case 1:14-cv-03878-akh document 25 filed 10/14/14 page 1...

Case 1:14-cv-03878-AKH Document 25 Filed 10/14/14 of 39

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK

x :

KAREN J. DESROCHER, Individually and on : Behalf of All Others Similarly Situated, :

: Plaintiff, :

: vs. :

COVISINT CORPORATION, COMPUWARE : CORPORATION, DAVID A. MCGUFFIE, : ENRICO DIGIROLAMO, ROBERT C. : PAUL, BERNARD M. GOLDSMITH, : WILLIAM O. GRABE, RALPH J. : SZYGENDA, CREDIT SUISSE SECURITIES : (USA) LLC, EVERCORE GROUP L.L.C., and : PACIFIC CREST SECURITIES LLC, :

: Defendants.

: x :

NADEAN BURNES, Individually and on : Behalf of All Others Similarly Situated, :

: Plaintiff,

: vs. :

COVISINT CORPORATION, COMPUWARE : CORPORATION, DAVID A. MCGUFFIE, : ENRICO DIGIROLAMO, ROBERT C. : PAUL, BERNARD M. GOLDSMITH, : WILLIAM O. GRABE, RALPH J. : SZYGENDA, CREDIT SUISSE SECURITIES : (USA) LLC, EVERCORE GROUP L.L.C., and : PACIFIC CREST SECURITIES LLC, :

: Defendants. : x

Civil Action No. 1:14-cv-03878-AKH (Consolidated)

DEMAND FOR JURY TRIAL

Civil Action No. 1:14-cv-05361-AKH (Consolidated)

CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS


Lead Plaintiff Charles Rankin (“Plaintiff”), by his undersigned attorneys, alleges the

following based upon the investigation conducted by Plaintiff’s counsel. The investigation

included, among other things, a review of United States Securities and Exchange Commission

(“SEC”) filings by Covisint Corporation (“Covisint” or the “Company”), as well as regulatory

filings and reports; securities analysts’ reports and advisories about the Company; press releases,

earnings calls, and other public statements issued by the Company; media reports about the

Company; and interviews with former Covisint employees. Plaintiff believes that substantial

additional evidentiary support exists for the allegations set forth herein after a reasonable

opportunity for discovery.

NATURE OF THE ACTION

1. This is a federal securities class action on behalf of a class of all purchasers of the

common stock of Covisint in and/or traceable to the Company’s initial public offering of its

common stock on or about September 26, 2013 (the “IPO”), seeking to pursue remedies under

§§11 and 15 of the Securities Act of 1933 (the “Securities Act”) (codified at 15 U.S.C. §§77k,

77o).

JURISDICTION AND VENUE

2. The claims asserted herein arise under and pursuant to §§11 and 15 of the

Securities Act. This Court has jurisdiction of this action pursuant to §22 of the Securities Act

(codified at 15 U.S.C. §77v) and 28 U.S.C. §1331.

3. Venue is properly laid in this District pursuant to §22 of the Securities Act and

28 U.S.C. §1391(b) and (c). The acts and conduct complained of herein occurred in substantial

part in this District, and certain of the Underwriter Defendants (defined herein) maintain their

headquarters in this District.


4. In connection with the acts alleged in this Complaint, Defendants, directly or

indirectly, used the means and instrumentalities of interstate commerce, including, but not

limited to, the mails, interstate telephone communications and the facilities of the national

securities markets.

PARTIES

5. Plaintiff purchased Covisint common stock traceable to the IPO, as set forth in his

certification previously filed in this action and incorporated herein by reference, and was

damaged thereby.

6. Defendant Covisint is a provider of cloud-based systems for integrating business

information and processes between partners, customers and suppliers. The Company focuses its

solutions on the global automotive, healthcare and energy industries. Covisint stock trades on

the NASDAQ Stock Market (“NASDAQ”) under the ticker symbol “COVS.”

7. Defendant Compuware Corporation (“Compuware”) develops and sells software

directed at the information technology departments of large businesses. Compuware’s services

include testing, development, automation, cloud-based collaboration and performance

management software for programs running on mainframe computers and distributed client-

server systems. At the time the Registration Statement (defined below) became effective,

Compuware owned 100% of the common stock of Covisint. Post-IPO, Compuware’s ownership

was reduced to 82.4% of Covisint common stock. In addition to its stock ownership,

Compuware has three seats on the Covisint Board of Directors – held by Compuware directors

Robert C. Paul, William O. Grabe, and Ralph J. Szygenda.

8. Defendant David A. McGuffie (“McGuffie”) was, at the time of the IPO,

President, Chief Executive Officer (“CEO”), and a director of Covisint.

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9. Defendant Enrico Digirolamo (“Digirolamo”) is, and was at the time of the IPO,

the Chief Financial Officer (“CFO”) of Covisint.

10. Defendant Robert C. Paul (“Paul”) is, and was at the time of the IPO, Chairman of

the Covisint Board of Directors, and the CEO and a director of Compuware.

11. Defendant Bernard M. Goldsmith (“Goldsmith”) is, and was at the time of the

IPO, a director of Covisint, and a general partner of Updata Partners.

12. Defendant William O. Grabe (“Grabe”) is, and was at the time of the IPO, a

director of both Covisint and Compuware, and an advisory director of General Atlantic LLC.

13. Defendant Ralph J. Szygenda (“Szygenda”) is, and was at the time of the IPO, a

director of both Covisint and Compuware.

14. The defendants named in ¶¶8–13, above, are referred to herein as the “Individual

Defendants.” The Individual Defendants each signed the Registration Statement, thus making

them liable under §11 of the Securities Act for actionable statements in and omissions from the

Registration Statement. Compuware and the Individual Defendants were each control persons of

Covisint who were culpable participants in the violations of §11 of the Securities Act, thus

making them liable under §15 of the Securities Act.

15. Defendant Credit Suisse Securities (USA) LLC (“Credit Suisse”), based in New

York, New York, is a financial services company that advises clients in all aspects of finance,

serving companies, institutional clients, and high-net-worth private clients worldwide. Credit

Suisse acted as an underwriter of Covisint’s IPO, helping to draft and disseminate the offering

documents.

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16. Defendant Evercore Group L.L.C. (“Evercore”) is an independent investment

banking advisory firm headquartered in New York, New York. Evercore acted as an underwriter

of Covisint’s IPO, helping to draft and disseminate the offering documents.

17. Defendant Pacific Crest Securities LLC (“Pacific Crest”) is an independent

investment bank headquartered in Portland, Oregon. Pacific Crest acted as an underwriter of

Covisint’s IPO, helping to draft and disseminate the offering documents.

18. The defendants named in ¶¶15–17, above, are referred to herein as the

“Underwriter Defendants.” Pursuant to the Securities Act, the Underwriter Defendants are liable

for the false and misleading statements in and omissions from the Registration Statement as

follows:

(a) The Underwriter Defendants are investment banking houses that

specialize, inter alia, in underwriting public offerings of securities. They served as the

underwriters of the IPO and shared approximately $4.5 million in fees. The Underwriter

Defendants determined that in return for their share of the IPO proceeds, they were willing to

merchandize Covisint stock in the IPO. The Underwriter Defendants arranged a multi-city

roadshow prior to the IPO during which they, and representatives from Covisint, met with

potential investors and presented highly favorable information about the Company, its operation,

and its financial prospects;

(b) The Underwriter Defendants also demanded and obtained an agreement

from Covisint that Covisint would indemnify and hold the Underwriter Defendants harmless

from any liability under the federal securities laws. They also made certain that Covisint had

purchased millions of dollars in directors’ and officers’ liability insurance;

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(c) Representatives of the Underwriter Defendants also assisted Covisint and

the Individual Defendants in planning the IPO, and purportedly conducted an adequate and

reasonable investigation into the business and operations of Covisint, an undertaking known as a

“due diligence” investigation. The due diligence investigation was required of the Underwriter

Defendants in order to engage in the IPO. During the course of their “due diligence,” the

Underwriter Defendants had continual access to confidential corporate information concerning

Covisint’s operations and financial prospects; and

(d) The Underwriter Defendants caused the Registration Statement to be filed

with the SEC and declared effective.

CONFIDENTIAL SOURCES

19. As part of their investigation into the facts underlying this action, counsel for

Plaintiff interviewed numerous former employees of Covisint. The allegations made herein are

based, in part, upon information and belief and are supported by the first-hand knowledge of four

confidential witnesses (“CWs”). These CWs have direct first-hand knowledge about Covisint’s

business and operations and the facts alleged herein.

20. Confidential Witness No. 1 (“CW1”) was a Vice President of Sales at Covisint at

all relevant times. Throughout his/her tenure at Covisint, including at the time of the IPO, CW1

served as the head of sales of Covisint’s Enterprise Division. As such, CW1 was the senior most

employee at Covisint’s Enterprise Division. CW1 reported directly to Joel Kremke (“Kremke”),

Covisint’s Senior Vice President responsible for all of the Company’s direct sales and

operations. Kremke, in turn, reported to Covisint’s CEO, Defendant McGuffie. CW1 personally

spoke with Defendant McGuffie frequently in the period leading up the IPO. In addition,

throughout his/her employment at Covisint, CW1 participated in weekly management conference

calls during which sales and forecasts were discussed with Defendant McGuffie, Defendant

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Digirolamo, Covisint’s CFO, Kremke, Steven McDonald, the head of sales at Covisint’s

Healthcare Division, Doug Kuiper, Covisint’s Chief Marketing Officer, and Steve Asam,

Covisint’s Senior Vice President of Delivery, Operations and Engineering.

21. Confidential Witness No. 2 (“CW2”) was employed by Covisint as a customer

technical support analyst from 2012 through 2014. As part of his/her duties, CW2 provided

support to Covisint’s automotive, healthcare, and enterprise clients.

22. Confidential Witness No. 3 (“CW3”) was employed by Covisint as a business

analyst from 2013 through 2014. As part of his/her duties, CW3 served as a liaison between the

Covisint’s information technology (“IT”) department and Covisint’s clients.

23. Confidential Witness No. 4 (“CW4”) was employed by Covisint as a delivery

manager from 2012 through 2014. As part of his/her duties, CW4 worked with Covisint

customers on issues related to the quality of Covisint’s deliverables. CW4 was directly involved

with the management of the healthcare portfolio that Covisint provided to AT&T.

SUBSTANTIVE ALLEGATIONS

The Company’s History and Business

24. The Company’s predecessor, Covisint LLC, was founded in February 2000 by a

consortium of global automotive manufacturers, including General Motors Company (“General

Motors”), Ford Motor Co., DaimlerChrysler, Nissan, Renault and Peugeot, to develop a secure,

online auto-parts exchange that would make it easier and less costly for carmakers to manage

their complex supply chains. However, the exchange failed and, in March 2004, Compuware

purchased substantially all of the assets of Covisint LLC, including its name and messaging,

portal, and web services technology.

25. Following Compuware’s acquisition of Covisint, Covisint expanded its business

into the healthcare, oil and gas, government, and financial services sectors.

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26. Covisint now claims to provide a cloud-based platform that permits its customers

to securely share, integrate and present information to their extended network of business

partners and customers. Covisint’s platform purports to allow global organizations with complex

external business relationships to create, streamline and automate external mission-critical

business processes that involve the secure exchange of and access to critical information from

multiple sources.

27. Covisint delivers its platform through industry-specific solutions that address

processes common to companies across a number of different industries where the secure sharing

of complex and distributed data is of particular importance.

28. The Company is organized into three divisions: (1) the Automotive Division,

which focuses on customers in the automotive sector; (2) the Healthcare Division, which focuses

on customers in the healthcare sector; and (3) the Enterprise Division, which focuses on

customers in the energy industry, financial services industry, the travel industry and any other

industry not encompassed by the Automotive or Healthcare Divisions.

29. Covisint’s Automotive Division focuses on providing its platform and solutions to

global automakers and their direct suppliers. The Company offers solutions across the

automotive industry for connecting the supply chain, global networks, consumers, and joint

ventures. Covisint’s solutions for the automotive industry include: (i) Connected Vehicle &

Owner Engagement, which provides owners with secure, single sign-on access to vital vehicle

information such as miles to the next oil change and in-car services such as entertainment,

navigation, hands-free communication, and the ability to remotely start the engine or unlock the

doors; (ii) Supply Chain Engagement, which enables automakers and suppliers to securely

exchange information; and (iii) Dealer Engagement, an integrated dealer network experience that

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is meant to enable more efficient processes and make information more easily accessible,

including dealer lead management systems, inventory, dealer trade, vehicle ordering, and

financing systems providing dealers with real-time visibility to information and streamlining

processes that enhance the dealer business experience.

30. Covisint’s Healthcare Division provides a platform that is meant to provide

caregivers with secure capabilities for sharing private health information. Covisint’s healthcare

solutions include: (i) Health Information Exchange, which connects systems, bridges the

communication gaps left by the rollout of proprietary electronic medical records, and provides a

comprehensive, real-time view of a patient’s clinical information by consolidating data from a

variety of systems; (ii) Clinical Messaging, which enables the secure distribution of clinical and

administrative data, such as referrals, laboratory and radiology results from a hospital or health

system, to the entire provider community and physician offices; and (iii) Analytics, which

enables the aggregation of information across the care community into an analytics engine.

31. Covisint’s Enterprise Division services clients that do not operate in the

automotive or healthcare industries. For example, the Company’s platform is used by large

global energy companies to connect with external partners, including contractors and joint-

venture partners, to provide secure access to resources. The platform provides a centralized

mechanism for granting access rights to the appropriate users across joint-venture initiatives and

provides joint-venture partners with a single identity to securely access all the information,

applications and systems required to manage their role in the joint-venture.

32. Covisint also provides its clients with identity management and platform solutions

that reduce the burden of integrating complex systems and of managing multiple IDs and

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passwords across a wide network of internal and external employees, customers, partners, and

other stakeholders.

33. Covisint sells its solutions through a direct sales force and increasingly through its

channel partners. The Company claims to have over 3,000 customers that have deployed its

platform to connect to over 80,000 of their customers, business partners, and suppliers. This

allows more than 18 million users to access the mission-critical applications and information

provided by Covisint’s customers. The Company’s customers include approximately 150 core

platform customers, which represented 93% and 91% of its total revenue for the years ended

March 31, 2013 and 2012, respectively.

34. Covisint classifies and accounts for its services and business as being either

Subscription and Support (“Subscription”) or Services (“Services”). According to the Company,

it derives its Subscription revenue through contracts under which it provides access to and

support of the Covisint cloud-based platform, and it derives its Services revenue through the

services provided to customers in connection with implementation, solution deployment, and on-

boarding.

35. The Company claims that its cloud-based platform enables organizations to

securely connect, engage and collaborate with large, distributed communities of customers,

business partners and suppliers. The Company offers this engagement platform as a service,

commonly referred to as Platform-as-a-Service or PaaS. The Company’s platform supports

customers in the automotive, healthcare, energy, financial services, and travel industries. For

example, the Company’s technology ostensibly allows auto suppliers to access carmakers’

production schedules, enables doctors to see labwork and X-rays ordered by other physicians,

and allows oil drillers to collaborate with their joint-venture partners in geological engineering.

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36. The Company also generates revenue from the provision of services related to

implementation, solution deployment and on-boarding of new customers onto its cloud-based

platform.

37. The Company’s largest customer at the time of the IPO was General Motors,

which accounted for 33% and 35% of the Company’s total revenue for the years ended March

31, 2013 and 2012, respectively.

38. Other core platform customers at the time of the IPO included AT&T, Blue Cross

Blue Shield Association, Blue Cross Blue Shield of North Carolina, Daimler AG, Detroit

Medical Center and the Vermont Blueprint for Health.

The Company’s Sales and Forecasting Process

39. Covisint utilized computer software known as “Salesforce” to track negotiations

and contracts with potential and actual customers. Sales representatives who dealt with

customers had the ability to make appropriate notations in Salesforce concerning interaction with

the customers. In addition to the sales representative, the sales representative’s supervisor, the

supervisor’s supervisor, and so on up to Defendant McGuffie, had the ability to make notations

or otherwise alter the information contained in Salesforce about that particular customer, contract

or negotiation.

40. By way of example, CW1, the former Covisint Vice President of Sales, explained

that a sales representative in the Healthcare Division would enter a potential deal into Salesforce

and that person would be considered by the Salesforce to be the “owner” of the relationship.

Because that Healthcare Division sales person reported up the chain to Steve McDonald, the

Vice President of Healthcare Sales, who reported to Joel Kremke, the Senior Vice President of

Worldwide Sales, who reported to Defendant McGuffie, Covisint’s CEO, all four of those

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individuals – the representative, McDonald, Kremke, and McGuffie – would have “rights” in

Salesforce to add or edit the notes concerning the deal in the computer system.

41. In addition to tracking interactions with the customer, CW1 stated that Covisint

would utilize Salesforce to assign a numerical value to each deal denoting how far along the

Company was in the negotiations with the customer. Specifically, Salesforce would be used to

categorize the status of a negotiation as being either 20% completed, 40% completed, 60%

completed, 80% completed, or 100% completed – with “20%” meaning the potential client

showed some interest; “40%” meaning Covisint responded to a request for information or a

request for proposal; “60%” meaning that the parties were negotiating pricing; “80%” meaning

that the parties had agreed on pricing and were in the final process of agreeing to legal terms and

conditions; and “100%” meaning the parties fully executed the agreement. Each of the people

who had rights to edit the notes in Salesforce for the particular account also had the ability to

change the numerical status of negotiations.

42. When a negotiation was less than 80% completed, the deal would be classified as

a “pipeline” deal. Once a negotiation reached 80% completion, the classification changed to a

“committed” deal.

43. Importantly, until a deal was classified as a “committed” deal, CW1 stated that

Covisint was not supposed to include that deal in its revenue projections because the parties had

not come to terms on the pricing of “pipeline” deals.

The Registration Statement and the IPO

44. On or about May 14, 2013, Covisint filed a registration statement with the SEC on

Form S-1 (File No. 333-188603), and thereafter, filed five amendments thereto, the last of which

was filed on September 20, 2013.

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45. On or about September 26, 2013, the prospectus with respect to the IPO, which

forms part of the Registration Statement, became effective and 6.4 million shares of Covisint

common stock were sold to the public at $10 per share, thereby raising approximately

$64 million in gross proceeds for the Company ($59.52 million in net proceeds from the IPO

after deducting underwriting discounts, commissions and offering costs of approximately

$4.48 million).

46. The Registration Statement was negligently prepared and, as a result, contained

untrue statements of material fact and omitted other facts necessary to make the statements

therein not misleading. Additionally, the Registration Statement was not prepared in accordance

with the rules and regulations governing its preparation.

The Registration Statement Misrepresented the Company’s Projected Growth Rate

47. The former senior-most person of Covisint’s Enterprise Division, CW1, stated

that, prior to the IPO, Defendant McGuffie, without a proper basis, caused the categorization of

certain deals within Salesforce to be changed from being 60% completed to 80% completed. As

a result of that change, revenue from those contracts was improperly included in the projections

set forth in the Registration Statement.

48. For example, CW1 explained that prior to and at the time of the IPO, he and his

team were attempting to procure a contract with Starbucks Corporation (“Starbucks”). CW1 and

a salesperson who reported to him were the primary Covisint representatives directly involved in

the negotiations with Starbucks. They personally met with Starbucks representatives 16 times to

discuss the potential contract. As a result, they had direct knowledge of the status of the

negotiations with Starbucks. Because they and Starbucks had not agreed on pricing for the

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potential contract, CW1 classified the potential Starbucks contract within Salesforce as being

60% completed – a “pipeline” deal.

49. On the weekly management conference calls, CW1 reported on the status of his

negotiations with Starbucks and explained to those on the call, including Defendants McGuffie

and Digirolamo, that the Starbucks contract was not a done deal.

50. However, CW1 learned that prior to the IPO, Defendant McGuffie ordered

Kremke to change the categorization of the Starbucks negotiation in Salesforce from being 60%

complete to 80% complete, thus changing the deal from a “pipeline” deal still being negotiated to

a “committed” deal.

51. Based on the change that Defendant McGuffie caused to be made in Salesforce,

several million dollars of potential revenue from Starbucks was incorrectly included within the

Company’s projections. CW1 stated that, in fact, the Starbucks deal never closed.

52. In addition to the potential contract with Starbucks, the former senior-most

employee of Covisint’s Enterprise Division recounted that Defendant McGuffie also caused the

categorization of other pipeline deals to be changed to committed deals within Salesforce. CW1

stated that those changes concerned, among others, potential deals with a multi-national beverage

company and with an energy company. As a result of the changes McGuffie caused within

Salesforce, the revenue for those contracts was also incorrectly included within the Company’s

projections.

53. Thus, the mischaracterization of these deals as being “committed” caused the

Company to negligently represent its near-term revenue growth. In fact, the Registration

Statement represented that Covisint’s revenue would grow 20% during fiscal 2014.1 However,

1 The Company’s fiscal years runs from April 1 through March 31 of any given year.

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this 20% growth rate included revenue from “pipeline” deals that should not have been included

in the projections. Because there was no reasonable basis to represent that the above-described

deals were committed, it was negligent for the Registration Statement to represent that the

Company expected revenue to grow 20% during fiscal 2014.

54. Moreover, at the time of the IPO, the Company’s fiscal year 2014 was already

half over – with only four days remaining in the Company’s second quarter – yet the Registration

Statement only provided the results of the first quarter of fiscal 2014 and was silent as to the

Company’s poor performance during the second quarter.

55. The Registration Statement disclosed only that the Company earned $24.1 million

in revenue in the first quarter of fiscal 2014. Based on this disclosure and the forecast that the

Company would earn $108.88 million during fiscal 2014, the Company was effectively telling

the market that it would earn $84.78 million in revenue during the rest of fiscal 2014, or, on

average, approximately $28.26 million for each of the remaining three quarters in fiscal 2014 –

an unrealistic forecast.

56. However, at the time of the IPO, the Company’s second quarter was all but

finished and – unknown to the public – Covisint’s revenue numbers were nowhere near where

they needed to be for the Company to earn $108.88 million, as it was representing to the market.

During the period leading up to the IPO, Covisint’s executives, including Defendants McGuffie

and Digirolamo, were updated on at least a weekly basis on the Company’s sales and pipeline;

and for this reason, they were well aware that, at the time of the IPO, the Company was not on

track to earn $108.88 million.

57. In fact, Covisint only earned $24.5 million for the second quarter of fiscal 2014.

Thus, based on the average of the first two quarters ($24.1 million and $24.5 million), the

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Company was actually on track to earn just $97.2 million (the Company ended up earning

$97.1 million in revenue for fiscal 2014) – far less than the $108.88 million represented to the

market. In order for the Company to meet its improbable estimate, the Company would have

needed to average $30.12 million in revenue in each of the third and fourth quarters. In other

words, to meet its implausible forecast, the Company would need to increase its revenue by

nearly 23% in one quarter, which, simply put, was unattainable based on the loss of key

customers and significant customer complaints.

At the Time of the IPO, Covisint Was Experiencing Undisclosed Problems Including Loss of Key Customers and Significant Customer Complaints

58. According to the CWs, at the time of the IPO, the Company’s business was

deteriorating, with each of the Company’s three divisions – Healthcare, Automotive, and

Enterprise – experiencing declines in sales growth and customer satisfaction. Covisint was

supposed to provide a computerized platform to its customers but, according to CW2 who served

as a customer technical support analyst at relevant times, that platform was constantly going

down. CW2 stated, “It was almost like they didn’t have the help they needed. They focused

more on sales than anything else.”

59. Covisint’s customer service problems were well known throughout the Company.

For example, CW4, the Covisint delivery manager who worked directly with customers,

admitted that Covisint’s products were not working up to clients’ expectations, and CW3

disclosed that Covisint failed to provide adequate client support. As a result, CW4 stated that the

customers were not happy.

60. Automotive : For example, according to CW1, former Vice President of Sales,

Covisint was experiencing a decline in its automotive business and was losing Automotive

customers, including a loss of revenue from its largest client, General Motors. In addition, the

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Company was losing business from other key customers and accounts as well, including, but not

limited to, Landrover North America, Ford Motor Co., and OnStar Corporation. According to

CW2, a customer technical support analyst, Covisint also lost Chrysler as a client sometime

around the IPO.

61. Healthcare : At the time of the IPO, according to CW1, the Company’s

Healthcare Division was a “wreck” and “bleeding.” CW1 further stated that the product did not

work properly.

62. CW2, a customer technical support analyst, corroborated the fact that the

Company was having problems with its products and that its service was constantly going down.

As a result, CW2 said that he/she would not have been surprised if Covisint was losing half its

healthcare clients because “the product constantly didn’t work . . . and they were constantly

mad.”

63. Not only was the pipeline virtually non-existent, according to CW3, a business

analyst who served as a liaison between the IT department and clients, the infrastructure on the

healthcare side was “messed up,” with so many customer complaints that the Company did not

know how to support their clients anymore. In fact, according to CW2, when issues were

elevated for further investigation, they were not addressed because the Company was focused on

sales and not support.

64. Based on these issues, by the time of the IPO, Covisint was at significant risk of

losing its largest Healthcare customer – AT&T, which had been reselling Covisint’s platform to

end-users. According to CW4, a delivery manager directly involved with the management of the

AT&T healthcare portfolio, the problems with AT&T started prior to the IPO “because the

products weren’t working as planned.” As a result, AT&T was having a hard time implementing

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the platform. CW4 was privy to discussions during the year prior to the IPO during which

AT&T expressed its dissatisfaction. Beginning in July 2012, executives from Covisint and

AT&T held numerous meetings to try to get the product to work properly. During these

meetings, AT&T threatened that if Covisint did not rectify the situation, AT&T would terminate

the relationship with Covisint.

65. However, the issues were never satisfactorily resolved. Accordingly, shortly after

the IPO, AT&T prematurely canceled its contract with Covisint.

66. CW2, a customer technical support analyst, stated that AT&T’s cancellation of

its contract with Covisint was “a long time coming when they can’t get their product to work.”

67. According to the Vice President of Sales, CW1, the contracts between Covisint

and its customers included provisions that required the customer to provide Covisint with

advance notice if the customer decided to cancel the contract. Due to these advance notice

provisions, CW1 believed “without a doubt” that Defendants McGuffie and Digirolamo knew by

the time of the IPO that AT&T was going to cancel the contract.

68. The Healthcare customer dissatisfaction was not limited to AT&T. Rather, it was

widespread.

69. According to CW4, there were major problems with other clients, including

Baylor Health Care System (“Baylor”). In the fall of 2012, Covisint’s system malfunctioned,

taking Baylor’s system offline. According to CW4, when this occurred, discussions were held

between McGuffie and senior leadership including Joe Carlson and Angela Parker. “That was a

big big big visible situation,” said CW4, which caused Baylor to threaten to end its contract with

Covisint. CW4 believes that another issue arose with Baylor several months later. As a result,

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according to CW4, by the time of the IPO, the relationship between Covisint and Baylor was

“very tense.”

70. According to CW2, a customer technical support analyst, other healthcare

customers were similarly dissatisfied. These customers included Detroit Medical Center and

Cigna Corp. both of which were displeased because there were constant issues with Covisint’s

product and support.

71. Enterprise . Prior to the IPO, according to the former senior-most employee in

Covisint’s Enterprise Division, CW1, one of the Company’s key Enterprise clients, Carlson

Wagonlit Travel (“CWT”), was threatening to cancel its contract because CWT was dissatisfied

with the performance of the Covisint platform. CW1 stated that McGuffie disregarded the

complaint because he believed that it would be difficult for CWT to change platforms.

Apparently, it is not as difficult as McGuffie believed because, according to CW1, CWT has not

renewed its contract with Covisint even though the contract’s term expired.

Covisint Violated Its Revenue Recognition Policies

72. Prior to the IPO, Covisint violated its revenue recognition policies by prematurely

recognizing revenue.

73. According to Covisint’s revenue recognition policies, the Company was not

permitted to recognize revenue until delivery occurred. Yet, according to CW1, prior to the IPO,

the Company improperly booked revenue prior to delivery. For example, CW1 stated that the

Company entered into an agreement with a Healthcare client called Milliman, Inc. (“Milliman”)

However, before delivering the product to Milliman, the Company recognized the associated

revenue. CW1’s account of what happened with Milliman was corroborated by an anonymous

- 18 -


email received by Lead Counsel on May 23, 2014.2 The e-mail contained highly detailed

information concerning the issues facing the Company at the time of the IPO. According to the

email, prior to the IPO, the Company accepted a large payment from Milliman and recognized it

as revenue even though no services had yet been rendered.

The Registration Statement Contained Untrue Statements of Material Fact and Omitted to State Material Facts Required to be Stated Therein

or Necessary to Make the Statements Therein Not Misleading

74. The Registration Statement erroneously represented that the Company’s revenue

was expected to grow 20% in the year ended March 31, 2014. Specifically, the Registration

Statement stated, in pertinent part, as follows:

We expect our revenue to grow 20% in the year ended March 31, 2014 from the year ended March 31, 2013. Because we cannot assure you that such a growth rate will be achieved for fiscal 2014 or with respect to any fiscal quarter, you should not attribute undue certainty to this expectation. Our expectation is based primarily on our management’s experience, our past revenue growth and the increase in our annualized subscription revenue from fiscal 2012 to fiscal 2013. It is also based on the assumption that we will retain substantially all of our customers and their associated revenues and that there is continued demandfor our solutions and services. These assumptions may not prove to be accurate. Key factors that will determine our revenue growth include the size and timing of new bookings from both new and existing customers and the speed at which we are able to deploy our services and recognize the corresponding revenue. 3

75. The statements referenced in ¶74, above, regarding the Company’s expectation

that its revenue would grow 20% during fiscal 2014 and regarding the bases for such expectation

were materially untrue and misleading when made because of the following adverse facts that

existed at the time of the IPO:

2 Plaintiff believes that, after a reasonable opportunity for discovery, the author of this email can be identified and/or the facts provided by the author substantiated.

3 All emphasis herein added unless otherwise noted.

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(a) When estimating its revenue growth, the Company was improperly

including within its projections revenue from tentative, uncommitted negotiations;

(b) The growth rate of the Company’s Subscription revenue had declined

considerably, with Subscription revenue during the almost-completed second quarter of fiscal

2014 growing a mere 1.4% from the previous quarter. Additionally, the second quarter was the

second straight quarter of lower growth rate on a quarter-over-quarter basis;

(c) After experiencing a 17.6% decline in Services revenue in the first quarter

of fiscal 2014 from the previous quarter, the Company’s service revenue in the second quarter

did not bounce back, with revenue practically flat from the previous quarter ( i.e. , $8.24 million in

the first quarter and $8.3 million in the second quarter), seemingly guaranteeing that the

Company would not achieve 20% revenue growth in fiscal 2014;

(d) The Company was experiencing a material decline in General Motors-

related service revenue;

(e) The Company’s platform did not function as promised to clients, and the

Company lacked sufficient customer support personnel to effectively handle the resulting

customer discontentment and, as a result, customer satisfaction was declining;

(f) The Company was aware that there was a significant material risk that two

large healthcare clients, AT&T and Baylor Heath Care System, would cancel their contracts,

which would negatively impact the Company’s revenues; and

(g) As a result of the foregoing, there was no reasonable basis to “expect”

revenues for 2014 to increase by 20% from 2013.

76. In addition, because only four days remained in the second quarter of fiscal 2014

and because senior executives of the Company were consistently updated on and monitored the

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Company’s current sales and pipeline, the statements referenced in ¶74, above, were made

without a reasonable basis.

77. The Registration Statement inaccurately represented the Company’s revenue-

recognition policy. The Registration Statement included the following description summarizing

its revenue recognition policy:

Revenue Recognition

We derive revenue through contracts under which we provide customers services including access to and support of our platform and services related to implementation, solution deployment and on-boarding. The arrangements do not provide customers the right to take possession of the software at any time, nor do the arrangements contain rights of return. In order for a transaction to be eligible for revenue recognition, the following revenue criteria must be met: persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed and determinable, and collectability is reasonably assured.

Signed agreements and binding purchase orders are used as evidence of an arrangement. For customers where a purchase order is used as evidence of an arrangement, master terms and conditions exist that govern such arrangements. We assess likelihood of cash collectability based on a number of factors including past collection history with the customer. If we determine that collectability is not reasonably assured, we defer the revenue until collectability becomes reasonably assured, generally upon receipt of cash. We assess whether the fee is fixed and determinable based on the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment. Customers typically have the right to terminate their agreement if we fail to perform.

* * * *

Our subscription and support fees are recognized ratably over the applicable service period. Revenue recognition commences on the later of the start date specified in the subscription arrangement, the launch date of the customer’s access to our production environment or when all of the revenue recognition criteria have been met. We consider delivery to have occurred on the launch date, which is the point in time that a customer is provided access to use our platform.

78. The statements referenced in ¶77, above, regarding Covisint’s revenue

recognition policies were materially inaccurate because the Company had recognized revenue,

including revenue associated with Milliman, prior to delivery.

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79. The Registration Statement also inaccurately represented the Company’s revenue

and income. The Registration Statement included the following financial data:

Three Months Ended Years Ended March 31, June 30,

2013 2012 2011 2013 2012 (In thousands, except per share data)

Combined and Consolidated Statements of Comprehensive Income Data:

Revenue $90,732 $74,675 $54,154 $ 24,101 $ 20,613 Cost of revenue(1) 47,575 41,477 27,501 13,310 10,678

Gross profit 43,157 33,198 26,653 10,791 9,935

Operating expenses: Research and development(1) Sales and marketing(1) Administrative and general(1)

Total operating expenses

Income (loss) from operations Other income

Income (loss) from operations before income tax provision Income tax provision

Net income (loss)

Basic and diluted earnings per share(2)

Weighted-average shares outstanding, basic and diluted(2)

3,799 1,341 1,687 2,585

26,593 22,544 16,571 7,339

18,315 12,583 10,288 5,534

48,707 36,468 28,546 15,458

(5,550) (3,270) (1,893) (4,667)

0 0 750 0

(5,550) (3,270) (1,143) (4,667)

98 57 132 3

$ (5,648) $ (3,327) $ (1,275) $ (4,670)

$ (0.19) $ (0.11) $ (0.04) $ (0.16)

174 5,512 4,116

9,802

133 0

133 2

$ 131

$ 0.00

30,003 30,003 30,003 30,003 30,003

80. The financial information referenced in ¶79, above, was materially inaccurate

because it included revenue that should not have been included under the Company’s stated

revenue recognition policy as detailed herein.

81. The Registration Statement also inaccurately and misleadingly represented the

Company’s earnings per common share. The Registration Statement included the following

description summarizing the earnings per share:

Basic earnings (loss) per share: Numerator: Net income (loss)

Denominator: Weighted-average common shares outstanding(1)

Basic income (loss) per share

Diluted earnings (loss) per share: Numerator: Net income(loss) Denominator:

Year Ended March 31, 2013 2012 2011

$ (5,648) $ (3,327) $ (1,275)

30,003 30,003 30,003

$ (0.19) $ (0.11) $ (0.04)

$ (5,648) $ (3,327) $ (1,275)

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Weighted-average common shares outstanding(1)

30,003 30,003

30,003 Dilutive effect of stock awards — — —

Total shares

30,003 30,003

30,003

Diluted income (loss) per share

$ (0.19) $ (0.11)

$ (0.04)

82. The statements referenced in ¶81, above, regarding the Company’s earnings per

share were materially inaccurate because they were based on revenue that should not have been

included under the Company’s stated revenue recognition policy.

The Registration Statement Omitted Known Trends or Uncertainties Reasonably Likely to

Have a Material Effect on the Company’s Financial Results

83. At the time of the IPO, Covisint was experiencing numerous undisclosed trends

and uncertainties with its business that were impacting its continuing operations and were

required to be disclosed in the Registration Statement, but were not.

84. Under Section 7 of the Securities Act, a registration statement “shall contain such

other information . . . as the Commission may by rules or regulations require as being necessary

or appropriate in the public interest or for the protection of investors.” 15 U.S.C. §77g(a)(1).

Such a regulation that governs registration statements is Regulation S-K, which controls “the

requirements applicable to the content of the non-financial statement portions of . . .

[r]egistration statements under the Securities Act to the extent provided in the forms to be used

for registration under such Act.” 17 C.F.R. §229.10(a)(1).

85. Form S-1 is such a form and it provides that registrants must furnish in a

registration statement the information required by Item 303 of Regulation S-K (17 C.F.R.

§229.303), and the SEC’s related interpretive releases thereto, including any known trends,

events or uncertainties that have had or are reasonably likely to cause the registrant’s financial

information not to be indicative of future operating results.

- 23 -


86. In 1989, the SEC issued an interpretive release on Item 303 and the disclosure

required under the regulation. See Management’s Discussion and Analysis of Financial

Condition and Results of Operations, SEC Release No. 6835, 1989 WL 1092885, at *1 (May 18,

1989) (hereinafter referred to as “1989 Interpretive Release”). In the 1989 Interpretive Release,

the SEC stated that:

Required disclosure is based on currently known trends, events and uncertainties that are reasonably expected to have material effects, such as: A reduction in the registrant’s product prices; erosion in the registrant’s market share; changes in insurance coverage; or the likely non-renewal of a material contract . . . . A disclosure duty exists where a trend, demand, commitment, event or uncertainty is both presently known to management and reasonably likely to have material effects on the registrant’s financial condition or results of operation.

Id. at *4.

87. Furthermore, the 1989 Interpretive Release provided the following test to

determine if disclosure under Item 303(a) is required:

Where a trend, demand, commitment, event or uncertainty is known, management must make two assessments:

(1) Is the known trend, demand, commitment, event or uncertainty likely to come to fruition? If management determines that it is not reasonably likely to occur, no disclosure is required.

(2) If management cannot make that determination, it must evaluate objectively the consequences of the known trend, demand, commitment, event or uncertainty, on the assumption that it will come to fruition. Disclosure is then required unless management determines that a material effect on the registrant’s financial condition or results is not reasonably likely to occur.

Id. at *6.

88. Here, the Company was experiencing numerous known trends and uncertainties

that the Company reasonably expected to have an unfavorable impact on its net sales or

revenues, including, but not limited to: (i) the growth rate of Subscription revenue had declined

over the two quarters immediately preceding the IPO; (ii) the number of meaningful potential

- 24 -


deals in the pipeline was declining; (iii) the Company’s prospects of closing certain material

deals in the pipeline was highly uncertain; (iv) the Company was experiencing increased

customer dissatisfaction with its platform causing uncertainty; (v) at the time of the IPO, the

Company was at risk of losing one of its largest customers, AT&T; and (vi) the Company was

losing revenue from its largest customer, General Motors. Accordingly, the Registration

Statement was required to discuss these trends and uncertainties but did not do so adequately.

89. These known trends, events or uncertainties that were reasonably likely to have a

material unfavorable impact on Covisint’s net sales or revenues or income from continuing

operations were negligently omitted from the Registration Statement.

The Registration Statement Omitted Discussion of the Most Significant Factors that Made the IPO Risky

90. Pursuant to Item 3 of Form S-11, the Registration Statement was required to

furnish the information pursuant to Item 503 of Regulation S-K [17 C.F.R. §229.303], including,

among other things, a “discussion of the most significant factors that make the offering risky or

speculative.” Although the Registration Statement included a discussion or risk factors, it was

materially incomplete and therefore misleading.

91. The Registration Statement included representations concerning the risks related

to General Motors, stating, in pertinent part, as follows:

We derive a significant percentage of our total revenue from our largest customer, General Motors Company, as well as our ten largest customers.

Approximately 27%, 33% and 35% of our revenue for the three months ended June 30, 2013 and the years ended March 31, 2013 and 2012, respectively, was generated from our largest customer, General Motors Company, or General Motors. We expect revenues generated by sales to General Motors to decrease as a percentage of total revenues as we continue to expand our customer base and implement our growth strategies. General Motors has the ability to terminate the contracts we have with them prior to their expiration on short notice. It was reported in July 2012 that General Motors intends to significantly reduce its use of outsourced information technology services over the next three to five years.

- 25 -


Losing all or a significant portion of our business with General Motors could have a material impact on our business, liquidity and results of operations.

In addition, our top ten customers, including those we sold through and invoiced to our channel partner, accounted for 68%, 65% and 63% of total revenue for the three months ended June 30, 2013 and the years ended March 31, 2013 and 2012, respectively. Many of these customers may terminate their agreements upon advance written notice to us. The loss of any of these customers would decrease our revenue and adversely affect our operating results .

92. The statements referenced in ¶91, above, were both misleading and not sufficient

or meaningful to advise investors of the actual risks associated with any loss of business from

General Motors or the Company’s largest clients because, at the time of the IPO, the Company

was in fact already experiencing a significant decline in the revenue that the Company earned

from General Motors and the Company was at risk of losing its largest Healthcare client, AT&T.

Although the Registration Statement stated that “[i]t was reported in July 2012 that General

Motors intends to significantly reduce its use of outsourced information technology services over

the next three to five years,” this purported disclosure was not meaningful because the

Registration Statement failed to disclose that Covisint had already lost General Motors business

during the almost-completed second quarter of fiscal 2014 and that a material reduction of

General Motors business was imminent. Indeed, after the Company badly missed estimates for

the third quarter of fiscal 2014, the Company blamed the loss of General Motors business for the

staggering 22% year-over-year decline in Automotive revenues. This significant loss occurred

partly during the quarter following the IPO and was expected at the time of the IPO, yet not

disclosed. Given the significance of General Motors’ and AT&T’s business to the Company, the

Registration Statement should have disclosed that the Company was already losing significant

business from General Motors and was at risk of losing AT&T as a client.

93. The Registration Statement included representations concerning the risks related

to the implementation of its platform, stating, in pertinent part, as follows:

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Our solutions are complex and may include multiple dependencies that may cause our customers difficulty in implementing our solutions successfully or prolong the implementation process, which could negatively impact our future revenue and financial results.

Due to the scope and complexity of the solutions that we provide, our implementation cycle can be lengthy and unpredictable. Implementation of our solutions for new customers requires customization and integration with the customer’s existing computer systems and software programs, and those of their partners. This process can be complex, time-consuming and expensive for our customers and can result in delays in implementation and deployment of our solutions. As a result, some of our customers have had, and may in the future have, difficulty implementing our solutions successfully or otherwise achieving the expected benefits of our solutions . Additionally, while a customer may decide to purchase our solutions and services, the customer or its partners may require us to delay the implementation of our solutions due to their scheduling, resource or budgetary constraints.

Delayed or ineffective implementation of our solutions may limit our future sales opportunities, reduce revenue and net income, cause customer dissatisfaction, harm our reputation or cause non-payment issues due to any of the following events :

The withholding of cash payments or cancellation of contracts if we fail to meet our implementation commitments, the customers have financial difficulties or change strategy, or the functionality delivered is not acceptable to the customers or their partners. We are particularly susceptible to this with respect to arrangements where payments are scheduled to occur later in the engagement;

. The cancellation or scaling back of one or more of our larger implementation projects which could have a material adverse impact on our reputation and future revenue; or

. An inability to recognize subscription and support revenue due to delays in the launch date of the customer’s access to our production environment.

94. The Registration Statement included a discussion concerning the risks related to

level of service expected by Covisint’s clients, stating, in pertinent part, as follows:

We provide service level commitments to our customers, and our failure to meet the stated service levels could significantly harm our financial results and our reputation.

Our customer agreements provide that we maintain certain service level commitments to our customers relating primarily to functionality, network uptime

- 27 -


and critical infrastructure availability. For example, our service level agreements generally require that our solutions are available up to 99.5% of the time. If we are unable to meet the stated service level commitments, we may be contractually obligated to provide customers with credits. Additionally, if we fail to meet our service level commitments a specified number of times within a given time frame or for a specified duration, our customers may terminate their agreement with us. As a result, a failure to deliver services for a relatively short duration could cause us to issue credits to a large number of affected customers or result in the loss of customers. In addition, we cannot assure you that our customers will accept these credits or termination rights in lieu of other legal remedies that may be available to them. Our failure to meet our commitments could also result in substantial customer dissatisfaction or loss. If we fail to meet our service level commitments to our customers, the resulting issuance of credits, loss of customers or other potential liabilities could significantly and adversely impact our financial results.

95. The statements referenced in ¶¶93–94, above, were both misleading and not

sufficient or meaningful to advise investors of the actual risks related to the implementation of its

platform and the level of service expected by Covisint’s clients because, at the time of the IPO,

the Company was in fact already experiencing serious problems with its platform and its

substandard customer service was causing extreme customer dissatisfaction and would

eventually lead to defections and canceled contracts. As detailed above and corroborated by the

CWs, before the IPO, the Company was having problems with its product and its service was

constantly going down. Although the Registration Statement stated that “some of our customers

have had . . . difficulty implementing our solutions successfully or otherwise achieving the

expected benefits of our solutions,” such disclosure was materially incomplete and therefore

misleading because when made the Company was at significant risk of losing its largest

Healthcare client, AT&T, which canceled its contract with Covisint shortly after the IPO, and

also at risk of losing other major clients, including Baylor Health Care System and CWT.

Post-IPO Events

96. On October 24, 2013, the Company issued a press release announcing its financial

results for the second quarter of fiscal year 2014, for the period ended September 30, 2013. This

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press release was filed with the SEC on October 29, 2013 on Form 8-K and was signed by

Defendant Digirolamo. For the quarter, the Company reported revenue of just $24.5 million.

97. On November 21, 2013, the Company filed a Form 8-K with the SEC,

announcing that, on November 15, 2013, Defendant Szygenda resigned from the Board of

Directors of Covisint. No reason was given for his departure.

98. On January 16, 2014, the Company issued a press release introducing three new,

independent members to its Board of Directors, Dave Hansen, Sam Inman III and Philip Lay.

99. On January 23, 2014, the Company issued a press release announcing its financial

results for the third quarter of fiscal year 2014, for the period ended December 31, 2013. This

press release was filed with the SEC on the same day on Form 8-K and was signed by Defendant

Digirolamo. For the quarter, the Company reported total revenue of just $24.1 million, a decline

of 1.7% from the previous quarter. The Company’s Services revenue declined 21.7% from the

previous quarter and 30% from the previous year .

100. Additionally, the Company projected that its total revenue growth for the fiscal

year would be around 10% to 12%, putting it in the range of just $99.8 to $101.6 million.

101. Moreover, the full effect of the loss of General Motors’ business was finally being

reported by the Company. On January 23, 2014, the Company held a conference call with

analysts and investors to discuss the Company’s financial results. During the conference call,

Defendant McGuffie, commenting on the revenue the Company earned from Automotive, stated,

in pertinent part, as follows:

Auto revenues were $10.6 million in Q3, a decline of 22% year-over-year . The key driver in the automotive year-over-year revenue number was that General Motors services revenue declined on a compare basis. Last year, the GM services revenue was particularly strong because of the complexity of some of their rollouts at the time. These specific complex rollouts are now successfully behind

- 29 -


us as they are now live and online. General Motors still remains our largest services customer.

As is stated at ¶60, above, this significant loss in General Motors revenue was expected at the

time of the IPO, but was downplayed in the Registration Statement.

102. Over the next two trading days, the price of Covisint stock declined

approximately 32% – from $12.84 on January 23, 2014 to $8.74 on January 27, 2014.

103. On March 13, 2014, the Company issued a press release announcing its

preliminary financial results for the fourth quarter and full-year fiscal 2014. This press release

was filed with the SEC on March 17, 2014 on Form 8-K and was signed by Michael A. Sosin,

Covisint’s Vice President, General Counsel and Secretary. For the quarter, the Company

projected total revenues to be between just $24 and $25.5 million, Subscription revenue to be

between $17 and $18 million, and Services revenue to be between $7 and $7.5 million.

Moreover, the Company announced that Defendant McGuffie would be replaced by Sam Inman

as CEO and that a new Senior Vice President of Sales would be put in place in order to “improve

the [C]ompany’s execution.” For the nine months ending December 31, 2013, the Company

reported total revenues of $72.735 million. Thus, based on the Company’s expectation of $24

and $25.5 million in total revenues for the fourth quarter, Defendants revealed that the

Company’s total revenue for the fiscal year ending March 31, 2014, was projected to be in a

range of only $96.735 to $98.235 million.

104. The Company blamed its poor performance on what it termed “a slowdown in

pipeline conversion.” In other words, the Company was blaming the failure to meet expectations

on its failure to close deals. On March 13, 2014, the Company held a conference call with

analysts and investors to discuss the Company’s disappointing preliminary results. During the

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conference call, Defendant Digirolamo, explaining the Company’s performance, stated, in

pertinent part:

[W]e had a lot of quite big customers in the pipeline. And there was a handful of deals that we have expected to be actually closing in the November-December timeframe and they’ve actually slipped which is why Bob made reference to execution in his comments

105. Later on during the call, Defendant Paul also blamed the Company’s performance

on poor closure rates, stating, in pertinent part:

Initial data suggests that the revenue shortfall was primarily due to poor closure rates. It appears that the pipeline has been strong enough to achieve our expected goals, but continued execution issues have required us to take a much more granular look at the operations. We will continue to determine, define and rectify the root causes.


approximately 31% – from $10.36 on March 12, 2014 to $7.12 on March 14, 2014.

107. On March 14, 2014, Defendant Credit Suisse cut its rating of Covisint from

Outperform to Neutral.

108. On May 22, 2014, the Company issued a press release announcing its financial

results for the fourth quarter and full-year fiscal 2014 for the period ended March 31, 2014. This

press release was filed with the SEC on the same day on Form 8-K and was signed by Defendant

Digirolamo. For the year, the Company reported total revenues of $97.1 million, with

Subscription and support revenue of $66.7 million and Services revenue of $30.4 million. Thus,

the Company’s revenue only grew 7% for fiscal 2014 – significantly less than the 20% that

was represented to the public in the Registration Statement .

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109. Additionally, the Company was now forecasting that its revenue for 2015 would

be between $720 and $735 million – far lower than the $762.3 million estimated by the Street .

110. Inman, the Company’s newly appointed CEO, commented on the Company’s

financial results, stating, in pertinent part, as follows:

Fiscal 2014 was a year of dramatic change for Covisint as we successfully completed our initial public offering and established Covisint as a public company. While we achieved Subscription revenue growth of 17% year-over-year, we are disappointed with our overall performance. As we look forward to fiscal 2015, we are undertaking a series of strategic initiatives to refocus our business and reposition the company for success in fiscal year 2016 and beyond.

Fiscal 2015 will be a transition year for Covisint. We will make the necessary changes throughout every level of our organization to get back on track, and focus on our significant growth potential.


approximately 19% – from $7.09 on May 22, 2014 to $5.75 on May 27, 2014.

112. On May 23, 2014, Defendant Pacific Crest cut its rating of Covisint to Sector

Outperform.

113. At the time of the filing of this action, Covisint stock was trading at

approximately $5.37 per share – a 46% decline from the IPO price . As of October 14, 2014,

Covisint stock was trading at approximately $2.62 per share – a 74% decline from the IPO

price .

CLASS ACTION ALLEGATIONS

114. Plaintiff brings this action as a class action on behalf of a class consisting of all

those who purchased Covisint common stock in and/or traceable to the IPO (the “Class”)

Excluded from the Class are Defendants and their families, the officers and directors and

affiliates of Defendants, at all relevant times, members of their immediate families and their legal

- 32 -


representatives, heirs, successors or assigns and any entity in which Defendants have or had a

controlling interest.

115. The members of the Class are so numerous that joinder of all members is

impracticable. 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 of members in the proposed Class. Record owners and other members of the Class may

be identified from records maintained by Covisint 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.

116. 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.

117. Plaintiff will fairly and adequately protect the interests of the members of the

Class and has retained counsel competent and experienced in class and securities litigation.

118. 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 Defendants violated the Securities Act;

(b) whether the Registration Statement was negligently prepared and

contained inaccurate statements of material fact and omitted material information required to be

stated therein; and

(c) to what extent the members of the Class have sustained damages and the

proper measure of damages.

- 33 -


119. A class action is superior to all other available methods for the fair and efficient

adjudication of this controversy since joinder of all members is impracticable. Furthermore, as

the damages suffered by individual Class members may be relatively small, the expense and

burden of individual litigation make it impossible for members of the Class to individually

redress the wrongs done to them. There will be no difficulty in the management of this action as

a class action.

COUNT I

For Violation of §11 of the Securities Act Against All Defendants Except Compuware

120. Plaintiff incorporates ¶¶1–119 by reference.

121. This Count is brought pursuant to §11 of the Securities Act, 15 U.S.C. §77k, on

behalf of the Class, against all Defendants.

122. The Registration Statement for the IPO was inaccurate and misleading, contained

untrue statements of material facts, omitted to state other facts necessary to make the statements

made not misleading, and omitted to state material facts required to be stated therein.

123. Defendants are strictly liable to Plaintiff and the Class for the misstatements and

omissions.

124. None of the Defendants named herein made a reasonable investigation or

possessed reasonable grounds for the belief that the statements contained in the Registration

Statement were true and without omissions of any material facts and were not misleading.

125. By reason of the conduct herein alleged, each Defendant violated, and/or

controlled a person who violated, §11 of the Securities Act.

126. Plaintiff acquired Covisint common stock traceable to the IPO.

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127. Plaintiff and the Class have sustained damages. The value of Covisint common

stock has declined substantially subsequent to and due to Defendants’ violations.

128. At the time of their purchases of Covisint common stock, Plaintiff and other

members of the Class were without knowledge of the facts concerning the wrongful conduct

alleged herein and could not have reasonably discovered those facts prior to the disclosures

herein. Less than one year has elapsed from the time that Plaintiff discovered or reasonably could

have discovered the facts upon which this Complaint is based to the time that Plaintiff

commenced this action. Less than three years has elapsed between the time that the securities

upon which this Count is brought were offered to the public and the time Plaintiff commenced

this action.

COUNT II

For Violation of §15 of the Securities Act Against Compuware and the Individual Defendants

129. Plaintiff incorporates ¶¶1–128 by reference.

130. This Count is brought pursuant to §15 of the Securities Act against the Company

and the Individual Defendants.

131. The Individual Defendants each were control persons of Covisint by virtue of

their positions as directors and/or senior officers of Covisint. The Individual Defendants each

had a series of direct and/or indirect business and/or personal relationships with other directors

and/or officers and/or major shareholders of Covisint.

132. The Individual Defendants each were culpable participants in the violations of

§11 of the Securities Act alleged in the Count above, based on their having signed or authorized

the signing of the Registration Statement and having otherwise participated in the process which

allowed the IPO to be successfully completed.

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133. Compuware was a control person of Covisint by virtue of it being the controlling

shareholder of Covisint at the time of the IPO, and by virtue of its agents – Defendants Paul,

Grabe, and Szygenda – being members of the Covisint Board of Directors.

134. Compuware was a culpable participant in the violations of §11 of the Securities

Act alleged in the Count above, based on it having the means to elect all of the members of the

Covisint board of directors – directors who signed or authorized the signing of the Registration

Statement and otherwise participated in the process which allowed the IPO to be successfully

completed.

PRAYER FOR RELIEF

WHEREFORE , Plaintiff prays for relief and judgment, as follows:

A. Determining that this action is a proper class action, designating Plaintiff as Lead

Plaintiff and certifying Plaintiff as a Class representative under Rule 23 of the Federal Rules of

Civil Procedure and Plaintiff’s counsel as Lead Counsel;

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 equitable/injunctive or other relief as deemed appropriate by the Court.

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JURY TRIAL DEMANDED

Plaintiff hereby demands a trial by jury.

DATED: October 14, 2014 ROBBINS GELLER RUDMAN & DOWD LLP

SAMUEL H. RUDMAN ROBERT M. ROTHMAN CHRISTOPHER M. BARRETT

s/ Samuel H. Rudman SAMUEL H. RUDMAN

58 South Service Road, Suite 200 Melville, NY 11747 Telephone: 631/367-7100 631/367-1173 (fax) [email protected] [email protected] [email protected]

JOHNSON & WEAVER, LLP FRANK J. JOHNSON 110 West “A” Street, Suite 750 San Diego, CA 92101 Telephone: 619/230-0063 619/255-1856 (fax)

JOHNSON & WEAVER, LLP MICHAEL I. FISTEL, JR. 40 Powder Springs Street Marietta, GA 30064 Telephone: 770/200-3104

Co-Lead Counsel for Lead Plaintiff

- 37 -


CERTIFICATE OF SERVICE

I, Samuel H. Rudman, hereby certify that on October 14, 2014, I authorized a true

and correct copy of the attached:

Consolidated Class Action Complaint for Violations of the Federal Securities Laws

to be electronically filed with the Clerk of the Court using the CM/ECF system, which

will send notification of such public filing to all counsel registered to receive such notice.

/s/ Samuel H. Rudman SAMUEL H. RUDMAN

case 1:14-cv-03878-akh document 25 filed 10/14/14 page 1...

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