1 2 3 4 5 6 UNITED STATES DISTRICT COURT WESTERN DISTRICT OF WASHINGTON 7 AT SEATTLE 8 WARDELL BENFORD, individually, and on behalf 9 of all others similarly situated, Civil Action No. 10 Plaintiff, CLASS ACTION COMPLAINT 11 v. JURY TRIAL DEMANDED 12 JONES SODA COMPANY, PETER M. VAN 13 STOLK, SCOTT BEDBURY, MICHAEL M. FLEMING, ALFRED W. ROSSOW, JR., JOHN J. 14 GALLAGHER, JR., STEPHEN C. JONES,, HASSAN N. NATHA and LARS P. NILSEN, 15 16 Defendants. 17 Plaintiff, Wardell Benford, on behalf of itself and a Class (defined below) comprised of 18 all other persons similarly situated, alleges upon the investigation made by and through its 19 20 counsel, which includes, inter alia, a review of relevant public filings made by Jones Soda 21 Company ("Jones Soda" or the "Company") with the Securities and Exchange Commission 22 ("SEC"), as well as teleconferences, press releases, news articles, analysts' reports, and media 23 reports concerning the Company. This Complaint is based upon plaintiff's personal knowledge 24 as to its own acts, and upon information and belief as to all other matters, based upon the 25 aforementioned investigation. 26 LAW OFFICES OF KELLER ROHRBACK L.L.P. CLASS ACTION COMPLAINT 1 _ 1201 THIRD AVENUE, SUITE 3200 SEATTLE, WASHINGTON 98101-3052 TELEPHONE: ( 206) 623-1900 FACSIMILE: ( 206) 623-3384 1 NATURE OF THE CASE 2 1. This is a class action on behalf of all persons, other than defendants, who 3 purchased Jones Soda Corporation common stock between November 1, 2006, and August 2, 4 2007, inclusive (the "Class Period"), to recover damages caused by defendants' violations of the 5 federal securities law (the "Class"), as set forth below. 6 2. Jones Soda and its President, Chairman, and CEO Peter M. van Stolk achieved 7 8 near rock star status over the last few years. The Company's quirky sodas, including Turkey & 9 Gravy flavor and Bubble Gum flavors (as well as soda made with pure sugar cane as opposed to 10 high-fructose corn syrup), became the darling of Wall Street and Mr. Stolk was a frequent guest 11 on Jim Cramer's Mad Money show watched by millions each night on CNBC. 12 3. Mr. van Stolk is recognized as "marketing maverick" and during the Class Period 13 touted his Company's growth prospects and ability to penetrate new markets with unabashed 14 15 enthusiasm even though they were untrue. 16 4. He issued extremely positive statements about the Company's new distribution 17 and production agreement with National Beverage Corporation and agreements with numerous 18 major retailers to garner precious shelf space for the Company's products. 19 5. Mr. van Stolk stated that each of these agreements were cemented and that the 20 Company was soon to realize the financial benefits thereof. Moreover, he issued numerous 21 statements that led the market to believe that major retailers had stocked the Company's sodas on 22 23 their shelves for sale, or would be stocked on shelves for sale by a date certain. These 24 statements, however, were false or were issued with such a degree of severe recklessness to 25 render them actionable. 26 LAW OFFICES OF KELLER ROHRBACK L.L.P. CLASS ACTION COMPLAINT -2- 1201 THIRD AVENUE, SUITE 3200 SEATTLE, WASHINGTON 98101-3052 TELEPHONE: ( 206) 623-1900 FACSIMILE : (206) 623-3384 1 6. For example, as detailed below, on May 3, 2007 Jones Soda barely posted a profit 2 and issued disappointing results for the quarter that ended March 31, 2007. Mr. van Stolk blamed 3 the weaker than expected earnings on problems converting bottled sodas from high-fructose corn 4 syrup to pure cane sugar, in addition to higher expenses. Nevertheless, he assured investors that 5 the Company was on track to be in 25 percent of the market with the new 12-ounce cans by 6 Memorial Day. He considered the shortfall an anomaly. 7 8 7. Though the weak earnings were well below Wall Street's estimates, and the stock 9 price fell 20 percent in after-hours trading before gaining back some ground, it rebounded on 10 news that the Company cut a deal to sell soda at Seattle Seahawks football games (announced a 11 few weeks later), and the Company's price per share stabilized just above $21 a share. 12 8. On August 3, 2007, however, the Company announced that it barely scratched out 13 a profit when earnings for the quarter that ended June 30, 2007 were again well below Wall 14 15 Street's expectations. In connection with the release (despite his earlier promises), Mr. van Stolk 16 said this time that the Company's canned products were not on enough store shelves in time for 17 peak summer sales, which begin during the Memorial Day weekend. 18 9. He further stated that 15,200 stores had "basically committed or ordered" 19 products , compared with 1,440 stores six months earlier. He, however, declined to say how 20 many stores were carrying Jones Soda currently, even though in March on Cramer's Mad Money, 21 he listed 15 major chains that would be carrying the cans by Memorial Day. 22 23 10. This news caused the Company's stock to plummet nearly 23 percent in after- 24 hours trading to $11.70 a share, causing stockholders to suffer significant damages. 25 11. Mr. van Stolk and other members the Company's Board, however, fared far 26 better. Specifically, less than a week after the van Stolk's March 8, 2007 announcement of LAW OFFICES OF KELLER ROHRBACK L.L.P. CLASS ACTION COMPLAINT -3- 1201 THIRD AVENUE, SUITE 3200 SEATTLE, WASHINGTON 98101-3052 TELEPHONE: ( 206) 623-1900 FACSIMILE : (206) 623-3384 1 strong fourth-quarter earnings and that the Company would be in 25 percent of the retail market 2 by selling at stores including Wal-Mart, Kroger, Safeway and Kmart, he and substantially all of 3 the members of the board began selling their stock en masse. 4 12. Mr. van Stolk, for example, sold 140,000 shares on March 14, 2007 for $2.53 5 million, which left him with 1.4 million shares. He subsequently exercised his options and 6 bought 250,000 more shares, bringing his total to 1.65 million. 7 8 13. Board member Scott Bedbury sold all 70,000 of his shares from March 13 to 16, 9 2007 for $1.3 million. 10 14. Board member Michael M. Fleming exercised options on a total of 55,000 shares 11 between March 13 and May 8, 2007, and then sold that many shares on those days for a $1 12 million profit. The options were to expire between 2009 and 2011. After the sale, Mr. Fleming 13 held only 5,000 shares in the Company. 14 15 15. Board member Alfred W. Rossow, Jr. exercised options on 30,000 shares on May 16 9, 2007 and sold all the shares the same day for a $600,719 profit. His options were set to expire 17 in 2009 and 2010. After the sale, Mr. Rossow held no direct ownership in the Company. 18 16. Board member John J. Gallagher, Jr. exercised options on 20,000 shares on May 19 7, 2007 and then sold all those shares for a $276,000 profit June 5, the day before van Stolk 20 disclosed at an investor conference that sales challenges were occurring. The options were set to 21 expire in 2010. After the sale, Mr. Gallagher held no direct ownership in the Company. 22 23 17. Board member Stephen C. Jones exercised options on 15,000 shares on May 24, 24 2007 and sold all the shares the same day for a $233,700 profit. The options would have expired 25 in 2011. After the sale, Mr. Jones held no direct ownership in the Company. 26 LAW OFFICES OF KELLER ROHRBACK L.L.P. CLASS ACTION COMPLAINT -4- 1201 THIRD AVENUE , SUITE 3200 SEATTLE, WASHINGTON 98101-3052 TELEPHONE : ( 206) 623-1900 FACSIMILE: (206) 623-3384 1 18. Lars Nilsen, the Executive Vice President of Sales at Jones Soda, exercised and 2 sold 3,000 shares March 15, 2007 for a $37,290 profit. The options were not set to expire until 3 2011. After the sale, Mr. Nilsen held no direct ownership in the Company. 4 19. The heavy exercising of Jones Soda options and sale of shares by the Company's 5 insiders has not gone unnoticed by industry observers and members of the legal community. 6 Michael Malloy, a former SEC enforcement official and a professor at the University of the 7 8 Pacific in Stockton, California, said the level of trades by insiders at Jones Soda would raise a 9 "red flag" for a regulator. According to Malloy, most directors of publicly held companies hold 10 at least some shares in the entity. "If they are punching the option button and dumping these 11 things, they are just turning on the spigot and going," Mr. Malloy said. "It's not someone who is 12 looking at a portfolio and looking to diversify. It's someone looking for a quick kill, and you 13 have to wonder what motivated that?" 14 15 20. Jill Fisch, a Fordham University Law School professor, who specializes in 16 securities, said options are a "potential payoff' and that "although the trades were made outside 17 the blackout periods, some appear `curiously timed' as they were done before the company 18 released bad news." She further noted that "[o]bviously, it's relatively unusual for a director to 19 sell all of the holdings, and the timing makes it look like it wasn't a coincidence." 20 21.