COHEN, MILSTEIN, HAUSFELD & TOLL, P.L.L.C Steven J. Toll...

COHEN, MILSTEIN, HAUSFELD & TOLL, P.L.L.C Steven J. Toll Daniel S. Sommers (DS-2084) Adam Savett (AS-5334) 1100 New York Avenue, N.W. West Tower, Suite 500 Washington, D.C. 2005 Telephone: (202) 408-4600 Facsimile: (202) 408-4699 Elizabeth A. Berney 150 East 52nd Street, 30th Floor New York, New York 10022 Telephone: (212) 838-7797 Facsimile: (212) 838-7745 Lead Counsel for Lead Plaintiffs

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW JERSEY

In Re DATATEC SYSTEMS, INC., SECURITIES LITIGATION This Document Relates to: All cases

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Master File No. 2:04-CV-525 WGB-MCA (Document Electronically Filed) CONSOLIDATED AMENDED CLASS ACTION COMPLAINT FOR VIOLATIONS OF FEDERAL SECURITIES LAWS JURY TRIAL DEMANDED

Lead Plaintiffs Yola Sherman, M. Ronald Sherman, Jean T. Beaubien, William E.

Garrett, Eugene E. Epstein and Joan Shalant (the “Datatec Lead Plaintiff Group” or “Plaintiffs”),

through their attorneys, bring this action on behalf of themselves and all other persons similarly

situated, on personal knowledge as to themselves and their own activities, and as to all other

matters, based upon the investigation of Plaintiffs’ counsel, which included, among other things:

Case 2:04-cv-00525-GEB-MCA Document 38-1 Filed 05/02/2005 of 64

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(i) interviews of former employees of Datatec Systems, Inc. (ADatatec” or the “Company”) and

other persons with knowledge and information concerning the matters alleged herein, including

the confidential sources described below; (ii) review and analysis of the public filings of Datatec,

including its filings with the Securities and Exchange Commission (“SEC”); and (iii) review and

analysis of news articles, press releases, announcements, and analysts' reports by or relating to

Datatec. Plaintiffs believe that further evidentiary support for the allegations set forth below will

exist after a reasonable opportunity for discovery.

CONFIDENTIAL SOURCES

Confidential sources (also referred to as “CS-__”) who provided information in

connection with Plaintiffs= counsel's investigation include the following:

CS-1: Confidential Source 1 is a former Datatec project administrator, who worked at

Datatec from approximately six years prior to the Class Period (defined below)

through approximately four months after the Class Period.

CS-2: Confidential Source 2 is a former high level technology executive at Datatec, who

worked at the Company commencing approximately seven years prior to the

Class Period through almost one year after the end of the Class Period. CS-2 had

frequent regular direct dealings with the Chief Executive Officer, Chief Financial

Officer, Chief Operating Officer and other top executives of the Company.

CS-3: Confidential Source 3 is a former Datatec national project manager, who worked

at Datatec commencing approximately four years prior to the Class Period

through approximately one week after the Class Period began. Throughout the

remainder of the Class Period and afterwards, CS-3 kept informed of events at


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Datatec by remaining in close personal contact and frequently conversing with

employees (mostly other project managers) who remained at Datatec.

CS-4: Confidential Source 4 is a former high level sales executive at Datatec, from

approximately 14 years prior to the Class Period through over one year after the

Class Period.

CS-5: Confidential Source 5 is a former Datatec collections manager, who worked at the

Company for approximately 15 years, until approximately one year prior to the

Class Period. Thereafter, including throughout the Class Period, CS-5 kept in

contact with, and had frequent conversations with former and then current Datatec

employees. CS-5 worked closely with Datatec=s financial officers during CS-5's

long tenure at Datatec.

CS-6: Confidential Source 6 is a former Datatec regional operations manager, who

worked at the Company commencing approximately five years prior to the Class

Period through approximately 3 months after the Class Period.

CS-7: Confidential Source 7 is a former Datatec product manager involved with

Datatec=s eDeploy product, who worked at the Company from approximately

seven years prior to the Class Period through the end of the Class Period.

NATURE OF THE ACTION

1. This is a federal class action on behalf of purchasers of Datatec securities between

June 26, 2003 and December 16, 2003, inclusive, (the AClass Period@), seeking remedies under

the Securities Exchange Act of 1934 (the AExchange Act@).

2. Datatec was essentially, at its core, a company which stringed the cable needed by

new stores and other facilities which required computer access. The business was neither a


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profitable one nor an advanced technology company which would attract investors. Competition

from local cable stringing companies, which did not have Datatec’s enormous overhead, was

fierce. According to CS-2, the business should have failed years ago, and was only kept alive

through Defendants’ fraudulent practices for obtaining financing from investors and its credit

facilities.

3. In fact, both before and during the Class Period, Datatec could not meet its

payroll or other bills without resorting to the manipulations described herein, which included a

repeatedly employed phantom invoicing scheme and a phantom products scheme designed to

portray the Company as a high technology company rather than as a cable stringing company.

4. Thus, throughout the Class Period, Defendants gave the investing public a false

picture of the Company=s financial condition, balance sheet, and products, and failed to disclose

that the Company had become reliant on fraudulently-obtained financing.

5. Indeed, on June 26, 2003, Defendant Isaac Gaon (“Gaon”), the Company=s CEO,

told investors that the Company was on track to post earnings for fiscal year 2004 (ending April

30, 2004) of $0.14 to $0.16 per share. On September 15, 2003, Defendants reiterated favorable

fiscal 2004 full year earnings guidance, of $0.12 per share.

6. On December 5, 2003, Datatec surprised investors with the news that Gaon had

stepped down as Chairman and CEO of the Company, and been replaced by a new CEO, Raul

Pupo. The Company also announced that board member Mark Berenblut had resigned.

7. Also on December 5, 2003, Datatec announced that it was retracting its

previously announced earnings estimates for Fiscal 2004. Far from earning $0.14 to $0.16 per

share, or $0.12 per share, the Company would suffer a net loss for the fiscal quarter ended

October 31, 2003, as well as an overall net loss for Fiscal 2004. Although the Company=s stock


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price dropped substantially on the news (nearly 34%), the full impact of the adverse news did not

come out for almost another two weeks.

8. On December 17, 2003, the close of the Class Period, Datatec announced that it

would suffer a $10 million loss for the fiscal quarter ended October 31, 2003. In addition, the

Company told investors it was delaying the filing with the SEC of its quarterly report for the

quarter ending October 31, 2003, and that the Company=s Audit Committee had decided to hire

outside counsel to conduct an independent review of the Company=s valuation of its long-term

contracts. In addition, the Company advised investors that on December 12, 2003, IBM Credit

had informed the Company that it would not provide Datatec with a written default waiver for

the fiscal quarter ended October 31, 2203. The Company=s stock fell another 15% on extremely

high volume of 2.3 million shares.

JURISDICTION AND VENUE

9. This Court has jurisdiction over the subject matter of this action pursuant to 28

U.S.C. ''1331 and 1337 and Section 27 of the Exchange Act (15 U.S.C. ' 78aa).

10. The claims asserted herein arise under Sections 10(b) and 20(a) of the Exchange

Act (15 U.S.C. '' 78j(b) and 78t(a)) and Rule 10b-5 promulgated thereunder (17 C.F.R. '

240.10b-5).

11. Venue is proper in this District pursuant to Section 27 of the Exchange Act (15

U.S.C. ' 78aa) and 28 U.S.C. ' 1391(b). Substantial acts in furtherance of the alleged fraud,

including the preparation and dissemination of materially false and misleading information,

and/or its effects have occurred within this District. In addition, Datatec was headquartered in

Fairfield, New Jersey, within this District, at all times relevant to this litigation.


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12. In connection with the acts and omissions alleged in this complaint, Defendants,

directly or indirectly, used the means and instrumentalities of interstate commerce, including, but

not limited to, the United States mails, interstate telephone communications, and the facilities of

the national securities markets.

PARTIES

Plaintiffs:

13. On December 23, 2004, the Court appointed Yola Sherman, M. Ronald Sherman,

Jean T. Beaubien, William E. Garrett, Eugene E. Epstein and Joan Shalant to serve as Lead

Plaintiffs pursuant to 15 U.S.C. ' 78(u)-4. Lead Plaintiffs purchased Datatec common stock at

artificially inflated prices during the Class Period and were damaged thereby. Certifications for

the Lead Plaintiffs were previously submitted to the Court.

Defendants:

14. Defendant Isaac J. Gaon (“Gaon”) served as Datatec=s Chairman of the Board

from December 1997 until his resignation from all his positions at Datatec on or about December

5, 2003. Gaon also served as a Director from 1992 until his December 2003 resignation; and as

Datatec’s Chief Executive Officer from October 1994 until his December 5, 2003 resignation. In

addition, Gaon served as Datatec’s CFO from April 1992 until October 1994. Gaon is also a

chartered accountant.

15. Defendant Mark J. Hirschhorn (“Hirschhorn”) served as Datatec=s Chief Financial

Officer from approximately March 3, 2003, through the Class Period.

16. Defendants are liable as direct participants with respect to the wrongs complained

of herein. In addition, Defendants were “controlling persons” within the meaning of Section

20(a) of the Exchange Act. Each exercised his power and influence to cause the Company to


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engage in the fraudulent practices complained of herein. In addition, on July 22, 2003,

Defendants each signed Section 302 certifications pursuant to Sarbanes-Oxley that, among other

things, Defendants had reviewed Datatec’s 2003 Form 10-K, and that the financial statements,

and other financial information included therein fairly presented in all material respects

Datatec’s financial condition, results of operations and cash flows, and that Defendants were

responsible for establishing and maintaining Datatec’s disclosure controls and procedures.

17. It is appropriate to treat Defendants as a group for pleading purposes and to

presume that the materially false, misleading and incomplete information conveyed in the

Company’s public filings, press releases, and other public statements, are the collective action of

the narrowly defined group of Defendants identified herein. During the Class Period, the

Defendants, as senior executive officers and/or directors of Datatec, directly participated in the

management of the Company, were directly involved in the day-to-day operations of the

Company at the highest levels, and were privy to confidential and proprietary information

concerning Datatec, its operations, finances, financial condition, present and future business

prospects. Defendants also had access to material adverse non-public information concerning

Datatec. Because of their positions with Datatec, Defendants had access to non-public

information about its business, finances, products, markets and present and future business

prospects via access to internal corporate documents, conversations and connections with other

corporate officers and employees, attendance at management and board of directors meetings

and committees thereof and via reports and other information provided to them in connection

therewith. Because of their direct participation in the activities complained of herein, and

possession of such information, Defendants knew or recklessly disregarded the fact that adverse


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facts specified herein had not been disclosed to, and were being concealed from, the investing

public.

18. Defendants, because of their positions with the Company, controlled and/or

possessed the authority to control the contents of its reports, press releases and presentations to

securities analysts and through them, to the investing public. Defendants were 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. Thus, Defendants had the opportunity to commit the fraudulent acts

alleged herein.

19. As senior executive officers and/or directors and as controlling persons of a

publicly-traded company whose common stock was, and is, registered with the SEC pursuant to

the Exchange Act, and was traded on the NASDAQ Small Capital Market (ANASDAQ@) and

governed by the federal securities laws, Defendants had a duty to disseminate promptly accurate

and truthful information with respect to Datatec=s financial condition and performance, growth,

operations, financial statements, business, products, markets, management, earnings and present

and future business prospects, to correct any previously issued statements that had become

materially misleading or untrue, so that the market price of Datatec=s common stock would be

based upon truthful and accurate information. Defendants= misrepresentations and omissions

during the Class Period violated these specific requirements and obligations.

20. Defendants are liable as participants in a fraudulent scheme and course of conduct

that operated as a fraud or deceit on purchasers of Datatec common stock by disseminating

materially false and misleading statements and/or concealing material adverse facts. The

scheme: (i) deceived the investing public regarding Datatec=s business, operations and


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management and the intrinsic value of Datatec common stock; (ii) enabled Datatec to obtain

more than $8.4 million in private placements and other financing transactions; (iii) allowed the

Company to obtain waivers of default on its existing $25 million credit line with IBM; and (iv)

caused Plaintiffs and members of the Class to purchase Datatec securities at artificially inflated

prices.

Non–Party Datatec:

21. Datatec is a corporation organized under the laws of Delaware with its principal

executive offices located at 1275 Alderman Drive, Alpharetta, Georgia 30005. On December

14, 2004, Datatec filed a bankruptcy petition pursuant to 11 U.S.C. § 1101 et. seq. Accordingly,

Datatec is not named as a defendant herein at this juncture due to its bankruptcy filing and the

protections afforded by the automatic bankruptcy stay.

THE FRAUDULENT SCHEMES

22. Defendants described Datatec’s business as follows:

Datatec Systems, Inc., and its subsidiaries . . . are in the business of providing rapid and accurate technology services and licensing software tools designed to accelerate the delivery and management of complex Information Technology (“IT”) solutions for technology providers, primarily Original Equipment Manufacturers (“OEMs”), systems integrators, independent software vendors, telecommunications carriers and service providers . . . as well as to a select number of “Fortune 2000” customers in the United States and Canada. (Datatec Form 10-K for the fiscal year ending 4/30/03, filed 7/23/03) 23. However, according to CS-2, Datatec was essentially, at its core, a company

which stringed the cable needed by new stores and other facilities which require computer

access. Datatec’s core business was not profitable, and faced fierce competition from local cable

stringing companies, which did not have Datatec’s enormous overhead. Datatec could not meet

its payroll, vendor and other bills without fraudulent manipulation.


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24. Thus, throughout the Class Period, Defendants tried to portray Datatec as an

advanced technology company, which was creating new breakthrough software products which

would appeal to investors. Defendants gave the market place a false picture of the Company=s

financial condition, balance sheet, and products, and failed to disclose that the Company had

become reliant on financing obtained with “phantom invoices,” and that the Defendants were

touting essentially non-existent products to keep investors pouring money into the Company

when Datatec was neither profitable nor solvent.

The Phantom Invoicing Scheme:

25. Throughout the Class Period, Defendants failed to disclose that the Company was

buttressing its financials with “phantom invoices,” and had become reliant on financing obtained

through this same fraudulent mechanism. Several confidential sources, including CS-1, CS-2,

CS-3 and CS-5, described the following phantom invoicing scheme, which Defendants

personally directed:

26. Both prior to the Class Period and during the Class Period with increasing

frequency and magnitude, Defendants regularly placed phantom invoices on Datatec’s books, to

overstate the Company’s revenues, and to enable Datatec to obtain critical accounts receivable

financing through its $25 million credit facility with IBM Credit LLC (AIBM Credit@). Datatec=s

true but undisclosed financial condition was so precarious that Datatec needed the fraudulently-

obtained accounts receivable financing for Datatec to meet its semi-monthly payroll, and to

avoid having Datatec=s vendors cut off essential supplies.

27. Specifically, according to CS-1, CS-2, and CS-5, Defendants, including Gaon,

directed Datatec=s employees to post to Datatec=s accounts receivable phony invoices for work

that was not yet done and/or not yet billable. According to CS-2, this same “phantom invoicing”


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device was used to “cure” a variety of Datatec’s business problems. First, at the end of each

quarter, Defendants directed phantom invoices to be issued so that the Company would

recognize more income on its public (SEC) financial filings. Second, prior to each semi-monthly

payroll, the head of Datatec’s HR department would tell Defendants, including Gaon, that there

was not enough money to meet the payroll – and Defendants would “cure” the problem by

ordering phantom invoices to be issued and posted to the Company’s accounts receivable,

thereby obtaining approximately 85% financing on those receivables. Third, Datatec also

frequently received threats from its supply vendors to cut off the Company’s essential supplies if

overdue payments were not forthcoming. Again, the solution was to issue phantom invoices and

thereby fraudulently obtain accounts receivable financing.

28. Defendants constantly faced the prospect of not being able to meet payroll

throughout the Class Period. Datatec was also constantly in jeopardy of being cut off by its

vendors, such as Graybar (which sells just about everything that Datatec would use at a job site –

such as oil, screws, brackets, and clamps), Hertz (which rented Datatec the vans and lifts used at

all of Datatec’s job sites), materials companies, and cable companies. According to CS-2, Gaon

attended the “vendor meetings” held at Datatec which concerned getting money to the vendors

who were threatening to discontinue sending needed supplies to Datatec.

29. On each of the above-described occasions, Defendants, usually Gaon himself,

telephoned certain Company managers, and ordered them to direct the Company’s project

administrators to post phantom invoices to the Company’s accounts receivable. These invoices

listed work which the Company “expected” to do in the coming weeks as already complete. CS-

2 often personally overheard Defendant Gaon issuing such instructions to Datatec’s managers

during the Class Period. The managers then called in the project administrators who reported to


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them, and gave them the same instructions. CS-1’s manager called in CS-1 for a meeting shortly

before every payroll, and instructed CS-1 to post the phantom invoices, while commenting:

“Corporate says we need to do it again.”

30. Datatec’s project administrators complained about these instructions. CS-3, a

national project manager, reported that “at least half” of the 8 project administrators with whom

he had contact complained about being asked to post phantom invoices. Some project

administrators objected strenuously. According to CS-1, one project administrator, who worked

in the Company’s Dallas office, and who had an accounting degree, complained to supervisory

personnel that what Defendants were asking them to do was illegal, and that the Company could

not post phantom invoices. Defendants responded by moving this project administrator into an

area with different responsibilities (collections).

31. Upon receipt of the instructions handed down from their managers, the project

administrators thereupon obtained information from project managers as to future estimated

work to be done by the Company, and “pre-invoiced” the work on the Company’s accounts

receivable, as if the work had already been done. Once the “pre-invoice” was placed on the

Company’s accounts receivable, the Company would receive financing from IBM Credit of

approximately 85% of the amount of the invoice.

32. In the ensuing weeks, if and when the “pre-invoiced” work was performed, the

Company reversed the “pre-invoice” and issued a real invoice to the customer. These

manipulations played havoc with the Company’s billing processes, and wasted enormous

amounts of Datatec employees’ time. CS-1 described the havoc created by the pre-invoicing as

“a nightmare,” and said that it resulted in triple the amount of work. As a result of the extensive

pre-invoicing, the Company’s accounts receivable bore no relation to reality, and billing had to


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be done by hand to try to avoid sending the phantom “pre-invoices” to customers who were not

supposed to receive bills for work that was not yet performed. According to CS-3, who was a

national project manager, Datatec’s project managers were constantly concerned that pre-

invoices would accidentally be sent to their customers for work that was not yet performed. CS-

3 heard of a number of occasions prior to and during the Class Period when pre-invoices were in

fact sent to customers erroneously. For instance, according to CS-3, in approximately mid-2003,

AT&T / Banc One received one of these “funny invoices” for “an obnoxious number” –

approximately $75,000 or $125,000. Datatec sales representatives or project managers then had

to “back track” and give excuses to their irate customers for such bills, such as “It was just a

clerical error.”

33. The phantom invoicing began well before the Class Period on a limited basis, and

continued to snowball, until it became a regular occurrence throughout the Class Period. For

instance, in 1999, the project manager on a project for LibbyOwensFord complained to CS-3

about having to invoice ahead of time, but the invoicing was only a little ahead of time, about a

week. CS-1, CS-2, CS-3 and CS-5 noted that the pre-invoicing increased throughout the years,

and during the Class Period, was the “regular” way of doing business.

34. The impact on accounts receivable from the pre-invoicing was dramatic, and

became more so over time. CS-5 reported that in 2002, only $1 million out of $11 million on the

accounts receivable aging was real. Nonetheless, despite the fact that Defendant Gaon had

instructed Datatec’s employees to engage in pre-invoicing, according to CS-5, Gaon sometimes

“played dumb” as to the impact on the accounts receivable aging. CS-5 reported attending

meetings in approximately 2002, with Gaon, as well as the then-CFO, and another manager,

during which the following conversation repeatedly took place:


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Gaon: “I don’t understand why you can’t collect more money on the accounts receivable.” CS-5: “Because the invoices aren’t real and haven’t been sent to the customers yet.” Gaon: “Who told people to invoice when the invoices aren’t real?” CS-5: “You did.”

35. Although CS-5 witnessed the conversation recounted in the preceding paragraph

prior to the Class Period, the situation kept escalating and was even worse during the Class

Period. CS-2 reported that during the Class Period, pre-invoicing was a frequent occurrence, the

“regular” way of doing business. CS-2 reported that the amounts directed to be pre-billed were

substantial and meaningful, usually over $100,000, and frequently involved Datatec’s largest

accounts, including Home Depot. CS-2 often heard Defendant Gaon say during the Class

Period, “We need to pre-bill $100,000 of the project today.” CS-2 opposed the pre-billing

strategy in conversations with Gaon. However, CS-2 reported that at no time during his seven

years at Datatec (which included the Class Period) did Gaon abandon the pre-billing practices.

36. Similarly, CS-3 reported that the pre-invoicing continued to escalate: There were

progressive stages: When Datatec was doing better, there was just a little pushing ahead on

invoices, with the excuse from management that it was just so that the Company could “close out

the month.” Later, the invoicing was required to be more and more ahead of time. For instance,

CS-3 reported that the invoicing for a large project involving AT&T and Banc One was “well

ahead of time.” Project managers started receiving emails every two weeks, just before payroll,

to “get everything in” that could conceivably lead to billings. By 2003, and during the Class

Period, if there was any remote possibility of invoicing an item, Defendants pre-invoiced it.


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37. Not surprisingly given what the finance personnel were asked to do, there was

enormous turnover in Datatec’s finance department throughout the years. CS-5 reported that

there were eight different bosses (usually the controller) in the finance department over the

course of 5 years. According to CS-1, there was “a whole shuffle” in the finance department

beginning in 2003, in which a “whole new crew” was brought in by Defendant Gaon. The

previous payroll person was the only individual who stayed with the Company. About 8 out of

10 people in the finance department were swapped in 2003.

38. According to CS-5, Defendants also furthered their pre-invoicing scheme by

manipulating audits of Datatec’s accounts receivable. When auditors sent letters to customers

requesting confirmation of the phantom accounts receivable listed on Datatec’s books,

Defendants arranged to have Datatec’s sales representatives and project managers prevail upon

Datatec’s customers to either discard the auditor letters or falsely confirm the phantom invoices,

“as a favor.” Smaller customers generally went along with confirming to the auditors that

invoices were true when they were not. Datatec’s major customers (such as Dayton Hudson,

Walgreens and Wal-Mart) would not confirm to the auditors that the invoices were true, but

instead often discarded the auditor letters without responding to them.

39. CS-5 reported that Datatec had other finance companies prior to IBM Credit, and

that whenever Datatec “got in trouble” with its financing company (i.e., the finance company

finally did an extensive audit and learned what was really occurring, or became completely

dissatisfied because the poor collections did not reflect the amounts shown on the accounts

receivable), Datatec switched financing companies. Prior to IBM Credit, there was a finance

company called Finova which Datatec had these types of problems with.


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40. According to CS-1 and CS-5, towards the end of the Class Period, auditors for

IBM Credit went “on a rampage” and undertook a very extensive audit of Datatec=s accounts

receivable because the accounts receivable – and the amounts actually paid to Datatec by

customers against the accounts receivable -- were so askew that they did not make any sense.

IBM Credit demanded extensive back-up materials from Defendants, and apparently finally

learned the truth about the phony invoicing

41. A few days before the end of the Class Period, IBM Credit essentially cancelled

Datatec’s credit facility. Previously, commencing with the fiscal quarter ended January 31,

2001, through and including the fiscal quarter ended July 31, 2003, IBM Credit had always

provided the Company with written default waivers for the Company’s non-compliance with

certain financial covenants in the IBM Credit facility. However on December 12, 2003, IBM

Credit informed the Company that it would not provide the Company with a written waiver for

the fiscal quarter ended October 31, 2003.

42. The investing public and others were kept in the dark about Defendants’

fraudulent invoices, the full extent of Datatec’s non-compliance with IBM Credit=s financing

requirements, and the true state of Datatec’s financial condition indicated by Defendants’

phantom invoicing scheme.

The Phantom Products Scheme:

43. In addition, during the Class Period, Defendants touted certain new software

products, including an “Asset Guardian” service, as well along in development, in order to entice

investors to invest in the Company. The following information regarding Defendants’ phantom

products was related by CS-2, a high-level former technology executive at Datatec:


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44. Asset Guardian was, “by definition a product which couldn’t exist” -- particularly

as Defendants conceived and touted it, according to CS-2. The product was supposed to manage

the entire life cycle of a technology asset (such as a computer, phone device, or any other

technology device) from its earliest conception to the final phases of disposal. The product was

supposed to manage technology assets’ life cycles all the way from procurement (sourcing,

purchasing), through deployment, configuration, installation, help desks, maintenance,

depreciation, technology refresh, planned obsolescence, retirement and disposal, and everywhere

in-between. The project was impossibly over-ambitious. A lot of large companies – far larger

than Datatec – “aspire just to bite off just a small piece of the life cycle management products,

and make a living from that,” according to CS-2.

45. In reality, Defendants knew or recklessly disregarded that Asset Guardian was

utter “pie in the sky,” and was impossible to produce with the limited financial and manpower

resources Defendants allotted to it. However, Defendant Gaon knew that investors would like

the concept. According to CS-2, Defendants thus merely went through the motions of trying to

develop the Asset Guardian product, and tried to put together a “skeletal product, like a slide

show,” to show to investors.

46. Some of the specific facts which Defendants knew or disregarded as to the

impossibility of Datatec developing Asset Guardian, given Datatec’s limited resources, included

the following:

(a) According to CS-2 (who made his views known to Defendants), development of the extraordinarily ambitious Asset Guardian project would have required millions upon millions of dollars (perhaps $30 million, but it is difficult to know, since “it’s never been done” and “nothing like that exists”) and a coordinated effort of hundreds of top programmers at a powerhouse software development company such as


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IBM or Microsoft. A company of Datatec’s size “couldn’t pull it off if it had 100 years,” according to CS-2.

(b) Defendants’ development efforts were paltry “for show” efforts amounted

to only the tiniest fraction of what the project required. Defendants merely allocated to the project approximately $250,000 (for software and database applications and hardware), and approximately twelve programmers all together, consisting of some offshore developers, and the Datatec team which had previously failed to produce other viable software products whom CS-2 referred to as the “failed eDeploy team.” CS-7, a former project manager for eDeploy, explained that, after a series of layoffs, Datatec’s “software development division” consisted of only 10 people by May 2001, and continued to be cut until the few remaining people were all laid off at the end of 2003.

(c) Datatec’s competency was never in software development; it was not a

software development company. The same small team of programmers went from one failed project to another, while Defendants touted the failed projects.

47. Asset Guardian was merely the last of Datatec’s “phantom products.” These

products only existed as “power point presentations.” Defendants would put on “dog and pony

shows” for investors, and act as if significant development of the product was only days away.

Investors would throw money at the Company, which Defendants would promptly squander.

48. Another failed Datatec product was “eDeploy.” Datatec previously received $10

million of financing from IBM for eDeploy. Defendants went through the $10 million in

approximately a year and a half. At the same time, Datatec had lavish offices in Denver, with

budgets for ski vacations for employees, a frozen margarita machine and foosball in the office:

“It was a dot.com party,” according to CS-2.

49. eDeploy was supposed to manage a technology deployment project when devices

were located in many different locations. However, it wound up being a web-based spreadsheet

instead of a product with any intrinsic value. eDeploy was a “skeleton, extremely bare bones”

compared to what it was supposed to be. It was more work to use eDeploy than not to, and it


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created more work (administration and paperwork) than it saved, because it was so poorly

designed and executed. Defendants made rules attempting to force Datatec’s managers to use

eDeploy in their work, but the managers refused to use eDeploy because it created so much extra

work. Some Datatec managers were fired for refusing to use eDeploy. Outside companies who

licensed eDeploy from Datatec discovered that it was unusable in its natural state. These

companies either discontinued using eDeploy, or revised it themselves. CS-2 summed up

eDeploy as follows: “It was just another failed software product.”

50. Another such failed Datatec product, which the same programmers worked on,

was IWPS. IWPS was supposed to be a software configuration tool, which configured computer

devices “wholesale” – loading software onto hundreds of computers in an unattended and

automatic fashion, to the customers’ specs, without the need for anyone to spend “one on one”

time with the individual computers. It never worked.

51. The same developers who failed at putting together IWPS and eDeploy went on to

fail with Asset Guardian. Asset Guardian never saw the light of day, and was never licensed or

used.

52. Behind each of Datatec’s phantom products, there was someone – usually a crony

of Defendant Gaon’s – who had the vision for the product.

53. According to CS-2, Michael Lazar was the individual responsible for the vision

for Asset Guardian. Lazar and Gaon went “way back” and had previously worked with one

another at Glassgal. Raul Pupo, Datatec’s new CEO after Gaon resigned, immediately

recognized that Asset Guardian was valueless. During Pupo’s first two weeks as CEO, he

dismissed Lazar and everyone else who had anything to do with Asset Guardian.

MATERIALLY FALSE AND MISLEADING


20

STATEMENTS ISSUED DURING THE CLASS PERIOD

54. The Class Period began on June 26, 2003. On that date, the Defendants issued a

press release announcing the financial results of its fourth quarter of fiscal 2003 (ending April

30, 2003) and revenue and earnings guidance for fiscal 2004.1 Defendants reported that for

fiscal 2003, the Company would report $125.1 million in revenues and $1.4 million in income,

or $0.04 per share.

55. Also on June 26, 2003, with respect to fiscal 2004 (ending April 30, 2004),

Defendants stated the following:

For fiscal 2004, Datatec expects that sales, excluding potential sales from new government opportunities, will be in the range of $120 to $125 million and earnings per share will be between $0.14 and $0.16. The Company expects to be profitable in all four quarters. Any Government sales in the year would be incremental to both the top and bottom line forecasts.

56. Chairman and CEO Gaon stated that the Company would be working to improve

its gross profit margins, profitability and cash flow, in an attempt to reduce the Company=s future

working capital needs: “The Company expects to achieve improvements to gross margins,

profitability and cash flows by taking a more selective approach to project opportunities,

adjusting its sales mix and continuing to focus on expense control.” Gaon told the public that the

Company=s recent acquisition of Millennium Care, combined with Datatec=s Asset Guardian

software-enabled services, was expected to contribute to the gross margin improvement.

57. The statements in the preceding three paragraphs were materially false and

misleading when made for the following reasons:

1 The Company=s fiscal year begins on May 1, and thus its quarters break down as follows: Q1 (May 1 to July 31); Q2 (August 1 to October 31); Q3 (November 1 to January 31); Q4 (February 1 to April 30).


21

(a) The statements setting forth Datatec’s financial results for its fourth quarter of fiscal 2003 (ending April 30, 2004) were materially false and misleading because they (i) failed to disclose that the results were based on extensive pre-invoicing and improper recognition of revenues for work which was not performed when invoiced, and (ii) failed to disclose that Datatec’s finances were so dire that the Company was meeting its semi-monthly payroll and its bills from Datatec’s vendors with fraudulently-obtained accounts receivable financing. Defendants directed and knew about, or recklessly disregarded, the Company’s pre-invoicing to bolster revenues. In addition, Defendants were directly involved with obtaining such fraudulent financing in order to meet payroll and vendor bills.

(b) The statements setting forth Datatec’s positive revenue and earnings

guidance for fiscal 2004 lacked any reasonable basis and were materially false and misleading because they (i) failed to disclose that the guidance was based on continuing and increasing Defendants’ improper practice of extensive pre-invoicing and improper recognition of revenues for work which was not performed when invoiced, and (ii) failed to disclose that Datatec’s finances were so dire that the Company was meeting and could only continue to meet its semi-monthly payroll and its bills from Datatec’s vendors with fraudulently-obtained accounts receivable financing. Defendants directed and knew about, or recklessly disregarded, the Company’s pre-invoicing to bolster revenues. In addition, Defendants were directly involved with obtaining such fraudulent financing in order to meet payroll and vendor bills, and knew, or recklessly disregarded that the revenue and earnings guidance had no basis in reality.

(c) The statement that “Datatec’s Asset Guardian software-enabled services is

expected to contribute to . . . gross margin improvement” had no reasonable basis and was materially false and misleading because the Asset Guardian software was essentially “pie in the sky” and could not “contribute to . . . gross margin improvement.” Defendants knew, or recklessly disregarded, that the Asset Guardian software did not work and was not achievable without a commitment of resources far in excess of anything Datatec was capable of, and that Datatec had no viable plan for the development, financing and commercialization of the Asset Guardian software.

58. On July 3, 2003, Datatec announced that it had received “aggregate gross

proceeds of $4.9 million from six funds managed by The Palladin Group L.P., one of the

Company’s current lenders, through the issuance of Subordinated Secured Convertible Notes.”


22

The Company also issued four-year warrants to purchase an aggregate of 875,000 shares of

Common Stock at an exercise price of $1.32 per share to the purchasers of the Notes.

59. On July 23, 2003, the Company filed its annual report on Form 10-K for its fiscal

2003 year ended April 30, 2003 (the “2003 Form 10-K”). The 2003 Form 10-K was signed and

certified by defendants Gaon and Hirschhorn. The Management Discussion and Analysis

(“MD&A”) section of the 2003 Form 10-K contained the following statements regarding the

Company’s critical revenue recognition policies:

Critical Accounting Policies and Use of Estimates

Revenue Recognition

. . .

Services from deployment activities are performed primarily under long-term contracts, but may be performed under short-term workorders or time and material arrangements. The Company's typical long-term contract contains multiple elements designed to track the various services required under the arrangement with the customer. These elements are used to identify components of progress billings, but are combined for revenue recognition purposes. The Company recognizes revenue earned under long-term contracts utilizing the percentage of completion method of accounting by measuring a contract's percentage of completion as determined by the percentage of total costs incurred to date to total estimated costs. Contracts are reviewed at least quarterly and if necessary, revenue, costs and gross margin are adjusted prospectively for revisions in estimated total contract value and total estimated contract costs. Estimated losses are recognized when identified. Payment milestones differ according to the customer and the type of work performed. Generally, the Company invoices customers and payments are received throughout the deployment process and, in certain cases, in advance of work performed if a substantial amount of up front costs are required. In certain cases payments are received from customers after the completion of site installation. However, revenue and costs are only recognized on long-term contracts to the extent of the contracts’ percentage of completion. Costs and estimated earnings in excess of billings, which is classified as a current asset, is recorded for the amount of revenue earned in excess of billings to customers.


23

Deferred revenue is recorded as a current liability for the amount of billings in excess of revenue earned. The Company records payments received in advance and services to be supplied in the future under contractual agreements as billings in excess of costs and estimated earnings until such related services are supplied. [Emphasis supplied.]

60. The statements in the preceding paragraph were materially false and misleading

when made for the following reasons:

(a) The statement that “revenue and costs are only recognized on long-term contracts to the extent of the contracts’ percentage of completion” was false and misleading because Defendants were causing Datatec to recognize substantial revenues well prior to the performance of the work on Datatec’s long-term contracts, pursuant to Defendants’ undisclosed phantom invoicing scheme. Defendants directed and knew about, or recklessly disregarded, the Company’s pre-invoicing of work on long-term contracts long before completion, in order to bolster revenues. In addition, Defendants were directly involved with invoicing work on long term contracts prior to completion to obtain fraudulent accounts receivable financing in order to meet payroll and vendor bills, and knew, or recklessly disregarded that Datatec’s stated revenue recognition policy was continually being violated.

(b) The statement that “Generally, the Company invoices customers and

payments are received throughout the deployment process and, in certain cases, in advance of work performed if a substantial amount of up front costs are required” failed to disclose that Defendants in fact were causing Datatec to place phantom “pre-invoices” on its accounts receivable prior to the deployment process, or the appropriate stage in the deployment process, and well in advance of work being performed regardless of the up front costs required. Defendants directed and knew about, or recklessly disregarded, the Company’s pre-invoicing of work prior to deployment, to bolster revenues, and to obtain fraudulent accounts receivable financing in order to meet payroll and vendor bills.

61. The MD&A in the 2003 Form 10-K also contained a chart purporting to

summarize Datatec’s defaults in its financial covenants (e.g., “net profit to revenue” and “annual

revenue to working capital” ratios) with IBM Credit during each fiscal quarter, beginning in the

fiscal quarter ended as of January 31, 2001, which IBM Credit had waived. For instance, the


24

chart listed the following financial covenants with which Datatec had failed to comply for

quarters ending in 2003:

Period Covenant Requirement Actual

Jan. 31, 2003 Annual revenue to working capital

Greater than 5.0 to 1.0 and equal to or less than 25.0 to 1.0

(126.9) to 1

Jan. 31, 2003 Debt service ratio Equal to or greater than 2.0 to 1.0 0.2 to 1

Apr. 30, 2003 Debt service ratio Equal to or greater than 1.25 to 1.0 (1.73) to 1

Apr. 30, 2003 Net profit to revenue Equal to or greater than 0.10 percent

(3.38%)

The introductory material to the chart in the 2003 Form 10-K explained that: “The Company and

IBM Credit entered into an Acknowledgement, Waiver and Amendment to the Inventory and

Working Capital Financing Agreement as of the end of each quarter since January 31, 2001 by

which IBM Credit has waived the Company’s defaults.”

62. The statements in the introductory material and chart referenced in the preceding

paragraph were materially false and misleading when made for the following reasons:

(a) The default ratios for items involving revenues (such as “annual revenue to working capital” and “net profit to revenue”) summarized in said chart were more serious than stated, because Defendants had caused Datatec had recognized substantial revenues well prior to work being performed, pursuant to Defendants’ undisclosed phantom invoicing scheme.

(b) The statement that IBM had waived the Company’s defaults with its financial covenants failed to disclose that Defendants had caused Datatec to engage in a pervasive fraudulent invoicing scheme, which, if known to IBM, would in all likelihood result in IBM’s refusal to continue waiving Datatec’s defaults with its financial covenants, and result in the termination of the accounts receivable financing upon which the Company was dependent for meeting payroll and vendor bills.

63. The 2003 Form 10-K also contained the following description of Datatec’s

“deployment services”:


25

The Company utilizes internally developed Web-enabled implementation tools that differentiate its deployment services. These tools, together with its proprietary processes, allow the Company to rapidly and efficiently deliver high quality and cost effective large-scale technology deployment solutions to its clients, which it does primarily on a fixed time/fixed cost basis. The components of the Company's implementation model are made up of a combination of people, processes and technology that include: • The utilization of eDeploy®, a Web-based software tool that

provides collaboration capabilities for remote planning and design, communication capabilities through fax, voice, data, or digital photographs and monitoring capabilities, ensures that best practices are employed and that mission critical milestones or timelines are escalated to supervisory levels if missed by the responsible parties. These features and others are designed to enhance the speed, accuracy and productivity of the deployment process.



(a) The statements that that “The Company utilizes internally developed Web-enabled implementation tools that differentiate its deployment services” and that “These tools, together with its proprietary processes, allow the Company to rapidly and efficiently deliver high quality and cost effective large-scale technology deployment solutions to its clients” were false and misleading because, instead of favorably differentiating Datatec’s deployment services, Datatec’s internally developed Web-enabled implementation tools (such as eDeploy, the first tool listed in the 2003 Form 10-K) were rudimentary, hindered Datatec’s services, and were generally not used by Datatec’s personnel, who refused to utilize these tools due to their inefficiency.

(b) The statements regarding eDeploy’s capabilities and the statement that

“These features and others are designed to enhance the speed, accuracy and productivity of the deployment process” were false and misleading because eDeploy was essentially a poorly-designed web-based spread sheet, which Datatec’s own personnel refused to utilize because it was more cumbersome than traditional methods.

65. In a press release dated July 23, 2003, issued in connection with the filing of the

fiscal 2003 Form 10-K, Datatec stated that it had reported $125.1 million in sales for fiscal 2003,


26

a 66% increase compared to fiscal 2002. Reported operating income for fiscal 2003 was $5.1

million compared to an operating loss of $245,000 for the prior year. Reported net income was

$1.4 million or $0.04 per share in fiscal 2003 compared to a net loss of $2.7 million or $0.08 per

share in fiscal 2002.

66. In the July 23, 2003 press release, Datatec “reiterated fiscal 2004 revenue

guidance of $120 to $125 million and EPS guidance of $0.14 to $0.16, based upon 41 million

shares outstanding.” Gaon again told the public:

Our primary objectives for fiscal 2004 are to improve gross margins by being more selective with respect to the projects we undertake and to increase the focus on our suite of Asset Lifecycle Software products now integrated under the Asset Guardian brand name. In the short time we have been marketing the capabilities of Asset Guardian, which incorporates IW2000, eDeploy and I-Care and their attendant services, we are very encouraged with the response and traction this offering is having with both existing clients and prospects alike. The Asset Guardian web enabled solution has a high gross margin potential and should grow at significantly higher rate than other parts of the business.

67. In the press release Gaon went on to say:

Datatec is continuing to penetrate into new major OEM organizations with the expectation of securing their deployment services and we are also working diligently to increase our exposure to government opportunities through existing relationships. The Company expects to close its first government opportunity with Q2. At this time, we appear to be on track with the fiscal 2004 forecast that was announced on June 26. [Emphasis supplied.]

68. The statements in the preceding three paragraphs were materially false and


(a) The statements setting forth Datatec’s financial results for fiscal 2003 were materially false and misleading because they (i) failed to disclose that the results were based on extensive pre-invoicing and improper recognition of revenues for work which was not performed when invoiced, and (ii) failed to disclose that Datatec’s finances were so dire that the Company was meeting its semi-monthly payroll and its bills from


27

Datatec’s vendors with fraudulently-obtained accounts receivable financing. Defendants directed and knew about, or recklessly disregarded, the Company’s pre-invoicing to bolster revenues. In addition, Defendants were directly involved with obtaining such fraudulent financing in order to meet payroll and vendor bills.

(b) The statements reiterating Datatec’s positive revenue and earnings

guidance for fiscal 2004 and claiming that “At this time, we appear to be on track with the fiscal 2004 forecast that was announced on June 26” lacked any reasonable basis and were materially false and misleading because they (i) failed to disclose that the guidance was based on continuing and increasing Defendants’ improper practice of extensive pre-invoicing and improper recognition of revenues for work which was not performed when invoiced, and (ii) failed to disclose that Datatec’s finances were so dire that the Company was meeting and could only continue to meet its semi-monthly payroll and its bills from Datatec’s vendors with fraudulently-obtained accounts receivable financing. Defendants directed and knew about, or recklessly disregarded, the Company’s pre-invoicing to bolster revenues. In addition, Defendants were directly involved with obtaining such fraudulent financing in order to meet payroll and vendor bills, and knew, or recklessly disregarded that the revenue and earnings guidance had no basis in reality.

(c) The statements that “In the short time we have been marketing the

capabilities of Asset Guardian, which incorporates IW2000, eDeploy and I-Care and their attendant services, we are very encouraged with the response and traction this offering is having with both existing clients and prospects alike” and that “The Asset Guardian web enabled solution has a high gross margin potential and should grow at significantly higher rate than other parts of the business” had no reasonable basis and were materially false and misleading because the Asset Guardian software was essentially “pie in the sky” and did not have “high gross margin potential.” Defendants knew, or recklessly disregarded, that the Asset Guardian software did not work and was not achievable without a commitment of resources far in excess of anything Datatec was capable of, and that Datatec had no viable plan for the development, financing and commercialization of the Asset Guardian software.

69. Five days later, on July 28, 2003, Datatec announced that it had “sold 3,696,621

shares of newly issued common stock to institutional and other accredited investors for gross

proceeds of $3.49 million. Investors will also receive five-year warrants to purchase 1,848,306

shares of common stock at a strike price of $1.3637 per share.”


28

70. On July 29, 2003, Datatec filed an amendment to a Form S-1 Registration

Statement (File No. 333-105654) for the sale of 8,226,247 shares of stock by certain selling

shareholders. Four million shares pertained to a private placement of Datatec common stock in

April 2003, through which Datatec had raised $5 million; two million shares pertained to

conversion of warrants sold in connection with the same private placement; 480,000 shares

pertained to conversion of warrants issued to a financial adviser in connection with the April

2003, private placement, and over 1.5 million shares were in connection with Datatec’s

acquisition of Millennium Care, Inc.

71. On July 31, 2003, Datatec filed a Form S-1 Registration Statement (File No.

333-107502) for the sale of another 9,546,250 shares of stock held by certain selling

shareholders. The shares were previously issued to the selling shareholders upon conversion of

$4.9 million aggregate principal amount of subordinate secured convertible notes issued in a

private placement in July 2003.

72. On August 13, 2003, Defendants announced that Datatec was awarded a $5.8

million wireless deployment project. Defendants told the public that Datatec would receive $5.8

million to deploy “wireless technologies at 170 retail locations nationwide” and that “[w]ork is

scheduled to start immediately and will be completed by October 31, 2003, coinciding with the

end of Datatec=s fiscal 2004 second quarter.” However, Defendants did not reveal the identity of

the purported customer who had awarded the alleged contract.

73. On September 9, 2003, Defendants issued a press release stating that it had been

awarded a contract valued at $11.6 million “to deploy new LAN-based security technologies at

more than 500 retail locations across North America.” According to the press release, the

project would “start up immediately and is scheduled for completion by January 31, 2004,


29

coinciding with the end of Datatec=s fiscal 2004 third quarter.” The press release also claimed

that the Company’s “Millennium Care division will play a pivotal role during both the planning

and implementation phases . . . .” Defendants again did not name the customer who purportedly

contracted for these services.

74. On September 12, 2003, the Company filed a Registration Statement on Form S-1

(File No. 333-108737) for the sale of another 8,071,611 shares of stock by certain selling

shareholders in the secondary market, including 5.5 million shares issued in a July 28, 2003

private placement through which Datatec received $3.49 million in proceeds. Thus, by

September 12, 2003, the Company had registered a total of nearly 26 million shares for sale in

the secondary market, or more than half of the Company=s issued shares. These secondary stock

offerings were being made on behalf of several companies that had provided financing for the

Company in exchange for common stock, such as The Palladin Group, and others.

75. On September 15, 2003, Defendants issued a press release reporting Datatec’s

results for the first quarter of fiscal 2004 ended July 31, 2003, and reiterated “fiscal 2004

revenue guidance of $120 to $125 million and EPS guidance of $0.12 cents based upon 50

million shares outstanding.”

76. Defendants reported in this press release that Datatec’s operating profits for the

first fiscal quarter of 2004 were $613,000 compared to a loss of $89,000 in the prior quarter. The

net loss for the quarter was $175,000 or $0.00 per share, compared to a net loss of $1,133,000 or

$0.03 per share in the prior quarter.

77. Defendant Gaon also stated in the September 15, 2003 press release that: “Despite

having achieved a break-even quarter compared to a loss in Q4 in what is a continuing difficult


30

economic environment,” he was still “reiterating the same guidance of 12 cents per share that we

gave three months ago.”

78. The September 15, 2003 press release expounded on fiscal 2004:

Mr. Gaon continued, >Some 12 months ago we stated that our primary objectives were to return to profitability and to strengthen the balance sheet following the debilitating effect of the technology slow down. We fully expect to sustain the profitability that we attained in fiscal 2003, and today, our balance sheet is stronger than ever. We are committed to improving the balance sheet even further without recourse to the capital markets through a combination of operational and marketing initiatives that should start positively impacting operations from Q3 onwards. These include anticipated Government revenues to provide greater critical mass and economies of scale, the full launch of Asset Guardian software and its attendant services that we expect will generate $7m in revenues this year climbing to $15m-$18m next year at a combined gross margin of around 50%, and finally, the automation and centralization of certain internal processes and functions to reduce costs.= [Emphasis supplied.]

79. The statements in the preceding four paragraphs were materially false and


(a) The statements setting forth Datatec’s financial results for first quarter of fiscal 2004 and claiming that “today, our balance sheet is stronger than ever” were materially false and misleading because they (i) failed to disclose that the results were based on extensive pre-invoicing and improper recognition of revenues for work which was not performed when invoiced, and (ii) failed to disclose that Datatec’s finances were so dire that the Company was meeting its semi-monthly payroll and its bills from Datatec’s vendors with fraudulently-obtained accounts receivable financing. Defendants directed and knew about, or recklessly disregarded, the Company’s pre-invoicing to bolster revenues. In addition, Defendants were directly involved with obtaining such fraudulent financing in order to meet payroll and vendor bills.

(b) The statements again reiterating Datatec’s positive revenue and earnings

guidance for fiscal 2004, and Gaon’s insistence that he was reiterating “the same guidance of 12 cents per share that we gave three months ago” lacked any reasonable basis and were materially false and misleading because they (i) failed to disclose that the guidance was based on continuing and increasing Defendants’ improper practice of extensive pre-invoicing and


31

improper recognition of revenues for work which was not performed when invoiced, and (ii) failed to disclose that Datatec’s finances were so dire that the Company was meeting and could only continue to meet its semi-monthly payroll and its bills from Datatec’s vendors with fraudulently-obtained accounts receivable financing. Defendants directed and knew about, or recklessly disregarded, the Company’s pre-invoicing to bolster revenues. In addition, Defendants were directly involved with obtaining such fraudulent financing in order to meet payroll and vendor bills, and knew, or recklessly disregarded that the revenue and earnings guidance had no basis in reality.

(c) The statements that “operational and marketing initiatives . . . should start

positively impacting operations from Q3 onwards” and that these initiatives included “the full launch of Asset Guardian software and its attendant services that we expect will generate $7m in revenues this year climbing to $15m-$18m next year at a combined gross margin of around 50%” had no reasonable basis and were materially false and misleading because the Asset Guardian software was essentially “pie in the sky” and would not have a “full launch” anytime in the foreseeable future. Nor could Asset Guardian generate the revenues which Defendants claim they “expected,” nor could it achieve a “combined gross margin of 50%.” Defendants knew, or recklessly disregarded, that the Asset Guardian software did not work and was not achievable without a commitment of resources far in excess of anything Datatec was capable of, and that Datatec had no viable plan for the development, financing and commercialization of the Asset Guardian software.

80. On September 15, 2003, Defendants filed Datatec’s Form 10-Q for the quarterly

period ended July 30, 2003. The Form 10-Q was signed by defendants Gaon and Hirschhorn.

81. The Form 10-Q described Datatec’s purported revenue recognition policies as

follows (similarly to the description of these policies in the 2003 Company’s 10-K):

Critical Accounting Policies:

Revenue Recognition

The Company generates revenue from: (1) providing technology deployment services, including configuring Internetworking and computing devices to meet the specific needs of its customers, integrating these devices as well as operational and application software with a customer's existing hardware and software, and physically installing the


32

technology on the customer's network and (2) from licensing its software to third parties.

Services from deployment activities are performed primarily under long-term contracts, but may be performed under short-term workorders or time and material arrangements. The Company's typical long-term contract contains multiple elements designed to track the various services required under the arrangement with the customer. These elements are used to identify components of progress billings, but are combined for revenue recognition purposes. The Company recognizes revenue earned under long-term contracts utilizing the percentage of completion method of accounting by measuring total costs incurred to total estimated costs. Under the percentage of completion method of accounting, revenue, costs and gross margin are recognized as work is performed based on the relationship between total costs incurred and total estimated costs.

Contracts are reviewed at least quarterly and, if necessary, revenue, costs and gross margin are adjusted prospectively for revisions in estimated total contract value and total estimated contract costs. Estimated losses are recognized when identified.

Payment milestones differ according to the customer and the type of work performed. Generally, the Company invoices customers and payments are received throughout the deployment process and, in certain cases, in advance of work performed if a substantial amount of up front costs is required. In certain cases payments are received from customers after the completion of site installation. However, revenue and costs are only recognized on long-term contracts to the extent of the contracts' percentage of completion. Costs and estimated earnings in excess of billings, which is classified as a current asset, is recorded for the amount of revenue earned in excess of billings to customers. Accrued costs or deferred revenue is recorded as a current liability for the amount of billings in excess of revenue earned.

Revenue earned under short-term workorders and time and material arrangements is recognized as the work is completed. Billings under these arrangements are typically done when the work is completed. [Emphasis supplied.]

82. The statements concerning revenue recognition in the Form 10-Q set forth in the

preceding paragraph were false and misleading for the reasons set forth in ¶ 60, and for the

additional reason that the statement that “revenue earned under short-term workorders and time


33

and material arrangements is recognized as the work is completed” was false and misleading

because Defendants caused Datatec to recognize revenues prior to completion of short-term

workorders and time and material arrangements.

83. The same Form 10-Q also set forth the partial information regarding Datatec’s

liquidity difficulties:

Liquidity

The net loss of $19.4 million for the fiscal year ended April 30, 2001 and the net loss of $2.7 million for the fiscal year ended April 30, 2002 resulted in a strain on the Company's cash resources. Although the Company realized net income of $1.4 million for fiscal year ended April 30, 2003 and took dramatic measures to cut costs and to manage cash, it is still experiencing a significant strain on cash resources. The primary reason for the strain on resources is the increased requirements for expenditures for field personnel, job expenses and materials related to the increased revenue. As a result, the working capital financing line regularly remains at or close to its maximum allowable levels and the average days outstanding on trade payables have extended beyond normal credit terms granted by vendors. Achievement of the Company's fiscal 2004 operating plan, including maintaining adequate capital resources, depends upon the timing of work performed by us on existing projects, our ability to gain and perform work on new projects, our ability to maintain positive relations with our key vendors and our ability to raise permanent capital and replace our current working capital financing line within the timeframe required to meet our spending requirements. Multiple project cancellations, job performance related losses, delays in the timing of work performed by us on existing projects, our inability to gain and perform work on new projects, or our inability to raise permanent capital and replace our current working capital financing line in a timely fashion could have an adverse impact on our liquidity and on our ability to execute our operating plan.

The Company has taken a variety of actions to ensure our continuation as a going concern. A summary of recent events and our completed or planned actions are as follows:

• The Company initiated and completed substantial cost saving measures during the fiscal years ended April 30, 2001 and 2002 and now believes it has a cost structure in line with our expected revenue.


34

• As a result of the increase in demand for our services and the cost reduction measures initiated over the past two years, we achieved profitability during the fourth quarter of fiscal 2002 and during fiscal 2003. We expect to be profitable throughout fiscal 2004.

• In April 2003, the Company raised aggregate gross proceeds of $5.0 million in a private placement of our common stock and warrants. The proceeds were raised for working capital purposes.

• In June 2003, we extended our credit facility with IBM Credit to August 2004 from August 2003 and lowered the interest charges on the debt from prime rate plus 4.25% to prime rate plus 1.75%.

• On July 3, 2003, the Company raised an additional $4.9 million by issuing subordinated secured convertible notes and warrants to one of its existing lender groups. The proceeds are being used to pay down the IBM credit facility and for working capital purposes.

• On July 28, 2003, the company raised an additional $3.49 million aggregate gross proceeds in a private placement of our common stock and warrants. The proceeds were raised for working capital purposes.

• On August 29, 2003, the Company entered into an agreement with Christopher J. Carey, by which it agreed to pay down amounts owed to Mr. Carey in equal monthly amounts of $316,666.67, plus interest, beginning September 2003 and ending February 2004. At its option, the Company may pay such monthly amounts in cash or in shares of the Company's common stock determined using a five day average prior to the monthly payment date. The agreement with Mr. Carey also requires the Company to register the shares of common stock issuable to Mr. Carey.

• Management continues to seek to replace our working capital financing line and raise additional permanent capital to support our growth in business. However, management believes that if it is unable to replace our working capital financing line and raise additional capital, it may not be able to continue as a going concern.

IBM Credit, the Company's working capital lender, has notified the Company that it does not intend to renew its working capital line beyond August 2004 (see Note 6 of the Notes to the Condensed Consolidated Financial Statements). As a result, the company is seeking replacement financing for its credit facility. [Emphasis supplied.]


35

84. The statements in the Form 10-Q set forth in the preceding paragraph were false

and misleading when made for the following reasons:

(a) The statements that “As a result of the increase in demand for our services and the cost reduction measures initiated over the past two years, we achieved profitability during the fourth quarter of fiscal 2002 and during fiscal 2003” were materially false and misleading because they (i) failed to disclose that the 2003 results were based on extensive pre-invoicing and improper recognition of revenues for work which was not performed when invoiced, and (ii) failed to disclose that Datatec’s finances were so dire that the Company was meeting its semi-monthly payroll and its bills from Datatec’s vendors with fraudulently-obtained accounts receivable financing. Defendants directed and knew about, or recklessly disregarded, the Company’s pre-invoicing to bolster revenues. In addition, Defendants were directly involved with obtaining such fraudulent financing in order to meet payroll and vendor bills.

(b) The statements that “We expect to be profitable throughout fiscal 2004” lacked

any reasonable basis and were materially false and misleading because they (i) failed to disclose that the guidance was based on continuing and increasing Defendants’ improper practice of extensive pre-invoicing and improper recognition of revenues for work which was not performed when invoiced, and (ii) failed to disclose that Datatec’s finances were so dire that the Company was meeting and could only continue to meet its semi-monthly payroll and its bills from Datatec’s vendors with fraudulently-obtained accounts receivable financing. Defendants directed and knew about, or recklessly disregarded, the Company’s pre-invoicing to bolster revenues. In addition, Defendants were directly involved with obtaining such fraudulent financing in order to meet payroll and vendor bills, and knew, or recklessly disregarded that the revenue and earnings guidance had no basis in reality.

(c) The statements regarding Datatec’s liquidity were false and misleading because

they did not reveal that Datatec was resorting to fraudulent invoicing to obtain financing in order to meet payroll and vendor bills, and that the Company’s liquidity problems were thus actually worse than portrayed in the Form 10-Q.

85. The same Form 10-Q also contained a chart purporting to summarize Datatec’s

defaults of its financial covenants (e.g., “net profit to revenue” and “annual revenue to working

capital” ratios) under the IBM Credit facility, for each fiscal quarter, beginning in the fiscal

quarter ended as of January 31, 2001, which IBM Credit had waived. For instance, the chart


36

listed the same financial covenants with which Datatec had failed to comply for quarters ending

in 2003 which are listed in ¶ 61 of this Complaint, plus the following additional item:

Period Covenant Requirement Actual

July 31, 2003 Net profit to revenue Equal to or greater than 0.10% (0.05%)

The introductory material to the chart in the Form 10-Q explained that: “The Company and IBM

Credit entered into an Acknowledgement, Waiver and Amendment to the Inventory and Working

Capital Financing Agreement as of the end of each quarter since January 31, 2001 by which IBM

Credit has waived the Company’s defaults.” Following the chart, the Form 10-Q advised that:

“IBM Credit, the Company’s working capital lender, has notified the Company that it does not

intend to renew its working capital line beyond August 2004. As a result, the Company is

seeking replacement financing for its credit facility.”

86. The statements in the introductory material and chart and following the chart,

referenced in the preceding paragraph were materially false and misleading when made for the

following reasons:

(a) The default ratios for items involving revenues (such as “annual revenue to working capital” and “net profit to revenue”) summarized in said chart were more serious than stated, because Defendants had caused Datatec to recognize substantial revenues well prior to work being performed, pursuant to Defendants’ undisclosed phantom invoicing scheme.

(b) The statement that IBM had waived the Company’s defaults with its

financial covenants and would not renew beyond August 2004 failed to disclose that Defendants had caused Datatec to engage in a pervasive fraudulent invoicing scheme, which, if known to IBM, would in all likelihood result in IBM’s refusal to continue waiving Datatec’s defaults with its financial covenants, and result in the termination of the accounts receivable financing upon which the Company was dependent for meeting payroll and vendor bills sooner than August 2004.


37

87. On September 26, 2003, Defendants issued the following press release, touting its

Asset Guardian product and a business partnership purportedly entered into for the purpose of

enhancing Datatec’s Asset Guardian Service, as follows:

[Datatec] entered into a partnership with Network Physics to accelerate and simplify enterprise deployments of advanced network services such as IP Telephony, Wireless and Virtual Private Networking (VPN).

Datatec will utilize the Network Physics’ NP/BizFlow product as a cornerstone for its “Day 2” Asset Guardian® service, and Network Physics has selected Datatec’s Millennium Care division as its service desk partner for frontline help desk operations, providing tier one support for Network Physics customers.

Datatec’s Asset Guardian service focuses on the monitoring, maintenance, and administration of critical network services. Network Physics will provide three vital capabilities to Datatec’s Asset Guardian service: -- end-to-end service visibility from an end-user perspective -- business impact alerting that identifies which business users and what applications are affected by network performance issues

-- rapid problem resolution for hard failures and hard-to-find performance degradations.

“Understanding the ongoing performance of your key assets is an integral part of the operations and maintenance of today’s IT environments,” said Michael Lazar, Datatec Vice President of Technology and Development. “By adding Network Physics as an offering to our Asset Guardian service, we can measure in real-time the key performance indicators (KPI’s) of an enterprise’s most strategic assets, including business critical applications and vital network connections across WAN, LAN, VPN, wireless, and Internet telephony deployments. The Network Physics product provides the right mix of end-to-end business application performance and deep network visibility to capture the end user experience and truly manage inside the network cloud.”

“The synergy between Datatec and Network Physics drove us to select Datatec as our frontline Help Desk delivery partner,” said David Jones, President and CEO of Network Physics. “Both Datatec’s and Network Physics’ customer bases are facing enormous challenges in the


38

deployment (Day 1) and management (Day 2) of critical new network initiatives. Asset Guardian’s seamless approach to the full service chain made Datatec a natural choice as our Level One service desk partner for 24 x 7 customer support.”



(a) The statement that “Datatec’s Asset Guardian service focuses on the monitoring, maintenance, and administration of critical network services” was materially false and misleading because the Asset Guardian software was essentially “pie in the sky” and therefore could not “focus on” or otherwise assist with “monitoring maintenance and administration of critical network services.” Defendants knew, or recklessly disregarded, that the Asset Guardian software did not work and was not achievable without a commitment of resources far in excess of anything Datatec was capable of, and that Datatec had no viable plan for the development, financing and commercialization of the Asset Guardian software.

(b) Similarly, the statement that “By adding Network Physics as an offering to

our Asset Guardian service . . .” falsely and misleadingly implied that Asset Guardian was a functional service to which additional capabilities were being “added.” Defendants knew, or recklessly disregarded, that the Asset Guardian software did not work and was not achievable without a commitment of resources far in excess of anything Datatec was capable of, and that Datatec had no viable plan for the development, financing and commercialization of the Asset Guardian software.

89. On October 21, 2003, Datatec held its Annual Shareholders= Meeting for the year

ended April 30, 2003. In pertinent part, Defendant Gaon made the following disclosures with

respect to Datatec=s prospects for fiscal 2004:

Finally, on the issue of growth, we believe Asset Guardian will start to make a contribution to top and bottom lines by the fourth quarter of this year. We expect to have a prototype of the product by the middle of November when beta testing will commence. The general launch to the market will take place mid January to early February 2004. This software product has truly unique capabilities that will allow companies to capture, manage, monitor, analyze and account for all their assets from cradle to grave. This development is a mammoth undertaking for a company of our size and limited resources, but our development team is rising to the occasion and I have every faith that


39

they will meet or exceed all our expectations. . . . We will be providing the product primarily through an ASP hosting offering thereby making it affordable and easy to license for CAPEX restricted organizations and it will also provide Datatec with an increasing recurring and very high margin revenue stream. The product is also positioned to be deep rather than wide in applications, therefore providing greater practical assistance to management thereby allowing for a quick payback and significant R.O.I. . .

Institutional investors would understand where we are in our lifecycle and I think would be excited about our prospects especially now with our imminent launch of Asset Guardian. However, following the meltdown of the market in 2000/2001 and the subsequent dislocation of our business, we have not reached out to attract institutional support as we had much to do internally to get our business back on a sound footing. With operating performance and our balance sheet now both on firmer ground and economic prospects looking somewhat brighter although still very fragile, I believe the time is right to proceed with a program to increase the share of institutional holdings in our stock, which is currently very small. To help us with this effort and the launch of Asset Guardian, we will be engaging both an IR and PR firm.

In summation, I believe we are taking all the right steps to position this company to take full advantage of the technology recovery which many have anticipated is finally upon us and appears to have some greater momentum to it this time round.



(a) The statement that Asset Guardian “has truly unique capabilities that will allow companies to capture, manage, monitor, analyze and account for all their assets from cradle to grave” was materially false and misleading because the Asset Guardian software was essentially “pie in the sky” and did not have any of the “unique capabilities” which Defendants claimed it had. Defendants knew, or recklessly disregarded, that the Asset Guardian software did not work and was not achievable without a commitment of resources far in excess of anything Datatec was capable of, and that Datatec had no viable plan for the development, financing and commercialization of the Asset Guardian software.

(b) Similarly, the statements that “We expect to have a prototype of the

product by the middle of November when beta testing will commence” and “The general launch to the market will take place mid January to early


40

February 2004” and the statement referring to the “imminent launch of Asset Guardian” falsely and misleadingly implied that Asset Guardian was close to a launch as a functional service. Defendants knew, or recklessly disregarded, that the Asset Guardian software did not work and was not achievable without a commitment of resources far in excess of anything Datatec was capable of, and that Datatec had no viable plan for the development, financing and commercialization of the Asset Guardian software.

(c) In addition, the statements that “We believe Asset Guardian will start to

make a contribution to top and bottom lines by the fourth quarter of this year” had no basis in reality, and falsely and misleadingly implied that Asset Guardian was close to a launch as a functional service. Defendants knew, or recklessly disregarded, that the Asset Guardian software could not and would not contribute to Datatec’s revenues, did not work and was not achievable without a commitment of resources far in excess of anything Datatec was capable of, and that Datatec had no viable plan for the development, financing and commercialization of the Asset Guardian software.

(d) The statement that “operating performance and our balance sheet [are] now both

on firmer ground was false and misleading because they (i) failed to disclose that Datatec’s financials were based on extensive pre-invoicing and improper recognition of revenues for work which was not performed when invoiced, and (ii) failed to disclose that Datatec’s finances were so dire that the Company was meeting its semi-monthly payroll and its bills from Datatec’s vendors with fraudulently-obtained accounts receivable financing, and (iii) failed to disclose that Datatec’s finances were continuing to worsen and were clearly not on “firmer ground.” Defendants directed and knew about, or recklessly disregarded, the Company’s pre-invoicing to bolster revenues. In addition, Defendants were directly involved with obtaining such fraudulent financing in order to meet payroll and vendor bills to an ever-increasing extent.

91. On December 5, 2003, Datatec filed a Form S-3 Registration Statement (File No.

333-110935) to reregister the shares that had previously been registered as alleged above,

namely: 8,226,247 shares declared effective July 31, 2003 (File No. 333-107502); 9,546,250

shares declared effective 10/30/03 (File No. 333-107502); 8,071,611 shares declared effective

11/26/03 (File No. 333-108737).


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92. On December 5, 2003, in a partial revelation of the truth, Datatec unexpectedly

announced that Gaon had stepped down as Chairman and CEO, and that Mark Berenblut had

resigned as a board member. According to Datatec, Gaon would be replaced by Raul Pupo as

Chief Executive Officer. The Company said it was Afinalizing the terms of [Pupo=s]

employment,” and thus implying that the executive search to replace Gaon had begun

substantially earlier. Datatec also retracted its previously-announced earnings estimates for

fiscal year 2004 and instead stated that it expected a net loss for the second quarter of fiscal 2004

and an overall loss for all of fiscal 2004. Datatec=s stock price dropped 34%, from $1.16 on

December 4, 2003 to close at $0.77 on December 5, 2003.

93. The Class Period ended on December 16, 2003. Before the opening of trading on

December 17, 2003, Datatec announced the extent of its earnings retraction:

Datatec Systems, Inc. (Nasdaq: DATC), a leading provider of technology deployment software, services and post-implementation customer care solutions, today announced that it expects the loss for the fiscal quarter ended October 31, 2003 to be approximately $10 million. The Company also intends to take a restructuring charge of approximately $4.5 million in the following fiscal quarter in connection with its decision to eliminate the commercialization of certain software applications and to refocus the business on its core strengths of configuration and deployment. The Company also announced that it will delay the filing with the Securities and Exchange Commission of its Quarterly Report on Form 10-Q for the fiscal quarter ended October 31, 2003 and has decided, through its Audit Committee, to hire outside counsel to conduct an independent review of the valuation of long-term contracts. (Emphasis added).

94. Datatec =s stock price dropped another 15% on the news from $0.68 in the prior

day=s trading to close at $0.58 on December 17, 2003 on extremely heavy volume of 2,348,000


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shares compared to the average daily volume of Datatec stock for the prior 3 months which was

approximately 908,863 shares.

Relevant Post-Class Period Events

95. Throughout the class period, Datatec was not in compliance with certain required

covenants under its credit facility with IBM Credit. On December 18, 2003, Datatec filed a

Form 8-K with the SEC disclosing, among other things, that on December 12, 2003, IBM Credit

informed Datatec that it would not provide the Company with a written waiver of Datatec=s

default under its credit facility with IBM Credit, for the fiscal quarter ended October 31, 2003.

The 8-K stated, in pertinent part, as follows:

Default Upon Senior Securities The Company maintains a credit facility with IBM Credit in the amount of approximately $25 million. For the fiscal quarter ended October 31, 2003, the Company was not in compliance with certain required financial covenants, and as a result, the Company is in default of the credit facility with IBM Credit. Since the fiscal quarter ended January 31, 2001, through and including the fiscal quarter ended July 31, 2003, the Company has had similar financial covenant defaults. For each of these fiscal quarters, IBM Credit had provided to the Company a written default waiver. On December 12, 2003, IBM Credit informed the Company that it would not provide the Company with a written waiver for the fiscal quarter ended October 31, 2003. The Company also has outstanding $4.9 million Subordinated Secured Convertible Notes which were issued to funds managed by the Palladin Group L.P. Pursuant to certain cross-default provisions of these notes, the Company has defaulted on these notes, as a result of its default of the IBM Credit facility and failure to obtain a waiver from IBM Credit on such default.

96. On December 17, 2003, the new CEO Pupo held a conference call with analysts.

An individual investor on the call was furious with Datatec for giving positive earnings guidance

to the public, only to announce a $10 million loss for the quarter. The investor wanted to know,


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in substance, how defendant Gaon could have given such guidance repeatedly to the public

during the Class Period when the Company=s earnings were obviously headed toward the

substantial losses the Company ultimately announced. Pupo was courteous to the investor, but

was careful not to answer any of the questions about Gaon=s conduct.

97. On December 23, 2003, Datatec announced that the Nasdaq Listings

Qualification Department had notified the Company that it violated Marketplace Rule

4310(c)(14) by failing to file its Form 10-Q for the period ended October 31, 2003, and that

consequently, the Company=s securities would be delisted from the Nasdaq Stock Market at the

opening of business on December 31, 2003.

98. On January 21, 2004, the Company announced the appointment of two new

independent directors to the Datatec board, John W. Adams and Per-Olof Loof, to serve on the

Audit Committee.

99. On October 20, 2004, Traxi LLC (“Traxi”) was retained by Datatec to examine

and understand the Company’s business, and prepare financial information about Datatec for

prospective buyers. On November 17, 2004, Traxi presented a confidential presentation to IBM

Credit and the Palladin Group, L.P., which contained an “Adjusted Statement of Operations”

covering Datatec’s operations from 2001 through 2004. In the “Adjusted Statement of

Operations,” Datatec’s revenue for 2004 was reduced by approximately $10 million to write off

unbilled revenue at April 30, 2004, and Datatec’s revenue for 2003 was reduced by

approximately $15 million (to $109.8 million) “to reflect adjustments recorded in FY2004 which

are believed to relate to FY2003.” Traxi’s “Adjusted Statement of Operations” thus confirms

that Datatec’s revenues were materially over-stated during the Class Period.


44

100. On December 14, 2004, Datatec filed voluntary petitions for bankruptcy under

Chapter 11 of the Bankruptcy Code, in the District of Delaware.

ADDITIONAL SCIENTER ALLEGATIONS

101. As alleged herein, Defendants acted with scienter in that Defendants directed and

participated in the fraudulent schemes described herein. As detailed herein, Defendants had

actual knowledge, or at a minimum recklessly disregarded the fact that Datatec and Defendants

engaged in the phony invoicing and phantom products schemes detailed herein. Among other

things, Gaon himself frequently called Company managers and ordered them to post phantom

invoices to the Company’s accounts receivable. Gaon was often overheard to say, “We need to

pre-bill $100,000 of the project today.” Gaon also attended the vendor meetings which

concerned getting funds to Datatec’s vendors, who were threatening to cut off sending needed

supplies to Datatec – and Gaon “resolved” these difficulties by ordering more pre-invoicing.

Gaon was also informed of the Company’s inability to meet payroll, and also “resolved” these

problems by ordering more pre-invoicing. Gaon was also advised by employees that the Asset

Guardian software was not feasible with Datatec’s limited resources. Despite this knowledge,

Defendants touted the product, knowing full well that Datatec could not make the product

functional or commercially feasible.

102. In addition, Defendants knew that the public documents and statements issued or

disseminated in the name of the Company were materially false and misleading; knew that such

statements or documents would be issued or acquiesced in the issuance or dissemination of such

statements or documents as primary violations of the federal securities laws. Defendants, by

virtue of their receipt of information reflecting the true facts regarding Datatec, their control

over, and/or receipt and/or receipt of information of Datatec=s allegedly materially misleading


45

misstatements and/or their associations with the Company which made them privy to

confidential proprietary information concerning Datatec, participated in the fraudulent scheme

alleged herein.

103. In addition, Defendants were motivated to commit the fraud alleged herein -- and

in particular, Defendants’ use of the phony invoicing scheme detailed herein -- to maintain the

Company=s financing from IBM Credit. The Company has had a history of limited working

capital. As a result, it was critical to the survival of Datatec that the Company have sufficient

accounts receivable in order to induce IBM Credit to extend financing, as well as to induce

investors to purchase Datatec securities which were being offered during the Class Period. As of

June 2003, Datatec had borrowed the maximum available under its credit facility with IBM

Capital. According to Datatec, on April 14, 2003, IBM Credit agreed to amend the credit facility

to: A(i) extend the expiration date of the facility to August 2004 from August 2003; (ii) provide a

maximum availability of (a) $29 million until May 31, 2003; (b) $25 million until December 31,

2003; (c) $20 million until March 31, 2004; and (d) $15 million until August 1, 2004; (iii) lower

the charges to prime plus 1.75% from prime plus 4.25% and (iv) alter certain financial

covenants.” (Form S-1A, filed 10/2/03). IBM Credit subsequently informed Datatec, at least as

early as April 30, 2003, that it was Anot prepared to extend [Datatec=s] credit facility beyond

August 2004.” (SEC Form S-1A, filed 10/2/03). Defendants were motivated to engage in the

fraudulent scheme alleged herein in order to conceal its viability in repaying its credit facility

with IBM Credit. Through Defendants’ concealment of Datatec=s true financial condition, the

Company was able to obtain waivers of its default from fiscal quarter ended January 31, 2001,

through and including the fiscal quarter ended July 31, 2003 from IBM.


46

104. In addition, Defendants were motivated to engage in the fraudulent scheme

alleged herein in order to enable the Company to raise much-needed capital through the issuance

of Subordinated Secured Convertible Notes and through newly issued common stock to

institutional and other accredited investors, as detailed herein. In total, the Company was able to

raise more than $13.39 million in proceeds. See Complaint ¶¶ 70, 71 and 74.

105. In addition, Defendants were motivated to engage in the fraudulent scheme

alleged herein to enable Datatec to pay vendors who were threatening to stop providing supplies,

which would have closed down the Company, as detailed above.

106. Also, Defendants were motivated to continue the substantial compensation,

bonuses and perquisites they were receiving or due to receive from Datatec, inasmuch as

publicly admitting that the Company was effectively insolvent and reliant on fraudulently-

obtained financing would end all of these substantial benefits. Defendant Gaon’s employment

agreement (which commenced on May 1, 2003 and was originally scheduled to end on April 30,

2006) provided him with a $400,000 base salary plus consumer price index adjustments; a cash

incentive bonus based on Datatec’s net consolidated after-tax profits; a cash incentive bonus

based on cumulative stockholder return; a discretionary cash incentive bonus; stock options; and

medical, life, health, dental and disability insurance, among other perquisites.

VIOLATIONS OF GAAP AND SEC REPORTING RULES

Improper Revenue Recognition

107. During the Class Period, Defendants materially misled the investing public,

thereby inflating the price of the Company’s common stock, by publicly issuing false and

misleading statements and omitting to disclose material facts necessary to make Defendants’

statements, as set forth herein, not false and misleading. These statements and omissions were


47

materially false and misleading in that they failed to disclose material adverse information and

misrepresented the truth about the Company and the accounting, reporting, and financial

condition of the Company in violation of the federal securities laws and GAAP.

108. The GAAP provisions violated by Defendants, and discussed in detail below,

were not new or untested provisions of GAAP and did not involve complex accounting issues.

Additionally, Defendants committed these GAAP violations repeatedly, both before and during

the Class Period.

109. The true nature of Defendants’ revenue recognition practices were not revealed

during the Class Period. According to information related by Plaintiffs’ confidential sources set

forth in this Complaint, Datatec’s improperly recognized revenues consisted of estimated

revenues on estimated, not-yet-performed future work, which were recognized contrary to

Defendants’ stated revenue recognition policies.

110. The SEC requires that publicly traded companies present their financial

statements in accordance with GAAP. 17 C.F.R. § 210.4-01(a)(1). GAAP consists of those

principles recognized by the accounting profession as the conventions, rules, and procedures

necessary to define accepted accounting practices at the particular time. Regulation S-X, to

which the Company is subject as a registrant under the Exchange Act, 17 C.F.R § 210.4-

01(a)(1), 65 provides that financial statements filed with the SEC that are not prepared in

compliance with GAAP are presumed to be misleading and inaccurate. Accounting Series

Release (“ASR”) 4, codified at SRA 34.

111. As set forth in Financial Accounting Standards Board (“FASB”) Statement of

Financial Accounting Concepts (“SFAC”) No. 1, one of the fundamental objectives of financial


48

reporting is to provide accurate and reliable information concerning an entity’s financial

performance during the period being presented. SFAC No. 1, ¶42 states:

Financial reporting should provide information about an enterprise’s financial performance during a period. Investors and creditors often use information about the past to help in assessing the prospects of an enterprise. Thus, although investment and credit decisions reflect investors’ and creditors’ expectations about future enterprise performance, those expectations are commonly based at least partly on evaluations of enterprise performance.

112. Additionally, Section 13 of the Exchange Act requires, in part, that companies

like Datatec:

devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that - -

* * *

transactions are recorded as necessary (i) to permit preparation of financial statements in conformity with generally accepted accounting principles or any other criteria applicable to such statements, and (ii) to maintain accountability for assets;

15 U.S.C. § 78m(b).

113. Defendants’ representations that Datatec’s financial statements were prepared in

accordance with GAAP were materially false and misleading because, as alleged in this

Complaint, Defendants: (1) engaged in the fraudulent revenue recognition practices detailed in

this Complaint, which materially overstated the Company’s reported revenues, accounts

receivable and other financial results; (2) failed to disclose material trends in sales and invoicing

practices that would have a significant, adverse effect on future results; and (3) failed to disclose

the lack of internal controls necessary to ensure that work which was not performed was not

improperly booked. Each of these misrepresentations, material omissions and fraudulent


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revenue recognition practices, standing alone, was a material breach of GAAP, applicable SEC

regulations and the Company’s own accounting policies.

114. Under GAAP, revenue should not be recognized until it is both earned and

collectible. SFAC No. 5, ¶¶ 83-84. These paragraphs indicate the following:

83. Further guidance for recognition of revenues and gains is intended to provide an acceptable level of assurance of the existence and amounts of revenues and gains before they are recognized. Revenues and gains of an enterprise during a period are generally measured by the exchange values of the assets (goods or services) or liabilities involved, and recognition involves consideration of two factors (a) being realized or realizable and (b) being earned, with sometimes one and sometimes the other being the more important consideration.

a. Realized or realizable. Revenues and gains generally are not recognized

until realized or realizable. Revenues and gains are realized when products (goods or services), merchandise, or other assets are exchanged for cash or claims to cash. Revenues and gains are realizable when related assets received or held are readily convertible to known amounts of cash or claims to cash. Readily convertible assets have (i) interchangeable (fungible) units and (ii) quoted prices available in an active market that can rapidly absorb the quantity held by the entity without significantly affecting the price.

b. Earned. Revenues are not recognized until earned. An entity's revenue-

earning activities involve delivering or producing goods, rendering services, or other activities that constitute its ongoing major or central operations, and revenues are considered to have been earned when the entity has substantially accomplished what it must do to be entitled to the benefits represented by the revenues. Gains commonly result from transactions and other events that involve no "earning process," and for recognizing gains, being earned is generally less significant than being realized or realizable.

84. In recognizing revenues and gains:

a. The two conditions (being realized or realizable and being earned) are usually met by the time product or merchandise is delivered or services are rendered to customers, and revenues from manufacturing and selling activities and gains and losses from sales of other assets are commonly recognized at time of sale (usually meaning delivery).


50

b. If sale or cash receipt (or both) precedes production and delivery (for example, magazine subscriptions), revenues may be recognized as earned by production and delivery.

c. If product is contracted for before production, revenues may be recognized

by a percentage-of-completion method as earned—as production takes place—provided reasonable estimates of results at completion and reliable measures of progress are available.

d. If services are rendered or rights to use assets extend continuously over

time (for example, interest or rent), reliable measures based on contractual prices established in advance are commonly available, and revenues may be recognized as earned as time passes.

e. If products or other assets are readily realizable because they are salable at

reliably determinable prices without significant effort (for example, certain agricultural products, precious metals, and marketable securities), revenues and some gains or losses may be recognized at completion of production or when prices of the assets change. Paragraph 83(a) describes readily realizable (convertible) assets.

f. If product, services, or other assets are exchanged for nonmonetary assets

that are not readily convertible into cash, revenues or gains or losses may be recognized on the basis that they have been earned and the transaction is completed. Gains or losses may also be recognized if nonmonetary assets are received or distributed in nonreciprocal transactions. Recognition in both kinds of transactions depends on the provision that the fair values involved can be determined within reasonable limits.

g. If collectibility of assets received for product, services, or other assets is

doubtful, revenues and gains may be recognized on the basis of cash received.

SFAC No. 5, ¶¶ 83-84.

115. For companies like Datatec that sell mostly services, revenue is recognized when

the services are received and accepted by Datatec’s customers. As detailed herein, Defendants

violated GAAP by repeatedly causing Datatec to recognize revenue for services which were not

yet performed and billable.


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116. These same straight-forward accounting principles were reflected in Datatec’s

own stated revenue recognition policy. Datatec’s 2003 Form 10-K represented the Company’s

revenue recognition policy as set forth in paragraph 59 of this Complaint. Datatec’s Form 10-Q,

for the period ending July 31, 2003, set forth the Company’s revenue recognition policy as set

forth in paragraph 81 of this Complaint.

117. As detailed herein, Defendants repeatedly caused Datatec to violate both GAAP

and its own revenue recognition policies by repeatedly recognizing revenue before products were

shipped or services rendered, and/or where the purchaser had not yet been billed and had no

fixed payment obligation; the products or services had not been delivered; or collectibility was

not reasonably assured.

118. In addition, the recognition of assets, that is accounts receivable, was in direct

violation of GAAP, because such items did not meet the definition of assets contained in SFAC

6, ¶¶ 25-26. These paragraphs provide as follows:

25. Assets are probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events. Characteristics of Assets 26. An asset has three essential characteristics: (a) it embodies a probable future benefit that involves a capacity, singly or in combination with other assets, to contribute directly or indirectly to future net cash inflows, (b) a particular entity can obtain the benefit and control others' access to it, and (c) the transaction or other event giving rise to the entity's right to or control of the benefit has already occurred. Assets commonly have other features that help identify them—for example, assets may be acquired at a cost and they may be tangible, exchangeable, or legally enforceable. However, those features are not essential characteristics of assets. Their absence, by itself, is not sufficient to preclude an item's qualifying as an asset. That is, assets may be acquired without cost, they may be intangible, and although not exchangeable they may be usable by the entity in producing or distributing other goods or services. Similarly, although the ability of an entity to obtain benefit from an asset and to control others' access to it generally rests on a foundation of legal rights, legal enforceability of a claim to the benefit is not a


52

prerequisite for a benefit to qualify as an asset if the entity has the ability to obtain and control the benefit in other ways.

SFAC ¶¶ 25-26. Datatec’s Lack Of Internal Controls To Prevent Improper Recognition

119. Article 11 of Regulation S-X and GAAP, in FASB’s SFAS No. 5, required

Datatec to disclose in the footnotes of its financial statements during the Class Period that

internal control problems could reasonably cause the Company’s financial statements to be

materially misstated. In violation of GAAP, Datatec’s financial statements failed to disclose that

these internal control weaknesses were reasonably likely to have a material adverse effect on

Datatec’s results.

120. In addition, Item 7 of Datatec’s 2003 Form 10-K and Item 2 of Datatec’s Form

10-Q for the quarter ending July 31, 2003, Management’s Discussion and Analysis of Financial

Condition and Results of Operations (“MD&A”), required Defendants to furnish information

required by Item 303 of Regulation S-K, 17 C.F.R. § 229.303. In discussing results of

operations, Item 303 of Regulation S-K says a registrant must:

Describe any known trends or uncertainties that have had or that the registrant reasonably expects will have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations.

The Instructions to Paragraph 303(a) add:

The discussion and analysis shall focus specifically on material events and uncertainties known to management that would cause reported financial information not to be necessarily indicative of future operating results.

121. In its May 18, 1989 Interpretive Release No. 33-6835, the SEC indicated that

registrants should employ the following two-step analysis in determining when a known trend or


53

uncertainty is required to be included in the MD&A disclosure pursuant to Item 303 of

Regulation S-K:

A disclosure duty exists where a trend, demand, commitment, event or uncertainty is both presently known to management and is reasonably likely to have material effects on the Registrant’s financial condition or results of operations.

122. Defendants knew or recklessly disregarded that Item 303 of Regulation S-K

required Datatec to disclose that it lacked internal controls necessary to prevent revenue

recognition abuses, and that the absence of such internal controls was reasonably likely to have a

material adverse effect on the Company’s operating results. Disclosure of this information was

necessary for a proper understanding evaluation of Datatec’s operating performance and in

making an informed investment decision.

Additional Violations of GAAP

123. In addition to the accounting violations described above, Defendants allowed

Datatec to present its financial statements in a manner that violated, among others, the following

GAAP principles:

(a) the principle that a conservative approach be taken to ensure that uncertainty and risks inherent in business situations are adequately considered, and that errors in measurement be in the direction of understatement rather than overstatement of net income and net assets. (See SFAC No. 2 ¶¶ 91-97);

(b) the principle that the financial information presented should be complete.

(See SFAC No. 2, ¶¶ 79-80);

(c) the principle of fair presentation (“presents fairly”). (See SFAC No. 1, ¶33);

(d) the principle of adequacy and fairness of disclosure. (See SFAC No. 1, ¶34

and SFAC No. 5, ¶¶7, 12);


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(e) the principle of materiality concerning information that is significant enough to affect the judgment of a reasonable person. (See SFAC No. 2, ¶132);

(f) the principle that the financial statements contain and disclose relevant

and timely information for the economic decisions of the user. (See SFAC No. 2, ¶¶ 47, 48, 52, 56);

(g) the principle that the financial statements provide reliable financial

information that represents the economic conditions or events that it purports to represent. (See SFAC No. 2, ¶¶ 58, 62);

(h) the principle that financial information should be comparable and

consistent with similar information about other enterprises and with similar information about the same enterprise for some other period or some other point in time. (See SFAC No. 2 ¶¶ 111, 115, 117, 120);

(i) the principle that financial information should be neutral, or free from bias

towards a predetermined result. (See SFAC No. 2 ¶¶ 98, 99);

(j) the principle that financial reporting should provide information about the economic resources of an enterprise, the claims to those resources, and the effects of transactions, events, and circumstances that change resources and claims to those resources. (See SFAC No. 1 ¶40);

(k) the principle that financial reporting should provide information that is

useful to users of the financial statements in making rational investment, credit, and similar decisions. (See SFAC No. 1 ¶34);

(l) the principle that accounts receivable must be reported in the financial

statements at net realizable value. (See ARB 43, Chapter 3A); and

(m) the principle that disclosure of an entity’s accounting policies should identify and describe the accounting principles followed by the reporting entity and the methods of applying those principles that materially affect the determination of financial position, changes in financial position, or results of operations because information about the accounting policies adopted by a reporting entity is essential for financial statement users. (See APB 22, ¶8, 12).

124. In filing financial statements with the SEC which failed to conform to the

requirements of GAAP, Defendants repeatedly disseminated financial statements that were

presumptively misleading and inaccurate. Indeed, the accounting improprieties detailed herein


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evidence Defendants’ intent to deceive investors during the Class Period and misrepresent the

truth about the Company and its business, operations and financial performance to the detriment

of those who relied on them.

125. Defendants were required to disclose, in the Company’s financial statements, the

existence of the material facts described herein and to appropriately recognize and report assets,

revenues, and expenses in conformity with GAAP. The Company failed to make such

disclosures and to account for and to report its financial statements in conformity with GAAP.

Defendants knew, or were reckless in not knowing, the facts which indicated that all of the

Company’s financial statements during the Class Period, including press releases, public

statements, and filings with the SEC, which were disseminated to the investing public during the

Class Period, were materially false and misleading for the reasons set forth herein. Had the true

financial position and results of operations of the Company been disclosed during the Class

Period, the Company’s common stock would have traded at prices well below its posted price.

APPLICABILITY OF PRESUMPTION OF RELIANCE: FRAUD-ON-THE-MARKET DOCTRINE

126. At all relevant times, the market for Datatec common stock was an efficient

market for the following reasons, among others:

(a) that Datatec common stock met the requirements for listing, and was listed and actively traded, on the Nasdaq, a highly efficient market;

(b) As a regulated issuer, Datatec filed periodic public reports with the SEC; (c) Datatec stock was followed by securities analysts employed by major

brokerage firms who wrote reports which were distributed to the sales force and certain customers of their respective brokerage firms. Each of these reports was publicly available and entered the public marketplace; and


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(d) Datatec regularly issued press releases which were carried by national newswires. Each of these releases was publicly available and entered the public marketplace.

127. As a result, the market for Datatec securities promptly digested current

information with respect to Datatec from all publicly-available sources and reflected such

information in Datatec=s stock price. Under these circumstances, all purchasers of Datatec

common stock during the Class Period suffered similar injury through their purchase of stock at

artificially inflated prices and a presumption of reliance applies.

PLAINTIFFS= CLASS ACTION ALLEGATIONS

128. Plaintiffs bring this action as a class action pursuant to Federal Rule of Civil

Procedure 23(a) and (b)(3) on behalf of a Class, consisting of all those who purchased the

securities of Datatec during the Class Period who were damaged thereby. Excluded from the

Class are Defendants, the officers and directors of the Company, at all relevant times, members

of their immediate families and their legal representatives, heirs, successors or assigns and any

entity in which Defendants have or had a controlling interest.

129. The members of the Class are so numerous that joinder of all members is

impracticable. Throughout the Class Period, Datatec common shares were actively traded on an

efficient market, the NASDAQ. While the exact number of Class members is unknown to

Plaintiffs at this time and can only be ascertained through appropriate discovery, Plaintiffs

believe that there are hundreds or thousands of members in the proposed Class. Record owners

and other members of the Class may be identified from records maintained by Datatec or its

transfer agent and may be notified of the pendency of this action by mail, using the form of

notice similar to that customarily used in securities class actions.


57

130. Plaintiffs’ claims are typical of the claims of the members of the Class as all

members of the Class are similarly affected by Defendants= wrongful conduct in violation of

federal law that is complained of herein.

131. Plaintiffs will fairly and adequately protect the interests of the members of the

Class and has retained counsel competent and experienced in class and securities litigation.

132. Common questions of law and fact exist as to all members of the Class and

predominate over any questions solely affecting individual members of the Class. Among the

questions of law and fact common to the Class are:

(a) whether the federal securities laws were violated by Defendants= acts as alleged herein;

(b) whether statements made by Defendants to the investing public during the Class

Period misrepresented material facts about the business, operations, and management of Datatec; and

(c) to what extent the members of the Class have sustained damages and the proper

measure of damages.

133. A class action is superior to all other available methods for the fair and efficient

adjudication of this controversy since joinder of all members is impracticable. Furthermore, as

the damages suffered by individual Class members may be relatively small, the expense and

burden of individual litigation make it impossible for members of the Class to individually

redress the wrongs done to them. There will be no difficulty in the management of this action as

a class action.

NO SAFE HARBOR

134. The statutory safe harbor provided for forward-looking statements under certain

circumstances does not apply to any of the allegedly false statements pleaded in this complaint.

The specific statements pleaded herein were not identified as Aforward-looking statements” when


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made. To the extent there were any forward-looking statements, there were no meaningful

cautionary statements identifying important factors that could cause actual results to differ

materially from those in the purportedly forward-looking statements. Alternatively, to the extent

that the statutory safe harbor does apply to any forward-looking statements pleaded herein,

defendants are liable for those false forward-looking statements because at the time each of those

forward-looking was made the particular speaker knew that the particular forward-looking

statement was false, and/or the forward-looking statement was authorized and/or approved by an

executive officer of Datatec who knew that those statements were false when made.

COUNT I

Violations Of Section 10(b) Of The Exchange Act And Rule 10b-5 Promulgated

Thereunder Against All Defendants

135. Plaintiffs repeat and reallege each and every allegation contained above as if fully

set forth herein.

136. During the Class Period, Defendants, and each of them, carried out a plan, scheme

and course of conduct which was intended to and, throughout the Class Period, did: (a) deceive

the investing public, including Plaintiffs and other Class members, as alleged herein; (b)

artificially inflate and maintain the market price of Datatec=s securities; and (c) cause Plaintiffs

and other members of the Class to purchase Datatec=s securities at artificially inflated prices. In

furtherance of this unlawful scheme, plan and course of conduct, Defendants, and each of them,

took the actions set forth herein.

137. Defendants (a) employed devices, schemes, and artifices to defraud; (b) made

untrue statements of material fact and/or omitted to state material facts necessary to make the

statements not misleading; and (c) engaged in acts, practices, and a course of business which


59

operated as a fraud and deceit upon the purchasers of the Company=s securities in an effort to

maintain artificially high market prices for Datatec=s securities in violation of Section 10(b) of

the Exchange Act and Rule 10b-5. All Defendants are sued either as primary participants in the

wrongful and illegal conduct charged herein or as controlling persons as alleged below.

138. In addition to the duties of full disclosure imposed on Defendants as a result of

their making of affirmative statements and reports, or participation in the making of affirmative

statements and reports to the investing public, Defendants had a duty to promptly disseminate

truthful information that would be material to investors in compliance with the integrated

disclosure provisions of the SEC as embodied in SEC Regulation S-X (17 C.F.R. Sections

210.01 et seq.) and Regulation S-K (17 C.F.R. Sections 229.10 et seq.) and other SEC

regulations, including accurate and truthful information with respect to the Company=s

operations, financial condition and earnings so that the market price of the Company=s securities

would be based on truthful, complete and accurate information.

139. Defendants, individually and in concert, directly and indirectly, by the use, means

or instrumentalities of interstate commerce and/or of the mails, engaged and participated in a

continuous course of conduct to conceal adverse material information about the business,

operations and future prospects of Datatec.

140. Defendants employed devices, schemes and artifices to defraud, while in

possession of material adverse non-public information and engaged in acts, practices, and a

course of conduct as alleged herein in an effort to assure investors of Datatec=s value and

performance and continued substantial growth, which included the making of, or the

participation in the making of, untrue statements of material facts and omitting to state material

facts necessary in order to make the statements made about Datatec and its business operations


60

and future prospects in the light of the circumstances under which they were made, not

misleading, as set forth more particularly herein, and engaged in transactions, practices and a

course of business which operated as a fraud and deceit upon the purchasers of Datatec=s

securities during the Class Period.

141. Defendants= primary liability, and controlling person liability, arises from the

following facts: (a) Defendants were high-level executives and/or directors at the Company

during the Class Period; (b) Defendants were privy to and directly participated in the fraudulent

schemes described herein, and in the creation, development and reporting of the Company=s

internal budgets, plans, projections and/or reports; and (c) Defendants were aware of the

Company=s dissemination of information to the investing public which they knew or recklessly

disregarded was materially false and misleading.

142. Defendants had actual knowledge of the misrepresentations and omissions of

material facts set forth herein, or acted with reckless disregard for the truth in that they failed to

ascertain and to disclose such facts, even though such facts were available to them. Such

Defendants= material misrepresentations and/or omissions were done knowingly or recklessly

and for the purpose and effect of concealing Datatec=s operating condition and future business

prospects from the investing public and supporting the artificially inflated price of its securities.

As demonstrated by Defendants= overstatements and misstatements of the Company=s business,

operations and earnings throughout the Class Period, Defendants, if they did not have actual

knowledge of the misrepresentations and omissions alleged, were reckless in failing to obtain

such knowledge by deliberately refraining from taking those steps necessary to discover whether

those statements were false or misleading.


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143. As a result of the dissemination of the materially false and misleading information

and failure to disclose material facts, as set forth above, the market price of Datatec=s securities

was artificially inflated during the Class Period. In ignorance of the fact that market prices of

Datatec=s publicly-traded securities were artificially inflated, and relying directly or indirectly on

the false and misleading statements made by Defendants, or upon the integrity of the market in

which the securities trade, and/or on the absence of material adverse information that was known

to or recklessly disregarded by Defendants but not disclosed in public statements by Defendants

during the Class Period, Plaintiffs and the other members of the Class acquired Datatec securities

during the Class Period at artificially high prices and were damaged thereby.

144. At the time of said misrepresentations and omissions, Plaintiffs and other

members of the Class were ignorant of their falsity, and believed them to be true. Had Plaintiffs

and the other members of the Class and the marketplace known of the true financial condition

and business prospects of Datatec, which were not disclosed by Defendants, Plaintiffs and other

members of the Class would not have purchased or otherwise acquired their Datatec securities,

or, if they had acquired such securities during the Class Period, they would not have done so at

the artificially inflated prices which they paid.

145. By virtue of the foregoing, Defendants have violated Section 10(b) of the

Exchange Act, and Rule 10b-5 promulgated thereunder.

146. As a direct and proximate result of Defendants= wrongful conduct, Plaintiffs and

the other members of the Class suffered damages in connection with their respective purchases

and sales of the Company=s securities during the Class Period.

COUNT II

Violation Of Section 20(a) Of The Exchange Act


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147. Plaintiffs repeat and reallege each and every allegation contained above as if fully

set forth herein.

148. Defendants acted as a controlling person of Datatec within the meaning of Section

20(a) of the Exchange Act as alleged herein. By virtue of their high-level positions, and their

ownership and contractual rights, participation in and/or awareness of the Company=s operations

and/or intimate knowledge of the statements filed by the Company with the SEC and

disseminated to the investing public, Defendants had the power to influence and control and did

influence and control, directly or indirectly, the decision-making of the Company, including the

content and dissemination of the various statements which Plaintiffs contend are false and

misleading. Defendants were provided with or had unlimited access to copies of the Company=s

reports, press releases, public filings and other statements alleged by Plaintiffs to be misleading

prior to and/or shortly after these statements were issued and had the ability to prevent the

issuance of the statements or cause the statements to be corrected.

149. In particular, Defendants had direct and supervisory involvement in the fraudulent

schemes described herein, and in the day-to-day operations of the Company and, therefore, are

presumed to have had the power to control or influence the particular transactions giving rise to

the securities violations as alleged herein, and exercised the same.

150. As set forth above, Datatec and the Defendants each violated Section 10(b) and

Rule 10b-5 by their acts and omissions as alleged in this Complaint. By virtue of their positions

each as a controlling person, Defendants are liable pursuant to Section 20(a) of the Exchange

Act. As a direct and proximate result of Datatec=s and the Defendants= wrongful conduct,


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Plaintiffs and other members of the Class suffered damages in connection with their purchases of

the Company=s securities during the Class Period.

WHEREFORE, Plaintiffs prays for relief and judgment, as follows:

(a) Determining that this action is a proper class action, and certifying

Plaintiffs (that is, the members of the Datatec Lead Plaintiff Group) as class representatives

under Rule 23 of the Federal Rules of Civil Procedure and Plaintiffs’ counsel as Lead Counsel;

(b) Awarding compensatory damages in favor of Plaintiffs and the other Class

members against all Defendants, jointly and severally, for all damages sustained as a result of

Defendants= wrongdoing, in an amount to be proven at trial, including interest thereon;

(c) Awarding Plaintiffs and the Class their reasonable costs and expenses

incurred in this action, including counsel fees and expert fees; and

(d) Such other and further relief as the Court may deem just and proper.

JURY TRIAL DEMANDED

Plaintiffs hereby demand a trial by jury.

Dated: May 2, 2005

COHEN, MILSTEIN, HAUSFELD & TOLL, P.L.L.C

By: /s/ Adam T. Savett Steven J. Toll Daniel S. Sommers (DS-2084) Adam Savett (AS-5334) 1100 New York Avenue, N.W. West Tower, Suite 500 Washington, D.C. 2005 Telephone: (202) 408-4600 Facsimile: (202) 408-4699

Elizabeth A. Berney


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150 East 52nd Street, 30th Floor New York, New York 10022 Telephone: (212) 838-7797 Facsimile: (212) 838-7745 Lead Counsel for Lead Plaintiffs


CERTIFICATE OF SERVICE

I certify that on this 2nd day of May 2005, I caused a true and correct copy of the

Consolidated Amended Class Action Complaint to be sent to all counsel on the attached service

list via e-mail.

/s/ Adam T. Savett

Case 2:04-cv-00525-GEB-MCA Document 38-2 Filed 05/02/2005 Page 1 of 4

IN RE DATATEC SYSTEMS INC. SEC. LITIG.Civil Action No. 2:04-CV-525 (WGB)

SERVICE LIST

Edward P. GilbertMORRISON COHEN LLP909 Third AvenueNew York, New York 10022Telephone: (212) 735-8600Facsimile: (212) 735-8708E-mail: [email protected]

Counsel for Defendants Datatec Systems, Inc.,Raymond Koch, and Isaac J. Gaon

John D. RapoportJOHN D. RAPOPORT, P.C.81 Main StreetWhite Plains, New York 10601Telephone: (914) 421-1210Facsimile: (914) 686-4824E-mail: [email protected]

Counsel for Defendant Mark Hirschhorn

Allyn Z. LiteJoseph DePalmaSusan D. PontorieroKatrina Blumenkrants LITE DEPALMA GREENBERG & RIVAS2 Gateway Center, 12th FloorNewark, New Jersey 07102Telephone: (973) 623-3000 Facsimile: (973) 623-0858E-mail: [email protected]

Counsel for Plaintiffs Matthew Brubraker(2:04-cv-657) and Henry J. Lupkowski(2:04-cv-772)

Marc TopazSCHIFFRIN & BARROWAYThree Bala Plaza East, Suite 400Bala Cynwyd, Pennsylvania19004Telephone: (610) 667-7706Facsimile: (610) 667-7056E-mail: [email protected]

Counsel for Plaintiff Matthew Brubraker(2:04-cv-657)

Samuel H. RudmanDavid A. RosenfeldMario Alba Jr. LERACH COUGHLIN STOIA GELLER

RUDMAN & ROBBINS LLP200 Broadhollow Road, Suite 406Melville, New York 11747Telephone: (631) 367-7100Facsimile: (631) 367-1173E-mail: [email protected]

Counsel for Plaintiff Matthew Brubraker(2:04-cv-657) and Movant, The FrybergerGroup

Guri AdemiShpetim AdemiRobert O'Reilly ADEMI & O'REILLY, LLP3620 East Layton AvenueCudahy, Wisconsin 53110Telephone: (414) 482-8000Facsimile: (414) 482-8001E-mail: [email protected]

Counsel for Plaintiff Matthew Brubraker(2:04-cv-657)



SERVICE LIST

-2-

Robert I. HarwoodSamuel K. RosenWECHSLER HARWOOD LLP488 Madison AvenueNew York, New York 10022Telephone: (212) 935-7400Facsimile: (212) 753-3630E-mail: [email protected]

Counsel for Plaintiff Henry J. Lupkowski(2:04-cv-772)

Charles J. PivenLAW OFFICES OF CHARLES J. PIVEN, P.A.401 East Pratt Street, Suite 2525Baltimore, Maryland 21202Telephone: (410) 332-0030Facsimile: (410) 685-1300E-mail: [email protected]

Counsel for Plaintiff Henry J. Lupkowski(2:04-cv-772)

Robert J. BergBERNSTEIN LIEBHARD & LIFSHITZ, LLP2050 Center AvenueSuite 200Fort Lee, New Jersey 07024Telephone: (201) 592-3201Facsimile: (201) 461-9598E-mail: [email protected]

Counsel for Plaintiff George Lawry(2:04-cv-1395)

Mel E. LifshitzBERNSTEIN LIEBHARD & LIFSHITZ, LLP10 East 40th StreetNew York, New York 10016Telephone: (212) 779-1414Facsimile: (212) 779-3218E-mail: [email protected]

Counsel for Plaintiff George Lawry(2:04-cv-1395)

Patrick L. RoccoSHALOV STONE & BONNER LLP163 Madison AvenueP.O. Box 1277Morristown, New Jersey 07962Telephone: (973) 775-8997Facsimile: (973) 775-8777E-mail: [email protected]

Counsel for Plaintiff Marvin Kahn(2:04-cv-525) and Movant, The Fidel Family

Lee S. ShalovSHALOV STONE & BONNER LLP485 Seventh Avenue, Suite 1000New York, New York 10018Telephone: (212) 239-4340Facsimile: (212) 239-4310E-mail: [email protected]




SERVICE LIST

-3-

Kenneth J. VianaleJulie Prag VianaleVIANALE & VIANALE LLP2499 Glades Road, Suite 112Boca Raton, Florida 33431Telephone: (561) 391-4900Facsimile: (561) 368-9274E-mail: [email protected]


Steven KatzmanCraig RubensteinKATZMAN, WASSERMAN & BENNARDINI, P.ABoca Corporate Plaza, Suite 1407900 Glades RoadBoca Raton, Florida 33434Telephone: (561) 477-7774Facsimile: (561) 477-7447E-mail: [email protected]

Counsel for Plaintiff Marvin Kahn(2:04-cv-525)


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