Frederick Hoeck, Et Al. V. Compusa, Inc., Et Al. 98-CV-00998

rn1cT COURT Non r,,- sTR3CT OF TEXAS . I4 I _ -, ORIGINAL i FILED SEP a 0 1999 ... NANCY. D04 LE' UNITED STATES DISTRICT COUR L ay,1m NORTHERN DISTRICT OF TEXAS DALLAS DIVISION

FREDERICK HOECK, et al., On Behalf of ) Civil Action No. 3:98-CV-0998-G Themselves and All Others Similarly Situated, ) ) (Consolidated With No. 3:98-CV-1457-G) Plaintiffs, ) ) CLASS ACTION VS. ) ) SECOND AMENDED CONSOLIDATED COMPUSA, INC., JAMES F. HALPIN, ) COMPLAINT FOR VIOLATIONS OF THE ROBERT S. SEAY, LAWRENCE N. ) SECURITIES EXCHANGE ACT OF 1934 MONDRY, LESLIE C. MARSHALL, ) HAROLD D. GREENBERG, RICK L. ) FOUNTAIN, PAUL F. EWERT, ROBYN ) GATCH-PRIEST and JAMES F. SKINNER, ) ) Defendants. ) ) DEMAND FOR JURY TRIAL

\, ) 0 SUMMARY AND OVERVIEW 1. This is a class action on behalf of all purchasers of the common stock and publicly traded options of CompUSA, Inc. ("CompUSA" or the "Company") between 12/31/97 and 4/29/98

against CompUSA and certain of its top insiders. In 12/97, CompUSA's stock declined by 32% (from $38 on 12/1/97 to $25-3/4 on 12/29/97) due to investor concerns that CompUSA and other computer retailers were encountering slow sales growth and increasing pressure on profit margins due to increased price competition. This sharp price decline eliminated millions of dollars in value of the CompUSA stock owned and options to purchase CompUSA stock held by its insiders. 2. In order to halt this decline in CorripU SA stock and to artificially inflate it back up to higher levels so that they could sell off large amounts of their CompUSA stock, top CompUSA insiders falsely reported to the market in early 1/98, inter alia, that CompUSA was achieving strong sales in both its inexpensive PCs (below $1,000) and its higher margin computers despite the experiences of other similar computer retailers. They further represented that CompUSA's financial results were not being harmed by expanding sales of inexpensive computers, since the Company was continuing to sell a substantial number of its higher profit margin PCs to sophisticated computer users and upscale customers. These insiders went so far as to state that the trend toward low-end PCs was "healthy" for CompUSA's business. Along with these misrepresentations and others,

CompUSA projected fiscal third quarter earnings to exceed the prior quarter with 1998 earnings per share ("EPS") of at least $1.35. Based upon these false statements, CompUSA's stock price recovered with a 36% increase to $35-3/8 on 3/2/98.

3. As the stock price rebounded based upon CompUSA's misrepresentations, the CompUSA executives named as defendants unloaded 564,790 shares of their CompUSA stock at prices as high as $33.15, selling off 41% of the CompUSA stock they actually owned and 100% of the stock they acquired via option exercise during the Class Period, pocketing $17.6 million in illegal insider-trading proceeds. 4. On 3/4/98, CompUSA traded as high as $33-7/16. On 3/5/98, just eight trading days after CompUSA's insiders had completed their insider-selling spree, CompUSA stock was twice halted from trading and ultimately plunged to $26 on volume of over 9 million shares (the

-.1- largest one-day volume in CompUSA's history as a public company up to that point) as it leaked into the market that CompUSA was about to make a negative announcement about its 3rdQ F98 results. After the close, CompUSA revealed that it expected much lower 3rdQ F98 sales than earlier forecast.

Then on 4/1/98, CompUSA revealed that its 3rdQ F98 sales fell from the prior quarter, due in large part to a decline in sales per superstore, which would result in lower than expected 3rdQ F98 EPS. CompUSA revealed that gross margins would be approximately 14.1%, lower than in any quarter in the past year. CompUSA also indicated that these adverse conditions would continue during 4thQ F98, resulting in lower margins and EPS at least one-third lower than earlier forecast for the 3rdQ and 4thQ of F98. CompUSA stock plunged from $26-7/16 on 3131198 to $20-1/2 on 411/98 on volume of 10.1 million shares — the largest one-day volume in CompUSA's history as a public company. 5. On 4/1/98, contrary to defendants representations, the Company reported that its third quarter sales fell from the prior quarter and that its fourth quarter estimates would have to be adjusted downward by at least a third. Further, defendants admitted that CompUSA's gross margins had fallen to their lowest level of the past year, despite their representations in January that the margins were protected due to its sales of high-end PCs. Immediately following these disclosures, the Company's stock plummeted an additional 22% to $20-1/2 — a price at least $10 per share less than any price obtained by defendants only five weeks earlier. On 4/29/98, the Company officially announced its third quarter results, confirming its prior announcement on 4/1/98 and indicating that net income fell 22% from the same period of fiscal 1997. Despite defendants' representations during the Class Period that the industry's trend toward lower priced PCs was "healthy" for CompUSA's business, they now revealed that because more of the computers CompUSA sold were models costing less than $1,000, profits sank to $25.4 million (or $0.27 per share) from $32.7 million (or $0.35 per share). CompUSA's stock fell to $17-3/16. These events are evidenced by the following stock chart:

-2-

, i

.. •

CornpUSA., Inc.

December 1, 1997 -April 29, 1998 Daily Stock Prices vs. S&P Retail Composite index 40 Feb. 2-23, 1998 Insiders self 605,322 shares for $19,175,559 S&P Retail Composite 35 1— \ilk \ r.., ai cr, s.a qr- Al CompLISA 2 ,a 30 — 0) f a. 0 2.' TO 1, Aill041111P.r \ -9-3 Izi 25 — —6 0 0 g 13 C 20 —

I 1 1 1 I 1 i 15 I _L_ 1 12/01197 12/30197 01/29/98 02127/98 03/27198 04127198

12/15/97 01/14/98 02/12198 03/13/98 04/13198

6. Defendants insider trading was unusual in timing and amount, as shown below:

% of Shares Shares Actually Owned Defendants Sold Proceeds Sold

Ewert 20,000 $ 639,397 21% Fountain 21,123 $ 654,790 33% Gatch-Priest 8,484 $ 271,488 55% Greenberg 16,546 $ 529,472 79% Ha/pin 360,000 $11,173,780 56% Marshall 34,166 $ 1,132,603 91% Mondry 100,000 $ 3,133,200 20% Seay 4,47 $ 141,418 68%

TOTALS: 564,790 $17676,148 41%

• - 3 -

, r

CompUSA, Inc. Quarterly Stock Sales By Defendants - Dollar Volume March 1997 - Aeril 1998 $20 $40 Class Period: 12/31/97 - 4/29/98

$15 $30 Tfc

5—

E $1 () -0 3

$5 4' $10

Pre Class Period Sales

$0 $0 M A M JJ A SO NDJ F M A 1997 1990

JURISDICTION AND VENUE 7. Jurisdiction is conferred by §27 ofthe Securities Exchange Act of 1934 ("1934 Act"). The claims asserted herein arise under §§10(b) and 20(a) of the 1934 Act and Rule 10b-5. 8. Venue is proper in this District pursuant to §27 of the 1934 Act. CompUSA is headquartered in this District. The false and misleading statements were made or issued from this District.

THE PARTIES 9. (a) PlaintiffFrederick Hoeck, who was appointed as a lead plaintiff in this action by Order dated June 23, 1998, purchased shares of CompUSA common stock during the Class Period, as described in the certification filed with plaintiffs initial complaint, and was damaged thereby.

(b) The following individuals, who were appointed as lead plaintiffs in this action by Order dated June 23, 1998, purchased shares of CompUSA common stock and/or publicly traded options on the open market during the Class Period, as described in the certifications attached as

Exhibit 1 to the Declaration of Katherine L. Blanck filed in support of the Hoeck Group's motion to

-4 r

be appointed lead plaintiffs, and were damaged thereby: Jeff Ackerman, Reza Ansari, Robert E. Appleby, Jr., Boris Blanter, William Blust, Benedict J. Bucalo Trust, Josephine F. Bucalo Trust, Michael Bucalo, Mary Suk Fun Cheung, John and Honey Jean Christofiles, Ronny and Lourdes Cohen, Bruce Devlin, Frankie Dinsmore, Michael Dougherty, Joseph Drazdowski, Peter Dugery, Fran and Paul Gonnelli, Jr., Charles Katsohis, John Kemendo, Ken Klein, Alan Koch, Marc Lupczynski, John Macuski, Wayman D. Merrill, John T. and Ruth Q. Neary, Philip Ramirez, Larry Rebich, Jack Rushing, George Schneider, John Special, Wieslawa Tabor, Patricia Waldschmidt, Irving M. Weiner, Stephen Winarick, and Jedidiah Yueh. (c) Plaintiff Herbert Silverberg purchased shares of CompUSA common stock during the Class Period, as described in the certification filed with plaintiffs initial complaint, and was damaged thereby. 10. Defendant CompUSA, Inc. ("CompUSA") is a large retailer of personal computers and related products and services. CompUSA operates 150+ Computer Superstores in the United States. The Company's executive offices are in Dallas, Texas. CompUSA's common stock trades in an efficient market on the New York Stock Exchange. 11. (a) Defendant James F. Halpin ("Halpin") is President, ChiefExecutive Officer and a director of the Company. During the Class Period and as part of the fraudulent scheme, Halpin sold 360,000 shares of CompUSA stock at prices as high as $31.31 per share based on inside information, pocketing over $11.1 million. These sales constituted 56% of the CompUSA stock Halpin actually owned. Halpin's stock sales during the Class Period were unusual in timing and amount, as set forth below:

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•

CompUSA, inc. J. Halpin, Pres. CEO - Quarterly Stock Sales - Dollar Volume March 1997 - April 1998 $12 Class Period: $40 1 14 - • r t,

$10 • $30

,o $8

9:1 E " $20 23 (3, No Pre Class Period Sales -3 $4 ' $10 $2 -

$0 $0 MA M J J A S 0 NC:0J F M A 1997 1998

(b) Defendant Lawrence N. Mondry ("Mondry") is Executive Vice President- Merchandising of the Company. During the Class Period and as part of the fraudulent scheme, Mondry sold 100,000 shares of CompUSA stock at prices as high as $3 1.63 per share based on inside

information, pocketing over $3.1 million. These sales constituted 20% of the CompUSA stock Mondry actually owned. Mondry's stock sales during the Class Period were unusual in timing and amount, as set forth below:

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CompUSA, Inc. L. Mondry, Executive V.P. Merch. - Quarterly Stock Sales - Dollar Volume March 1997 - April 1998 $3,500 $40 Class Period 12131197 - 4129198 $3,000

$30 $2,500 1'7") o 8 10 en $2,000

No Pre Class Period Sales $20 43 77; to $1,500 - o o 1 st000 . via

$500

$0 $0 MA M JJA SO NDul F M A 1997 1998

of the Company. During the Class Period and as part of the fraudulent scheme, Ewert sold 20,000 shares of CompUSA stock at prices as high as $32 per share based on inside information, pocketing $639,397. These sales constituted 21% ofthe CompUSA stock Ewert actually owned. Ewert's stock sales during the Class Period were unusual in timing and amount, as set forth below:

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_ r

CompUSA, Inc. P. Ewert, S.V. P. Merchandising - Quarterly Stock Sales - Dollar Volume March 1997 April 1998 $700 $40 Class Period: 12/31/97 - 4/29/98

...... $600 •••- • - ...

$30 $500 o o 0 g. $400

$20 143 $300 • (313' 0 No Pre Class Period Sales $200 $10

$100

$0 $0 MAM JJ A SO NIDJ F M A

1997 19913

(d) Defendant James E. Skinner ("Skinner") was, during the Class Period, Executive Vice President, ChiefFinancial Officer, Treasurer and Assistant Secretary ofthe Company. Because of hi s unique position at CompUSA and his sophisticated financial knowledge, Skinner knew CompUSA's business was deteriorating during the 2ndQ F98 — he sold off 15,000 shares of CompUSA stock on 11/21/97 at $35-3/4 per share.

(e) Defendant Harold D. Greenberg ("Greenberg") is Senior Vice President- Inventory Management of the Company. During the Class Period and as part of the fraudulent scheme, Greenberg sold 16,546 shares of CompUSA stock at $32 per share based on inside information, pocketing $592,472. These sales constituted 79% of the CompUSA stock Greenberg actually owned. Greenberg's stock sales during the Class Period were unusual in timing and amount, as set forth below:

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CompUSA, Inc. H. Greenberg, Sr. V.P. Inv. Mgmt - Quarterly Stock Sales - Dollar Volume March 1997 - April 1998 $800 Class Period: As - •

$600 $30

o P_ a -o g $400 • ...... - $20 s: =- 4 No Pre Class Period Sales 0

$200 ...... $10

$0 $0 M A M J J A S 0 NDJ F M A 1997 1998

Defendant Rick L. Fountain ("Fountain") is Vice President-Technical Services of the Company. During the Class Period and as part of the fraudulent scheme, Fountain sold 21,123 shares of CompUSA stock at prices as high as $31 per share based on inside information, pocketing

$654,790. These sales constituted 33% of the CompUSA stock Fountain actually owned. Fountain's stock sales during the Class Period were unusual in timing and amount, as set forth below:

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CompUSA, Inc. R. Fountain, V.P. Tech. Services - Quarterly Stock Sales - Dollar Volume March 1997 - April 1998 $700 Class Period 540 12/31/97 - 4/29/98

$600

$30 $500 ...... ______

tt $400 --- $20 2 cn 3 $300

0 No Pre Class Period Sales $200 $10

....

$0 $0 MA M J J A SO NDJ F M A 1997 1998

(g) Defendant Robyn Gatch-Priest ("Gatch-Priest") is Vice President, Controller and Assistant Treasurer of the Company. During the Class Period and as part of the fraudulent scheme, Gatch-Priest sold 8,484 shares of CompUSA stock at $32 per share based on inside information, pocketing over $271,000. These sales constituted 55% of the CompUSA stock Gatch- Priest actually owned. Gatch-Priest's stock sales during the Class Period were unusual in timing and amount, as set forth below:

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•

CompUSA, Inc. R. Gatch - Priest, V.P. & Controller - Quarterly Stock Sales - Dollar Volume March 1997 - April 1998

$300 $40 Class Period: 12/31197- 4/29198

$250 $30

11-; $200

-a $150 -- $20 co

Class Period Sales `Co No Pre

8 $100 $10 $50 ...... _ _

so so M A M J J A SO NCI J F MA

1997 1998

(h) Defendant Leslie C. Marshall ("Marshall") is Vice President-Loss Prevention of the Company. During the Class Period and as part ofthe fraudulent scheme, Marshall sold 34,166 shares of CompUSA stock at $33.15 per share based on inside information, pocketing over $1.1 million. These sales constituted 91% of the CompUSA stock Marshall actually owned. Marshall's stock sales during the Class Period were unusual in timing and amount, as set forth below:

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CompUSA, Inc. L. Marshall, V.P. Loss Prevention - Quarterly Stock Sales - Dollar Volume March 1997 - April 1998 $1200 $40

$1000 : $30

-,-,-) $800 4 Class Period: 12131197 - 4/29/98 2.

E $600 . 3z L$20 ID, No Pre Class Period Sales 8 $400 $10 $200

$0 $0 MA M J J A $ 0 N DJ F M A 1997 1998

(i) Defendant Robert S. Seay ("Seay") is Vice President-Technological Training of the Company. During the Class Period and as part of the fraudulent scheme, Seay sold 4,471 shares of CompUSA stock at $31.63 per share based on inside information, pocketing $141,418. These sales constituted 68% of the CompUSA stock Seay actually owned. Seay's stock sales during the Class Period were unusual in timing and amount, as set forth below:

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CompUSA, Inc. • R. Seay, V.P. Tech. Training - Quarterly Stock Sales - Dollar Volume March 1997 - April 1998 $160 $40 Class Period. 12/31/97 - 4/29/98 $140

$120 --

S 8 0 $100 9_ No Pre Class Period Sales

$80 r - $20 -43

$6c1

$40 $10

$20

$0 $0 M A M J J A SO N DJ F M A 1997 1998

12. The individuals named as defendants in ¶11(a)-(i) are referred to herein as the "Individual Defendants." The Individual Defendants, because of their positions with the Company, controlled and/or possessed the power and authority to control the contents of its quarterly and annual reports, press releases and presentations to securities analysts, which information was conveyed through the analysts to the investing public.

- 13 - THE INDIVIDUAL DEFENDANTS' PARTICIPATION IN ISSUING FALSE AND MISLEADING STATEMENTS DURING THE CLASS PERIOD WITH SCIENTER 13. Each of the Individual Defendants is liable for making false statements and for participating in a fraudulent scheme which permitted defendants to sell or dispose of 564,790 shares of CompUSA stock at artificially inflated prices, for $17.6 million in insider-trading profits. Additionally, defendants Halpin, Gatch-Priest, Mondry, Ewert, Greenberg, Seay, Fountain and Marshall are liable for failing to disclose material adverse facts while selling CompUSA stock. 14. Halpin, Skinner, Gatch-Priest, Mondry, Ewert, Greenberg, Seay, Fountain, and Marshall were the top executives of CompUSA. They had daily contact while running CoxnpUSA as "hands-on" managers, dealing with the most important issues facing CompUSA's business, i.e., its sales growth, average selling prices of its PC products, its profit margins, its inventory levels and its financial performance compared to budgeted or forecasted levels. As President, CEO and a director of the Company, defendant Halpin was responsible for and oversaw all operations of the Company, including sales, merchandising, inventory planning and control, marketing, and financial reporting as well as the performance of individual product lines, product demand, inventory levels and mix, production schedules, sales and earning growth, and actual versus budgeted or forecasted results. As Executive Vice President, CFO, Treasurer and Assistant Secretary of the Company, defendant Skinner was responsible for and oversaw all financial matters of the Company, including the overall financial performance of the Company, the performance of individual product lines,

product demand, inventory levels and mix, production schedules, sales and earnings growth, and actual versus budgeted or forecasted results. As Vice President, Controller and Assistant Treasurer of the Company, defendant Gatch-Priest was responsible for and oversaw the preparation of perio dic financial reports, including, inter alia, the calculations made for reserves for excess and obsolete inventory. She was also responsible for the preparation of financial analyses which were distributed to Halpin, Skinner, Mondry, Ewert, Greenberg, Seay, Fountain and Marshall and she supervised all CompUSA financial personnel. As Executive Vice President-Merchandising, defendant Mondry was

responsible for and oversaw product development. He also controlled purchasing decisions,

- 14 - selected, managed and controlled inventory mix, and tracked product demand and monitored sales of all products. As Senior Vice President-Merchandising, defendant Ewert was responsible for tracking purchasing decisions, product demand and sales, and determining and monitoring inventory mix. As Senior Vice President-Inventory Management, defendant Greenberg was responsible for and oversaw, by product category and region, product demand, inventory levels and mix, production schedules and sales. As Vice President-Technological Training, defendant Seay was responsible for developing and overseeing the Company's technical programs and training and working with the technical specialists and salespeople in CompUSA stores, which required him to obtain up-to-date information about which CompUSA products were selling to avoid expending company resources on training for products which had become obsolete. As Vice President-Technical Services, defendant Fountain was responsible for and oversaw technical support services, which required his knowledge of which specific categories of products were in high (and low) inventory. As Vice President, Loss Prevention, defendant Marshall was responsible for tracking inventory levels and minimizing inventory loss by the Company. Because sharply increased sales of the proper mix of PC products at strong profit margins were indispensable elements to CompUSA meeting its internally budgeted and publicly disseminated F98 revenue and EPS forecasts, each of these Individual Defendants constantly monitored each of these key factors affecting CompUSA's business.

15. CompUSA has a highly automated "point-of-sale" management information system which provides instant and detailed information with respect to each store's daily, weekly and monthly performance to the Individual Defendants who were CompUSA's top executives working in the Company headquarters in Dallas, Texas. CompUSA's management information system accumulates data on a per-store basis each time a sale is made of any product, identifying the product and sales price, thus enabling CompUSA's managers to track sales on a per-store basis, as well as

for the entire corporation, on a daily and weekly basis including the precise products which are sold, the amount of remaining inventory of each product and the actual sales price of each product sold, all compared to budgeted and forecasted amounts. Each of the Individual Defendants utilized this

instantaneously available data during the Class Period to constantly and closely monitor the

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performance of each CompUSA store and the overall corporate entity. This was done in part by tracking the sales of each product and the average sales price of the product to determine sales rates, inventory turnover and gross margin. In addition, this data is used to ascertain "product mix" of sales and compare individual store performance and overall corporate performance to budgeted or internally forecasted levels so that during the Class Period each of the Individual Defendants could determine whether or not individual stores and the corporation are falling behind, meeting or exceeding budgeted levels of sales and profits and whether average selling prices of key products are holding to expected levels or falling below expected levels due to weak demand, price competition or other factors. 16. As a result of this sophisticated management information system, unlike some other corporations, each of the Individual Defendants had unusually rapid access to information about CompUSA's business, including changes in trends such as changes in "product mix," slowing sales, declining average selling prices, increasing inventories and individual store, regional or corporate performance falling below budgeted or internally forecasted levels. For instance, as a result of this ultra-sophisticated management information system, even though CompUSA has over 150 retail stores located throughout the United States selling hundreds if not thousands of separate products, it is able to announce its corporate-wide sales (including detailed data about sales compared to budget) and comparative same-store sales (individually and collectively) for a quarter within just 72 hours of the end of the quarter. 17. Because of their top executive positions with CompUSA, their involvement in the day-to-day management of its business, conversations with other corporate officers and employees and their attendance at management meetings, each of the Individual Defendants had access to internal corporate documents concerning the adverse non-public information about the slowing sales of CompUSA's PC products, its declining profit margins and its accumulation of excessive inventories. Each of the Individual Defendants closely monitored the performance of CompUSA's business via reports which CompUSA's Finance Department (under Skinner) and other departments generated on a weekly, monthly and quarterly basis. Specifically, they circulated product sales

reports (detailed by product category and geographic region), including sales versus year-ago reports,

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_ daily, weekly and monthly sales reports showing sales by region and product type, product mix reports, flash reports and average selling prices reports. They also circulated inventory reports, including inventory ledgers, inventory aging reports, inventory turnover analysis reports, and excess and obsolete inventory worksheets. CompUSA's Finance Department also distributed monthly financial statements and reports which included, among other things, income statements which tracked overall margins (in the aggregate and by product) and compared CompUSA's actual financial results to projected results. Thus, each of the Individual Defendants was apprised of the status of sales of every CompUSA product and store, as well as inventories, so that they knew where CompUSA stood in terms of the sale of and demand for its products as well as CompUSA's actual results compared to budget. Thus, each of the Individual Defendants was constantly aware of the current sales rates for CompUSA products, its product mix and its inventories and knew that sales were weakening and that CompUSA had accumulated excessive inventories, that CompUSA was achieving sales and profit margins under internal budget and thus CompUSA's F98 EPS forecasts could not and would not be achieved. 18. Because of CompUSA's sophisticated management information system, the Individual Defendants each knew by 12/31/97 that CompUSA's 3rdQ F98 results would be worse than internally budgeted and forecasted, a below trend-line performance they knew was continuing in 1/98. As a result, by no later than 12/31/97, the Individual Defendants each knew that CompUSA's sales growth was deteriorating significantly, in large part due to a decline in average selling prices of personal computers which, in fact, was significantly worse than CompUSA had publicly disclosed and that, as a result, CompUSA's profit margin, net income and EPS performance during the second half of F98 would be far worse than CompUSA had been forecasting. This, in turn, they knew would result in a substantial decline in CompUSA's stock price when these adverse conditions inside CompUSA's business became publicly known. Thus, shortly after the announcement of CompUSA's financial results for the 2ndQ F98 on 2/1/98, the Individual Defendants took advantage of CompUSA's artificially inflated stock price to sell off 564,790 shares of their CompUSA stock at as high as $33.15 per share, pocketing $17.6 million in insider-trading proceeds.

- 17 - 19. Each of the Individual Defendants also had the motive and the opportunity to make the false statements and perpetrate the scheme described herein. Each of the defendants is liable for making false statements and as a participant in a fraudulent scheme and course of business that operated as a fraud or deceit on purchasers of CompUSA stock, including the making of false and misleading statements and/or concealing of material adverse facts. The fraudulent scheme and course of business: (i) deceived the investing public regarding CompUSA's products and business; (ii) artificially inflated the price of CompUSA's stock and publicly traded options; (iii) caused plaintiffs and other members of the Class to purchase CompUSA stock and options at inflated prices; and (iv) permitted the defendants to sell off 564,790 shares of their Comp -USA stock, pocketing $17.6 million in insider-trading proceeds. Thus, defendants' fraudulent scheme was a success — for them. The Individual Defendants sold 564,790 shares of their CompUSA stock at artificially inflated

prices, pocketing $17.6 million in illegal insider-trading proceeds. BACKGROUND TO THE CLASS PERIOD 20. In late 1996, Monorail, a competitor of CompUSA, introduced a "fall-featured" computer priced at less than $1,000. In early 1997, CompUSA and other manufacturers and retailers began to follow Monorail's lead — offering stripped down, yet still powerful, PCs at prices less than

$1,000. 21. By mid-1997, lower priced PCs began to gain substantial market share. In 8/97, a month popular for back-to-school purchases, PCs costing less than $1,000 accounted for 38.7% of all PCs sold in the industry. During 11/97, the average price of a PC sold at computer retailers and superstores throughout the industry was $1,329, an all-time low, according to a survey done by

Computer Intelligence. 22. During the holiday shopping season in 12/97, PCs costing less than $1,000 represented over 40% of all PCs sold. Only one year earlier, lower priced PCs accounted for less

than 10% of the PC sales in the industry.

23. In 12/97, CompUSA's stock declined sharply from $38 on 12/1/97 to as low as $25- 3/4 on 12/29/97, due to investor concerns that CompUSA and other computer retailers were encountering slowing sales growth of their products and suffering profit margin pressure due to price

- 18 - cutting and increasing sales of lower priced PCs. This sharp price decline eliminated millions of dollars in value of the CompUSA stock owned and stock options held by its insiders. 24. In order to halt the decline in CompUSA stock and to artificially inflate it back up to higher levels so that they could sell off large amounts of -their CompUSA stock, CompUSA's top insiders falsely reassured the securities markets that CompUSA was encountering very strong sales, that its profit margins were intact, the industry's trend toward lower priced PCs was "healthy" for CompUSA's business and that it expected to achieve strong revenue and EPS growth during F98. FALSE AND MISLEADING STATEMENTS ISSUED DURING THE CLASS PERIOD 25. On 12/31/97, CompUSA issued a press release reporting "record sales" for its 2ndQ F98, ended 12/27/97. In fulfilling their responsibilities as CompUSA's top officers, as described in detail in 714-18 and incorporated into this paragraph by reference, defendants Halpin, Skinner, Mondry, Seay, Marshall, Greenberg, Fountain, Ewert and Gatch-Priest prepared and reviewed summaries of CompUSA's quarterly sales results and financial information, knowing and believing that such info would be analyzed and reported by CompUSA's CEO (Halpin) and CFO (Skinner) in the form of the Company's quarterly financial statement and press release. Prior to the issuance of that press release, each of the Individual Defendants discussed what information would be released to the public regarding the Company's second quarter sales. Each of the Individual Defendants was provided with a copy of the draft press release prior to or shortly after its issuance and had the ability and opportunity to prevent its issuance or cause it to be corrected. While the 12/31/97 press release was the collective product of each defendant, it quoted defendant Halpin. It stated: "We reached a milestone in this quarter— over $5 billion in sales for calendar year 1997, in addition to achieving strong second quarter sales, led by a substantial comparable store sales increase," said James F. Halpin, president and chief executive officer. "These accomplishments are a result of our ongoing investment in CompUSA, including opening 14 Computer Superstores (SM), opening five small market stores, and premiering our new Apple® product, 'store within a store' concept." However, as CompUSA's top executives with responsibility for and knowledge of the Company's sales performance, defendants Halpin, Skinner, Gatch-Priest, Mondry, Ewen, Greenberg, Seay,

Fountain, Marshall knew the material, adverse, non-public information about CompUSA's financial

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_ results and then-existing business conditions discussed in ¶32, which were not disclosed and they knew or recklessly disregarded that the contents of the 12/31/97 press release were false or misleading when made. For instance, the Individual Defendants each knew that CompUSA's sales growth was deteriorating significantly, in large part due to a decline in average selling prices of personal computers which, in fact, was significantly worse than CompUSA had publicly disclosed and that as a result, CompUSA's profit margin, net income and EPS performance during the second half of F98 would be far worse than CompUSA had been forecasting. Despite their duty not to sell their CompUSA stock under such circumstances, each of the Individual Defendants, except Skinner, nonetheless did so. 26. In fulfilling their responsibilities as CompUSA's top officers, as described in detail in r14-18 and incorporated into this paragraph by reference, in early 1/98, subsequent to the release of CompUSA's 2ndQ F98 sales, each of the Individual Defendants provided CompUSA's CEO (Halpin) and CFO (Skinner) with information about CompUSA for inclusion in a script to be read to securities analysts who followed the Company. Each of the Individual Defendants conferred with the CEO and/or CFO regarding the content of the subject matter that would be discussed with the analysts. While not all the Individual Defendants spoke words during the conversations and conferences with analysts, each, through their participation in the preparation of the conference - statements became speakers. During these discussions, Halpin and Skinner disseminated the following information to the market by stating: • CompUSA's business was very strong and it was achieving strong sales not only of newer, below $1,000 PCs, but also continuing strong sales of more expensive PCs which carried higher margins. • CompUSA's financial results were not being harmed by the increase in sales of cheaper PCs largely because it was continuing to sell substantial numbers of more expensive PCs which carried higher profit margins. • CompUSA was more insulated from adverse impact on profit margins due to increased sales of $1,000 and under PCs than other PC retailers because CompUSA's business was unique in attracting a larger number of sophisticated computer users and upscale customers who purchased more expensive PCs and associated equipment than unsophisticated users and/or first-time buyers.

• CompUSA's inventories were under tight control and within budgeted and forecasted levels and thus CompUSA would not have to engage in promotional pricing or price cutting to move excess inventory which would otherwise have a negative impact on its margins.

- 20 - • CompUSA's superstore format was doing especially well with strong sales of higher end PCs and inventories under tight control.

• While some computer retailers were finding their profit margins hurt by the upsurge in the sale of $1,000 and under PCs, this was not the case with CompUSA, and in fact this trend was healthy for CornpUSA's business because it was continuing to sell high-end, more expensive PCs while the interest in $1,000 and under PCs was bringing many more shoppers into its stores leading to excitement, revenue increases and purchases of peripheral equipment.

• As a result of the foregoing, CompUSA's business was performing on track and in line with internally forecasted and budgeted levels; CompUSA expected 2ndQ EPS of $.32- $.37, 3rdQ EPS of $.42-$.43, and 4thQ EPS of $ .29-$ .31, leading to F98 EPS of approximately $1 .30-$1 .35. However, as CompUSA's top executives with responsibility for and knowledge of the Company's sales performance, defendants Halpin, Skinner, Seay, Mondry, Marshall, Greenberg, Fountain, Ewert and Gatch-Priest knew the material, adverse, non-public information about CompUSA's financial results and then-existing business conditions discussed in ¶32, which were not disclosed, and they knew or recklessly disregarded that the statements about CompUSA which were made to the analysts were false or misleading when made. For instance, the Individual Defendants each knew that CompTJSA's sales growth was deteriorating significantly, in large part due to a decline in average selling prices of personal computers which, in fact, was significantly worse than CompUSA had publicly disclosed and that as a result, CompUSA's profit margin, net income and EPS performance during the second half of F98 would be far worse than CompUSA had been forecasting. Despite their duty not to sell their CompUSA stock under such circumstances, each of the Individual Defendants, except Skinner, nonetheless did so. 27. On 12/31/97, Gerard Klauer Mattison issued a report on CompUSA, written by Ciccarelli, which was based on and repeated information provided Ciccarelli in conversations with Halpin and Skinner. The report forecast F98 and F99 EPS of $1.35 and $1.70, respectively, for CompUSA and the following quarterly F98 EPS:

Q 1 $ .25A Q2 $ .37 Q3 $ .43 Q4 $ .30 Year $1.35 The report also stated:

-21 - Despite investor concerns over the last few weeks regarding CornpUSA's business in December, the company posted better-than-expected comps of 8.8%. Although the question still remains how much promotional activity was needed to achieve these results, we do not believe the promotional environment was much greater than originally anticipated. Corporate sales were somewhat better than retail, however, which puts some pressure on gross margin. As a result, we are maintaining our 2Q EPS estimate of $0.37 vs. $0.25 • CompUSA is less affected by declining ASPs than many of its peers. The precipitous decline in ASPs has hindered the sales growth of most PC manufacturers and retailers as more units need to be sold just to equal prior year dollar totals. However, we believe CompUSA is more insulated from the decline in ASPs than its consumer electronic counterparts as it still tends to attract more sophisticated PC customers than CE retailers (we believe that the CE retailers still have a greater mix of first time or less sophisticated buyers than Comp USA and have, as a result, been more affected by the strong sales in the sub-$1,000 category). • Excess inventory fears appear unfounded. In our opinion, fears of excess inventory were a primary factor in the recent decline in CPU shares. However, we believe CompUSA manages its inventory as well as any company in the PC distribution industry and CPU would likely only take extra product from vendors if it were given a compelling enough opportunity, in terms of pricing and extended payment terms. INVESTMENT CONCLUSION * * *

Given the company's momentum and our expectation for continued margin expansion, we remain convinced that CompUSA is a compelling, long term, retail growth company. In addition, we believe the company's relatively new BTO business (which got off to a very strong start) could, over time, add substantial incremental revenue and profits. We further believe the stock's pullback in December provides investors with an excellent buying opportunity, especially given the dissipation of fears that the company's fundamentals had softened. 28. On 12/31/97, DLJ Securities issued a report on CompUSA, written by Batter, which was based on and repeated information provided him in conversations with Halpin and Skinner. The report forecast F98 and F99 EPS of $1.30 and $1.60, respectively for CompUSA, and the following quarterly F98 EPS: Q1 $ .25 Q2 $ .35 Q3 $ .42 Q4 $ .29 Year $1.30 The report also stated:

- 22 We continue to believe that CPU is {sic] taken the steps necessary to maintain its position as the leading pure computer retailer and has built a reputable service business that will continue to be a major factor in driving the company's earnings. ... Although CompUSA will not break out the sales, sub-$1000 computers sales continue to be strong and represent by our estimates 35-40% of total PC sales. While this hardware does not carry as high margins as the higher-end computers, it does invite more first time buyers into the stores and creates excitement. In addition, sales for the Pentium II picked up as they moved through the quarter which is an excellent sign heading into 1998. Overall, after what appears now to be an overstated scare in December, the PC industry at the retail level is relatively healthy. Margins should be in line, with several items keeping them harnessed. One, the business mix was weighted heavier toward corporate business which has tighter margins than retail. While this keeps margins lower for the quarter, it is essential as the company continues to make headway in the corporate world so as to build their service business down the road. Two, the company did use this quarter to make some significant investments including new stores and the infrastructure for the new smaller format that is going in some rural locations. 29. On 12/31/97, Credit Suisse First Boston issued a report on CompUSA, written by Yarchover, which was based on and repeated information provided her in conversations with Halpin and Skinner. The report forecast F98 and F99 EPS of $1.34 and $1.65, respectively, for CompUSA, and the following quarterly F98 EPS:

Q1 $ .25A Q2 $ .36 Q3 $ .43 Q4 $ .31 Year $1.34 The report also stated:

We believe sales continue to be strong for high-end machines, the low-end $1,000 PC's, software and peripherals. Services, training, and corporate sales also remain strong, increasing CompUSA's position as a significant competitor in these segments. Going into the next quarter, we think CPU's inventory is in good shape, and we do not think that the company has a material amount of clearance-type merchandise.... While competitors continue to scale back their PC efforts, we think CompUSA is in an excellent position to continue growing and improving its return on capital.

30. On 1/2/98, UBS Securities issued a report on CompUSA, written by Erner, which was based on and repeated information provided her in conversations with Halpin and Skinner. The report forecast F98 and F99 EPS of $1.35 and $1.75, respectively, for CompUSA, and the following quarterly F98 EPS:

- 23 - Q1 $ .25A Q2 $ .37E Q3 $ .43E Q4 $ .30E Year $1.35 The report also stated:

CompUSA reported almost a 9% same-store sales gain for its second quarter, allaying concerns regarding the impact of sub-$1,000 PCs on total sales dollar volume. We believe this lower-price point is attracting first-time buyers that would not previously have shopped in its stores. Furthermore, lower price points may also be working towards shortening the replacement cycle, and encouraging the purchase of more than one computer per household. Since CompUSA is still experiencing strong high-end sales, we do not see sub-$1,000 PCs as detrimental to its business. * * *

CompUSA continued to report strength at both the high end and at the low end of PCs. Sales of the sub-$1,000 PC were strong at the start of the quarter. Pentium II sales picked up later in the period. While declining average selling prices were a factor at the low end, PC prices excluding the sub-$1,000 category seem to be holding up.

31. Based on the extremely positive information defendants disseminated to the market on and after 12/31/97, the precipitous 12/97 decline in CompUSA's stock was halted, and CompUSA stock jumped from $25-3/4 on 12/29/97 to $31-1/2 by 1/5/98.

32. The positive statements about CompUSA's business made in late 12/97 and early

1/98, as set forth in 1125-30, were materially false and misleading when issued, and failed to disclose, inter alia, the following true facts which were then known only to each of the Individual Defendants who had access to and opportunity to review the internal CompUSA data described in 1115-17:

(a) CompUSA's revenue growth was slowing dramatically due to softening demand for PC products generally, combined with an increasing percentage of its sales being composed of much lower priced and therefore much lower margin PC products; (b) Due to price cutting of higher priced PCs and increasing sales of much lower priced PC products, including under $1,000 PCs, CompUSA's profit margins were below internally forecasted or budgeted levels, a negative trend defendants knew was accelerating and would continue for the foreseeable future;

- 24 - (c) The increasing popularity and sales of under $1,000 PCs was not a healthy development for CompUSA's business but in fact a negative development which was adversely affecting CompUSA's revenue growth, profitability and EPS due to the much lower profit margins on the sale of these much less expensive products;

(d) CornpUSA's sales of cheap, under $1,000 PC units was accelerating at the expense of sales of its more expensive and much more profitable PCs which was having an adverse impact on CompUSA's business, revenue growth, profitability and EPS;

(e) CompUSA's business was performing with revenues, net income and EPS below internally budgeted or forecasted levels, a negative trend and condition defendants knew was accelerating and would continue for the next several months;

(f) CompUSA had accumulated excessive levels of slow-moving PC products and accessory items that it would have to sell at highly promotional, 1. e., discounted, prices which would hurt its profit margins in the second half of F98;

(g) CompUSA's inventories were more heavily weighted with higher end Pentium II products, which were not selling nearly as well as the lower end sub-$1000 PCs, leading to an imbalance between the Company's inventory and market demand, which would lead to margin reductions in the future as the Company had to engage in price cutting to move its inventory; and (h) As a result of the foregoing negative factors and conditions impacting CompUSA's business, the Individual Defendants each actually knew the forecasts being made by and on behalf of CompUSA for significantly increased revenue, net income and EPS during the second half of F98 were false and misleading when made as they could not and would not be achieved. 33. On 1/28/98, CompUSA issued a press release reporting its 2ndQ F98 results. In fulfilling their responsibilities as CornpUSA's top officers, as described in detail in 914-18 and incorporated into this paragraph by reference, defendants Halpin, Skinner, Mondry, Seay, Marshall, Greenberg, Fountain, Ewert, and Gateh-Priest prepared and reviewed summaries of CompUSA's quarterly sales results and financial information, knowing and believing that such information would be analyzed and reported by CompUSA's CEO (Halpin) and CFO (Skinner) in the form of the

Company's quarterly financial statement and press release. Prior to the issuance of that press release,

- 25 - „ -

each of the Individual Defendants discussed what information would be released to the public regarding the Company's second quarter sales. Each of the Individual Defendants were provided with a copy of the draft press release prior to or shortly after its issuance and had the ability and

opportunity to prevent its issuance or cause it to be corrected. While the 1/28/98 press release was the collective product of each defendant, it quoted defendant Halpin. It stated: CompUSA Inc. Reports Record Financial Results for the Second Quarter of Fiscal 1998 CornpUSA Inc. America's Largest Computer superstore(R) retailer, today announced record financial results for the second quarter of fiscal 1998. * * *

"This was another outstanding quarter for CompUSA punctuated by excellent results which we achieved while continuing to make significant investments in all of our businesses,” said James F. Halpin, CompUSA president and chief executive officer. However, as CompUSA's top executives with responsibility for and knowledge of the Company's sales performance, defendants Halpin, Skinner, Seay, Mondry, Marshall, Greenberg, Fountain, Ewell, and Gatch-Priest knew the material, adverse, non-public information about CompUSA's financial results and then-existing business conditions discussed in ¶44, which were not disclosed, and they knew or recklessly disregarded that the public statements about CompUSA in the 1/28/98 press release were false or misleading when made. For instance, the Individual Defendants each knew that CornpUSA's sales growth was deteriorating significantly, in large part due to a decline in

average selling prices of personal computers which, in fact, was significantly worse that CompUSA had publicly disclosed and that as a result, CompUSA's profit margin, net income and EPS performance during the second half of F98 would be far worse than CompUSA had been forecasting. Despite their duty not to sell their CompUSA stock under such circumstances, each of the Individual

Defendants, except Skinner, nonetheless did so. 34. In fulfilling their responsibilities as CompUSA's top officers, as described in detail in (11j14-18 and incorporated into this paragraph by reference, on 1/28/98, subsequent to the release of its 2ndQ F98 results, each of the Individual Defendants provided CompUSA's CEO (Halpin) and CFO (Skinner) with information about CompUSA for inclusion in a script to be read to securities

- 26 - analysts who followed the Company. Each of the Individual Defendants conferred with the CEO and/or CFO regarding the content of the subject matter that would be discussed with the analysts. While not all the Individual Defendants spoke words during the conversations and conferences with analysts, each, through their participation in the preparation of the conference statements became speakers. During an analyst conference call — and during follow-up conversations with participants (including Ciccarelli of Gerard Klauer Mattison, Yarchover of Credit Suisse First Boston, Balter of DLJ Securities, Emer of UBS Securities and Lawrence of Morgan Keegan) — Halpin and Skinner disseminated the following information to the market by stating: • CompUSA's business was very strong and it was achieving strong sales not only of newer, below $1,000 PCs, but also continuing strong sales of more expensive PCs which carried higher margins. • CompUSA's financial results were not being harmed by the increase in sales of cheaper PCs largely because it was continuing to sell substantial numbers of more expensive PCs which carried higher profit margins.

• CompUSA was more insulated from adverse impact on profit margins due to increased sales of $1,000 and under PCs than other PC retailers because CompUSA's business was unique in attracting a larger number of sophisticated computer users and upscale customers who purchased more expensive PCs and associated equipment than unsophisticated users and/or first-time buyers. • CompUSA's inventories were under tight control and within budgeted and forecasted levels and thus CompUSA would not have to engage in promotional pricing or price cutting to move excess inventory which would otherwise have a negative impact on its margins. • CompUSA's superstore format was doing especially well with strong sales of higher end PCs and inventories under tight control. • While some computer retailers were finding their profit margins hurt by the upsurge in sale of $1,000 and under PCs, this was not the case with CompUSA and in fact this trend was healthy for CompUSA's business because it was continuing to sell high-end, more expensive PCs while the interest in $1,000 and under PCs was bringing many more shoppers into its stores leading to excitement, revenue increases and purchases of peripheral equipment. • As a result of the foregoing CompUSA's business was performing on track and in line with internally forecasted and budgeted levels; CompUSA expected 3rdQ EPS of $ .42-$.43 and 4thQ EPS of $.29-$.31, leading to F98 EPS of approximately $1.30-$1.35. However, as CompUSA's top executives with responsibility for and knowledge of the Company's sales performance, defendants Halpin, Skinner, Gatch-Priest, Mondry, Ewell, Greenberg, Seay, Fountain and Marshall knew the material, adverse, non-public information about CompUSA's financial results and then-existing business conditions discussed in '144, which were not disclosed

-27- and they knew or recklessly disregarded that the public statements about CompUSA made in the 1/28/98 conference call and in follow-up discussions were false or misleading when made. For instance, the Individual Defendants each knew that CompUSA's sales growth was deteriorating significantly, in large part due to a decline in average selling prices of personal computers which, in fact, was significantly worse that CompUSA had publicly disclosed and that as a result, CompUSA's profit margin, net income and EPS performance during the second half of F98 would be far worse than CompUSA had been forecasting. Despite their duty not to sell their CompUSA stock under such circumstances, each of the Individual Defendants, except Skinner, nonetheless did so. 35. After the issuance of CompUSA's 1/28/98 release and conference call, the positive information presented by each of the Individual Defendants was reinforced by a statement made by Halpin which appeared in the Pittsburgh Post-Gazette on 2/1/98. Halpin described the effect that the industry trend toward lower priced PCs was having on CompUSA as follows: "We believe it's healthy for our business. At the time Halpin made this statement, he knew it was misleading in that it contained misrepresentations and failed to disclose material facts necessary in order to make it not misleading for the reasons discussed in detail in 144(a)-(h) which is incorporated into this paragraph by reference. 36. On 1/28/98, Gerard Klauer Mattison issued a report on CompUSA, written by Ciccarelli, which was based on and repeated information provided him in the 1/28/98 conference call and in follow-up conversations with Halpin and Skinner. The report forecast F98 and F99 EPS of $1.35 and $1.70, respectively, for CompUSA, and the following quarterly F98 EPS:

Q1 $ .25A Q2 $ .36A Q3 $ .43 Q4 $ .31 Year $1.35 The report also stated: • Sales trends continue to track recent history. Corporate sales continue to outpace retail sales and services continue to be the fastest growing part of the business. For actual CPUs, the company is still experiencing a barbell pattern for

-28-

_ pricing with the strength coming from both the high-end and the sub-$1,000 category, while sales of mid-level machines are relatively softer.

• Gross margin continues to expand. Gross margin equaled 1Q's level at 14.7% and up 80 basis points year-over-year. We expect to see continued gross margin expansion due to the strength CompUSA's high-margin services as well as a generally less competitive environment (promotional activity has softened dramatically, as expected, now that the holiday selling season is over). * * *

INVESTMENT CONCLUSION In our opinion, CompUSA is an excellent long term investment and offers investors a very favorable risk/reward opportunity at current levels. We believe the company continues to gain market share at the retail level and increase its penetration into the direct channel, while its growing service businesses continue to drive margin expansion. We further believe that the company will continue to experience additional gross margin expansion from a decreasingly competitive environment. 37. On 1/28/98, Credit Suisse First Boston issued a report on CompUSA, written by Yarchover, which was based on and repeated information provided her in conversations with Halpin and Skinner. The report forecast F98 and F99 EPS of $1.34 and $1.65, respectively, for CompUSA, and the following quarterly F98 EPS:

Q1 $ .25A Q2 $ .36A Q3 $ .43 Q4 $ .31 Year $1.34 The report also stated: The big question on everyone's mind has been settled — CompUSA managed to grow sales and earnings. This quarter's results are particularly impressive in a selling season that was marked by big promotions at the end of the quarter, strong sales of the lower margin $1000 PC's, and significant reinvestments in the business. We think CPU's strong sales growth of 22% and earnings growth of 44% should give investors comfort that the company has found a way to do what few other computer retailers (and especially mass merchants and consumer electronics chains) have been able to do — make money selling computers. While competitors continue to scale back their PC efforts, we think CompUSA is in an excellent position to continue growing and improving its return on capital. ... All-in-all, CompUSA's future looks bright. * * *

Highlights * * *

- 29 -

Going into the next quarter, we think CPU's inventory is in good shape, and we do not think that the company has a material amount of clearance-type merchandise. .. For the year, we project sales growth of 23% driven by 6.5% comparable store sales growth and the opening of 32 large format stores and 5 small format stores. From a product mix standpoint, we expect the sub-$1000 PC's and the very high-end systems to continue strong .... * * *

The build-to-order CompUSA branded PC appears to be selling well. After some initial challenges, management believes it has a strong business model and a workable infrastructure. 38. On 1/29/98, DU Securities issued a report on CompUSA, written by Baiter, which was based on and repeated information provided him in the 1/28/98 conference call and in follow-up conversations with Halpin and Skinner. The report forecast F98 and F99 EPS of $1.30 and $1.60, respectively, for CompUSA, and the following quarterly F98 EPS:

Q1 $ .25 Q2 $ .36 Q3 $ .42 Q4 $ .29 Year $1.30

The report also stated: In the face of all the concerns of a difficult Christmas, CompUSA put up strong earnings for its second quarter. ... We continue to believe that CPU is taking the steps necessary to maintain its position as the leading computer retailer and has built a reputable service business that will continue to be a major factor in driving the company's earnings. * * *

The company also made considerable investment in its BTO business. After coming out of the gate perhaps too fast, CPU used this quarter to catch the infrastructure up to the burgeoning demand. It plans to increase its advertising over the next year to continue to bolster this business. ... Sub-$1000 computers sales continue to be strong and represent by our estimates 35-40% of the total PC sales. While this hardware does not carry as high margins as the higher-end computers, it does invite more first time buyers into the stores and creates excitement. In addition, sales for the Pentium IT picked up as they moved through the quarter which is an excellent sign heading into 1998. Overall, after what appears now to be an overrated scare in December, the PC industry at the retail level is relatively healthy.

39. On 1/29/98, UBS Securities issued a report on CompUSA, written by Erner, which was based on and repeated information provided her in the 1/28/98 conference call and in follow-up

- 30 -

conversations with Halpin and Skinner. The report forecast F98 and F99 EPS of $1.35 and $1.75, respectively, for CompUSA, and the following quarterly F98 EPS:

Q 1 $ .25A Q2 $ .36A Q3 $ .42E Q4 $ .32E Year $1.35 The report also stated: Earnings growth outpaced sales growth for the 13th consecutive quarter. ... PC sales were strong at the high and low end and average selling prices declined less than last quarter...... Inventory is current with Pentium IIs making up a large part of the high-end inventory. * * *

Product outlook is exciting. High-end Pentium II PCs have been selling very well in the last five weeks. We expect sub-$1000 PCs and bundled systems to continue to attract new customers. 40. On 1/29/98, Morgan Keegan issued a report on CornpUSA, written by Lawrence, which was based on and repeated information provided him in the 1/28/98 conference call and in follow-up conversations with Halpin and Skinner. The report forecast F98 EPS of $1.32 for CompUSA, and the following quarterly F98 EPS:

Q 1 $ .25A Q2 $ .36A Q3 $ .42E Q4 $ .30E Year $1.32 The report also stated: Although average selling prices have been coming down margins should not be affected. Most sub $1,000 units bring in shoppers who tend to be first time buyers. These same individuals often purchase several hundred dollars of high margin accessories. CompUSA's superior selection and value added service capabilities keep these customers coming back to purchase new software and accessories. ... Nineteen new stores have been opened in the first half bringing total store count to 148.

41. On 2/12/98, Salomon Smith Barney issued a report on CompUSA, written by McGrath, which was based on and repeated information provided him during the 1/28/98 conference

- 31 -

- call and in follow-up discussions with Halpin and Skinner. The report forecast F98 and F99 EPS

of $1.33 and $1.65, respectively, for CompUSA, a 28% five-year EPS growth rate and the following F98 quarterly results: EPS/1998

Q 1 $ .25A Q2 $ .36A Q3 $ .43E Q4 $ .29E Year $1.33E The report also stated: Built-to-suit business is still in early stages; the company will spend more to market private-label products in the second half of fiscal 1998. Otherwise, corporate is still stronger than retail, and services remains the fastest-growing segment. Hardware product pricing is down, but significantly less so than for the industry, overall. Sub-$1,000 PC sales are good, and so is consumer upgrade business. 42. On 2/24/98, Prudential Securities issued a report on CompUSA, written by Katica. As this was Prudential's first report on CompUSA, this report was written only after Katica had extensive detailed discussions with Halpin and Skinner and was based on and repeated infoimation provided him by them during the 1/28198 conference call and in other conversations. The report forecast F98 and F99 EPS of $1.32 and $1.65, respectively, for CompUSA, a 20%-25% five-year growth rate and the following F98 quarterly results: EPS/1998 Q1 $ .25E Q2 $ .36E Q3 $ .42E Q4 $ .30E Year $1.32E The report designated CompUSA as Prudential's "Single Best Idea" and stated: Multi-Channel Strategy Creates High Productivity And Return On Investment. CompUSA has become the largest and most highly profitable dedicated personal computer retailer by expanding its target market beyond the traditional retail store. Today, retail represents about 60% of total sales while non-retail markets (corporate, government and education), training, technical service, and mail-order account for about 40% of sales. This combination allows CompUSA to generate impressive sales per foot of $1,400 and an unleveraged return on equity of 27% for the last twelve months. Industry Expansion And Higher Non-Retail Sales Driving Earnings Growth. We expect total sales and earnings to grow 20%-25% annually over the next five

-32-

_ . ,

years, fueled by ongoing store expansion and 5%-6% increases in same store sales. ..

Demand For Personal Computers And Related Products Remains Strong. 43. During 2/98, CompUSA stock moved higher, reaching $35-1/8 on 2/27/98 and its Class Period high of $35-3/8 on 3/2/98, the next trading day. During 2/2/98-2/23/98 — just 16 trading days — the Individual Defendants, CompUSA's top executives, sold 564,790 shares of CompUSA stock at as high as $33.15 per share pocketing $17.6 million in illegal insider-trading proceeds. 44. Each of the positive statements about CompUSA's business during the Class Period made between 1/28/98-2/24/98, as set forth in T533-42, was materially false and misleading when issued, and failed to disclose, inter alia, the following adverse information which was then known only to each of the Individual Defendants who had access to and opportunity to review the internal CompUSA data described in 11115-17: (a) CompUSA's revenue growth was slowing dramatically due to softening demand for PC products generally combined with an increasing percentage of its sales being composed of much lower priced and therefore much lower margin PC products;

(b) Due to increasing sales of much lower priced PC products, including under $1,000 PCs, Comp-USA's profit margins were below internally forecasted or budgeted levels, a negative trend defendants knew was accelerating and would continue for the foreseeable future;

(e) The increasing popularity and sales of under $1,000 PCs was not a healthy development for CompUSA's business, but in fact a negative development which was adversely affecting CompUSA's revenue growth, profitability and EPS due to the much lower profit margins on the sale of these much less expensive products;

(d) CompUSA's sales of cheap, under $1,000 PC units was accelerating at the expense of sales of its more expensive and much more profitable PCs which was having an adverse impact on CompUSA's business, revenue growth, profitability and EPS;

(e) CompUSA's business was performing with revenues, net income and EPS below internally budgeted or forecasted levels, a negative trend and condition defendants knew was

accelerating and would continue for the next several months;

- 33 - ,

(f) CompUSA had accumulated excessive levels of slow-moving PC products and accessory items that it would have to sell at highly promotional, i.e., discounted, prices which would hurt its profit margins in the second half of F98;

would not be achieved. 45. On 3/4/98, CompUSA stock traded as high as $33-7/16. On 3/5/98, just eight trading days after CompUSA's insiders had completed their insider-selling spree, CompUSA stock was twice halted from trading and ultimately plunged to $26 per share on volume of over 9 million shares (the largest one-day volume in CompUSA's history as a public company up to that date) as it leaked into the market that CompUSA was about to make a negative announcement about its 3rdQ F98 results. After the close, CompUSA revealed that it expected lower 3rdQ F98 sales than earlier forecast.

46. Then on 4/1/98, CompUSA revealed that its 3rdQ F98 sales fell from the prior quarter, due in part to a 6% decline in sales per superstore, which would lead to a lower than expected 3rdQ F98 EPS. CompUSA revealed that gross margins would be approximately 14.1%, lower than in any quarter in the past year. CompUSA also indicated that these adverse conditions would continue during the 4thQ F98 resulting in lower margins and EPS at least one-third lower than earlier forecast for the 3rdQ and 4thQ of F98. CompUSA stock plunged from $26-7/16 on 3/31/98 to $20-1/2 on 4/1/98 on volume of 10.1 million shares — the largest one-day volume in CompUSA's

history as a public company.

47. On 4/29/98, the Company officially announced its third quarter results, confirming its prior announcement on 4/1/98 and indicating that net income fell 22% from the same period of

- 34 -

fiscal 1997. Despite defendants' representations during the Class Period that the industry's trend

toward lower priced PCs was "healthy" for CompUSA's business, they now revealed that because more of the computers CompUSA sold were models costing less than $1,000, profits sank to $25.4 million ($0.27 per share) from $32.7 million ($0.35 per share). Furthermore, although the Company previously represented that comparable same-store sales would be flat, it now stated that the comparable same-store sales would likely be negative based on continued weak sales. The Company also revealed that business conditions would remain weak in the 4thQ F98. CompUSA's stock fell to $17-3/16. Subsequent to the end of the Class Period, CompUSA's business has continued to deteriorate. On 8/12/98, the Company reported a net loss for the 4thQ F98 of $51.4 million, or $0.57 per share, compared with net income of $22.9 million or $0.24 per share, for the same period of fiscal 1997. A non-recurring amortization charge related to the Company's plan to implement a new information technology strategy was included in the net loss for that quarter. Excluding that charge, the net loss for the fourth quarter was $17.1 million, or $0.19 per share. Once again, in 8/99, CompUSA posted a net loss for the 4thQ F99 of $64.5 million, or $.70 per share, which reportedly reflected a restructuring that called for the elimination of direct-sales organizations in each CompUSA store, and the consequent loss of 2,300 jobs in the Company's commercial sales unit. INSIDER SELLING 48. While CompUSA's top insiders were issuing favorable statements about CompUSA, the Individual Defendants sold 564,790 shares of CompUSA stock, for more than $17.6 million 41% of their collective holdings of CompUSA stock— to personally profit from the artificial inflation in CompU SA's stock price which their fraudulent scheme had created. Notwithstanding their access to confidential information as a result of their status as directors, officers and/or insiders of the Company, and their corresponding duty to disclose adverse material facts before trading in CompUSA stock, the Individual Defendants sold significant amounts of CompUSA shares at artificially inflated prices in order to profit from the fraud, and did so while in possession of material non-public information. Defendants' insider selling during the Class Period is detailed below:

% OF PRICE SHARES DATE SHARES PER PROCEEDS OWNED OPTION

- 35 -

T - • n -

. .

NAME SOLD SOLD SHARE FROM SALE SOLD SHARES PRICE Ewert 02/06/98 6,700 $31.91 $ 213,797 02/09/98 3,300 832.00 $ 105,600 02/18/98 5,000 832.00 $ 160,000 02/19/98 5 000 $32.00 $ 160,000 20 000 8 639,397 21%

Fountain 01/28/98 11,104 $ 3.19 02/02/98 73 830.68 $ 2,240 02/02/98 21 050 831.00 $ 652,550 21 123 $ 654,790 33% 11,104

Gatch- 02/19/98 8,484 $32.00 $ 271,488 Priest 02/26/98 1,723 $ 8.84 02/26/98 4,000 $ 3.19 02/26/98 1,880 $ 6.19 02/26/98 881 $20.50 8 484 $ 271,488 55% 8 484

Greenberg 02/06/98 16 546 $32.00 $ 529,47 79%

Halpin 02/01/98 120,000 $ 3.19 02/04/98 160,000 $ 4.91 02/04/98 280,000 $31.00 8 8,680,000 02/05/98 54,500 $31.25 $ 1,703,125 02/05/98 25,000 831.00 $ 775,000 02/05/98 500 831.31 $ 15,655 360 000 811,173,780 56% 280,000

Marshall 02/17/98 2,668 $ 4.91 02/17/98 28,832 8 3.19 02/17/98 2,666 8 8.84 02/23/98 34,166 $33.15 81,132,603 91% 34 166 $1,132,603 34,166

Mondry 02/04/98 10,000 830.63 $ 306,300 02/09/98 20,000 $31.00 $ 620,000 02/09/98 10,000 $31.63 $ 316,300 02/09/98 10,000 831.56 $ 315,600 02/10/98 15,000 831.50 $ 472,500 02/11/98 35 000 $31.50 81,102,500 100,000 83,133,200 20%

Seay 02/03/98 1,335 84.03 02/03/98 1,803 83.19 02/03/98 1,333 88.82 02/21/98 4 471 $ 141,418 4A2]. 831.63 $ 141,418 68% 4A21

TOTALS: 564.790 817,676,148

49. Each Individual Defendant who exercised options to purchase CompUSA stock

during the Class Period sold a majority of the CompUSA stock acquired by option exercise. During

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2/2/98-2123/98 — just 16 trading days — the top CompUSA executives named as defendants sold 564,790 shares of CompUSA stock at as high as $33.15 per share pocketing $17.6 million in illegal insider-trading proceeds. On 3/4/98, CompUSA traded as high as $33-7/16. On 3/5/98, just eight trading days after CompUSA's insiders had completed their insider-selling spree, CompUSA stock was twice halted from trading and ultimately plunged to $26 on volume of over 9 million shares (the largest one-day volume in CompUSA's history as a public company up to that point) as it leaked into the market that CompUSA was about to make a negative announcement about its 3rdQ F98 results. After the close, CompUSA revealed that it expected much lower 3rdQ F98 sales than earlier forecast. 50. Defendants insider selling during the Class Period is summarized below:

% of Shares Shares Actually Owned Defendants Sold Proceeds Sold

Ewert 20,000 $ 639,397 21% Fountain 21,123 $ 654,790 33% Gatch-Priest 8,484 $ 271,488 55% Greenberg 16,546 $ 529,472 79% Halpin 360,000 $11,173,780 56% Marshall 34,166 $ 1,132,603 91% Mondry 100,000 $ 3,133,200 20% Seay 4,471 $ 141,418 68% TOTALS: 564,790 $17,676,148 41%

51. During 2/98, while CompUSA's top insiders were unloading 564,790 shares of their CompUSA stock at prices as high as $33.15, they were using millions of dollars of CompUSA's own

funds to repurchase shares of CompUSA stock on the open market to help artificially inflate the stock while they were unloading their own shares, thus boosting their illegal insider-trading profits. It was manipulative and deceptive for CompUSA's insiders to do this as they were engaging in conduct as fiduciaries for CompUSA which was inconsistent with their conduct on their own behalf

and for their own account, i.e. , they were selling their own CompUSA stock knowing the stock was artificially inflated and would soon collapse in price when they were forced to reveal the

deteriorating condition of CompUSA's business and yet were causing CompUSA to purchase

thousands of shares of its own stock on the open market which they knew would result in CornpUSA

- 37 - suffering a substantial loss on those purchases, but which they caused CompUSA to do because those purchases helped to keep CompUSA stock artificially inflated in the open market while they unloaded their own shares. Thus, while the CompUSA insiders named as defendants in this action were unloading 564,790 shares of their CompUSA stock at as high as $33.15 per share, pocketing over $17.6 million in illegal insider-trading profits, they caused CompUSA to purchase over 150,000 shares of its common stock on the open market, causing CompUSA to suffer millions in losses on those stock repurchases, but helping themselves pocket millions in insider-trading profits. FIRST CLAIM FOR RELIEF For Violation Of Section 10(b) Of The 1934 Act And Rule 10b-5 Against All Defendants 52. Plaintiffs incorporate 111111-51 by reference. 53. Each of the defendants: (a) knew or recklessly disregarded the material, adverse, non- public information about CompUSA's financial results and then-existing business conditions, which was not disclosed; and (b) participated in drafting, reviewing, and/or approving the misleading statements, releases, reports, and other public representations of and about CompUSA. 54. During the Class Period, defendants disseminated or approved the false statements specified above, which they knew or recklessly disregarded were misleading in that they contained misrepresentations and failed to disclose material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading. 55. Defendants violated §10(b) of the 1934 Act and Rule 10b-5 in that they: (a) Employed devices, schemes, and artifices to defraud; (b) Made untrue statements of material facts or omitted to state material facts necessary in order to make statements made, in light of the circumstances under which they were made, not misleading; or

(c) Engaged in acts, practices, and a course of business that operated as a fraud or deceit upon plaintiffs and others similarly situated in connection with their purchases of CompUSA common stock and publicly traded options during the Class Period.

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56. Plaintiffs and the Class have suffered damages in that, in reliance on the integrity of the market, they paid artificially inflated prices for CompUSA stock. Plaintiffs and the Class would not have purchased CompUSA stock at the prices they paid, or at all, if they had been aware that the market prices had been artificially and falsely inflated by defendants' misleading statements. SECOND CLAIM FOR RELIEF For Violation Of Section 20(a) Of The 1934 Act Against Defendants Halpin and CompUSA 57. Plaintiffs incorporate Irlfl -56 by reference. 58. Defendant Halpin acted as a controlling person of CompUSA within the meaning of §20(a) of the 1934 Act. By reason of his positions as President, Chief Executive Officer and a director of CompUSA and general partner in CompUSA ls largest partner, he had the power and authority to cause CompUSA to engage in the wrongful conduct complained of herein. CompUSA controlled each of the Individual Defendants and all of its employees. 59. By reason of such wrongful conduct, Halpin and CompUSA are liable pursuant to §20(a) of the 1934 Act. As a direct and proximate result of these defendants' wrongful conduct, plaintiffs and the other members of the Class suffered damages in connection with their purchases of CompUSA common stock and publicly traded options during the Class Period. CLASS ACTION ALLEGATIONS 60. Plaintiffs bring this action as a class action pursuant to Federal Rule of Civil Procedure 23(a) and (b)(3) on behalf of all persons who purchased CompUSA stock and options (the "Class") on the open market during the Class Period. Excluded from the Class are defendants herein, members of their immediate families, any entity in which a defendant has a controlling interest, and the legal representatives, heirs, successors-in-interest, or assigns of any excluded party.

61. The members of the Class are so numerous that joinder of all members is impracticable. The disposition of their claims in a class action will provide substantial benefits to the parties and the Court. During the Class Period, CompUSA had more than 25 million shares of stock outstanding as well as publicly traded options, owned by hundreds if not thousands of persons.

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62. There is a well-defined community of interest in the questions of law and fact involved in this case. The questions of law and fact common to the members of the Class which predominate over questions which may affect individual Class members include the following: (a) Whether the federal securities laws were violated by defendants;

(b) Whether defendants omitted and/or misrepresented material facts; (c) Whether defendants statements omitted material facts necessary to make the statements made, in light of the circumstances under which they were made, not misleading; (d) Whether defendants knew or had reasonable grounds to believe that their statements were false and misleading;

(e) Whether the price of CompUSA stock was artificially inflated during the Class Period; and

(f) The extent of damage sustained by Class members and the appropriate measure of damages. 63. Plaintiffs' claims are typical of those of the Class because plaintiffs and the Class sustained damages from defendants' wrongful conduct. 64. Plaintiffs will adequately protect the interests of the Class and have retained counsel who are experienced in class action securities litigation. Plaintiffs have no interests which conflict with those of the Class.

65. A class action is superior to other available methods for the fair and efficient adjudication of this controversy. 66. The prosecution of separate actions by individual Class members would create a risk of inconsistent and varying adjudications. STATUTORY SAFE HARBOR

67. The statutory safe harbor provided for forward-looking statements under certain circumstances does not apply to any of the allegedly false forward-looking statements pleaded in this Complaint because the statutory safe harbor does not apply to CompUSA's financial statements and

because none of the particular oral forward-looking statements pleaded herein were specifically

identified as "forward-looking statements" when made. None of the written forward-looking

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_ statements made were specifically identified as forward-looking statements and none o f the false and misleading statements contained in the press releases or news article are forward-looking projections or forecasts, but rather statements of past financial data or present-tense business conditions. Nor was it stated as to either type of forward-looking statement that actual results "could differ materially from those projected." Nor did "meaningful cautionary statements" identifying important factors that could cause actual results to differ materially from those in the forward-looking statements accompany those forward-looking statements. In any event, each of the forward-looking statements alleged herein was authorized by an executive officer of CompUSA and was actually known by each of the Individual Defendants to be false when made. BASIS OF ALLEGATIONS 68. Because the PSLRA, §21D(c) of the 1934 Act [15 U.S.C. §78u-4(c)], requires complaints to be pleaded in conformance with Federal Rule of Civil Procedure 11, plaintiffs have alleged the foregoing based upon the investigation of their counsel, which included a review of CompUSA's SEC filings, securities analysts reports and advisories about the Company, press releases issued by the Company, media reports about the Company, private investigations and discussions with consultants, and, pursuant to Rule 11(b)(3), believe that after reasonable opportunity for discovery, substantial evidentiary support will likely exist for the allegations set forth at 72, 25-26, 32-35 and 44. PRAYER FOR RELIEF WHEREFORE, plaintiffs pray for judgment as follows: 1. Declaring this action to be a proper class action pursuant to Rule 23(a) and (b)(3) of the Federal Rules of Civil Procedure on behalf of the Class defined herein; 2. Awarding plaintiffs and the members of the Class compensatory damages, including rescissory damages, where applicable; 3. Awarding plaintiffs and the members of the Class pre-judgment and post-judgment interest, as well as reasonable attorneys' fees, expert witness fees, and other costs; 4. Awarding extraordinary, equitable, and/or injunctive relief as permitted by law, equity, and federal statutory provisions sued hereunder, including rescission, the imposition of a•

- 41 - constructive trust upon the proceeds of defendants insider trading, pursuant to Rules 64, 65, and any appropriate state law remedies; and

5. Awarding such other relief as this Court may deem just and proper. JURY DEMAND Plaintiffs demand a trial by jury.

DATED this 20th day of September, 1999. STANLEY, MANDEL & IOLA, L.L.P. MARC R. STANLEY Texas State Bar No. 19046500 ROGER L. MANDEL Texas State Bar No. 128.91750 4141 alb Y MARC S. ST :7111111.F 3100 Monticello Avenue, Suite 750 Dallas, TX 75205 214-443-4300 214-443-0358 (Fax) LIAISON COUNSEL FOR PLAINTIFFS MILBERG WEISS BERSHAD HYNES & LERACH LLP WILLIAM S. LERACH California Bar No. 68581 KIRK B. HULETT California Bar No. 110726 KATHERINE L. BLANCK California Bar No. 149110 600 West Broadway, Suite 1800 San Diego, CA 92101 619-231-1058 619-231-7423 (Fax) MILBERG WEISS BERSHAD HYNES & LERACH LLP KAREN T. ROGERS California Bar No. 185465 355 South Grand Avenue, Suite 4170 Los Angeles, CA 90071 213-617-9007 213-617-9185 (Fax)

- 42 - SCHIFFRIN & BARROWAY, LLP RICHARD S. SCHIFFRIN Pennsylvania Bar No. 61872 ANDREW L. BARROWAY Pennsylvania Bar No. 64477 MARC A. TOPAZ Pennsylvania Bar No. 63782 Three Bala Plaza East, Suite 400 Bala Cynwyd, PA 19004 610-667-7706 610-667-7056 (Fax) CO-LEAD COUNSEL FOR PLAINTIFFS

NADOCSAP1463.11Pleading \Second Amended Petition.vvpd

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CERTIFICATE OF SERVICE The undersigned hereby certifies that true and correct copies of the foregoing were served on the 20th day of September, 1999, on the following counsel of record:

Mr. Thomas R. McCormick El via certified mail, return receipt requested Mr. William L. Banowsky via fax # 214-969-1751 THOMPSON & KNIGHT, P.C. via first-class, U.S. mail 1700 Pacific Avenue, Ste. 3300 0 Dallas, TX 75201 0 via overnight delivery Z via hand delivery

Mr. Larry R. Veselka o via certified mail, return receipt requested Mr. Lee L. Kaplan 0 via fax # 713-221-2320 SMYSER, KAPLAN & VE5E-LICA, L.L.P. via first-dass, U.S. mail 700 Louisiana, Ste. 2300 Houston, TX 77002 0 via overnight delivery O via hand delivery D via certified mail, return Mr. Harvey Greenfield receipt requested LAW FIRM OF HARVEY GR.EENFIELD 0 via fax # 212-679-9820 10 East 40th Street, 44th Floor 10 via first-class, U.S mail New York, NY 10016 0 via overnight delivery 0 via hand delivery

Aid/1 kiALL-4 / • „ • IVIARC R. TANLEY

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