LITE DEPALMA GREENBERG & RIVAS, LLC Joseph J. DePalma ... · PDF file Case...

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Transcript of LITE DEPALMA GREENBERG & RIVAS, LLC Joseph J. DePalma ... · PDF file Case...

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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,

    Plaintiff,

    vs. CONEXANT SYSTEMS INC., DWIGHT, W. DECKER, and ARMANDO GEDAY, et al,

    Defendants. _________________________________________

    ) ) ) ) ) ) ) ) ) ) ) ) )

    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

    Case 2:04-cv-06219-SRC-CCC Document 66-1 Filed 12/05/2005 Page 1 of 61

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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.

    Case 2:04-cv-06219-SRC-CCC Document 66-1 Filed 12/05/2005 Page 2 of 61

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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

    stated:

    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