: (i) hired CW1 to design and implement

a new training program called, Five Steps for Mastering Remote Magnetic Navigation ("Five-

Steps"); and (ii) made upgrades to the technology that supported the Niobe System. In addition to

- 17 -


implementing the training program for new accounts, the Company tasked CW1 with implementing

the training program for stalled accounts to try to "bring the doctors back on board" and get them to

adopt the technology in the clinical setting.

38. The Five-Steps training program, however, required a substantial commitment of

time, which discouraged most doctors from participating. The training program would start by

having new customers/doctors fly to Chicago, where the initial phase of training was conducted in a

lab setting with phantom procedures for eight to ten hours. The new customer/doctor would then

perform five to ten cases with a doctor that was familiar with the technology. The new

customer/doctor would then do ten to fifteen cases with the support of an account manager. After

twenty-five cases were conducted, an advanced training session was held in which the new

customer/doctor practiced performing cases with peers. After fifty cases were conducted, an

advanced training session was held and the new customer/doctor was finally deemed "clinically

independent and efficient." The program was set up so doctors could finish the training in three to

six months. According to CW1, however, it was hard to get doctors to commit to this training

regime and most of those who signed up never completed the training.

39. CW2's experiences were consistent with those of CW1. In addition to training

responsibilities, CW2's team was responsible for fielding the customer call center, thus, CW2 was

privy to physician feedback regarding the Niobe System. By virtue of CW2's position and her/his

job responsibilities of fielding customer complaints, she/he was privy to product deficiencies. With

only approximately 150 Niobe systems in the field, CW2 was able to gain an understanding of the

broad-based resistance to the Niobe System adoption. CW2 discussed the following product flaws

identified by nearly all the physicians/customers:

(a) Procedure Time: It took physicians longer to complete procedures/cases with

the Niobe System than it did if the physicians performed the procedure manually. Specifically,

- 18 -


procedures that usually took physicians two to three hours to complete manually were taking

physicians approximately five to seven hours with the Niobe System;

(b) Steep Learning Curve: The Niobe System had a steep learning curve and was

hard to learn even after months of training. The more the system was used, the more skilled the

physician became; but increased skill was only obtained through long hours of practice. It took

many months, and sometimes longer, for physicians to become comfortable with the system; and

(c) Efficacy: some physicians were concerned with the efficacy of the actual

ablation and how clinically effective it was compared to other products. Physicians were concerned

about the catheter contact force.

40. These product flaws caused physicians to use the Niobe System "passively" at first,

and then ultimately prevented widespread clinical adoption and use. CW2 explained that it was

extremely frustrating fielding complaints from customers because engineers were not focused on

addressing current issues to ensure broad clinical adoption, but were focused instead on developing

upgrades, bringing new products to the market, and getting them installed. CW2 could not get the

Company to address or fix the problems with the current Niobe System, even after reporting the

adverse customer feedback to her/his direct supervisor, Khait, who reported directly to Bruce, the

CTO was tasked with reporting material technical problems impacting sales of the Niobe System to

CEO, defendant Kaminski.

D. The Epoch Platform, Stereotaxis' "New Standard of Care"

41. Defendants withheld from shareholders the fact that the fundamental problems which

plagued the Niobe System from its inception, stalled its clinical adoption, and jeopardized realization

of revenues from Stereotaxis' backlog, had already led Defendants to invest heavily in the

development of a substantially upgraded system, the Epoch Platform. Even as Defendants claimed

that the Niobe System set the "new standard for care" and was on a predictable ramp towards broad

clinical adoption, they were preparing to introduce within three quarters a new system designed to

- 19 -


address the well-known fundamental deficiencies that had stalled Niobe System's clinical adoption

and completed sales.

42. CW1 confirmed that in addition to investing in new training procedures to address the

Niobe System's problems, Stereotaxis launched the Epoch Platform, a fundamentally new upgrade

which rendered the Niobe System obsolete. The Epoch Platform upgrade included substantially

improved hardware and software designed to address the myriad of problems plaguing the Niobe

System based on user feedback. According to CW1, the Epoch Platform was "a much better

technology" and the updates "addressed 90–95% of the concerns clinicians had."

43. Defendants introduced the Epoch Platform to the market in April 2011. What the

Defendants knew and failed to disclose to investors when they published their bullish 2011 revenue,

sales, and gross margin projections was that the faltering interest in the Niobe System would be

exacerbated by the launch of the Epoch Platform, with many choosing to wait for this upgrade rather

than make the significant capital and time investment required for purchase, implementation, and

clinical adoption of the Niobe System. Defendants knew 2011 was going to be a transition year for

the Company, yet still published hopelessly aggressive and unattainable guidance of new capital

order growth in the mid-30% range, total revenue growth in the mid-20% range, and gross margins

in the high-60% range.

44. CW1 confirmed that this was widely understood within Stereotaxis. She/he explained

that prior to and during the Class Period, Stereotaxis' existing customer base was unsatisfied with the

Niobe System, resistance that was amplified by anticipation of the Epoch Platform. The facts were

well understood by Stereotaxis executives. Stereotaxis developed and marketed the Epoch Platform

specifically to address the concerns of customers that the Niobe System did not perform as expected

or promised. Indeed, CW1 recalled attending the Heart Rhythm Society's conference in San

Francisco during May 5-7, 2011, in which Stereotaxis had a booth displaying the new Epoch

Platform technology, where the pitch was that the Epoch Platform had been designed to address the

- 20 -


complaints of doctors who had purchased the Niobe System. Hospitals and clinics that wanted the

newer technology did not want to have to buy the Niobe System only to have to reinvest in the

superior Epoch Platform, and physicians did not want to spend more time learning to use the difficult

Niobe System when the easier-to-use Epoch Platform would soon provide the performance that had

been promised for the Niobe System.

E. Stereotaxis' Deceptive Backlog Reporting

45. Throughout the Class Period, Defendants touted ever-growing backlogs for the Niobe

System and maintained that this specific measure was a "significant indicator of future performance"

for the Company. Defendants repeatedly pointed to the " strength in global new capital orders " and

increasing "backlog," which they claimed consisted of "outstanding purchase orders and other

commitments that management believes will result in recognition of revenue upon delivery or

installation of [the] systems." Defendants touted " $43 million of backlog, consisting ofoutstanding

purchase orders and other commitments for these systems " as of December 31, 2010. Defendants

touted such an aggressive figure while repeatedly acknowledging the fact that investors considered

the Niobe System backlog a "significant indicator of future performance " for the Company.

46. Order backlog can be an important indicator of future revenues of a company

resulting from already recognized new orders, but only where standard procedures for calculating

backlog are followed. Stereotaxis' stated policy was to include in backlog "those outstanding

purchase orders and other commitments that management believes will result in recognition of

revenue upon delivery or installation of our systems." The Company caused investors to believe that

their new orders were determined principally as estimated revenue of accepted purchases.

47. The truth, however, was that the Company treated nonbinding letters of intent as

orders in its reported backlog of Niobe Systems. These letters of intent contained no commitment

from the customers to actually buy a Niobe System or Stereotaxis to tender a Niobe System.

Moreover, Defendants claimed that the backlog reflected orders that "management believes will

- 21 -


result in recognition of revenue," without disclosing the facts that problems with Niobe System

stymied broad clinical adoption and that the introduction of the Epoch Platform would materially

undercut orders in the backlog. As a result of the multiple contingencies existing at the time a letter

of intent was signed, it is not surprising that less than half of these letters of intent actually turned

into completed purchase orders.

48. Over the course of the Class Period and the period immediately following,

Defendants were forced to remove over 62% of capital orders out of the reported backlog. At the

very least, as admitted by Defendants and depicted by the following chart, two Niobe Systems were

removed from backlog in the first quarter of 2011, seven Niobe Systems were removed from backlog

in the second quarter of 2011, three Niobe Systems were removed from backlog in the third quarter

of 2011, and five Niobe Systems were removed from backlog in the fourth quarter of 2011:

Value Niobe Systems N lobe System (Total Backlog

QuarterEnded Removed Units in Backlog ForAllProducts) 2/3/200 -2 27 $43 M11 1ci 3/31/2011 -2 - $44 Million 6/30/201 -7 20 $33 M11 ion 9/30/2011 -3 16 $29 Million

12/31/2011 -5 10 $20M1H[on

49. Defendant Johnston discussed the two Niobe Systems that were removed from

backlog in the first quarter of 2011 in the May 2, 2011 conference call, stating:

We actually canceled two NIOBE labs. One was in Korea, it was an old order that's been around for over four years and just isn't progressing, so we've taken that out of backlog. Then we also took a system in Madrid. The hospital is having some financial issues, so we are -- we decided to go ahead and take that out of backlog as well. So we canceled two.

50. Defendant Kaminski discussed the seven Niobe Systems that were removed from

backlog in the second quarter of 2011 in the August 8, 2011 conference call, stating:

Turning now to the NIOBE backlog, we've conducted a thorough review to identify orders that are not projected to come to revenue in a reasonable amount of time. We've reduced our backlog by 7 systems to a total of 20 systems that we expect to

- 22 -


go to revenue in the next 18 months. Thus, to summarize the Epoch platform, the early reaction among key opinion leaders is extremely positive. Epoch is designed to enable a faster, more efficient and dynamic control for all devices of robotic assisted EP procedures while maintaining the NIOBE's recognized benefits of safety, radiation reduction and clinical outcomes.

51. During the November 7, 2011 conference call, the Company's new CFO after

defendant Johnston resigned, Duggan, discussed the three Niobe Systems that were removed from

backlog in the third quarter of 2011, stating:

Let's move on to backlog, which consists of orders that we anticipate will go to revenue in the next 18 months. We conducted a comprehensive evaluation and identified four projects where there is low likelihood that this hurdle will be met and removed these systems from active backlog. Three of these were Niobe projects .

52. Finally, during the March 5, 2012 conference call, Duggan explained that the new

backlog included only ten systems in its entirety, explaining that the Company "removed five

projects from active backlog valued at $7.3 million."

53. Defendants were responsible for Stereotaxis' backlog reports and knew they were

misleading during the Class Period. CW2 confirms that the Company's misleading backlog figures

were brought directly to the attention of defendant Kaminski. According to CW2, Pierre Rivaux

("Rivaux"), Vice President, Europe, Middle East, Africa, discovered that many of the Company's

reported orders were not in fact "real orders." CW2 was responsible for leading the global sales

training efforts for all vice presidents, and as such, had a close working relationship with Rivaux.

Rivaux told CW2 about his discovery of the "fake backlog orders" and his communications

regarding this issue with defendant Kaminski.

54. According to CW2, Rivaux hired Olivier Tintorini ("Tintorini") in or around

December 2010 and shortly after, asked Tintorini to look into the backlog and determine the status of

the purchase orders. CW2 confirmed that Tintorini's investigation into the backlog occurred

between December 2010 and February 2011. CW2 stated that Rivaux told her/him that Tintorini

discovered that "none" of the purchase orders in backlog were in fact "real purchase orders." Rivaux

- 23 -


also discovered that sales managers, including at least Michael Heuer ("Heuer") and Magnus Holm

("Holm"), were paid bonuses and/or commissions on the fake backlog purchase orders that never

materialized into sales. Rivaux told CW2 he reported the backlog and commission issue directly to

defendant Kaminski and the Board of Directors (the "Board"). CW2 confirmed that Kaminski and

the Board knew about the results of the investigation and had spoken with Rivaux by at least May

2011. CW2 also confirmed that Rivaux told Kaminski he would refuse to accept a "Q1 bonus based

on 'purchase orders' in backlog."

II. DEFENDANTS' MATERIALLY FALSE AND/OR MISLEADING STATEMENTS DURING THE CLASS PERIOD REGARDING STEREOTAXIS' CLINICAL ADOPTION, BACKLOG, AND FINANCIAL GUIDANCE

A. Misleading Statements Regarding Clinical Adoption and Demand for the Niobe System

55. Throughout the Class Period, Defendants touted the efficacy, growing rate of clinical

adoption, and growth potential of the Niobe System. Specifically, on February 28, 2011, Stereotaxis

issued an earnings press release in which defendant Kaminski stated that the Company had made

significant progress in establishing the Niobe System "as a new standard of care." The release stated

in part:

"In 2010 we achieved significant progress toward our goal of establishing our Niobe robotic platform as a new standard of care for [electrophysiology] interventional medicine that we believe offers improved safety, efficacy and cost of care ," said Michael P. Kaminski, President and Chief Executive Officer of Stereotaxis. " The strength in global new capital orders confirms that we continue to make progress in our key initiatives of driving stronger Niobe reference sites and expanding our Odyssey business into standard EP labs."

56. After releasing its 2010 financial results on February 28, 2011, defendants Kaminski

and Johnston hosted an earnings conference call with investors, media representatives, and analysts,

during which Kaminski represented the following:

As we enter 2011 we are more optimistic than ever about our platforms' ability to drive value in [electrophysiology] ablations .

* * *

- 24 -


This past year we have published and discussed our value for [ventricular tachycardia] procedures and why the distal tip control provides superior safety, efficacy and efficiency . We believe slide seven demonstrates that the market agrees with us. The same kind of pre-and post-2007 installs demonstrates that our [ventricular tachycardia] procedures grew 38% in 2010 , or two to three times the market growth. We are even more pleased that, as seen by these two charts, utilization grew in both groups and significantly (technical difficulty) faster than the (inaudible). This fact and the general market feedback gives us confidence that we are poised to make our technology the standard of care for [ventricular tachycardia] .

* * *

So we continue to see a robust market, obviously, driven by the market growing.

57. Defendants' representations in the February 28, 2011 press release and the conference

call that followed about significant progress towards establishing the Niobe System as the new

standard of care and positive "market feedback" enabling Stereotaxis to take advantage of the

"robust market" for robotic ablation technology were materially false and misleading. Defendants

knew and failed to disclose that market feedback from users of the Niobe System technology was

decidedly "mixed"; that 30% or more accounts were stalled due to the cost, complexity, and the

enormous time investment required to achieve the level of proficiency in magnetic catheter control

that was critical to clinical adoption; and that the Niobe System's users were demanding

"fundamental product improvements," resulting in declining sales, softening backlog, and falling

revenues. Defendants had no basis to tout "confidence that [the Company was] poised to make [its]

technology the standard of care." Defendants knew that broad clinical adoption had in fact stalled

because of the serious product deficiencies in the Niobe System, including the fact that it took

physicians longer to complete procedures with the Niobe System than it did if the physicians

performed the procedure manually; that the design of the user interface was not user-friendly,

causing the actual navigation of the catheter to be very difficult to master for the doctors; that there

was a steep learning curve associated with the technical aspects of the Niobe System which caused a

lack of commitment to the product; that many doctors were not willing to complete the extensive

- 25 -


training process associated with becoming proficient in using the Niobe System, a process that took

as long as six months; that efficacy of the Niobe System was questionable due to issues relating to

catheter contact force; and that there was a low level of technical support from Stereotaxis. In fact,

Defendants pushed development and introduction of the Epoch Platform upgrades to address the

Niobe System's fundamental flaws since 2010, and Stereotaxis marketed the Epoch Platform on this

basis.

58. Defendants' statement that "strength in global new capital orders confirms that we

continue to make progress in our key initiatives of driving stronger the Niobe System reference

sites" also was fundamentally misleading in light of these facts – deception that was compounded by

Defendants' misleading reporting of order backlog for the Niobe System. Stereotaxis' claimed order

backlog did not represent revenues the Company could reasonably expect to realize. The truth was

that most of the "capital orders" in the reported backlog were nothing more than signed letters of

intent that carried no obligation to actually complete the purchase of a Niobe System. Over the

course of the Class Period and the period immediately following, Defendants were forced to move

over 62% of capital orders out of the reported backlog.

59. During the February 28, 2011 conference call, defendant Kaminski falsely touted the

Company's "predictable ramp to [Niobe System] usage and clinical adoption":

Our top operating initiative continues to be driving adoption of the NIOBE platform in our installed base. As we look at our Company today we believe we have crossed the chasm into the early majority and are now entering a much more predictable ramp to NIOBE usage and clinical adoption.

* * *

To summarize, we believe we are near the tipping point for our technology to be widely adopted, led by sites installed after 2010 .

60. In fact, however, the Company had not "crossed the chasm" of user resistance and

was nowhere near reaching a tipping point that would lead to a predictable ramp to Niobe System

usage and clinical adoption. As confirmed by CW1, doctors, clinicians, and electrophysiologists

- 26 -


familiar with the Niobe System agreed that it was not being broadly clinically adopted primarily

because of the high cost and very steep learning curve associated with the technical aspects of the

machinery. The main reason CW1 was hired in the first place was to implement a training program

to try to "bring the doctors back on board" and decrease the growing number of stalled accounts.

The majority of calls CW2's team received while fielding the call center were complaints from

physicians regarding the Niobe System's fundamental deficiencies that stymied clinical adoption. As

confirmed by CW4, the product flaws that led physicians to use the system "passively" and

prevented clinical adoption were problems Defendants knew for years, even prior to the Class

Period. Moreover, as admitted by defendant Kaminski in his August 8, 2011 disclosures, the

Company was experiencing "a slowdown in Niobe II momentum" "due to the market's demand for a

more efficient solution for complex ablation procedures."

61. Kaminski ended the February 28, 2011 conference call by reassuring investors that

the Company's 2011 "sales pipeline of prospective customers" provided the Company "comfort that

the [Niobe System] will continue to grow in orders and revenue." Kaminski stated, in relevant part:

Next, let's look at our capital part of our business model. While we are disappointed with the NIOBE revenue in 2010, we believe it reflect the softness of incoming orders in 2009 and a one-time event with an imaging partner. Conversely, the incoming orders in 2010 reflect a growing interest and adoption of the NIOBE platform , fueled by the excitement in the installed base .

* * *

Importantly, our sales pipeline of prospective customers continues to strengthen. At the beginning of 2011 our pipeline has over 200 accounts which are moving through a decision process in the next two years, which provides us comfort that the NIOBE will continue to grow in orders and revenue. Additionally, the NIOBE interest has grown in all geographic markets, especially in Asia, as we are just entering this fast-growing market. I'm happy to announce that last week our partner received regulatory approval for the magnetic ThermaCool catheter in China. We have seven systems installed in China awaiting this product introduction. This milestone is critical to driving success in the installed base and to capitalizing on the tremendous growth in [electrophysiology] procedures forecasted over the next 10 years.

- 27 -


62. Kaminski's statements in the February 28, 2011 conference call regarding the

"growing interest and adoption of the [Niobe System] platform," and especially his statement that

this was "fueled by the excitement in the installed base," were false and misleading. As confirmed

by CW1, doctors, clinicians, and electrophysiologists all complained about the very steep learning

curve associated with mastering the Niobe System. CW1 also confirmed that these doctors,

clinicians, and electrophysiologists, "the installed based," reiterated that this learning curve was

debilitating and was the prime reason why the Company would not be able to achieve adoption of

the Niobe System. Defendants knew about the lack of clinical adoption of the Niobe System as

demonstrated by the fact that they hired CW1 to "bring the doctors back on board" at a time when

stalled accounts were growing and reaching at least 30% of all Niobe System purchases. CW2

confirmed that it was not "excitement" she/he heard from the "installed base" when fielding the call

center for user feedback. Instead, CW2 confirmed that her/his team continuously received

complaints from doctors regarding the Niobe System's fundamental deficiencies. Contrary to the

"growing interest and adoption of the [Niobe System]," touted by Kaminski in the February 28, 2011

conference call, his August 8, 2011 disclosures proved that the Company was actually experiencing

"a slowdown in Niobe II momentum" "due to the market's demand for a more efficient solution for

complex ablation procedures." Even as Defendants claimed that the Niobe System set the new

standard for care and would achieve broad clinical adoption, they were preparing to introduce within

three quarters a new system designed to address the known fundamental deficiencies that had

plagued the Niobe System from its inception and had stalled clinical adoption and completed sales.

Defendants knew but failed to disclose that problems with Niobe System clinical adoption and the

introduction of the Epoch Platform would materially stymie future sales of the Niobe System before

the Epoch Platform could fill the gap.

63. On April 27, 2011, Stereotaxis issued a press release announcing the introduction of

its upgraded technology, the Epoch Platform. This press release disclosed for the first time

- 28 -


Stereotaxis' introduction of a "new standard of care." Defendants failed to address the immediate

materially negative impact the introduction of the Epoch Platform would have on the Company's

2011 financial results. The release stated in part:

Stereotaxis, Inc. (Nasdaq: STXS) today announces the introduction of its new Stereotaxis Epoch(TM) platform, a comprehensive solution for any electrophysiology lab which combines the recognized benefits of remote magnetic catheter control, the efficiency of remote robotic device manipulation, and the power of the Odyssey platform, enabling highly sophisticated procedural data integration and transmission. The Epoch (TM) platform will be unveiled at the annual Heart Rhythm Society meeting May 5-7, 2011 in San Francisco, CA.

The Stereotaxis Epoch solution is the beginning of a new modular platform designed to meet the broad range of clinical needs physicians face today and in the future. Building on the strength of Magnetic Navigation's exceptional safety profile and significant radiation reduction, the Epoch platform features the latest technological breakthroughs in Magnetic Navigation, which will lead to faster, more efficient, and dynamic magnetic catheter control . In addition, the Epoch platform will seamlessly integrate Stereotaxis' Vdrive(TM) mechanical robotic platform for remote manipulation of a growing array of devices, such as loop diagnostic catheter and sheath.

The Epoch solution delivers value well beyond the lab with the power of Stereotaxis' Odyssey(TM) solution-an unprecedented offering which integrates the complex array of clinical data into synchronized, high-definition view delivering real-time clinical information anywhere at physicians' fingertips. The Odyssey solution empowers hospital executives to drive initiatives which improve care, enhance performance, and increase referrals and market services throughout global communities.

"We are excited to introduce our Epoch solutions to the EP market as we are committed to developing solutions that meet the most critical needs of our customers, while supporting any preferred clinical treatment technique," said Michael P. Kaminski, President and Chief Executive Officer of Stereotaxis. "Early feedback from key opinion leaders suggests that the Epoch platform enables us to deliver a much more efficient and enhanced EP workflow while maintaining our excellent profile in safety, radiation reduction and clinical outcome."

64. Stereotaxis' May 2, 2011 press release also reiterated the Company's introduction of

the Epoch Platform. Defendants reiterated that the Epoch Platform would address the problems with

catheter control and efficiency that made the Niobe System so time intensive to master, but failed to

address the negative impact its introduction would have on the Company's short-term financial

results, primarily Niobe System sales and backlog:

- 29 -


Product Advancements to be Featured at Heart Rhythm Society's 32nd Annual Scientific Sessions

Stereotaxis announced that its new Stereotaxis EpochTM platform, which enhances the efficiency and versatility of the Niobe system, will be unveiled at the Heart Rhythm Society's (HRS) 32nd Annual Scientific Sessions in San Francisco during May 5-7, 2011. The Stereotaxis Epoch solution is designed to meet the broad range of clinical needs physicians face today and in the future. Building on the strength of Magnetic Navigation's exceptional safety profile and significant radiation reduction, the Epoch platform features the latest technological breakthroughs in Magnetic Navigation, which will lead to faster, more efficient, and dynamic magnetic catheter control .

"We remain focused on developing solutions that meet the most critical needs of our customers, while supporting any preferred clinical treatment technique . Epoch is designed to significantly reduce procedure time for all types of robotic-assisted EP procedures, especially for complex ablation procedures. We believe the Epoch platform will enable a much more efficient and enhanced EP workflow while maintaining our excellent profile in safety, radiation reduction and clinical outcomes," stated Mr. Kaminski.

65. Defendants' representations in the April 27, 2011 and May 2, 2011 press releases

were materially false and misleading because Defendants knew and failed to disclose to investors

that the Company's transition away from the Niobe System and into the Epoch Platform would have

dire consequences on the Company's financial prospects in the short term. Defendants knew that

interest in the Niobe System was faltering due to difficulties and inefficiencies in using the

technology, and that Stereotaxis' own, long-planned new technology introduction would soon render

the Niobe System obsolete. While the announcement of the Epoch Platform's release crushed

already-weak Niobe System sales, the manufacture, installation, and training of the Epoch Platform

would not be completed until well into 2012, creating a three quarter revenue gap. The first round of

Epoch Platforms was not slated to be shipped until December 2011. New customer training on the

Epoch Platform would take as long as six months. Stereotaxis' August 8, 2011 press release

regarding Stereotaxis' second quarter results was the first time Defendants disclosed to the public the

impact of the Company's transition. Defendants admitted that revenue had declined over 22% and

net losses had doubled from the second quarter of 2010. The introduction of the Epoch Platform's

- 30 -


adverse effect on the short-term financial health of the Company was foreseeable because

Defendants knew of the problems plaguing the Niobe System and understood that customers would

not invest money in the old system when the new system addressed these issues, including user

interface design and procedure time.

B. False Statements about Stereotaxis' Backlog

66. Defendants further deceived investors by encouraging them to believe that the Niobe

System had moved to a predictable ramp in "clinical adoption" by touting the "strength in global new

capital orders" and a backlog that purportedly included "those outstanding purchase orders and other

commitments that management believes will result in recognition of revenue upon delivery or

installation of [the] systems." Throughout the Class Period, Defendants repeatedly trumpeted the

ever-growing backlog for the Niobe System and acknowledged that investors rely on this metric as a

"significant indicator of future performance." Stereotaxis' improper system of determining and

reporting their alleged backlog of orders, however, provided no reasonable basis for fairly

representing future revenue the Company expected to recognize, however, because it was comprised

of nothing more than non-binding letters of intent. Over the course of the Class Period and the

period immediately following, Defendants were forced to move over 62% of capital orders out of the

reported backlog.

67. On February 28, 2011, Stereotaxis issued a press release touting continued

momentum in new capital orders. The release stated in part:

"In 2010 we achieved significant progress toward our goal of establishing our Niobe robotic platform as a new standard of care for EP interventional medicine that we believe offers improved safety, efficacy and cost of care," said Michael P. Kaminski, President and Chief Executive Officer of Stereotaxis. " The strength in global new capital orders confirms that we continue to make progress in our key initiatives of driving stronger Niobe reference sites and expanding our Odyssey business into standard [electrophysiology] labs ."

- 31 -


68. After releasing its press release on February 28, 2011, defendants Kaminski and

Johnston hosted an earnings conference call with investors, media representatives, and analysts,

during which Johnston published the following projections for Niobe System sales for 2011:

Finally, I'd like to give you our first look at 2011. I would like to break this down by product line as growth characteristics and the predictability of each of these product groups varies. From a base of about $21.9 million (technical difficulty) in [ 2010], we expect the midpoint of our range for NIOBE to be around $26 million. NIOBE will grow in the high-teen percentage for 2011. We recognized revenue on 21 systems in 2010, and we expect to place between 23 and 25 systems in 2011. This increase reflects the increase in our current backlog of NIOBEs which stands at 27 systems versus 23 a year ago. The forecasted revenue per system for 2011 is about the same as 2010. The largest variable in how many systems go to revenue is the nature of today's backlog versus 2010 beginning backlog . At 30%, our NIOBE backlog is an Asia-Pacific region today. At the beginning of 2010 that number was about 10%. Variability in construction cycles in Asia-Pacific is greater. However, we do have a potential upside of we have success with our expanded distributor strategy in Europe and if accelerated worldwide adoption occurs.

69. On March 11, 2011, in its Form 10-K, signed by defendants Kaminski and Johnston,

Stereotaxis again claimed that the backlog reflected orders that "management believes will result in

recognition of revenue," without disclosing the facts that problems with Niobe System clinical

adoption and the introduction of the Epoch Platform would materially undercut orders in the backlog

and stymie future sales of the Niobe System before the Epoch Platform would be ready to fill the

gap. Worse, Defendants acknowledge that investors understand backlog to be a "significant

indicator of future performance," and do not debunk this perception. The Form 10-K stated in part:

As of December 31, 2010, we had approximately $43 million of backlog, consisting of

outstanding purchase orders and other commitments for these systems. We had backlog of

approximately $37 million and $45 million as of December 31, 2009 and 2008, respectively,

using the same active backlog criteria. Of the December 31, 2010 backlog, we expect

approximately 67% to be recognized as revenue over the course of 2011.

* * *

If we are unable to fulfill our current purchase orders and other commitments on a timely basis or at all, we may not be able to achieve future sales growth.

- 32 -


Our backlog, which consists of purchase orders and other commitments, is considered by some investors to be a significant indicator of future performance. Consequently, negative changes to this backlog or its failure to grow commensurate with expectations could negatively impact our future operating results or our share price. Our backlog includes those outstanding purchase orders and other commitments that management believes will result in recognition of revenue upon delivery or installation of our systems.

70. Along with signing the Form 10-K for fiscal year 2010, defendants Kaminski and

Johnston signed required certifications pursuant to the Sarbanes-Oxley Act of 2002 that falsely

attested to the purported accuracy and completeness of its disclosures and effectiveness of the

Company's internal controls. The certification stated in pertinent part, as follows:

Certification of Principal Executive Officer

I, Michael P. Kaminski, certify that:

1. I have reviewed this annual report on Form 10-K of Stereotaxis, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

* * *

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: March 11, 2011 /s/ MICHAEL P. KAMINSKI

Michael P. Kaminski President & Chief Executive Officer Stereotaxis, Inc.

(Principal Executive Officer)

* * *

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Certification of Principal Financial Officer

I, Daniel J. Johnston, certify that:

1. I have reviewed this annual report on Form 10-K of Stereotaxis, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

* * *

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: March 11, 2011 /s/ DANIEL J. JOHNSTON

Daniel J. Johnston Chief Financial Officer

Stereotaxis, Inc. (Principal Financial

Officer)

71. Defendants Kaminski's and Johnston's representations in the Company's February 28,

2011 press release, and the conference call that followed, and the Form 10-K filed on March 11,

2011 were materially and knowingly false and misleading. Defendants knew and failed to disclose

that the "strength in global new capital orders" and the reported backlog were not genuine indicators

of progress or future performance. Stereotaxis did not wait until it entered into a contract that was

considered legally effective and compulsory to recognize a new order. Instead, Stereotaxis included

letters of intent as orders in their reported backlog of Niobe Systems. These letters of intent

contained no commitment from the customers to actually buy a Niobe System or Stereotaxis to

tender a Niobe System. Defendants exacerbated the misleading impact of these statements by failing

to disclose that the Company was planning to introduce an upgrade that would address many of the

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inefficiencies and quality issues experienced by users of the Niobe System, rendering Niobe Systems

obsolete in the eyes of its current and potential customers, including customers who had made non-

binding "capital orders." As a result of the multiple contingencies existing at the time a letter of

intent was signed, less than half of these letters of intent actually turned into completed purchase

orders – a fact Defendants withheld from investors until the end of the Class Period. Between the

beginning of the second quarter of 2011 and the end of 2011, Stereotaxis removed at least fifteen

Niobe Systems out of its active backlog. This was over a 62% reduction and only related to

removals not linked to recognized revenue base upon completed orders.

72. Defendants took care to try to protect themselves by issuing general warnings that

"some of our purchase orders and other commitments are subject to contingencies that are outside

our control," and that "these orders and commitments may be revised, modified or cancelled, either

by their express terms, as a result of negotiations or by project changes or delays[.]" The Form 10-K

stated:

We cannot assure you that we will recognize revenue in any particular period or at all because some of our purchase orders and other commitments are subject to contingencies that are outside our control . In addition, these orders and commitments may be revised, modified or cancelled, either by their express terms, as a result of negotiations or by project changes or delays. System installation is by its nature subject to the interventional lab construction or renovation process which comprises multiple stages, all of which are outside of our control. Although the actual installation of our Niobe system requires only a few weeks, and can be accomplished by either our staff or by subcontractors, successful installation of our system can be subjected to delays related to the overall construction or renovation process. If we experience any failures or delays in completing the installation of these systems, our reputation would suffer and we may not be able to sell additional systems. We have experienced situations in which our purchase orders and other commitments did not result in recognizing revenue from placement of a system with a customer. In addition to construction delays, there are risks that an institution will attempt to cancel a purchase order as a result of subsequent project review by the institution or the departure from the institution of physicians or physician groups who have expressed an interest in the Niobe or Odyssey system.

73. Defendants, however, omitted to disclose the known facts that the backlog of Niobe

System "orders" was made up largely of signed letters of intent that customers were likely to walk

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away from after experiencing the problems Defendants knew most would have in achieving clinical

adoption, and especially after introducing the Epoch Platform designed to address those problems.

As noted, Stereotaxis subsequently removed over 62% worth of capital orders from its reported

backlog.

C. False and Misleading 2011 Financial Guidance

74. During the Class Period, Defendants issued false and misleading projections about

Stereotaxis' 2011 financial performance knowing that the projections lacked a reasonable basis and

aware of undisclosed facts that seriously undermined the accuracy of the projections.

75. On February 28, 2011, Stereotaxis issued a press release announcing its fiscal full

year and fourth quarter 2010 financial results, and issuing an aggressive 2011 business outlook.

Defendants forecast that Stereotaxis would achieve new capital order growth in the mid-30% range,

total revenue growth in the range of 20% to 30%, gross margins in the high-60% range, and

operating expenses in the range of $62-63 million.

76. Defendants' aggressive forecasts were material to investors and had the desired effect.

Analysts immediately responded to the positive forecasts and announcements by reaffirming their

"Buy" ratings and issuing price targets of $4.50 and $5 per Stereotaxis share, well above Stereotaxis'

$3.79 share price. Madison Williams and Company's March 1, 2011 report, entitled "4Q10 Review:

Odyssey Reviving Growth and Paving the Way to Profitability," stated "We reiterate out Buy rating

and $5 price target," noting that its analysts were impressed by both the Niobe System and Odyssey

Systems' alleged "growth" in the market. Collins Stewart's March 1, 2011 report, entitled "Trends

Continue to Improve; Reiterate Buy" stated "4Q results and outlook should quell investor concerns."

77. On May 2, 2011, Stereotaxis issued a press release announcing its first quarter 2011

financial results largely reiterating their reckless forecasts. Defendants announced that first quarter

results missed expectations, but stated that continued strong momentum in new capital orders,

revenue for the Company's Odyssey System, and growth in recurring revenues would enable

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Stereotaxis to meets its prior guidance. The Company again projected 2011 new capital order

growth in the mid-30% range, total revenue growth in the range of 20% to 30%, gross margins in the

high-60% range, and operating expenses in the range of $64 million to $65 million. The only change

was a mere $2 million increase for operating expenses. Stereotaxis refused to admit that the

financial expectations it provided to the market earlier in the year could not and would not be

achieved based on what they knew about stalled clinical adoption of the Niobe System, softening

backlog orders, and the immediate materially negative impact the introduction of the Epoch Platform

would have on the Niobe System sales before the Epoch Platform revenues would fill the gap.

78. Less than three months later, Defendants not only withdrew these projections, but

suspended all guidance for the remainder of 2011. Defendants had no reasonable basis for these

forecasts when they were made. At the same time that Defendants published this guidance, the

Company had only two primary sources of capital growth: Niobe System and Odyssey System sales.

Niobe System and Odyssey System sales accounted for over 44% of revenues. Defendants

Kaminski's and Johnston's forecasts in the February 28, 2011 press release were materially false and

misleading because they knew and failed to disclose that market feedback from users of the Niobe

System technology was "mixed," demanding "fundamental product improvements." Defendants

were fully aware of clinicians' complaints regarding the Niobe System long before February 28,

2011, and acted on them, devoting significant resources over the course of 2010 to the development

of the Epoch Platform upgrades that addressed the Niobe System's need for "fundamental product

improvements." The several well-understood problems with the Niobe System included that it took

physicians longer to complete procedures with the Niobe System than it did to performed the

procedures manually; that the design of the user interface was not user-friendly causing the actual

navigation of the catheter to be very difficult for the doctors to master; that there was a steep

learning curve associated with the technical aspects of the Niobe System, which caused a lack of

commitment to the product; that many doctors were not willing to complete the extensive training

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process associated with becoming proficient in using the Niobe System, a process that took as long

as six months; that efficacy of the Niobe System was questionable due to issues relating to catheter

contact force; and that there was a low level of technical support from Stereotaxis.

79. Defendants knew and failed to disclose and account for the fact that the Niobe System

was not being clinically adopted primarily because there was a very steep learning curve associated

with the technical aspects of the machinery. CW1 was hired to implement a training program to try

to "bring the doctors back on board." CW1 witnessed a number of stalled accounts where customers

that had acquired the technology were not using it or were using it in a very limited way, such as

only having five cases performed per year, "if that." CW1's conservative estimate was that at least

30% of the accounts in the United States were completely stalled. CW1 explained that the Company

would see usage during the first month of a new client purchasing the Niobe System, and then usage

would completely stop. CW1 stated that there were very few accounts that were actually using the

technology, were proficient, and clinically adopting the technology to perform procedures. As

confirmed by CW2, the majority of the calls her/his team received while fielding the call center were

complaints from physicians regarding the Niobe System's fundamental deficiencies that stymied

clinical adoption. Moreover, as admitted by defendant Kaminski in his August 8, 2011 disclosures,

the market demanded "a more efficient solution for complex ablation procedures."

80. Defendants' projections also failed to account for the immediate and material negative

impact their introduction of the Epoch Platform would have on Niobe System sales before Epoch

Platform sales could make up for the lost revenues. Defendants were well aware that interest in the

Niobe System was faltering due to difficulties and inefficiencies in using the technology, and that

Stereotaxis' own, long-planned new technology introduction would soon render the Niobe System

obsolete and materially undercut sales, as well as backlog "orders." Defendants knew and failed to

disclose to investors that the Company's transition away from the Niobe System and into the Epoch

Platform would have dire consequences for the Company's financial prospects in the short term.

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While the announcement of the Epoch Platform's release crushed already-weak Niobe System sales,

the manufacture, installation, and training of the Epoch Platform would not be completed until well

into 2012, creating a three-quarter revenue gap. The first round of Epoch Platforms was not even

slated to be shipped until December 2011. The introduction of the Epoch Platform's adverse effect

on the short-term financial health of the Company was foreseeable because Defendants knew of the

problems plaguing the Niobe System and understood that customers would not invest money in the

old system when the new system addressed these issues, including user interface design and

procedure time. This was a material omission that misled investors and their assessment of the

financial health and business prospects of Stereotaxis.

THE TRUTH IS REVEALED

81. On August 8, 2011, after the market closed, Stereotaxis issued a press release

announcing disappointing second quarter fiscal 2011 financial results, including a larger than

expected net loss of $9.7 million, or $0.18 diluted earnings per share, and a 22% decline in net

revenue for the second quarter ended June 30, 2011. Citing "corporate developments and an

uncertain business environment," Defendants' bullish statements about growth based on the

predictable ramp to broad clinical adoption of the Niobe System were abruptly withdrawn along with

Stereotaxis' 2011 financial guidance. Defendants announced that they would provide no further

guidance "until there is more predictability to the Company's magnetic platform business."

Stereotaxis also announced that its CFO, defendant Johnston, would resign effective August 15,

2011.

82. Defendant Kaminski revealed that the rosy picture the Company had painted for rapid

and predictable growth in Niobe System sales did not reflect reality. Kaminski admitted that the

Company's falling revenue was directly attributable to the "market's demand for a more efficient

solution to complex ablation procedures" than the Niobe System provided – facts Defendants knew

throughout the Class Period, but only now openly admitted. Kaminski further admitted that the

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Epoch Platform would replace the Niobe System and establish a "new standard of care." Defendants

also acknowledged for the first time the materially negative impact on Niobe System sales, backlog,

and Company revenues "as the market awaits the availability of Epoch." The press release stated in

relevant part:

"Our revenue and new capital order performance is being impacted by a slowdown in Niobe II momentum and the related impact on the Odyssey business due to delays of Odyssey installations in Niobe labs," said Michael P. Kaminski, President and Chief Executive Officer of Stereotaxis. "The slowdown in Niobe is due to the market's demand for a more efficient solution for complex ablation procedures. We successfully introduced our new Epoch platform, the Niobe II replacement , at our industry's most widely attended event, the Heart Rhythm Society annual meeting. The significant interest in Epoch's dramatically enhanced efficiency in electrophysiology (EP) procedures has intensified the market shift away from the current Niobe II. "

Kaminski continued, "Epoch's technological improvements over Niobe II provide the foundation to accelerate broad adoption of our technology. We are encouraged by the significant market interest that Epoch is generating as a new potential standard of care for EP interventional medicine. Since Epoch's release, we have scheduled 36 site visits with Niobe customers and potential customers to review the next generation system. The early, very positive reaction among key opinion leaders suggests that Epoch enables a faster, more efficient and dynamic magnetic catheter control for all types of robotic-assisted EP procedures while maintaining Niobe's recognized benefits in safety, radiation reduction and clinical outcome. We are focused on converting the strong interest into orders as quickly as possible, and plan for initial shipments to customers in the fourth quarter 2011. "

The Company generated global new capital orders of $4.4 million in the second quarter, which were comprised of two Niobe systems, as well as $1.7 million in orders related to Odyssey. Capital orders in the second quarter 2010 were $10.2 million.

Epoch and Odyssey Commercial Plan

In order to ensure successful commercialization of Epoch and Odyssey platforms, as well as conserve resources, Stereotaxis is implementing a wide ranging plan that includes rebalancing and reducing operating expenses by approximately 15 to 20 percent. This plan is designed to minimize the Company's cash burn, while continuing to fund R&D investment in key growth areas. In addition, Stereotaxis is working on several options to raise cash with minimal or no dilution to shareholders. The Company expects the impact of these initiatives on operating expenses will begin to occur in the fourth quarter of 2011.

"We are committed to taking the necessary actions to improve our operating performance, enhance our competitive position and strengthen the business for the

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long term," Kaminski said. "We need to take difficult but prudent actions to significantly reduce our costs as the market awaits the availability of Epoch , and we are immediately implementing overhead cost-reduction initiatives that will significantly realign and reduce operating expenses and minimize cash burn, while maintaining R&D investments to fund high growth opportunities like the continued advancement of our robotic technology platform."

83. After releasing its second quarter fiscal 2011 financial results on August 8, 2011,

defendants Kaminski and Johnston hosted an earnings conference call with investors, media

representatives, and analysts, during which Kaminski finally admitted the full extent of the long-

known fundamental problems with the Niobe System that had stymied clinical adoption, slowed

sales, and undercut reported backlog and revenues:

There are two factors impacting NIOBE II revenue. First, the market's demand for a more efficient solution for complex ablation procedures has caused mixed and sometimes negative reviews in our install base, the slowing of the sales momentum of the current NIOBE product. Second, the introduction of the Epoch and the positive market reaction is causing a rapid shift away from the current NIOBE II. We clearly underestimated the rate of market shift and forecasted a slower transition and although the shift ultimately is very positive to the Company, in the near term it will cause a disruption to our system orders and revenue expectations.

Let's start with NIOBE II trends. The market feedback from users has been mixed even after we have invested in developing the scientific proof regarding safety and efficacy, revising our training, improving customer site support and expanding our physician peer-to-peer education . It became apparent that the NIOBE product needed fundamental product improvements. After multiple discussions with users, we determined that the primary barrier in driving adoption was the inefficiency of the remote case and the long learning curve. Our new Epoch platform is designed to address these barriers and thus far the market response suggests we have succeeded.

* * *

Additionally, the new Epoch interface is designed to shorten the learning curve for physicians . The exact impact will vary by physician, but early testing supports efficiency improvements up to 30 minutes shorter for an AF case . We're very pleased with the significant level of interest in recent symposiums and at our exhibit booths with physicians clearly interested in understanding how this platform can meet their needs. We're focused on converting their strong interest into orders as quickly as possible and are aggressively following up on the high level of physician interest at HRS and EUROPACE to generate new leads for system placements and refocus on improved utilization that -- with accounts that have historically been under performers.

* * *

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Turning now to the NIOBE backlog, we've conducted a thorough review to identify orders that are not projected to come to revenue in a reasonable amount of time. We've reduced our backlog by 7 systems to a total of 20 systems that we expect to go to revenue in the next 18 months. Thus, to summarize the Epoch platform, the early reaction among key opinion leaders is extremely positive. Epoch is designed to enable a faster, more efficient and dynamic control for all devices of robotic assisted EP procedures while maintaining the NIOBE's recognized benefits of safety, radiation reduction and clinical outcomes.

* * *

In summary, the NIOBE II adoption is continuing based on strong scientific evidence. The positive utilization trends gives us confidence that the foundation of science, along with our Epoch improvements and efficiency, will position us well to become the standard of care for complex ablations .

* * *

Regarding financial guidance, we announced on our press release that we've withdrawn previous financial guidance for 2011 and are temporarily suspending providing financial guidance until we have more predictability to the ramp in our magnetic platform business.

84. These fundamental problems with the Niobe System and their impact on clinical

adoption and future sales were not, in fact, news to Defendants. As the Confidential Witnesses made

clear, these problems were well-understood when Defendants published in February 2011 and re-

published in March 2011 their wildly aggressive financial projections. For years, both during and

before the Class Period, Defendants were aware of the fundamental problems plaguing the Niobe

System. Defendants admitted that they had implemented new training programs, customer site

support, and physician peer-to-peer education programs to reverse stalled clinical adoption of the

Niobe System's costly, slow, overly complex, and difficult to use magnetic navigation system. In

this context, Defendants' claim to have merely under-estimated the impact introduction of the Epoch

Platform would have rings hollow. The Niobe System's problems were not only well-understood,

but they were among the key reasons for Defendants' substantial investment in the development of

the Epoch Platform.

85. When the true state of market acceptance of the Niobe System became public,

Stereotaxis' shares sank from a closing pricing of $2.85 on August 8, 2011, to a closing price of - 42 -


$1.19 at the end of the day on August 9, 2011. As depicted by the graph below, this amounted to a

single-day decline of 58% on volume of over 55 million shares:

86. Analysts immediately understood the impact the Epoch Platform-induced revenue gap

would have on Stereotaxis' financial performance. On August 8, 2011, Oppenheimer & Co. Inc.

("Oppenheimer") issued a report entitled, "Disappointing 2Q/Outlook; Lowering Rating to Perform,"

that succinctly reported that previous price targets would have to be re-evaluated as analysts' models

had assumed the truth of Defendants' representations that the Niobe System had turned the corner

toward a predictable ramp to broad clinical acceptance:

We are lowering our rating on [Stereotaxis] to Perform from Outperform and removing our $5 price target. [Stereotaxis] reported a disappointing 2Q and rescinded guidance. [Stereotaxis] continues to struggle with Niobe system placements and believes the impact of the improved Epoch platform will take time .

* * *

However, with uncertainty high and the path to improved performance now longer, we lower our rating.

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87. Following the August 8, 2011 disclosures, ThinkEquity LLC downgraded the

Company's stock from "Buy" to "Hold" and cut its price target from $6 to $2 per share. Specifically

highlighting the reduced backlog, analyst Sameer Harish ("Harish") openly questioned the credibility

of Defendants' reported backlog: "Backlog reductions and withdrawn guidance also call into

question the quality of system orders in backlog." Mr. Harish also noted the serious revenue gap

induced by the Company's Epoch Platform transition, a material fact that was known but omitted by

Defendants throughout the Class Period:

We lower our 2011 and 2012 revenues to reflect uncertainty regarding the timing of revenue recognition as well as delays in orders as hospitals elect to wait for the new Epoch system. While we expect the Epoch system advancements to significantly benefit the physician experience with the Stereotaxis magnetic robotic system, we cautiously remove Epoch revenue benefits from our estimate until 2H2012.

88. Stereotaxis filed a Form 10-Q on August 9, 2011, that explained in detail the facts

Defendants had previously withheld regarding the reasons behind falling Niobe System sales, the

materially negative impact of the Epoch Platform introduction, and the true state of the Company's

unreliable backlog. The Form 10-Q stated in part:

Revenue decreased from $15.0 million for the three months ended June 30, 2010 to $11.6 million for the three months ended June 30, 2011, a decrease of approximately 23%. Revenue from the sale of systems decreased from $9.4 million to $5.0 million, a decrease of approximately 47%, primarily due to a decrease in the number of NIOBE systems sold. We recognized revenue on three NIOBE systems and a total of $1.6 million for ODYSSEY and CINEMA systems during the 2011 period, versus seven NIOBE systems and a total of $2.5 million for ODYSSEY and CINEMA systems during the 2010 period.

* * *

We expect to have negative cash flow from operations in 2011 . Throughout 2011, we expect to continue the development and commercialization of our existing products and, to a lesser extent, our research and development programs and the advancement of new products into clinical development. We expect that our sales and marketing expenditures and our general and administrative expenses will increase in 2011 in order to support our product commercialization efforts. During a recent review of our backlog, we identified certain sales in which revenue recognition is uncertain due to factors including the migration from Niobe II to Niobe ES. As a result, we have removed systems from our backlog which could negatively impact future revenue recognition. Until we can generate significant cash

- 44 -


flow from our operations, we expect to continue to fund our operations with existing cash resources that were primarily generated from the proceeds of our public offerings, private sales of our equity securities and working capital and equipment financing loans. In the future, we may finance future cash needs through the sale of other equity securities, strategic collaboration agreements and debt financings. We cannot accurately predict the timing and amount of our utilization of capital, which will depend on a number of factors outside of our control.

POST CLASS PERIOD REVELATIONS AND ADMISSIONS

89. As further revelations clarified the magnitude of the impact of the Niobe System's

failure to attain broad clinical adoption, the Epoch Platform's introduction, and Stereotaxis'

unreliable backlog, the Company's shares were hammered by massive selling, dropping the price by

over 71% from the Class Period high by September 2011.

90. After releasing its financial results for the fourth quarter of fiscal year 2011 and the

year ended December 31, 2011, on March 5, 2012, defendant Kaminski and the Company's new

CFO, Duggan, hosted an earnings conference call with investors, media representatives, and

analysts. In this conference call, Kaminski finally explained to investors what he should have

disclosed during the Class Period: 2011 was going to be "a challenging year" for the Company due

to the impact of the "robotic platform transition." " Niobe system orders and revenue stalled as

customers waited to see the upgraded technology. " This was a material omission that should have

been disclosed to investors during the Class Period, and especially when the Epoch Platform was

introduced in late April 2011. Kaminski stated, in relevant part:

Clearly, 2011 was a challenging year for us, in which we experienced both successes and setbacks. During 2011, as we recognized the impact of our robotic platform transition on our financial results, we took immediate actions, including significantly reducing operating expenses, raising capital, and executing on the Epoch platform commercial launch. While we're confident these actions will lead to improved operating performance beginning in 2012, we know we have much work to do. We're determined to lead this company to profitability and will continue to take the necessary steps to improve on our financial position as we execute on our current business plan and growth strategies. To that end, our immediate priority is to address the capital needs of the company.

* * *

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Third, we reduced our operating expenses, the run rate by 20% by the end of 2011 to align costs to the revenue growth. Operating expenses are at our lowest level since 2005. Offsetting these successes we experienced some setbacks. While we are excited about the potential of the Epoch platform, the platform transition had a negative impact on 2011 financial results. Following the introduction of the Epoch product at the HRS meeting in May, Niobe system orders and revenue stalled as customers waited to see the upgraded technology. The Odyssey business was also negatively impacted as Odyssey orders and installations -- at installations in Niobe lab slowed . At the same time, while we had significant interest in Odyssey from standard labs, the anticipated larger deals did not materialize.

91. During the March 5, 2012 conference call, defendant Kaminski further exposed the

truth behind the Company's admittedly unreliable backlog, but only under pressure from analysts:

[ANALYST:] Let's see here. Let's talk a little bit about the backlog. I think you mentioned a couple of moving parts, or a $7 million taken off of the backlog last quarter and you added $3 million. Has anything changed, while we're talking about numbers, has anything changed in terms of how you think about or qualify these large projects?

I'm just trying to figure out that $10 million that you have in the backlog. Has the criteria by which you were judging those and including them in the probability of them being completed in 18 months changed over the last six months or so? In other words, should we, perhaps, look to see that number to be above the core predictables as we had in the 2012?

[KAMINSKI:] Jose, let me -- Sam can address the puts and takes of the backlog. Let me address the overarching question you asked first. If you look at the backlog today, there is 10 systems in backlog. I think we believe 8 of the 10 should be in a position to go to revenue this year . Two are sitting right on the beginning of next year in the 18-month window.

We've taken everything outside of that, out of the backlog. And then, the 10 we're confident will go to be an Epoch system in that period of time , the next 18 months . All right? So, and we think that we're now in a position to make that a very predictable part of how we look at revenue roll forward in the Company's business model.

92. Duggan, the Company's new CFO who had replaced defendant Johnston, confirmed

Kaminski's statements and added his own thoughts about the Company's new more "predictable"

backlog:

[WJe are attempting to make the backlog more predictable as we move forward. And by that I mean we are trying to make sure that as new items come into backlog, that we have a very -- a high level of confidence that they will turn to revenue.

- 46 -


93. Between the beginning of the second quarter of 2011 and the end of 2011, Stereotaxis

removed at least fifteen Niobe Systems out of its active backlog. This was over a 62% reduction and

only related to removals not linked to recognized revenue based upon completed orders. Kaminski

and Duggan's carefully guarded statements about the Company's new, higher confidence approach to

backlog reporting confirmed the loose and deceptive nature of the Company's backlog during the

Class Period. Kaminski's and Duggan's statements also confirmed what Defendants had known all

along: against the backdrop of the Niobe System's well-understood problems, high cost, and stalled

clinical adoption, the introduction of the Epoch Platform was the death-knell for the Niobe System.

All ten units in Stereotaxis' new, reliable backlog were Epoch Platforms.

ADDITIONAL FACTS EVIDENCING DEFENDANTS' SCIENTER

94. Stereotaxis is a relatively small company with approximately 200 employees during

the Class Period. According to the Company's filed Form 10-K for FY2010, "as of December 31,

2010, [Stereotaxis] had 204 employees, 41 of whom were engaged directly in research and

development, 92 in sales and marketing activities, 27 in manufacturing and service, 9 in regulatory,

clinical affairs and quality activities, 10 in training activities and 25 in general administrative and

accounting activities." CW2 estimated that only 100 employees worked at the St. Louis, Missouri

headquarters. Defendants Kaminski and Johnston were close to and directly involved in the

Company's operations, sales, and financial reporting. CW2 confirmed that Kaminski "knew every

customer, every sale, and was acutely aware" of the status of each purchase order.

95. During the Class Period, the Company's business was almost entirely derived from

the sale of its flagship Niobe System and Odyssey Cinema Portfolio to a limited number of

customers, along with limited additional sales of disposable catheters to existing Niobe System

customers/users. During each quarter of the Class Period, the Company sold less than a handful of

Niobe Systems. During the entire Class Period, approximately half of the Company's revenues were

derived from the sale of only five Niobe Systems and $5.3 million worth of Odyssey Cinema

- 47 -


Portfolio sales. Given the outsized impact each individual order and sale of a Niobe System would

have on quarterly revenues, Defendants Kaminski and Johnston were acutely aware of the actual

status of orders in backlog, the myriad of problems customers and employees reported in qualifying

physicians for clinical adoption, and the urgent need for a fundamentally upgraded system to replace

the Niobe System.

96. CW2 confirmed that Stereotaxis used the Salesforce.com software system to track all

information for customer accounts, including backlog orders, sales, service claims, warranty claims,

and other related data for each Niobe System. The information was kept up-to-date and was

accessed by Stereotaxis' small and centralized executive management team. According to the

Company's website, the Company lists only six people under the section entitled, "Executive

Management Team." During the Class Period, both defendants Kaminski and Johnston were a part

of this executive management team and therefore had access to the real-time order, sales, and

backlog data on the Company's Salesforce.com software system.

97. Further, defendants Kaminski and Johnston were members of the centralized

executive management team with Bruce. As Stereotaxis' CTO, Bruce was responsible for

communicating critical issues impacting development and sales of the Company's core products'

(Niobe System and Odyssey System) technical issues to the rest of the executive management team.

As confirmed by CW1, Bruce attended executive meetings on a weekly basis with Kaminski and

Johnston, in which they discussed the Company's core operations, including the performance and

sales of the Niobe System, and the development, trials, and plans for rolling out the Epoch Platform.

98. The foregoing facts support a strong inference that, throughout the Class Period,

Defendants knew the extent of the product deficiencies plaguing the Niobe System, the timing and

inevitable impact of the Epoch Platform rollout on Niobe System backlog, sales, and revenue, the

true state of the Company's backlog, and the effect the combination of these factors would have on

the Company's 2011 financial results. Defendants had hoped that they could conceal the truth about

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the Niobe System in part because they knew that the Company was entering a critical transition

period to the new Epoch Platform, and was in desperate need of capital to finance. Defendants knew

that the Company could not afford to lose its ability to raise capital to fund necessary expenditures

during this transition period, including, but not limited to research and development of the Epoch

Platform to address the collapse in clinical adoption, customer support, backlog and sales of the

failed Niobe System; marketing of the Epoch Platform to new customers and the Company's existing

customer base; and training efforts to facilitate clinical adoption of the Epoch Platform. As revealed

in the Company's Form 10-K for fiscal 2011, filed on March 15, 2012, the Company's ability to raise

capital during and after the Class Period was in serious jeopardy:

In addition, as of the date of the filing of this Form 10-K, our public float is below $75 million. As a result, we are limited in our ability to file new shelf registration statements on SEC Form S-3 and/or to fully use the remaining capacity on our existing registration statements on SEC Form S-3. We have relied significantly on shelf registration statements on SEC Form S-3 for most of our financings in recent years, so any such limitations may harm our ability to raise the capital we need . In addition, if we are unable to remain compliant with our bank financing covenants, or if we are not able to timely file and make effective registration statements prior to the dates required under the federal securities laws, we would be ineligible to use Form S-3 for a 12-month period. Under those circumstances, until we are again eligible to use Form S-3, we would be required to use a registration statement on Form S-1 to register securities with the SEC or issue such securities in a private placement, which could increase the cost of raising capital.

99. Defendants decided that Stereotaxis could not afford to publish the truth about the

Niobe System's failure and the financial implications of the impending multi-quarter revenue gap

that would follow introduction of the Epoch Platform. Instead, Defendants continuously touted a

strong backlog of orders and bullish 2011 financial guidance to maintain their façade of continued

growth and preserve the artificially high stock price for Stereotaxis common stock as long as

possible before their house of cards collapsed, and published the truth only after the collapse of the

backlog, new orders, and revenues forced their hand.

LOSS CAUSATION

100. As detailed above, Defendants' false and misleading statements caused Stereotaxis'

stock to trade at artificially inflated prices and operated as a fraud and deceit upon Class Period

- 49 -


purchasers of Stereotaxis securities. From February 28, 2011 until August 8, 2011, Stereotaxis'

stock price traded at inflated prices between $2.67 and $4.24 per share. After the market closed on

August 8, 2011, Stereotaxis revealed the truth about its business health and prospects, resulting in an

immediate and statistically significant decline in the aftermath of the August 8, 2011 disclosure.

Class members who had purchased Stereotaxis stock during the Class Period suffered economic loss

as a result of the revelation of material facts that contradicted and corrected Defendants' earlier

misleading statements and omissions.

101. On August 8, 2011, the Company announced financial results for the second quarter

of 2011, which had plummeted from second quarter 2010 levels and fell drastically below

expectations, and rescinded their guidance for the full year 2011. On the poor results, defendant

Kaminski commented that Stereotaxis' "revenue and new capital order performance is being

impacted by a slowdown in Niobe II momentum." Indeed, systems sales contracted sharply in the

second quarter of 2011, falling 47% versus the second quarter of 2010, "primarily due to a decrease

in the number of Niobe Systems sold" due to the fact that (a) "the [Niobe System] needed

fundamental product improvements"; (b) the "primary barrier" to adoption was "the inefficacy of the

remote case and the long learning curve" of the [Niobe System]; and (c) customers would wait for

the Epoch Platform before investing millions of dollar in purchasing and thousands of man-hours in

trying to master the Niobe System. Contrary to Defendants' assertion that the Niobe System had

achieved a predictable ramp toward clinical acceptance and forecasts of significant revenue growth,

Stereotaxis experienced a revenue gap, withdrew its previous financial guidance, and suspended all

future guidance.

102. Defendants also corrected their false and misleading statements made during the

Class Period regarding a metric that they knew and acknowledged in Stereotaxis' March 11, 2011

Form 10-K was particularly important to investors, backlog. During the August 8, 2011 conference

call, Stereotaxis announced that it dramatically slashed its Niobe System backlog by over 25% for

- 50 -


the second quarter of 2011 alone. Over the course of the Class Period and the period immediately

following, however, Defendants were forced to remove over 62% of capital orders out of the

reported backlog.

103. The market quickly acknowledged the materiality of these new facts. Following the

August 8, 2011 disclosures, analyst Harish issued a report in which he downgraded the Company's

stock from $6 to $2 per share. Specifically highlighting the reduced backlog and rescinded

guidance, Harish wrote in his report: "Backlog reductions and withdrawn guidance also call into

question the quality of system orders in backlog."

104. Oppenheimer removed its $5 price target for the Company and lowered its rating to

"perform" from "outperform," blaming the Company's continuing "struggle with the Niobe system

placement."

105. The August 8, 2011 announcement removed the artificial inflation in Stereotaxis'

stock. When the market opened for trading the day after this corrective disclosure, the Company's

stock price fell from $2.85 to close at $1.19 on August 9, 2011, a drop of over 58%.

106. Stereotaxis' stock price declined significantly more than the changes in its peer group

and the S&P 500. As a result, the price decline following this disclosure provides a measurement of

Class members' economic losses. The declines in the Company's stock price following the

Company's disclosures compared to the changes in the peer group and S&P 500 negate any inference

that the losses suffered by Class members were caused by changed market or industry conditions or

Company-specific facts unrelated to the fraudulent conduct. The following chart illustrates the

changes in Stereotaxis' stock price during the Class Period compared to the S&P 500 and the Russell

2000 Medical Equipment Growth Index 4 :

4 The Russell 2000 Medical Equipment Growth Index measures the performance of the small-cap growth segment of medical equipment manufacturers and marketers in the U.S. equity universe. It includes companies with higher price-to-value ratios and higher forecasted growth values

- 51 -


Time After 8/8/11 STXS % S&P 500 Index Russell 2000 Disclosure Change % Change Medical % Change

One Day - 8/9/2011 -58.2% 4.7% 6.6%

One Week - 8/15/2011 -59.3% 7.6% 7.5%

FRAUD-ON-THE-MARKET DOCTRINE

107. At all relevant times, the market for Stereotaxis securities was an efficient market for

the following reasons, among others:

(a) Stereotaxis securities met the requirements for listing, and was listed and

actively traded on the NASDAQ, a highly efficient and automated market;

(b) Stereotaxis filed periodic public reports with the SEC and the NASDAQ;

(c) Stereotaxis regularly communicated with public investors via established

market communication mechanisms, including regular disseminations of press releases on the

national circuits of major newswire services and other wide-ranging public disclosures, such as

communications with the financial press and other similar reporting services;

(d) Stereotaxis was followed by several leading securities analysts, including

Madison Williams and Company, Collins Stewart, JMP Securities, and Oppenheimer, and the

business press;

(e) Numerous National Association of Securities Dealers member firms,

including Morgan Stanley, Goldman Sachs, and Merrill Lynch, were active market-makers in

Stereotaxis stock at all times during the Class Period, confirming that investors were able to trade

continuously during market hours in an orderly, liquid, and efficient market; and

(f) According to the Company’s Form 10-Q filed with the SEC on August 9,

2011, as of August 1, 2011, there were over 55.4 million shares of Stereotaxis common stock

outstanding. During the Class Period, on average, over 1.7 million shares, or greater than 3% of the

outstanding shares of Stereotaxis stock were traded on a weekly basis, demonstrating a very active

- 52 -


and broad market for Stereotaxis stock and permitting a very strong presumption of an efficient

market.

108. As a result of the foregoing, the market for Stereotaxis securities promptly digested

current information regarding Stereotaxis from all publicly available sources and reflected such

information in the prices of the securities. Under these circumstances, all purchasers of Stereotaxis

securities during the Class Period suffered similar injury through their purchase of Stereotaxis

securities at artificially inflated prices and a presumption of reliance applies.

NO SAFE HARBOR

109. The statutory safe harbor provided for forward-looking statements under certain

circumstances does not apply to any of the allegedly false statements pleaded in this Complaint. The

safe harbor does not apply to the false and misleading statements of current facts alleged herein. As

to the misleading forward looking statements challenged herein, the published cautionary statements

failed to address known risks that had already materialized and that could cause actual results to

differ materially from those in the purportedly forward-looking statements. Moreover, to the extent

that the statutory safe harbor is determined to apply to any forward-looking statements pleaded

herein, Defendants are liable for those false forward-looking statements because at the time each of

those forward-looking statements was made, the speaker had actual knowledge of information

demonstrating that the forward-looking statement was materially false or misleading, and/or the

forward-looking statement was authorized or approved by an executive officer of Stereotaxis who

knew that the statement was false when made.

CLASS ACTION ALLEGATIONS

110. Plaintiff brings this action as a class action pursuant to Rule 23 of the Federal Rules

of Civil Procedure on behalf of all persons who purchased or otherwise acquired Stereotaxis

securities during the Class Period. Excluded from the Class are Defendants and their families, the

officers and directors of the Company, at all relevant times, members of their immediate families and

- 53 -


their legal representatives, heirs, successors, or assigns, and any entity in which Defendants have or

had a controlling interest.

111. 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. Stereotaxis has over 55 million shares of stock outstanding, owned by

hundreds if not thousands of persons.

112. There is a well-defined community of interest in the questions of law and fact

involved in this case. Questions of law and fact common to the members of the Class which

predominate over questions which may affect individual Class members include:

(a) whether the Exchange Act was violated by Defendants;

(b) whether Defendants omitted and/or misrepresented material facts;

(c) whether Defendants' statements omitted material facts necessary to make the

statements made, in light of the circumstances under which they were made, not misleading;

(d) whether Defendants knew or deliberately disregarded that their statements

were false and misleading;

(e) whether the price of Stereotaxis securities was artificially inflated; and

(f) the extent of damage sustained by Class members and the appropriate measure

of damages.

113. Plaintiff's claims are typical of those of the Class because Plaintiff and the Class

sustained damages from Defendants' wrongful conduct.

114. Plaintiff will adequately protect the interests of the Class and has retained counsels

who are experienced in class action securities litigation. Plaintiff has no interests which conflict

with those of the Class.

115. A class action is superior to other available methods for the fair and efficient

adjudication of this controversy.

- 54 -


COUNT I

Against Defendants for Violation of Section 10(b) of the Exchange Act and SEC Rule 10b-5

116. Plaintiff incorporates by reference and realleges each and every allegation contained

above, as though fully set forth herein.

117. During the Class Period, Defendants disseminated or approved the false statements

specified above, which they knew or deliberately disregarded were misleading in that they contained

misrepresentations and failed to disclose material facts necessary in order to make the statements

made, in light of the circumstances under which they were made, not misleading.

118. Defendants violated section 10(b) of the Exchange Act and SEC Rule 10b-5 in that

they:

(a) employed devices, schemes, and artifices to defraud;

(b) made untrue statements of material facts or omitted to state material facts

necessary in order to make the statements made, in light of the circumstances under which they were

made, not misleading; or

(c) engaged in acts, practices, and a course of business that operated as a fraud or

deceit upon Plaintiff and others similarly situated in connection with their purchases of Stereotaxis

securities during the Class Period.

119. Plaintiff and the Class have suffered damages in that, in reliance on the integrity of

the market, they paid artificially inflated prices for Stereotaxis securities. Plaintiff and the Class

would not have purchased Stereotaxis securities at the prices they paid, or at all, if they had been

aware that the market prices had been artificially and falsely inflated by Defendants' misleading

statements.

- 55 -


COUNT II

Against Defendants for Violation of Section 20(a) of the Exchange Act

120. Plaintiff incorporates by reference and realleges each and every allegation contained

above, as though fully set forth herein.

121. Defendants acted as controlling persons of Stereotaxis within the meaning of section

20(a) of the Exchange Act. By reason of their positions with the Company, Defendants had the

power and authority to cause Stereotaxis to engage in the wrongful conduct complained of herein.

Defendants controlled Stereotaxis and all of its employees. By reason of such conduct, Defendants

are liable pursuant to section 20(a) of the Exchange Act.

122. As a direct and proximate result of Defendants' wrongful conduct, Plaintiff and

members of the Class suffered damages in connection with their respective purchases and sales of

the Company's securities during the Class Period.

PRAYER FOR RELIEF

WHEREFORE, Plaintiff prays for judgment as follows:

A. Declaring this action to be a proper class action pursuant to Rule 23 of the Federal

Rules of Civil Procedure and certifying Plaintiff as a representative of the Class;

B. Awarding Plaintiff and the members of the Class damages, including interest;

C. Awarding Plaintiff reasonable costs and attorneys' fees; and

D. Awarding such equitable/injunctive or other relief as the Court may deem just and

proper.

Dated: March 19, 2012 CAREY, DANIS & LOWE JAMES J. ROSEMERGY

s/James J. Rosemergy JAMES J. ROSEMERGY (#50166MO)

8235 Forsyth Boulevard, Suite 1100 St. Louis, Missouri 63105 Telephone: (314) 725-7700 Facsimile: (314) 721-0905 E-mail: [email protected]

- 56 -


Liaison Counsel for Plaintiff

ROBBINS UMEDA LLP BRIAN J. ROBBINS CRAIG W. SMITH JULIA M. WILLIAMS KEVIN S. KIM 600 B Street, Suite 1900 San Diego, CA 92101 Telephone: (619) 525-3990 Facsimile: (619) 525-3991 E-mail: [email protected]

[email protected] [email protected] [email protected]

ROBBINS GELLER RUDMAN & DOWD LLP

TRICIA MCCORMICK 655 West Broadway, Suite 1900 San Diego, CA 92101 Telephone: (619) 231-1058 Facsimile: (619) 231-7423 E-mail: [email protected]

Co-Lead Counsel for Plaintiff

698303

- 57 -

Case: Case: 4:1-cv-01752-HEA 4: 1 1-cv-01752-HEA Doc. Doc. #: #: 18 12-1 Filed: Filed: 03/912 1 2/09/11 Page: Page: 58 2 of of 62 4 ID Page ID : # : 72 266

CERTIFICATION OF NAMED PLAINTIFF PURSUANT TO FEDERAL SECURITIES LAWS

LOCAL 522 PENSION FUND ("Plaintiff') declares:

1. Plaintiff has reviewed a complaint and authorized the filing of a motion

for lead plaintiff in this action

2. Plaintiff did not acquire the security that is the subject of this action at the

direction of plaintiff's counsel or in order to participate in this private action or any

other litigation under the federal securities laws,

3. Plaintiff is willing to serve as a representative party on behalf of the

class, including providing testimony at deposition and trial !, if necessary.

4. Plaintiff has made the following transaction(s) during the Class Period in

the securities that are the subject of this action:

Security Transaction Date Price Per Share

See attached Schedule A.

5. Plaintiff has not sought to serve or served as a representative party in a

class action that was filed under the federal securities laws within the three-year

period prior to the date of this Certification except as detailed below:

6. The Plaintiff will not accept any payment for serving as a representative

party on behalf of the class beyond the Plaintiff's pro rata share of any recovery,

Si iRIOiXS

Case: Case: 4:1-cv-01752-HEA 4: 1 1-cv-01752-HEA Doc. Doc. #: #: 18 12-1 Filed: Filed: 03/912 1 2/09/11 Page: Page: 59 3 of of 624 ID Page ID : # : 73 267

except such reasonable costs and expenses (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.

Executed this 7 day ofcç2Ol1,

LOCAL 522 PENSION FUND

By:___

Its:

S.! ER}OTAX!S


SCHEDULE A

SECURITIES TRANSACTIONS

Acquisitions

Date Type/Amount of Acquired Securities Acquired Price

04/05/2011 4,850 $4.11 06/2212011 500 $3.45 06/2212011 5,950 $3.48

0

0,

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C', 0)C ' ft CJ ..

10 co

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OL 70

ca L!

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Z CCC a) a)

U.- U.- W-

.2

- - U CCC Cft

00 U) - - a) .- CODC

COCa) - cI°> j,JD

QQU- I-. (i).DQ) Cj) a) O C'JNN Ca ?•a) c-SI c'i o '- LOLOLO -

Cfl_C C -5 cn

02CU) 000 U-

. . -

C.) -D i— E


CERTIFICATE OF SERVICE

I hereby certify that on March 19, 2012, I electronically filed the foregoing with the

Clerk of the Court using the CM/ECF system which will send notification of such filing to

the e-mail addresses denoted on the Court's electronic mail notice list.

I certify under penalty of perjury under the laws of the United States of America

that the foregoing is true and correct. Executed March 19, 2012.

s/James J. Rosemergy JAMES J. ROSEMERGY

Documents

Kevin Pound, et al. v. Stereotaxis, Inc., et al. 11-CV-01752-First …securities.stanford.edu/filings-documents/1047/STXS00_01/... · 2012. 3. 20. · Exchange Act, 15 U.S.C. §78j(b)