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

moms u. S. DiSTR/CT COURT NORTHERN DISTRICT OF TEXAS FILED

3 I 1998 I i

UNITED STATES DISTRICT COURT 'N !ERTY • LERK NORTHERN DISTRICT OF TEXAS EY DALLAS DIVISION MP" Deputy

FREDERICK HOECK, On Behalf of Himself and All Others Similarly ) N°' 3 - • 8 0 VO 9 9 8 G Situated, ) COMPLAINT - CLASS ACTION ) Plaintiff, ) ) COMPLAINT FOR VIOLATIONS OF vs. ) THE SECURITIES EXCHANGE ACT ) OF 1934 COMPUSA, INC., JAMES F. HALPIN, ) ROBERT S. SEAY, LAWRENCE N. MONDRY, ) LESLIE C. MARSHALL, HAROLD D. ) GREENBERG, RICK L. FOUNTAIN, PAUL ) F. EWERT, ROBYN GATCH-PRIEST and ) JAMES E. SKINNER, ) ) Defendants. ) Plaintiff Demands A ) Trial By Jury -

, 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 3/5/98, against CompUSA and certain of its top insiders. CompUSA's stock declined sharply from $38 on 12/1/97 to $25-3/4 on 12/29/97 -- 32% -- due to investor concerns that CompUSA and other computer retailers were encountering slowing sales growth and suffering profit margin pressure due to price cutting and increased sales of lower priced PCs. 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 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 told the securities markets that CompUSA was encountering very strong sales of its more expensive higher margin PCs, that its profit margins were intact, the industry's trend toward lower priced PCs was "healthy" for CompUSA i s business and CompUSA expected to achieve strong revenue and EPS growth during 98, with 98 earnings per share ("EPS") of at least $1.35. As a result of these assurances, CompUSA i s stock rebounded strongly during early 98, climbing to a high of $35-3/8 by 3/2/98. As CompUSA stock climbed to these artificially inflated levels, 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

-1- , dcquired via option exercise during the Class Period, pocketing $17.6 million in illegal insider-trading proceeds. 3. On 3/4/98, CompUSA traded as high as $33-7/16. On 3/5/98, lust 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. 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 a lower than expected 3rdQ F98 BPS. 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 3/31/98 to $20-1/2 on 4/1/98 on 10.1 million shares volume -- the largest one-day stock volume in CompUSA's history as a public company. These events are evidenced by the following stock chart:

// // // // //

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CompLISA, Inc.

December 1, 1997 - April 17, 1998 Daily Stock Prices vs S&P Retail Composite Index 40

S&P Retail Composite

35— , . • . .

CompUSA -c 3O— (13 a) a. co

-5 25 — Feb 2-23, 1998 0 Insiders sell 605,322 shares for $19,175,559

20 —

15 I 12/01/97 12/26/97 01/23/98 02/19198 03/17/98 04/13/98

12/12/97 01/09/98 02/05/98 03/04/98 03/30/98

4. Defendants' insider trading was unusual in timing and

amount, as shown below:

%. of Shares Shares Actually Owned Defendants Sold Proceeds Sold Fwert 20,000 $ 639,397 21%. Fountain 21,123 $ 654,790 33% Catch-Priest 8,484 $ 271,488 55%. Greenberg 16,546 $ 529,472 7996 Halpin 360,000 $11,173,780 5696 Marshall 34,166 $ 1,132,603 919g Mondry 100,000 $ 3,133,200 2096- Seay 4,471 $ 141,418 68% TOTALS: 564 790 $17,676,148 419g

—3-

CompUSAI Inc. Quarterly Stock Sales By Defendants - Dollar Volume March 1997 - March 1998 $20 $40 Class Period: I 12131f97 - 315198

$15 - - - - $30

IT)

2-- a E $10 - - $20 3,3 o 0)

$5 $10

Pre Class Peliod Sales

$0 $0 MAMJJASONDJ F M A 1997 1998 JURISDICTION AND VENUE 5. Jurisdiction is conferred by §27 of the Securities Exchange Act of 1934 ("1934 Act"). The claims asserted herein arise under S§10(b) and 20(a) of the 1934 Act and Rule 10b-5. 6. 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 7. Plaintiff Frederick Hoeck purchased shares of CompUSA common stock as described in the attached certification and was damaged thereby. 8. 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

-4-

Company's executive offices are in Dallas, Texas. CompUSA's common stock trades in an efficient market on the New York Stock Exchange. 9. (a) Defendant James F. Halpin ("Halpin") is President, Chief Executive 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:

CompUSA, Inc. J. Halpin, Pres. CEO - Quarterly Stock Sales - Dollar Volume March 1997 - March 1998

$12 Class Penod: $40 12/31197 - 3/519:

$10 $30

c $8

CD $6 - - $20 -43

7- > No Pre Class Period Sales Fe' 75 $4_ 0 I $10

$0 $0 M A M J J A SO ND J F M A 1997 1998

• -5- - —

(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 $31.63 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:

CompUSA, Inc. L. Mondry, V.P. Merch. - Quarterly Stock Sales - Dollar Volume March 1997 - March 1998 $3500 $40 Class Period 12/31197 - 3/5198 $3000 ------

$30 $2500 - - -

37a. 0

69' $2000 - - - - _ a No Pre Class Period Sales $20 13 > $1500 - - - _ _ _

$1000 $lo

$500

so $0 M A M J J A SO NDJ F M A

1997 1998

—6- f (c) Defendant Paul F. Ewert ("Ewert") is Senior Vice President-Merchandising 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% of the CompUSA stock Ewert actually owned. Ewert's stock sales during the Class Period were unusual in timing and amount, as set forth below:

CompUSA, inc. P. Ewert, S.V. P. Merchandising - Quarterly Stock Sales - Dollar Volume March 1997 - March 1998 $700 $10 Class Period 12/31197- 315/98

$600 - -

$30 $500

- a $20 SI; > $300 - CD No Pre Class Period Sales a 0 $200 $10 I 5100- L 1

1 $0 M AM J J A SO NDJ F M A 1997 1998

- —7- • (d) Defendant James E. Skinner ("Skinner") was, during the Class Period, Executive Vice President, Chief Financial Officer, Treasurer and Assistant Secretary of the Company. Because of his 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 9.- 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: CompUSA, Inc. H. Greenberg, Sr. V.P. Inv. Mgmt - Quarterly Stock Sales - Dollar Volume March 1997 - March 1998 $800 $40 Class Penod I 12/31197 - 3/5/99

$600 • - - $30

000 0

,E $400 $20 I)

No Pre Class Period Sales a

$200 ------$10

I I 1 $0 $0 MAM JJ A SO NDJ FM A

1997

-8-

_ (f) 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:

CompUSA Inc. R. Fountain, V.P. Tech. Services - Quarterly Stock Sales - Dollar Volume March 1997 - March 1998 $700 $40 12/31197 -W5A*

5600 Class:

; $30 5500 - - - - -

o 4o.).- --- 1 U) $20 13 g), > $300 - _ _ =cti No Pre Class Period Sales 1 5200 - 510

5100

50 I 50 M AM J J A SO NDJ F M A

1997 1 998

-9--

(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:

CompUSA, Inc. R. Gatch, V.P. - Quarterly Stock Sales - Dollar Volume March 1997 - March 1998 $300 $40 Class Period 12/31/97 - 3/5/98

$250 - -

$30

1-,-) $200 - - 0

--- $20 13 $1543 41).

No Pre Class Period Sales to

0 $l00

$50 - -

I $0 $0 M AM J J A SO NE),1 F M A 1997 1998

— 10 —

(h) Defendant Leslie C. Marshall ("Marshall") is Vice President-Loss Prevention of the Company. During the Class Period and as part of the 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:

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

I 31000 - - - -

330

1,7,- $800 Class Period. 12/31197 - 315/98 a se a $20 -43, E7 $600 ------0 No Pre Class Period Sales z uclo $10

$200

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

1997 1998

- 11 -

•

(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:

CompUSAI Inc. R. Seay, V.P. Tech. - Quarterly Stock Sales - Dollar Volume March 1997 - March 1998 $160 $40 Chns Period 12131197-315196 $140

$120 • - - $30

Q voo 0 No Pre Class Period Sales g $80 up -13

7—, $60 r - $40 $10

$20

$0 M A M J J A SO NDJ FMA 1997 1998

- 12 - 10. The individuals named as defendants in ¶9(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. Each defendant was provided with copies of the Company's reports and press releases alleged herein to be misleading prior to or shortly after their issuance and had the ability and opportunity to prevent their issuance or cause them to be corrected. Because of their positions and access to material non-public information available to them but not to the public, each of these defendants knew that the adverse facts specified herein had not been disclosed to and were being concealed from the public and that the positive representations which were being made were then materially false and misleading. Despite their duty not to sell their CompUSA stock under such circumstances, defendants nonetheless did so. The Individual Defendants are liable for the false statements pleaded herein at ¶1126 and 34, as those statements were each "group-published" information, the result of the collective action of the Individual Defendants. DEFENDANTS FRAUDULENT SCHEME AND SCIENTER ALLEGATIONS 11. Each defendant is liable for making false statements, for failing to disclose adverse facts while selling CompUSA stock and for participating in a fraudulent scheme which permitted defendants to sell or dispose of 564,790 million shares of CompUSA stock at

- 13 - artificially inflated prices, for $17.6 million in insider-trading profits. 12. Halpin, Seay, Mondry, Marshall, Greenberg, Fountain, Ewert, Gatch-Priest and Skinner were the top executives of CompUSA. They had daily contact while running CompUSA 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 and its financial performance compared to budgeted or forecasted levels. 13. 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 98 revenue and EPS forecasts, defendants constantly monitored each of these key factors affecting CompUSA's business. 14. 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 defendant 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. Thus, each defendant actually knew or recklessly disregarded that the public statements about CompUSA pleaded herein were false or misleading when made. 15. CompUSA has a highly automated "point-of-sale" computer management information system which provides instant and detailed information with respect to each store's daily, weekly and monthly performance to CompUSA's top executives in Dallas, Texas.

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• 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. 16. CompUSA's top executives utilize this instantaneously available data to constantly and closely monitor the performance of each CompUSA store and the overall corporate entity. This is 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 CompUSA's top executives can 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. 17. As a result of this sophisticated management information system, unlike some other corporations, CompUSA's top executives have unusually rapid access to information about its 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

- 15 - below budgeted or internally forecasted levels. For instance, and 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 lust 72 hours of the end of the quarter. 18. The defendants closely monitored the performance of CompUSA's business via reports which CompUSA's Finance Department (under Skinner) generated on a weekly and monthly basis. There were product sales reports, inventory reports, "product mix" reports and average selling prices reports. The Finance Department also distributed monthly financial reports comparing CompUSA's actual financial results to proiected results. Thus, each defendant 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, the defendants were constantly aware of the current sales rates for CompUSA products, its product mix and its inventories and knew that sales were weakening and 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. 19. 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

- 16 - 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 4 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. 20. 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 false and misleading statements and/or concealed 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 plaintiff and other members of the Class to purchase CompUSA stock and

options at inflated prices; and (iv) permitted the defendants to

- 17 - sell off 564,790 shares of their CompUSA 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 21. In late 1996, Monorail, a competitor of CompUSA, intro- duced a "full-featured" computer priced at less than $1,000. In early 97, 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. 22. By mid-97, 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. 23. 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. 24. 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 cutting and increasing sales of lower priced PCs.

- 18 - This sharp price decline eliminated millions of dollars in value of the CompUSA stock owned and stock options held by its insiders. 25. 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 98. FALSE AND MISLEADING STATEMENTS ISSUED DURING THE CLASS PERIOD 26. On 12/31/97, CompUSA reported "record sales" for its 2ndQ F98, ended 12/27/97 in a release stating: "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." 27. In early 1/98, subsequent to the release of CompUSA's 2ndQ F98 sales, Halpin and Skinner talked to securities analysts to discuss CompUSA's business and its prospects. During these discussions, Halpin (the CEO) and Skinner (the CFO) disseminated important 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

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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 the 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 2ndQ EPS of $.32-$.37, 3rdQ EPS of $.42-$.43, 4thQ EPS of $.29-$.31 leading to 98 EPS of approximately $1.30-$1.35. 28. 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: Q1 $ .25A Q2 $ .37 Q3 $ .43 Q4 $ .30 Year $1.35

- 20 - The report also stated: Despite investor concerns over the last few weeks regarding CompUSA'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 unites 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 CompUSA 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. 29. On 12/31/97, DLJ Securities issued a report on CompUSA, written by Balter, which was based on and repeated information

- 21 -

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: 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. 30. 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:

- 22 -

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.

31. 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:

QI $ .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 iow end of PCs. Sales of the

- 23 - sub-$1,000 PC were strong at the start of the quarter. Pentium 11 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. 32. Based on the extremely positive information defendants disseminated to the markets 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. 33. The positive statements about CompUSA's business made in late 12/97 and early 1/98, as set forth in 1[526-31, were materially false and misleading when issued, and failed to disclose, inter alia, the following true facts which were then known only to defendants due to their access to internal CompUSA data: (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; (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) CompUSA's sales of cheap, under $1,000 PC units was accelerating at the expense of sales of its more expensive and much

- 24 -

_ ,

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 in 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, i.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. 34. On 1/28/98, CompUSA reported its 2ndQ F98 results in a release headlined and stating: CompUSA Inc. Reports Record Financial Results for the Second Quarter of Fiscal 1998 CompUSA Inc. America's Largest Computer superstore(R) retailer, today announced record financial results for the second quarter of fiscal 1998.

- 25 - * * * "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. 35. On 1/28/98, subsequent to the release of its 2ndQ F98 results, CompUSA held a conference call for securities analysts, money and portfolio managers, institutional investors, large CompUSA shareholders, brokers and stock traders to discuss CompUSA's business and its prospects. During these calls, Halpin (the CEO) and Skinner (the CFO) made presentations and answered questions. During the call -- and in follow-up conversations with participants (including Ciccarelli of Gerard Klauer Mattison, Yarchover of Credit Suisse First Boston, Baiter of DLJ Securities, Erner of UBS securities and Lawrence of Morgan Keegan) -- they directly disseminated important 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.

- 26 -

• 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 FPS of $.42-$.43, 4thQ EPS of $.29-$. ,31 leading to 98 EPS of approximately $1.30- $1.35. 36. After the issuance of CompUSA's 1/28/98 release and conference call, the positive information presented by 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. . . •" 37. 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: QI $ .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

- 27 -

services continue to be the fastest growing part of the business. For actual CPUs, the company is still experiencing a barbell pattern for 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 . . . . 38. 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: QI $ .25A Q2 $ .36A 03 $ .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

- 28

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 * * * 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 theverhihemsto 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. 39. On 1/29/98, DLJ Securities issued a report on CompUSA, written by Balter, 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: QI $ .25 Q2 $ .36 Q3 $ .42 Q4 $ .29 Year $1.30

- 29 -

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 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 overrated scare in December, the PC industry at the retail level is relatively healthy. 40. 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 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: Q1 $ .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. . . .

- 30 -

. . . 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. . . . 41. On 1/29/98, Morgan Keegan issued a report on CompUSA, 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: QI $ .25A Q2 $ .36A Q3 $ .42E Q4 $ .30E Year $1.32 The report also stated: Although average selling pric‘s 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. 42. On 2/12/98, Salomon Smith Barney issued a report on CompUSA, written by McGrath. This report was written after McGrath had extensive discussions with Halpin and Skinner and was based on and repeated information provided her by them. Halpin and skinner reviewed this report before it was issued and assured McGrath it was substantially accurate, knowing it would be publicly issued and affect the total mix of information impacting CompUSA's stock price. Subsequent to the release of this report, CompUSA copied

- 31 -

and distributed it, thus adopting it as its own. 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/I998A Q1 $ .25 Q2 $ .36 Q3 $ .43 Q4 $ .29 Year $1.33 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. 43. 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 information provided him by them. Halpin and Skinner reviewed this report before it was issued and assured Katica it was substantially accurate, knowing it would be publicly issued and affect the total mix of information impacting CompUSA's stock price. Subsequent to the release of this report, CompUSA copied and distributed it, thus adopting it as its own. 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:

- 32 -

EPS/1998 Ql $ .25E Q2 $ .36E Q3 $ .42E Q4 $ .30E Year $1.32E The report designated CompUSA as Prudential's "Single Best Idea" ("SBI") 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 years, fueled by ongoing store expansion and 5%-6% increases in same store sales. . . . Demand For Personal Computers And Related Products Remains Strong. 44. 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 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. 45. Each of the positive statements about CompUSA's business during the Class Period between 1/28/98-2/24/98, as set forth in ¶1134-43, was materially false and misleading when issued, and failed to disclose, inter alia, the following adverse information

- 33 - which was then known only to defendants due to their access to internal CompUSA data: (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, 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; (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) 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 in 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;

- 34 - (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 98 were false and misleading when made as they could not and would not be achieved. 46. 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 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. 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

- 35 -

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 10.1 million shares volume -- the largest one-day stock volume in CompUSA's history as a public company. INSIDER SELLING 47. 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 CompUSA'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:

t OF PRICE SHARES DATE SHARES PER PROCEEDS OWNED OPTION NAME SOLD SOLD SHARE FROM SALE SOLD SHARES PRICE Ewert 02/06/98 6,700 $31.91 $ 213,797 02/09/98 3,300 $32.00 105,600 02/18/98 5,000 $32.00 160,000 02/19/98 5,000 $32.00 $ 160,000 2Q,000 $ 639,397 2196- Fountain 01/28/98 11,104 $3.19 02/02/98 73 $30.68 $ 2,240 02/02/98 21,050 $31.00 $ 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 55t 8,484

- 36 -

Greenberg 02/06/98 16,546 $32.00 $ 529,472 79% Halpin 02/01/98 120,000 $3.19 02/04/98 160,000 $4.91 02/04/98 280,000 $31,00 $8,680,000 02/05/98 54,500 $31.25 1,703,125 02/05/98 25,000 $31.00 775,000 02/05/98 500 $31.31 $ 15,655 360,000 11,173,780 56% 280,000 Marshall 02/17/98 2,668 $4.91 02/17/98 28,832 $3.19 02/17/98 2,666 $8.84 02/23/98 34,165 $33.15 $1,132,603 91% 34, 166 $1,132,603 34,165 Mondry 02/04/98 10,000 $30.63 $ 306.300 02/09/98 20,000 $31.00 620,000 02/09/98 10,000 $31u63 316,300 02/09/98 10,000 $31.56 315,600 02/09/98 15,000 $3150 472,500 02/10/98 35 000 $31.50 .$1,102,500 100,000 $3_,133,200 20% Seay 02/03/98 1,335 $4.03 02/03/98 1,803 $3.19 02/03/98 1,333 $8.82 02/21/98 4,471 g 141,418 4 471 $31.63 $ 141,418 68% 4,471 TOTALS: 564,790 $17,676,148

48. Each Individual Defendant who exercised options to purchase CompUSA stock during the Class Period sold 100% of the CompUSA stock acquired by option exercise. During 2/2/98-2/23/98 -- 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, lust 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.

- 37 -

49. Defendants' insider selling during the Class Period is summarized below:

96. 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 5696 Marshall 34,166 $ 1,132,603 91% Mondry 100,000 $ 3,133,200 20% Seay 4 471 $ 141,418 68% TOTALS: 564 '790 $.17,676,148 419-

50. 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 stook 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 CompUSA 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

- 38 - $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 §10(b) Of The 1934 Act And Rule 10b-5 Against All Defendants 51. Plaintiff incorporates 111-50 by reference. 52. Each of the defendants: (a) knew 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. 53. During the Class Period, defendants disseminated or approved the false statements specified above, which they knew 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. 54. Defendants violated S10(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 -39- - (c) Engaged in acts, practices, and a course of business that operated as a fraud or deceit upon plaintiff and others similarly situated in connection with their purchases of CompUSA common stock and publicly traded options during the Class Period. 55. Plaintiff and the Class have suffered damages in that, in reliance on the integrity of the market, they paid artificially inflated prices for CompUSA stock. Plaintiff 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 §20(a) Of The 1934 Act Against Defendants Halpin and CompUSA 56. Plaintiff incorporates 111[1-55 by reference. 57. 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's 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. 58. 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, plaintiff 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.

- 40 -

_ CLASS ACTION ALLEGATIONS 59. Plaintiff brings 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. 60. 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. 61. There is a well-defined commonality 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;

- 41 - ,

(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. 62. Plaintiff's claims are typical of those of the Class because plaintiff and the Class sustained damages from defendants' wrongful conduct. 63. Plaintiff will adequately protect the interests of the Class and has retained counsel who are experienced in class action securities litigation. Plaintiff has no interests which conflict with those of the Class. 64. A class action is superior to other available methods for the fair and efficient adjudication of this controversy. 65. The prosecution of separate actions by individual Class members would create a risk of inconsistent and varying adjudications.

STATUTORY SAFE HARBOR 66. 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 identified as "forward-looking statements" when made. None of the written forward-looking statements made were identified as forward-looking

- 42 - statements. 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 67. Because the PSLRA, §21D(c) of the Exchange Act [15 U.S.C. §78u-4(c)1, requires complaints to be pleaded in conformance with Federal Rule of Civil Procedure 11, plaintiff has alleged the foregoing based upon the investigation of his 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 investi- gations and discussions with consultants, and, pursuant to Rule 11(b)(3), believes that after reasonable opportunity for discovery, substantial evidentiary support will likely exist for the allegations set forth at If2, 33 and 45. PRAYER FOR RELIEF WHEREFORE, plaintiff prays 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 plaintiff and the members of the Class compen- satory damages, including rescissory damages, where applicable;

- 43 -

_ 3. Awarding plaintiff 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 provi- sions sued hereunder, including rescission, the imposition of a 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 Plaintiff demands a trial by jury. DATED: April 2 3, 1998 STANLEY, MANDEL & IOLA, L.L.P. MARC R. STANLEY Texas State Bar No. 19046500 ROGER L. MANDEL Texas State Bar No. 12891750 1

AMARC R. STANLEY/ 3100 Monticello Avenue Suite 750 Dallas, TX 75205 Telephone: 214/443-4301 Of Counsel: MILBERG WEISS BERSHAD HYNES & LERACH LLP WILLIAM S. LERACH California Bar No. 68581 ALAN SCHULMAN California Bar No. 128661 DARREN J. ROBBINS California Bar No. 168593 600 West Broadway, Suite 1800 San Diego, CA 92101 Telephone: 619/231-1058

- 44 -

_ SCHIFFRIN CRAIG & BARROWAY, LLP RICHARD S. SCHIFFRIN Pennsylvania Bar No. 61872 ANDREW L. BARROWAY Pennsylvania Bar No. 64477 Three Bala Plaza East Suite 400 Bala Cynwyd, PA 19004 Telephone: 610/667-7706 Attorneys for Plaintiff

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CERTIFICATION OF NAME]) PLAINTIFF PURSUANT TO FEDERAL SECUR/TXES LAWS , FREDERICK HOECK ("Plaintiff") declares, as to the claims asserted under the federal securities laws, that 1. Plaintiff has reviewed tlie Omplaint and authorized its 1 filing. 2. Plaintiff did not purchase : the security that is the subject of this action at the direCtiOn of Plaintiff's counsel or in order to participate in any priVateJ action. 3. Plaintiff is willing to serkre as a representative party 1 , on behalf of the class, including providing testimony at deposition and trial, if necessary. 4. Plaintiff's transaction inl the security that is the 1, I subject of this action during the claps. 1 Period is as follows: : I Price Security Transaction Date Per Share. 1 Common Stock Purchased 300 shares 02/27/98 $35.00

5. During the three years ior, to the date of this , Certification, Plaintiff has sought to serve or served as a representative party for a class in the following actions filed under the federal securities laws:: NA, 6. Plaintiff will not accept , y payment for serving as a ?I[n representative party on behalf of the class beyond the Plaintiff's pro rata share of any recovery, except such reasonable costs and expenses (including lost wages) directly relating to the representation of the class as ordered or approved by the Court.

LHH1b EIHNKUwHT Lt.Hum - rNivHit NU.dro rioutvialb

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I declare under penalty of perjury that the foregoing ie true and correct. Executed this Pr day ofiltpril, 1998.

, ttri4t, FREDERirex!fliOECK compusa‘Hogag.an

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