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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
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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
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 this action.
14. In connection with the acts, conduct and other wrongs alleged in this Complaint,
Defendants, directly and/or indirectly, used the means and instrumentalities of interstate
commerce, including without limitation, the mails, and interstate telephone communications and
the facilities of the national securities markets and exchanges.
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PARTIES
15. Plaintiff purchased the publicly traded common stock of Conexant at artificially
inflated prices during the Class Period, as demonstrated by Plaintiff’s certifications previously
filed with the Court and has suffered damages as a result of the disclosure of the wrongful acts of
Defendants as alleged herein. By order dated April 6, 2005, the Court appointed Plaintiff as the
lead plaintiff in this case pursuant to 15 U.S.C. §78u-4.
16. Defendant Conexant is a corporation organized under the laws of Delaware. At
all times relevant to this action, the Company maintained principal executive offices located at
100 Schultz Drive, Red Bank, New Jersey 07701.
17. Defendant Decker was, at all relevant times, the Company=s Chairman. Decker
was the CEO and chairman of Conexant from December 1998 until February 27, 2004, when the
Globespan Acquisition closed. Decker reviewed, approved and signed certain of Conexant’s
false and misleading SEC filings during the Class Period. Decker was reinstated as CEO on
November 9, 2004.
18. Defendant Geday was, until his resignation on November 9, 2004, Conexant’s
CEO and a director. In 1997, Geday left Rockwell to join Globespan as its CEO and a director.
Geday reviewed, approved and signed certain of Conexant’s false and misleading SEC filings
during the Class Period.
19. Defendant McMullan was the Senior Vice President (“SVP”) and Chief Financial
Officer (“CFO”) of Conexant from February 27, 2004, until his resignation on August 12, 2004.
Prior to the Globespan Acquisition, McMullan was CFO of Globespan and worked closely with
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Geday. McMullan reviewed, approved and signed certain of Conexant’s false and misleading
SEC filings during the Class Period.
20. Defendant Blouin was Conexant’s SVP and CFO from June 2003 until February
2004; SVP, CFO and Controller from March 2002 to June 2003; SVP and CFO from January
2001 to March 2002. Blouin was reinstated as SVP and CFO of Conexant when McMullan
resigned in August 2004. Blouin reviewed, approved and signed certain of Conexant’s false and
misleading SEC filings during the Class Period.
21. During the Class Period, each of the Individual Defendants, as senior executives
officers and/or directors of Conexant, were privy to material non-public information concerning
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
possession of such information, the Individual Defendants knew or recklessly disregarded the
fact that adverse facts specified herein had not been disclosed to, and were being concealed from,
the investing public.
22. Because of the Individual Defendants’ positions with the Company, they had
access to the adverse undisclosed information about the Company’s (and Globespan’s) business,
operations, operational trends, financial statements, markets and present and future business
prospects via access to internal corporate documents (including both the Company’s and
Globespan’s operating plans, budgets and forecasts and reports of actual operations compared
thereto), conversations and connections with other corporate officers and employees, attendance
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at management and Board of Directors meetings and committees thereof and via reports and
other information provided to them in connection therewith.
23. It is appropriate to treat the Individual Defendants as a group for pleading
purposes and to presume that the false, misleading and incomplete information conveyed in the
Company’s public filings, press releases and other publications as alleged herein are the
collective actions of the narrowly defined group of defendants identified above. Each of the
above officers of Conexant, by virtue of their high-level positions with the Company, directly
participated in the management of the Company, was directly involved in the day-to-day opera-
tions of the Company at the highest levels and was privy to confidential proprietary information
concerning the Company and its business, operations, growth, financial statements, and financial
condition, as alleged herein. The Individual Defendants were involved in drafting, producing,
reviewing and/or disseminating the false and misleading statements and information alleged
herein, were aware, or recklessly disregarded, that the false and misleading statements were
being issued regarding the Company, and approved or ratified these statements, in violation of
the federal securities laws.
24. As officers and controlling persons of a publicly-held company whose securities
were, and are, registered with the SEC pursuant to the Exchange Act, and were traded on the
NASDAQ and governed by the provisions of the federal securities laws, the Individual
Defendants each had a duty to disseminate promptly, accurate and truthful information with
respect to the Company’s financial condition and performance, growth, operations, financial
statements, business, markets, management, earnings and present and future business prospects,
and to correct any previously-issued statements that had become materially misleading or untrue,
so that the market price of the Company’s publicly-traded securities would be based upon
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truthful and accurate information. The Individual Defendants’ misrepresentations and omissions
during the Class Period violated these specific requirements and obligations.
25. The Individual Defendants participated in the drafting, preparation, and/or
approval of the various public and shareholder and investor reports and other communications
complained of herein and were aware of, or recklessly disregarded, the misstatements contained
therein and omissions therefrom, and were aware of their materially false and misleading nature.
Because of their board membership and/or executive and managerial positions with Conexant,
each of the Individual Defendants had access to the adverse undisclosed information about
Conexant’s financial condition and performance as particularized herein and knew (or recklessly
disregarded) that these adverse facts rendered the positive representations made by or about
Conexant and its business issued or adopted by the Company materially false and misleading.
26. The Individual Defendants, because of their positions of control and authority as
officers and/or directors of the Company, were able to and did control the content of the various
SEC filings, press releases and other public statements pertaining to the Company during the
Class Period. Each Individual Defendant was provided with copies of the documents alleged
herein to be misleading prior to or shortly after their issuance and/or had the ability and/or
opportunity to prevent their issuance or cause them to be corrected. Accordingly, each of the
Individual Defendants is responsible for the accuracy of the public reports and releases detailed
herein and are therefore primarily liable for the representations contained therein.
27. Each of the Individual Defendants is liable as a participant in a fraudulent scheme
and course of business that operated as a fraud or deceit on purchasers of Conexant securities by
disseminating materially false and misleading statements and/or concealing material adverse
facts. The scheme: (i) deceived the investing public regarding Conexant’s business, operations,
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management and the intrinsic value of Conexant securities by portraying that its integration with
Globespan’s operations and personnel was proceeding with outstanding success when in reality
there were significant integration problems causing Conexant to sustain a loss of market share in
its DSL and WLAN product lines, and (ii) caused Defendants to stuff the distribution channels
causing Plaintiff and other members of the Class to purchase Conexant securities at artificially
inflated prices.
SUBSTANTIVE ALLEGATIONS
About Conexant 28. Conexant is a “fabless” semiconductor company that provides semiconductor
system solutions for digital home information and entertainment networks. The Company’s
products include DSL and cable modem solutions, home network processors, broadcast video
encoders and decoders, digital set-top box components and systems solutions, and dial-up
modems. The Company also offers a suite of wireless data and networking components
solutions that includes HomePlug®, HomePNA™ and WLAN (802.11g) components and
reference designs.
29. During the three years prior to the Class Period, Conexant, like other high-
technology companies, experienced a severe decline in sales. In an effort to reverse this decline,
Conexant employed a strategy to divide the Company into three separate businesses. In
September 2000, Conexant spun-off of its Internet infrastructure business and in June 2002, it
spun-off its wireless chip business. Following the divestiture of these businesses, Conexant was
left to focus exclusively on its broadband business.
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About Globespan 30. Globespan was created in 1996 as a spin-off of Lucent Technologies.
Globespan’s products included broadband system-level solutions for modems, routers,
residential gateways, and DSLAMs, as well as a variety of wireless networking chip sets and
reference designs enabling wireless connectivity in notebooks, PDAs, digital cameras, MP3
players and other handheld networking appliances.
31. In December 2001, Globespan completed a merger with Virata creating
GlobespanVirata, which was the leading supplier of silicon used in DSL modems. In July 2003,
Globespan acquired Intersil Corporation’s (“Intersil”) WLAN chip group. Intersil’s WLAN chip
group was one of the primary product lines that Conexant sought to acquire in the Globespan
Acquisition.
Decker And Geday Plan To Merge Conexant and Globespan
32. Geday and Decker were longtime business associates who together rose through
the ranks at Rockwell International (“Rockwell”) during the 1990s. In 1997, Decker and Geday
parted ways when Geday left Rockwell to become CEO of Globespan. Decker remained at
Rockwell until January 1999, when he left to become the CEO of Conexant, which was spun-off
from Rockwell as a stand-alone company.
33. At the time they orchestrated the Globespan Acquisition, Decker and Geday fully
understood that a merger of their respective companies could produce enormous financial
rewards for themselves. They schemed together for approximately three years to bring this
business combination to fruition. The history of Decker’s and Geday’s merger negotiations is
described in a Registration and Proxy Statement on Form S-4/A that Conexant filed with the
SEC on January 15, 2004 (the “Registration/Proxy Statement”). Specifically, the
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Registration/Proxy Statement discloses that Decker and Geday had been engaged in on-
again/off-again negotiations to combine Conexant and Globespan since late November and
December 2000.
34. The Registration/Proxy Statement states that in June 2002 Conexant executed an
agreement to acquire Globespan’s iCompression business. Following the iCompression deal,
Geday and Decker resumed discussions concerning a combination of the two companies.
According to the Registration/Proxy Statement, “Between September and October 2002,
Conexant and GlobespanVirata had discussions regarding a potential combination of one or more
of Conexant’s businesses with GlobespanVirata.” Decker, Geday, and McMullan, as well as
representatives of Credit Suisse First Boston, financial advisor to Conexant, and representatives
of Morgan Stanley, financial advisor to GlobespanVirata, participated in the discussions.
35. According to the Registration/Proxy Statement, discussions between Geday,
Decker and McMullan resumed in August 2003 and September 2003. Following these
discussions, “both parties believed there was a strong strategic and business rationale to combine
their two companies and a means to integrate successfully both businesses to realize operational
scale and efficiencies.” In October 2003, the management teams from Conexant and Globespan,
including the general manager of the WLAN products group, met “to review and discuss the
operations and business plan of [Globespan’s] recently acquired WLAN products group.”
Finally, on November 2, 2003, the board of directors from both companies approved an
agreement whereby Conexant would acquire Globespan.
The Globespan Acquisition Is Announced
36. On November 3, 2003, Defendants issued a press release (the “November 3, 2003
Press Release”) announcing that Conexant had signed an agreement to acquire Globespan
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through a stock-for-stock merger (the “Globespan Acquisition”). According to the
Registration/Proxy Statement, consideration for the Globespan Acquisition was valued at
approximately $1.1 billion. Under the terms of the merger agreement, Globespan shareholders
would receive 1.198 shares of Conexant stock for each share of Globespan stock, which
represented a 13.87 percent premium for Globespan shareholders. The merger agreement further
provided that Geday would become CEO of Conexant, replacing Decker who would serve as the
non-executive chairman and McMullan would replace Blouin as SVP and Chief Financial
Officer (“CFO”). According to the merger agreement, Conexant’s new board of directors would
consist of 12 members, including five Globespan designated directors and seven Conexant
designated directors. The combined company would retain the Conexant name and continue
trading its stock on the NASDAQ stock exchange under the symbol “CNXT.”
37. In the November 3, 2003 Press Release, Defendants claimed that the combined
company would be greater than the sum of its parts because of operational synergies,
complementary product lines -- particularly in the WLAN and DSL businesses -- and cross-
selling opportunities.
38. On January 16, 2004, Conexant announced that the SEC had declared the
Registration/Proxy Statement effective. The transaction was subject to customary closing
conditions, including the approval by the shareholders of both companies. Conexant
shareholders voted on the proposed merger at the Company’s annual shareholders meeting on
February 25, 2004. Globespan held a separate special shareholders meeting at the same time and
location to vote on the merger.
39. On February 25, 2004, Conexant issued a press release announcing that the
Company’s shareholders of record as of January 2, 2004 had voted to approve the Globespan
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Acquisition, which provided in part: “The combined company will have an annual revenue run-
rate of approximately $1.2 billion, and will possess the industry’s most complete and most
advanced portfolio of semiconductor solutions targeting broadband communications, enterprise
networks and the digital home.” On this news, the price of Conexant stock jumped to close at
$7.30 per share, on February 25, 2004, up $0.42 from its previous close of $6.88 per share, on
February 24, 2004.
40. On March 1, 2004, the first day of the Class Period, Conexant issued a press
release (the “March 1, 2004 Press Release”) announcing the Globespan Acquisition had closed
on February 27, 2004. The March 1, 2004, Press Release promised that the newly combined
company would possess “leading positions in [DSL] connectivity, [WLAN], dial-up modems,
home networking, broadcast video products and digital set-top box system solutions.”
According to the March 1, 2004 Press Release, the combined company was valued at
approximately $3.4 billion, and had 2,400 employees worldwide.
41. News of the closing propelled the price of Conexant common stock to a new 52-
week high of $7.77 per share on March 1, 2004, up $0.42 from its previous close of $7.35 per
share, on February 27, 2004.
Defendants Reassure Investors That Globespan’s Integration Is “On Track”
42. After the closing of the Globespan Acquisition, Defendants repeatedly
represented that the integration of Globespan’s operations and personnel with Conexant was
proceeding as planned and that the Company would soon reap the benefits of stronger purchasing
power from suppliers and operational efficiencies. Indeed, Defendants made numerous
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misrepresentations about the status of the Globespan Acquisition, including the March 1, 2004
Press Release in which Geday stated:
We have made outstanding progress toward integrating the organizations, systems, technologies and processes of Conexant and GlobespanVirata over the past two months and are in a strong position as we begin combined operations today.
Similarly, in an April 26, 2004 press release, Geday asserted:
Since the close of the Conexant-GlobespanVirata merger transaction, our team has done an outstanding job of integrating processes, systems, technologies and organizations, and we have a clear path to the successful completion of our integration work.
Also, in a July 6, 2004 conference call, Geday claimed:
In our leadership DSL business we have made significant progress in the consolidation of the former GlobespanVirata and Conexant productlines.
43. Unbeknownst to the investing public, however, the Globespan Acquisition was a
disaster due to significant problems integrating Globespan’s operations and personnel,
overlapping product lines, lagging designs, and delayed hiring of critical staff, which ultimately
caused Conexant to lose its market share in its DSL and WLAN businesses. In order to conceal
these problems from investors, Conexant stuffed its distribution channels, which artificially
boosted the Company’s sales and revenue figures by immediately recognizing revenue for
products that were shipped to customers.
Defendants’ Scheme Begins to Unravel 44. Defendants’ deceptions began to unravel on July 6, 2004, when Conexant issued
an earnings warning for the third quarter 2004 and lowered the Company’s anticipated quarterly
revenues by $55 million. Conexant announced that it expected revenues for the third quarter of
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2004 to be between $265 million and $270 million, compared to earlier projections of $308
million to $323 million. Conexant blamed its revenue shortfall on several Taiwanese suppliers
who offered low-priced WLAN chips that purportedly “diluted the consumption” of Conexant’s
competitive models. Despite the foregoing, Defendants maintained that Conexant “continued to
be wholly confident in the market positions, profitability and growth prospects of our new
combined company.”
45. This news shocked the market and the price of Conexant stock plummeted $1.77
per share from its previous closing price of $4.08 per share, on July 2, 2004, to close at $2.31 per
share, on July 6, 2004.
46. Nonetheless, Conexant continued to mislead the investing public that its business
plan remained on a successful track. For example, during a July 29, 2004 conference call to
securities analysts, Geday promised that, “[Conexant] continue[s] to build a lasting franchise
offering competitive products and selling technology and world class support. . . . Our design
wins and customer focus will drive long-term operating margin improvement, as we successfully
execute on our business plan.”
47. On August 12, 2004, Conexant issued a press release announcing that McMullan
had resigned for purported “personal reasons” and that Blouin was replacing him.
48. Conexant again shocked the market on November 4, 2004, the last day of the
Class Period, when Geday admitted during an analysts’ conference call, “the inventory has been
building for multiple quarters, maybe 4 or 5 quarters.” During that conference call Conexant’s
President also disclosed the difficulties Conexant was experiencing integrating Globespan’s
offices. In a press release issued that day, the Company also reported revenues of $213 million
for the fourth quarter of 2004, representing a loss of $367.5 million, or $0.79 per share, which
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the Company attributed to diminished demand for its products, inventory buildup and delayed
releases of new products.
49. The market swiftly reacted to these disclosures, driving the price of Conexant
common stock down 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.
50. On November 9, 2004, Conexant confirmed its partial disclosure of November 4,
2004, that the Company had failed to integrate Globespan’s operations and personnel.
Specifically, on that day, the Company held a conference call for securities analysts during
which Decker announced that Geday had resigned for purported “personal reasons” and that
Decker would resume his role as CEO. During the conference call Decker finally admitted that
with regard to the Globespan Acquisition, “not 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.”
The Confidential Witnesses
51. Former Conexant employees confirm that there were severe problems integrating
Globespan’s operations and personnel that caused Conexant to postpone critical hiring, delay
releasing new products and, ultimately, to lose market share. In order to mask these problems,
Conexant stuffed its distribution channels with excess products that caused the Company’s
revenues to be artificially inflated and not a reflection of the true end-user demand for its
products.
52. A former Conexant product manager in the WLAN group, who worked for
Intersil from 2001 until it was acquired by Globespan and then worked for Conexant following
the Globespan Acquisition until February 2005 (“CW-1”), stated that during the merger, and
immediately after, a “turf war” was waged between senior management involving “petty
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bickering” that went on for months after the Globespan Acquisition. Specifically, CW-1
confirmed that these debates were between Geday and Rhodes, who had the backing of Decker,
concerning the leadership of the combined company and whether to expand Conexant’s Newport
Beach WLAN facility or Globespan’s Florida WLAN facility. CW-1 also noted that the friction
and confusion about the direction of the newly combined company, as well as a hiring freeze,
injured WLAN’s relationship with its customers. In particular, CW-1 stated that Conexant was
no longer able to inform its customers when a new product would be launched or what features it
would possess. CW-1 noted, “We weren’t able to meet the commitment to our customers, which
led to the loss of business.”
53. According to CW-1, after the Globespan Acquisition, WISOC, a WLAN program,
was transferred from the Netherlands facility to the Newport Beach facility, at a time when its
release was already four months behind schedule. CW-1 observed that WISOC still had not been
launched when CW-1 left the Company in February 2005. The delay in releasing WISOC,
according to CW-1, cost Conexant between $4 million and $5 million per quarter. CW-1 stated
that the Company’s decision to transfer Longbow, a next generation dual-band wireless chip, to
Newport Beach from another facility resulted in a delay in development and ultimately caused
Conexant to cancel the product altogether. According to CW-1, this product loss cost Conexant
millions in revenues. Since Longbow was supposed to be the next generation in wireless, CW-1
believed its cancellation caused Conexant lose its status as cutting-edge in the wireless field.
54. Most notably, CW-1 relayed the tremendous pressure that Geday placed on his
unit to make numbers. CW-1 affirmed that at the time of the merger and its ensuing months,
Conexant was receiving customer complaints from Dell, Gemtek, Z-com, and Arcadian. CW-1
stated that because of the Globespan Acquisition, and the product delays that followed, Conexant
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lost its credibility with vendors and these companies shifted their business (in a “steep slide”) to
other vendors, such as Atheros, Broadcom, and Marvell. CW-1 estimated that these losses
represented approximately $10 million over the Class Period. CW-1 also confirmed that during
the Class Period, Conexant lost IBM, Hewlett Packard and Microsoft as customers
55. A former Conexant product manager, who worked for the Company from April
2001 to December 2004 (“CW-2”), confirmed the severe problems with the integration of
Globespan. CW-2 reported that senior management of Conexant and Globespan were openly
“jockeying for positions” in an “East Coast versus West Coast” rift. Specifically, CW-2
complained that significant product overlap in the DSL and WLAN lines and lagging designs led
to significant losses in market share, causing Conexant to stuff its distribution channels in order
to artificially boost its sales and revenue figures by immediately recognizing revenue for
products that were shipped to customers.
56. Another former Conexant employee, who worked as a customer manager from the
time of the Globespan Acquisition until February 2005 (“CW-3”), corroborated that after the
Globespan Acquisition, Conexant’s WLAN group began to suffer, resulting in customer
complaints that products were not being timely delivered. CW-3 recalled that Conexant tried to
boost its revenues by increasing product shipments at the end of each calendar quarter.
57. According to a former Conexant employee in shipping and receiving, who worked
for the Company for five years until August 2004 (“CW-4”), Conexant regularly stuffed its
distribution channels. CW-4 was instructed by managers to prematurely ship products at the end
of each quarter. CW-4 commented that there was a lot of excess inventory at Conexant, which
“sat on the back burner” and was sometimes sold to third world countries while Conexant
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introduced new products. In addition, CW-4 noted the significant decrease in orders from Cisco
Systems, Inc., one of Conexant’s major customers.
58. A former member of Conexant senior management in the WLAN division, who
worked for the Company from the Globespan Acquisition until January 2005 (“CW-5”), said that
there were obvious integration problems that far exceeded what one would expect with a merger
of this sort. CW-5 confirmed that these problems included senior management debating over
mundane issues such as whether the Company should use Microsoft Outlook Express versus
Lotus Notes as the e-mail system. CW-5 stated that this rift prevented Conexant employees from
using e-mail for months following the Globespan Acquisition. CW-5 also stated that senior
management could not agree on where to locate the Company’s headquarters or the WLAN
division. As a result, CW-5 confirmed that the post-merger disarray caused delays in purchasing
major equipment and hiring critical employees, causing Conexant to rapidly lose an already
dwindling market share.
59. A former Conexant WLAN team leader, who worked for the Company until
September 2004 (“CW-6”), noted that the integration problems led to the delayed introduction of
new WLAN products. CW-6 also acknowledged the lack of hiring critical staff contributed to
the integration problems.
60. A former Conexant district sales manager, who worked for the Company from
August 1999 through December 2004 (“CW-7”), confirmed the severity of the integration
problems describing the acquisition as one of “animosity.” As a district manager, CW-7 was
instructed to ship products early and stated that Conexant had “the habit of pushing products out
the door at the end of every quarter” to make each quarter “look good.” CW-7 confirmed that
Conexant would offer discounts to customers who agreed to accept products early.
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The Individual Defendants’ Scienter 61. Each of the Individual Defendants was highly motivated by opportunities for
personal profit when structuring the Globespan Acquisition and concealing its problems
throughout the Class Period.
62. Decker and Geday remained in contact for three years prior to the Globespan
Acquisition. As described in the Registration/Proxy Statement, during that time Decker and
Geday engaged in numerous discussions concerning the potential for combining their respective
companies. The cozy relationship between Geday and Decker was highly conducive to
structuring a deal that allowed the senior officers of Conexant and Globespan to personally profit
from the acquisition, while disregarding the interests of their shareholders.
63. Former Globespan executives, Geday and McMullan, were willing participants in
the Globespan Acquisition because they were poised to receive millions from the generous 13.87
percent premium that was being offered for their personally held shares of Globespan stock. In
addition, they were motivated by the accelerated vesting of their Globespan options, hefty
bonuses and more lucrative salaries.
64. Geday’s new employment agreement provided him with a $550,000 annual salary
as compared to the $350,000 annual salary he received from Globespan. In addition, Geday
received options to purchase more than 1 million shares of Conexant stock and eligibility to
receive an annual bonus of up to 100 percent of his base salary, as compared to the $280,000
bonus he received during his last year at Globespan.
65. McMullan’s new employment agreement provided him with a $360,000 annual
salary with the eligibility to receive an annual bonus of up to 70 percent of his annual base salary
as compared to the $250,000 annual salary and $120,000 bonus he received from Globespan. In
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addition, McMullan received options to purchase 250,000 shares of Conexant common stock,
plus an additional 175,000 in “retention options.”
66. Decker’s new employment agreement after the Globespan Acquisition provided
him with a $575,000 annual salary, a signing bonus of $718,000, options to purchase 125,000
shares of Conexant and eligibility to receive an annual bonus of up to 100 percent of his annual
base salary. In addition, Decker’s new employment agreement provide that his 1,172,041
unvested Conexant options, worth approximately $7,149,450 as of September 30, 2003, would
immediately vest if he resigned or was terminated other than for cause.
67. Blouin’s new employment agreement provided him with a $300,000 annual
salary; eligibility to receive an annual bonus of up to 60 percent of his base salary; a signing
bonus of $125,000 and an additional bonus of $75,000 to be paid one year after the “Effective
Date,” defined in Blouin’s employment agreement as 14 days after closing of the Globespan
Acquisition. In addition, Blouin was immediately granted options to purchase 200,000 shares of
Conexant stock and options to purchase an additional 175,000 shares within one year of the
Effective Date.
PRE-CLASS PERIOD STATEMENTS
The November 3, 2003 Press Release
68. On November 3, 2003, Conexant issued a press release and concurrently filed
with the SEC a report on Form 8-K (“November 3, 2003 Press Release”) announcing, the signing
of an agreement to combine Conexant and Globespan. Commenting on the Globespan
Acquisition, Decker stated that he anticipated the integration process to be complete within two
to three quarters. Specifically, Decker stated:
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From a financial perspective, we have the opportunity to capture significant operating efficiencies, and we anticipate that the merger will be accretive within six to nine months from the close of the transaction....Together, we will have the scale and scope to make the necessary R&D investments for continued innovation leadership in wired and wireless communications and multimedia applications for the digital home.
(Emphasis added.)
The November 3, 2003 Conference Call
69. On November 3, 2003, Conexant and Globespan held a conference call for
securities analysts (the “November 3, 2003 Conference Call”), during which Defendants
announced the proposed Globespan Acquisition. Commenting on the Globespan Acquisition,
Decker stated: “This is an outstanding combination that results in a company that is unique in
scope and breadth of technology and that will possess the world’s most complete and most
advanced portfolio of semiconductor solutions targeting the broadband digital home.” Geday
added that after the acquisition, “[Conexant] will be the clear leader in both broadband and
narrowband access, as well as wireless networking, and will have a strong and growing position
in digital media processing.” Decker also added that he anticipated the integration to be
complete within two to three quarters:
We will expect this transaction to be accretive within six to nine months of the close, so in two or three quarters we are confident that the transaction will be accretive.
(Emphasis added.)
The Registration/Proxy Statement
70. On January 15, 2004, Conexant filed with the SEC a registration statement and
proxy statement on Form S-4/A (the “Registration/ Proxy Statement”), in which Defendants
solicited shareholder approval of the proposed Globespan Acquisition.
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71. Under the heading, “Recommendations of the Boards of Directors of Conexant
and GlobespanVirata,” the Registration/Proxy Statement implored Conexant shareholders to
approve the Globespan Acquisition because the “Conexant board believes that the merger is fair
to, and in the best interests of, Conexant and Conexant stockholders.”
72. Under the heading, “Question and Answer,” the Registration/Proxy Statement
further induced shareholders to vote in favor of the Globespan Acquisition:
Q: “Why are Conexant and GlobespanVirata proposing the merger? A: We want to merge our two companies because we believe that the combined company will be a worldwide leader in semiconductor solutions for broadband communications and the digital home. While no assurances can be made, we believe that by combining we have the opportunity to capture significant operating efficiencies through scale and synergy. We believe that the combined company will deliver stronger financial performance and create more value for our stockholders, customers and employees than either company could operating independently.
The January 28, 2004 Conference Call 73. On January 28, 2004, Conexant held conference call for securities analysts (the
“January 28, 2004 Conference Call”), during which Decker and Geday commented on the
impending Globespan Acquisition. Decker promised shareholders as a combined company
Conexant would possess “the strongest overall market positions of the broadband digital home,
with market leadership DSL, wireless LAN, and universal access positions, and a growing
number 2 worldwide share position in the broadband media processing market.” In addition
Geday further promised that the new company would “take advantage of strong financial
synergies and significant economies of scale by combining our operations, and we expect the
merger to be immediately earnings accretive to current Conexant performance estimates.”
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FALSE AND MISLEADING STATEMENTS DURING THE CLASS PERIOD
The March 1, 2004 Press Release
74. On March 1, 2004, the beginning of the Class Period, Conexant issued a press
release announcing the completion of the Globespan Acquisition (the “March 1, 2004 Press
Release”). In the March 1, 2004 Press Release, Geday promised shareholders the new Conexant
would secure market leadership in DSL and WLAN, and that Conexant had been working to
successfully integrate Globespan’s operations and products. The March 1, 2004 Press Release
provided in part:
We successfully combined the highly complementary product and technology portfolios of Conexant and GlobespanVirata to create a worldwide leader in semiconductor solutions for broadband communications, enterprise networks and the digital home, three of the industry’s most exciting and fastest growing segments....The new Conexant has leading positions in [DSL] connectivity, [WLAN], dial-up modems, home networking, broadcast video products and digital set-top box system solutions. Our unique combination of products and technologies will drive broader, deeper engagements with worldwide customers that are recognized leaders in broadband communications and consumer electronics.
(Emphasis added).
75. In the March 1, 2004 Press Release, Geday further represented “outstanding
progress” had been made towards integrating Conexant’s and Globespan’s operations and the
combined company would deliver better financial results than either company could on its own.
The March 1, 1004 Press Release provided in part:
We have made outstanding progress toward integrating the organizations, systems, technologies and processes of Conexant and GlobespanVirata over the past two months and are in a strong position as we begin combined operations today....The new Conexant has the scale and scope to make the necessary R&D investments for continued innovation leadership. We remain
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completely confident that the merged company will deliver stronger financial performance and will create more value for our shareholders, customers and employees than either Conexant or GlobespanVirata could have operating independently.
(Emphasis added.)
The Second Quarter 2004 Earnings Release
76. On April 26, 2004, Conexant issued a press release announcing its results for the
quarter ended March 31, 2004 (the “Second Quarter 2004 Earnings Release”). The Second
Quarter 2004 Earnings Release reported combined revenues of $243.8 million for the quarter.
Specifically, the Second Quarter 2004 Earnings Release reported:
[R]evenues of $243.8 million for the second quarter of fiscal 2004, which ended April 2, 2004. This is the company’s first earnings report following the completion of the merger with GlobespanVirata, Inc. on February 27, 2004 . Conexant’s second fiscal quarter report incorporates the results of GlobespanVirata from February 28, 2004 through April 2, 2004.
As reported, including the results of GlobespanVirata from February 28, 2004, second fiscal quarter 2004 revenues of $243.8 million increased 38 percent over first fiscal quarter 2004 revenues of $177.3 million, and increased 74 percent over second fiscal quarter 2003 revenues of $140.1 million. The net loss for the second quarter of fiscal 2004 was $143.4 million, or $0.41 per diluted share, compared to a net loss of $68.0 million, or $0.26 per diluted share, in the second quarter of fiscal 2003, and net income of $40.6 million, or $0.13 per diluted share, in the first fiscal quarter of 2004. The second quarter of fiscal 2004 included a merger-related, non-cash charge of $160.8 million for in-process research and development.
Second fiscal quarter pro forma operating profit was $20.1 million, or 8.2 percent of revenues, compared to $0.4 million in the year-ago quarter. Second fiscal quarter 2004 pro forma operating profit increased by 16.9 percent from $17.2 million in the first fiscal quarter of 2004. On a pro forma basis, net profit for the second fiscal quarter of 2004 was $0.06 per diluted share, compared to $0.02 per diluted share in the second fiscal quarter of 2003.
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77. In the Second Quarter Earnings Release, Geday again assured the investing public
that integration of Globespan was on track:
Since the close of the Conexant-GlobespanVirata merger transaction, our team has done an outstanding job of integrating processes, systems, technologies and organizations, and we have a clear path to the successful completion of our integration work....Combined company revenues of $293.3 million in our second fiscal quarter reflected strength in our growth platforms, which include products for digital subscriber line connectivity and wireless local area networking as well as digital set-top box and PC video solutions. This strength was partially offset by normal seasonal weakness in our universal access business.
(Emphasis added.) With respect to the Company=s Fiscal 2004 outlook, Geday stated:
The June quarter will be our first complete quarter as a combined company, and we are enthusiastic about the prospects for the new Conexant…The combined company is addressing high-growth opportunities in broadband communications, enterprise networks and the digital home with a world-leading portfolio of products and technologies differentiated by its depth and breadth.
In the third fiscal quarter, we expect revenues to grow in a range of 5 percent to 10 percent sequentially to between $308 million and $323 million....We anticipate that gross margin will be between 42 percent and 44 percent of sales, and we expect to deliver pro forma non-GAAP net earnings per share of $0.03 to $0.05, based on approximately 525 million fully diluted shares.
The April 26, 2004 Conference Call
78. On April 26, 2004, Conexant held a conference call for securities analysts during
which it reiterated the financial results reported in the Company’s Second Quarter 2004 Earnings
Release (the “April 26, 2004 Conference Call”). During the April 26, 2004 Conference Call,
Geday once again assured investors that the integration of Globespan was on track:
We have secured the world’s largest wireless local area networking [WLAN] market position.
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* * * Since the close of the merger, roughly seven weeks ago, our team has done an outstanding job of integrating processes, systems, technologies and organizations and we have a clear path to the successful completion of our integration work.
(Emphasis added.)
The Second Quarter 2004 10-Q 79. On May 17, 2004, Conexant filed with the SEC its quarterly report on Form 10-Q
for the quarter ended March 31, 2004 (the “Second Quarter 2004 10-Q”). McMullan signed the
Second Quarter 2004 10-Q. The Second Quarter 2004 10-Q reiterated the financial results
reported in the Company’s Second Quarter 2004 Earnings Release.
80. Under the headings, “Results of Operations” and “Inventories,” the Second
Quarter 2004 10-Q represented that the Company regularly assessed its inventory levels to
ensure that the Company’s inventories would not exceed the foreseeable demand for its products:
On an operational basis and unrelated to any significant single event we assess the recoverability of our inventories at least quarterly through a review of inventory levels in relation to foreseeable demand (generally over six to twelve months). Foreseeable demand is based upon all available information, including sales backlog and forecasts, product marketing plans and product life cycles. When the inventory on hand exceeds the foreseeable demand, we reserve for the excess which, at the time of our review, we expect to be unable to sell. The amount of the inventory reserve is the excess of historical cost over estimated realizable value. We base our assessment of the recoverability of our inventories, and the amounts of any reserves, on currently available information and assumptions about future demand and market conditions.
81. The statements in paragraphs 74 through 80 were each false and misleading when
made because they misrepresented and omitted material adverse facts, in that:
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a. The Individual Defendants knew or recklessly disregarded the fact that the
Globespan Acquisition was neither in the best interests of Conexant shareholders or
the Company and that the combined entity had far worse prospects for success than
Conexant as a stand-alone company;
b. The Individual Defendants knew and failed to disclose that their sole motivation for
entering into the Globespan Acquisition was the opportunity for personal profit;
c. The combined company failed to gain “leading positions” in WLAN and DSL
solutions because the Company was suffering from severe problems integrating
Globespan’s operations and personnel, resulting in the delay in hiring of critical staff
and the release of new products that caused the Company to lose its market share in
its DSL and WLAN businesses;
d. Defendants knew and failed to disclose that the Company already lost significant
customers such as IBM, Hewlett Packard and Microsoft;
e. Defendants knew or recklessly disregarded the fact that there was too much overlap
between Conexant’s and Globespan’s products, particularly in the DSL and WLAN
divisions of the two companies, that made efficient integration of the Companies
impossible;
f. The Company failed to regularly assesses its inventory levels to ensure that the
Company’s inventories would not exceed the foreseeable demand and continued to
stuff its distribution channels, which caused its revenues to be artificially inflated and
not a reflection of the true end-user demand for its products, to conceal the integration
problems afflicting Conexant;
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g. The Company’s financial results were inherently unsustainable because its excessive
channel inventories would inevitably lead to lowered revenues as distributors and
retailers would need to exhaust existing inventory before ordering and purchasing
new products from Conexant; and
h. Statements concerning the performance of the combined company were knowingly
false when made because Defendants knew that the Company’s financial results were
the product of channel stuffing and, therefore, were inherently unsustainable in the
absence of fraud.
The Fraud Begins To Unravel
The July 6, 2004 Earnings Warning
82. On July 6, 2004, Conexant issued a press release announcing results for the third
quarter 2004 (the “July 6, 2004 Earnings Warning”). Conexant stated that revenues would come
in between $265 million and $270 million, compared to expectations of revenues between $308
million and $323 million. Specifically, the July 6 2004 Earnings Warning reported that
Conexant expected “total third fiscal quarter revenues to be between $265 million and $270
million and pro forma non-GAAP net earnings per share (EPS) of $0.02, compared to
expectations in April of revenues between $308 million and $323 million and pro forma non-
GAAP EPS of $0.03 to $0.05.”
83. In addition, in the July 6, 2004 Earnings Warning Geday stated:
[W]e are absolutely confident in the long-term prospects for the combined company. Several factors affected our wireless LAN business during the course of the quarter.... A number of Taiwan-based chip suppliers emerged with extremely low-priced solutions, displacing incumbent suppliers in certain high-volume applications. These additional competitors
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exacerbated pricing pressure in a market already characterized by severe price competition. Also, channel inventory of our customers= products increased as new competitors= products, based on low-priced Taiwanese solutions, caused our customers to lose market share.
The July 6, 2004 Conference Call
84. On July 6, 2004, Conexant held a conference call for securities analysts (the “July
6, 2004 Conference Call”) during which Defendants reiterated the financial results it reported in
the Company’s July 6, 2004 Earnings Warning. Commenting on these results, Geday stated:
In our leadership DSL business we have made significant progress in the consolidation of the former GlobespanVirata and Conexant productlines. We are seeing increased recognition from our customer base that our portfolio leads the market in performance/cost ratio. As a result of our team’s superior performance we have generated more revenues from high-speed ADSL than any other chip set vendor.
* * *
[A]n extremely competitive wireless LAN market has become considerably more crowded, impacting our business results this past quarter. We have every intention to aggressively expand our position by leveraging our best in class capabilities. We will become laser focused on combining a differentiated marketing strategy with innovative product features and roadmaps to extract value from our product offerings resulting in increased share and profitability.
The Third Quarter 2004 Earnings Release
85. On July 29, 2004, Conexant issued a press release announcing its financial results
for the quarter ended July 2, 2004 (the “Third Quarter 2004 Earnings Release”). Specifically, the
Third Quarter 2004 Earnings Release reported:
Third fiscal quarter 2004 revenues of $267.6 million decreased 9 percent from the second fiscal quarter revenues of $293.3 million the company would have reported if its merger with GlobespanVirata, which closed on February 27, 2004, had closed on January 1, 2004. Third fiscal quarter revenues increased 77 percent over third fiscal quarter 2003 revenues of $151.0 million. The net loss for the third
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quarter of fiscal 2004 was $71.4 million, or $0.15 per diluted share, compared to a net loss of $49.1 million, or $0.18 per diluted share, in the third quarter of fiscal 2003, and a net loss of $143.4 million, or $0.41 per diluted share, in the second quarter of fiscal 2004.
Third fiscal quarter 2004 pro forma operating profit was $8.1 million, or 3.0 percent of revenues, compared to $3.3 million in the year-ago quarter.
86. In the Third Quarter 2004 Earnings Release, Geday attributed the increased
inventory and decreased revenue to lower sales and a shortfall in demand from the WLAN
business. Geday nonetheless continued to reassure investors. More specifically, the Third
Quarter Earnings Release stated:
Conexant’s overall third fiscal quarter performance was adversely impacted by a shortfall in demand in our wireless LAN business. . . .We are intensifying our effort to regain and expand our market position.
While our other businesses came in essentially flat for the third fiscal quarter, we remain optimistic about the growth prospects for our company.
* * *
We expect revenues for Conexant’s fourth fiscal quarter to be between $250 million and $255 million. . . .We anticipate that gross margin will be in a range between 40 and 42 percent, and we expect to further reduce our pro forma operating expenses by $3 million to $4 million. Finally, we anticipate that our pro forma non-GAAP net earnings per share will be in a range from $0.00 to $0.02 per share based on approximately 500 million fully diluted shares.
The July 29, 2004 Conference Call
87. On July 29, 2004, Conexant held a conference call for securities analysts during
which Defendants reiterated the financial results reported in the Company’s Third Quarter 2004
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Earnings Release (the “July 29, 2004 Conference Call”). During the July 29, 2004 Conference
Call Geday stated:
The [WLAN] market has been characterized by rapid growth and severe price competitions. . . . [T]his sequential drop in [WLAN] revenues was primarily the result of severe price declines resulting in market share loss. This situation was compounded by excess inventory in the channel. Although we anticipate that tier recapture will take some time, and will likely impact our gross margins, we are committed to regaining market share in [WLAN].
* * * Our design wins and customer focus will drive long-term operating margin improvement, as we successfully execute on our business plan.
The Third Quarter 2004 10-Q 88. On or about August 16, 2004, Conexant filed with the SEC its quarterly report on
Form 10-Q for the quarter ended June 30, 2004 (the “Third Quarter 2004 10-Q”). The Third
Quarter 2004 10-Q, which was signed by Defendant Blouin, reiterated the financial results
reported in the in the Company’s Third Quarter 2004 Earnings Release.
The September 30, 2004 Press Release 89. On September 30, 2004, Conexant issued a press release announcing that it had
lowered its financial outlook for the quarter ending October 1, 2004 (the “September 30, 2004
Press Release”). Specifically, the Company announced that it expected revenues for the quarter
ended October 1, 2004, to be down by $50 million. Geday attributed these results to “excess
channel inventory in Asia that is a result of lower-than-expected demand.” Geday also disclosed
that “Conexant=s lowered fourth fiscal quarter expectations are a direct result of excess channel
inventory in our service-provider and PC-related businesses. . . . Ongoing softness in customer
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demand, reduced product lead times and price erosion also resulted in weakness in our turns
business.” Geday also discussed the future prospects of the Company:
For our fourth fiscal quarter, we expect gross margin to be at the low end of the range of 40 to 42 percent that we anticipated in July, and we expect to reduce pro forma operating expenses by considerably more than the $3 million to $4 million we anticipated in July, to a level approaching $95 million from $104.4 million last quarter.
90. The statements in paragraphs 82 through 89 were each false and misleading when
made because they misrepresented and omitted material adverse facts, in that:
a. The Individual Defendants knew or recklessly disregarded the fact that the
Company’s decline in revenues for the third quarter 2004 and loss of market share in
the WLAN and DSL groups were due to severe problems integrating Globespan’s
operations and personnel resulting in a delay in hiring of critical staff and the release
of new products, and not only the result of lower customer demand and/or increased
competition;
b. The combined company could not “execute on its business plan” because the
Company was suffering from severe problems integrating Globespan’s operations and
personnel that caused the Company to lose its market share in its DSL and WLAN
businesses;
c. The Company could not have seen increased recognition from its customer base that
its portfolio led the market because the Company was losing significant customers
such as IBM, Hewlett Packard and Microsoft;
d. Defendants knew or recklessly disregarded the fact that there was too much overlap
between Conexant’s and Globespan’s products, particularly in the DSL and WLAN
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divisions of the two companies, that made efficient integration of the Companies
impossible;
e. The Company continued to stuff its distribution channels, which caused its revenues
to be artificially inflated and not a reflection of the true end-user demand for its
products, to conceal the integration problems afflicting Conexant;
f. The Company’s financial results were inherently unsustainable because its excessive
channel inventories would inevitably lead to lowered revenues as distributors and
retailers would need to exhaust existing inventory before ordering and purchasing
new products from Conexant; and
g. Statements concerning the performance of the combined company were knowingly
false when made because Defendants knew that the Company’s financial results were
the product of channel stuffing and, therefore, were inherently unsustainable in the
absence of fraud.
The Fourth Quarter 2004 Earnings Warning 91. On November 4, 2004, the last day of the Class Period, Conexant issued a press
release announcing disappointing revenues of $213 million for the fourth quarter of 2004,
including a loss of $367.5 million, or $0.79 per share (the “Fourth Quarter 2004 Earnings
Warning”). Specifically, the Fourth Quarter Earnings Warning reported:
Fourth fiscal quarter 2004 revenues of $213.1 million decreased 20 percent from the third fiscal quarter revenues of $267.7 million. Fourth fiscal quarter 2004 revenues increased 29 percent over fourth fiscal quarter 2003 revenues of $164.7 million as a result of the merger. The net loss for the fourth quarter of fiscal 2004 was $367.5 million, or $0.79 per diluted share, compared to net income of $37.2 million, or $0.12 per diluted share, in the fourth quarter of fiscal 2003, and a net loss of $71.4 million, or $0.15 per diluted share, in the third quarter of fiscal 2004.
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Fiscal year 2004 revenues of $901.9 million increased 50 percent over fiscal 2003 revenues of $600.0 million as a result of the merger. The net loss for fiscal 2004 was $541.6 million, or $1.39 per diluted share, compared to a net loss in fiscal 2003 of $705.3 million, or $2.56 per diluted share. The net loss in fiscal 2003 includes a $728.9 million loss from discontinued operations.
92. In the Fourth Quarter Earnings Warning, Conexant attributed its financial
hardships to lower demand, inventory buildup and, for the first time, the delayed release of new
products. In the Fourth Quarter 2004 Earnings Warning, Geday stated:
Conexant’s sequential decline in revenues to $213.1 million in the fourth fiscal quarter was largely due to excess channel inventory that resulted from lower-than-expected customer demand. . . . As is often the case during an inventory correction, our revenue decline was exacerbated by average selling price erosion caused by an unfavorable product mix as newer, more valuable products were slower to ramp. While our visibility continues to be limited, we remain confident in Conexant=s long-term prospects.
(Emphasis added.)
The November 4, 2004 Conference Call 93. On November 4, 2004, Conexant held a conference call for securities analysts (the
“November 4, 2004 Conference Call”) during which the Company reiterated the financial results
reported in the Company’s Fourth Quarter 2004 Earnings Warning. During the November 4,
2004 Conference Call, Geday revealed for the first time that the Company’s channel stuffing had
been occurring for as long as four to five quarters, even before the Globespan Acquisition.
Indeed, Geday admitted, “it looks like the inventory has been building for multiple quarters,
maybe 4 or 5 quarters.” Defendant Blouin also confirmed that channel stuffing was a problem
that needed to be rectified: “I think the biggest thing that has to change, is we have to work
through the inventory that’s in the channel.”
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94. During the November 4, 2004 Conference Call, when directly asked by an analyst
from Morgan Stanley about the transition since the Globespan Acquisition and the relocation of
company headquarters to New Jersey, Rhodes was unable to say that the integration was
successful. Instead, Rhodes explained that the Company was still juggling how to manage a
business operating out of four major sites, rather than operating as a single entity. Specifically,
Rhodes stated:
As far as integration with Red Bank, it is the case that the integrated company has four major business locations. . . . And I think like any modern company, we maintain strong presence in these business centers and have design centers, and we have had to learn to manage on a worldwide basis, because we go and we work with the talent where the talent is. And I think we’re settled into that configuration and continuing to learn how to be a best in class managing across multiple sites.
95. Sophisticated securities analysts understood the November 4, 2004 disclosures to
mean that Conexant’s restructuring effort, including the Globespan Acquisition, was a dismal
failure. For example, Kintishef Research in a report dated November 5, 2004, concluded:
[W]e believe it is safe to say at this point that Conexant’s restructuring efforts over the past couple of years, which have included a number of divestitures and acquisitions, have failed to improve the competitive positioning of the company.
THE AFTERMATH
96. On November 9, 2004, Conexant held a conference call for securities analysts (the
“November 9, 2004 Conference Call”) during which Decker announced that Geday had resigned
for purported personal reasons and that he would assume the role as CEO. During the November
9, 2004 Conference Call, in response to a question posed by an Unterberg analyst concerning the
integration effort, Decker confirmed there were problems:
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I have found with mergers in the past that completing the merger really takes a year; and really integrating the mindset and the full dedication of the team sometimes can take as long as two years. So it is a merger in process. And not 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.
97. On that same day, my-esm.com (“Electronics Supply & Manufacturing”)
published an article entitled “Geday Out, Decker Back in as Conexant CEO.” The article quoted
Decker:
We made bets that were significant . . .Those bets weren’t right.
I think the weakness in DSL is almost all price, but overall, inventory build in the channel. . . We expect the DSL business to start growing again.
We have a strong position in that market due to the timing of our products. . . . We have products ready to go to production. We have secured design wins.
98. On November 10, 2004, the Los Angeles Times published an article entitled
“Conexant Founder Returns as CEO.” The article, in relevant part, read:
Conexant has racked up more than $439 million in losses since the deal closed in late February. Those losses have been “unexpected and unacceptable,” said Decker, who had been serving as chairman of the combined company.
Decker blamed the losses on a decline in the market for DSL equipment for high-speed Internet access -- especially in Japan and China -- and on internal mismanagement that led to delays in new products that cost market share. He did not specifically criticize outgoing CEO Armando Geday, who had been CEO of GlobespanVirata. Geday resigned Tuesday for personal reasons, the company said.
Conexant has underperformed this whole year compared to what we expected, and we all agreed that this was the best thing to do. . . . Slumping demand and product delays will slash Conexant’s revenue
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in the quarter that ends in December to about $180 million, down from $297 million a year earlier, Decker said. Conexant=s shares have lost 78% of their value since the company completed its purchase of GlobespanVirata. They rose 1 cent to $1.62 in regular NASDAQ trading Tuesday and moved only slightly in extended trading after the executive changes were announced.
99. In an analyst report issued on November 10, 2004, Unterberg also abandoned
hope that the union of Conexant and Globespan would succeed: “Can CNXT do better than ‘one
plus one equals one’? Our current estimates for CNXT’s FY2005 are at the same level as
FY2002 prior to the merger with GSPN.” In the wake of the merger fiasco, Unterberg wrote the
Globespan Acquisition’s epitaph: “Not only the opportunity for post merger synergies and
operational efficiency has all but disappeared, but the combined company revenue and outlook is
also lower than standalone Conexant in the past.”
100. On December 13, 2004, the extent of the channel stuffing was confirmed when
Conexant revealed during a conference call that it was undertaking actions that would result in
the consumption of approximately $50 million in channel inventory. Indeed, Conexant’s
distribution channels were so saturated that during the conference call, Decker announced that
Conexant would not be shipping “anything to distributors” until the inventory was consumed.
Thus, Conexant had finally disclosed the full extent of its channel stuffing, which boosted the
Company’s financial results during the first and second quarters of 2004, by robbing the
Company of revenue for numerous future quarters. Entering the fourth quarter, Conexant
expected revenues to be $175-185 million, with and inventory consumption of between $10-20
million.
101. Also during the December 13, 2004 conference call, Decker attributed the
revenue decline and excess inventory to “a combination of market conditions and company
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execution problems, primarily in our wireless networking and DSL businesses.” He conceded
that Conexant’s WLAN business suffered from significant share loss resulting from delays in
new product introduction, particularly its 802.11g chip solutions, which was already saturated by
the market. He also admitted that the DSL business suffered from a significant revenue decline
over the two previous quarters due to lack of market demand in Japan and China resulting in
“excess inventory piled up throughout the channel.”
102. In an effort to clear its distribution channels of excess inventory, in its 10-Q for
the first quarter 2005 filed with the SEC on February 8, 2005, Conexant declared that it would
continue its revenue reduction effort into 2005, with internal and channel inventory charges of
approximately $53 million. These charges included $26 million for excess and obsolete
inventory relating to broadband and WLAN products; $18.8 million of lower of cost or market
write-downs for wireless networking inventory; and $7.9 million of pricing adjustments to
channel inventories.
LOSS CAUSATION/ECONOMIC LOSS
103. During the Class Period, as detailed herein, Defendants engaged in a scheme to
deceive the market and a course of conduct that artificially inflated Conexant’s stock price and
operated as a fraud or deceit on the investing public by misrepresenting the Company’s financial
results. Defendants created Conexant’s facade of success, growth and strong future business
prospects by:
a. Improperly representing the newly combined company would achieve greater
financial results than either company would have if it operated independently, when
in fact the combined company had revenues that were no greater than Conexant’s
revenues as a stand-alone company. ¶¶ 72 and 75;
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b. Improperly representing that Globespan’s operations and personnel were effectively
being integrated with Conexant, when in reality the Company was plagued with
integration problems that caused Conexant to delay the hiring of critical staff and the
release of new products resulting in a loss of market share. ¶¶ 42, 75, 77, and 78;
c. Improperly representing that the combined company was achieving leadership
positions in its DSL and WLAN product lines, when in truth the Company sustained a
loss of market share in these product lines. ¶¶ 41, 42, 68, 69, 72-75 and 78; and
d. Improperly representing that the excess channel inventory was the result of decreased
demand and increased competition in WLAN and DSL product lines, when in reality
the Company had been stuffing its distribution channels for more than four quarters
which caused its revenues to be artificially inflated and not a reflection of the true
end-user demand for its products. ¶¶ 5, 7, 83, 86, 87, 92 and 101.
104. Defendants’ false and misleading statements had the intended effect and caused
Conexant stock to trade at artificially inflated levels, reaching as high as $7.77 per share, on
March 1, 2004. When the Company was forced to disclose the extent of its channel stuffing and
excess inventory, Conexant stock dropped $1.77 per share, or 56.6 percent, on July 6, 2004, from
its previous closing price of $4.08 per share, on July 2, 2004, to close at $2.31 per share. Upon
further revelations made by the Company on November 4, 2004, Conexant stock dropped $1.76
per share, or 10 percent, at the close of trading on November 4, 2004, to $1.60 per share at the
close of trading on November 5, 2004.
105. The above-referenced stock drop was directly related to the disclosures of the
misrepresentations or omissions or other fraudulent conduct alleged herein and was unrelated to
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general stock market movements, industry related stock market movements, changed economic
conditions and/or changed investor expectations.
UNDISCLOSED ADVERSE FACTS
106. The market for Conexant’s securities was open, well-developed and efficient at all
relevant times. As a result of these materially false and misleading statements and failures to
disclose, Conexant’s securities traded at artificially inflated prices during the Class Period.
Plaintiff and other members of the Class purchased or otherwise acquired Conexant securities
relying upon the integrity of the market price of Conexant=s securities and market information
relating to Conexant, and have been damaged thereby.
107. During the Class Period, Defendants materially misled the investing public,
thereby inflating the price of Conexant=s securities, 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. Said statements and omissions were materially false
and misleading in that they failed to disclose material adverse information and misrepresented
the truth about the Company, its business and operations, as alleged herein.
108. At all relevant times, the material misrepresentations and omissions particularized
in this Complaint directly or proximately caused or were a substantial contributing cause of the
damages sustained by Plaintiff and other members of the Class. As described herein, during the
Class Period, defendants made or caused to be made a series of materially false or misleading
statements about Conexant=s business, prospects and operations. These material misstatements
and omissions had the cause and effect of creating in the market an unrealistically positive
assessment of Conexant and its business, prospects and operations, thus causing the Company=s
securities to be overvalued and artificially inflated at all relevant times. Defendants’ materially
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false and misleading statements during the Class Period resulted in plaintiff and other members
of the Class purchasing the Company=s securities at artificially inflated prices, thus causing the
damages complained of herein.
ADDITIONAL SCIENTER ALLEGATIONS
109. As alleged herein, the Individual Defendants acted with scienter because the
Individual 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 disseminated to the investing public; and knowingly and
substantially participated or acquiesced in the issuance or dissemination of such statements or
documents as primary violations of the federal securities laws. As set forth elsewhere herein in
detail, the Individual Defendants, by virtue of their receipt of information reflecting the true facts
regarding Conexant, their control over, and/or receipt and/or modification of Conexant allegedly
materially misleading misstatements and/or their associations with the Company which made
them privy to confidential proprietary information concerning Conexant, participated in the
fraudulent scheme alleged herein.
110. The Individual Defendants knew and/or recklessly disregarded the falsity and
misleading nature of the information that they caused to be disseminated to the investing public.
The ongoing fraudulent scheme described in this complaint could not have been perpetrated over
a substantial period of time, as has occurred, without the knowledge and complicity of the
personnel at the highest level of the Company, including the Individual Defendants.
The Individual Defendants’ Motive and Opportunity
111. The Individual Defendants were highly motivated by the opportunities for
personal profit to: (i) devise, orchestrate and complete the Globespan Acquisition; and (ii)
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artificially inflate Conexant’s financial results while concealing the true financial condition of
Conexant throughout the Class Period. Had the investing public known the truth concerning
Conexant, including the fact that it was stuffing its distribution channels with far more product
than justified by its end-user demand; that there were severe problems integrating Globespan’s
operations and personnel; and that there was too much product overlap between Conexant’s and
Globespan’s products particularly the WLAN and DSL businesses that made the integration
impossible, the Conexant shareholders would have never approved the Globespan Acquisition,
nor would the investing public have purchased Conexant shares at artificially inflated prices.
112. The benefits the Individual Defendants received as a result of the Globespan
Acquisition are demonstrated in the following diagram:
Executive Salary Bonus Options Other
Geday $550,000 as compared to $350,000 he received from Globespan
● eligibility for an annual bonus up to 100% of base salary as compared to $280,000 in bonus he received from Globespan
● options to purchase 1,050,000 shares of Conexant stock
On resignation or termination other than for cause: ● cash lump-sum equal to the sum of any unpaid base salary accrued through the date of his resignation or termination; ● a pro rata share of his annual bonus of $550,000 for fiscal 2004; ● cash payment of $1,000,000; ● two times his annual bonus of $550,000 for fiscal 2004; and ● a lump sum of $510,000.
Decker $575,000 ● cash signing bonus of $718,000. ● eligibility for an annual bonus up to 100% base salary
● options to purchase 125,000 shares of Conexant stock
On resignation or termination other than for cause: ● accelerated vesting of 1,172,041 previously unexercisable options worth $7,149,450 as of September 30, 2003. ● any unpaid base salary through the date of termination
McMullan $360,000 as compared to $220,000 he received from Globespan
● eligibility for an initial annual bonus of 70% of base salary as compared to $120,000 in bonus he received from Globespan
● options to purchase 250,000 shares of Conexant stock, and retention options to purchase 175,000 shares
On resignation or termination other than for cause: ● a pro rata share of his bonus for the fiscal year; ● the full amount of his bonus with respect to such fiscal year; and ● immediate vesting of the retention options
Blouin $300,000 ● cash signing bonus of $125,000.
● options to purchase 200,000 shares of
Upon “change of control” including the Globespan Acquisition:
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● cash bonus of $75,000 to be paid upon one year of the Effective Date. ● eligibility for an annual bonus of 60% of base salary
Conexant stock and retentions options to purchase 175,000 shares
● accelerated vesting of as much as fifty percent of his 552,008 options to purchase Conexant stock, worth approximately $3,367,249 as of September 30, 2003. On resignation or termination other than for cause: ● his annual base Salary through his date of termination; ● the amount of any compensation previously deferred; ● annual base salary for two years; ● the full amount of his annual bonus; and ● vesting of all unvested options to purchase Conexant stock.
113. Decker was highly motivated to commit fraud so that he could take advantage of
certain provisions in his new employment agreement. Under his new employment agreement,
Decker was paid $575,000 in base salary for his new role as Chairman and two-weeks after
closing Decker also was paid a cash bonus of $718,000 and options to purchase 125,000 shares
of the combined Company. In addition, Decker had the prospect of an annual bonus of 100
percent of his annual base salary. Decker also was eligible for the accelerated vesting of his
1,172,041 outstanding stock options (worth $7,149,450 as of September 30, 2003) if he resigned
or was terminated without cause following the Globespan Acquisition. Thus, Decker was given
highly lucrative separation terms that he did not have under his prior employment agreement.
114. Geday also was motivated to commit fraud so that he could take advantage of his
new employment agreement with Conexant. Conexant agreed to pay Geday an initial annual
base salary of $550,000 as compared to the $350,000 annual salary he was paid at Globespan.
Geday also had the prospect of an annual bonus of 100 percent of his annual base salary as
compared to the $280,000 bonus he received at Globespan. In addition, Geday was granted
options to purchase 600,000 shares of Conexant common stock, as well as retention options to
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purchase 450,000 shares of Conexant common stock. If he resigned or was terminated,
Conexant agreed to pay Geday his base salary as a non-executive employee until June 30, 2005;
a lump-sum equal to the sum of any unpaid base salary accrued through the date of his
resignation; a pro rata share of his annual bonus; $1,000,000; and a payment of $510,000.
115. In addition, before the news of the failed acquisition was announced, Geday used
artificially inflated shares of Conexant common stock to repay a loan from the Company.
Specifically, on August 17, 2004, Conexant filed with the SEC a Statement Of Changes In
Beneficial Ownership Of Securities on Form 4 reporting that on August 13, 2004 Geday
surrendered 452,826 shares of his personally held Conexant stock to Conexant as partial
repayment of an outstanding loan from the Company. Geday’s shares were reported to be $1.50
per share and, thus, the transaction generated proceeds of approximately $679,239.
116. Blouin was highly motivated commit fraud so that he could take advantage of
accelerated vesting of his outstanding Conexant options and bonuses upon change of control of
the Company. According to the Registration/ Proxy Statement, as of September 30, 2003,
Blouin held approximately 552,008 unvested Conexant options, worth approximately
$3,367,249.
117. On February 27, 2004, Blouin entered into an amendment to his previous
employment agreement. Under the amendment, Conexant agreed to pay Blouin an annual salary
of $300,000; an annual bonus of up to 60 percent of his base salary; a cash bonus after the
closing of $125,000; and an additional cash bonus of $75,000 to be paid one year after the
Effective Date. In addition, Blouin was granted options to purchase 200,000 shares of Conexant
stock and an additional 175,000 options within one year of the Effective Date. Upon resignation
or termination, Conexant agreed to pay Blouin: his annual base salary through his date of
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termination; the amount of any compensation previously deferred; his annual base salary for two
years; his full annual bonus; and continued vesting in all unvested options to purchase Conexant
stock.
118. Under Blouin’s employment agreement, dated December 18, 2002 (attached to
Conexant’s annual report on form 10-K for the fiscal year ended September 30, 2003), upon
change in control:
[O]ne-fourth of all awards granted on or before December 31, 2001 shall accelerate in vesting. Further, if within two years following the Change of Control event, Executive’s position is eliminated or Executive’s duties are changed in such a way that a substantial diminution of status and responsibilities occurs, an additional one-fourth of all awards granted on or before December 31, 2001 then outstanding, shall accelerate in vesting.
Blouin’s employment agreement defined “change in control” to include: “Consummation of a
reorganization, merger or consolidation or sale or other disposition of all or substantially all of the
assets of the Company or the acquisition of assets of another entity (a “Business
Combination”).” (Emphasis added.) Thus, the Globespan Acquisition triggered the change in
control provisions under Blouin’s employment agreement and the vesting of as much as fifty percent
of options that he was granted prior to December 31, 2001.
119. Defendant McMullan also was motivated to commit fraud so that he could take
advantage of his new employment arrangement. McMullan’s employment agreement provided
him with an annual base salary of $360,000 as compared to the $220,000 annual salary he
received from Globespan and the eligibility for an initial annual bonus of 70 percent of his
annual base salary as compared to the $120,000 bonus he received from Globespan. McMullan
also was granted options to purchase 250,000 shares of Conexant common stock and retention
options to purchase 175,000 shares of Conexant common stock. If he resigned or was
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terminated, other than for cause, Conexant agreed to pay him his base salary for 12 months
following the date of termination, a lump-sum equal to a pro rata share of his annual bonus for
the fiscal year in which the termination occurs and the full amount of his annual bonus with
respect to such fiscal year. If McMullan was terminated within 12 months after the Effective
Date, all of McMullan’s options would immediately vest, and his shares of restricted stock would
continue to vest. In addition, if McMullan was terminated within 24 months after the effective
time of the merger, all of his options to purchase Conexant common stock would accelerate into
vesting.
The Individual Defendants Had Actual Knowledge of the Fraud
120. Defendants were aware of or recklessly disregarded the fact that the integration
problems led to a loss of market share in the DSL and WLAN groups. CW-1 stated that because
of the integration problems, “We weren’t able to meet the commitment to our customers, which
led to the loss of business.” As a result, CW-1 noted that Conexant lost IBM, Hewlett Packard
and Microsoft as customers.
121. In addition, CW-2 remembered the severe integration problems that afflicted the
Conexant and specifically characterized the senior management disputes as “East Coast versus
West Coast.” CW-5 also stated that the senior management problems interfered with daily
business operations such as the e-mail system. Moreover, CW-5 confirmed that the bitter battle
between senior management caused slower product development leading to lower market share.
CW-6 also corroborated that the integration problems led to the delayed introduction of new
WLAN products and hiring of critical staff.
122. Once Defendants recognized a decrease in demand, they stuffed the distribution
channels in order to artificially inflate revenues to deceive the investing public. Specifically CW-
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3 recalled channel stuffing when Conexant tried to increase revenues by large increases in
product shipments at the end of a calendar quarter. CW-4 was specifically instructed by
management to ship out inventory at the end of each quarter. In addition, CW-7 stated that
Conexant had “the habit of pushing products out the door at the end of every quarter” to make
each quarter “look good.”
123. Based upon the foregoing, CW-1, CW-2, CW-3, CW-4, CW-5, CW-6 and CW-7
establish that each of the Individual Defendants had actual knowledge or was deliberately
reckless in failing to ascertain the fact that Conexant’s reported sales, income, earnings and
growth rates were overstated throughout the Class Period and were inherently unsustainable in
the absence of fraud.
124. Defendants’ scienter is further established through the various resignations by
senior management. As the Company’s downward spiral began and, shortly before the news of
the failed acquisition was revealed, McMullan resigned from his position for purported personal
reasons and was replaced by Blouin. Shortly after the news of the failed acquisition was
revealed to the public, on November 9, 2004, Geday resigned for purported personal reasons.
Defendants’ Misstatements Involved the Core Business of the Company
125. The Globespan Acquisition was a key business transaction for Conexant and
therefore any knowledge concerning its success or failure is attributable to the Individual
Defendants. For three years, the Individual Defendants met privately to negotiate the terms of
the Globespan Acquisition. The enormity of the Globespan Acquisition is demonstrated by the
$1.1 billion used in consideration for the deal, which resulted in a combined company valued at
$3.4 billion. Moreover, the Globespan Acquisition involved the complete restructuring of
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Conexant and the integration of key personnel and product lines. Thus, the success (or failure)
of the Globespan Acquisition was mission critical for Conexant.
126. At various times throughout the Class Period the Individual Defendants,
approved, helped prepare and/or signed Conexant’s public disclosures, which contained
information concerning the status of the Globespan Acquisition, including the integration efforts
and the combined company’s financial status. In these public disclosures, the Individual
Defendants represented that Conexant was securing leading market positions in its DSL and
WLAN product lines. While making these statements, the Individual Defendants had knowledge
of the severe integration problems (e.g., debates concerning the e-mail system, delayed hiring of
critical staff, and the delayed releases of new products) that caused Conexant to lose market
share in its DSL and WLAN product lines. Such problems affected the key aspect of Conexant’s
business. The Company’s financial success was contingent on its ability to efficiently develop
and market WLAN and DSL products and on a successful integration of Globespan. This fact is
reflected in Conexant’s Class Period financial disclosures that attributed its increased net
revenues “increased volumes of DSL and wireless LAN products associated with the
GlobespanVirata merger.”
127. Thus, the Individual Defendants’ participation in, creation and dissemination of
the Company’s public disclosures that contained material misrepresentations, constituted
recklessness and/or conscious behavior on the part of the Individual Defendants supports a
strong inference of scienter. Conexant and the Individual Defendants had a duty to ensure their
veracity of their statements and, by not doing so, acted with extreme recklessness. Accordingly,
knowledge of the misstatements with regard to the reporting of the Globespan Acquisition can be
attributed to the Individual Defendants.
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Applicability Of Presumption Of Reliance: Fraud-On-The-Market Doctrine
128. At all relevant times, the market for Conexant securities was an efficient market
for the following reasons, among others:
(a) Conexant securities met the requirements for listing, and was listed and actively
traded on the NASDAQ, a highly efficient and automated market;
(b) As a regulated issuer, Conexant filed periodic public reports with the SEC and the
NASDAQ;
(c) Conexant regularly communicated with public investors via established market
communication mechanisms, including through regular disseminations of press releases on the
national circuits of major newswire services and through other wide-ranging public disclosures, such
as communications with the financial press and other similar reporting services; and
(d) Conexant was followed by several 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.
129. As a result of the foregoing, the market for Conexant securities promptly digested
current information regarding Conexant from all publicly available sources and reflected such
information in Conexant’s stock price. Under these circumstances, all purchasers of Conexant
securities during the Class Period suffered similar injury through their purchase of Conexant
securities at artificially inflated prices and a presumption of reliance applies.
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NO SAFE HARBOR
130. 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.
Many of the specific statements pleaded herein were not identified as “forward-looking
statements” when 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 statements 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 Conexant who knew that those statements were false
when made.
PLAINTIFF’S CLASS ACTION ALLEGATIONS
131. Plaintiff brings 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 persons or entities who
purchased or otherwise acquired the securities of Conexant during the Class Period and 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 repre-
sentatives, heirs, successors or assigns and any entity in which Defendants have or had a control-
ling interest.
132. The members of the Class are so numerous that joinder of all members is imprac-
ticable. Throughout the Class Period, Conexant=s securities were actively traded on the
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NASDAQ. While the exact number of Class members is unknown to Plaintiff at this time and
can only be ascertained through appropriate discovery, Plaintiff believes 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 Conexant 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.
133. Plaintiff’s 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.
134. Plaintiff will fairly and adequately protect the interests of the members of the
Class and have retained counsel competent and experienced in class and securities litigation.
135. 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 Conexant; and
c. To what extent the members of the Class have sustained damages and the proper
measure of damages.
136. 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
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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.
FIRST CLAIM
Violation Of Section 10(b) of The Exchange Act Against And Rule 10b-5 Promulgated Thereunder
(Against All Defendants)
137. Plaintiff repeats and realleges each and every allegation contained above as if
fully set forth herein.
138. During the Class Period, Defendants carried out a plan, scheme and course of
conduct which was intended to and, throughout the Class Period, did: (i) deceive the investing
public, including Plaintiff and other Class Members, as alleged herein; and (ii) cause Plaintiff
and other members of the Class to purchase Conexant 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.
139. 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
operated as a fraud and deceit upon the purchasers of the Company’s securities in an effort to
maintain artificially high market prices for Conexant 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.
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140. 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 Conexant as specified herein.
141. 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 Conexant 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 Conexant and its business operations
and future prospects in the light of the circumstances under which they were made, not mislead-
ing, 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 Conexant securities during
the Class Period.
142. Each of the Individual Defendants’ primary liability, and controlling person
liability, arises from the following facts: (i) the Individual Defendants were high-level executives
and/or directors at the Company during the Class Period and members of the Company’s man-
agement team or had control thereof; (ii) each of these Defendants, by virtue of his
responsibilities and activities as a senior officer and/or director of the Company was privy to and
participated in the creation, development and reporting of the Company’s internal budgets, plans,
projections and/or reports; (iii) each of these Defendants enjoyed significant personal contact and
familiarity with the other Defendants and was advised of and had access to other members of the
Company’s management team, internal reports and other data and information about the Com-
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pany’s finances, operations, and sales at all relevant times; and (iv) each of these Defendants was
aware of the Company’s dissemination of information to the investing public which they knew or
recklessly disregarded was materially false and misleading.
143. 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. Defendants’
material misrepresentations and/or omissions were done knowingly or recklessly and for the
purpose and effect of concealing Conexant 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.
144. 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 Conexant securities
was artificially inflated during the Class Period. In ignorance of the fact that market prices of
Conexant 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 trades, 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, Plaintiff and the other members of the Class acquired
Conexant securities during the Class Period at artificially high prices and were damaged thereby.
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145. At the time of said misrepresentations and omissions, Plaintiff and other members
of the Class were ignorant of their falsity, and believed them to be true. Had Plaintiff and the
other members of the Class and the marketplace known the truth regarding the problems that
Conexant was experiencing, which were not disclosed by Defendants, Plaintiff and other
members of the Class would not have purchased or otherwise acquired their Conexant 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.
146. By virtue of the foregoing, Defendants have violated Section 10(b) of the
Exchange Act, and Rule 10b-5 promulgated thereunder.
147. As a direct and proximate result of Defendants’ wrongful conduct, Plaintiff 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.
SECOND CLAIM
Violation of Section 20(a) Of The Exchange Act (Against the Individual Defendants)
148. Plaintiff repeats and realleges each and every allegation contained above as if
fully set forth herein.
149. The Individual Defendants acted as controlling persons of Conexant 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 false financial statements filed by the
Company with the SEC and disseminated to the investing public, the Individual Defendants had
the power to influence and control and did influence and control, directly or indirectly, the
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decision-making of the Company, including the content and dissemination of the various
statements which Plaintiff contends are false and misleading. The Individual Defendants were
provided with or had unlimited access to copies of the Company’s reports, press releases, public
filings and other statements alleged by Plaintiff 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.
150. In particular, each of these Defendants had direct and supervisory involvement in
the day-to-day operations of the Company and, therefore, is 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.
151. As set forth above, Conexant and the Individual 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 as controlling persons, the Individual Defendants are liable pursuant to Section 20(a) of
the Exchange Act. As a direct and proximate result of Defendants’ wrongful conduct, Plaintiff
and other members of the Class suffered damages in connection with their purchases of the
Company’s securities during the Class Period.
THIRD CLAIM
Violation Of Section 18(a) Of The Exchange Act (Against Defendants McMullan And Blouin)
152. Plaintiff repeats and realleges each and every allegation contained above as if
fully set forth herein.
153. Plaintiff Sam Phillips asserts this claim on behalf of himself and other members
of the Class who read and relied upon the Company’s Class Period SEC filings in making their
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investment decisions concerning Conexant common stock, pursuant to Section 18 of the
Exchange Act against all Defendants.
154. As set forth above, Conexant and the Individual Defendants made or caused to be
made statements which were, at the time and in light of the circumstances under which they were
made, false and misleading with respect to material facts, in documents filed with the SEC.
155. Plaintiff Sam Phillips and other members of the Class read and relied upon each
of the Company’s Class Period SEC filings, not knowing that they were false and misleading.
156. Defendants McMullan and Blouin reviewed, approved and/or signed the
Company’s SEC filings, including quarterly reports on Forms 10-Q, as alleged herein.
157. In connection with his purchases of Conexant stock, Plaintiff Sam Phillips and
other class members specifically read and relied on the false and misleading statements
regarding: (i) Conexant’s efforts and purported success in integrating the operations and
personnel of Globespan, when in reality Conexant was plagued with integration problems that
caused the Company to delay the hiring of critical staff and the release of new products resulting
in a loss of market share; (ii) that the combined company was achieving leadership positions in
its DSL and WLAN product lines, when in truth the Company sustained a loss of market share in
these product lines, and (iii) improperly representing that the excess channel inventory was the
result of decreased demand and increased competition in WLAN and DSL product lines, when in
truth the Company had been stuffing its distribution channels for more than four quarters which
caused its revenues to be artificially inflated and not a reflection of the true end-user demand for
its products. Plaintiff Sam Phillips’ and the Class’ reliance was reasonable.
158. When the market began to assimilate the truth about Defendants’ fraud and the
effect of those disclosures was reflected in the stock price. Specifically, Conexant’s stock
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dropped $1.77 per share, on July 6, 2004, from its previous closing price of $4.08 per share, on
July 2, 2004, to close at $2.31 per share. Upon further revelations made by the Company on
November 4, 2004, Conexant stock dropped $1.76 per share, or 10 percent, at the close of
trading on November 4, 2004, to $1.60 per share at the close of trading on November 5, 2004.
As a result, Plaintiff Sam Phillips and other members of the Class were significantly damaged by
these declines in the value of the Company’ stock.
159. As a direct and proximate result of Defendants’ wrongful conduct, Plaintiff Sam
Phillips and other Class members suffered damage in connection with their purchases of
Conexant stock.
160. By virtue of the foregoing, Conexant and the Individual Defendants have violated
Section 18 of the Exchange Act.
161. As a result of the Individual Defendants’ conduct described herein, Plaintiff Sam
Phillips and other Class members were damaged in amounts to be proved at trial.
WHEREFORE, Plaintiff prays for relief and judgment, as follows:
(a) Determining that this action is a proper class action and certifying Plaintiff as
class representatives under Rule 23 of the Federal Rules of Civil Procedure;
(b) Awarding compensatory damages in favor of Plaintiff 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 Plaintiff 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.
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JURY TRIAL DEMANDED
Plaintiff hereby demands a trial by jury.
Dated: December 5, 2005
LITE DEPALMA GREENBERG & RIVAS, LLC
By: /s/ Joseph J. DePalma Joseph J. DePalma Janet R. Bosi Two Gateway Center, 12th Floor Newark, New Jersey 07102 (973) 623-3000
Liaison Counsel for Plaintiff
SCHIFFRIN & BARROWAY, LLP Katharine M. Ryan Eric Lechtzin Jodi L. Cagan 280 King of Prussia Road Radnor, PA 19087 (610) 667-7706
Lead Counsel for Plaintiff
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