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LITE DEPALMA GREENBERG & RIVAS, LLC Joseph J. DePalma Janet R. Bosi Two Gateway Center, 12th Floor Newark, New Jersey 07102 Tel: (973) 623-3000 Fax: (973) 623-0858 Liaison Counsel for Plaintiff [Additional counsel on signature page]
UNITED STATES DISTRICT COURT DISTRICT OF NEW JERSEY
DOCUMENT ELECTRONICALLY FILED _________________________________________ JOSEPH WITRIOL, Individually and On Behalf of All Others Similarly Situated,
vs. CONEXANT SYSTEMS INC., DWIGHT, W. DECKER, and ARMANDO GEDAY, et al,
) ) ) ) ) ) ) ) ) ) ) ) )
Civil Action No.: 04-CV-6219 (SRC/TJB) JURY TRIAL DEMANDED
SECOND CONSOLIDATED AMENDED CLASS ACTION COMPLAINT
Lead Plaintiff, the Phillips Group (“Plaintiff”), on behalf of itself and all other persons or
entities that purchased or acquired the common stock of Conexant Systems, Inc. (“Conexant” or
the “Company”) between March 1, 2004 and November 4, 2004, inclusive (the “Class Period”),
alleges the following based upon information and belief, except as to those allegations
concerning Plaintiff, which are based upon personal knowledge. Plaintiff’s information and
belief allegations are based upon, among other things: (a) the investigation conducted by and
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through its attorneys; (b) review and analysis of filings made by Conexant with the United States
Securities and Exchange Commission (“SEC”); (c) review and analysis of press releases, public
statements, news articles, securities analysts’ reports and other publications disseminated by or
concerning Conexant; (d) interviews with former Conexant employees; and (e) other publicly
available information about Conexant. Most of the facts supporting the allegations contained
herein are known only to Defendants (defined at ¶ 1) or are within their control. Plaintiff
believes that substantial additional evidentiary support will exist for the allegations set forth in
this Second Consolidated Amended Class Action Complaint (“Complaint”) after a reasonable
opportunity for discovery.
NATURE OF THE ACTION
1. This is a federal class action on behalf of all persons or entities that purchased or
acquired shares of Conexant common stock during the Class Period, seeking to pursue remedies
under the Securities Exchange Act of 1934 (the “Exchange Act”). The defendants are Conexant
and four of the Company’s most senior officers and directors: Armando Geday (“Geday”),
Dwight W. Decker (“Decker”), J. Scott Blouin (“Blouin”) and Robert McMullan (“McMullan”)
(collectively the “Individual Defendants” and together with Conexant “Defendants”).
2. This case arises from the failed integration of GlobespanVirata, Inc.’s
(“Globespan”) operations and personnel following Conexant’s acquisition of Globespan through
a stock-for-stock merger (the “Globespan Acquisition”). The Class Period begins on March 1,
2004, when Defendants issued a press release and held a conference call to announce that the
Globespan Acquisition had closed on February 27, 2004.
3. Throughout the Class Period, Defendants made numerous false and misleading
statements that the integration of Globespan’s operations and personnel was proceeding on track.
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In reality, the Globespan Acquisition was fraught with problems resulting in a combined
company with revenues that were no greater than Conexant’s revenues as a stand-alone
company, but with the burden of carrying the overhead and expenses from both entities. Former
Conexant employees, state that following the Globespan Acquisition, senior management began
to debate over a variety of issues, including which e-mail system to employ, resulting in a delay
in hiring critical staff and the release of new products causing Conexant to lose market share in
the critical digital subscriber line (“DSL”) and wireless local area network (“WLAN”) segments.
In order to conceal these problems, as well as the sagging demand for the Company’s WLAN
and DSL products, the Defendants knowingly stuffed the Company’s distribution channels with
far more product than was required to meet its true end-user demand.
4. The Individual Defendants were highly motivated to orchestrate the Globespan
Acquisition and, later, to engineer the fraud to cover up the merger’s failure by opportunities for
personal profit through accelerated vesting of options, hefty bonuses and more lucrative salaries.
The Individual Defendants possessed the motive and opportunity to conceal their true intentions
when they entered the Globespan Acquisition.
5. Ultimately, this fraudulent scheme proved unsustainable. On July 6, 2004, in a
press release, the truth started to unravel when Conexant disclosed that its excess channel
inventory began to catch up with the diminished demand for its products and the Company was
forced to issue an earnings warning that shocked the financial markets. Specifically, Conexant
In the third fiscal quarter, a shortfall in demand in our wireless LAN business led to overall company performance that was less than we expected at the beginning of the quarter. . . . [C]hannel inventory of
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our customers’ products increased as new competitors’ products, based on low-priced Taiwanese solutions, caused our customers to lose market share.
6. This announcement sent the price of Conexant’s stock careening down $1.77 per
share, or 56.6 percent, by the close of trading on July 6, 2004. Despite this announcement,
however, Defendants continued to materially misrepresent the true state of affairs maintaining
that Conexant “continued to be wholly confident in the market positions, profitability and growth
prospects of our new combined company.”
7. On November 4, 2004, the last day of the Class Period, Conexant issued an
earnings warning for the fourth quarter of 2004 announcing losses of $367.5 million due to lower
demand for its products, excessive inventory build-up and the delayed release of new products.
Even more shocking was that Individual Defendant Geday admitted to knowing that inventory
had “been building for multiple quarters, maybe 4 or 5 quarters” and Conexant’s President,
Matthew Rhodes (“Rhodes”), disclosure that the integration was not successful.
8. The November 4, 2004, revelations caused the price of Conexant stock to
plummet 10 percent from $1.76 per share at the close of trading on November 4, 2004, to $1.60
per share at the close of trading on November 5, 2004. Shortly thereafter, Geday was forced to
resign and Decker was reinstated as the Company’s chief executive officer (“CEO”). In his first
public statement after being reinstated as CEO, Decker admitted that the Globespan Acquisition
was a failure: “[N]ot everything has gone as well as we’d like. Let me say that – so therefore, it
is the case that more work still needs to be done.”
9. On November 10, 2004, following Decker’s admission that the merger was a
failure, Dushyant J. Desai of C.E. Unterberg, Towbin, one of the leading securities analysts who
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followed Conexant during the Class Period, issued a report stating: “for all practical purposes,
the integration (of the two companies) was attempted but not effective… In the end, one plus one
equals one, instead of two or more.”
10. In December 2004, Conexant announced that it would halt shipping new products
until the clogged channels were cleared of approximately $50 million in excess inventory.
JURISDICTION AND VENUE
11. This Court has jurisdiction over the subject matter of this action pursuant to
Section 27 of the Exchange Act (15 U.S.C. § 78aa) and 28 U.S.C. § 1331.
12. The claims asserted herein arise under and pursuant to Sections 10(b), 18(a) and
20(a) of the Exchange Act, (15 U.S.C. §§ 78j(b), 78r(a) and 78t(a)), and Rule 10b-5 (17 C.F.R. §
240.10b-5), promulgated thereunder.
13. Venue is proper in this Judicial District pursuant to Section 27 of the Exchange
Act, 15 U.S.C. ' 78aa and 28 U.S.C. ' 1391(b). Many of the acts, practices and transactions
complained of herein, including the preparation and dissemination of materially false and
misleading information, occurred in substantial part in this Judicial District. Moreover, on April
6, 2005, this Court issued an Order transferring all related cases to this District and consolidating
these related cases under this caption. Additionally, the Company maintained a principal
executive office in this Judicial District at all times relevant to thi