:r1Zr LNORT • • F TEXAS
MAR 2 c
~, UNITED STATES DISTRICT COURT CO~T NORTHERN DISTRICT OF TEXA S DALLAS DIVISIO
, No. CivilN OSCAR PRIVATE EQUITY INVESTMENTS No . Individually And On Behalf of All Others Similarly Situated, Plaintiffs, V.
ROYCE J. HOLLAND, THOMAS M . LORD, DANIEL YOST and ANTHONY PARELLA ,
Defendants . JURY TRIAL DEMANDED
AMENDED CLASS ACTION COMPLAINT FOR VIOLATIONS OF FEDERAL SECURITIES LAWS • •
Lead Plaintiffs, by and through their attorneys, individually and on behalf of all other persons
similarly situated, for their Amended Class Action Complaint, allege the following upon persona l knowledge as to themselves and their own acts, and upon information and belief based upon th e investigation of plaintiffs' attorneys as to all other matters . The investigation includes interview s with former Allegiance employees and customers, as well as the review and analysis of publi c statements, reports filed by Allegiance Telecom, Inc . ("Allegiance" or the "Company") with th e
Securities and Exchange Commission ("SEC"), documents filed in conjunction with the Company' s ongoing Chapter 11 bankruptcy proceedings, press releases, news articles, investment analyst reports, and the review and analysis of accounting rules and related literature.
SUMMARY OF ACTION
1 . This is a securities class action on behalf of public investors who purchased o r otherwise acquired the securities of Allegiance during the period from April 24, 2001 throug h
February 19, 2002 (the "Class Period"). Plaintiffs allege federal securities law claims under Sections
10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§78j(b) and 78t(a), and Rule
I Ob-5 promulgated by the SEC pursuant thereto .
2 . Throughout the Class Period, Allegiance Chairman and Chief Executive Officer
Royce J. Holland; Executive Vice President and Chief Financial Officer Thomas J . Lord; Chief
Operating Officer and President Daniel Yost ; and Executive Vice President for Sales Anthony
Parella (collectively, "defendants"), artificially inflated the price of Allegiance's publicly trade d shares by knowingly and recklessly exaggerating the results of the Company's operations in severa l respects, the most important of which was a material overstatement of the Company's key operational metric, its "installed line" count .
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3 . On February 19, 2002, when defendants voluntarily admitted that they had overstate d the Company' s installed lines count by 125,000 - a significant overstatement of 12.3% -
Allegiance's share value fell 28% in a single day's trading, thereby damaging Lead Plaintiffs and th e
Class. Fifteen months after this devastating announcement, the Company was unable to meet its debt obligations and, on May 14, 2003, sought bankruptcy protection under Chapter 11 .
4. Headquartered in Texas, Allegiance is a Delaware corporation which, during th e
Class Period, provided integrated telecommunications services to business, government and othe r institutional users in major metropolitan areas across the United States . The Company offered local, long-distance, broadband/Internet access and Internet-related services, bundled and carrier-oriente d wholesale services, as well as end-user equipment sales and maintenance services to individual customers and businesses . According to documents filed on March 18, 2004, in the Company' s
Chapter 11 proceeding, the Company has sold most of its assets . Under the Company 's proposed
Plan of Reorganization, it will cease to exist and its remaining assets will be distributed . The plaintiff Class, who hold common stock equity, will receive nothing under the Company's propose d
Plan of Reorganization .
5 . The Company's formation and rapid expansion resulted from the fortunate confluenc e of two highly significant events: telecommunications deregulation in the United States and the high- tech stock boom :
a. As explained on the website of the Federal Communications Commissio n
("www.fcc.gov/telecom.html"), the enactment of the Telecommunications Act o f
1996 ("the Act") ushered in a "new era of competition" affecting, inter alia, local and
long distance telephone service, cable programming and broadcast services. The
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broadly worded goal of the Act was "to let anyone enter any communication s
business -- to let any communications business compete in any market against an y
other." At the same time, technology advanced at an extraordinary pace, providing
an array of new modes of communications -- wireless services, satellite broadcas t
services and Internet Protocols. Each seeking to carve out a niche in the newly
expanded telecommunications market, numerous new telecommunications
companies sprang up across the country. Whereas before the nation was served
primarily by GTE and the "Baby Bell" regional operating companies ("RBOCs"),
following the passage of the Act, the established players in the marketplace were no w
known as incumbent local exchange carriers ("ILECs") and the new start-ups -
companies like Allegiance - were known as the competitive local exchange carriers
("CLECs");
b. The now-infamous high-tech stock boom of the late 1990s saw billions of dollars
flood the equity markets ; new telecommunications ventures were able to rea p
hundreds of millions of dollars in an unprecedented number of initial public stoc k
offerings ("IPOs"), which provided them with the funding necessary to build their
infrastructures .
6. Two of the Company's founders, defendants Holland and Parella, are experienced industry veterans . Prior to forming Allegiance in 1997, Holland had successfully built up and sol d
MFS Communications to MCI WorldCom for $15 .46 billion; Parella had been a Vice President and
General Manager of an MFS operating unit. Defendant Lord was an investment banking professional who, in the five years before co-founding Allegiance, oversaw dozens of transaction s
3 • i in the telecommunications and information services industry while a Managing Director at Bear ,
Stearns & Co ., Inc., including helping to raise the financing for MFS . With their track record,
Holland, Lord and Parella were able to complete an IPO for Allegiance in 1998 --just one year after the Company's inception . The July 1, 1998 IPO sold 10,000,000 shares of stock valued at $15 per share, raising $150 million . Additionally, the Company raised hundreds of millions ofdollars, also in 1998, through the sale of long-term notes .
7. Having raised substantial capital, the Company grew rapidly . On May 2, 2001, th e
Company's common share price reached a Class Period high of $20 .35 per share. According to the
Company's IQ 2001 Form 10-Q filed with the SEC on that same day, as of April 26, 2001, th e
Company had 113,396,784 shares outstanding and thus a market capitalization in excess of $2 .3 billion.
8 . Rather than build an expensive network from the ground up, Allegiance's business plan was to sell services to individual and business customers in major metropolitan areas by leasing
"trunking" capacity from ILECs and interconnecting and "co-locating" with ILECs' facilities . In just a few years, this strategy enabled Allegiance to establish a presence in several dozen major U.S . markets.
9. The defendants, both of whom had substantial Allegiance holdings' and stock options , hoped that lightning would strike twice, i.e., that, like MFS, Allegiance would be purchased at a premium by a multinational telecommunications giant . For example:
a. When interviewed about potential takeovers shortly after the ]PO was completed ,
As set forth in the Company's Proxy Statement filed April 30, 2002, at 17 : "Royce Holland, Tom Lord, Dan Yost and Tony Parella were part of Allegiance Telecom's founding management team and today beneficially own in the aggregate approximately 10.4 million shares of common stock, or approximately 9% of the total shares outstanding as of March 31, 2002 ."
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Holland was hardly opposed, commenting : "This is business, not religion;"
b . Just prior to the Class Period, Lord expressed concern that Allegiance's share pric e
was weak and that the Company might get "picked off' for too low a price. Lord
further stated, however, that if someone offered him $80 per share "he's got th e
keys;"
c . Parella, whose annual salary was $250,000, borrowed $4.2 million from the
Company in connection with a land deal and was obligated to Allegiance on a full-
recourse loan. The loan was secured by Parella's Company stock options an d
350,000 shares of Allegiance's common stock; it was due to be repaid, with interest ,
by April 2004.
10. Like so many other start-up companies in the late 1990s, Allegiance did not make a profit before becoming a public company. Therefore, its success could not be measured by its net income figures. During the Class Period, the most important metric by which Allegiance, industry organizations, analysts, and investors measured the Company's performance and prospects was it s
"line count ," also referred to by Allegiance as the number of "installed lines ." According to
Allegiance's SEC filings, an "installed line" was one Allegiance sold to an Allegiance customer which was being used to provide Allegiance's service .
11 . Throughout the Class Period, defendants prominently reported the number of lines
Allegiance had "installed," both as subheadings in the Company's quarterly earnings releases and as line items in comparative charts in its periodic SEC filings, which were executed by defendant s
Holland and Lord. Reasoning that once a line was installed , it became a source of monthly recurring revenues, Wall Street analysts, and consequently the investing public, looked to Allegiance' s
5 • • subscriber line counts to gauge whether the Company's business model was being successfull y implemented. If Allegiance failed to publicly report a healthy, growing number of "lines installed" its stock price would be greatly diminished .
12 . Because "lines installed" was Allegiance's life-blood, management was aware of thi s figure at all times. Numerous witnesses who were employed by Allegiance during the Class Perio d confirm that, in fact, senior management was practically obsessed with monitoring the Company' s line count. For example, approximately 25 of the Company's top employees participated wit h defendants Holland, Yost and Parella in weekly "Count the Lines " meetings.
13 . Although an accurate line count was essential, Allegiance did not have the vaunte d back office capabilities it touted to the media . In fact, there were four separate, non-integrate d systems, each of which the Company could have used (alone, or in combination) to accuratel y determine the Company's line count . As defendants later admitted after the close of the Clas s
Period, the most accurate system for determining line count is, and was, the Company's billing system. Specifically, Allegiance's 2001 Form 10-K405 stated : "[Ilt is more informative to use the order management system as the basis for disclosing the number of lines sold and to use the billing system as the basis for disclosing the number of lines installed and generating revenue ." (Emphasis supplied)
14. Because the information contained on the billing database was readily available t o defendants throughout the Class Period and because the defendants knew that the market judge d
Allegiance largely by the number of lines it installed, it was incumbent upon them to use th e information in this database to provide line installation information to investors . Instead, defendant s recklessly ignored this information, and instead chose to tabulate Allegiance's line count based upo n
6 0 i data contained in the order management system, even though they knew or should have known tha t this database would likely inflate Allegiance' s line installation count .
15 . Other, more blatant, schemes were devised by the defendants to exaggerate line count , including, but not limited to :
a. counting of lines sold under obviously forged contracts ;
b . staggering termination of customer-cancelled lines for months while continuing t o
invoice the customer in the interim;
c . designing a data entry system to process line additions automatically while requiring
manual entries in order to terminate a line ;
d. counting lines which were on hold until the potential customer passed a credit chec k
or the line was operational, i.e., installed;
e. counting the same lines twice ; and
f. purchasing lines from other carriers which did not meet the stated definition of a n
"installed line," e.g., lines purchased on an "as-needed" basis from SBC solely t o
perform billing services, for which Allegiance retained only a fraction of the revenue ;
and
g. acquiring and gutting companies solely to artificially inflate the line count .
16 . Several of the defendants had regular contacts with analysts, at which time theywoul d establish line count goals for the following quarters and year-end . For example, a number o f members of Allegiance's senior management, including defendants Daniel Yost and Anthon y
Parella, Clay Myers, Senior Vice President of Finance and Accounting, and Chris Malinowski ,
Senior Vice President of Strategic Sales, made a formal slide show presentation at an Analyst
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Conference on or about May 2, 2001 . Emblazoned on one of the graphs in the portion of the presentation identified as having been made by Parella (attached hereto as Exhibit A) were the words: "2001 Line Growth 92%." The bar graph reported quarterly and yearly installed line figures
from Q3 1998 through Q4 2000, and projected that Allegiance would raise its installed line coun t from just over 600,000 at the end of 2000 to almost double that figure - 1,167,000 - by the end o f
2001 .
17 . Having raised the bar so high for 2001, there was both market and internal pressure to report steeply increasing number of lines installed . Defendants Holland, Parella and Yost wer e maniacally focused upon making sure that Allegiance reported that it attained its goals for line s installed. Holland told senior and mid-level executives on separate occasions during the Clas s
Period that if Allegiance did not meet its goals and analysts' expectations relating to the installatio n of lines, the Company would be "out of business," "dead" or "toast." These defendants' single- mindedness led one high level executive at the Company to comment : "Lines, lines, lines, that's al l they would talk about every time I saw them ... We have to install more lines ."
18 . The defendants tolerated no dissent. Nor did they apparently have any interest in accuracy, and they were so determined to report false line count numbers that they threatened to fir e a senior employee who questioned the numbers the Company reported to investors, according to a confidential witness, (referred to as "CW 1"). Specifically, defendants Dan Yost and Anthony
Parella told CW 1, a senior employee, who attended weekly "Count the Line" meetings to "shu t
[your] mouth" or "lose [your] job." The defendants ' eventually "excommunicated" CW 1 for pressing the issue .
19 . Frustrated with defendants Yost's and Parella's insistence on reporting th e
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Company's line count based on a database they knew was inflated and unreliable, CW 1 turned in
2001 to Clay Myers, Allegiance's Senior Vice President of Financial Accounting, to expres s frustrations with how Allegiance reported its line count. According to CW 1, Myers thought
Allegiance could face liability for reporting the number of lines it installed on the basis o f information in the order management system, and "pushed" the defendants to restate the Company' s line count for about four or five months prior to Allegiance's February 19, 2002 line restatement .
20. Allegiance' s outside auditor in 2001 was Arthur Andersen. In early 2002, amid th e questions raised about the integrity of Arthur Andersen's audits, and faced with the possibility tha t
Arthur Andersen would not survive the Enron scandal (which it did not), defendants recognized tha t they could no longer overstate their line counts .
21 . By manipulating reported line counts in the various ways described in ¶¶15, 81-119 ,
128 and 158-160, defendants proudly reported large increases in the number of installed lines in eac h of the first three quarters of 2001 . Consequently, because the number of installed lines was so heavily touted as the key metric, Allegiance's share price often reacted quite favorably when th e
Company falsely reported record numbers of new lines installed in a quarter .
22. On February 19, 2002, defendants shocked the market by disclosing that the numbe r of lines it had previously reported as "installed" had been materially inflated by approximatel y
125,000 lines, or 12 .3%.
23 . Like an accounting restatement, the significant line count reduction was an admission that the Company's statements of its installed line count in all of its Class Period earnings release s and SEC filings were false when made. This news caused the price of Allegiance shares to plumme t
28% on February 20, 2002 .
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24. While defendants also reported somewhat greater than expected losses that day, it was clear that the punishment meted out by investors was focused upon the false line counts and th e ethical cloud which now hung over senior management . In an article on Bloomberg News on
February 20, 2002, entitled "Allegiance Falls 28% After Company Lowers Line Count," James Ott , a telecommunications analyst at Hibernia Southcoast Capital Inc ., was quoted as saying "It doesn' t give people a good feeling about the predictability of their numbers," and "[T]he street is completel y unwilling to listen to management explanations . "
25 . The Company's lenders became wary as well . Several months later, defendant s disclosed that three lenders in the Company's 26-member bank syndicate had refused to fund $1 5 million of Allegiance's $150 million credit facility draw request . After renegotiating its loan covenants in November 2002, the Company was still unable to meet debt requirements . Finally, on
May 14, 2003, the Company sought bankruptcy protection under Chapter 11 .
26 . Contrary to defendants' highly positive Class Period representations, Allegiance' s business and growth prospects were poor and continued to stall after the Class Pe riod. With the
Company under bankruptcy protection since May 2003, its stock is now completely worthless.
JURISDICTION AND VENUE
27. The claims asserted arise under Sections 10(b) and 20(a) of the Securities Exchange
Act of 1934 (the "Exchange Act" or the "1934 Act") [15 U.S .C. § 78j(b) and §78t(a) and Rule l Ob-5 promulgated thereunder by the SEC [17 C.F.R. § 240. 1Ob-5] .
28. This Court has jurisdiction over the subject matter of this action pursuant to 28 U .S.C.
§ 1331 and § 1337 and Section 27 of the 1934 Act [15 U.S.C. § 78aa] .
29. Venue is proper in this district pursuant to Section 27 of the 1934 Act [15 U.S.C.
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§78aa] and 28 U.S .C . § 1391(b) as the defendants conduct business , and the wrongful conduct too k place, in this District . At all relevant times, Allegiance maintained its principal place of busines s in this District and many of the acts and practices complained of herein occurred in substantial par t in this district.
30. In connection with the acts alleged in this complaint, defendants, directly o r indirectly, used the means and instrumentalities of interstate commerce, including, but not limite d to, the mail, interstate telephone communications and the facilities of the national securities markets .
THE PARTIE S
31 . Lead Plaintiffs Oscar Private Equity Investments, Brett Messing and Marla Messin g purchased Allegiance Telecom publicly traded securities as detailed in their previously file d
Certifications and were damaged thereby. On February 6, 2004, the Court appointed them to serv e as Lead Plaintiffs.
32 . Defendant Royce J . Holland was, during the Class Period, and at all times relevant hereto, Chairman of the Board and Chief Executive Officer of Allegiance .
33 . Defendant Thomas J . Lord was, during the Class Period and at all times relevant hereto, Executive Vice President, Chief Financial Officer, and a Director of Allegiance .
34 . Defendant Daniel Yost was, during the Class Period and at all relevant times hereto , the Chief Operating Officer and President of Allegiance, and a Director of Allegiance since Marc h
1998.
35 . Defendant Anthony Parella was, during the Class Period and at all relevant times hereto, an Executive Vice President, and a Director of Allegiance since December 1999.
36 . Allegiance is a corporation organized under the laws of Delaware with its principal
11 • • place of business located at 9201 North Central Expressway, Dallas, Texas 75231 . The Company provides integrated telecommunications services, including among other things, local, long-distanc e and broadband/Internet access and Internet-related services to business, government and other institutional users in major metropolitan areas across the United States . Allegiance is not named a s a defendant herein because the Company filed for bankruptcy protection on May 14, 2003, under
Chapter 11 of the United States Bankruptcy Code .
37. Because of the defendants' positions with the Company, they had access to th e adverse undisclosed information about the Company's business, operations, operational trends , financial statements, markets, and present and future business prospects via access to interna l corporate documents (including the Company's operating plans, budgets and forecasts and reports of actual operations compared thereto), conversations and connections with other corporate officers and employees, attendance at management and Board of Directors meetings and committees thereo f and via reports and other information provided to them in connection therewith .
38 . As set forth below, in the section "Defendants' False and Misleading Statement s
During the Class Period," each of the defendants made materially false and misleading statements to investors through a variety of sources . These sources included quarterly reports to shareholder s filed with the SEC during the Class Period, which were signed by Holland and Lord . Such quarterly reports contained materially false statements about the lines Allegiance installed as well as abou t
Allegiance's geographic growth. Defendant Holland also made similarly false statements in pres s releases accompanying these quarterly reports .
39. Each of the defendants, Holland in particular, played a critical role at Allegiance. As admitted in the Company's 2000 Form 10-K, filed March 30, 2001 :
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We are managed by a small number of key executive officers, most notably Royce J. Holland, our Chairman and Chief Executive Officer, who is widely recognized as one of the pioneers in managing providers of competitive local exchange services . The loss of services of one or more of these key individuals, particularly Mr . Holland, could materially and adversely affect our business and our prospects.
40. In their discussions with analysts and with reporters,, Parella's presentation o f line counts during the May 2001 Analyst Conference, defendants made false and misleadin g statements concerning the number of installed lines. In all cases, the defendants acted knowingly or with severe recklessness .
41 . Because of the defendants' positions within the Company, they had access to th e adverse undisclosed information about the Company's business, operations, products, operationa l trends and problems, subscriber line counts, financial statements, markets, present and futur e business prospects via access to internal corporate documents (including the Company's operating plans, budgets and forecasts and reports of actual operations compared thereto), conversations an d connections with other corporate officers and employees, attendance at management and Board o f
Directors meetings and committees thereof and via reports and other information provided to them in connection therewith.
42 . It, therefore, also is appropriate (separate and apart from their liability for reasons se t forth in ¶¶43-47 ) to treat defendants as a group for pleading purposes and to presume that the false , misleading and incomplete information conveyed in the Company's public filings, press releases and other publications as alleged herein are the collective actions of the narrowly defined group o f defendants identified above .
43 . Each of the above defendants, by virtue of their high-level positions with th e
Company, directly participated in the management of the Company, was directly involved in th e
13 . 0 day-to-day operations of the Company at the highest levels and was privy to confidential proprietary information concerning the Company and its business, operations, products, growth, installation lin e counts, financial statements and financial condition, as alleged herein . The defendants were involve d in drafting, producing, reviewing and/or disseminating the false and misleading statements an d information alleged herein, were aware, or recklessly disregarded, that the false and misleadin g statements were being issued regarding the Company, and approved or ratified these statements, i n violation of the federal securities laws .
44. As officers and controlling persons ofa publicly-held company whose common stock was registered with the SEC pursuant to the Exchange Act, was traded on the NASDAQ and governed by the provisions of the federal securities laws, defendants each had a duty to disseminate prompt, accurate and truthful information with respect to the Company's financial condition an d performance, growth, operations, subscriber line counts, financial statements, business , products, markets, management, earnings and present and future business prospects, and to correct an y previously-issued statements that had become materially misleading or untrue, so that the market price of the Company's publicly-traded securities would be based upon truthful and accurat e information. Defendants' misrepresentations and omissions during the Class Period violated these specific requirements and obligations.
45 . Defendants participated in the drafting, preparation, and/or approval of the variou s public, shareholder and investor reports and other communications complained of herein and wer e aware of, or recklessly disregarded, the misstatements contained therein and omissions therefrom , and were aware of their materially false and misleading nature . Because of their Board membership and/or executive and managerial positions with Allegiance, each of the defendants had access to th e
14 • 0 adverse undisclosed information about Allegiance's business prospects and financial condition an d performance as particularized herein and knew (or recklessly disregarded) that these adverse fact s rendered the positive representations made by or about Allegiance and its business, and issued or adopted by the Company, materially false and misleading when made .
46. Defendants, because of their positions of control and authority as officer s and/or directors of the Company, were able to and did control the content of the various SEC filings , press releases and other public statements pertaining to the Company during the Class Period . Each defendant was provided with copies of the documents alleged herein to be misleading prior to o r shortly after their issuance and/or had the ability and/or opportunity to prevent their issuance or cause them to be corrected . Accordingly, each of the defendants is responsible for the accuracy of the public reports and releases detailed herein and is therefore primarily liable for the representation s contained therein.
47. Each of the defendants is liable as a participant in a fraudulent scheme and course o f conduct that operated as a fraud or deceit on purchasers of Allegiances' common stock b y disseminating materially false and misleading statements and/or concealing material adverse facts .
The defendants' wrongful course of business : (a) artificially inflated the price of Allegianc e
Telecom's stock during the Class Period; (b) deceived the investing public, including Lead Plaintiffs and other Class members, into acquiring Allegiance Telecom's securities at artificially inflate d prices; and (c) permitted Allegiance Telecom to grow and benefit economically from the wrongful course of conduct .
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CLASS ACTION ALLEGATIONS
48. Lead Plaintiffs bring this action as a class action pursuant to Rule 23 of the Federa l
Rules of Civil Procedure on behalf of all persons who purchased Allegiance Telecom publicly trade d securities (the "Class") on the open market during the Class Period and who were damaged thereby .
Excluded from the Class are defendants, the officers and directors of the Company at all relevan t times, members of their immediate families and their legal representatives, heirs, successors o r assigns and any entity in which defendants have or had a controlling interest.
49 . The members of the Class are so numerous that joinder of all members i s impracticable . Throughout the Class Period, Allegiance's common shares were actively traded o n the NASDAQ. While the exact number of Class members is unknown to plaintiff at this time an d can only be ascertained through appropriate discovery, plaintiff believes that there are hundreds or thousands of members in the proposed Class . Record owners and other members of the Class ma y be identified from records maintained by Allegiance or its transfer agent and may be notified of th e pendency of this action by mail, using the form of notice similar to that customarily used in securitie s class actions .
50 . Lead Plaintiffs' claims are typical of the claims of the members of the Class since all members of the Class are similarly affected by defendants' wrongful conduct in violation of the federal securities laws as complained herein.
51 . Lead Plaintiffs will fairly and adequately protect the interests of the members of the
Class and has retained counsel competent and experienced in class and securities litigation .
52 . Common questions of law and fact exist as to all members of the Class and predominate over any questions solely affecting individual members of the Class . Among the
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questions of law and fact common to the Class are :
a. whether the federal securities laws were violated by defendants' acts as allege d
herein;
b . whether statements made by defendants to the investing public during the Clas s
Period misrepresented or omitted material facts about the business, line counts ,
operations and management of Allegiance; and
c . to what extent the members of the Class have sustained damages and the prope r
measure of damages.
53. A class action is superior to all other available methods for the fair and efficien t
adjudication of this controversy since joinder of all members is impracticable . Furthermore, as the
damages suffered by individual Class members may be relatively small, the expense and burden of
individual litigation make it impossible for members of the Class to individually redress the wrongs
done to them. There will be no difficulty in the management of this action as a class action.
CORE MATERIAL ADVERSE FACTS AFFECTING ALLEGIANCE THROUGHOUT THE CLASS PERIO D
FACTUAL BACKGROUN D
54. Allegiance was a start-up company established in the wake of the
Telecommunications Act of 1996. Prior to passage of the Act, the United States
telecommunications market had been controlled by the "Baby Bell" companies . At the time of
passage of the Act, these "Baby Bell" companies controlled local phone service, but were prohibite d
from entering the heavily regulated long distance market.
55. Congress enacted the Act to create greater competition in the telecommunications
industry. It enabled the "Baby Bell" companies for the first time to enter the long distance market ,
17 • • but also required these companies to lease key components of their infrastructure at regulated price s to companies seeking to do local telecommunications business .
56. Prior to the passage of the Act, it was prohibitively expensive for start-up companie s to build the infrastructure to enter the telecommunications business . This legislation enabled
Allegiance and other start-up, CLEC telecommunications companies to lease use of infrastructure and certain equipment necessary to enter the telecommunications business.
57. Holland, a co-founder of Allegiance, previously founded a company called MFS
Communications ("MFS"). MCI WorldCom purchased MFS for $15.46 billion on December 31 ,
1996 . As set forth below, Holland's plan was to build Allegiance into a national company operating in 36 major cities throughout the United States and then, when the right opportunity arose, to sell
Allegiance as he had done with MFS.
ALLEGIANCE'S CORPORATE AND SALES STRUCTURE
58 . Allegiance's corporate structure remained essentially the same throughout the Clas s
Period. The top executive positions under Holland were, in hierarchical order, the following :
Company President (defendant Yost) ; Executive, Senior and Regional Vice Presidents; Vice
Presidents; Senior Directors, and Directors .
59 . During the Class Period, Yost ran Allegiance's day-to-day operations and reporte d directly to Holland . The vast majority of Allegiance's employees worked in the company's retai l sales force headed by Parella, who reported to Yost .
60 . On the retail end, Allegiance had Divisional , Regional and City Vice Presidents wh o reported directly to Parella . Under the City Vice Presidents were a number of Sales and Channel
Managers. The Sales Managers directed teams of sales and engineering agents as well as clerica l
18 0 0 employees, and reported to regional and city vice presidents . Allegiance also had wholesale an d
Broadband (internet) sales forces, also headed by Parella . These sales forces were smaller than th e retail sales force and, unlike the retail sales force, were not organized by geographic region.
CONFIDENTIAL WITNESSE S
61 . Numerous witnesses provided information to Lead Plaintiffs . These witnesses spoke to Lead Plaintiffs' counsel on a confidential basis and are referred to herein as Confidential Witnes s
("CW") 1-12. CW's 1-12 are described in (¶¶62-72) below.
62. CW 1 was a senior employee at Allegiance before, during, and after the Class Period .
During the Class Period, CW 1 had contact with defendants Holland and Parella . CW 1 was one of less than two dozen employees who participated with defendants Parella, Yost and Holland i n
Allegiance's weekly "Count the Lines" meetings . As a senior employee, CW 1 had knowledge o f the internal financials of the Company and the importance of the line count to the Company . CW
1 had knowledge of the Company's policies with regard to reporting sales, and their problems with the billing system.
63. CW 2 was a senior employee at Allegi ance, who worked in various divisions before , during, and after the Class Period, including Collocations, Billing, and Broadband . During the Clas s
Period, CW 2 had frequent personal contact with defendant Parella . During this period, CW 2 also had contact, in person, several times a week with defendant Yost, and several times a month wit h defendant Holland . CW 2 was one of less than two dozen employees who participated with defendants Parella, Yost and Holland in Allegiance's weekly "Count the Lines" meetings . CW 2 has knowledge that the Company was aware of systemic problems with its databases and that the
Company under-reported disconnects .
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64. CW 3 was a Sales and Channel Manager who worked at Allegiance from 199 8 through the entire Class Period. CW 3 worked in Allegiance's offices in Texas as well as in offices on the East Coast and Mid-West . During the Class Period, CW 3 sat in on Company conferenc e calls with Parella and City Sales Vice Presidents at the request of or in place of one or more of this
City Sales Vice Presidents . CW 3 also sat in on a few Regional Sales Vice President conferenc e calls . CW 3 has knowledge of the Company' s focus on their line count , and improper sales practices utilized to manipulate the line count .
65 . CW 4 was a senior employee in Broadband at Allegiance, who worked at th e
Company before, during and after the Class Period . CW 4 worked on the wholesale side of
Allegiance's business. CW 4 has knowledge of the pressure at the Company to install lines and its failure to timely correct billing and provisioning problems, which inflated its line count .
66. CW 5 worked in Allegiance's Credit and Collections Department from 1998 unti l early 2000, and then worked in the Company's Finance and Accounting Department until late 200 0 or early 2001 . CW 5 had knowledge of the Company inflating the line count.
67 . CW 6 was a Senior Manager at Allegiance prior to, during and after the Class Period.
CW 6 worked on the technical support side of Allegiance' s business. CW 6 had contact several times a week with one of the Company's Senior Vice Presidents, who reported directly to defendan t
Yost. CW 6 also had direct contract with defendant Yost several times a month. CW 6 has knowledge of the Company's policy of ignoring customer cancellation requests and not timel y disconnecting customer lines .
68 . CW 7 worked at Allegiance as a Manager in Provisioning prior to the Class Perio d and worked in Industrial Relations from the start of the Class Period forward. CW 7 had frequent
20 y • s
contact with Allegiance's billing and sales employees, including Parella, other senior sale s
executives, and the Senior Vice President in charge of Allegiance's billing department, Denise
Crane. CW 7 has knowledge of the Company 's sales and provisioning practices, and related costs.
69. CW 8 was a sales representative who worked at Allegiance from December 2000 t o
October 2001, who has knowledge of the Company' s sales practices .
70. CW 9 was a collocation project manager at Allegiance from 1998 to 2002, who
worked at sites in cities in the Southeast, Northeast and Southwest .
71 . CW 10 was a Sales and Channel Manager at Allegiance, who worked at the compan y
from early 2000 to mid-2001 .
72. CW 11 is a former Program M anager for Broadband services at Allegi ance, who
worked under CW 4 at the Company throughout the Class Period. CW 11 has knowledge of the
Company's failure to timely disconnect lines .
THE CRITICAL IMPORTANCE OF REPORTING INCREASED LINE COUNTS
73. To those with insight into both the internal operations of Allegiance and its publi c
facade, it is hardly surprising that Allegiance's stock would fall from $3 .70 to $2.65 - a loss of
$1 .05 or 28% - after the Company lowered its line count .
74. Allegiance' s line growth was the key operational yardstick by which the Company ,
investors and analysts measured Allegiance's success . Securities analysts and the market treate d
CLEC telecom companies ' line counts as the benchmark for measuring a telecom company' s
performance and prospects . Moreover, defendants' publicly issued statements repeatedly reinforcin g
the relationship that increasing line counts was the key factor in improving the Company's financial
results.
21 0 0
75 . Even among themselves, telecommunications companies talked not of revenue, but of line count (particularly lines installed ). As set forth in ¶¶10-12, 17, 76-79 and 129-148, durin g the Class Period, Allegiance's growth was measured both internally and externallybythe Company' s line count. An increase in lines installed reflected additions to the customer base, as well as development of the Company's network infrastructure and expansion of geographic coverage of it s network systems. Throughout most of the Class Period, it was line count increases that Wall Stree t analysts and investors primarily focused on to gauge Allegiance ' s business and growth prospects . According to the Association of Local Telecommunications Services ("ALTS"), a telecommunications trade group of which Allegiance was a member, line growth and total line installations were the key metrics upon which Allegiance and its competitors were judged by investors.
76. As set forth more fullybelow in the section "False and Misleading Statements Durin g
The Class Period," all of Allegiance' s press releases during the Class Period highlighted an d extensively discussed Allegiance's quarterly lines installed and total lines installed .
77. As further evidence of the critical importance of the installation of new lines to defendants, during the Class Period, top and mid-level Allegiance executives regularly participate d in "Count the Lines" meetings, according to CW 1, CW 2, CW 4 and CW 6 :
a. CW 2, a regular participant in the meetings, said that the participants discussed
Allegiance's installed line count and how to solve operational problems hamperin g
the Company from installing additional lines . Participants also discussed issues
relating to market rollout as well as construction-related issues, installation goals ,
day-to-day progress in installation lines, and "lines in jeopardy," i e•, lines sold 60-90
days before the Company was capable of provisioning the line (which might caus e
22 0 0
customers to cancel the order). b. "Count the Lines" meetings took place in the main conference room on the Sixt h
Floor of Allegiance's main office, according to CW 1, CW 2, CW 4 and CW 6.
Holland, Yost and Parella all had their offices on this floor, according to these an d
other confidential witnesses. The meetings took place at least once a week, an d
sometimes twice a week, and lasted from about one to four hours, according to C W
2; c. Between a dozen and two dozen high-level Allegiance executives, including CW 1
and CW 2 regularly attended meetings , according to CW 1, CW 2, and CW 4 . CW
1 and CW 2 indicated that Yost and Parella also regularly attended, and that Holland
attended about once or twice a month ; d. "The purpose of the meetings was to keep track of our line count and to make sure
[that] we would meet the analysts' and the Street's expectations regarding the lin e
count," CW 1 said. "It was very clear to all of us that this was how we were being
judged. Everyone kept track of the line count . The line count was part of our
indoctrination. The line count was how we looked at our success, and the market was
looking at the line count ." At the meetings, the Company executives discussed
operational problems and "orders [that] got messed up," CW 1 added ; e. According to CW 1, Yost and Parella, who also headed Allegiance 's sales force, led
most of the "Count the Line" meetings and were effectively in charge of the lin e
count; f. CW 2 indicated that, at several times during the Class Period, Holland said at a
23 "Count the Lines" meeting : "If you don't make your numbers this month, we'r e
dead." According to CW 2, Holland also said during at least one "Count the Lines "
meeting: "If we don't make your numbers this month, we're toast." Yost and
Parella made similar comments , according to CW 2, who also said: "The powers that
be said that if we sold enough lines, the revenue would come ."
78 . Numerous confidential witnesses stated that they knew from personal experience that increasing Allegiance's lines in service was critically important to Holland, Yost and Parella :
a. Throughout the Class Period, CW 2 often had personal contact with Parella on a
daily basis, with Yost several times a week, and with Holland several times a month .
According to CW 2, each of these defendants frequently mentioned to CW 2 that it
was essential to increase the number of lines Allegiance had in service . "Lines, lines ,
lines, that's all they [Holland, Yost, and Parella] would talk about every time I saw
them," CW 2 said. "We have to install more lines" ;
b. Discussion of line count occurred at every major meeting, according to CW 1, no t
just at the "Count the Lines" meetings ;
c . CW 6 recalled an employee conference call in early or mid-2002, during which
Holland told employees : "If we don' t increase our line count and become EBITD A
positive, we're all out of business ."
d. According to CW 2 and CW 6, defendants and other members of upper management
at Allegiance closely monitored information relating to Allegiance's lines .
Specifically, during the Class Period, the Company had a "Line Count Team" which
put together daily line count reports for upper management, including Holland, Yost ,
24 . 0
and Parella.
79. Just as increasing Allegiance's line count was a focus of defendants' attention, s o too was decreasing Allegiance's cancellation (or "churn") rate, which had become a growin g problem for the defendants during the Class Period. Defendants Holland, Yost and Parell a personally received complaints from customers, and also expressed concerns over Allegiance' s cancellation or churn rate because of its detrimental impact on Allegiance's line count . The high churn rate, coupled with the defendants' promises to deliver an ever increasing line count, put enormous pressure on the defendants to replace the lines lost .
a. Up until 2002, the Company' s plan was to "out-install" the churn rate, i .e., add new
lines faster than the cancellation rate. CW 2 commented that over time the line
installation rate dropped and churn became an insurmountable problem . However,
by 2002, Allegiance's churn rate had become a preoccupation of the defendants
Holland, Yost and Parella, and a key subject of discussion in the "Count the Line "
meetings, according to CW 1 and CW 2;
b . According to CW 3, in late 2001 or early 2002 Yost informed several City an d
Regional Sales City Presidents that Allegiance ' s churn rate was 3 . 9% a quarter.
Based upon CW 3's experience and that of fellow Sales Managers, the churn rate wa s
actually closer to 6-7 % at the time . According to CW 4, on the wholesale end, b y
October 2001 the churn rate was greater than 4-5% a quarter ;
c. During a conference call with company employees in late 2001, Holland expressly
recognized this problem . According to CW 6, Holland said that to deal with its high
churn rate, the Company would make it increasingly difficult for a customer to leav e
25 • 0
Allegiance. Shortly thereafter, CW 6 pointed out the Company began to sign u p
customers under one-year and multi-year contracts which imposed severe penaltie s
for switching carriers ;
d. CW 6 recalled that during another employee conference call, in 2002, Yost sai d
Allegiance was selling a sufficient number of lines, but was having trouble meetin g
analysts' expectations and company projections because of its high churn rate an d
customer cancellations .
THE DEFENDANTS' KNOWING FALSIFICATION AND/OR RECKLESS OVERSTATEMENT OF LINES INSTALLE D
80. Pervasive pressure from upper management to increase the number of line s
Allegiance reported as installed led to a falsification of Allegiance's line counts in myriad ways as set f o r t h in ¶¶15, 81-119, 128 and 158-160 below .
PRE-CLASS COURSE OF CONDUCT
81 . CW 5, who worked in Allegiance ' s Finance and Accounting Department from early
2000 until late 2000, was responsible for gathering Allegiance's line count through most of 2000 .
At that time, CW 5's duties included compiling figures of the Company' s line count, revenue per line, and other marketing and budgetary information two to three times a week and at the end of each month. At that time, CW 5 compiled this information from the Company' s billing and other data systems, and provided it to senior executives in the Company's finance department, including th e
Company's controller.
82 . CW 5 believes that the mate rial CW 5 provided was used in closed-door meetings in which executives discussed the line count. On at least three occasions, CW 5's boss, a manager i n the Finance and Accounting Department directed CW 5 to prepare "inflated" line count summaries ,
26 0 0 which CW 5 said were significantly greater than the line count numbers CW 5 had gathered .
83 . The manager told CW 5 exactly what numbers to put in the phony, marked-up summaries. "These were big increases," CW 5 said . On at least one occasion in 2000, immediatel y before being asked to provide the inflated numbers, CW 5 overheard the Company's then-controller telling CW 5's boss the numbers the controller wanted, in the summary ; CW 5's boss then asked C W
5 to provide those specific numbers .
84 . These inflated line counts would have inflated the cumulative total of installed line s reported by the Company.
CLASS PERIOD MISCONDUCT WHICH FALSELY INCREASED LINE COUNT S
Including "Hold" Orders As Installed Lines
85 . Potential sales that could not be completed because of a problem, e.g., customer credit concerns or the absence of an installed line, were listed in the Consolidated Order Entry System as
"hold" orders , according to CW 3 and CW 10.
86. To inflate reported line installation numbers during the Class Period, Allegiance sales personnel, following Parella's directives, processed "hold" orders as completed line sales, according to CW 3 .
87. CW 3 said that to meet analysts ' expectations, Regional and City Vice Presidents, wh o reported directly to Parella, would direct that hold orders submitted by the sales force be processe d as if they were consummated sales .
88. According to CW 3 , City and Regional Vice Presidents had told CW 3 that Parella had ordered the sales force to process hold orders as completed sales . CW 3 also heard Parella issu e such orders during several City Vice President and Regional Vice President conference calls that C W
27 • •
3 attended. Furthermore, according to CW 3 and CW 7, the sales representatives and m anagers had
an incentive to comply with Parella's directive because they received sales commissions when the y
submitted these hold orders as sales. According to CW 7, up until September 2001 salesperson s
received a one-time commission at the time of each sale . Thereafter, CW 7 added, the salespersons
received half the total commission at the time of the sale, an additional one-fourth of the commission
upon installation of the line, and the final one-fourth of the commission after the customer had bee n billed for three months .
Including SBC Lines For Which Allegiance Provided Billing Services
89 . According to CW 3 and CW 7, another way that Allegiance artificially increased it s
line count was by "purchasing" phone lines from SBC Communications in St . Louis, Dallas, Fort
Worth, Austin, San Antonio, Houston and Detroit. City and Regional Sales Vice Presidents told C W
3 that Holland made the decision to purchase these lines . According to CW 3, Allegiance counted
the SBC Communications Lines as Allegiance lines even though SBC Communications derive d
almost all of the revenue from these lines . CW 3 said that Allegiance's limited role with regard to
these lines was to bill the customer on behalf of SBC . Nevertheless, Allegiance would include thes e
irregularly purchased lines in the Company's line count - a count which was supposed to reflec t
recurring revenue streams from the provisioning of telecommunications services.
90. CW 2 said Allegiance only purchased such lines on "an as-needed basis " at the end
of each month or quarter "if the line count was running low ." According to CW 6, "[i]t was a
running j oke in the company that Holland was going to buy more lines" to meet analysts' expectations
and company projections . Numerous times, fellow employees would say, "Royce is going to go bu y
some more lines to meet our numbers this quarter."
28 r • .
91 . The Allegiance sales force recorded line sales on a Consolidated Order Entry System.
For Allegiance customers, the unit value for local service on such forms was $60 .00. For lines
Allegiance purchased from SBC Communications, Allegiance sales representatives were told by th e
Regional and CityVice Presidents (under Parella) to record a local service charge in the Consolidated
Order Entry System of $0.00. Allegiance entered into contracts with the SBC Communication s
customers billed by Allegiance . Under these contracts, such consumers had 90 days to cancel thes e
"contracts" - and often did so, CW 3 said.
Acquiring Other Companies Solely To Add Their Lines To Allegiance 's Count
92 . Defendants used Allegiance stock as capital to purchase a series of othe r
telecommunications companies, apparently to artificially inflate Allegiance' s line count. According
to CW 6, Allegiance had no legitimate business purpose to acquire these companies . As explained
below, CW 6 came to this conclusion based on personal experience, and based on information from
a senior Allegiance executive:
a. CW 6 was part of the technical team in charge of integrating companies Allegianc e
acquired. Many of these companies, however, had technological systems that did not
- and could not - mesh with Allegiance's;
b . CW 6 worked under a Senior Vice President at Allegiance with whom CW 6 had
frequent contact. The Senior Vice President told CW 6 that Allegiance acquired a
number of companies at Holland's direction in 2001 and 2002 for only one reason : to
meet Allegiance's line count and EBITDA numbers;
c . CW 6 also was told by this Senior Vice President that Holland did not care that a
number of these acquired companies could never be integrated into Allegiance
29 E
because in the short term their recurring revenue and lines would help Allegiance
show revenue and line count growth, and would help Allegiance show that it wa s
coming closer to becoming a successful company, as measured by EBITDA;
d. Moreover, the Senior Vice President told CW 6 that Allegiance did not have a
business plan beyond Year 4 and that Holland just wanted to do what he had don e
with MFS - build up an entity that looked like a real company and then sell it .
(Similarly, when CW 2 first came to Allegiance, CW 2 was told that the company was
designed to be bought out in four years, and "everyone would be very rich .")
93 . CW 6 said that companies that Allegiance acquired purely to improve Allegiance' s numbers on paper included : Coast to Coast, a Detroit company; Virtualis, a Los Angeles company;
CTS, a San Diego company ; HarvardNet, a Massachusetts company, Jump .Net, an Austin, Texas , company; and InterAccess, a Chicago company .
94. One example of how worthless (to Allegiance) these acquired companies were i s
Allegiance's experience with Coast to Coast . CW 6 said that within one month after it acquired Coast to Coast, Allegiance fired 120 of its 130 employees ; the remainder were fired the following month .
On paper, the acquisition had given Allegiance $3 to $4 million in recurring revenue . However, according to CW 6, Coast to Coast ' s technology was so poor and so incompatible with Allegiance' s that CW 6 had to physically move Coast to Coast's databases from Detroit to Allegiance's Dalla s offices in order to show that Allegiance received something tangible, of value, from the acquisition.
According to CW 6, Allegiance kept these databases in a closet ; the Company could never make any use of them.
95 . According to CW 6, after turning the acquired entities into shell companies, Allegianc e
30 0 0 merged their assets into its "Hosting.com" subsidiary. As described at the 2001 Analyst Conference ,
Hosting.com was a "national provider of Web hosting and Internet connectivity services ." Originally, according to CW 6, Hosting .com had no business purpose . Later, Holland and Lord said that
Hosting.com would better enable Allegiance to provide a full package of services to Allegianc e customers . This was just public relations "spin" to justify Allegiance's series of acquisitions .
Although Hosting.com purportedly sold Web hosting and bundled services, it fired all of the sale s people at the acquired companies . Hosting.com was set up around Harvard.net after Allegiance acquired that company.
Double Counting Of Installed Lines
96. Another way that defendants inflated the line installation numbers during the Clas s
Period was through Company initiatives designed to double count existing lines . Between April an d
July 2001, according to CW 8, Allegiance management began "Project Silvermine." This initiative gave the false impression that the Company was selling new lines, and adding to Allegiance's lin e count. The idea, CW 8 said, was that sales representatives would contact existing Allegianc e customers who purchased Allegiance's services through a resell agent and then try to switch tha t customer directly to Allegiance, i .e., convert a resell customer to a direct customer . CW 8 said that in submitting the orders for these customers, Allegiance sales representatives failed to note that thes e were existing customers when processing these sales . According to CW 2, the Company also sponsored other similar initiatives during the Class Period, including one called "Project Goldmine."
Punitive Sales Quotas
97 . To artificially maintain and increase its line count, Allegiance imposed sales quotas and penalized sales personnel for cancelled orders . According to CW 3 and CW 7, to achieve the line
31 count analysts and top executives sought, Allegiance imposed strict and ever-increasing quotas o n its sales employees. CW 3 mentioned that failure to meet these quotas for three consecutive month s frequently resulted in an employee being fired. CW 7 stated that for each line cancelled by a customer, the sales employee who sold that line was required to sell an additional one and , sometimes, 1 %2 lines. The City Vice Presidents in some cities , including Chicago and Detroit , forbid sales personnel from processing any cancellation orders unless they had new sales to replace them, according to CW 7.
Delays In Processing Cancellation s
98 . To maintain an inflated line count, defendants Holland and Parella (as well as othe r senior Allegiance executives reporting directly to them) caused Allegiance to delay the recording o f cancelled line orders . According to numerous confidential witnesses, Allegiance, at the defendants ' direction, knowingly and/or acting with severe recklessness, delayed and manipulated cancellation s of service to inflate the Company's line count during the Class Period . According to these witnesses , as set forth in detail below, this manipulation of cancellations was pervasive and took a variety o f forms.
99. One way that Allegiance skewed its cancellation or churn statistics was to delay th e recording of cancelled lines in Allegiance's various databases . This occurred by design and/or was the result of poor internal controls.
100. Throughout the Class Period, new line installation orders were entered by Allegianc e
sales personal into an automated, modular Consolidated Entry Order system . According to CW 3 ,
CW 4 and CW 6, this system was custom -designed by Allegiance's own Information Services ("IS" )
department based upon a Telecom Business Software package .
32 101 . According to CW 2, CW 3, CW 4 and CW 6, upon taking an order, a sales agent would fill out a computer software interface form, and the sales information would be stored in a n
Allegiance database. Consequently, according to CW 2, all new sales information was consolidate d and available for tabulation almost immediately, without first having to be manually entered .
102 . The same did not hold true for cancellations . CW 2 noted that the IS department, which reported to Yost, could have easily designed this system so that line cancellations were handled in the same automated manner as additions. Allegiance chose not to, so cancellations could only b e recorded manually. In short, according to CW 2, by 2001 Allegiance' s computer systems were designed so that all newly-installed lines could be entered into Allegiance's databases and woul d show up in its computerized line count almost instantly . In contrast, by design and under the instruction of Parella, any retail sales lines cancelled could only be taken off the system manually ; this
choice was made in order to better control - and strategically delay - the timing of orde r
cancellations.
103. CW 2 believes that upper management - at Parella's instigation - made a conscious
decision to slow and make a cumbersome process of manual cancellation because the deletion o f
canceled lines from Allegiance's systems was not important to Parella as it allowed him to keep th e
lines inflated. "This was the way Parella decided to do it, since cancellations was not a priority," C W
2 said. "There really was no other reason to do things this way ."
104. Thus, Allegiance' s description of the automation process, set forth in the Company' s
February 19, 2002 press release, was less than accurate . According to Allegiance, automating all
databases meant "[t]he manual keying of new installation and disconnect information into billin g
[would] then be eliminated." According to CW 2, Allegiance automated their installation system ,
33 • i allowing them to rapidly report installation numbers . On the other hand, disconnects were done manually, delaying the impact on the line count .
105. As a matter ofpolicy, or because of a reckless lack of internal controls, Allegiance als o manipulated and overstated its line count by responding to cancellation requests from customers - especially large customers - in a dilatory manner .
106 . According to Allegiance's Master Service Agreements, when a customer requested a disconnection Allegiance was obligated to cancel service and stop billing that customer within 3 0 days. Typically, Allegiance did not cancel service within 30 days . Cancellations, particularly for customers who had large accounts, often took much longer to complete, because it was th e
Company's practice to take them off the system slowly .
107. According to CW 7, if a salesperson had a cancellation order, CW 7 had to push the m to get it out; it was standard practice that salespeople would not put through cancellation orders until the first of the month or, more often, the beginning of the next quarter . At one point, early in 2001 ,
CW 7 added, a City Vice President and the acting head of customer services informed him that no cancellation orders were currently being processed . CW 2 said these individuals received thei r marching orders from the Company's Senior Vice President in charge of Billing, Denise Crane, an d that Crane, who regularly attended the "Count the Line" meetings, worked closely with Parella .
108. During the Class Period, sales personnel were told on numerous occasions (by City
Sales Vice Presidents) that they had to find between one and two new line orders to replace each o f
their cancelled lines.
109 . In late 2001 or early 2002, CW 4 decided to track a wholesale account with a servic e
provider, Internet America, "from cradle to grave ." CW 4 worked on this project with a salesperson
34 0 • he supervised, CW 11, for six weeks. They learned that although Internet America had requested th e cancellation of 1,200 of the Company's lines, six months earlier, only 120 of those 1,200 lines had been cancelled.
110. As a result of Internet America's overpayment for lines it cancelled, according to C W
4, Allegiance owed Internet America several hundred thousand dollars. CW 4 said a subordinate, CW
11, contacted the Company's billing department, and was told that the department had a policy o f deliberately stretching out the cancellation for large orders . The billing department employe e indicated that she was under orders to cancel only two lines each week . Based on their investigation , both CW 4 and the subordinate believed that the directive to cancel this order in a piecemeal manner , over many months, came directly from Ms . Crane.
111 . CW 4 learned of other customers who continued to receive bills for services the y cancelled or reduced, but in those cases the customer only paid the portion of its bill that it believe d it owed. CW 4 said Allegiance referred these matters to a Disputes section in Ms . Crane's Billing
Department, which was lax in seeking to collect unpaid bills . According to CW 4, some wholesal e customers who were billed after they asked to cancel their accounts would e-mail Holland to complain, who would send the e-mail down to Yost, and then to Parella - which would put all of them on notice of the slow cancellation problem .
112. CW 6's friend, who worked in the Disputes subsection of the billing department, showed CW 6 piles of files and paper work in mid-2001 and told CW 6 (at that time) that th e
Disputes subsection was not adequately staffed and had, at a minimum, a six-month backlog o f unresolved cancelled/disputed accounts . In 2001 and 2002, CW 6 met several times a week with one of the Company's Senior Vice Presidents who told the witness that Holland did not want Allegianc e
35 to respond promptly to customer cancellations requests . It stands to reason that by not promptl y cancelling customer accounts, and continuing to bill them, Allegiance was artificially inflating it s revenue.
113 . Based upon experience, CW 3 concurred that Allegiance's billing department wa s slow to respond to cancellation requests, which sometimes took three months or more to process . CW
4 said that on the wholesale end, the process of cancelling an account could take up to a year to complete. The Company did not place any urgency on disconnecting cancelled accounts from it s billing system, added CW 11 . CW 2 indicated that while the Company had a very large sales force , it was critically understaffed when it came to hiring technical personnel to deal with disconnection orders.
114. Because it required constant monitoring of accounts, CW 4 pointed out that th e gradual deletion of customers from Allegiance's billing system required more work than if al l cancellations had been processed at one time . CW 7 agreed, indicating that disconnecting customer s in this manner was a "complete nightmare" from a record keeping standpoint .
115 . CW 2 said that in 2001 some of the personnel in the Finance Department and in th e
Provisioning Department said Allegiance held back cancellation orders from retail customers to mee t
Allegiance's promised line install numbers . CW 2 also recalls hearing in early 2003, from a director in the Billing Department, that "if he gave disconnects out again, he would be thrown out the window." This director also told CW 2 that Parella had at some point in the past ordered him to hold disconnects because "I [Parella] have got to make my net install numbers ." CW 2 also believes, based on certain comments this director made, that Parella also asked him to provide fals e information at various times relating to Allegiance's line count.
36 0 LJ
Inclusion of Lines Fictitiously Ordered by Obviously Forged Contract s
116. The defendants also inflated the number of lines Allegiance reported as installed b y including thousands of lines based on forged contracts . During the Class Period, forging contracts to increase Allegiance's line count was rampant and top Company officials, including Parella, knew about the problem .
117. The Los Angeles City Sales Vice President was notorious in 2001 for bringing i n forged contracts . At one point in 2001, CW 2 said, almost 20% of Allegiance 's sales orders from Los
Angeles came from forged contracts. The problem was so severe that CW 2 was forced to talk to customers personally to make sure the contracts submitted by the Los Angeles office of Allegianc e were legitimate. Eventually, a legal team from Allegiance was dispatched to warn this City Sale s
Vice President that too many forged orders were being submitted under his watch. Although Parella had been notified of this problem, according to CW 2, he took no action to punish the Los Angele s
City Vice President. Other orders from this office also had been inflated, CW 2 said. For example , this City Sales Vice President submitted an order from one customer for seven Ti lines even though the customer only asked to order four such lines, according to CW 2. Each Ti line contains twenty- four separate lines. Therefore, this order had been inflated by seventy-two lines .
118. CW 3 recalled a number of similar incidents:
a. In Fort Worth, Sales Managers and agents forged contracts during 2001 and 2002 to
meet increasingly high sales quotas;
b. In New York, a sales agent forged a contract for several thousand lines, and the
Company was forced to provide free service to this customer, a well-know n
international publishing company ;
37 r 0
c. Shortly before the beginning of the Class Period, one East Coast Divisional Sales Vice
President reported 6,500 non-functional lines as lines in service . Allegiance had
reported about $1 .2 million in revenue based on these non-functioning lines. Parella
helped "clean up this mess" too, with help from another regional sales manager .
119. CW 1 stated that forged contracts were a problem known to Allegiance's uppe r
management .
CLASS PERIOD MISSTATEMENTS OF ALLEGIANCE'S CO-LOCATIONS AND LINES SOLD
120. At the same time that Allegiance overstated the number of lines it installed, th e
Company also made false and misleading statements about another operational of the Company : the
number of local geographic areas, known as co-locations, that Allegiance had the capability to serve .
Both the Company and analysts claimed that infrastructure growth was a precursor to the Company' s
becoming profitable . Allegiance's number of co-locations was the measure analysts and investors
followed to determine whether the Company was expanding its infrastructure .
121 . Allegiance's Form 10 -Q for Ql 2001, filed May 2, 2001 and signed by Holland an d
Lord, provided a description of a "co-location" and explained why growth in the number o f
Allegiance' s co-locations was important. The report states:
We and many financial analysts evaluate the growth of our business by focussing on various operational data in addition to financial data . Within each of our metropolitan markets, we have located our equipment in the central offices of the established telephone companies . This practice is commonly referred to as a co-location . The number of co-locations that we have indicates the number of different local geographic areas that we can serve within each of our markets . Once we are co-located in a central office, we can then begin offering service to all of the customers that have local loop connections to that central office .
This description is repeated in Allegiance's Form 10-Q for Q2 2001, filed on August 14, 2001, an d
38 • in its Form 10-Q for Q3 2001, filed on November 14, 2001 .
122. All three quarterly reports also contained charts listing the number of co-location s
Allegiance maintained at various points in time, as did Allegiance's press releases announcing it s quarterly results during the Class Period . These press releases and numerous analyst reports durin g the Class Period also touted the importance of Allegiance' s co-locations as an important indicator o f its growth.
123 . For example:
a. On April 24, 2001, Allegiance issued a press release, entitled "Allegiance Telecom
Continues On Plan with Record Setting First Quarter Results," which states : "51 New
Co-locations for a Total of 687, Addressing Approximately 17 .81 Million Business
Lines `On-Switch."' This news was highlighted by analysts following Allegiance ,
including Salomon Smith Barney ; Buckingham Research Company; Fahnestock &
Company and Robertson Stephens.
b. Similarly, on July 24, 2001, October 23, 2001 and February 19, 2002, Allegianc e
reported increases in its co-locations, increases which were subsequently highlighte d
by various analysts following Allegiance - some of whom referred to the number o f
co-locations as an operational metric .
124. Moreover, both before and after the Class Period, Holland pointed to Allegiance' s growth in co-locations as a measure of the Company' s success. In an August 28, 2000, Wall Street
Transcript interview, he was asked which information in Allegiance's financial reports investor s should look at, and he gave the following response :
TWST: What should long-term investors look at in your financial reports?
39 •
Mr. Holland: . .. Investors also look at the number of central office collocations that we implement each quarter. We increased that dramatically in the second qua rter, adding 80 new central office collocations for a total of 75, which represents an addressable market of over 13 million local business access lines.
125 . Shortly after Allegiance filed for bankruptcy, in the May 26, 2003, issue of Fiber ti c
News, an article titled "Allegiance Telecom Uses Chapter 11 To Thaw Its Nuclear Winter," quote d
Holland describing the importance of Allegiance' s co-locations:
Au contraire, says Holland, who believes his company will emerge from Chapter 11 in a mood to compete. "We have a good business . It's not like our business opportunities have gone away like others in the dot .com meltdown," he says . "We're still in a strong position, with $250 million in cash . We're got quite a network out there, with about 850 collocations in 36 markets, which comprise a bit more than half of the U.S . communications market..."
126. Despite the obvious importance of reporting accurate numbers of co-locations, C W
2, whose duties from sometime in 2000 until around July 2001 included reporting the numbers of co- locations Allegiance had completed to personnel in its Business Analysis department, the number s
CW 2 initially reported for completed co-locations were later inflated. According to CW 2 , personnel in the Business Analysis section these numbers needed to be increased "to meet the promises Royce [Holland] made to the Street . "
127. As co-location manager, working in various cities in the Southwest and the East Coast
during the Class Period, CW 9 regularly prepared "progress reports" that charted the percentage o f
work completed - if any - at co-location sites . After submitting these charts to his superiors, CW 9
received copies of "progress reports," in which CW 9's superiors changed and over-estimated the
percentage of work done. CW 9 said that some of the charts he prepared had been altered by his
superiors to indicate that co-location work was being performed even though no work had bee n
performed and the equipment that needed to be installed was still in unopened boxes .
40 0 i
128 . According to CW 2, Allegiance also overstated the number of lines it repo rted as sold by including in its line count lines from co-locations that were not "revenue ready" because
Allegiance had not completed its work at various facilities (the "co-locations") . Although Allegiance included such non-revenue ready lines in its publicly reported "lines sold" count, privately, Company executives referred to these as "lines in jeopardy" because it was not clear when, or even if, thes e lines would become operational.
FALSE AND MISLEADING STATEMENTS DURING THE CLASS PERIOD
129. The Class Period begins on April 24, 2001, when Allegiance issued a press release announcing the Company's first quarter 2001 financial performance . The press release touted
"record" growth in installed lines, stating in pertinent part :
Allegiance Telecom Continues on Plan With Record Setting First Quarter Result s
-- 1 Q01 Revenues of $105 .9 Million - Increased by 11 Percent Compared with 4Q00 and 124 Percent Compared with 1 Q00 -- Record Levels of Quarterly Installs and Orders -- New Installs of 126,200 Lines and New Orders of 165,900 Lines -- Total Lines in Service Increases to 733,900
DALLAS, April 24 /PRNewswire Interactive News Release / -- Allegiance Telecom, Inc. (Nasdaq: ALGX), an integrated communications provider (ICP), announced first quarter 2001 revenues of $105 .9 million, an increase of 11 percent as compared with 4Q00 and 124 percent compared with 1 Q00 . Lines sold as well as lines installed were quarterly records, with new lines sold increasing from 152,000 in 4000 to 165,900 lines in 1Q01 Lines installed also showed record growth, with new lines installed increasing from 108,000 in 4000 to 126,200 in 1001 . To date, Allegiance has installed 733,900 lines, of which 90 percent are "on-switch . "
"Despite the negative financial market environment and the large number of technology and communications companies lowering their growth targets, we are pleased to announce that we have met or exceeded our key first quarter operating and financial metrics," said Royce J. Holland, chairman and CEO of Allegiance Telecom .
Financial and Operational Highlights
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Allegiance Telecom posted a strong sales increase for the quarter, with lines sold increasing from 152,000 lines in 4Q00 to 165,900 in 1Q01, an increase of 9 percent compared with 4Q00 and an increase of 74 percent compared with l Q00. Lines installed also showed significant growth, with organic lines installed increasing 108,000 in 4000 to 126,200 in 1001, a 17 percent increase in new installs compared to 4000 and an increase of 74 percent compared with 1000 . (Emphasis added.)
130. On the same day defendants issued this positive press release, Allegiance's stock ros e
8.8% as a result of this news.
131 . A Stephens Inc . analyst report on April 25, 2001 prominently reported that
Allegiance's line installation count slightly exceeded expectation:
Allegiance Telecom reported its first quarter results for fiscal 2001, in line with our expectations. Revenues of $105 .9 million and net line adds of 126,200 both modestly exceeded our expectations .
132. Also on April 25, 2001, a Fahnestock & Co ., Inc . analyst reported Allegiance' s
"Access Line Additions" and "Total Access Lines" in a table called "Key Operational Results," an d the Buckingham Research Group, citing the numbers in defendants' April 24, 2001, press release, rated Allegiance as a "STRONG BUY," with one of the bases for that recommendation being the following:
. ..[T]he company installed 126,000 lines in 1001 compared with 108,000 lines in 4000 and appears well on its way to realizing its 550,000-line addition target for the year.
133. On April 26, 2001, a Robertson Stephens analyst took note of Allegiance' s
"impressive ramp in net line additions" and reported :
Allegiance has demonstrated an impressive ramp in net line additions in over the past few quarters, adding 91,900 in 03 2000, 108,000 in Q4 2000, and 126,000 in Q1 2001 . We do not expect the substantial ramp in line additions to fully impact the revenues until later this year as the company actively manages down its exposure to access charges . Revenue per line has dropped from $57 .21 in the fourth quarter to $52.61 in the first quarter due to lower access charges.
42 134. On May 2, 2001, Allegiance Telecom filed its Form 10-Q for Q1 2001with the SEC .
The quarterly report, signed by Holland and Lord, repeated the financial results announced in th e
April 24 press release and included the following table comparing the Company's line counts year- over-year. Similarly, all of Allegiance's Form 10-Qs during the Class Period2, signed by Holland and
Lord, highlight and describe Allegiance' s line count as a key operational metric :
Expenses are expected to exceed revenues in each market in which the Company offers service until a sufficient customer base is established . It is anticipated that obtaining a sufficient customer base will take several years, and positive cash flows from operations are not expected in the near future .. .
We and many financial analysts evaluate the growth of our business by focusing on various operational data in addition to financial data . . . (Emphasis added .)
This is followed by a table showing "selected key operational data" which includes a year-over-yea r comparison of the number of lines installed :
MARCH 3 1 MARCH 3 1 2001 2000
Markets served 29 20
Number of switche s 27 16 deployed
Central offic e 687 395 collocations
Lines installed 733900 314, 300
Customers 120500 27600
Sales force employees 1471 905
Total employees 3834 203 8
135. According to the Form 10-Q, "lines installed" represented "the lines sold that are no w
2The Company's Form 10-Q for Q1 2001, filed on May 2, 2001 ; the Form 10-Q for Q2 2001, filed on August 14, 2001 ; and the Form 10-Q for Q3 2001, filed on November 14, 2001 .
43 0 0 being used by us to provide our services ." (The quarterly report also compared "lines installed" and
"lines sold." The numbers for "lines sold" were slightly greater than those for "lines installed ." The
Company defined "lines sold" as representing "the number of lines for which customers have place d orders with us to provide service .")
136. Defendants knew or recklessly disregarded that the foregoing representations on lin e counts in the Company's April 24, 2001 press release and IQ 2001 10-Q were materially false and misleading due to the defendants' false and misleading inflating of line counts by fraudulent sales ; hold lines; lines in jeopardy; silvermine "sales" ; failing to timely process cancelled lines, and not using their most reliable database to report lines installed, for the reasons alleged in ¶¶15, 81-119, 128 and 158-160.
137. On July 24, 2001, Allegiance Telecom issued a press release announcing the
Company's Q2 2001 financial results . The press release stated, in pertinent part :
Allegiance Telecom Announces Solid Second Quarter Result s
Meets or Exceeds Targets for Revenue, Line Sales, Installations, and EBITDA -- 2Q01 Revenues of $124 .1 Million - Increased by 17 .2 Percent Compared with 1 Q01 and 96 .9 Percent Compared with 2Q00 -- New Installs of 135,800 Lines and New Orders of 192,000 Lines -- Total Lines in Service Increases to 869,700
DALLAS, July 24 /PRNewswire/ -- Allegiance Telecom, Inc . (Nasdaq: ALGX), an integrated communications provider (ICP), announced second quarter 2001 revenues of $124.1 million, an increase of 17.2 percent as compared with 1Q01 and 96 .9 percent compared with 2Q00. Lines sold as well as lines installed were quarterly records, with new lines sold increasing from 165,900 in l Q01 to 192,000 lines in 2Q01 . Lines installed also showed record growth, with new lines installed increasing from 126,200 in 1001 to 135,800 in 2001 . To date, Allegiance has installed 869,700 lines of which 90 percent are "on-switch." "I am pleased to report another successful quarter of significant top line growth . . . . said Royce J. Holland, chairman and CEO of Allegiance Telecom . . . ** * Financial and Operational Highlights
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Allegiance Telecom posted a strong sales increase for the quarter, with lines sold increasing from 165,900 lines in 1 Q01 to 192,000 in 2Q01, an increase of 15 .7 percent compared with 1Q01 and an increase of 56.4 percent compared with 2Q00. Lines installed also showed noteworthy growth, with lines installed increasing from 126,200 in 1 QO 1 to 135,800 in 2001, a 7 .6 percent increase in new installs compared to 1001 and an increase of 45 .2 percent over 2000.
In 2Q01, the nine early markets continued to show growth and margin improvements . New line installations increased by 57,281 lines, resulting in an improvement of 16 .1 percent compared with 1 QO 1 . Lines installed in these nine markets now total 482,661 for an increase of 75 .7 percent compared to 2000 installed base of 274,740 lines .
138 . The next day, after defendants' positive press release, Allegiance's stock price ros e
20% in one day.
139 . A July 24, 2001 analyst report by Jack Grubman, then with Salomon Smith Barney,
in section called "Operating Metrics Continue to Improve," which repeated defendants' line count numbers, Grubman reported :
Operational metrics continue to be quite good with 135,800 lines installed in 2Q'01 versus 126,200 in I Q'01 and versus our estimate of 135,000, which brings total lines installed to 869,700 . . . Lines sold were 192,000 in the quarter up from 165,000 in the 1Q'01 .
140. On July 25, 2001, a Lehman Brothers report specifically noted that Allegiance's lin e installs beat their projections . Informing investors that Allegiance had delivered "another stron g quarter," Lehman Brothers calculated daily "installs" :
Provisioning Improvements . All in, ALGX [Alle iancel delivered another strong quarter in the back office . Net installs of 135,000 slightly bettered guidance and our estimates of 135,000 and 134,000, respectively, suggesting a 4% sequential increase to 2,122 installs, on a per business day basis .
141 . On August 29, 2001, BB&T Capital Markets also repeated defendants' line coun t numbers, praised Allegiance for producing "positive results," in terms of line additions, "quarter ove r
quarter," and directly related increasing line counts to strong revenue growth :
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Continued Execution. In an era when man off its peers are falling by the wayside, Allegiance continues to execute upon its business plan and produce positive results quarter over quarter. In just over four years , Allegiance has installed more than 869,000 cumulative access line equivalents (ALEs), an increase of more than 18% over O1'01, and 113% over Ql'00. While other companies are missing and/or pulling back on line count guidance, Allegiance has been hitting its numbers consistently quarter over quarter.
Allegiance has been able to translate its strong line additions into strong revenue growth as well .
The focus of resources allocated to the back office has afforded Allegiance the ability to install lines at an industry-leading pace . In Q2'01, the company installed more than 135,000 lines, a sequential increase of more than 7% to end the quarter with 869,700 cumulative lines installed . Figure 11 reflects the tremendous growth that the company has experienced since 1998 .
142. On August 14, 2001, Allegiance Telecom filed its Q2 2001 Form 10-Q with the SEC .
The quarterly report, signed by Holland and Lord, repeated the financial results announced in the Jul y
24, 2001, press release, and included the following table comparing the Company' s line counts year- over-year:
JUNE 30 JUNE 3 0 2001 2000
Markets served . 32 24
Number of switches deployed 30 20
Central office collocations 740 475
Lines installed 869700 407800
Customers 120500 27600
Sales force employees 1612 111 5
Total employees 3874 2548
143. Defendants knew or recklessly disregarded that the foregoing representations on lin e counts in the Company's July 24, 2001 press release and 2Q 2001 10-Q were materially false an d misleading due to the defendants' false and misleading inflating of line counts by fraudulent sales;
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hold lines; lines in jeopardy; silvermine "sales" ; failing to timely process cancelled lines, and no t
using their most reliable database to report lines installed, for the reasons alleged in ¶¶ 15, 81-119,12 8
and 158-160.
144 . On October 23, 2001, Allegiance Telecom issued a press release announcing th e
Company's financial results for Q3 2001 . The press release stated , in pertinent part:
One Millionth Line Installed ; Revenues, Sales, Installations and EBITDA On Track With Pre-Release
3Q01 Revenues of $135 .1 Million - Increased by 8 .9 Percent Compared with 2Q01 and 68 .9 Percent Compared with 3Q00 New Installs of 136,200 Lines and New Orders of 182,000 Lines Total Lines in Service Increases to 1,005,90 0
DALLAS, October 23, 2001 -- Allegiance Telecom, Inc . (Nasdaq: ALGX), an integrated communications provider (ICP), announced third quarter 2001revenues of $135 .1 million, an increase of 8 .9 percent as compared with 2Q01 and 68 .9 percent compared with 3Q00. Allegiance Telecom sold 182,000 new lines in 3Q01, consistent with plan. Lines installed for 3Q01 totaled 136,200 . With the installation of its one millionth line during the quarter, Allegiance Telecom now has an installed base of 1,005,900 lines: 91 percent of them are "on-switch . "
Financial and Operational Highlights
Allegiance Telecom line sales held steady during the quarter, with 182,000 lines sold in 3Q01, an increase of 34. 3 percent compared with 3Q00. Lines installed showed modest improvement, with the milestone of Allegiance 's one millionth installed line occurring during 3001 .
Lines installed increased from 135,800 in 2001 to 136,200 in 3001 a 0.3 percent increase in new installs compared to 2001 and an increase of 48 .2 percent over 3000 (Emphasis added).
145. Within one day of Allegiance' s issuance of this release, the Company's stock shot up from $5.21 to $6.74 - a rise of $1 .52, or 29% - as a result of this news.
146. Based on Allegiance's October 23, 2001 press release, that same day Salomon Smit h
Barney reported that "Operational metrics continue to be quite good with 136,200 lines installed in
47 0 0
3Q'01, versus our estimate of 135,000, which brings total lines installed to 1,005,900. "
147. Similarly, on October 24, 2001, Robertson Stephens reported that "Allegiance reporte d third quarter revenues of $135 .1 million, up 8.9%. . . Net line additions came in as expected at 136,200 versus 135,800 in the first quarter . The company now has just over 1 .0 million lines in service ."
148. The line counts and revenue figures announced in the October 23, 2001, press releas e were repeated in the Company's Form 10-Q for the period ending September 30, 2001, which wa s
signed by defendants Holland and Lord and filed on November 14, 2001, with the SEC .
149. Defendants knew or recklessly disregarded that the foregoing representations on line counts in the Company's October 23, 2001 press release and 3Q 2001 1 O-Q were materially false and misleading due to the defendants' false and misleading inflating of line counts by fraudulent sales ; hold lines; lines in jeopardy; silvermine "sales"; failing to timely process cancelled lines, and not using their most reliable database to report lines installed, for the reasons alleged in ¶¶15, 81-119, 12 8 and 158-160 .
150. As set forth in ¶¶152, 155-156 below, defendants have admitted that they overstated
Allegiance's line count by 125,000 lines . Thus, the fact that the line installation numbers tha t defendants provided to investors were false and materially misleading is conclusively established .
Moreover, the statements referenced in ¶¶129 , 134, 137,142, 144 and 148 were each materially false and misleading when made because they failed to disclose the following adverse facts which wer e then known to defendants or severely recklessly disregarded by them :
a. that defendants caused Allegiance to report false and/or materially overstated line
installation counts, in that defendants included lines that had not been ordered o r
installed, were counted twice, or were supposed to have been disconnected (see ¶¶15 ,
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81-119, 128, 158-160); and
b. that defendants caused Allegiance to report false and/or materially overstated lin e
installation counts, by choosing not to rely on Allegiance's billing system - the mos t
logical and reasonable database to furnish line installation count information - in
reporting its line installation numbers to investors .
THE TRUTH IS REVEALED
151 . The Class Period ended on February 19, 2002, when a Company press release announcing Allegiance Telecom's Q4 2001 financial results revealed that the number of line s
Allegiance installed had been inflated by 12.3% and was actually 125,000 lines fewer than th e numbers Allegiance previously reported .
152. Allegiance's February 19, 2002 press release stated in pertinent part as follows :
. . . the Company has been conducting a database reconciliation project to reconcile the order management, provisioning and billing databases for inconsistencies that had developed in the past. These inconsistencies are related to a number of factors, including as a result of manual data entry into these systems . The reconciliation project resulted in the identification and correction of discrepancies in line count between the databases .
As a result of the reconciliation, the line count in the order management system, which is the basis for tracking line count , has been adjusted downward approximately by 125,000 lines to conform with the line count in Allegiance's billing systems. The adjustment includes 95,000 facilities lines and 30,000 resale lines and results in a starting point for 2002 of 1,015,000 lines in service of which 93 percent are facilities based. The inconsistencies between the various databases had an immaterial ($5 million or less) impact on revenue because most of the adjustments are to the line count in the order management and provisioning system, not the billing systems. ARPU (average revenue per unit ) for Q401, however, increases to $50 .08 per line as a result of the reconciliation project .
153. The market reacted strongly to this bad news, even though the Company's admissio n that it had falsely reported the number of lines Allegiance installed was buried in a press releas e
49 0 0 entitled, "Allegiance Telecom Announces Solid Fourth Quarter and Year-End Results With Annual
Revenue Growth of Over 80 Percent." An article published by Bloomberg News on February 20 ,
2002, bore a very different title, stating:
Allegiance Falls 28% After Company Lowers Line Count
Dallas, Feb. 20 (Bloomberg) -- Allegiance Telecom Inc . shares fell 28 percent after the seller of telephone and Internet service to businesses said it doesn't operate as many phone lines as previously reported .
Allegiance shares fell $ 1 .05 to $2.65 after dropping to $2 .52 earlier. They've fallen 86 percent in the past year.
Dallas-based Allegiance said a review of its databases caused it to lower its phone-line count by about 125,000 to 1 .01 million. The company said it discovered the discrepancy during a project to upgrade its billing systems .
"It doesn't give people a good feeling about the predictability of their numbers," said James Ott, a telecommunications analyst at Hibernia Southcoast Capital Inc. "The street is completely unwilling to listen to management explanations ." Ott has a "short-term strong buy"' rating on the shares and doesn't own them. [Emphasis added . ]
154. Investor reaction to the news of Allegiance's inflated line counts was sharply negative .
The next day, February 20, 2002, the Company's stock plummeted, closing at $2.65 - a 28% drop in one day from the previous day's close of $3 .70. This one day price drop of 28% resulted in a loss of the Company's market capitalization of about $140 million (based on approximately 125 millio n shares outstanding and a loss of $1 .05 per share) . This drop came amid heavy trading of 9.180 million shares - more than two and half times the trading volume of the previous day.
155 . The defendants provided a more complete explanation for their restatement of th e number of lines Allegiance installed in a Form 10-K for the year ending December 31, 2001, whic h
Allegiance filed with the SEC on April 1, 2002. Defendants Holland, Lord, Yost and Parella all signed this Form 10-K . In the Form 10-K, the defendants pointed out that, during the Class Period,
50 ! y
Allegiance had four separate databases in which it stored Company information . One database stored billing information . A second database stored provisioning information . A third database stored telecommunications switch information. The fourth database stored order management information .
156 . In the Form 10-K the defendants provided the following explanation for thei r restatement of lines installed :
Prior to the fourth quarter 2001, we used the database from our order management systems to track the number of customer lines installed . During the fourth quarter 2001 and going forward, we used and will use the database from our billing systems to track the number of customer lines sold . . . We have made these changes because we believe it is more informative to use the order management system as the basis for disclosing the number of lines installed and generating revenue . As a result of this reconciliation project, in fourth quarter 2001, we adjusted our reported number of customer lines installed downward by approximately 125,000 lines to conform to the number of customer lines installed in our billing systems . The adjustment included 95,000 based lines and 30,000 resale lines and resulted in 1,015,000 customer lines installed and in service as of December 31, 2001, of which 93/% are facilities-based . This adjustment had no impact on our revenues because the lines taken out of our reported installed line base were not in our billing systems and were therefore not generating revenue. (Emphasis added.)
157. Defendants' contention in this annual report that the 12 .3% restatement of Allegiance' s line count had no impact on its revenue is at odds with its press release of February 19, 2002 in which defendants claimed the restatement did, in fact, have an effect on the Company's revenue .
Regardless, the extent the defendants' line count manipulations alleged herein also impacte d
Allegiance's revenue, defendants' financial reporting of revenues throughout the Class Period also were false and misleading .
158. Neither of defendants' explanations come close to the truth. According to CW 1, in
2001 Allegiance's order management, billing and provisioning systems were not integrated, an d defendants Parella and Yost decided to use the Company' s order management system rather than the billing system as the source for Allegiance' s line count because they knew the order management
51 rl~ LJ 0 system would artificially yield a higher line count. "A high line count was what they [Yost an d
Parella] were looking for, so they went to the system that they knew they could find the highest line count from, and used that number," CW 1 explained. "They knew that the [lines installed] numbe r in the order management system was the greatest number ."
159 . CW 1 further explained: "There was so much pressure to generate line count and th e company was not so worried until later about revenue or what was coming off the back end . Yost really made the decision [to use the order management system] . Tony [Parella] was responsible fo r generating line counts, that's what he had been told to generate so he was going to do whatever he could to generate the highest line count possible."
160. When CW 1's questioned Allegiance's reporting of its lines installed, Parella said "h e was told to measure the lines and that his group was just doing what they were supposed to do ." In addition, Yost and Parella told CW 1 to "shut [your] mouth" or "lose [your] job." Frustrated wit h defendants' Yost' s and Parella's insistence on reporting the Company's line count based on a database they knew was inflated, inaccurate and unreliable, CW 1, who reported directly to Yost an d
Parella, turned in 2001 to Clay Myers, who "pushed " the defendants to restate the Company's lin e count for about four or five months prior to February 19, 2002 . CW 1 believes that in 2001, others in the Company, besides CW 1 and Myers, informed Yost and Parella that Allegiance's orde r management was not reliable to tabulate its installation line count .
161 . According to CW 1, Allegiance restated its line count at the time it did, in large part , because the defendants wanted to clean up their books in anticipation of engaging a new outside auditor or because it was coming under increasing scrutiny from its existing auditor, Arthur Andersen .
162. CW 1's explanation of the impetus of Allegiance' s release is consistent with
52 0 0
contemporaneous news reports . For example, on January 21, 2002, a month before defendants '
restatement, Bloomberg reported the following: "Arthur Andersen LLP's audits of Qwes t
Communications International Inc . and other telecommunications companies are prompting som e
investors to ask whether the firm permitted clients to use aggressive accounting practices, the Wal l
Street Journal said ."
163. On January 23, 2002, in an article entitled "Andersen's Telecom Clients May Face
Scrutiny - Investors Say Enron Affair Raises Questions About Firm's Practices," the Wall Street
Journal reported: "While companies may not dump Arthur Andersen, those companies' financia l statements may come under heightened scrutiny . . . Patrick McGurn, Vice President of Institutiona l
Shareholder Services, predicted investors `are going to look more closely at Andersen companie s figuring where there's smoke, there's fire. "' In a Form 8-K filed with the SEC on June 7, 2002, th e
Company announced that it terminated its relationship with Arthur Andersen and engaged KPMG
LLP on May 31, 2002 .
ADDITIONAL SCIENTER ALLEGATION S
164. As alleged herein, defendants acted with scienter in that defendants recklessly disregarded that the public documents and statements issued or disseminated in the name of the
Company were materially false and misleading, recklessly disregarded that such statements o r documents would be issued or disseminated to the investing public, and recklessly and substantially participated or acquiesced in the issuance or dissemination of such statements or documents a s primary violations of the federal securities laws. For the reasons set forth in ¶¶158-162, defendants knew or were reckless in recording false and misleading line counts in the above press releases an d
SEC filings issued during the Class Period .
53 0 0
165. As set forth elsewhere herein in detail, defendants, by virtue of their receipt o f
information reflecting the true facts regarding Allegiance, their control over, and/or receipt and/o r
modification of allegedly materially misleading misstatements and/or their associations with the
Company which made them privy to confidential proprietary information concerning Allegiance,
participated in the course of conduct alleged herein.
166. The defendants' scienter is demonstrated by their own belated confession that they
recklessly elected not to use the most obvious and reliable method for determining and quantifying
the number of lines Allegiance installed and instead elected to use a patently unreliable method
designed to inflate the lines count as much as possible . By their own admission, the defendants were
obsessed with Allegiance's line installation count for good reason . As they were well aware, the
number of lines Allegiance reported installing was a critical yardstick by which investors, analyst s
and even the defendants judged the Company . It was basis for the investment community' s
evaluation of Allegiance, and for the Company's stock price .
167. Even taken at face value, the defendants' explanation for their restatement of the line s
Allegiance installed amounts to a confession of their knowing or severely reckless conduct i n
reporting Allegiance's installation line count . However, as set forth in ¶¶158-160 above, defendant s
knowingly reported inflated numbers and stifled efforts to rectify the situation.
168 . As defendants finally admitted, Allegiance always had an accurate way to obtain th e
installation line count . All the defendants had to do was calculate that line count from Allegiance' s billing system database - in much the same fashion that the owner or a business would calculate how much cash he had by counting the cash in his register or looking at his bank balance . Defendants made a conscious decision not to do this .
54 0 0
169 . Given the importance of Allegiance's line count to the Company, to analysts and t o
investors, it should have been incumbent on them to use the information in Allegiance billing syste m
to provide line installation information to investors . Indeed, defendants had the ability to use the
information in their billing database to calculate lines installed, and it was within their control do so .
Instead, they ignored this information, and chose a method for tabulating Allegiance's line count tha t
they knew, or should have known, grossly inflated the Company' s installation line count .
170. Moreover, defendants were further motivated to inflate Allegiance's line count ,
because of the Company's high chum rate . Allegiance's high chum rate, coupled with the
defendants' promises to deliver an ever increasing line count, put enormous pressure on the
defendants to replace the lines lost .
171 . The defendants' obsessionwith Allegiance' s line installation numbers provides furthe r
evidence of their scienter . That defendants manipulated Allegiance's reported line installation numbers is hardly shocking given : the defendants' all-consuming focus upon Allegiance's line installation count (detailed in ¶¶17 and 78-79 above) ; Holland's abiding fear that absent constant reports of high installation line counts Allegiance would be "out of business," "toast" or "dead ;"
Parella's dual responsibility as head of both sales and the line count ; and defendants Holland, Yost and Lord's decision to put Parella in that position .
172. The defendants themselves also recklessly directed , participated in, encouraged and/or blindly countenanced improper conduct designed to artificially inflate and report Allegiance's lines installed. These techniques and the defendants' role in advancing them (described in ¶¶15, 81-119,
128 and 158-160 above) included : deliberately failing to take cancelled orders out ofAllegiance's line counts ; and falsely recording lines installed based on forged contracts and hold orders .
55 173. Additionally defendants were motivated to perpetuate the fraudulent scheme and course of conduct described herein because they held substantial stock and options in Allegiance an d stood to benefit substantially by boosting Allegiance's stock price .
174. According to the Company's DEF14A, filed May 31, 2001, prior to the Class Period :
a. The defendants in the aggregate beneficially own approximately 10 .5 million shares
of common stock, or approximately 9 .3% of the total shares outstanding as of May 29 ,
2001 ,
b. As of May 29, 2001, defendant Holland held 5 ,703,142 shares (or 5 .3 percent of the
class) of Allegiance stock. On November 30, 2000 Holland was also granted 21,404
shares of options with an exercise price of $14 .0156 that vested throughout the Clas s
Period.
c. As of May 29, 2001, defendant Lord held 2,036,919 shares (or 1 .8 percent of th e
class) of Allegiance stock. On November 30, 2000 Lord was also granted 21,404
shares of options with an exercise price of $14 .0156 that vested throughout the Clas s
Period.
d. As of May 29, 2001, defendant Yost held 2,268,284 shares (or 2 .0 percent of th e
class) of Allegiance stock . On November 30, 2000 Yost was also granted 21,404
shares of options with an exercise price of $14.0156 that vested throughout the Clas s
Period.
e. As of May 29, 2001, defendant Parella held 804,283 shares of Allegiance stock . Tony
Parella was granted (a) 300,000 non-qualified stock options on August 2, 2000 wit h
an exercise price of $50 .1250 (vesting from August 2, 2001, for the next two years) ,
56 (b) 600,000 non-qualified stock options on November 30, 2000 with an exercise pric e
of $14.0156 (vesting during and after the Class Period), and (c) 7,135 outperfor m
stock options on November 30, 2000 with an exercise price of $14 .0156 (vesting
throughout the Class Period) .
175. Defendants also were motivated to report positive numbers so that Allegiance migh t become an attractive acquisition target . Prior to founding Allegiance, Holland with backing from
Lord, then an investment banker, started MFS Communications . Holland and Lord took MFS public in 1993 . Three years later, Holland persuaded Bernard Ebbers to have Ebbers' company, MC I
WorldCom, purchase MFS for, according to press reports, $15 .46 billion. In conversations with reporters and in conversation calls and discussions with senior officials at Allegiance, Holland an d
Lord indicated that they would look favorably upon an acquisition of Allegiance. For example:
a. In a September 2, 1998, Conference Call with analysts, Holland admitted to being
open to having Allegiance acquired . He stated: "Whether Allegiance will be a take-
over target or not, I guess time will tell . This is business, not religion . "
b. Holland made similar comments at a Bloomberg Forum, which were reported in a
Bloomberg News article on February 2, 1999 : "`With MFS, WorldCom came alon g
and wrote a check and gave us a 50 percent premium on our stock," Holland told th e
Bloomberg Forum : "If the same thing happened with Allegiance, we would have an
obligation to our shareholders to take a look at it ."
c. On May 29, 2000, a Forbes article, entitled "C-lect Your Customer," discusse d
Holland and Lord's roles in the MFS buyout and pointed out that the two currentl y
collectively held 7.6% of Allegiance, which they obtained for a total of $5 millio n
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when they set up Allegiance . At the time, Holland's and Lord's combined stake in
Allegiance had been worth $632 million, according to Forbes .
176. Because of his stake in the Company, Lord told analysts that he was motivated to kee p
Allegiance from being acquired at what he perceived would be too low a price . At a March 1, 2001 ,
Bloomberg Telecom Day, Lord expressed his fear that if Allegiance did not take immediate actio n to increase its stock price, the Company could be acquired too cheaply, and Lord would be out o f work. Lord candidly stated:
My biggest fear that we have at Allegiance is that I'm $20 a share . I'm scared to death, very vulnerable, even though we control 35% of the stock . There's no way I was worth $110 a share a year ago . . . You can make up your own minds, but y biggest fear is that I don't get to go work for the next year or two because somebody in the industry realizes the intrinsic assets we have up there and we get picked off at $30-40 a share. In July of last year, I was trading for $50 a share and folks thought that was the end of it all. For us to get to $20 a share having $9 a share in cash and little or nil debt means I probably should have gone into the retailing business or the oil refinery business . . . . If Clark wants to give me $80 a share for the stock, he's got the keys . (Emphasis added .)
177. Parella also was motivated to perpetuate the fraudulent scheme and course of busines s described herein because he personally was deeply indebted to Allegiance . In 2001 and 2002,
Allegiance paid Parella an annual salary of $250,000 . However, according to a Company 10-K405 filed with the SEC on April 1, 2002, Allegiance also lent Parella $3 million on April 4, 2001 and an additional $1 .2 million sometime in September 2001to repay debts he owed in connection with a lan d purchase. Parella signed a full recourse loan obligating him to pay this $4 .2 million plus interest on
April 4, 2004. The loan was secured by Parella's Company stock options and 350,000 shares o f
Allegiance' s common stock; it was due to be repaid, with interest , by April 2004.
178. Defendants were further motivated to make false statements about Allegiance's lin e count to inflate Allegiance's stock price because they used Allegiance stock to acquire numerou s
58 other companies before and during the Class Period . As mentioned, defendants purchased thes e
companies largely to inflate Allegiance's line count . Allegiance listed the companies it purchase d
in 2001, and the stock and cash consideration Allegiance paid for these companies, in its 10-K40 5
for the year ending December 31, 2002, which it filed with the SEC on April 1, 2001 . In that annual
statement Allegiance stated:
During the year ended December 31, 2001, we acquired the stock of Adgrafix Corporation, an Internet-based, web hosting applications specialist, and Coast to Coast Telecommunications, Inc., a provider of local and long-distance telecommunications services . We also acquired certain assets of HarvardNet, Inc ., an Internet-based, web hosting applications specialist, and Intermedia Business Internet, a Tier 1 Internet Service Provider. The Company acquired these entities for an aggregate purchase price of $92,602, consisting of $17,651 in cash and 3,694,502 shares of the Company's common stock . Included in the aggregate purchase price as of December 31, 2001 is $9,083, payable in shares of the Company's common stock or cash, which has been held by the Company until settlement of certain pre-acquisition vendor liabilities assumed by the Company.
APPLICABILITY OF PRESUMPTION OF RELIANCE : FRAUD-ON-THE-MARKET DOCTRIN E
179. At all relevant times, the market for Allegiance securities was an efficient market fo r the following reasons, among others:
a. Allegiance stock met the requirements for listing, and was listed and actively trade d
on NASDAQ, a highly efficient and automated market;
b. As a regulated issuer, Allegiance filed periodic public reports with the SEC ;
Allegiance regularly communicated with public investors via established marke t
communication mechanisms, including through regular disseminations of pres s
releases on the national circuits of major newswire services and through other wide-
ranging public disclosures, such as communications with the financial press and othe r
similar reporting services ; and
59 c. Allegiance was followed by securities analysts employed by major brokerage firm s
who wrote reports which were distributed to the sales force and certain customers o f
their respective brokerage firms . Each of these reports was publicly available and
entered the public marketplace.
180. As a result of the foregoing, the market for Allegiance securities promptly digeste d
current information regarding Allegiance from all publicly available sources and reflected such
information in Allegiance's stock price . Under these circumstances, all purchasers of Allegiance
securities during the Class Period suffered similar injury through their purchase of Allegiance
securities at artificially inflated prices and a presumption of reliance applies .
NO SAFE HARBOR
181 . The statutory safe harbor provided for forward-looking statements under certai n
circumstances does not apply to any of the allegedly false statements pleaded in this complaint . Many
of the specific statements pleaded herein were not identified as "forward-looking statements" when
made. To the extent there were any forward-looking statements, there were no meaningful cautionary
statements identifying important factors that could cause actual results to differ materially from those
in the purportedly forward-looking statements . Alternatively, to the extent that the statutory safe harbor does apply to any forward-looking statements pleaded herein, defendants are liable for those false forward-looking statements because at the time each of those forward-looking statements was made, the particular speaker knew or recklessly disregarded that the particular forward-looking statement was false, and/or the forward-looking statement was authorized and/or approved by an executive officer of Allegiance who knew or recklessly disregarded that those statements were false when made.
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COUNT I
Violations of Section 10(b) of the Exchange Act And Rule IOb-5 Promulgated Thereunder Against All Defendants
182. Lead Plaintiffs repeat and reallege each and every allegation contained above as if fully
set forth herein.
183 . During the Class Period, defendants carried out a plan, scheme and course of conduc t
which was intended to and, throughout the Class Period, did : (i) deceive the investing public ,
including Lead Plaintiffs and other Class members, as alleged herein ; and (ii) cause Lead Plaintiffs
and other members of the Class to purchase Allegiance securities at artificially inflated prices . In
furtherance of this unlawful scheme, plan and course of conduct, defendants, and each of them, took the actions set forth herein.
184. Defendants (a) employed devices, schemes, and artifices to defraud ; (b) made untrue statements of material fact and/or omitted to state material facts necessary to make the statements no t misleading; and (c) engaged in acts, practices, and a course of business which operated as a fraud an d deceit upon the purchasers of the Company's securities in an effort to maintain artificially high market prices for Allegiance securities in violation of Section 10(b) of the Exchange Act and Rule 1 Ob-5 . All defendants are sued either as primary participants in the wrongful and illegal conduct charged herein or as controlling persons as alleged below.
185 . Defendants, individually and in concert, directly and indirectly, by the use, means o r instrumentalities of interstate commerce and/or of the mails, engaged and participated in a continuou s course of conduct to conceal adverse material information about the business, operations and financial performance of Allegiance as specified herein.
61 186. These defendants employed devices, schemes and artifices to defraud, while i n possession of material adverse non-public information and engaged in acts, practices, and a cours e of conduct as alleged herein in an effort to assure investors of Allegiance's value and performanc e and continued substantial growth, which included the making of, or the participation in the making of, untrue statements of material facts and omitting to state material facts necessary in order to make the statements made about Allegiance and its business operations and financial performance in th e light of the circumstances under which they were made, not misleading, as set forth more particularl y herein, and engaged in transactions, practices and a course of business which operated as a fraud an d deceit upon the purchasers of Allegiance securities during the Class Period .
187. Each of the Individual Defendants' primary liability, and controlling person liability , arises from the following facts: (i) the Individual Defendants were high-level executives and/o r directors at the Company during the Class Period and members of the Company management team or had control thereof; (ii) each of these defendants, by virtue of his responsibilities and activities a s a senior officer and/or director of the Company was privy to and participated in the creation, development and reporting of the Company's internal budgets, plans, projections and/or reports ; (iii) each of these defendants enjoyed significant personal contact and familiarity with the other defendants and was advised of and had access to other members of the Company's management team, internal reports and other data and information about the Company's finances, operations, and sales at all relevant times ; and (iv) each of these defendants was aware of the Company's dissemination of information to the investing public which they knew or recklessly disregarded was materially false and misleading.
188 . The defendants had actual knowledge of the misrepresentations and omissions o f
62 material facts set forth herein, or acted with reckless disregard for the truth in that they failed t o
ascertain and to disclose such facts, even though such facts were available to them . Such defendants '
material misrepresentations and/or omissions were done knowingly or recklessly and for the purpose
and effect of concealing Allegiance's operating financial performance and operations from the
investing public and supporting the artificially inflated price of its securities . As demonstrated by
defendants' misstatements of the Company's business and operations throughout the Class Period,
defendants, if they did not have actual knowledge of the misrepresentations and omissions alleged,
were reckless in failing to obtain such knowledge by deliberately refraining from taking those steps
necessary to discover whether those statements were false or misleading .
189 . As a result of the dissemination of the materially false and misleading information an d
failure to disclose material facts, as set forth above, the market price of Allegiance's securities was
artificially inflated during the Class Period . In ignorance of the fact that market prices of Allegiance's publicly traded securities were artificially inflated, and relying directly or indirectly on the false and misleading statements made by defendants, or upon the integrity of the market in which the securities trade, and/or on the absence of material adverse information that was known to or recklessly disregarded by defendants but not disclosed in public statements by defendants during the Class
Period, Lead Plaintiffs and the other members of the Class acquired Allegiance securities during the
Class Period at artificially high prices and were damaged thereby .
190. At the time of said misrepresentations and omissions, Lead Plaintiffs and othe r members of the Class were ignorant of their falsity. Had Lead Plaintiffs and the other members o f the Class and the marketplace known the truth regarding the problems that Allegiance wa s experiencing, which were not disclosed by defendants, Lead Plaintiffs and other members of the Class
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would not have purchased or otherwise acquired their Allegiance securities, or, if they had acquired
such securities during the Class Period, they would not have done so at the artificially inflated prices
which they paid .
191 . By virtue of the foregoing, defendants have violated Section 10(b) of the Exchang e
Act, and Rule l Ob-5 promulgated thereunder .
192. As a direct and proximate result of defendants' wrongful conduct, Lead Plaintiffs an d
the other members of the Class suffered damages in connection with their respective purchases of the
Company's securities during the Class Period.
COUNT II
Violations of Section 20(a) of The Exchange Act Against the Individual Defendants
193. Lead Plaintiffs repeat and reallege each and every allegation contained above as if fully
set forth herein.
194. The Individual Defendants acted as controlling persons of Allegiance within th e meaning of Section 20(a) of the Exchange Act as alleged herein . By virtue of their high-level positions, and their ownership and contractual rights, participation in and/or awareness of the
Company's operations and/or intimate knowledge of the false financial statements filed by the
Company with the SEC and disseminated to the investing public, the Individual Defendants had the power to influence and control and did influence and control, directly or indirectly, the decision- making of the Company, including the content and dissemination of the various statements whic h
Lead Plaintiffs contend are false and misleading . The Individual Defendants were provided with o r had unlimited access to copies of the Company's reports, press releases, public filings and othe r statements alleged by Lead Plaintiffs to be misleading prior to and/or shortly after these statement s
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were issued and had the ability to prevent the issuance of the statements or cause the statements t o
be corrected.
195 . In particular, each of these defendants had direct and supervisory involvement in the
day-to-day operations of the Company and, therefore, is presumed to have had the power to contro l
or influence the particular transactions giving rise to the securities violations as alleged herein, an d
exercised the same.
196. As set forth above, Allegiance and the Individual Defendants each violated Sectio n
10(b) and Rule IOb-5 by their acts and omissions as alleged in this Complaint . By virtue of their positions as controlling persons, the Individual Defendants are liable pursuant to Section 20(a) of the
Exchange Act. As a direct and proximate result of defendants wrongful conduct, Lead Plaintiff and other members of the Class suffered damages in connection with their purchases of the Company's securities during the Class Period.
PRAYER FOR RELIEF
WHEREFORE , Plaintiff demands judgment :
1 . Determining that the instant action is a proper class action maintainable under Rul e
23 of the Federal Rules of Civil Procedure ;
2. Awarding compensatory damages and/or rescission as appropriate against Defendants , in favor of Lead Plaintiffs and all members of the Class for damages sustained as a result of
Defendants' wrongdoing ;
3. Awarding Lead Plaintiffs and members of the Class the costs and disbursements o f this suit, including reasonable attorneys', accountants' and experts' fees ; and
4. Awarding such other and further relief as the Court may deem just and proper.
65 JURY DEMAND
Plaintiff hereby demands a trial by jury .
Dated: March 26, 2004 Respectfully submitted,
By: 0 g;6 Roger F . Claxton SBN: 04329000 Robert Hill SBN 09652100 CLAXTON & HILL, PLLC 3131 McKinney Avenue #700 Dallas, Texas 75204 Telephone : (214) 969-9029 Facsimile : (214) 953-0583
Liaison Counselfor Plaintiffs
GLANCY BINKOW & GOLDBERG LLP Lionel Z. Glancy Robin B . Howald Mark I. Labaton Claudia J. Bugh 1801 Avenue of the Stars , Suite 311 Los Angeles, California 90067 Telephone : (310) 201-9150 Facsimile : (310) 201-9160
Lead Counselfor Plaintiffs
SCHIFFRIN & BARROWAY, LLP Mark Topaz 3 Bala Plaza East Suite 400 Bala Cynwyd, Pennsylvania 19004 Telephone : (610) 667-7706 Facsimile: (610) 667-7056
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CAULEY GELLER BOWMAN & RUDMAN, LLP Sam Rudman 200 Broadhollow , Suite 406 Melville, NY 11747 Telephone : (631) 367-7100 Facsimile: (631) 367-117 3
Attorneys for Plaintiffs
CERTIFICATE OF SERVICE
I hereby certify that on the day of March, 2004, a copy of the foregoing document was sent to all counsel listed below via hand delivery:
Timothy R. McCormick Thompson & Knight, LLP 1700 Pacific Avenue, Suite 3300 Dallas, Texas 75201 47q~~' Robert J. Hill'
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