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IN THE UNITED STATES DISTRICT COURT A ^ , • FOR THE SOUTHERN DISTRICT OF TEXAS' HOUSTON DIVISION 4,1 JEFF KURTZMAN, Individually and on behalf § of all those similarly situated, § Civil Action No. Plaintiff,
V. § JURY TRIAL DEMANDED COMPAQ COMPUTER CORPORATION; ECKHARD PFEIFFER; and EARL L. MASON; Defendants. §
CLASS ACTION COMPLAINT
Plaintiff, by and through his attorneys, alleges the following upon personal knowledge as -_-? to himself and his acts. All other allegations are based upon the investigation of counset-which
has included, inter alia. review and analysis of filings made by Compaq Computer Corporation
("Compaq" or the "Company") with the Securities and Exchange Commission ("SEC"), press
releases issued by Compaq, interviews given by officers of Compaq, securities analysts' reports
concerning Compaq and media reports concerning Compaq.
NATURE OF THE ACTION
1. This is a class action on behalf of all persons, other than defendants and certain
related persons, who purchased the common stock of Compaq on the open market during the
period from January 27, 1999 through February 25, 1999, inclusive (the "Class Period'') to
recover damages caused by defendants' fraudulent scheme to artificially inflate the price of
Compaq common stock through a series of false and misleading statements to the market in
violation of the federal securities laws.
Class Action Complaint 1 2. In a succession of announcements beginning on January 27, 1999 and continuing throughout the Class Period, defendants Compaq, Pfeiffer and Mason repeatedly told the investing public that demand for, and sales of Compaq's products in the first quarter of 1999 to date were strong when, in fact, defendants knew or recklessly disregarded the material facts that sales to small and medium size businesses particularly in North America and Europe, which sales account for more than 40% of Compaq's total revenues, had slowed throughout January and continuing into February. During the Class Period, numerous officers of Compaq sold hundreds of thousands of shares of Compaq common stock in advance of the revelation of the truth about reduced demand for Compaq's products and the reduced rate of sales growth in
January and February 1999 and the corresponding reduction in revenues. When the truth was exposed to the market, Compaq common stock prices plunged.
3. Defendants' statements about the strong demand for and level of sales of
Compaq's products in January and February 1999 were statements of current or historical fact, were materially false and misleading when made and were made without reasonable basis.
JURISDICTION AND VENUE
4. The claims asserted herein arise under and pursuant to Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act")[15 U.S.C. §§78j(b) and 78t(a)] and
Rule 10b-5 promulgated thereunder by the SEC [17 C.F.R. §240.10b-5].
5. This Court has jurisdiction of this litigation pursuant to §27 of the Exchange Act, as amended [15 U.S.C. §78aa1, and 28 U.S.C. §1331.
6. Venue is properly laid in this District pursuant to §27 of the Exchange Act and 28
U.S.C. §1391(b) and (c). The acts, conduct and scheme complained of herein, including the preparation, issuance and dissemination of materially false and misleading information to the
Class Action Complaint investing public, occurred in part in this District. Defendants have their principal place of business in this District.
7. In connection with the acts, conduct, and scheme alleged in this Complaint, defendants, directly and indirectly, used the means and instrumentalities of interstate commerce, including the mails and telephonic communications and the facilities of the national securities exchanges.
PARTIES
8. Plaintiff Jeff Kurtzman purchased 500 shares of Compaq common stock on
February 18, 1999, as set forth more fully on the attached certification, and was damaged thereby.
9. Defendant Compaq maintains its principal offices and corporate headquarters at
20555 State Highway 249, Houston, Texas 77070. Compaq, a Fortune Global 100 company, is the second largest computer company in the world and the largest global supplier of computer systems. Compaq develops and markets hardware, software, solutions, and services, including industry-leading enterprise computing solutions, fault-tolerant business-critical solutions, networking and communication products commercial desktop and portable products and consumer PCs.
1 0. Defendant Eckhard Pfeiffer ("Pfeiffer") is and has been President, Chief
Executive Officer and a Director of Compaq prior to and during the Class Period. Pfeiffer signed Compaq's 1998 Form 10-K filed with the SEC on February 24, 1999.
11. Defendant Earl L. Mason ("Mason") is and has been Senior Vice President and
Chief Financial Officer of Compaq prior to and during the Class Period, On February 1, 1999,
Mason sold 265,236 shares of Compaq common stock, reaping gross proceeds of approximately
$12.3 million, which shares were acquired by the exercise of options at greatly lower prices,
Class Action Complaint 3 reaping millions of dollars in profits. Mason signed Compaq's 1998 Form 10-K filed with the
SEC on February24TllE , 1999
FRAUDULENT. SCHEME AND DEFENDANTS' ROLES AND RESPONSIBILITIES WITH RESPECT THERETO
12. During the Class Period, the defendants, and each of them, embarked upon and participated in a plan, scheme and a course of conduct which was intended to and, throughout the
Class Period, did: (i) deceive the investing public, including plaintiff and the other Class members, regarding, among other things, the business, financial condition and performance of
Compaq during the first quarter of 1999 to date; (ii) artificially inflate and maintain the market price of Compaq common stock; (iii) cause plaintiff and the other members of the Class to purchase Compaq common stock at artificially inflated prices; and (iv) permit defendant Mason to sell 265,236 shares of Compaq common stock at artificially inflated prices. In furtherance of the foregoing unlawful plan, scheme and course of conduct, defendants, among other acts of deception, issued or caused to be issued, during the Class Period, a series of false and misleading public statements, as described herein, which operated as a fraud and deceit upon the market for the common stock, plaintiff and the other members of the Class.
13, Defendants Pfeiffer and Mason participated directly in the wrongs complained of herein. They each made false and misleading statement to the market during the Class Period. In addition, Defendant Pfeiffer, by reason of among other things, his position as the President and
Chief Executive Officer of Compaq, is a "controlling person" of the Company within the meaning of Section 20(a) of the Exchange Act and had the power and influence, and exercised the same, to cause the Company to engage in the unlawful conduct complained of herein. As a result, defendant Pfeiffer, throughout the Class Period, was able to, and did, directly or indirectly
Class Action Complaint 4 control the conduct of the Company's business, as well as the contents of the public statements
issued by or on behalf of the Company.
14. As officers of a publicly-held company, defendants Pfeiffer and Mason, at all times relevant hereto, each had a duty to disseminate timely, accurate, truthful, and complete information with respect to the Company's business, operations, products, financial condition, performance and future prospects, so that among other things, the market price of Compaq's stock would be based on truthful, accurate and complete information.
15. As direct participants in the wrongs complained of herein, defendants Pfeiffer and
Mason are each jointly and severally liable or proportionately liable for the damages suffered by plaintiff and other purchasers of the stock during the Class Period.
PLAINTIFF'S CLASS ACTION ALLEGATIONS
16. Plaintiff brings this action as a class action pursuant to Federal Rules of Civil
Procedure 23(a) and 23(b)(3) on behalf of himself and a class (the "Class") of all persons who purchased the common stock of Compaq during the period from January 27, 1999 through
February 25, 1999, inclusive (the "Class Period"), and who were damaged thereby. Excluded from the Class are: the defendants herein; members of the immediate families of each individual defendant, any parent, subsidiary, affiliate, officer, or director of Compaq, any entity in which any excluded person has a controlling interest; and the legal representatives, heirs, successors and assigns of any excluded person.
17. The members of the Class are so numerous that joinder of all members is impracticable. While the exact number of Class members is unknown to plaintiff at the present time and can only be ascertained from books and records maintained by Compaq and/or its transfer agent(s), plaintiff believes that there arc, at a minimum, thousands of members of the
Class located throughout the United States. During the Class Period, Compaq's common stock
Class Action Complaint 5 was actively traded on the New York Stock Exchange under the symbol "CPQ" and
approximately 323,000,000 shares were traded.
18. Plaintiff will fairly and adequately represent and protect the interests of the
members of the Class. Plaintiff has retained competent counsel experienced in class and
securities litigation and intend to prosecute this action vigorously. Plaintiff is a member of the
Class and does not have interests antagonistic to, or in conflict with, the other members of the
Class.
19. Plaintiff's claims are typical of the claims of the members of the Class. Plaintiff
and all members of the Class purchased Compaq's common stock during the Class Period at artificially inflated prices and have sustained damages arising out of the same wrongful course of conduct.
20. 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 questions of law and fact common to the Class are:
(a) Whether the federal securities laws were violated by defendants' acts and omissions as alleged herein; (b) Whether defendants participated in and pursued the common course of conduct and fraudulent scheme complained of herein; (c) Whether the statements disseminated to the investing public, including purchasers of Compaq common stock, during the Class Period omitted and/or misrepresented material facts about the business, financial condition, and performance of Compaq; (d) Whether defendants acted knowingly or recklessly in omitting to state and/or misrepresenting material facts; and (e) Whether plaintiff and the other members of the Class have sustained damages and, if so, the appropriate measure thereof.
Class Action Complaint 6 21. A class action is superior to other available methods for the fair and efficient adjudication of this controversy since, among other things, joinder of all members of the Class is impracticable. Furthermore, as the damages suffered by individual Class members may be relatively small, the expense and burden of individual litigation make it virtually impossible for many Class members individually to seek redress for the wrongful conduct alleged. Plaintiff does not foresee any difficulty in the management of this litigation that would preclude its maintenance as a class action.
22. Plaintiff will rely, in part, upon the presumption of reliance established by the fraud-on-the-market doctrine in that, among other things:
(a) Defendants made public misrepresentations or failed to disclose material facts during the Class Period; (b) The omissions and misrepresentations were material; (c) The common stock of Compaq traded in an efficient market; (d) The misrepresentations alleged would tend to induce the market to misjudge the value of the common stock of Compaq; and (e) Plaintiff and the other members of the Class purchased the common stock between the time the defendants failed to disclose or misrepresented material facts and the time the true facts were disclosed, without knowledge of the omitted or misrepresented facts.
23. Based upon the foregoing, plaintiff and the other members of the Class are entitled to a presumption of reliance upon the integrity of the market for, at least, the purpose of class certification, as well as for ultimate proof of their claims on the merits. Plaintiff will also rely, in part, upon the presumption of reliance established by a material omission.
24. As aforesaid, the names and addresses of at least the record owners of the common stock purchased during the Class Period are available from Compaq and/or its transfer agent(s). Notice can be provided to purchasers of the common stock by a combination of
• Class Action Complaint 7 published notice and first class mail using techniques and forms of notice similar to those
customarily used in class actions arising under the federal securities laws.
MATERIALLY FALSE AND MISLEADING STATEMENTS DURING THE CLASS PERIOD
25. On January 27, 1999, Compaq issued a press release announcing, inter alia, its results for the fourth quarter and full year 1998 ("Press Release"). In the Press Release,
Defendant Pfeiffer said that the fourth quarter revenues and earnings results were new Compaq records and stated that "1998 was a year of significant transformation for Compaq, and with our strong fourth quarter results, we enter the new year with a great deal of momentum and optimism." Defendant Mason stated that, "[the synergies from the Digital acquisition are becoming more and more evident in our financial performance. Sequential revenue growth in products was exceptionally strong, and we continue to gain momentum in our service business."
26. After highlighting Compaq's record growth in 1998 and knowing that the level of demand for Compaq's products is a critical factor used by the market to evaluate Compaq's competitive position and Compaq's profitability, defendants Pfeiffer and Mason used the occasion of the Press Release to discuss the demand for Compaq's products in 1999 year to date, i.e., as of January 27, 1999. Defendant Pfeiffer stated:
We continue to see strong demand for Compaq products and services and the opportunity for continued market share gains and revenue growth. This statement was false and misleading because defendant Pfeiffer knew or recklessly disregarded the fact that at the time he made the statement the "continue[d]... strong demand for Compaq product and services" had been reduced dramatically throughout January 1999. This misstatement was particularly critical because, as reported by Merrill Lynch analysts on January 28, 1999, North America and Europe had driven Compaq's growth in the fourth quarter of 1998, with sales sequentially up 16% and 38%, respectively, and "[Ole company expects North
Class Action Complaint 8 America Europe solwpoeteod be the growth driversda lrei sv eirhs halde ddii uti tonn C o mh hp sa iqh' es s es xmp earrikeentc we ai ns
JanuaryA mer a1a9n9d9e demand ther small m "anIdn ,size
normal seasonal pattern with consumer sales winding
Season) and commercial sales gaining strength. In a Dow Jones news story published January
27, 1999, it was reported again that Pfeiffer stated that "[w]e continue to see strong demand for
Compaq products and services and the opportunity for continued market share gains and revenue growth." It was further reported that Compaq expects continued improvement in its results.
In the Press Release defendant Mason stated:
As we enter the first quarter of 1999, we will maintain our focus on the basics looking to improve both income statement and balance sheet performance in support of continued growth in return on invested capital.
As reported in the Wall Street Journal on January 28, 1999, by Gary McWilliams, Mason, in further discussion of the Press Release, said that Compaq expects to match Wall Street's earnings estimate of 35 cents a share in the current quarter, i.e., the quarter ending March 31,
1999. These statements were misleading because defendant Mason knew or recklessly disregarded the fact that demand and revenue had slowed dramatically during January 1999 and, therefore, the only actual numbers for 1999 which Mason had available to him showed that despite Compaq's best efforts, income in 1999 was down. On January 28, 1998 Knight Ridders
Tribune Business News reported that Mason said Compaq remains on target to meet Pfeiffer's goal of earning $50 billion in revenue by 2000.
27. On the same date as the Press Release, Andreas Barth ("Barth"), Compaq's Senior
Vice President and General Manager for Europe, Middle East and Africa, gave an interview to
Bundeep Singh.Rangar at Bloomberg, which was reported by Bloomberg, concerning, inter alia,
Compaq's European sales. Barth stated that in 1998 in Europe, Compaq exceeded market growth, expanded its positions, and saw good growth with European operations accounting for
Class Action Complaint 9 40% of Compaq's total revenues and profits. For 1999, Barth stated that Europe is Compaq's fastest growing region and that the market in Europe in 1999 is strong for the industry and for
Compaq.
28. The quoted statements made by defendants Pfeiffer, Mason and Compaq, set forth in paragraph 26 and Barth's statements with respect to the current strength of the market in
Europe, set forth in paragraph 27, were false and misleading when made. Defendants knew that demand for, and sales of Compaq's products to small and medium size businesses, particularly in
North America and Europe, which represent more than 40% of Compaq's total revenues, had slowed throughout January 1999 causing a decline in Compaq's revenues for the month of
January. This decline in demand, reduced revenues and slower rate of growth were particularly meaningful for Compaq because for 1998, Compaq's revenues in Europe had grown by approximately 46% over 1997s European revenues, and Europe represented Compaq's fastest growing region. For example, in the fourth quarter of 1998 alone, Compaq sold 1.6 million personal computers in Europe, representing an 18% market share in Europe. The statements were further misleading because defendants failed to disclose, in their discussions of strong demand and fast growth in 1999, that for the month of January 1999, which was the only month for which defendants had actual numbers, demand and growth had actually slowed. Thus, the clear picture conveyed to the market was that actual demand for, and sales of Compaq's products in the month of January 1999 was in line with defendants' statements that the record demand and
growth experienced in 1998 was continuing into 1999. However, as defendants knew, this was not true because the levels of demand and growth had slowed throughout January 1999. In
addition, the decline in demand and sales was not an industry wide phenomenon- -IBM had no
Class Action Complaint 10 _ ,
weakness in sales to the small and medium size business market, and Dell and Gateway recorded
strong growth in that market in January 1999.
29. On February 16, 1999 defendants went back to the market to report again on
Compaq's product demand and revenues in 1999 year to date. Compaq held its International
Press Briefing, attended by Pfeiffer arid Barth, in London. At the conference, Pfeiffer, reiterating
analysts' estimates that Compaq will report $43.5 billion in revenue for 1999, outlined Compaq's
gains in market share and stated that Dell will lose market share and that Compaq controls 15.4%
of the PC market worldwide, outpacing IBM, Dell and Hewlett-Packard. Barth then gave an
interview reported by Bloomberg in London. Barth, in commenting on Compaq's market
position in Europe stated that "[m]arket wide, there was 26% unit growth in 1998. Europe was
the fastest growing PC market in the world [in 1998]. The Dataquest projection for 1999 is about
15 percent market unit growth, a view we share, because there are some unknowns like some
slowing down of the U.K. economy and the Year 2000 problem... As for Compaq, we don't
make projections but what I've said is we want to grow faster than the market in order to
increase market share."
30. Also on February 16, 1999 Defendant Pfeiffer gave an interview to Ines
Karschoeldgen of Bloomberg, carried by Bloomberg on that date, to discuss, inter alia,
Compaq's European sales. Defendant Pfeiffer stated that in 1998 Compaq grew faster than the
European market because it had good products, good customer relations and good niche.
Looking to 1999, Defendant Pfeiffer further stated that these reasons would enable Compaq to
continue to grow at a faster rate than the European market in 1999. In contrast, defendant
Pfeiffer said that Compaq currently had more than 35% of the personal computer Intel-based
server market in Europe, and that because of its already large market share, Compaq would only
Class Action Complaint 11 ,
grow with the market in 1999 in that market. Defendant Pfeiffer also stressed in the interview
that Compaq had great strength in Europe and a strong organization and had no plans to
downsize its presence in Europe.
31. The statements set forth in paragraphs 29 and 30 were false and misleading when
made. Defendants knew that demand for, and sales of Compaq's products in the small and
medium size businesses particularly in North America and Europe, which represents more than
40% of Compaq's total revenues, had slowed throughout January 1999 and early February 1999
causing a decline in Compaq's revenues for the month of January and the first two weeks of
February. The statements were further misleading because defendants failed to disclose, in their
discussions of strong demand and fast growth in 1999, that for the month of January 1999 and
the first two weeks in February 1999, which was the only period for which defendants had actual
numbers, demand, revenues and growth had actually slowed. Thus, the clear picture conveyed to
the market was that actual demand for, and sales of Compaq's products in the months of January
and February 1999 were in line with defendants' statements that the record demand and growth
experienced in 1998 was continuing into 1999. However, as defendants knew, this was not true
because the levels of demand and growth had slowed throughout January and February 1999. In
addition, the decline in demand and sales was not an industry wide phenomenon--IBM had no
weakness in sales to the small and medium size business market and Dell and Gateway recorded
strong growth in that market in January 1999.
32. On February 24, 1999, Compaq filed its 1998 Form 10-K with the SEC, signed by
defendants Pfeiffer and Mason. Defendants continued to discuss product demand in 1999. In
Item 7, Management's Discussions and Analysis of Financial Condition and Results of
Class Action Complaint 12 Operations, defendants stated that "Compaq expects the personal computer market to expand in
1999 in line with third-party research organizations' forecasts of unit growth of 15%."
33. The statement set forth in paragraph 32 was false and misleading when made and defendants lacked any reasonable basis for the statement. Defendants knew that demand for and sales of Compaq's products in small and medium size businesses particularly in North America and Europe, which represents more than 40% of Compaq's revenues, had slowed throughout
January and February 1999 causing Compaq's revenues for the months of January and February to date to decline. Thus, the only facts defendants had available to them at the time they issued the Form 10-K showed that demand in the personal computer had slowed for Compaq.
34. On February 25, 1999, during a meeting between Compaq, Pfeiffer and Mason and a Credit Suisse First Boston analyst, Michael Kwatinetz, and a group of his firms' clients, defendants finally admitted that Compaq's sales in January had slowed. As a result, Kwatinetz lowered his earnings forecast for Compaq.
35. This startling news, selectively disclosed by Compaq, Pfeiffer and Mason to one analyst, rattled the market when it became available to the general market on February 26, 1999.
Compaq common stock, which had closed on February 25, 1999 at $41 per share, closed at
$35318 on February 26, 1999, on volume of 74, 507,900 shares, four times the volume traded on
February 25, 1999.
36. On February 26, 1999. securities analyst Steven Milunovich of Merrill Lynch &
Co., reported that Compaq stated that its sales to small and medium size businesses, which represent more than 40% of its total revenues, were lower in January and the beginning of
February 1999 and that the Company's results for the first quarter of 1999 may be short of the
Company's forecast for the quarter because of the slowed revenue growth. Compaq's common
Class Action Complaint 13
stock price fell further, closing at $33 17/32 on March 1, 1999 and closing at a new low of $31 15/16
on March 2, 1999.
37. In the wake of these disclosures by defendants, all in stark contrast to their earlier
positive statements during the Class Period concerning the strength of the demand for, and sales
of Compaq's products in January and February 1999, securities analysts, including Milunovich
and Don Young at Paine Webber, Inc., cut revenue and earning projections for 1999 and ratings
to "neutral" from "buy". John Geraghty, an analyst at Gerard Klauer Mattison, said that
"Compaq calls into question the strength of the computer market place."
38. Throughout the Class Period defendant Mason and other non-defendant Senior
Compaq officers (and one director) sold hundreds of thousands of shares of Compaq common
stock at prices artificially inflated by the misleading statements alleged herein, as follows:
Shares Percent of Name Sold Price(S) Date Stockholdings Sold
William D. Strecker 99,100 42.625 2/16/99 (Senior Vice President, 20,900 42.5625 2/16/99 Technology & 120,000 99%
Rodney W. Schrock 6,249 46.75 2/1/99 (President and 2,267 46.75 2/1/99 Chief Executive Officer, 3,733 46.875 2/1/99 AltaVista Company) 7,500 46.875 2/1/99 37,500 46.875 2/1/99 6,146 46.50 2/1/99 63,395 90%
John T. Rose 30,000 47.4375 2/3/99 (Senior Vice President & 15,000 41.4375 2/22/99 Group General Manager, 20,000 41.50 2/22/99 Enterprise Computing) 5,000 41.5625 2/22/99 10,000 41.625 2/22/99 30,000 41.875 2/22/99 110,000 59%
Class Action Complaint 14
,
Shares Percent of Name Sold Price(S) 218/9D9 ate Stockholdings Sold
Enrico Pesatori 10,000 44.75 91% (Senior Vice President Corporate Marketing)
Earl L. Mason 26,200 46.375 2/1/99 (Defendant) 20,469 46.25 2/1/99 38,531 46.25 2/1/99 11,052 46.3125 2/1/99 55,948 46.3125 2/1/99 63,000 46.3750 2/1/99 5_040116. 46.4375 2/1/99 265,236 94%
Kenneth L. Lay 30,000 46.6875 2/4/99 7% (Director)
Hans W. Gutsch 42,756 47.00 2/1/99 (Senior Vice President, 50,000 42.6875 2/22/99 Human Resources, 20,000 43.625 2/23/99 Organization & 112,756 65% Environment)
Michael D. Heil (Senior Vice President, 14,167 47.625 2/1/99 General Manager, 1,984 46.75 2/1/99 Worldwide Sales & 11,350 46.875 2/1/99 Marketing) 2,500 47.4375 2/2/99 17,500 47.375 2/2/99 20,000 47.50 2/3/99 20,000 45.5625 2/4/99 3,667 _ 44.1875 2/15/99 94,168 79%
Thomas C. Siekman 30,000 46.5625 2/4/99 (Senior Vice President, 10,000 46.3125 2/4/99 General Counsel & 20,000 46.25 2/4/99 Secretary) 60,000 94%
John J. Rand° 75,615 44.00 2/23/99 100% (Senior Vice President Group General Manager, Services)
Class Action Complaint 15 Shares Percent of Name Sold Price(S) Date Stockholdings Sold Michael J. Winkler 10,000 47.6875 2/1/99 (Senior Vice President 33,336 47.75 2/1/99 & Group Manager, 35,000 43.375 2/24/99 PC Products) 35,000 43.4375 2124/99 15,000 43.50 2/24/99 15,000 43.625 2/24/99 10,000 43.6875 2/24/99 143,336 86%
STATUTORY SAFE HARBOR
39. The statutory safe harbor provided for forward-looking statements under . certain circumstances does not apply to any of the allegedly false statements pleaded in this
Complaint. The statements are historical or present tense statements. To the extent that any of the statements were "forward-looking statements," none of the statements was accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from the statements made. To the extent that the statutory safe harbor might otherwise apply to any statements pleaded herein because they are "forward-looking," the defendants are liable for those statements because at the time each of those statements was made, the speaker knew the statement was false and the statement was authorized and/or approved by an executive officer of Compaq who knew that those statements were false when made.
COUNT I AGAINST DEFENDANTS FOR VIOLATION OF SECTION 10(b) OF THE EXCHANGE ACT AND SEC RULE 10b-5
40. Plaintiff repeats and realleges each and every allegation contained in each of the foregoing paragraphs as if fully set forth in full herein.
41. This Count is asserted against all defendants and is based upon Section 10(b) of the Exchange Act, 15 U.S.C. §78j(b), and Rule lOb-5 promulgated thereunder by the SEC.
Class Action Complaint 16 42. During the Class Period, defendants, singly and in concert, directly or indirectly, engaged in a common plan, scheme, and unlawful course of conduct pursuant to which they knowingly or recklessly engaged in acts, transactions, practices, and courses of business which operated as a fraud and deceit upon plaintiff and the other members of the Class, and made various deceptive and untrue statements of material facts and omitted to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading to plaintiff and the other members of the Class. The purpose and effect of said scheme, plan, and unlawful course of conduct was to induce plaintiff and the other members of the Class to purchase Compaq common stock during the Class Period at artificially inflated prices.
43. During the Class Period, defendants, pursuant to said scheme, plan, and unlawful course of conduct, knowingly and recklessly issued, caused to be issued, participated in the preparation and issuance of deceptive and materially false and misleading statements to the investing public as Particularized above.
44. The statements set forth in paragraphs 26, 27, 29, 30 and 32 were materially false and misleading for the reasons set forth above in paragraphs 26, 28, 31, and 33.
45. At all relevant times, defendants had actual knowledge that the statements complained of herein were materially false and misleading and intended to deceive plaintiff and the other members of the Class. In the alternative, these defendants acted in reckless disregard for the truth in that they failed or refused to ascertain and disclose such facts as would have revealed the materially false and misleading nature of the statements complained of herein although such facts were readily available to such defendants. The facts and omissions of such defendants were committed willfully or with reckless disregard for the truth. In addition, such
Class Action Complaint 17 defendants knew or recklessly disregarded that material facts were being misrepresented or omitted as alleged herein.
46. Information showing that defendants acted knowingly or with reckless disregard for the truth is peculiarly within their knowledge and control. However, the following facts, in addition to those alleged above, indicate a strong inference that such defendants acted with scienter:
(a) Defendants knew that Compaq's rate of revenue growth and demand for its products are critical indicators to the market and measures of Compaq's profitability. The slowing of Compaq's sales growth in January and early February occurred in the European and North American Operations of Compaq's business, operations which account for more than 40% of Compaq's revenues and profits and were so essential to Compaq's operations that defendants knew or are charged with knowledge of the performance of these operations. (b) The statements made by defendants were made on the very subject at issue- the historical and current demand and rate of revenue growth during the Class Period - and were made in SEC filings, press releases and interviews. The statements were authored by defendants Compaq, Pfeiffer and Mason, each of whom knew or is charged with knowledge of the facts on the subject of the statements each defendant made. The true facts are directly contrary to the statements made by these defendants. (c) the time frame of defendants' misrepresentations is a 30 day period, and defendants disclosed the truth at the end of the 30 day period. The defendants knew the truth or are charged with knowledge of the truth due to the close proximity of the alleged misstatements to the revelation of the truth. (d) Defendant Mason had the motive and opportunity to misrepresent the truth because he sold 265,236 share of Compaq common stock durin g the 30 day period in which he and defendants Compaq and Pfeiffer were
Class Action Complaint 18 misrepresenting the truth to the market. His motive to artificially inflate the price of Compaq common stock during this short time period is further evidenced by the fact that Mason used this short window of opportunity to exercise virtually all of his exercisable options and sell virtually all of his available stockholdings on February 1, 1999. Mason currently owns 120,391 shares of common stock, of which 102,091 shares are represented by options which are not exercisable or will not become exercisable until April 27, 1999. (e) Compaq compensates its senior officers, including those officers listed in paragraph 38 hereof, primarily through the grant of stock options. Thus, Compaq had the motive to artificially inflate its common stock price to enable its senior officers to cash in on their options. For example, John T. Rose and defendant Mason, defendant Pfeiffer's top lieutenants, received only 7% of their $16.4 million 1997 incomes in cash.
47. As a result of the dissemination of the false and misleading statements set forth above, the market price of Compaq common stock was artificially inflated during the Class
Period. In ignorance of the false and misleading nature of the representations described above and the deceptive and manipulative devices and contrivances employed by defendants, plaintiff and the other members of the Class relied to their detriment on the integrity of the market price of the stock. Had plaintiff and the other members of the Class known of the materially adverse information misrepresented or not disclosed by defendants, they would not have purchased the stock at the artificially inflated prices that they did.
48. As a result of the inflation of the prices of the stock during the Class Period caused by the material misrepresentations and omissions, plaintiff and the other members of the
Class have suffered substantial damages as a result of the wrongs alleged.
Class Action Complaint 19 49. By reason of the foregoing, defendants violated Section 10(b) of the Exchange
Act and Rule 10b-5 promulgated thereunder in that they:
(a) employed devices, schemes, and artifices to defraud; (b) made untrue statements of material facts or omitted to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; and/or (c) engaged in acts, practices, and a course of business which operated as a fraud and deceit and a scheme to defraud upon plaintiff and the other members of the Class in connection with their purchases of the Securities during the Class Period.
COUNT II AGAINST DEFENDANT PFEIFFER UNDER SECTION 20(a) OF THE EXCHANGE ACT
50. Plaintiff repeats and realleges each and every allegation contained in each of the foregoing paragraphs as if fully set forth herein.
51. Defendant Pfeiffer, by virtue of his offices and specific acts described above, was, at the time of the wrongs alleged herein, a controlling person of Compaq within the meaning of
Section 20(a) of the Exchange Act. Defendant Pfeiffer, as Chief Executive Officer and Director of Compaq, had the power and influence and exercised the same to cause Compaq to engage in the conduct and practices complained of herein in violation of Section 10(b) of the Exchange Act and Rule 10b-5.
52. By reason of the conduct by Compaq alleged herein, defendant Pfeiffer is liable to plaintiff and to the other members of the Class for the substantial damages which they suffered in connection with their purchases of stock during the Class Period.
Class Action Complaint 20 . _
JURY DEMAND
53. Plaintiff demands a trial by jury on all issues.
WHEREFORE, plaintiff, on behalf of himself and the members of the Class,
prays for judgment as follows:
A. Declaring this action to be a proper class action and certifying plaintiff as the proper representative of the Class under Rule 23 of the Federal Rules of Civil Procedure;
B. Awarding compensatory damages in favor of plaintiff and the other members of the Class against all defendants for the damages sustained as a result of the wrongdoing of defendants, together with interest thereon; C. Awarding plaintiff and the Class their costs and disbursements incurred in this action as permitted by law; and D. Granting such other and further relief as the Court may deem just and proper.
Dated: March 12, 1999 Respectful, • nitted,
Wm. B. Emmons, SBN 06610-7-1- 3223 Smith, Suite 303 Houston, TX 77006 (713) 522-4435 (713) 527-8850 - fax Attorney-in-charge for Plaintiff OF COUNSEL:
EMMONS & JACKSON, P.C. Daniel W. Jackson, SBN 00796817 3223 Smith, Suite 303 Houston, TX 77006 (713) 522-4435 (713) 527-8850 - fax
Class Action Complaint 21 Stuart H. Savett, Robert P. Frutkin. Barbara A. Podell SAVETT FRUTKIN PODELL & RYAN, P.C. 325 Chestnut Street, Suite 700 Philadelphia, PA 19106 (215) 923-5400 (215) 923-9353 - fax
Deborah Gross, Esquire LAW OFFICE BERNARD M. GROSS, P.C. 1500 Walnut Street, Sixth Floor Philadelphia, PA 19102 (215) 561-3600 (215) 561-3000 - fax
Richard Appleby, Esquire 39 Broadway Suite 2705 New York, New York 10006 (212) 344-1800 (212) 809-6174 - fax
Class Action Complaint 22