Zoran Corporation Securities Litigation 06-CV-04843-Consolidated

1 LIONEL Z. GLANCY #134180 PETER A. BINKOW #173848 2 MICHAEL GOLDBERG #188669 GLANCY BINKOW & GOLDBERG LLP 3 1801 Avenue of the Stars, Suite 311 Los Angeles, California 90067 4 Telephone: (310) 201-9150 Facsimile: (310) 201-9160 5 Email: [email protected] 6 Local Counsel for Lead Plaintiff and the Class 7 LABATON SUCHAROW & RUDOFF LLP IRA A. SCHOCHET 8 CHRISTOPHER J. KELLER NICOLE M. ZEISS 9 ANDREI V. RADO ALAN I. ELLMAN 10 100 Park Avenue, 12th Floor New York, New York 10017 11 Telephone: (212) 907-0700 Facsimile: (212) 818-0477 12 Email: [email protected] 13 Lead Counsel for Lead Plaintiff and the Class 14 UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA 15 16 MURRAY ZUCKER, MIDDLESEX ) RETIREMENT SYSTEMS, and CAPITALIA ) Case No.: 3:06-cv-04843-WHA 17 ASSET MANAGEMENT SGR SPA, on ) behalf of themselves and all others similarly ) CONSOLIDATED AMENDED CLASS 18 situated, ) ACTION COMPLAINT FOR VIOLATION ) OF THE FEDERAL SECURITIES LAWS 19 Plaintiffs ) ) JURY TRIAL DEMANDED 20 v. ) ) 21 ZORAN CORPORATION, UZIA GALIL, ) LEVY GERZBERG, KARL ) 22 SCHNEIDER, RAYMOND A. ) BURGESS, JAMES D. MEINDL, JAMES ) 23 B. OWENS, JR., DAVID RYNNE, ) ARTHUR B. STABENOW, AHARON ) 24 AHARON, CAMILLO MARTINO, and ) PHILLIP M. YOUNG, ) 25 ) Defendants. ) 26 _____________________________________ ) 27 28 CONSOLIDATED CLASS ACTION COMPLAINT 3:06-cv-04843-WHA 1 TABLE OF CONTENTS 2 NATURE OF THE ACTION ..........................................................................................................1 3 JURISDICTION AND VENUE ......................................................................................................6 4 PARTIES .........................................................................................................................................6 5 A. Plaintiffs...................................................................................................................6 6 B. Defendants ...............................................................................................................7 7 1. Officer Defendants.......................................................................................7 8 2. Compensation and Audit Committee Defendants........................................8 9 3. Director Defendants...................................................................................10 10 CLASS ACTION ALLEGATIONS ..............................................................................................13 11 SUBSTANTIVE ALLEGATIONS ...............................................................................................15 12 A. Improper Option Grants.........................................................................................15 13 1. Introduction................................................................................................15 14 2. Accounting Principles Board No. 25 .........................................................16 15 3. Zoran’s Stock Option Program ..................................................................19 16 4. The Zoran Compensation Committee........................................................22 17 5. The Zoran Audit Committee......................................................................25 18 6. The Stock Options Backdating Epidemic of 2006.....................................28 19 7. Defendants’ Improper Stock Option Granting 20 Practices .....................................................................................................32 21 8. The Defendants’ Scheme Caused the Company to Violate Generally Accepted Accounting Principles 22 and SEC Regulations .................................................................................47 23 MATERIALLY FALSE AND MISLEADING STATEMENTS..................................................51 24 A. Zoran’s False and Misleading Class Period Definitive Proxy Statements ...................................................................................................54 25 B. Zoran’s False and Misleading Periodic Financial 26 Statements..............................................................................................................75 27 28 CONSOLIDATED CLASS ACTION COMPLAINT - i - 3:06-cv-04843-WHA 1 ZORAN’S TRUE FINANCIAL CONDITION BEGINS TO EMERGE .................................... 99 2 A. Zoran Initiates an Internal Investigation of the Company’s Stock Option Grants and Fails to Timely File its Second 3 Quarter 2006 Results With the SEC ......................................................................99 4 1. The SEC and U.S. Attorney Investigate Zoran’s Stock-Option Practices.............................................................................101 5 2. NASDAQ Delisting.................................................................................102 6 UNDISCLOSED ADVERSE FACTS.........................................................................................103 7 LOSS CAUSATION....................................................................................................................104 8 ADDITIONAL SCIENTER ALLEGATIONS RELATED TO THE FIRST AND 9 SECOND CLAIMS .....................................................................................................................104 10 APPLICABILITY OF PRESUMPTION OF RELIANCE FOR DEFENDANTS’ OMMISSIONS OF MATERIAL FACTS UNDER THE AFFILIATED UTE 11 DOCTRINE, AND/OR, IN THE ALTERNATIVE, UNDER THE FRAUD ON THE MARKET DOCTRINE.......................................................................................................107 12 NO SAFE HARBOR ...................................................................................................................108 13 FIRST CLAIM.............................................................................................................................109 14 SECOND CLAIM........................................................................................................................113 15 THIRD CLAIM ...........................................................................................................................114 16 FOURTH CLAIM........................................................................................................................115 17 18 19 20 21 22 23 24 25 26 27 28 CONSOLIDATED CLASS ACTION COMPLAINT - ii - 3:06-cv-04843-WHA 1 Court-appointed Lead Plaintiff Middlesex Retirement Systems (“Lead Plaintiff”) and 2 Plaintiff Capitalia Asset Management SGR SpA (“Capitalia AM”) (collectively, “Plaintiffs”), 3 individually and on behalf of all other persons and entities similarly situated, by their 4 undersigned attorneys, allege the following based upon personal knowledge as to themselves and 5 their own acts and on information and belief as to all other matters based upon the investigation 6 of Plaintiffs’ counsel, which included, among other things: 1) a review of United States 7 Securities and Exchange Commission (“SEC”) filings by Zoran Corporation (“Zoran” or the 8 “Company”), as well as regulatory filings and reports; 2) a review of securities analysts’ reports 9 and advisories about the Company; 3) a review of press releases, conference calls and other 10 public statements issued by the Company; 4) a review of media reports about the Company; 5) 11 interviews with former Zoran employees; and 6) a review of other publicly available information 12 about the Company. Plaintiffs believe that substantial additional evidentiary support for the 13 allegations set forth in this Consolidated Amended Class Action Complaint (“Complaint”) will 14 become known after a reasonable opportunity for discovery. 15 NATURE OF THE ACTION 16 1. This is a federal class action (“Action”) on behalf of all persons and entities, other 17 than defendants, who purchased or acquired the securities of Zoran from August 10, 2001 to 18 October 24, 2006, inclusive (the “Class Period”), who have suffered damages thereby, which 19 seeks remedies under the Securities Exchange Act of 1934, 15 U.S.C. §§ 78a et seq. (the 20 “Exchange Act”). Plaintiffs also assert claims on behalf of the following two subclasses: (i) the 21 “2005 Proxy Subclass,” consisting of all persons and entities that were entitled to vote on the 22 proxy statement filed with the SEC on or about June 1, 2005; and (ii) the “2006 Proxy Subclass” 23 consisting of all persons and entities that were entitled to vote on the proxy statement filed with 24 the SEC on or about May 1, 2006. As alleged herein, throughout the Class Period, defendants 25 (defined infra) engaged in a fraudulent scheme and/or published a series of materially false and 26 misleading statements that defendants knew, and/or were severely reckless in not knowing, were 27 materially false and misleading, and failed to disclose material information necessary to render 28 CONSOLIDATED CLASS ACTION COMPLAINT 3:06-cv-04843-WHA 1 1 such statements not false and misleading. Defendants who solicited proxies through Zoran’s 2 2005 and 2006 proxy statements were negligent in their dissemination of the false and 3 misleading proxies and are liable. 4 2. Zoran develops and sells high performance digital audio and video imaging 5 applications to equipment manufacturers of digital televisions, DVD products, digital cameras, 6 digital printing and multimedia phones. 7 3. With respect to the fraud claims alleged herein, this Action involves a clear 8 example of uncontrolled, unchecked corporate wrongdoing carried out at the highest levels of 9 Zoran’s management. Defendants’ long-running scheme, undertaken

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