LERACH COUGHLIN STOIA GELLER RUDMAN & ROBBINS LLP WILLIAM S. LERACH [email protected] DARREN J. ROBBINS [email protected] 401 B Street, Suite 1600 San Diego, CA 92101 Telephone: 619/231-1058 619/231-7423 (fax) DENNIS J. HERMAN [email protected] 100 Pine Street, Suite 2600 San Francisco, CA 94111 Telephone: 415/288-4545 415/288-4534 (fax) TAMARA J. DRISCOLL [email protected] 700 Fifth Avenue, Suite 5600 Seattle, WA 98104 Telephone: 206/749-5544 206/749-9978 (fax) Lead Counsel for Plaintiffs [Additional counsel appear on signature page.] UNITED STATES DISTRICT COURT DISTRICT OF OREGON In re LATTICE SEMICONDUCTOR CORP. CV-04-01255-HU (Consolidated Cases) SECURITIES LITIGATION CLASS ACTION This Document Relates To: CONSOLIDATED CLASS ACTION ALL ACTIONS. COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS [Caption continued on following page.] DEMAND FOR JURY TRIAL CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS AUTUMN PARTNERS, LLC, Individually Case No. CV-04-01255-HU and On Behalf of Itself and All Others Similarly Situated, CLASS ACTION Plaintiff, vs. LATTICE SEMICONDUCTOR CORP., CYRUS Y. TSUI, STEPHEN A. SKAGGS, STEVEN A. LAUB and RONALD HOYT, Defendants. CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS TABLE OF CONTENTS Page I. INTRODUCTION............................................................................................................... 1 II. JURISDICTION AND VENUE..........................................................................................6 III. PARTIES............................................................................................................................. 7 IV. BACKGROUND AND OVERVIEW................................................................................. 9 A. Lattice’s Business Suffers as Its Core CPLD Business Declines, Competitors Dominate FPGA New Product Growth, and Its Inflated Expense Structure Decreases Profitability ............................................................ 11 B. Defendants Mislead the Market About the True Impact on Lattice's Business................................................................................................................. 13 C. Defendants Publish False Financial Statements to Mislead Investors About the Success of Lattice’s Business.......................................................................... 14 D. Lattice Restates Its Financial Results and Admits the Fraud that Had Been Perpetrated on Investors........................................................................................ 17 V. MATERIALLY FALSE AND MISLEADING STATEMENTS DURING THE CLASS PERIOD............................................................................................................... 19 A. False Statements Regarding 1Q03 Performance and Results ............................... 19 1. False Financial Statements and Results .................................................... 19 2. False Statements Regarding Lattice’s Performance in the Market During 1Q03.............................................................................................. 29 B. False Statements Regarding 2Q03 Performance and Results ............................... 31 1. False Financial Statements and Results .................................................... 31 2. False Statements Regarding Lattice’s Performance in the Market During 2Q03.............................................................................................. 37 C. False and Misleading Registration Statements to Permit Resale of Zero Coupon Bonds....................................................................................................... 40 D. False Statements Regarding 3Q03 Performance and Results ............................... 41 1. False Financial Statements and Results .................................................... 41 CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATION OF Page i THE FEDERAL SECURITIES LAW Page 2. False Statements Regarding Lattice’s Performance in the Market During 3Q03.............................................................................................. 48 VI. THE TRUTH BEGINS TO EMERGE.............................................................................. 53 VII. LATTICE’S MATERIALLY FALSE ACCOUNTING AND FINANCIAL REPORTING .................................................................................................................... 65 A. Overview ............................................................................................................... 65 B. Lattice’s Improper Recognition, Accounting and Reporting of Revenue............. 66 C. Lattice’s Improper Reporting of Gross Margins................................................... 69 D. Lattice’s Admission that It Issued False Financial Statements During the Class Period........................................................................................................... 71 E. Other GAAP Violations ........................................................................................ 75 VIII. ADDITIONAL MOTIVE AND SCIENTER ALLEGATIONS....................................... 77 A. Option Exchange Program .................................................................................... 77 B. Qualification for Incentive Compensation ............................................................ 80 C. Lattice Raises Capital Through Private Offering.................................................. 81 IX. APPLICABILITY OF PRESUMPTION OF RELIANCE: FRAUD-ON-THE- MARKET DOCTRINE..................................................................................................... 82 X. ADDITIONAL GROUP PLEADING AND CONTROL PERSON ALLEGATIONS ............................................................................................................... 85 XI. CLASS ACTION ALLEGATIONS.................................................................................. 89 CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATION OF Page ii THE FEDERAL SECURITIES LAW I. INTRODUCTION 1. This is a class action for violations of the federal securities laws brought on behalf of purchasers of the publicly traded securities of Lattice Semiconductor Corporation (“Lattice” or the “Company”) between April 22, 2003 and April 19, 2004 (the “Class Period”) seeking to pursue remedies under the Securities Exchange Act of 1934 (the “Exchange Act”) against Lattice and its top officers and directors during the Class Period: Chief Executive Officer (“CEO”) Cyrus Y. Tsui (“Tsui”), Chief Operating Officer (“COO”) Steven A. Laub (“Laub”), Chief Financial Officer (“CFO”) Stephen A. Skaggs (“Skaggs”), and Controller Ronald Hoyt (“Hoyt”) (collectively, the “Individual Defendants”). 2. Lattice designs, develops and markets programmable logic devices (“PLDs”) and related software. PLDs are widely used semiconductor components that can be configured by end customers as specific logic circuits, and thus enable shorter design cycle times and reduced development costs. Lattice sells three main types of products: Complex PLDs (“CPLDs”), Simple PLDs (“SPLDs”) and Field Programmable Gate Arrays (“FPGAs”). These three product lines are used primarily by original equipment manufacturers (“OEMs”) in the communications, computing, industrial, automotive, medical, consumer and military end markets. OEMs purchase products directly from Lattice or from Lattice’s distributors or manufacturers’ representatives. 3. Throughout the Class Period, defendants manipulated Lattice’s financial statements to inflate its revenues and gross margins, and understate its liabilities and net losses, causing Lattice’s shares to trade at artificially inflated levels. Defendants did this by intentionally manipulating its financial statements to achieve desired margins, and by causing or permitting Lattice to prematurely recognize revenues on products that had been shipped to distributors but never sold to end users. The recognition of these revenues was improper under Generally Accepted Accounting Principles CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATION OF Page 1 THE FEDERAL SECURITIES LAWS (“GAAP”) and contrary to Lattice’s publicly stated revenue recognition policies because the products sold to distributors were subject to rights of return and price protection agreements. 4. After the Class Period, Lattice restated its financial statements for the first three quarters of its 2003 fiscal year (“FY03”), revealing that its revenues had been inflated by $10.6 million as a result of these shipments, and its earnings per share (“EPS”) had been overstated by $0.08. In addition, Lattice revealed that gross margins had been declining during FY03 for the first time in years, a fact which had been hidden from investors as the result of intentional manipulation of Lattice’s accrued expenses and its deferred income accounts. Deferred income is the account Lattice used to reflect the expected revenues from, and the costs incurred to produce, inventory that had been shipped to distributors but not sold to end users. As defendant Skaggs admitted on a conference call with investors, Lattice’s deferred income account had been “over-depleted” and was “below the level that was required to support the inventory on our distributors’ shelves.” In other words, Lattice falsely claimed to have earned millions of dollars in revenue from the sale of products which were still sitting in its distributors’ warehouses and were subject to being sold at drastically reduced prices