ROBBINS GELLER RUDMAN & DOWD LLP ROBERT R. …securities.stanford.edu/filings-documents/1048/PWAV00_01/2012723_f... · 4. Powerwave engages in the design, ... repeaters, tower-mounted

Case 8:1

C-JPR Document 40 Filed 07/23/12 Page 1 of 25 Page ID #:397

ROBBINS GELLER RUDMAN & DOWD LLP

DARREN J. ROBBINS (168593) ROBERT R. HENSSLER JR. (216165) 655 West Broadway, Suite 1900 San Diego, CA 92101-3301 Telephone: 619/231-1058 619/231-7423 (fax) darrenrrgrd1aw.com bhensslerrgrd1aw.com

Lead Counsel for Plaintiff C)

UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNA

SOUTHERN DIVISION 171 1 0

PAWEL I. KMIEC, Individually and on No. 8: 12-cv-0022-iJPgj) Behalf of All Others Similarly Situated, )

CLASS ACTIO( Plaintiff, -

CONSOLIDATEO COMPLAINT FOR vs. VIOLATIONS OF THE FEDERAL

SECURITIES LAWS POWERWAVE TECHNOLOGIES INC., et al.,

Defendants.

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1 TABLE OF CONTENTS

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II. JURISDICTION AND VENUE .....................................................................1

III

INTRODUCTION AND OVERVIEW ........................................................... 1

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CLAIMS ASSERTED IN THE COMPLAINT..............................................3

IV. PLAINTIFFS...................................................................................................3

V. DEFENDANTS...............................................................................................4

I VI. SOURCES OF ALLEGATIONS....................................................................6

VII. FACTUAL BACKGROUND TO DEFENDANTS' SCHEME...................10

Nature of Powerwave's Business .......................................................10

Because of Declining Demand Powerwave Engaged in a Revenue Recognition Scheme that Masked the True Demand forIts Products....................................................................................12

VIII. DEFENDANTS' FALSE STATEMENTS AND OMISSIONS ISSUED DURING THE CLASS PERIOD...................................................19

IX. THE TRUTH BEGINS TO EMERGE .........................................................31

X. DEFENDANTS' MATERIALLY FALSE AND MISLEADING FINANCIAL REPORTING AND GAAP VIOLATIONS DURING THECLASS PERIOD ..................................................................................44

A. Powerwave Improperly Recognized Revenue on Contingent Sales with Team Alliance, in Violation of GAAP .............................. 45

Sales of Defective Product............................................................................46

BulkOrders ..................................................

B. Powerwave Recorded Premature and Inflated Revenue in Violation of GAAP and the SEC's Revenue Recognition Requirements......................................................................................47

Powerwave '5 Disclosures Regarding Revenue Recognition Were False and Misleading and in Violation of GAAP and SEC Guidance............................................................................................. 50

Powerwave's Revenue Recognition Scheme Is Supported by the 92% Increase in DSO in 3Q11.....................................................52

Powerwave's Revenue Recognition Scheme Also Affected Inventory............................................................................................. 55

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1 TABLE OF CONTENTS

Page

F. Powerwave 'S Financial Statements Violated Fundamental AccountingConcepts.......................................................................... 57

XI. DEFENDANTS' KNOWLEDGE OR RECKLESS DISREGARD OF THE TRUTH ABOUT POWERWAVE'S BUSINESS ............................... 58

I XII. FRAUDULENT SCHEME AND COURSE OF BUSINESS ......................61

XIII. ADDITIONAL SCIENTER ALLEGATIONS.............................................61

Defendants' Post Class Period Conduct of Shipping Unneeded Products to Customers Supports a Strong Inference of Scienter........62

Each of Defendants' False Statements and Omissions Involved One of Powerwave's Core Operations................................................62

Powerwave's Incentive Compensation Structure Created an Incentive for Fraud and Strongly Supports an Inference of Scienter................................................................................................ 63

D. Defendants' Fraudulent Conduct Allowed Defendants to Preserve Powerwave's Credit and Debt Ratings and Raise $100

n Million in the July 20, 2011 Offeng................................................. 65

Defendants' Misleading Statements About the Reasons for the 3Q11 "Nightmare" Support a Strong Inference of Scienter...............66

SOXCertification ...............................................................................68

1. Defendants Signed False Statements Regarding Powerwave's Internal Controls and Procedures.......................68

2. Reasons Why Defendants' Internal Controls and Procedure Statements Were Materially False and Misleading ................................................... 70

XIV. LOSS CAUSATION/ECONOMIC LOSS....................................................72

XV. ANY PURPORTED TUSK WARNING WERE INADEQUATE OR MATERIALLY FALSE AND MISLEADING ............................................ 74

XVI. NO SAFE HARBOR..................................................................................... 75

XVII. APPLICABILITY OF PRESUMPTION OF RELIANCE: FRAUD-ON-THE MARKET......................................................................................75

XVIII. CLASS ACTION ALLEGATIONS...................................................76

CLAIMS FOR RELIEF...........................................................................................78

COUNTI .................................................................................................................78

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COUNTII ................................................................................................................ 78

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PRAYERFOR RELIEF..........................................................................................79

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JURYDEMAND ..................................................................................................... 79

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1 I. JURISDICTION AND VENUE

2

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

3 Exchange Act of 1934 ("1934 Act") (15 U.S.C. §78j(b) and 78t(a)) and Rule lOb-5

4 (17 C.F.R. §240.10b-5) promulgated thereunder by the Securities and Exchange

5 I commission ("SEC"). Jurisdiction is conferred by §22 of the Securities Act of 1933

6 I ("1933 Act") (15 u.s.C. §77v) and §27 of the 1934 Act (15 U.S.C. §78aa). Venue is

7 proper pursuant to §22 of the 1933 Act and §27 of the 1934 Act. Powerwave

8 Technologies, Inc.'s ("Powerwave" or the "Company") headquarters are located at

9 1801 East St. Andrew Place, Santa Ana, CA 92705 and many of the acts and

10 transactions constituting the violations of the securities laws alleged herein occurred

11 in this District.

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2. In connection with the acts and conduct alleged herein, defendants,

13 directly and indirectly, used the means and instrumentalities of interstate commerce,

14 including, but not limited to, the United States mails, interstate telephone

15 communications and the facilities of the national securities exchanges and markets.

16 II. INTRODUCTION AND OVERVIEW

17

3. This is a securities class action on behalf of all persons who purchased or

18 otherwise acquired the securities of Powerwave between October 28, 2010 and

19 October 18, 2011, inclusive (the "Class Period"), against Powerwave and certain of its

20 officers and/or directors for violations of the 1934 Act. These claims are asserted

21 against Powerwave and certain of its officers and/or directors who made materially

22 false and misleading statements during the Class Period in press releases, analyst

23 conference calls and filings with the SEC.

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4. Powerwave engages in the design, manufacture, marketing and sale of

25 wireless solutions for wireless communications networks worldwide. This action

26 concerns defendants' false statements and omissions regarding demand, and the

27 Company's financial statements. During the Class Period, defendants caused

28 Powerwave to report artificially inflated financial results in an effort to meet or exceed

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Powerwave's financial guidance in the face of a market that analysts believed would

experience slow growth through the 2011 fiscal year. Defendants' false explanation

for their tremendous feat was that Powerwave' s products were technically superior to

the competition and that, as a result, Powerwave's growth would exceed that of the

market as a whole.

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5. In truth, defendants knew or recklessly disregarded that demand for

7 Powerwave's products was actually steeply declining. To off-set the declining

8 demand, and cloak the Company's deteriorating financial condition, defendants

9 engaged in an accounting scheme to artificially inflate its revenue and earnings by: (1)

10 shipping "bulk orders" of unsold and/or unsellable inventory to resellers on a

11 contingent basis whereby Powerwave would grant special extended payment terms

12 and rights to return the product; and (2) knowingly and deliberately shipping product

13 that Powerwave knew did not function "with the promise to replace" the defective

14 products in a later quarter. Defendants' false statements and omissions artificially

15 inflated Powerwave's stock price, allowing defendants and the Company to complete

16 a $100 million bond offering and collect millions in performance bonuses. As the

17 truth about defendants' false statements and omissions were revealed, Powerwave

18 shareholders suffered millions of dollars in damages and the Company's common

19 stock price plummeted from a Class Period high of $4.69 per share to $.68 per share

N) on October 19, 2011 - a 85% decline in little over five months, from which

21 Powerwave's stock price never recovered.

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1 Powerwave Technologies October 28, 2010 - October 18, 2011

$25

$20

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$10

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$01 I I I I I I I H I I

0110412010 07.104,2010 0110412011 0710512011 01/03/2012 0710312012 04/0642010 1010412010 04/0412011 1010312011 04/03/2012

0

III. CLAIMS ASSERTED IN THE COMPLAINT

6. Lead Plaintiff the Government of Bermuda Contributory and Public

Service Superannuation Pension Plans (the "Bermuda Pension Plans") asserts claims

arising from allegations of securities fraud in violation of § 10(b) of the 1934 Act

against those defendants, Powerwave and certain of the Company's senior executives,

who made materially false and misleading statements that caused the price of

Powerwave securities to be artificially inflated over the course of the Class Period.

The Bermuda Pension Plans also asserts control-person claims under §20(a) of the

1934 Act.

IV. PLAINTIFFS

7. On April 26, 2012, the Court appointed the Bermuda Pension Plans as

Lead Plaintiff to represent the proposed class of Powerwave shareholders. During the

Class Period, the Bermuda Pension Plans purchased and held shares of Powerwave

The "Dollars Per Share" reflects the 1-for-S reverse stock split. See ¶175.

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1 common stock. As a result of the defendants' conduct detailed herein, the Bermuda

2 Pension Plans suffered damages in connection with its purchases of Powerwave

3 securities.

4 V. DEFENDANTS

5 : 8. Defendant Powerwave engages in the design, manufacture, marketing

6 and sale of wireless solutions for wireless communications networks worldwide. The

7 Company offers antennas, boosters, combiners, cabinets, shelters, filters, radio

8 frequency power amplifiers, remote radio head transceivers, repeaters, tower-mounted

9 amplifiers ("TMI's"), and advanced coverage solutions for use in frequency bands,

10 including cellular, PCS, 3G, and 4G wireless communications networks.

11 Powerwave's common stock was listed and traded on the National Association of

12 Securities Dealers Automated Quotations ("NASDAQ") under the symbol PWAV

13 during the Class Period.

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9. Defendant Ronald J. Buschur ("Buschur") served as the Company's

15 President and Chief Executive Officer ("CEO") during the Class Period. During the

16 Class Period, Buschur participated in the issuance of false and misleading statements

17 and failed to disclose the true facts about Powerwave's business. At no time during

18 the Class Period did Buschur or any other defendant assert that they were not aware of

19 material aspects of Powerwave's business or finances. Moreover, Buschur issued

70 statements in press releases and led the Company's conference calls with analysts and

21 investors, representing himself as a primary person with knowledge about the

22 Company's business, outlook, financial reports and business practices. In addition to

23 issuing statements throughout the Class Period, Buschur repeatedly had the

24 opportunity to correct the misstatements and omissions by and on behalf of

25 Powerwave, and failed to do so.

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10. Defendant Kevin Michaels ("Michaels") served as the Company's Chief

27 Financial Officer ("CFO") during the Class Period. During the Class Period, Michaels

28 participated in the issuance of false and misleading statements and failed to disclose

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1 the true facts about Powerwave's business. At no time during the Class Period did

2 Michaels or any other defendant assert that they were not aware of material aspects of

3 Powerwave's business or finances. Moreover, Michaels issued statements in press

4 releases and led the Company's conference calls with analysts and investors,

5 representing himself as a primary person with knowledge about the Company's

6 business, outlook, financial reports and business practices. In addition to issuing

7 statements throughout the Class Period, Michaels repeatedly had the opportunity to

8 correct the misstatements and omissions by and on behalf of Powerwave, and failed to

9 Idoso.

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11. Buschur has been with the Company since 2001 and became CEO of

11 Powerwave and a member of the Board of Directors (the "Board") in February 2005.

12 Michaels has been with the Company since 1996. According to the Company's 2010

13 Form 10-K, which was filed with the SEC on February 17, 2011, the Company was

14 small, consisting of approximately 2,100 employees throughout the entire Class

15 Period. The vast majority of these employees - approximately 1,900 - were on

16 manufacturing, quality, supply chain, sales and research and development.

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12. Defendants Buschur and Michaels (collectively, the "Individual

18 Defendants"), by virtue of their high-level positions with the Company, had access to

19 adverse, undisclosed information about Powerwave's business, operations, financial

statements, markets and present and future business prospects, via internal corporate

21 documents, conversations and connections with other corporate officers and

22 employees, attendance at management and Board meetings and committees thereof,

23 and reports and other information was provided to them as part of their positions.

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13. By virtue of their high level positions with the Company, the Individual

25 Defendants possessed the power and authority to control the contents ofPowerwave's

26 quarterly reports and other public filings, press releases and presentations to securities

27 analysts, money and portfolio managers and institutional investors, i.e., the market.

28 Each of the Individual Defendants, by virtue of their high level positions with

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PR Document 40 Filed 07/23/12 Page 10 of 25 Page ID #:406 Case 8:1

Powerwave, directly participated in the management of the Company and was directly

involved in the day-to-day operations of the Company. The Individual Defendants

were involved in drafting, producing, reviewing and/or disseminating the false and

misleading statements and information alleged herein, and were aware, or recklessly

disregarded, that false and misleading statements regarding Powerwave were being

issued, and approved or ratified these statements, in violation of the federal securities

Ilaws.

14. Powerwave had internal systems that allowed senior management - the

Individual Defendants - to monitor up-to-date quarterly revenues. According to

former employees, the Company used a Hyperion system and a salesforce.com system

Ito provide senior management with updated forecasts and revenues.

15. As officers and controlling persons of a publicly-held company whose

common stock was traded on the NASDAQ during the Class Period, and governed by

the federal securities laws, each of the Individual Defendants had a duty to

disseminate promptly accurate and truthful information regarding the Company's

financial condition and performance, growth, operations, financial statements,

business, markets, management, earnings and present and future business prospects,

and to correct any previously-issued statements that had become materially misleading

or untrue, so that the market price of Powerwave common stock would be based upon

truthful and accurate information. The Individual Defendants' misrepresentations and

omissions during the Class Period violated these specific requirements and

obligations.

VI. SOURCES OF ALLEGATIONS

16. Plaintiffs' allegations are based upon the investigation of plaintiffs'

counsel, including information contained in SEC filings by Powerwave, regulatory

filings and reports, securities analysts' reports and advisories about the Company,

press releases, conference call transcripts and other public statements issued by the

Company, as well as media reports and other sources of information about the

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PR Document 40 Filed 07/23/12 Page 11 of 25 Page ID #:407

1 Company, including information obtained from more than 15 former employees of

2 Powerwave. Information provided by the former employees of Powerwave are

3 reliable and credible because: (a) each of the witnesses worked at Powerwave during

4 or immediately prior to the Class Period; (b) each witness stated that they had personal

5 knowledge of the information provided; (c) the witnesses' job titles and

6 responsibilities show that they had personal knowledge of the information provided;

7 (d) the witness accounts corroborate one another; and (e) the witness accounts are

8 corroborated by other information alleged herein.

9

17. CW1 was a Senior Demand Planner at Powerwave from 2008 until

10 November 2011, when CW1 was laid off. CW1 's duties included analyzing the sales

11 forecasts for Powerwave's North and South American network operator customers for

12 all of Powerwave's products. CW1 's network operator customers included AT&T,

13 Verizon, T-Mobile and several others. During 2011, CW1 reported to Materials

14 Manager Alain Ducharme ("Ducharme"). Ducharme reported to Senior Director of

15 Supply Chain Operations Mike Ryberg ("Ryberg") who reported to Chief Operating

16 Officer ("COO") Mary MaGee ("MaGee"). CWI was involved in determining how

17 and when Powerwave could realize revenues on product sales to North and South

18 American customers. To that end CW1 participated in weekly Sales Operations

19 meetings held every Monday morning in which CW1 assessed just how confident the

7() sales personnel were that projected orders were going to materialize. After those

21 meetings, on Monday afternoons, CW1 met with Powerwave's corporate planning

22 group as part of the larger objective of determining how many orders had already been

23 invoiced in a given quarter (and thereby revenue already recognized), how many

24 orders were "in backlog" (i.e., orders that had been received, but had yet to be

25 fulfilled), and how many orders were projected to come in during the quarter, as well

26 as how many orders needed to come in to meet projected revenue targets for a given

27 quarter. CW1 prepared a Sales and Operations Planning Report - known internally as

28 an "S&OP Report" - that was discussed in the Monday meetings. CW1 also

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1 performed a "risk analysis" so that executives could closely monitor the Company's

2 progress in achieving its projected revenues over a given quarter. As part of the risk

3 analysis, CW1 prepared a "Gap Report" which showed Powerwave's present

4 forecasted revenue vs. actual revenue.

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18. CW2 was a Director of Financial Planning at Powerwave from January

6 12007 until November 2011, when CW2 was laid off. As Director of Financial

Planning, CW2 was responsible for "developing and executing" a forecasting process

8 that began with a "bottoms-up" sales forecast from the Company's sales force and

9 then forecasting expenses and costs to derive forecasts of margins and profits. This

10 forecasting process was undertaken annually and then updated on a quarterly basis.

11 CW2 reported directly to Michaels, but once Treasurer Tom Spaeth ("Spaeth") was

12 hired, CW2 reported to Spaeth, who reported to Michaels. At the end of quarters,

13 CW2 met with Michaels and Spaeth in Michaels' office to discuss end of quarter

14 margins.

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19. CW3 was a Senior Manager of Strategic Sourcing with Goodman

16 Networks ("Goodman") (an AT&T "Turf Partner" and Powerwave customer), from

17 November 2009 until February 2012 when he was laid off. CW3's role included

18 ordering equipment and products from three primary vendors that Goodman used to

19 build cell-sites on behalf of AT&T. These vendors included Andrews/CommScope,

Powerwave, and a German firm - Kathrein. According to CW3, the primary products

21 purchased from Powerwave were antennas, diplexers and TMIs. Goodman's activity

22 on behalf of AT&T covered the entire U.S.

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20. CW4 worked at Powerwave as a Senior Inside Sales Rep on

24 Powerwave's Customer Relationship Management ("CRM") team from 1994 until

25 March, 2012 when CW4 was laid off. CW4 was the CRM team member assigned to

26 AT&T. As an Inside Sales Rep, CW4 dealt directly with the Powerwave sales team

27 assigned to AT&T as well as with AT&T personnel. The AT&T personnel CW4 most

28 often dealt with were members of AT&T's supply chain management group which

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1 was located in Seattle. As an Inside Sales Rep CW4 was essentially responsible for

2 receiving AT&T orders and ensuring that the order terms were not only entered into

3 Powerwave's Oracle system, but also that the orders were fulfilled according to

4 AT&T's delivery requirements. This entailed dealing with Powerwave's supply chain

5 organization to ensure that the products necessary to fulfill orders were being

6 manufactured.

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21. CW5 started at the Company in 2004 and worked as National Sales

8 Manager for Powerwave's Tier 2 accounts in the U.S. and Canada. These Tier 2

9 accounts included US Cellular, Cricket and MetroPCS. As part of his job, CW5

10 participated in regular sales calls with the various Account Managers, MaGee, and the

11 V.P. of Sales. CW5 left Powerwave of his own volition in June 2011.

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22. CW6 worked at Powerwave from around February 2007 through

13 November 2011 when CW6, and numerous other employees, were laid off. During

14 CW6's time at the Company CW6 had been Global Inventory Manager. Initially,

15 CW6 reported to Ryberg, but at some point, began reporting to Martin Cooper

16 ("Cooper"). Both Ryberg and Cooper reported to current COO MaGee. CW6

17 continued having dealings with Ryberg even after he began reporting to Cooper. As

18 Global Inventory Manager, CW6 had been primarily responsible for monitoring the

19 levels of component/raw material inventory held by Powerwave facilities around the

7n world. CW6 ensured that Powerwave had adequate quantities of such materials to

21 meet production demands and would also facilitate the movement of component

22 inventory from one location to another depending on the respective needs of the

23 'locations. Another function of CW6's job was to dispose of Excess and Obsolete

24 component inventory. In addition, as part of CW6's job duties, CW6 had insight to

25 the forecasted demand for Powerwave's products. In this regard, CW6 worked with

26 Powerwave's Planners to determine the component and raw material inventory that

27 would be needed to fulfill expected demand.

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II VII. FACTUAL BACKGROUND TO DEFENDANTS' SCHEME

A. Nature of Powerwave's Business

23. Powerwave was founded in 1985 and became a public company through

an initial public offering ("IPO") in 1996. The Company sells its products through its

direct sales force, independent sales representatives, and resellers to wireless original

equipment manufacturers ("OEM's") and individual wireless network operators.

Powerwave's customers include the OEM's: Alcatel-Lucent, Ericsson, Huawei,

Motorola, Nokia Siemens and Samsung. Powerwave's network operator customers

include AT&T, Bouygues, Orange, Sprint, T-Mobile, Verizon Wireless and

Vodafone. While defendants repeatedly claimed to have technically superior

products, there were other companies competing for the same business - including

CommScope, Comba Telecom, Fujitsu Limited, Hitachi Kokusai, Japan Radio and

Tyco Electronics. In addition, Powerwave also competes with the OEM's - who are

also customers - Alcatel-Lucent, Ericsson, Huawei, Motorola, Nokia Siemens and

Samsung.

24. During the Class Period, Powerwave sold a relatively few products to a

handful of customers. In fact, according to the Company, Powerwave's sale of its

antennas and base stations represented 90% of Powerwave's business during the Class

Period. In addition, according to the Company, sales to North American customers

represented over 40% of Powerwave' s business during the Class Period.

25. During the Class Period, a substantial portion of Powerwave's sales were

made through resellers or various "Turf Partners." 2 Powerwave's major reseller for

AT&T was Team Alliance. Turf Partners typically purchased Powerwave product

through resellers such as Team Alliance. The Turf Partner would then use the product

2 These "Turf Partners" included: Goodman, Black & Veatch, NSORO and Bechtel.

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as part of building segments or elements of a network building the wireless cell site or

infrastructure for AT&T. Powerwave's sales to Team Alliance were as follows:

2nd Half ($000's) 3Q10 1Q11 2Q11 2011

Net Sales to Team Alliance $ 171249 $ 19,127 $ 47,779 $ 4,205 As a percent of total Powerwave sales 11% 14% 28% 3%

26. The North American wireless carrier AT&T was one of Powerwave's

largest customers during the Class Period. But, as discussed above, Powerwave did

not sell directly to AT&T, but sold to the Turf Partner - through Team Alliance. The

role of AT&T Turf Partners was acknowledged and explained by Michaels in an

I August 2, 2010 earnings conference call:

One other thing just to note for you. I think on customers, I'm

sure from an operator basis in North America, our overall largest

relationship there is AT&T. We don't necessarily sell everything

directly there. So, it doesn't count as a 10% customer, but we sell

through their Turf Partners and such. So, I think in this relationship it

would be over a 10% customer. It just doesn't show up that way [sic]

technically.

27. During the Class Period, AT&T was going through a transition as it

announced the purchase of T-Mobile on March 20, 2011. According to the New York

Times, the deal "would create the largest wireless carrier in the nation." Also,

according to the New York Times, critics, including Senator Herb Kohl of Wisconsin,

immediately denounced the merger on anti-trust grounds, saying it could lead to

higher prices for consumers. On May 11, 2011, the Senate held hearings on the

proposed merger - and strongly questioned whether the merger should be allowed.

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Because of Declining Demand Powerwave Engaged in a Revenue Recognition Scheme that Masked the True Demand for Its Products

Former employees of Powerwave have confirmed that contrary to the

Individual Defendants' claims of strong demand, demand was actually steeply

declining during the Class Period. In fact, contrary to defendants' claims, according

to CW1 and CW3, Powerwave began "seeing a slowdown" with AT&T at least as

soon as when the T-Mobile merger was announced in March 2011. In order to

artificially counteract the slow down in demand, Powerwave engaged in what CW1

called "shady" business practices to try to hide the Company's true financial

condition. Powerwave's "shady" business practices occurred in 3Q10, 4Q10, 1Q11,

and 2Q11 and included improper revenue recognition accounting practices that

violated GAAP and SEC guidance as detailed in §X.

29. CW1, CW4, CW5 and CW6 explained that Powerwave's relationship

with AT&T involved third-party "Turf Partners" that actually built different segments

or elements of AT&T's network and a reseller - Team Alliance - that also processed

orders from the Turf Partners for Powerwave products. In essence, according to CW1,

CW4, CW5 and CW6, a Turf Partner would place its order with Team Alliance, which

would then issue an order to Powerwave and purchase the products with instructions

for Powerwave to drop ship the products directly to the Turf Partner's premises. CW3

confirmed that the Turf Partner Goodman placed its orders for Powerwave products

through Team Alliance.

30. But, according to CW1, the Team Alliance arrangement had another,

"shady benefit" for Powerwave because beginning in 3Q10 and then continuing every

quarter thereafter up until 3Q11, Powerwave was able to ship unneeded product to

Team Alliance in order for Powerwave to make revenue goals. As a quarter drew to

an end, CW1 explained that Powerwave personnel would "look around" at whatever

inventory was unsold and would then obtain "a bulk order" from Team Alliance that

permitted Powerwave to ship these items prior to the end of the quarter. According to

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1 CW1, if Powerwave had "overbuilt" inventory that could not be sold because actual

2 orders for the inventory had not been received, Powerwave could persuade Team

3 Alliance to issue orders for a portion of the inventory. Powerwave would purposely

4 ship the inventory to Team Alliance by boat rather than air from China so as to ensure

5 that the products had shipped and were in transit while delaying delivery by three to

6 four weeks. The delayed delivery was important to Team Alliance because it did not

7 need the product. CW1 understood that Powerwave granted Team Alliance special

8 extended payment terms and rights of return in order to get Team Alliance to accept

9 delivery of the products - products Team Alliance did not need - without having to

10 assume the full responsibility of paying for the products. CW2, CW5 and CW6

11 confirmed that Powerwave engaged in this end-of-quarter practice.

12

31. According to CW1, Powerwave's quarters always ended on a Sunday.

13 I CW1 knew that CW1 would be working that weekend because the bulk orders would

14 I be arranged on the Saturday - the day before the last day of the quarter.

15

32. CW5 stated that from CW5's participation in sales calls, CW5 knew that

16 Powerwave routinely shipped large volumes of inventory to Team Alliance at the ends

17 of quarters. CW5's impression from what CW5 heard on the sales calls was that

18 Powerwave was typically "trying to make a deal" by informing Team Alliance of the

19 inventory Powerwave had on hand and asking what Team Alliance was willing to

7(1 order of that inventory.

21

33. In addition, CW5 stated that the end-of-quarter orders required the

22 extension of discounts and incentives to the customer. It was CW5 's understanding

23 that such discounts and incentives had to be approved by Buschur. CW5 based this

24 perception on "word of mouth" that CW5 heard during various sales calls in which the

25 Account Managers working on a particular deal discussed the terms of the transaction.

26 In those calls, MaGee and the VP of Sales (CW5 could not recall this person's name)

27 would make comments to the effect that a proposed discount or incentive needed

28

- 13 - 718102_i

Case 8:1


1 Buschur's approval and/or that a particular discount or incentive had received

2 Buschur's approval.

3

34. According to CW6, "Team Alliance was our best friend at the end of the

4 quarter" and Powerwave was "dependent on Team Alliance to meet numbers," in

5 1Q11 and 2Q11. CW6 said it was definitely the case that Powerwave made large

6 shipments to Team Alliance at the ends of 1Q11 and 2Q11. CW6 knew about the

7 large, end-of-quarter shipments to Team Alliance from CW6's regular meetings and

8 discussions with Planning personnel where it would be discussed that Team Alliance

9 would be taking a particular amount of product from Powerwave. CW6 stated that

10 MaGee knew about the shipments to Team Alliance, but it was Ryberg who seemed to

11 deal directly with Team Alliance so far as getting the orders.

12

35. Once CW6 found out about the Team Alliance shipments at the ends of

13 quarters CW6 began to consider them problematic. Even though these shipments

14 were not under the scope of CW6's responsibility, CW6 questioned why Powerwave

15 would ship so much product to Team Alliance since CW6 did not believe there was

16 any identified end-user for the products. CW6 could not recall the exact size of the

17 end-of-quarter shipments to Team Alliance, but believed they were typically worth

18 millions of dollars.

19

36. In addition, CW6 observed on a number of occasions that the finished

20 goods inventory accounts would increase shortly after the fifth or sixth day of the new

21 quarter. In essence, at the end of a quarter CW6 would see the finished goods

22 inventory levels go down as goods were shipped and then go back up shortly after the

23 new quarter got underway. Although CW6 did not handle product returns - returns

24 were handled by Cooper and MaGee - CW6 strongly suspected that these increases in

25 finished goods reflected returns from Team Alliance.

26

37. CW3 confirmed that in order to get Goodman to accept Powerwave

27 inventory for which AT&T did not order, Powerwave would extend special

28 concessions that were not reflected in theformal documentation for the transactions

-14- 718102_i

Case 8:1


1 (e.g., purchase order and invoice). CW3 stated that concessions, made through verbal

2 side agreements, were extended to Goodman by Powerwave in order to get Goodman

3 to issue Purchase Orders and accept delivery. These sales were often authorized by

4 Powerwave employee Ryberg and Powerwave's District Manager assigned to

5 Goodman, Isaac Bustamante ("Bustamante").

6

38. Thus, these special contingent arrangements with reseller Team Alliance

7 and Turf Partner, Goodman, allowed Powerwave to artificially inflate and manipulate

8 its revenues. According to CW1, Powerwave was well aware of the inventory levels

9 at Team Alliance and how much product was needed to fulfill true customer

10 I requirements. CW1 stated that Team Alliance sent their inventory report to

11 Powerwave on an regular basis. According to CW1, Powerwave had to keep track of

12 the inventory being held by Team Alliance because there were times when

13 Powerwave received orders from other customers and Powerwave would use Team

14 Alliance's inventory to fill those other customer orders.

15

39. According to CW2, the approval for the large end-of-quarter deals came

16 from Buschur and Michaels. CW2 based CW2's awareness that Buschur and

17 Michaels were directly involved in approving the end-of-quarter deals and terms

18 because the internal controls at Powerwave required that deals above a certain

19 threshold - say, several million dollars - and involving discounts and other

20 concessions had to be approved by Buschur and Michaels. And "culturally" CW2

21 said that Powerwave was tightly controlled and managed by Buschur and Michaels.

22

40. CW1 knew about the "shady" end-of-quarter "orders" from Team

23 Alliance and the terms of these "orders" through "countless conversations" with

24 CW1 's manager Ducharme - who dealt directly by phone with Team Alliance - in

25 which they would discuss how much unsold inventory was on-hand. In addition,

26 according to CW1, CW1 received e-mails where the last-minute, end-of-quarter Team

27 Alliance orders were discussed. According to CW1, once the amount of unsold

28 inventory was determined "we'd have Team Alliance cut a Purchase Order" for that

- 15 - 718102_i


amount of product. CW2 also confirmed that large end-of-quarter "orders" were

obtained from Team Alliance during the Class Period.

41. According to CW1, the "last minute" "orders" that Powerwave got from

Team Alliance in 3Q10, 4Q10, 1Q1 1 and 2Q11 were very big - at least $15 million

each quarter and as high as $25 million in a quarter. CW1 stated that the last-minute

bulk orders to Team Alliance were done to close the gap in forecasted sales for the

quarter. Additionally, according to CW1, salesmen Lance Craft ("Craft") and Greg

Moetl ("Moetl") were forced by COO MaGee to inflate forecasted sales.

42. CW2 corroborated CW1, explaining that the large end-of-quarter deals

made up a large portion of quarterly revenue during this time. CW2 said that CW2

"didn't like" the large end-of-quarter orders, but "was powerless to change it." CW2

and other personnel often wondered "why we were operating this way" and concluded

that "management was not competent."

43. Bogus revenue from Team Alliance was critical to Powerwave during the

Class Period. This is confirmed in Powerwave's SEC filings. See ¶25. On May 5,

2011, Powerwave filed its Form 10-Q for the quarterly period ended April 3, 2011 and

disclosed that "[for the first quarter of 2011, Nokia Siemens accounted for

approximately 25% of total net sales, [and] Team Alliance, one of the Company's

North American resellers accounted for approximately 14% of total net sales." On

August 10, 2011, Powerwave filed its Form 10-0 for the six months ended July 3,

2011 and disclosed that "for the first half of 2011, total sales to Team Alliance, one of

our North American resellers, accounted for approximately 22% of sales." In

addition, the August 10, 2011 Form 10-Q revealed that "[for the second quarter of

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718102_i

Case 8:1

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112011, sales to Team Alliance, one of our North American resellers, accounted for

II approximately 28% of our total sales. ,3

44. One particularly egregious shipment of product to Team Alliance

occurred at the very end of 1Q11. At that time, CW1 said that Powerwave knowingly

and deliberately shipped product that it knew did notfunction and which had been

"put aside by quality" because it was "bad product. ,4 According to CW1,

Powerwave shipped the product - which were a new type of LTE Antenna - to Team

Alliance as part of the end-of-quarter bulk order "with the promise to replace" the

defective products once Powerwave had functional products available in a later

quarter. CW1 recalled being in a meeting in which Ryberg spoke by phone to the

Powerwave factory in China directing them to ship the defective products and in a

later meeting hearing Ryberg tell the Chinese factory the specific products that needed

to be replaced.

45. CW1 could not recall exactly how many of the defective products went

out in the 1Q11 shipment, but estimated that many thousands of the products were

shipped; the selling price of the products ranged from $700413,000 so the aggregate

amount was significant and at least $15 million. Throughout 2011, "we were working

on swapping out" the defective products, but the situation had not been resolved as of

CW1 's lay-off in November 2011 at which time "we were still trying to get [the

products] built correctly" and Pow..eve "still owed Team Alliance good"

replacements.

46. During 3Q11 Team Alliance balked at accepting anymore of the

Powerwave inventory and, according to CW1, "said 'no more." In essence,

In the February 28, 2012 Form 10-K, for the fiscal year ended January 1, 2012, Powerwave revealed that "[for fiscal 2011, sales to Team Alliance, one of our North American resellers, accounted for approximately 16% of revenues." 4

All citations are omitted and emphasis is added unless otherwise noted.

-17- 718102_i

Case 8:1


1 according to CW1, Team Alliance "wouldn't allow us" to ship any more product and

2 "drew the line." By 3Q11, Team Alliance was holding very large quantities of

3 Powerwave product for which there was no identified or confirmed end-user demand

4 - CW1 estimated there was as much as $40 million of such inventory (per its "retail

5 value"). In fact, CW1 heard from Ducharme during 3Q11 that far from taking on

6 additional Powerwave product, Team Alliance wanted to return to Powerwave the

7 excessive product it was already holding.

8

47. CW2 confirmed that because of the large end-of-quarter "orders" in

9 1Q11 and 2Q11, Powerwave was unable to duplicate such deals in 3Q11. During the

10 Class Period, CW2 heard from co-workers at Powerwave that "we had filled the

11 channels in 1Q and 2Q" 2011.

12

48. Because ofCWI's position as Senior Demand Planner, CW1 was acutely

13 aware of the Company's business with AT&T. CW1 said that Powerwave began

14 "seeing a slowdown" in business with AT&T as soon as the AT&T/T-Mobile merger

15 I was announced in March 2011.

16

49. CW3 confirmed this. According to CW3, around the time of AT&T's

17 proposed merger with T-Mobile, March 2011, AT&T began drastically slowing down

18 when it wanted new cell-sites built. CW3 emphasized that not only was Powerwave

19 fully apprised of the drop-off in AT&T new cell-site construction and attendant drop-

20 off in purchasing by Goodman, but also that there was no indication whatsoever going

21 into and during 3Q11 that the situation would improve. When the drop-off in new

22 AT&T cell-site construction activity began, in 1Q11 according to CW3, CW3

23 promptly notified various Powerwave personnel by email, telephone conversation, and

24 in-person meetings that Goodman was going to delay and push-out the delivery of any

25 existing orders they had placed with Powerwave.

26

27

718102_i

28

Case 8:t


1 VIII. DEFENDANTS' FALSE STATEMENTS AND OMISSIONS ISSUED DURING THE CLASS PERIOD

2

3 50. The Class Period commences on October 28, 2010. On that date

4 Powerwave issued a press release announcing its financial results for its third quarter,

5 the period ending October 3, 2010. For the quarter, the Company reported net sales of

6 $156.8 million, compared with $139.0 million in the third quarter of fiscal 2009.

7 Defendant Buschur commented on the results, stating, in pertinent part, as follows:

8 "For the third quarter of 2010, we were able to show growth of 12.8%

9 over the same period last year.... " "More importantly, we were able to

10 continue our improvements in our gross margins for this year, with the

11 added benefit of demonstrating strong profitability on both a GAAP and

12 pro forma basis for the third quarter. While we continue to experience

13 longer than normal supply chain lead times and global macro economic

14 issues which continue to impact our business, we see signs of

15 improvement in overall demandfor wireless infrastructure equipment.

16 In particular, we believe that strong North American wireless capital

17 spending patterns should remain throughout the next year. We will

18 continue to work to position Powerwave to capitalize on the long-term

19 growth opportunities within the global wireless infrastructure

20 marketplace."

21 51. Following the issuance of the press release, also on October 28, 2010,

22 Powerwave held a conference call with analysts and investors to discuss the

23 Company's earnings and operations. During the conference call, defendants Michaels

24 and Buschur made positive statements about the Company, current demand, and its

25 operations.

26 52. On November 2,2010, Powerwave filed its quarterly report on Form 10-

27 Q for the quarterly period ending October 3, 2010. In the 3Q10 Form 10-Q

28 defendants emphasized that Powerwave has "maintained [its] overall market share

7181021 -19-

Case 8:1


1 within the wireless communications infrastructure equipment market," and that its

2 "proprietary design technology is a further differentiator for our products."

3

53. On February 1, 2011, the Company issued a press release announcing

4 financial results for 4Q10, the period ending January 2, 2011, which reported net sales

5 of $175.6 million, compared to $142.6 million for the same period the prior year.


7

"For the fourth quarter of 2010, we were able to show growth of 23%

8

over the same period last year and 12% sequentially over the third

9

quarter of this year. . . ." "More importantly, we were able to continue

10

our improvements in our operating income for this year, with the added

11

benefit of demonstrating strong profitability on both a GAAP and pro

12

forma basis for the fourth quarter and year results. We continue to see

13

signs of improvement in overall demand for wireless infrastructure

14

equipment, driven globally by the continued increase in demand for

15

smartphones and the requirements for faster data transmission rates. We

16

are continuing to work to position Powerwave to capitalize on the long-

17

term growth opportunities we believe are available within the global

18

wireless infrastructure marketplace."

19

54. Following the issuance of the press release, also on February 1, 2011,


21 Company's fiscal 2010 earnings and operations. During the conference call,

22 defendants Michaels and Buschur made positive statements about the Company and

23 its current operations. Buschur bragged that for the fiscal year 2010, "we met our

24 annual guidance," and that 2010 was Powerwave' s "first fully profitable year on a

25 GAAP basis since 2005." Michaels stated that Powerwave was establishing a fiscal

26 2011 annual revenue range "of $650 million to $680 million." Michaels added that

27 "[t]he midpoint of this range represents annual growth of 12% which we believe is

28 above the expected growth rates for the industry."

-20- 718102_i

Case 8:1


1

55. During the February 1, 2011 conference call, Buschur also made the

2 II following statements:

3

As you know, during the last few years we completed our

4

manufacturing consolidation activities, which has enabled Powerwave to

5

have a highly competitive, low costs manufacturing structure that is

6

highly flexible and scalable without compromising our superior quality

7

and our leading edge technology and product solutions. Our focus on

8

expense management has positioned this Company to be truly a lean and

9

mean operation.

10 * * *

11

The demand in the Wireless data is exploding, as can be seen by the

12

exponential growth in the use of Smart Phones utilizing voice, video and

13

data. This demand is fueling requirements for cost effective

14

infrastructure deployments for both upgrading to existing 2G, 3G, and

15

4G deployment technologies. We believe that Powerwave has the

16

products and solutions necessary for these types of cost effective

17

deployments, and we are well positioned to benefit from this demand.

18 * * *

19

Charles Johns - Canaccord Genuity - Analyst

20

Great. And then Ron, maybe a last one for you. Just wondering,

21

when you look out longer term and think of the LTE and the various

22

carrier deployments that should occur this year, maybe you could just

23

talk about Powerwave's strategic position relative to these LTE builds.

24

Ron Buschur - Powerwave Technologies - President and CEO

25

I think we're in an excellent position, when I look at the selection

26

criteria of our products and solutions across the carrier arena. I think, as

27

you can see from our antenna deployments, as well as our tower

28

mounted amplifiers in some of our base stations subsystems, we have

718102_i -21-

Case 8 :12-cv-00222-CJC-JPR Document 40-1 Filed 07/23/12 Page 1 of 25 Page ID

#:422

had tremendous growth in the LTE segment of our business, specifically

with two large operators here in North America that are building out and

one in Europe. So I'm very happy with the selection criteria and

certainly our ability to deliver large quantities - not samples, but large

volume quantities - all of these solution sets across the product portfolio. * * *

We think that we have a technology advantage today in our

product offering when you look at the companies that have chosen us

and the awards and the percentage of the awards that we've been

awarded, when you look at percent of business.

56. During the February 1, 2011 conference call, Michaels emphasized that

I Powerwave was actually being "conservative" in its 2011 guidance:

I think to further on what Ron's saying, we obviously think that we're

going to grow faster than the market in our segment. But I think the

point you're asking, which I would agree with, is that no, we're not

looking for huge upsides. We think the market, we think we're

positioned well, and it isn't counting on our verticals like the government

business to be major contributors in the year. As Ron mentioned, we're

still at the early stage there. The actual revenue contribution is quite

1 rx- r r T fh t-ilr c 11 x tcvi 11 rl c ,

arm' r lc i- 1.J VV • L)tJ I Lj1jjjj. J /%.1 I11 VV %. VV %.J 41I L/I11

reasonably conservative in our guidance and that there is good upside

potential.

57. On February 1, 2011, Deutsche Bank issued a report on Powerwave.

Based on defendants' positive statements about demand, Deutsche Bank adjusted their

estimates for Powerwave's 2011 revenue as follows: (1) 1Q11E was $156m, is

$160m; (2) 2Q11E was $158m, is $162m; and (3) 2011E was $639m, is $654m.

Deutsche Bank also noted that "[t]he company again said that the second half of the

year will provide most of the growth."

-22- 17181021

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58. On February 17, 2011 Powerwave filed its annual report on Form 10-K

2 for the fiscal year 2010, ended January 2, 2011. In the 2010 Form 10-K, defendants

3 emphasized that Powerwave has "maintained [its] overall market share within the

4 wireless communications infrastructure equipment market," and that its "proprietary

5 design technology is a further differentiator for our products." In its 2010 Form 10-K,

6 I Powerwave also reported revenues of $591.5 million and earnings of $0.03 for the

7 I fiscal year.

8

59. By virtue of the facts alleged in §VI, VII and X, and the other facts set

9 forth herein, it may be strongly inferred that defendants knew or recklessly

10 disregarded that the statements in the October 28, 2010 and February 1, 2011 press

11 releases, the October 28, 2010 and February 1, 2011 conference calls, and the

12 financial information discussed therein and in the February 17, 2011 Report on Form

13 10-K and November 2, 2010 Form 10-Q, would be, and were, misleading to and

14 operated as a fraud upon investors. Considered as a whole, defendants'

15 representations about the Company's revenue and the purported continuing strength of

16 Powerwave's performance along with its prospects for driving further growth,

17 continued to mislead investors by presenting an overly-optimistic picture of

18 Powerwave's results, while failing to disclose, and actively concealing or recklessly

19 ignoring, conditions which created material and significant risks to the Company.

Together, these facts and the other allegations herein give rise to a strong inference

21 that defendants knew or recklessly disregarded the actual condition of the Company at

22 the time they delivered their statements. In particular, the foregoing statements were

23 false and recklessly misleading in at least the following respects:

24

(a) Defendants concealed the extent to which the Company's revenues

25 had been achieved through improper and unsustainable sales practices, including their

26 over-reliance on quarter-end bulk sales that were unconnected to actual demand. See

27 §VI, VII and X.

28

718102_i -23-


#:424

1

(b) Defendants omitted disclosure of the true nature and substance of

2 I the sales with Team Alliance and Turf Partners in the February 17, 2011 Report on

3 I Form 10-K and statements detailed above, or the material risks those practices created

4 Ito Powerwave's future financial results. See §VI, VII and X.

5

(c) Powerwave's reported financial results were the result of an

6 accounting scheme employing improper accounting practices in violation of GAAP

7 and SEC revenue recognition requirements. See § § VI, VII and X.

8

(d) At the time the statements were made, internal forecasting data and

9 sales reports that were circulated among the Company's executives and management

10 contradicted the positive outlook the defendants' public statements were intended to

11 create. See §VI, VII and X.

12

(e) The financial results created a false and misleading appearance of

13 demand for Powerwave's products because the reported revenues had been artificially

14 inflated. See §VI, VII and X

15

(f) Powerwave's purported demand was a result of unsustainable

16 business practices of forcing more products through its sales channels with end-of-

17 quarter bulk sales than Powerwave's customers could reasonably expect to absorb,

18 thereby cannibalizing sales from future periods. See §VI, VII and X.

19

(g) Powerwave's financial guidance was false and lacked a reasonable

2 00 basis, because it included fiCttOU5 bulk sales that were improperly recorded in

21 violation of GAAP. See §VI, VII and X.

22

60. On March 17, 2011, Brigantine Advisors issued a report on Powerwave,

23 "Initiating Coverage with a Buy Rating." The report noted that Powerwave had

24 exhibited new products to the analyst, Kevin Dede, "behind closed doors at Mobile

25 World Congress in Barcelona this past February," which led the analyst to make his

26 recommendation and set a $5 price target. Powerwave was then trading at $3.78. One

27 of the new products that Powerwave demonstrated was its "MIMO Active Array

28 Antenna solution that integrates basestation electronics for improved coverage and

718102_i -24-

Case 8

:12-cv-00222-CJC-JPR Document 40-1 Filed 07/23/12 Page 4 of 25 Page ID

I #:425

lower operating costs on account of both the space and energy savings." According to

Powerwave, the MIMO integrated antenna was "involved in network testing" at that

time, "and should be generally available in [the] September quarter."

61. The March 17, 2011, Brigantine Advisors report went on to discuss the

5 "mobile infrastructure industry" generally and noted that "third party research

6 providers appear to believe that the mobile infrastructure industry should see

7 lackluster growth this year." Specifically, the report noted that iSuppli - a

8 technology market research firm - "projects that the global mobile infrastructure

9 market should return to modest growth of 3.6% in 2011." And, the Dell'Oro Group -

10 a networking and telecommunications industries market research firm - "concurs with

11 iSuppli" and projects "roughly 4%" growth in 2011. The Brigantine Advisors report

12 contrasts what the market experts are expecting with what Powerwave said it expects

13 for 2011, "the mid-point" of Powerwave' s 2011 guidance, "$655 million represents

14 12% annual growth for the current year."

15

62. On March 24, 2011, after meeting with Powerwave's management on

16 March 23, 2011, CL King & Associates issued an analyst report on Powerwave,

17 "[u]pgrading to Buy from Neutral." The report noted that the "overall tenor of the

18 meeting was highly upbeat." That same day, March 24, 2011, WJB Capital Group

19 issued an analyst report, noting that they had met with CFO Michaels, "who suggested

that wireless spending trends remain strong, driven by North America."

21

63. Following the release of these misleading statements, Powerwave's stock

22 began climbing steadily from $1.91 on October 28, 2010 to $4.69 on May 2, 2011.

23

64. On May 5, 2011, Powerwave issued a press release announcing its

24 financial results for its first quarter, the period ending April 3, 2011. For the quarter,

25 the Company reported net sales of $136.6 million, compared to $114.5 million for the

26 same period the prior year. Defendant Buschur commented on the results, stating, in

27 pertinent part, as follows:

28

718102_i - 25 -


#:426

1

The first quarter revenue was impacted by delays we encountered

2

ramping up one of our new LTE products. . .. "We believe that we

3

have resolved the production issues that impacted our revenues for the

4

first quarter. Looking ahead for the remainder of this year, we continue

5

to believe that we are on track for meeting our annual revenue

6

guidance. There are signs of improving demand for global wireless

7

infrastructure for the remainder of 2011. We believe that Powerwave is

8

in an excellent position to build upon and capture the long-term growth

9

opportunities that are in the wireless infrastructure marketplace."

10

65. Following the issuance of the press release, on May 5, 2011, Powerwave

11 held a conference call with analysts and investors to discuss the Company's earnings

12 and operations. During the conference call, defendants Michaels and Buschur made

13 positive statements about the Company and its operations. Michaels stated that 1Q11

14 revenues were impacted by the fact that "the first quarter is usually the slowest quarter

15 of the year." Michaels also explained that 1Q revenues "were impacted by production

16 delays we encountered while ramping up one of our new LTE products." He added

17 that the production delays on the new LTE product "impacted our revenue for the first

18 quarter by approximately $8 million." Michaels emphasized that Powerwave had

19 "resolved this issue going forward to meet our customers' increased demand."

7(1 Further bolstering his statements about increased demand, Michaels said that

21 Powerwave had "reviewed [its] market forecast and current demand trends and we

22 continue to believe that we will achieve our fiscal 2011 annual revenue range of $650

23 million to $680 million."

24

66. On the same May 5, 2011 conference call, Buschur explained that the

25 disappointing first-quarter results were due to "unique issues" that "are behind us,"

26 and emphasized that "[t]he demand for Powerwave's advanced products are

27 extremely strong." In addition, Buschur added:

28

718102_i -26-

Case 8 :12-cv-00222-CJC-JPR Document 40-1 Filed 07/23/12 Page 6 of 25 Page ID II #:427

1

As Kevin noted, we continue to believe that we will be able to

2

achieve our annual revenue guidance of $650 million to $680 million.

3

As you know, we typically do not give quarterly guidance, but due to

4

the current results and the fact that we have been seeing an increase in

5

demand for our products, we believe the revenue for Q2 will be

6

between $170 million and $180 million. We are confident that the

7

demand should continue to improve throughout this year.

8 * * *

9

We believe that Powerwave has the product and solutions necessary for

10

these types of cost-effective deployments, as well as we are well

11

positioned to benefit from this demand.

12

67. During the May 5, 2011 conference call, defendants also responded to a

13 number of questions regarding the "surge in demand" that defendants were reporting:

14

Mike Walkley - Canaccord Genuity - Analyst

15 • . . Ron, with the strong sequential guidance it appears you didn't lose

16

any sales to a competitor due to issues with LTE delays. Can you give

17

us a little more color on maybe what caused the delay and also, can you

18

update us on the competitive environment?

19


20 • . . We may have underestimated the ability to ramp that product so

21

quickly with the volume demand that was placed upon us, but we have

22

that behind us, and you're correct, we don't believe that it hurt our

23

market share. In fact, we're seeing demand across the board, not just

24

with the one operator for our LTE products.

25 * * *

26

Ted Moreau - WBJ Capital - Analyst

27

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718102_i -27-

Case 8

2-cv-00222-CJC-JPR Document 40-1 Filed 07/23/12 Page 7 of 25 Page ID #:428

1 • . . On the guidance for Q2, it's a pretty big snap back and so I'm just

2

wondering if— how comfortable do you feel about your manufacturing

3

capacity and your ability to handle the surge in demand for Q2?

4


5

Well, I think, Ted, we feel very comfortable that we can achieve that

6

range.

7

Ted Moreau - WBJ Capital - Analyst

8

Okay, great. And then one of the North American carriers spent heavily

9

in Qi, really seems like they're front-end loading their full year. So, do

10 you think once you get through Q2 does 2011 for North America flatten

11

out a little bit, or do you still - would you still see nice growth as the

12

year progresses?

13


14

We - I guess I don't see that same type of rollout, Ted, yet. I see a

15 pretty healthy growth in North America across most of the operators

16

the remainder of 2011, and then assuming that the merger of the two

17

large operators takes place as scheduled, I think 2012 should be a pretty

18

good year, as well.

19

68. Powerwave's constant assurances of increased revenue from strong

20 demand was adopted by financial analysts. The next day, May 6, 2011, Brigantine

21 Advisors issued a report on Powerwave titled: "Disappointing March Report, but

22 Raising Sales Estimates on Expected Strong June Demand; Reiterate Buy." The

23 report notes that "Powerwave's March quarter report of $136.6M . . . missed our

24 $150.0 and $0.04 estimate and consensus estimates of$151.8M and $0.03 last night."

25

69. That same day, May 6, 2011, WJB Capital Group issued a report on

26 Powerwave titled "Messier Than It Should Have Been." The report noted that

27 Powerwave "missed" analyst expectations. "Despite the Q miss," given

28 Powerwave' s positive statements on May 5, 2011, WJB Capital Group stated that

- 28 - 718102_i


#:429

1 Powerwave "doesn't appear to have lost market share or demand." Merriman Capital

2 also issued a report that day, "remain[ing] positive" on Powerwave given defendants'

3 claims of "broad based demand from operators as well as an alleviation of production

4 issues."

5

70. On May 9, 2011, Powerwave filed its quarterly report on Form 10-Q for

6 the quarterly period ending April 3, 2011. In the 1Q11 Form 10-Q defendants again



9 design technology is a further differentiator for our products."

10

71. On May 10, 2011, following meeting with management at the 2011

11 I TIMT Conference, Jefferies issued a report on Powerwave. In the report, Jefferies

12 I noted that Powerwave said that "order patterns are tracking well."

13

72. On May 24, 2011, Powerwave participated in the Barclays Capital Global

14 I Communications, Media, and Technology Conference and reiterated that demand was

15 "improving and strong." Michaels made the following statements:

16

Last quarter, we had some production issues on a new product.

17

We had yield issues on it. We did not get as high yield as we expected.

18

We, since the end of the quarter, have significantly improved our yield.

19

We have caught up with the stuff that we missed in that quarter.

20

At the same time, demand has continued to be improving and

21

strong, so we're feeling fairly confident today in the outlook in the

22

demand side of the market. It is tracking to what we expected, which

23

initially in the first quarter, the very beginning of the first quarter, was a

24

little slower than we expected. It didn't start picking up until toward the

25 end of the first quarter and a little too late for us, but it certainly has

26

improved now. So we're fairly - things are tracking what we expect.

27

On the production side, we're feeling reasonably confident with

28 our production capabilities and think that we have things under control

718102_i -29-


#:430

1

and can meet the requirements that are out there. So, we're feeling

2

reasonably confident.

3



5 disregarded that the statements in the May 5, 2011 press release, the May 5, 2011

6 conference call, the May 24, 2011 Conference, and the financial information discussed

7 there and in the 1Q11 Report on Form 10-Q, would be, and were, misleading to and

8 operated as a fraud upon investors. Considered as a whole, defendants'

9 representations about the Company's revenues and the purported continuing strength

10 of Powerwave's performance along with its prospects for driving further growth,

11 continued to mislead investors by presenting an overly-optimistic picture of

12 Powerwave's results, while failing to disclose, and actively concealing or recklessly

13 ignoring, conditions which created material and significant risks to the Company.

14 Together, these facts and the other allegations herein give rise to a strong inference

15 that defendants knew or recklessly disregarded the actual condition of the Company at

16 the time they delivered their statements. In particular, the foregoing statements were

17 false and recklessly misleading in at least the following respects:

18


19 had been achieved through improper and unsustainable sales practices, including their

20 over-reliance on quarter-end bulk sales that were unconnected to actual demand. See

21 §VI, VII and X.

22


23 the sales with Team Alliance and Turf Partners in the May 9, 2011, Form 10-Q and

24 statements detailed above, or the material risks those practices created to Powerwave's

25 future financial results. See §VI, VII and X.

26



28 and SEC revenue recognition requirements. See §VI, VII and X.

7181021 -30-

Case 8:12-cv-00222-CJC-JPR Document 40-1 Filed 07/23/12 Page 10 of 25 Page ID I #:431

1



3 1 contradicted the positive outlook the defendants' public statements were intended to


5


6 demand for Powerwave's products because the reported revenues had been artificially

7 I inflated. See §VI, VII and X.

8



10 I quarter bulk sales than Powerwave's customers could reasonably expect to absorb,

11 I thereby cannibalizing sales from future periods. See §VI, VII and X.

12

(g) Powerwave's financial guidance was false and lacked a reasonable

13 I basis because it included fictitious bulk sales that were improperly recorded in


15 IX. THE TRUTH BEGINS TO EMERGE

16

74. On July 12, 2011, Powerwave issued a press release to provide a "Second

17 Quarter Update." In the press release, the Company reduced the 2Q11 guidance it had

18 given on May 5, 2011. The Company reported that for its second fiscal quarter, the

19 period ending July 3, 2011, it "anticipates that revenues for its fiscal second quarter

"Ii ended July 3, 2011 willbe in the range of $168 million to $172 million. This updates

21 Powerwave's previously announced expectations of revenues for the second quarter."

22 Defendant Buschur commented on the announcement, stating, in pertinent part, as

23 follows:

24

"For the second quarter, in spite of some slowness in several of

25 our markets, we were able to increase revenues by over 24 percent from

26

the first quarter of this year and achieve the anticipated revenue range[.]

27

Looking ahead for the remainder of this year, we continue to believe that

28

we are on track for meeting the bottom range of our 2011 annual

718102_i -31-


#:432

1

revenue guidance of $650 million to $680 million. We continue to

2

believe that Powerwave is in an excellent position to build upon and

3

capture the long-term growth opportunities that are in the wireless

4

infrastructure marketplace."

5

75. On July 13, 2011, Merriman Capital issued a report on Powerwave. The

6 report emphasized that Powerwave's reducing its full-year 2011 guidance, "is not

7 AT&T driven as many reports have recently speculated." And added, that based on

8 defendants' assurances, "[w]e believe that AT&T's wireless spending plans remain on

9 I track."

10

76. Also, on July 13, 2011, WJB Capital Group issued a report on

11 Powerwave and, given Buschur's positive statements the day before, noted that "we

12 do not believe the updated guidance is the result of changes in market share."

13

77. On July 20, 2011, Powerwave issued a press release announcing that it

14 had entered into a purchase agreement to which it would issue an aggregate of $100

15 million of 2.75% Convertible Senior Subordinated Notes due 2041. According to

16 Powerwave, the offering allowed the Company to repurchase $42.6 million in

17 aggregate principal amount of its outstanding 1.875% Convertible Subordinated Notes

18 due 2024, leaving approximately $15.3 million in principal amount of its 1.875%

19 Notes outstanding. In addition, the Company stated that it was using approximately

20 $25 million from the offering to repurchase 11.2 million shares of its common stock

21 and would use the remaining net proceeds to pay down additional indebtedness and

22 for working capital purposes.

23

78. On August 4, 2011, Powerwave issued a press release announcing its

24 financial results for its second quarter, the period ending July 3, 2011. For the quarter,

25 the Company reported net sales of$ 170.6 million, compared to $144.6 million for the

26 same period the prior year. For the first six months of 2011, total revenue was $307.3

27 million compared with $259.1 million for the first six months of fiscal 2010.


-32- 1718102_i

Case 8:12-cv-00222-CJC-JPR Document 40-1 Filed 07/23/12 Page 12 of 25 Page ID II #:433

1

For the second quarter, we were able to grow our revenues by 25%

2

sequentially from the first quarter of this year, and by 18% when

3

compared to the same period last year[.] In addition, we were able to

4

show improvement in our gross margins during the quarter while

5

continuing to control our operating expenses, thereby driving strong

6

profitability on both a GAAP and pro forma basis for the second quarter.

7

While we are concerned about global macro economic issues, we

8

continue to believe that we have positioned Powerwave to be in an

9

excellent position from which to build upon and capture both the

10

short-term and long-term growth opportunities that are in the global

11

wireless infrastructure marketplace.

12

79. Following the issuance of the press release, on August 4, 2011,


14 Company's earnings and operations. During the conference call, defendants Michaels

15 and Buschur made positive statements about the Company and its operations.

16 Michaels and Buschur both reiterated that defendants "continue to believe that we will

17 achieve our 2011 annual revenue guidance of $650 million to $680 million."

18 Analysts questioned whether the revenue guidance range could be achieved but,

19 Buschur emphasized that "we're pretty confident still that we should be able to

20 achieve the guidance that we had given for the full year." Given that in July

21 defendants had stated that they expected to hit the "low end" of the range, analysts

22 questioned whether defendants' statements on August 4, 2011, that 2011 would be

23 within the $650 million to $680 million range was a case of defendants being more

24 positive. Buschur agreed that it was, stating: "we're well positioned, and we're going

25 to continue to focus on taking advantage of the opportunities in North America and in

26 Europe, as well as the APac region."

27

80. During the August 4, 2011 conference call, defendants also commented

28 11 on present demand:

718102_i -33-

Case


1

No. What I was saying is the view that we're seeing right now,

2

the questions is, what's the view that we're seeing in the global market?

3

We're seeing a better anticipated view in Western Europe, than what we

4

had anticipated. And Eastern Europe has always been pretty strong and

5

continues to be strong for us.

6

81. Defendants were also specifically asked about North American carrier

7 spending for the second half of the year - and whether any of the "dynamic"

8 I macroeconomic factors - including the AT&T/T-Mobile merger - were impacting

9 I Powerwave's business. Buschur was unequivocal that this was not impacting

10 I demand:

11

Matt Ramsay - Canaccord Genuity - Analyst

12

First I'd like, Ron, to ask for your thoughts on the very dynamic

13

macro environment, I guess that's to say the least. With Clearwire's

14

well-publicized funding issues and their discussion of both LTE and

15

WiMAX network plans, plus Verizon and AT&T giving somewhat

16

different directional back half wireless CapEx guidance, could you

17

discuss your overall views of the carrier spending in North America

18 and effects on your business for the back half?

19

Ron Buschur - Powerwave Technologies Inc - President and CEO

20

Well, Matt, we 'repretty confident still that we should be able to

21 achieve the guidance that we had given for the full year. Obviously,

22

the clarity of the market that we see with the uncertainty of Clearwire,

23

some of the uncertainty that exists since AT&T and T-Mobile have

24

combined, has made it little more difficult to predict exact time of some

25

of the build out and the expenditures, but we do believe that we're going

26

to continue to see some growth in North America and it's going to be

27

strong.

28

718102_i -34-

Case 8:12-cv-00222-CJC-JPR Document 40-1 Filed 07/23/12 Page 14 of 25 Page ID #:435

1

82. In the August 4, 2011 press release Powerwave also noted that, "[i]n the

2 second quarter of 2011, Powerwave' s largest customer was one of our North

3 American resellers, which accounted for approximately 28 percent of revenue." This

4 huge percentage of revenue to a "North American reseller" did not go unnoticed by

5 I analysts, but defendants continued to conceal that this huge percentage of revenue was

6 I being achieved through end-of-quarter "bulk sales" to Team Alliance.

7

Larry Harris - CL King & Associates - Analyst

8 * * *

9

And I noticed you had several distributors or resellers show up as

10

greater than 10% customers this quarter. Do you think this could be, you

11

know, a trend here over the next few quarters, and is there any impact on

12 margins, if you have more sales through distributors?

13

Kevin Michaels - Powerwave Technologies Inc - CFO

14

Larry, this is Kevin.

15

They're not distributors, they're direct resellers. And actually,

16

they've been showing up for a while. You're just seeing more business

17

there in certain markets. I think, as Ron mentioned, really if you look in

18

Europe, it's Eastern Europe where we are really seeing strength in

19

Eastern Europe. Western Europe has been kind of flat, but we deal with

20 a reseller over there, a couple of them, but one of them has been seeing

21

the strength for us there. And in the North American market, some of

22

the large operators want to bring stuff more through some of these

23 resellers that qualify for certain business conditions. So we have seen

24 an increase of that and that's just really driven by the operators

25

decision. So it's not really affecting - they're not distributors in that

26

type of sense, so it's not having a big impact there.

27

So to answer your question overall, yes we expect to continue to

28 see that in certain markets.

718102_i - 35 -


1

83. On August 9, 2011, Powerwave participated in the Canaccord Genuity

2 1 Global Growth Conference. Michaels discussed Powerwave's current business and

3 I stated that "we are in a very strong position in with these new technologies."

4 Michaels added that Powerwave has the right product mix to meet the present needs of

5 OEM's and wireless operators: "we clearly believe that we have a product portfolio

6 that addresses the needs of wireless operators and original equipment manufacturers

7 I looking at today's obviously 2G, 3G systems as well as LTE in the next four

8 I generation systems." Michaels also discussed current demand at Powerwave and

9 I emphasized that "[wJireless demand is very healthy."

10

84. During the August 9, 2011 Canaccord Genuity Global Growth

11 Conference, Michaels also took specific questions from financial analysts. Michaels

12 was asked about Powerwave's outlook for the second half of 2011 - "better or worse

13 than the first half and do the recent events change anything on that?" Just six weeks

14 before the end of 3Q11, Michaels again maintained that demand was strong:

15

I would say our outlook is better. The first quarter was really kind of

16

slow for us so the second half is a better outlook from the first half

17

because clearly what our view is and the events of the last week and a

18

half haven't changed that.

19

85. Powerwave reported $307.2 million in revenue for the first half of 2011.

20 In other words, Michaels was telling investors that Powerwave expected revenues

21 greater than that in the second half of 2011. To meet the low-end of the $650 million

22 to $680 million revenue guidance, Powerwave would need to record approximately

23 $350 million in the second half of 2011 - or approximately $175 million in each

24 quarter.

25

86. During the August 9, 2011 Canaccord Genuity Global Growth

26 Conference, Michaels was also specifically asked about current demand: "Maybe you

27 could walk us through - obviously there is a lot of worry about demand trends out

28 there. Maybe if you could walk us through what you are seeing on a regional basis in

718102_i -36-


#:437

1 different parts of the world." Michaels again reiterated that North American demand

2 was strong: "North American operators we believe from what they said, they are all

3 committed to goingforward, don't have any reason to not believe that even with the

4 events we have had this last week."

5

87. On August 10, 2011, Powerwave filed its quarterly report on Form 10-Q

6 for the quarterly period ending July 3, 2011. In the 2Q11 Form 10-Q defendants again



9 design technology is a further differentiator for our products."

10



12 disregarded that the statements in the July 12, 2011 press release, the August 4, 2011

13 press release, the August 4, 2011 conference call, the August 9, 2011 Conference, and

14 the financial information discussed there and in the 2Q11 Report on Form 10-Q,

15 would be, and were, misleading to and operated as a fraud upon investors. Considered

16 as a whole, defendants' representations about the Company's revenues and the

17 purported continuing strength of Powerwave's performance and its prospects for

18 driving further growth, continued to mislead investors by presenting an overly-

19 optimistic picture of Powerwave's results, while failing to disclose, and actively

7(1 concealing or recklessly ignoring, conditions which created material and significant

21 risks to the Company. Together, these facts and the other allegations herein give rise

22 to a strong inference that defendants knew or recklessly disregarded the actual

23 condition of the Company at the time they delivered their statements. In particular,

24 the foregoing statements were false and recklessly misleading in at least the following

25 respects:

26


27 had been achieved through unsustainable sales practices, including by over-reliance

28

718102_i -37-


1 on quarter-end bulk sales that were unconnected to actual demand. See §VI, VII and

2 Ix.

3


4 I the sales with Team Alliance and Turf Partners, in the August 10, 2011 Report on

5 I Form 10-Q and statements detailed above, or the material risks those practices created

6 Ito Powerwave's future financial results. See §VI, VII and X.

7



9 and SEC revenue recognition requirements. See § §VI, VII and X.

10



12 contradicted the positive outlook the defendants' public statements were intended to


14


15 demand for Power -wave's products because the reported revenues had been artificially

16 inflated. See § §VI, VII and X.

17



19 quarter bulk sales than Powerwave's customers could reasonably expect to absorb,

20 thereby cannibalizing sales from future periods. See §VI, VII and X.

21

(g) Powerwave' s financial guidance was false and lacked a reasonable

22 basis because it included fictitious bulk sales that were improperly recorded in


24

89. On October 18, 2011, Powerwave issued a press release that shocked

25 investors and revealed that contrary to defendants' repeated claims, demand had fallen

26 off a cliff. The Company announced that "it anticipates that revenues for its fiscal

27 third quarter ended October 2, 2011 will be in the range of $75 million to $79

28

EI 718102_i


1 I million." Defendant Buschur commented on the announcement, stating, in pertinent

2 part, as follows:

3

Our third quarter revenues were impacted by several factors,

4

which included a significant slowdown in spending by North American

5

network operators, a significant reduction in activity with our original

6

equipment manufacturing customers, coupled with further weakness in

7

several international markets, including Western and Eastern Europe,

8

and the Middle East[.] From a global perspective, we believe that the

9

current economic environment has caused operators to reduce or

10

postpone their spending plans for the near term while they evaluate the

11

macro-economic pressures in each individual market. The Middle East

12

market has been significantly impacted by the political unrest throughout

13

the region. In addition, in the North American market we believe that

14

the uncertainty arising from the government's recent opposition to the

15

proposed merger of AT&T and T-Mobile, has led to delays in spending

16

as these operators re-evaluate their capital spending plans. All of these

17

factors, combined together, have had a significant impact on our third

18

quarter revenues. While near term visibility remains difficult in our

19

markets, we continue to believe that the long-term demand for

20

improvements in wireless infrastructure remain strong, as global demand

21

for data continues and wireless network operators continue to promote

22

their plans to improve existing coverage and add additional capacity, in

23

the form of 4G capabilities, to wireless networks across the globe. We

24

believe that Powerwave remains positioned to build upon and capture the

25

long-term growth opportunities that are in the wireless infrastructure

26

marketplace.

27

90. Following the issuance of the press release, Powerwave held a conference

28 call to discuss the announcement. During the conference call, defendants Michaels

718102_i -39-

Case 8


1 and Buschur admitted that the Company was performing poorly and burning through a

2 substantial amount of free cash. Given how positive defendants were just weeks

3 earlier, financial analysts were stunned by the huge miss and actually questioned

4 whether Buschur was fit to run the Company:

5

James Basch - Dialectic Capital Management - Analyst

6

Okay. And then my second question. This is going to be the

7

worst revenue quarter that you guys have had since 2004. And then,

8

Ron, if I look at your tenure as CEO, sales have declined dramatically.

9

The Company really has not been profitable in any way, consistently.

10

And now you are coming up with a quarter like this. And what I've

11

always heard about the Company, is that there is great technology, but

12

it's mismanaged. What should give us confidence at this point, that

13

you should still be managing this business?

14

91. During the same October 18, 2011 conference call several analysts

15 questioned defendants about the huge decline in revenue and specifically whether it

16 indicated "market share losses" and customer "inventory buildup." Buschur admitted

17 that "inventory buildup" or customers having too much of Powerwave's product -

18 was a cause of the huge decline in demand.

19

Umesh Mehta - Tenaya Capital - Analyst

20

Okay. And then if - and then in terms of, you talked about

21

customer loses. So how do we - and sort of a slow down with some of

22

the large telcos. How do we what is - how do we sort of view that

23 versus actual market share losses? I mean, how do you get comfortable

24

that, these are sort of a one-time things, versus more - these are more

25

secular sort of situations?

26 * * *

27

Ted Moreau - WBJ Capital Group, Inc. - Analyst

28

7181021

A'


1

Okay. Was there any possibility of an inventory buildup at any

2

other customers in North America?

3

Ron Buschur - Powerwave Technologies, Inc. - President and CEO

4

Well, I certainly would believe based on some of the slowdown,

5

and how abrupt it was after the August announcement, that there

6

probably is some inventory that is sitting there. We have a fairly good

7

understanding of the inventory that we hold, based on the delay, so I

8

would anticipate there is some inventory sitting there being positioned

9

for the next couple of quarters.

10

92. Michaels was also specifically asked where the biggest decline in

11 revenue was and Michaels admitted it was the North American market. "[D]d you

12 I give a break out between, which was the bigger decline? Was it North America or

13 I EMEA?" Michaels responded: "The North America market was the largest."

14

93. That same day, October 18, 2011, Powerwave disclosed that because of

15 the significant amount of cash it had burned it was forced to enter a sale and lease-

16 back transaction involving its corporate headquarters. The Company sold its

17 headquarters including the land and an adjacent vacant 2.87 acre lot for $49.55 million

18 and simultaneously entered into a 15 year lease. The lease payments start at $3.964

19 million/year and increase 2% per year. Under the lease, the Company would also be

20 required to pay insurance, real estate taxes, maintenance and repair expenses.

21

94. On October 24, 2011, Imperial Capital issued a report on Powerwave

22 bluntly stating that "3Q11 Revenue Shocks Market."

23

95. Also, on October 19, 2011 Brigantine Advisors issued a report on

24 Powerwave. In the report, Brigantine Advisors noted that Powerwave's revenue range

25 of $75-59M for 3Q11 "has the makings of a nightmare," given that their previous

26 estimate for the quarter was $162M. The report also noted the Company's cash-

27 crunch:

28

718102_i -41-


1

At the end of2Ql 1, Powerwave was carrying about $206M in debt and

2

$50M in cash, and through 3Q11, raised a net of $25M, but burned

3

roughly $28M implying a gross margin in the 10% range. In attempting

4

to meet ends going forward, Powerwave sold its Santa Ana, CA

5

headquarters for about $50M in cash.

6

96. That same day, October 19, 2011, J.P. Morgan issued a report on

7 Powerwave. J.P. Morgan noted that Powerwave's preannounced revenue of $75-59M

8 "fell 54% against our prior $168M estimate." The report also stated that Powerwave's

9 "[c]ash burn is troubling."

10

97. Also, on October 19, 2011, WJB Capital Group issued a report on

11 Powerwave and bluntly stated that the "Q3 Pre-Announcement: Fell Off a Cliff." The

12 I report noted that consensus estimates for the quarter were $168 million.

13

98. On October 28, 2011, Powerwave issued a press release announcing that

14 its Board had approved a 1 -for-5 reverse stock split and a reduction in the number of

15 authorized shares of its common stock. The 1 -for-5 reverse stock split reduced the

16 number of authorized shares of common stock from 250,000,000 to 100,000,000.

17

99. On November 1, 2011, Powerwave issued a press release announcing its

18 financial results for its third fiscal quarter, the period ending October 2, 2011. The

19 Company reported a net loss of $35.1 million, or a basic loss per share of $1.09.


21

"As we have previously reported, our third quarter revenues were

22

impacted by several factors, which included significant slowdowns in

23

several of our markets, including North America, Western and Eastern

24

Europe and the Middle East, as well as our original equipment

25

manufacturing customers[.] From a global perspective, we believe that

26

the current economic environment has caused operators to reduce or

27

postpone their spending plans for the near term while they evaluate the

28

macro-economic pressures in each individual market. While near term

-42- 7181021

Case 8: 12-cv-00222-CJC-JPR Document 40-1 Filed 07/23/12 Page 22 of 25 Page ID II #:443

1

visibility remains difficult in our markets, we continue to believe that the

2

long-term demand for improvements in wireless infrastructure remain

3

strong, as global demand for data continues and wireless network

4

operators continue to promote their plans to improve existing coverage

5

and add additional capacity, in the form of 4G capabilities, to wireless

6

networks across the globe. We are currently finalizing our restructuring

7

plans in order to take the steps we believe necessary to maintain

8

Powerwave's competitive position and continue to position Powerwave

9

for long-term success."

10

100. That same day, November 1, 2011, defendants also hosted a conference

11 call with financial analysts. On the call, defendants took questions from financial

12 analysts. An analyst from Canaccord Genuity again questioned whether the huge

13 reduction in revenue was due to market share loss or "inventory balancing":

14

Mike Walkley - Canaccord Genuity - Analyst

15

Just following-up maybe on your OEM customer mix - second

16

straight quarter of pretty good drop at Nokia Siemens. Is it just an

17

inventory balancing maybe with that customer? Or do you have any

18

idea of potential share loss or second sourcing that maybe doing it, since

19

they've been a very strong customer for a long time?

20

101. During the November 1, 2011 conference call, an analyst from Credit

21 Suisse also questioned whether "given the significance of the drop-off," product

22 defects played a role in the 3Q11 revenue numbers: "Okay. One final question. I

23 mean, this obviously comes to mind, given the significance of the drop-off. Have

24 there been any issues with products - defects, et cetera, at all out there?" Buschur

25 stated that there had not been product defect issues since 1Q:

26

No, we had - Arun, as we had stated in Qi, we had issues where

27

we were trying to ramp up some of the LTE products, and we had issues

28

with the quality of those products in the factory. We had pulled back

-43- 718102_i

Case 2-cv-00222-CJC-JPR Document 40-1 Filed 07/23/12 Page 23 of 25 Page ID #:444

and worked on the product that was affected. And at this point, there is

no quality issues or concerns around the product that's out in the field or

with our customers.

X. DEFENDANTS' MATERIALLY FALSE AND MISLEADING FINANCIAL REPORTING AND GAAP VIOLATIONS DURING THE CLASS PERIOD

102. In order to meet its revenue goals, Powerwave improperly inflated its

'publicly reported revenue, gross profit, income from operations, net income and net

income per share. As detailed herein, defendants and the Company reported false

financial results in Powerwave's publicly issued financial statements and related

earnings releases during the Class Period . 5 These financial results were materially

false and misleading and in violation of GAAP 6 and SEC guidance by improperly

recognizing revenue on purported sales to resellers - particularly one North American

reseller called Team Alliance. During the Class Period, Powerwave engaged in a

revenue recognition scheme of improperly reporting material amounts of revenue in

violation of GAAP for consignment sales where:

Powerwave's Class Period financial statements and earnings releases issued to the public and filed with the SEC include: SEC Form 10-Ks for full fiscal year ended January 2,2011; SEC Form 10-Qs for periods ended October 3,2010, Apnl 3,2011, July 3, 2011 and October 2, 2011; SEC Form 8-Ks issued on February 1, 2011, May 5,2011 and August 4, 2011.

GAAP are those principles recognized by the accounting profession as the conventions, rules, and _procedures necessary to define accepted accounting practice at a particular time. SEC Regulation S-X (17 C.F.R. §2110.4-01(a)(1)) states that financial statements filed with the SEC that are not prepared in compliance with GAAP are presumed to be misleading and inaccurate, despite footnotes and other disclosure. Regulation S-X requires that interim financial statements must also comply with GAAP, with the exception that interim financial statements need not include disclosure that would be duplicative of disclosures accompanying annual disclosures, per 17 C.F.R. §210.10-01(a). On June 3O, 2009, the Financial Accounting Standards Board ("FASB' ) issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles - a

,placement ofFA SB Statement No. 162. FASB Accounting Standards Coc[iflcation ('ASC") became the source of authoritative U.S. accounting and reporting standards for nongovernmental entities, in addition to guidance issued by the SEC, effective for financial statements issued for reportingpenods that ended after September 15, 2009. The ASC did not change existing U.S. (jAAP.

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718102_i

Case 8:12-cv-00222-CJC-JPR Document 40-1 Filed 07/23/12 Page 24 of 25 Page ID I #:445

1 (a) Powerwave knowingly and deliberately shipped defective product

2 to Team Alliance with an agreement to swap these out with functional products in

3 future periods; and

4 (b) Powerwave shipped to Team Alliance "bulk orders" of unsold

5 and/or unsellable inventory with rights to return product along with special extended

6 payment terms. See §VI and VII.

7 103. As a result of these improper revenue recognition schemes, Powerwave

8 materially overstated revenue and earnings in each of its quarterly and annual public

9 financial statements filed with the SEC during the Class Period. In total, Powerwave

10 overstated revenue reported during the Class Period by at least $60 million, over 9%

11 and earnings by at least 39%, as depicted in the following table:

12 (Dollars in

13 Thousands) Net Sales as

14 Reported Net Sales as

15 Adjusted

16 Overstatement

17 Net Income as Reported

18 Net Income as Adjusted

19 Overstatement

20 - A.

21

Total Class

Powerwave Improperly Recognized Revenue on Contingent Sales with Team Alliance, in Violation of GAAP

22 104. Sales to Team Alliance were material throughout the Class Period.

23 Powerwave disclosed the following amounts of revenue recorded with Team Alliance:

24 2nd Half ($000's) 3Q10 1Q11 2Q11 2011

25 Net Sales to Team Alliance $ 17,249 $19,127 $47,779 $ 4,205

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27 As a percent of total Powerwave sales 11% 14% 28% 3%

28

718102_i -45-


1 II Sales of Defective Product

2

105. According to CW1, in 1Q11, Powerwave knowingly and deliberately

3 shipped at least $15 million of defective product - mostly LTE antennas - to Team

4 Alliance in the last few days of the first fiscal quarter of 2011. According to CW 1,

5 this was explicitly done in an effort to meet its quarterly sales forecast. According to

6 CW1, one of the major problems with Powerwave's antennas during this period was

7 that the computer motherboards installed in the antennas were defective. Powerwave

8 did not have functional motherboards and was waiting for new motherboards from its

9 supplier. CW1 clearly recalled being in a meeting at the end of 1Q11 in which the

10 Senior Director of Supply Chain Operations, Ryberg, spoke by phone to the

11 Powerwave factory in China, directing them to ship the defective product to Team

12 Alliance. CW1 also recalls that in a later meeting in the beginning of April 2011,

13 Ryberg told the Chinese factory the specific products that needed to be replaced.

14 CW1 explained that at least $15 million of this bulk order was made up of defective

15 antennas. CW1 further explained that even though Team Alliance was unaware they

16 would receive a massive shipment of defective goods, Powerwave deliberately

17 shipped them with the plan to replace them in later periods. Like other end of quarter

18 bulk orders, CW1 explained that the defective goods were transported by boat 7 rather

19 than air from China so as to ensure that the products had shipped and were in transit,

20 while delavin delivery by three to four weeks Powerwave also minted special.. .

21 payment terms from the usual 30 days to at least 60 days. CW1 explained that as a

22 result of the repeated bulk shipments beginning in 3Q10, Team Alliance had fallen

23 behind on their payments, and yet they were never put on credit hold. According to

24 CW1, throughout 2011 and as of November 2011, Powerwave was still "working on

25 swapping out" the defective products. As described below, recording revenue on

26

27 Transportation costs were paid by Powerwave.

718102_i

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Case 8


#:447

I these shipments was improper and violated GAAP and SEC revenue recognition

requirements.

I Bulk Orders

106. Beginning by at least 3Q10 and continuing every quarter thereafter up

until 3Q11, Powerwave began shipping significant amounts of product to Team

Alliance with implicitly contingent payment terms. According to CW1, as the quarter

drew to an end, Powerwave would "look around" at whatever inventory was unsold

and then obtain "a bulk order" from Team Alliance. These bulk orders helped

Powerwave meet its revenue targets. According to CW1, however, these bulk orders

consisted of inventory that Powerwave had overbuilt and customers had not ordered.

In order to get Team Alliance to issue a bulk purchase order and accept delivery of

Powerwave's overbuilt inventory, Powerwave granted Team Alliance special

extended payment terms and rights to return the product. See §VII. For these orders,

Team Alliance did not accept full responsibility for these products and Powerwave, in

substance, retained the risk of ownership of the product. Id. Because the payment

terms on these deals were such that Team Alliance effectively did not have to pay for

the product until it was resold, the goods were implicitly sold on a consignment basis.

These deals, by their very nature, had no assurance of collectibility. According to

numerous CW's (see §VI and VII), these bulk orders were done so Powerwave could

meet its revenue goals. Recording revenue on these contingent sales was improper

and violated GAAP. According to confidential witnesses in 3Q10, 4Q10, 1Q11 and

2Q11 these orders were at least $15 million to $20 million each quarter and as high as

$25 million in a quarter. See § § VI and VII.

B. Powerwave Recorded Premature and Inflated Revenue in Violation of GAAP and the SEC's Revenue Recognition Requirements

107. ASC 605-10-25-1 clearly and concisely states that revenue should not be

recognized until it is both realized (or realizable) and earned. The SEC has further

reiterated revenue recognition rules under GAAP, which FASB has codified as ASC

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#:448

1 605-10-S25 and ASC 605-10-S99, by requiring that revenue can be recognized only

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(a) Persuasive evidence of an arrangement exists;

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(b) Delivery has occurred or services have been rendered;

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(c) The seller's price to the buyer is fixed or determinable; and

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(d) Collectibility is reasonably assured.

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If an entity sells its product but gives the buyer the right to return the

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b. The buyer has paid the seller, or the buyer is obligated to pay the

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event of theft or physical destruction or damage of the product.

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d. The buyer acquiring the product for resale has economic substance

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apart from that provided by the seller....

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e. The seller does not have significant obligations for future

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performance to directly bring about resale of the product by the buyer.

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f. The amount of future returns can be reasonably estimated.

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109. ASC 605-10-S99-1 clearly states that if a sales transaction fails to meet

23 all of the conditions of ASC 605-15-25-1, as outlined above, "no revenue may be

24 recognized until those conditions are subsequently met or the return privilege has

25 substantially expired."

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110. Recognizing revenue from Powerwave's bulk orders, including shipment

27 of defective products to Team Alliance was improper, as the sales did not meet these

28 criteria listed in ASC 605-10-S99-1 and ASC 605-15-25-1.

WE M 718102_i


#:449

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111. Powerwave's end of quarter sales deals were, in substance, consignment

sales. Powerwave had established a business practice whereby sales to Team Alliance

were contingent upon resale. According to CW1, Powerwave granted Team Alliance

the right to return product and extended their payment terms beyond the ordinary due

dates. According to CW1, Powerwave never put Team Alliance on credit hold despite

their lack of payment and explicitly waived payment during 2Q11. In 2Q11,

Ducharme told CW1 that Powerwave was "not going to ask them [Team Alliance] to

pay." Powerwave had deliberately shipped Team Alliance bulk orders and bulk

orders of defective product as part of their scheme to inflate revenue. Bulk orders

were shipped to Team Alliance even though Powerwave knew there was no end user

and that Team Alliance did not need the product based on known bulging inventory

levels. Accordingly, revenue could not be recognized because collectibility was not

reasonably assured (as required by ASC 605-1 0-S99- 1); the price to the buyer was not

fixed or determinable 8 (as required by ASC 605-10-S99-1); the buyer did not pay the

seller at the time of sale and the buyer's obligation to pay was contractually or

implicitly excused until the buyer resells the product (as required by ASC 605-10-

S99-1 and ASC 605-15-25-1(b)). 9 As a result of defendants' improper accounting

practices, Powerwave's financial statements were materially inflated.

112. As further evidence that collectibility was not assured on these sales (as

required by ASC-605-S99-1), Powerwave's accounts receivable grew

disproportionately to its sales. See §X.C. More specifically, Team Alliance's

accounts receivable balance disproportionately grew to 33% of the Company's total

8 ASC 605-10-S99-1 defines a "fixed fee" as a "fee required to be paid at a set amount that is not subject to refund or adjustment."

"The arrangement may not specify that payment is contingent upon subsequent resale or consumption. However, if the seller has an established business practice permitting customers to defer paymentbeyond the specified due date(s) until the products are resold or consumed then. . . the. . . right to receive cash representing the sales price is contingent." (ASi 605-10-S99-1)

718102_i


accounts receivable by 1Q12, despite three straight quarters of sales levels below 10%

II to Team Alliance.

113. Additionally, ASC 605-1 0-S99-1 precludes revenue recognition when the

II "the seller retains the risks and rewards of ownership of the product." According to

confidential witnesses (see §VII), Team Alliance did not accept full responsibility for

the products due to the special terms underlying the sale which effectively made the

sale risk free to Team Alliance. Accordingly, Team alliance did not assume the risks

I and rewards of ownership of the product. Therefore, ASC 605-10-S99-1 criterion

I requiring that "the seller retains the risks and rewards of ownership of the product"

I before revenue can be recognized was violated.

114. Powerwave ignored these well established accounting rules, and

improperly recognized revenue on contingent sales to Team Alliance anyway.

C. Powerwave's Disclosures Regarding Revenue Recognition Were False and Misleading and in Violation of GAAP and SEC Guidance

115. Powerwave was required by GAAP and SEC rules, including ASC 605-

!10-599-1 and ASC 235-10, to disclose in detail its significant accounting policies,

including its revenue recognition policy, in the footnotes to its financial statements in

each of its publicly issued Forms 10-K and 10-Q. ASC 605-10-S99-1 clearly and

I concisely states this requirement, as follows:

A registrant should disclose its accounting policy for the recognition of

revenue pursuant to APB Opinion No. 22 [Subtopic 23 5-10]. Paragraph

12 [paragraph 235-10-50-3] thereof states that "the disclosure should

encompass important judgments as to appropriateness of principles

relating to recognition of revenue. . .

116. With regard to its revenue recognition policy, Powerwave made the

I following disclosures during the Class Period:

- 50 - 17181021


#:451

1

Revenue Recognition

2

The majority of our revenue is derived from the sale of products.

3

We recognize revenue from product sales at the time of shipment or

4

delivery and passage of title depending upon the terms of the sale,

5

provided that persuasive evidence of an arrangement exists, the fee is

6

fixed or determinable and collectibility is reasonably assured. We offer

7

certain customers the right to return products within a limited time after

8

delivery under specified circumstances, generally related to product

9

defects. We monitor and track product returns and record a provision for

10

the estimated amount of future returns based on historical experience and

11

any notification we receive of pending returns. While returns have

12

historically been within our expectations and the provisions established,

13 we cannot guarantee that we will continue to experience the same return

14

rates that we have in the past. Any significant increase in product returns

15

could have a material adverse effect on our operating results for the

16 period or periods in which these returns materialize. A portion of our

17 sales involve contracts that may include the design, customization,

18

implementation and installation of wireless coverage applications

19 utilizing our coverage solution products. We recognize revenue using

the percentage-of-completion method for these types of arrangements.

21

We measure progress towards completion by comparing actual costs

22

incurred to total planned project costs. Such sales have not historically

23

been a significant amount of our total sales.

24

117. These disclosures were materially false and misleading and in violation

25 of the disclosure requirements included in ASC 605-10-S99-1 and ASC 235-10

26 because, as alleged in §VII.

27

(a) Collection was not reasonably assured on sales to resellers;

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(b) Persuasive evidence of an arrangement did not in fact exist; and

- 51 - 718102_i


#:452

(c) The criteria for revenue recognition under ASC 605-1 0-S99- 1 were

I not generally met upon shipment of the Company's products.

118. In addition to disclosing its revenue recognition accounting policy, ASC

605-10-S99-1 requires additional revenue disclosures for the following types of

I revenue transactions or events:

• Shipments of product at the end of a reporting period that

significantly reduce customer backlog and that reasonably might

be expected to result in lower shipments and revenue in the next

period.

• Granting of extended payment terms that will result in a longer

collection period for accounts receivable (regardless of whether

revenue has been recognized)....

Changing trends in shipments into, and sales from, a sales channel

or separate class of customer that could be expected to have a

significant effect on future sales or sales returns.

An increasing trend toward sales to a different class of customer,

such as a reseller distribution channel that has a lower gross profit

margin than existing sales that are principally made to end users.

As described herein, Powerwave was subject to several transactions and events that

are covered by the disclosure requirements described above including sales

transactions with Team Alliance. Despite these revenue transactions and events,

Powerwave failed to make the revenue disclosures required under GAAP.

D. Powerwave's Revenue Recognition Scheme Is Supported by the 92% Increase in DSO in 3Q11

119. As detailed herein (see §VI and VII), as a result of Powerwave's

"shady" practices, the amount owed by Team Alliance and other customers began to

grow rapidly. Accordingly, Powerwave's Days Sales Outstanding ("DSO") increased

from 91 days at 3Q10 to 175 days at 3Q11 a 92% increase.

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#:453

120. DSO is a common financial metric that represents the average number of

days it takes a company to collect its receivables. It is a measure of collectibility and

also serves as a useful measure of cash flow efficiency and revenue quality. A DSO

of 50, for example, means that it takes a company 50 days on average to convert a

credit sale (i.e., an account receivable) into cash. An abnormally high DSO, in

comparison to a relevant benchmark, is a sign that receivables are at risk of collection

and may indicate problems with the collection process at the Company.' ° An

abnormally high DSO is also often a symptom of improper revenue recognition. As

such, DSO is a widely used metric associated with measuring the quality of a

company's revenue and associated accounts receivable portfolio. The significance of

this metric has been made clear by the SEC: "[a] growing DSO figure is often a

telltale sign that a company's receivables are impaired." This is because the older a

receivable gets, the less likely it is to be collected, and there is a much greater chance

that receivables will not be collected when revenue has been recognized improperly.

121. Industry DSO figures were available to defendants during the Class

Period. Various professional organizations publish DSO information and industry

averages. The median industry DSO at the end of 2010 was 58 days ' 2 . This was

10 See David C. Hammer, Performance is reality, how is your revenue cycle holding up?, Healthcare Financial Management Association (July 1, 2005); see also Michael D. Carpenter, A Reliable Framework for Monitoring Accounts Receivable, Financial Management Vol. 8, No. 4 at 37-40 (Winter 1979); Scott Blakeley, Esq., The Credit Professional's Duty and Protection with Disclosing Corporate Fraud at the Public Company, The Credit Research Foundation at 2 (November 2002) ("A company's DSO is, at least on Wall Street, an important indicator of the condition of its accounts receivable, and therefore a gauge of asset quality.").

See SEC v. Korkuc, No. 03-cv-30 17, Complaint, ¶28 (E.D.N.Y., June 19 2003); see also SEC AAER No. 1673A (Nov. 25, 2002), available at http://www.sec.gov/litigation/litreleases/ lr 178 59a.htm. 12 Median DSO for the communications equipment industry per CFO/REL's "The 2011 Working Ca pital Scorecard," available at http://www.cfo.com/mediatpdf/1107WCcharts.pdf . The median DSO at the end of 2009 was 57 days per The 2010 Working Capital Scorecard.

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#:454

I calculated by dividing net accounts receivable by net revenue for the year and then

multiplying by 365 days. 13 Similarly, using a comparable formula, the median DSO

for Powerwave's competitors with publicly available quarterly financial statements

was approximately 69 days and the average DSO was 70 days for the December 2010

quarter. 14 Comparatively, Powerwave's DSO was 97 days for 4Q10 and ballooned to

175 days at the end of the Class Period, 3Q11. This was contrary to defendant

Michaels' statement during the 2Q11 conference call when DSO was already 114 days

that "DSOs should decrease.. . as [Powerwave management] anticipate[s] increased

collections throughout the third quarter." The following charts depict Powerwave's

abnormally high and escalating DSO:

3010 4Q10 1Q11 2Q11 3Q11 91 97 116 114 175

Powerwave's DSO Compared to Competitors

C

160

o 140 (0 0

Cl) (I, >.

60 0 I-

j

20

13 Net accounts receivable is derived by subtracting the allowance for doubtful accounts from gross accounts receivable. 14 Calculated based upon publicly available financial information for the following of Powerwave's competitors 'as disclosed in its 2010 and 2011 Forms 10- K: Fujitsu Limited, Hitachi Kokusai Electric Inc., and Tyco Electronics (now known as TE Connectivity Ltd). Several other foreign competitors were listed, but quarterly financial data was not easily available.

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Powerwa'e

---Tyco

-*--- Fujitsu

-*- Hitachi

3Q10 4010 1Q11 2Q11 3Q11

718102_i - 54 -

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Case 8


#:455

122. Moreover, the percentage of Powerwave's accounts receivable

attributable to Team Alliance was increasing at a rapid rate and ultimately outpacing

its sales. Prior to 1Q11, Team Alliance had accounted for less than 10% of total

I accounts receivable. As sales to Team Alliance increased, so did receivables and

Team Alliance accounted for 14% and 27% of Powerwave's receivables at the end of

1Q11 and 2Q11, respectively. But, despite sales to Team Alliance dropping well

below 10% of total sales in 3Q11, the percentage of receivables attributable to Team

Alliance dramatically increased to 34% and remained at 33% through April 1, 2012

despite a continued sales level below 10%. This demonstrates that Team Alliance

still had not paid down the receivables incurred during 1Q11 and 2Q11 as a result

of Powerwave 's improper revenue recognition.

E. Powerwave's Revenue Recognition Scheme Also Affected Inventory

123. Powerwave's decreasing sales had the effect of increasing inventory

during the Class Period. The Company did not sell as much, so correspondingly it had

more inventory leftover. Inventory increased 22.7% from 4Q10 to 1Q11 (which was

the largest percentage increase in five and a half years), and continued to increase

throughout the remainder of the Class Period. The vast majority of the increase was

attributable to finished goods inventory. Similarly, Team Alliance's inventory was

growing throughout the Class Period and according to CW1, Powerwave knew this

because Team Alliance sent inventory reports to Powerwave regularly.

124. Curiously, Powerwave's allowance for excess and obsolete ("E&O")

inventory decreased 30.4% during the same period to 24.4% of inventory, which was

the lowest percentage level in four years and the lowest dollar amount in five and a

half years. The allowance for E&O inventory as a percentage of inventory (i.e., the

percentage of inventory that was reserved for) continued to decrease throughout the

Class Period. This percentage of inventory covered by the reserve went from 42.7%

at the start of the Class Period to 24.4% at 1Q11 noted above and was down to 17.6%

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718102_i

Case

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12-cv-00222-CJC-JPR Document 40-2 Filed 07/23/12 Page 10 of 25 Page ID I #:456

by the end of3Ql 1. Increasing the allowance is accomplished by recording a charge

against earnings. Thus, by maintaining the allowance at a lower level, defendants

avoided taking charges which would have lowered earnings. Ultimately, Powerwave

belatedly increased its allowance for E&O inventory by $9.7 million from 3Q11 to

1Q12. These inventory and allowance figures are depicted in the charts below:

($'s in millions) 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 Inventory 55.5 50.4 61.9 69.7 84.5 88.6 83.0 Allowance for 23.7 21.7 15.1 15.4 14.9 15.8 24.6 E&O Inventory ("E&O Allowance") E&O 42.7% 43.1% 24.4% 22.1% 17.6% 17.8% 29.6% Allowance as a % of Inventory Inventory -0.5% -9.2% 22.7% 12.7% 21.2% 4.9% -6.3% increase (decrease) from pnor quarter 1&O -8.1% -8.4% -30.4% 2.0% -3.2% 6.0% 55.7% Allowance increase (decrease) from prior quarter

Allowance Decreased While inventory increased

4Q10 1Q11 2Q11 3Q11

I Inventory i E&O Allowance & E&O Allowance as a % of Inventory

I

900

80.0

70.0

60.0

60.0

40.0

30.0

2GM

1GM

50.0% 45.0% 40.0%

35.0% 30M% 2&0% 20M% 15,0%

10.0% 5.0% 0.0%

-56- 7181021

28

Case

1 2-cv-00222-CJC-JPR Document 40-2 Filed 07/23/12 Page 11 of 25 Page ID I #:457

1

F. Powerwave' s Financial Statements Violated Fundamental Accounting Concepts

2

3 125. In addition to the above-referenced departures from GAAP and SEC

4 guidance, as a result of the defendants' accounting improprieties, Powerwave

5 presented its financial results in a manner that violated the following fundamental

6 I accounting principles:

7 (a) The principle that "[fjinancial reporting should provide

8 information that is useful to present and potential investors and creditors and other

9 users [of the financial reports] in making rational investment, credit, and similar

10 decisions." (FASB Statement of Concepts No. 1, ¶34);

11 (b) The principle that "[f]inancial reporting should provide

12 information about the economic resources of an enterprise, the claims to those

resources, and the effects of transactions, events, and circumstances that change 13 14 resources and claims to those resources." (Id., ¶40);

15 (c) The principle that "[f]inancial reporting should provide

16 information about an enterprise's financial performance during a period. Investors

17 and creditors often use information about the past to help in assessing the prospects of

18 an enterprise. Thus, although investment and credit decisions reflect investors' and

19 creditors' expectations about future enterprise performance, those expectations are

20 commonly based at least partly on evaluations of past enterprise performance." (Id.,

21 ¶42);

22 (d) The principle that "[f]inancial reporting should provide

23 information about how management of an enterprise has discharged its stewardship

24 responsibility to owners (stockholders) for the use of enterprise resources entrusted to

it.... To the extent that management offers securities of the enterprise to the public, 25 26 it voluntarily accepts wider responsibilities for accountability to prospective investors

27 and to the public in general." (Id., ¶50);

28

- 57 - 17181021


(e) The principle that financial reporting should be reliable in that "it

represents what it purports to represent." That information should be reliable as well

as relevant is a notion that is central to accounting. (FASB Statement of Concepts No.

12, ¶J58-59);

(f) The principle of completeness, which means that "nothing material

is left out of the information that may be necessary to insure that it validly represents

I the underlying events and conditions." (Id., ¶79);

(g) The principle that conservatism be used as a "prudent reaction to

uncertainty to try to ensure that uncertainties and risks inherent in business situations

are adequately considered." (Id., ¶95);

(h) The principle that that revenues and gains should not be recognized

I until they are both earned and realizable (FASB Statement of Concepts No. 5, ¶83);

(i) The principle that if "collectibility of assets received for product,

services, or other assets is doubtful, revenues may be recognized on the basis of cash

received." (Id., ¶84);

(j) The principle that financial statements shall contain all data

I necessary for a fair presentation of financial position and results of operations as set

forth in U.S. GAAP, including compliance with the requirements of the SEC's rules

and regulations by SEC registrants (ASC 205-10);

(k) The nrinin1e that interim fnrni1 r ortinoqhnuldhehnsed iinnn \ -J

I the same accounting principles and practices used to prepare annual financial

statements (ASC-270-10-45-2); and

(1) The principle that interim financial information provide investors

and others with timely information as to the progress of the entity (ASC 270-10-45-1).

XI. DEFENDANTS' KNOWLEDGE OR RECKLESS DISREGARD OF THE TRUTH ABOUT POWERWAVE'S BUSINESS

126. As detailed above (see §VI-VII), throughout the Class Period,

defendants knew, or recklessly disregarded, the true facts about Powerwave's

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1 1 business. Defendants Buschur and Michaels held themselves out to investors and the

2 market as the persons most knowledgeable at Powerwave about demand. As detailed

3 in §V-IX, each of these defendants communicated with investors and analysts during

4 the Class Period and represented that they were informed of and knowledgeable about

5 demand. At no time during their communications with investors on these matters did

6 any of these defendants assert that they were uninformed about any material aspect of

I Powerwave's business.

8

127. The Individual Defendants did not merely hold themselves out as

9 knowledgeable about Powerwave's business, but specifically described how they

10 personally monitored and kept apprised of sales and demand at Powerwave. For

11 example, according to Powerwave's SEC filings Buschur carefully monitored the

12 Company's sales activity. On May 11, 2011, Powerwave disclosed that the Company

13 had established a Sales Incentive Program ("SIP") effective January 10, 2011. Under

14 the SIP, the Company's Vice President of Worldwide Sales, Basem Anshasi

15 ("Anshasi"), would receive quarterly cash bonus payments in 2011 based on quarterly

16 sales quotas established by Buschur.

17

128. In addition, defendants confirmed that they are able to see "booked

18 orders" five to six weeks in advance. On the November 1, 2011 conference call, a

19 financial analyst asked about Powerwave's "visibility" - or how far out defendants

7(1 ('nfl ee confirmed orders.

21

Arun Seshadri - Credit Suisse - Analyst

22

Got it. Okay. And then, finally, just wanted to get a sense as far

23 as your visibility goes, I mean, you answered a few questions about it,

24

but generally speaking, is it about five to six weeks normally? And can

25 you talk about when you will have some view into what Q could look

26

like?

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Ron Buschur - Powerwave Technologies, Inc. - President and CEO

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-59- 718102_i


1

Well, I think the five to six weeks is generous, as we've always

2

talked about, as far as visibility going forward. I don't think anyone in

3

this space, at least at our level of supply, has much better visibility than

4

that. So we don't see that improving, even as we go through with the

5

total economic slowdown improves tomorrow morning to where we're

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going to have better visibility than that. That's part of the business and

7

the challenges. And that's the reason that we think it's very critical for

8

the long-term of the Company to have diversification in other vertical

9

markets, so we're not so dependent on this market that doesn't seem to

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have that great a visibility, and can't forecast its demands very well.

11

Kevin Michaels - Powerwave Technologies, Inc. - CFO and Secretary

12

And let me just add onto that. And just to be a little clearer, I

13

think when we're discussing visibility, we're talking booked orders.

14

And as we've discussed many times, that orders - people are not placing

15

long lead-time orders out there.

16

129. The next day, November 2, 2011, a financial analyst from Brigantine

17 Advisors confirmed what defendants had said the day before about their visibility

18 being "5-6 weeks."

19

130. Given CW1 's position, CW1 also has experience with Powerwave's

visibility - or how far out it could see confirmed orders - during the Class Period.

21 CW1 said that in CW1 's experience, with the customers CW1 dealt with, Powerwave

22 typically had at least six weeks of visibility on orders initiated by customers.

23 Similarly, CW3 also stated that typical lead time between when an order was placed

24 with Powerwave and when it was received by Goodman was around six to eight

25 weeks.

26

131. Consistent with their claims of active involvement in and knowledge of

27 Powerwave's business and demand, former employees of Powerwave have confirmed

28 that defendants were directly involved in the operations of the businesses and that they

718102_i 'I


1 knew or had access to internal information identifying the known, but not timely

2 1 disclosed, declining demand.

3

132. Concurrent with their claims of personal knowledge and active

4 involvement in monitoring Powerwave's business, the Individual Defendants publicly

5 certified with each of the Company's SEC filings that each report "does not contain

6 any untrue statement of a material fact or omit to state a material fact necessary to

7 make the statements made, in light of the circumstances under which such statements

8 were made, not misleading with respect to the period covered by this report." This is

9 discussed more fully below.

10 XII. FRAUDULENT SCHEME AND COURSE OF BUSINESS

11

133. Defendants are liable for: (i) making false statements; or (ii) failing to

12 disclose adverse facts known to them about Powerwave. Defendants' fraudulent

13 scheme and course of business that operated as a fraud or deceit on purchasers of

14 Powerwave securities was a success, as it: (i) deceived the investing public regarding

15 Powerwave's prospects and business; (ii) artificially inflated the price of Powerwave

16 securities; and (iii) caused plaintiffs and other members of the class to purchase

17 Powerwave securities at inflated prices.

18 XIII. ADDITIONAL SCIENTER ALLEGATIONS

19

134. As alleged herein, defendants acted with scienter in that defendants either

20 knew or recklessly disregarded that the public documents and statements issued or

21 disseminated in the name of the Company were materially false and misleading; that

22 such statements or documents would be issued or disseminated to the investing public;

23 and substantially participated or acquiesced in the issuance or dissemination of such

24 statements or documents as primary violations of the federal securities laws. As set

25 forth elsewhere herein in detail, defendants, by virtue of their receipt of information

26 reflecting the true facts regarding Powerwave, their control over, and/or receipt and/or

27 modification of Powerwave's allegedly materially misleading misstatements and/or

28 their associations with the Company which made them privy to confidential

718102_I -61-


proprietary information concerning Powerwave, participated in the fraudulent scheme

II alleged herein.

A. Defendants' Post Class Period Conduct of Shipping Unneeded Products to Customers Supports a Strong Inference of Scienter

135. According to CW3, AT&T's ongoing deferral and delay of new cell-site

construction persisted beyond 1Q1 1-3Q1 1. According to CW3, by 4Q11, the situation

had grown very critical and "tempers were running high" between Powerwave and

Goodman. CW3 said that "we [Goodman] were mad" because Powerwave would not

let Goodman cancel orders for which Goodman had no need.

136. During 4Q11, the Powerwave VP of Global Sales Basem Anshasi came

to the Goodman premises to basically demand that Goodman take delivery of products

that Goodman had ordered but which Goodman had pushed out delivery of because

Goodman no longer needed the products given that AT&T had still not renewed its

cell-site construction activity. Altogether, CW3 said there were two truckloads of

antennas that CW3 estimated represented several million dollars. In spite of

Goodman telling Powerwave (i.e., Anshasi) that Goodman would not accept delivery

of the products, Powerwave shipped them anyway in 4Q11. CW3 refused to accept

delivery of the products and CW3 understands that Powerwave shifted the products to

a nearby warehouse while still insisting that Goodman owed Powerwave for the

products. But, as of CW3's departure from Goodman in February 2012, Goodman

still had not accepted delivery of the products, nor had Goodman paid Powerwave

anything for them. CW3 noted that this visit in 4Q11 was the first time that Anshasi

had ever come to the Goodman premises.

B. Each of Defendants' False Statements and Omissions Involved One of Powerwave's Core Operations

137. Each of the Individual Defendants was a top executive involved in

Powerwave's daily operations and with access to all material information regarding

the Company's core operations. Therefore, each of the Individual Defendants is

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7181021 -62-


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I presumed to have had knowledge of all material facts regarding Powerwave's core

I operations.

138. Each of the false statements alleged herein involved a core operation of

I Powerwave.

139. Powerwave sold a relatively few products to a handful of customers.

Powerwave's sale of its products, antennas and base stations, represented 90% of

Powerwave's business during the Class Period. In addition, sales to North American

customers represented over 40% of Powerwave's business during the Class Period.

And, during the Class Period Powerwave's North American sales were highly

concentrated. According to the Company, for the first half of 2011, total sales to

Team Alliance accounted for approximately 22% of sales. In addition, according to

the Company, for the second quarter of 2011, sales to Team Alliance "accounted for

approximately 28% of our total sales." And, according to the Company, sales to

Team Alliance accounted for 14% of total sales in 1Q11 and 11% of total sales in

3Q10.

C. Powerwave's Incentive Compensation Structure Created an Incentive for Fraud and Strongly Supports an Inference of Scienter

140. Defendants were also motivated to engage in the fraud alleged herein due

to the nature of the compensation system in place at Powerwave. Indeed, although

defendants knew, or recklessly disregarded, that the bulk sales strategy resulted in

inflated earnings and was vulnerable to worsening economic conditions, they were

motivated to keep the truth secret so as to avoid losing their jobs and lucrative

performance-based executive compensation.

141. Defendants, as well as other senior Powerwave executives, received

incentive compensation, and such compensation was a significant part of their

compensation packages. The Company states that it intends to tie a "significant

portion of [executive officers] total annual compensation to our financial performance

as measured by certain factors measured during the fiscal year." The Company's

718102_i -63-

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12-cv-00222-CJC-JPR Document 40-2 Filed 07/23/12 Page 18 of 25 Page ID I #:464

"executive compensation program" includes a "mix of base salary, annual

performance based cash incentives and long-term equity incentive awards."

142. Under the Company's "Performance Based Cash Incentive Plan,"

Powerwave executives had "incentives. . . in the form of cash payments for achieving

certain objective performance goals based on quarterly [EBITDA]." According to

Powerwave: "For 2010, earned incentives were paid out quarterly with twenty-five

percent (25%) of each executives officer's earned quarterly incentive held back until

the end of the year and is payable following the end of the year. This is done to give

the Compensation Committee the discretion to adjust payouts based on company

performance for the entire fiscal year."

143. Defendants were eligible for - and received - massive payouts under the

Company's executive compensation policy. In 2010 Michaels and Buschur each

received incentive compensation that more than quadrupled their total compensation.

In addition, defendants were eligible for and received massive stock awards and

option awards.

144. As detailed in the Company's SEC filings, defendants Michaels and

Buschur received the following pay-outs during 2009 and 2010:

Annual Total Equity Equity and Cash

Defendant Year Salary Bonus Awards Compensation

Ruschur 2010 $600,059 $525,000 $2,08,763 $,958 9 075

611,64115 -- $204 , 92 840,923

Michaels 2010 $450,058 $354,375 $968,133 $1,802,005

2009 $458,767 -- $102,410 $593,416

15 "The 2009 salaries include an extra week of compensation based on the fact that 2009 was a 53-week fiscal year. 2010 and 2008 were 52-week fiscal years."

718102_i


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145. The Company's compensation policies created an incentive for fraud. It

allowed executives to receive massive incentive compensation based on achieving

Company performance targets with no consequence to the executives if the financial

results were later determined to be achieved through fraud. In fact, had defendants

properly accounted for the 3Q10 and 4Q10 "bulk orders," their performance-based

compensation would have been substantially reduced. Defendants Michaels and

Buschur received incentive compensation under the "executive compensation

program" based on 3Q10 and 4Q10 conduct that plaintiffs allege to be fraudulent. See

§VI-VII, X. And, the Company's 25% "hold-back" policy gave them a huge

incentive to engage in this conduct at that time.

146. As detailed above, the incentive compensation at Powerwave played an

I unusually large part of the Individual Defendants' total compensation. Collectively,

I performance-based compensation comprised nearly 75% of the value of the Individual

I Defendants total compensation for 2010.

147. Thus, the compensation culture at Powerwave, which guaranteed massive

I incentive compensation based on fraudulent financial results, provided no mechanism

to recoup such improvidently paid bonuses, provided a strong motivation for fraud

and supports a strong inference of scienter.

D. Defendants' Fraudulent Conduct Allowed Defendants to Preserve Powerwave's Credit and Debt Ratings and Raise $100 Million in the July 20 9 2011 Offering

148. The Individual Defendants were further motivated to obfuscate the

problems with Powerwave's business, inflate the Company's reported financial

results, and keep Powerwave's stock trading at artificially inflated levels in order to

maintain positive credit and debt ratings.

149. On February 1, 2011, the Company disclosed that it had amended its $50

million credit revolver with Wells Fargo to significantly more favorable terms to

Powerwave. According to the Company: "The Amendment extends the maturity date

and the term of the Credit Agreement from August 15, 2011 to August 15, 2014. The

718102_i -65-


I Amendment also reduces the interest rate under the Credit Agreement by reducing the

Base Rate Margin by 1.50% and the LIBOR Base Rate Margin by 0.75%."

150. After the truth was revealed that Powerwave's business was not nearly as

strong as it had claimed, Wells Fargo acted to amend the Credit Agreement. On

December 29, 2011, the Company announced that the Wells Fargo Credit Agreement

was amended and most significantly, Wells Fargo reduced the maximum amount that

can be borrowed from $50 million to $30 million.

151. Defendants were also motivated to carry out the scheme to raise critically

needed capital through the July 20, 2011 offering.

152. On July 20, 2011, Powerwave issued a press release announcing that it

had entered into a purchase agreement to which it would issue an aggregate of $100

million of 2.75% Convertible Senior Subordinated Notes due 2041. According to

Powerwave, the offering allowed the Company to repurchase $42.6 million in

aggregate principal amount of its outstanding 1.875% Convertible Subordinated Notes

due 2024, leaving approximately $15.3 million in principal amount of its 1.875%

Notes outstanding. In addition, the Company stated that it was using approximately

$25 million from the offering to repurchase 11.2 million shares of its common stock

and would use the remaining net proceeds - over $30 million - to pay down additional

indebtedness and for working capital purposes.

Defendants' Misleading Statements About the Reasons for the 3Q11 "Nightmare" Support a Strong Inference of Scienter

When they were forced to disclose the truth defendants acted to off-set

the bad news by claiming that it was caused by an unexpected reduction in capital

expenditures by North American carriers. For example, defendants claimed there had

been "a significant slowdown in spending by North American network operators," and

that "the uncertainty arising from the government's recent opposition to the proposed

merger of AT&T and T-Mobile has led to delays in spending as these operators re-

evaluate their capital spending plans." Given defendants' repeated claims of strong

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E.

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718102_i 'S


#:467

1 demand, analysts were bewildered by defendants' explanation for the massive

2 shortfall - that AT&T and other North American carriers were suddenly reducing

3 capital expenditures - first, because they were not aware of it, and second, because

4 none of Powerwave's competitors mentioned it when they reported their earnings.

5 Indeed, financial analysts who follow Powerwave's industry questioned the honesty of

6 the Individual Defendants, pointedly challenging defendants during Powerwave's

7 November 1, 2011 conference call:

8

Tim Rebinoff - Fore Research and Management - Analyst

9 * * *

10

And lastly, just kind of thinking about your announcements last

11 week in terms of AT&T and some of the other telcos slowing down, a

12 couple of tower companies actually reported today. And the message

13

that came from them was pretty much the exact opposite. They said

14

there was no slowdown whatsoever. So I'm just trying to understand -

15

how do you think about that? Is there - I mean, what is it that I'm

16 missing in terms of what's happening with your Company versus some

17 of the other companies that are basically selling to the same end

18

customers? Thank you.

19

154. That defendants misled investors about the reasons for the 3Q11 miss

20 was further confirmed by financial analysts from Credit Suisse who closely monitor

21 AT&T's capital expenditures due to the impact it has on so many communications

22 infrastructure companies like Powerwave. In its October 21, 2011 report, Credit

23 Suisse bluntly noted that "of those communication equipment suppliers that have

24 reported or have 'preannounced' calendar third quarter operating results, we believe

25 that only Powerwave has specifically cited weak capital expenditure by AT&T as

26 being a significant contributor to its disappointing third-quarter results."

27

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-67- 17181021


155. The truth was that there was no sudden slowdown but, that Powerwave's

customers - particularly Team Alliance - would not (and could not) take on any more

inventory. See §VI-VII, IX-X.

F. SOX Certification

1. Defendants Signed False Statements Regarding Powerwave's Internal Controls and Procedures

156. Defendants Buschur and Michaels signed Sarbanes-Oxley ("SOX")

certifications accompanying Powerwave's 2010 Form 10-K, filed on February 17,

12011, Form 10-Q for 1Q11, filed on May 9, 2011, and Form 10-Q for 2Q11 filed on

August 10, 2011. Each certification stated in pertinent part:

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;

4. The Registrant's other certifying officer and I are

responsible for establishing and maintaining disclosure controls and

procedures (as defined in Exchange Act Rules 13a- 15(e) and 15d- 15(e))

and internal control over financial reporting (as defined in Exchange Act

Rules 13a- 1S(f) and 15d- 1 5(f)) for the Registrant and have:

(a) Designed such disclosure controls and procedures, or

caused such disclosure controls and procedures to be designed under our

supervision, to ensure that material information relating to the

Registrant, including its consolidated subsidiaries, is made known to us

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Imm 718102_i


1

by others within those entities, particularly during the period in which

2

this report is being prepared;

3

(b) Designed such internal control over financial reporting, or

4

caused such internal control over financial reporting to be designed

5

under our supervision, to provide reasonable assurance regarding the

-

I -- -reliability of financial reporting and the preparation - of financial

7

statements for external purposes in accordance with generally accepted

8

accounting principles;

9

(c) Evaluated the effectiveness of the Registrant's disclosure

10

controls and procedures and presented in this report our conclusions

11

about the effectiveness of the disclosure controls and procedures, as of

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the end of the period covered by this report based on such evaluation[.]

13

157. Defendants Buschur and Michaels also signed the 2010 Form 10-K filed

14 I with the SEC on February 17, 2011, that included the additional following assurances

15 I concerning Powerwave's controls.

16

Our management, with the participation of our principal executive

17

officer and principal financial officer, evaluated the effectiveness of our

18

disclosure controls and procedures (as such term is defined in Rules 13a-

19

15(e) and 1 5d-15(e) under the Exchange Act). . . . We maintain

20

disclosure controls and procedures that are designed to provide a

21

reasonable assurance level that information required to be disclosed in

22

our reports filed or submitted under the Exchange Act is recorded,

23

processed, summarized and reported within the time periods specified in

24

the SEC's rules and forms and that such information is accumulated and

25

communicated to our management, including our principal executive

26

officer and principal financial officer, as appropriate, to allow for timely

27

decisions regarding required disclosure.... Based upon the evaluation

28

of our disclosure controls and procedures . . . our principal executive

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officer and principal financial officer concluded that.. . our disclosure

controls and procedures were effective at the reasonable assurance level. * * *

Our management is responsible for establishing and maintaining

adequate internal control over our financial reporting (as defined in Rule

13a-15(f) and Rule 15d-15(f) under- the Exchange Act). Our

management assessed the effectiveness of our internal controls over

financial reporting as of January 2, 2011. In making its assessment of

the effectiveness of our internal controls over financial reporting, our

management used the criteria set forth by the Committee of Sponsoring

Organizations of the Treadway Commission ("COSO") in Internal

Control—Integrated Framework. Based on these criteria, our

management has concluded that, as of January 2, 2011, our internal

controls over financial reporting are effective.

158. Additionally, defendants Buschur and Michaels signed Powerwave's

Form 10-Q for 1Q11, filed on May 5, 2011, and Form lO-Q for 2Qll filed on July 3,

2011. Both filings adopted the previous internal controls assurances set forth in ¶157

by repeating the assurances regarding disclosure controls and by stating there had

been no change to internal controls over financial reporting that occurred during the

reporting period that materially affected, or were reasonably likely to materially

affect, Powerwave's internal controls over financial reporting.

2. Reasons Why Defendants' Internal Controls and Procedure Statements Were Materially False and Misleading

159. Defendants' statements concerning Powerwave's internal controls and

procedures and SOX certifications were false and misleading. As detailed herein,

Powerwave' s management circumvented internal controls and procedures, causing

Powerwave to falsely report its financial results included in publicly issued financial

-70- 718102_i


1 statements, press releases and conference calls, which improperly inflated the

2 Company's revenue and earnings.

3

160. Management of any public company is responsible for establishing and

4 maintaining adequate internal control over financial reporting as defined in 15 U.S.C.

5 §78m-o under the 1934 Act. AU 319.06, Internal Control in a Financial Statement

6 Audit, defines internal control as "a process -- effected by an entity's board of

7 directors, management, and other personnel - designed to provide reasonable

8 assurance regarding the achievement of objectives in the following categories: (a)

9 reliability of financial reporting, (b) effectiveness and efficiency of operations, and (c)

10 compliance with applicable laws and regulations."

11

161. Section 13(b)(2) of the 1934 Act states, in pertinent part, that every

12 reporting company must: "(A) make and keep books, records, and accounts, which, in

13 reasonable detail, accurately and fairly reflect the transactions and dispositions of the

14 assets of the issuer; [and] (B) devise and maintain a system of internal accounting

15 controls sufficient to provide reasonable assurances that.. . transactions are recorded

16 as necessary . . . to permit preparation of financial statements in conformity with

17 [GAAP]." 15 U.S.C. §78m(b)(2)(A)(B). These provisions require an issuer to

18 employ and supervise reliable personnel to maintain reasonable assurances that

19 transactions are executed as authorized, to properly record transactions on an issuer's

20 books and, at reasonable intervals, to compare accounting records with physical

21 assets.

22

162. Here, defendants claimed Powerwave's internal control procedures

23 I complied with the standards adopted by the Committee of Sponsoring Organizations

24 of the Treadway Commission ("COSO"). The COSO standards constitute a specific

25 internal control model, and require adopting entities to have: (i) a disciplined and

26 structured control environment; (ii) direct involvement by management in identifying

27 and analyzing internal control risks, rather than reliance on auditors; (iii) formal

28 policies, procedures and practices that ensure control activities are being properly

-71- 718102_i


carried out; (iv) accurate and timely communication of control responsibilities to

employees; and (v) continual monitoring by management of the controls through

formalized procedures or checklists. Had defendants followed these control

II guidelines as they represented, the falsity of Powerwave's revenue, income and

j earnings pled herein would have been apparent. Rather, defendants circumvented

Ii controls to improperly inflate the Company's revenue and earnings. - -

163. As detailed in §VI-X, Powerwave's financial statements contained

untrue statements and omitted material facts as alleged herein. Defendants' attestation

to the sufficiency of disclosure controls and procedures and internal controls over

financial reporting misled investors into believing that Powerwave's Class Period

financials fairly represented the financial condition of the Company when, in fact,

they materially overstated Powerwave's revenues and bottom-line.

164. Defendants' "review" of Powerwave's financial statements, "evaluation"

of Powerwave's disclosure controls, and "evaluation" ofPowerwave's internal control

over financial reporting that defendants certified they had personally performed in the

above SOX certifications, would clearly have alerted defendants to the presence of the

accounting misstatements described herein and to weaknesses in internal controls.

Therefore, defendants either knew of the misstatements in the financial statements, the

ineffectiveness of the disclosure controls and the weaknesses in internal controls or

defendants knowingly failed to carry out the required review of the financial

statements, evaluation of internal controls, and evaluation of disclosure controls (as

they stated they had done in the certifications). In either case, defendants knew or

recklessly disregarded that the SOX certifications they signed were false.

XIV. LOSS CAUSATION/ECONOMIC LOSS

165. During the Class Period, as detailed herein, the defendants made false

and misleading statements and engaged in a scheme to deceive the market and a

course of conduct that artificially inflated the prices of Powerwave securities and

operated as a fraud or deceit on Class Period purchasers of Powerwave securities by

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#:473

1 misrepresenting the Company's business and prospects. Later, when the defendants'

2 prior misrepresentations and fraudulent conduct became apparent to the market, the

3 price of Powerwave securities fell precipitously, as the prior artificial inflation came

4 out of the price over time. As a result of their purchases of Powerwave securities

5 during the Class Period, plaintiffs and other members of the class suffered economic

6 loss, i.e., damages, under the federal securities laws.

7

166. At all relevant times, the material misrepresentations and omissions

8 particularized in this Complaint directly or proximately caused or were a substantial

9 contributing cause of the damages sustained by plaintiffs and other members of the

10 class. As described herein, during the Class Period, defendants made or caused to be

11 made a series of materially false or misleading statements about Powerwave's

12 business, prospects and operations. These material misstatements and omissions had

13 the cause and effect of creating in the market an unrealistically positive assessment of

14 Powerwave and its business, prospects, and operations, thus causing the Company's

15 common stock to be overvalued and artificially inflated at all relevant times.

16 Defendants' materially false and misleading statements during the Class Period

17 resulted in plaintiffs and other members of the class purchasing the Company's

18 common stock at artificially inflated prices, thus causing the damages complained of

19 herein, upon defendants' revelations of the truth and resulting collapse of

20 Powerwave's stock price.

21

167. The inflation in Powerwave stock was dissipated through a series of

22 partial disclosures of the truth that revealed that, contrary to its representations, its

23 statements were false and the Company was not nearly as successful as it had claimed.

24

168. Asa direct result of disclosures on July 12, 2011 and October 18, 2011,

25 Powerwave' s stock price suffered statistically significant declines. On July 12, 2011,

26 when Powerwave disclosed that demand was not as strong as it had claimed, the

27 Company's stock price dropped from $2.77 per share on July 11, 2011, to $2.10 per

28 share on July 13, 2011, a decline of nearly 25%, on unusually high volume. But

-73- 718102_i


#:474

defendants continued to conceal the scope of the problems facing the Company,

repeatedly issuing false glowing statements about present demand. Then, on October

18, 2011, when defendants "shocked" investors with the disclosure that demand had

fallen off a cliff and 3Q11 revenues would be less than 50% of estimates, the

Company's stock price dropped from $1.46 per share to a low of $0.68 per share, or

over 40%, on extremely heavy trading volume of over four million shares. On that

day the NASDAQ fell 2%. Individually and collectively, these drops removed the

inflation from Powerwave's stock price, causing real economic loss to investors who

had purchased the stock during the Class Period.

169. In sum, the significant decline in Powerwave's stock price was a direct

result of the nature and extent of defendants' fraud finally being revealed to investors

and the market. The timing and magnitude of Powerwave's stock price decline

negates any inference that the loss suffered by plaintiffs and other class members was

caused by changed market conditions, macroeconomic or industry factors, or

Company-specific facts unrelated to the defendants' fraudulent conduct. The

economic loss, i.e., damages, suffered by plaintiffs and other class members was a

direct result of defendants' fraudulent scheme to artificially inflate Powerwave's stock

price and the subsequent significant decline in the value of Powerwave's stock when

defendants' prior misrepresentations and other fraudulent conduct was revealed.

XV. ANY PURPORTED RISK WARNING WERE INADEQUATE OR MATERIALLY FALSE AND MISLEADING

Even though the Company's earnings press releases, conferences calls and other

Class Period statements may have been accompanied by purported risk warnings or

warnings that certain statements may be forward-looking, they did not adequately

warn investors about the materially false and misleading statements alleged herein.

These risk warning: (i) were false or misleading as a matter of current or historical

fact; and/or (ii) were not meaningful because among other things, they were vague,

boilerplate and did not adequately warn of the true risks of investing in Powerwave.

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718102_i


#:475

1 I XVI. NO SAFE HARBOR

2

170. Powerwave's verbal "Safe Harbor" warnings accompanying its oral

3 I forward-looking statements ("FLS") issued during the Class Period were ineffective to

4 shield those statements from liability.

5

171. The defendants are also liable for any false or misleading FLS pleaded

6 because, at the time each FLS was made, the speaker knew the FLS was false or

7 misleading and the FLS was authorized and/or approved by an executive officer of

8 Powerwave who knew that the FLS was false. None of the historic or present tense

9 statements made by defendants were assumptions underlying or relating to any plan,

10 projection, or statement of future economic performance, as they were not stated to be

11 such assumptions underlying or relating to any projection or statement of future

12 economic performance when made, nor were any of the projections or forecasts made

13 by defendants expressly related to or stated to be dependent on those historic or

14 present tense statements when made.

15 XVII. APPLICABILITY OF PRESUMPTION OF RELIANCE: FRAUD-ON-THE MARKET

16

17 172. Plaintiffs will rely upon the presumption of reliance established by the

18 fraud-on-the-market doctrine in that, among other things:

19 (a) defendants made public misrepresentations or failed to disclose

20 material facts during the Class Period;

21 (b) the omissions and misrepresentations were material;

22 (c) the Company's stock traded in an efficient market;

23 (d) the misrepresentations alleged would tend to induce a reasonable

24 investor to misjudge the value of the Company's stock; and

25 (e) plaintiffs and other members of the class purchased Powerwave

26 stock between the time defendants misrepresented or failed to disclose material facts

27 and the time the true facts were disclosed, without knowledge of the misrepresented or

omitted facts. 28

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Case 8:12-cv-00222-CJC-JPR Document 40-3 #:476

Filed 07/23/12 Page 5 of 10 Page ID

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173. At all relevant times, the market for Powerwave stock was efficient for

2 the following reasons, among others:

3

(a) since well before the Class Period, Powerwave's stock has been

4 listed and actively traded on the NASDAQ National Market, a highly efficient and

5 automated market;

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(b) as a regulated issuer, Powerwave filed periodic public reports with

7 the SEC; and

(c) Powerwave regularly communicated with public investors via

established market communication mechanisms, including through regular

disseminations of press releases on the major news wire services and through other

wide-ranging public disclosures, such as communications with the financial press,

securities analysts and other similar reporting services.

XVIII. CLASS ACTION ALLEGATIONS

174. Plaintiffs bring 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 Powerwave securities during the Class Period (the "Class"). 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 their legal

representatives, heirs, successors, or assigns and any entity in which defendants have

or had a controlling interest.

175. 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. Powerwave has 100,000,000 shares of stock

outstanding, owned by hundreds of persons. 16

16 As noted, on October 28, 2011, Powerwave announced a 1 -for-5 reverse stock split of its outstanding shares of common stock and a reduction in the number of authorized shares of its common stock, each of which were effective as of October 28,

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Case 8:12-cv-00222-CJC-JPR Document 40-3 I #:477


176. There is a well-defined community of interest in the questions of law and

fact involved in this case. Questions of law and fact common to the members of the

Class which predominate over questions which may affect individual Class members

include:

(a) whether the 1934 Act was violated by defendants;

(b) whether defendants omitted and/or misrepresented material facts;

(c) whether defendants' statements omitted material facts necessary to

make the statements made, in light of the circumstances under which they were made,

not misleading;

(d) whether defendants knew or deliberately disregarded that their

statements were false and misleading;

(e) whether the prices of Powerwave securities were artificially

inflated; and

(f) the extent of damage sustained by Class members and the

appropriate measure of damages.

177. Plaintiffs' claims are typical of those of the Class because plaintiffs and

the Class sustained damages from defendants' wrongful conduct.

178. Plaintiffs will adequately protect the interests of the Class and has

retained counsel who are experienced in class action securities litigation. Plaintiffs

have no interests which conflict with those of the Class.

179. A class action is superior to other available methods for the fair and

efficient adjudication of this controversy.

2011. The 1-for-5 reverse stock split reduced the number of authorized shares of common stock from 250,000,000 to 100,000,000.

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718102_i

Case 8:12-cv-00222-CJC-JPR Document 40-3 I #:478


CLAIMS FOR RELIEF

COUNT I

For Violation of1O(b) of the 1934 Act and Rule 10b-5 Against All Defendants

180. Plaintiffs incorporate ¶J 1-179 by reference.

18i-.DuringtheClass-Period, defendants disseminated

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.

182. Defendants violated §10(b) of the 1934 Act and Rule 1 Ob-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 plaintiffs and others similarly situated in connection with their

purchases of Powerwave securities during the Class Period.

183. Plaintiffs and the Class have suffered damages in that, in reliance on the

integrity of the market, they paid artificially inflated prices for Powerwave securities.

Plaintiffs and the Class would not have purchased Powerwave 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.

COUNT II

For Violation of §20(a) of the 1934 Act Against All Defendants

184. Plaintiffs incorporate ¶Jl -183 by reference.

185. The Individual Defendants acted as controlling persons of Powerwave

within the meaning of §20(a) of the 1934 Act. By reason of their positions with the

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718102_i

12-cv-00222-CJC-JPR Document 40-3 #:479


Company, and their ownership of Powerwave securities, the Individual Defendants

had the power and authority to cause Powerwave to engage in the wrongful conduct

complained of herein. Powerwave controlled the Individual Defendants and all of its

employees. By reason of such conduct, defendants are:liable pursuant to §20(a) of the

1934 Act.

LYER FOWRE

WHEREFORE, plaintiffs pray for judgment as follows:

A. Declaring this action to be a proper class action pursuant to Fed. R. Civ.

P.23;

B. Awarding plaintiffs and the members of the Class damages, including

interest;

C. Awarding plaintiffs reasonable costs and attorneys' fees; and

D. Awarding such equitable/injunctive or other relief as the Court may deem

just and proper.

JURY DEMAND

Plaintiffs demand a trial by jury.

DATED: July 23, 2012 ROBBINSA &DOWD

DARBENJ. 7ROBRT R JR.

9ERT R. TF1ENSLER JR.

655 West Broadway, Suite 1900 San Diego, CA 92 101-3301 Telephone: 619/231-1058 619/231-7423 (fax)

Lead Counsel for Plaintiff

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7181021


DECLARATION OF SERVICE BY MAIL

I, the undersigned, declare:

1. That declarant is and was, at all times herein mentioned, a citizen of the

United States and a resident of the County of San Diego, over the age of 18 years, and

not a party to or interested party in the within action; that declarant's business address

is 655 West Broadway, Sui1900San Diego, C1if6inii921OT

2. That on July 23, 2012, declarant served the CONSOLIDATED

8 COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS by

9 depositing a true copy thereof in a United States mailbox at San Diego, California in a

10 sealed envelope with postage thereon fully prepaid and addressed to the parties listed

11 on the attached Service List.

12

3. That there is a regular communication by mail between the place of

13 mailing and the places so addressed.

14

I declare under penalty of perjury that the foregoing is true and correct.

17

15

16

Executed on July 23, 2012, at San Diego, California.

c 1~t /' S0SATTL.—fiAMTM1TN

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7181021

Case 8:12-cv-00222-CJC-JPR Document 40-3 Filed 07/23/12 Page 10 of 10 Page ID POWERWAVE 12 #:481

Service List - 7/23/2012 (12-0024)

Page 1 of I

Counsel For Defendant(s)

Seth A. Aronson Amy J. Longo Katharine S. Mercer O'Melveny & Myers LLP 400 South Hope Street, 10th Floor Los Angeles, CA 90071-2899

213/430-6000 213/430-6407(Fax)

Counsel For Plaintiff(s)

Jeffrey A. Berens Dyer & Berens LLP 303 East 17th Avenue, Suite 300 Denver, CO 80203

303/861-1764 303/395-0393 (Fax)

Darren J. Robbins Tricia L. McCormick Robert R. Henssler Jr. Robbins Geller Rudman & Dowd LLP 655 West Broadway, Suite 1900 San Diego, CA 92101

619/231-1058 619/231-7423(Fax)

Michael I. Fistel, Jr. Holzer Holzer & Fistel, LLC 200 Ashford Center North, Suite 300 Atlanta, GA 30338

770/392-0090 770/392-0029(Fax)

Documents

ROBBINS GELLER RUDMAN & DOWD LLP ROBERT R. …securities.stanford.edu/filings-documents/1048/PWAV00_01/2012723_f... · 4. Powerwave engages in the design, ... repeaters, tower-mounted