western pennsylvania electrical employees pension fund, et al. v....

Case 1:08-cv-1 0551 -DPW Document 25 Filed 08/25/2008 of 69

UNITED STATES DISTRICT COURTDISTRICT OF MASSACHUSETTS

WESTERN PENNSYLVANIA )ELECTRICAL EMPLOYEES PENSION )FUND, Individually and On Behalf of All )Others Similarly Situated, )

) C.A. No. 1:08-cv-10551-DPWPlaintiff, )

)vs. ) JURY TRIAL DEMANDED

CANDELA CORPORATION, et al., ))

Defendants. ))

BING CABALLERO, Individually and On )Behalf of All Others Similarly Situated,

))

Plaintiff, ))

C.A. No. 1:08-cv-10673-DPWvs. )

)CANDELA CORPORATION, et al., ) JURY TRIAL DEMANDED

)Defendants. )

CONSOLIDATED AMENDED COMPLAINT

Lead Plaintiffs Western Pennsylvania Electrical Employees Pension Fund (“Western

Pennsylvania”) and Employees’ Retirement System of the Government of the Virgin Islands

(“Virgin Islands”) (collectively, “Lead Plaintiffs”), by their undersigned attorneys, on behalf of

themselves and the class they seek to represent, for their Consolidated Amended Class Action

Complaint (the “Complaint”), allege the following upon knowledge as to their own acts, and upon

the investigation conducted by Lead Plaintiffs’ counsel, as detailed below.

NATURE OF ACTION

1. Lead Plaintiffs bring this securities fraud class action against Candela Corporation

(“Candela” or the “Company”), Gerard E. Puorro and Paul Broyer on behalf of themselves and all

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persons who purchased or otherwise acquired the securities of Candela between November 1, 2005

and August 21, 2006, inclusive (the “Class Period”), seeking to pursue remedies under the Securities

Exchange Act of 1934 (the “Exchange Act”), alleging violations of Sections 10(b) and 20(a) of the

Exchange Act and the rules and regulations promulgated thereunder.

2. Defendant Candela engages in the development and commercialization of aesthetic

laser systems that allow physicians and personal care practitioners to treat various cosmetic and

medical conditions worldwide. This case concerns materially false and misleading statements about

the condition of Candela’s business, Candela’s competitive position in the marketplace, and the

prospects and risks to the Company of a potential patent infringement lawsuit against Candela by

one of Candela’s largest competitors, Palomar Medical Technologies, Inc. (“Palomar”).

3. Throughout the Class Period, Defendants failed to provide a complete and accurate

picture of the condition of Candela’s business. Defendants failed to inform investors that Candela

was experiencing problems selling its products in the marketplace and was losing sales to its main

competitors because, among other reasons, Candela did not offer the primary product demanded by

the marketplace.

4. Candela manufactured and sold a variety of lasers, each of which had a single head

and generated a single wave-length and color of light, to be used for a specific purpose, such as

tattoo removal, vein removal, or hair removal. The segment of Candela’s market that represented

the biggest growth opportunity, such as general practitioners, however, was demanding a multi-

application device, which would enable them to purchase one machine that could perform multiple

functions. While Candela did not have a multi-application device to sell to customers, Candela’s

major competitors, such as Palomar, Cynosure, Inc. (“Cynosure”) and Syneron Medical Ltd.

(“Syneron”), did have multi-application devices to sell to these customers. Thus, during the Class

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Period, Candela’s business suffered and Candela lost market share because Candela’s competitors

were able to meet the market’s needs while Candela was not.

5. Candela’s business also suffered and it lost market share to competitors because: (i) it

failed to update the look of its machines to match those of its competitors, which were more

aesthetically pleasing and cost less; (ii) Candela poorly trained its customer service personnel and

service engineers, resulting in high turnover and customer satisfaction problems; and (iii) the hair

removal market had become saturated, resulting in slower growth for Candela.

6. Additionally, Defendants failed to provide a complete and accurate picture of the

condition of Candela’s business because they failed to inform investors of the extent of the risk and

probability that Candela could be sued for patent infringement by Palomar, one of Candela’s largest

competitors. Even though Candela had been repeatedly contacted by Palomar and put on notice that

Palomar believed that Candela violated Palomar’s patents, and even though Palomar was attempting

to aggressively enforce its patents against some of Palomar’s main competitors, Defendants denied

that they had been contacted by Palomar and failed to provide an accurate picture of the risk that

Palomar would file a patent infringement lawsuit against Candela.

7. Unlike Defendants, investors were unaware of the undisclosed problems with

Candela’s business and the extent of the risk that Palomar would sue Candela. In response to

Defendants’ positive statements, the price of Candela stock increased from $9.33 per share at the

start of the Class Period to a Class Period high of $23.53 on May 1, 2006.

8. On May 2, 2006, Defendants publicly disclosed for the first time that Candela had

received a “flyer” from Palomar about the infringement of Palomar’s patents by Candela. On May

3, 2006, Candela’s stock declined to $21.73 per share from $22.70 per share on May 2, 2006 – a

decline of more than 4%, on very heavy volume. Even though Defendants disclosed this piece of

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information, they continued to deny the seriousness of Palomar’s infringement warnings so that the

full scope of the risk that Candela could be sued by Palomar was still not known.

9. On August 9, 2006, Palomar filed a patent infringement suit against Candela. As a

direct result of the revelation about the patent infringement lawsuit against Candela by Palomar and

the fact that Palomar had repeatedly contacted Candela for seven years about its patent infringement,

the price of Candela’s stock dropped precipitously on heavy volume, falling from $14.76 per share

on August 9, 2006 (the last trading day prior to the announcement of the lawsuit by Palomar) to

$12.47 per share on August 10, 2006 – a decline of $2.29 per share, or nearly 15.51%.

10. Finally, on August 21, 2006, Defendants revealed that Candela had extremely

disappointing financial results for the fourth quarter, lost market share to competitors since it did not

offer a multi-application product to customers and provided additional detail about the negative

implications of the lawsuit with Palomar. As a direct result of these revelations, the price of

Candela’s stock dropped precipitously on very heavy volume of more than 8.1 million shares, falling

from $14.49 per share on August 21, 2006 (the last trading day prior to the August 21, 2006

announcements) to $10.33 per share on August 22, 2006 – a decline of $4.16 per share, or nearly

29%.

11. The following chart graphically depicts Defendants’ fraudulent scheme, some key

events during the Class Period and the devastating impact of the fraud on Lead Plaintiffs and the

Class:

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BASIS OF ALLEGATIONS

12. The allegations herein are based upon the investigation conducted by and under the

supervision of Lead Plaintiffs’ counsel, which included reviewing and analyzing information relating

to the relevant time period obtained from numerous public and proprietary sources (such as LEXIS-

NEXIS, Dow Jones and Bloomberg) – including, inter alia, Securities and Exchange Commission

(“SEC”) filings, other regulatory filings and reports, publicly available annual reports, press releases,

published interviews, news articles and other media reports (whether disseminated in print or by

electronic media), and reports of securities analysts and investor advisory services, in order to obtain

the information necessary to plead Lead Plaintiffs’ claims with particularity. In the course of their

investigation of the underlying claims, a number of former Candela employees who possessed direct

knowledge of the wrongdoing alleged herein were interviewed. The following individuals were

interviewed, among others:

(a) “CW 1,” who served as an electrical engineer at the Company from December2005 through January 2008;

(b) “CW2,” who served as a sales representative at the Company from 2004through early 2007;

(c) “CW3,” who served as a field service engineer at the Company fromDecember 2006 through July 2007;

(d) “CW4,” who served as a sales representative at the Company from 1999through 2007;

(e) “CW5,” who served as Project Manager at the Company from January 2006through January 2008;

(f) “CW6,” who served as a research and development engineer at the Companyfor about 20 years until January 2008;

(g) “CW7,” who served as a sales representative for the Company from October2004 through July 2007;

(h) “CW8,” who served as Candela’s Western Regional Sales Manager for 16years until January 2008; and

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(i) “CW9,” who served as a sales representative for the Company from 1998through November 2006.

13. Lead Plaintiffs believe that further substantial evidentiary support will exist for the

allegations set forth herein after a reasonable opportunity for discovery.

JURISDICTION AND VENUE

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

Exchange Act, 15 U.S.C. §§78j(b) and 78t(a), and the rules and regulations promulgated thereunder

by the SEC, including Rule 10b-5, 17 C.F.R. §240.10b-5.

15. 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.

16. Venue is proper in this District pursuant to Section 27 of the Exchange Act and 28

U.S.C. §1391(b). Many of the acts charged herein, including the dissemination of materially false

and misleading information, occurred in substantial part in this District and Candela’s principal

executive offices are located in this District.

17. 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

18. Lead Plaintiffs Western Pennsylvania and Virgin Islands, as set forth in their

respective certifications previously filed with this Court and incorporated by reference herein,

purchased the securities of Candela during the Class Period and have been damaged thereby.

19. Defendant Candela engages in the development and commercialization of laser and

light-based systems that allow physicians and personal care practitioners to treat various cosmetic

and medical conditions worldwide. Candela is incorporated in the state of Delaware and maintains

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its principle executive offices at 530 Boston Post Road, Wayland, Massachusetts 01778. Candela’s

shares are listed on the Nasdaq National Market System (“NASDAQ”) under the ticker symbol

CLZR.

(a) Defendant Gerard E. Puorro (“Puorro”) served as President and Chief

Executive Officer (“CEO”) and a Director of Candela during the Class Period. During the Class

Period, Defendant Puorro sold more than 98,000 shares of Candela stock for proceeds of more than

$1.8 million.

(b) Defendant Paul Broyer (“Broyer”) served as Senior Vice President, Finance

and Administration, and Chief Financial Officer (“CFO”) of Candela during the Class Period.

(c) Defendants Puorro and Broyer are collectively referred to herein as the

“Individual Defendants.”

20. Because of the Individual Defendants’ positions with the Company, they had access

to the adverse undisclosed information about the Company’s business, operations, operational

trends, financial statements, markets and present and future business prospects via access to internal

corporate documents (including the Company’s operating plans, budgets, forecasts and reports of

actual operations compared thereto), 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.

21. 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 Candela, by

virtue of their high-level positions with the Company, directly participated in the management of the

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Company, was directly involved in the day-to-day operations 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. Said 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.

22. As officers and controlling persons of a publicly-held company whose common stock

was, and is, registered with the SEC pursuant to the Exchange Act, and was, and is, 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 common stock would be based upon truthful and accurate

information. The Individual Defendants’ misrepresentations and omissions during the Class Period

violated these specific requirements and obligations.

23. The Individual Defendants participated in the drafting, preparation, and/or approval

of the various public, 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 Candela, each of the

Individual Defendants had access to the adverse undisclosed information about Candela’s business

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prospects, financial condition and performance as particularized herein and knew, or recklessly

disregarded, that these adverse facts rendered the positive representations made by or about Candela

and its business issued or adopted by the Company materially false and misleading.

24. 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 is therefore

primarily liable for the representations contained therein.

25. Each of the Defendants is liable as a participant in a fraudulent scheme and course of

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

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

(i) deceived the investing public regarding Candela’s business, operations, management and the

intrinsic value of Candela common stock; and (ii) caused Lead Plaintiffs and other members of the

Class to purchase Candela common stock at artificially inflated prices.

SUBSTANTIVE ALLEGATIONS

The Company and Its Business

26. Defendant Candela engages in the development and commercialization of laser and

light-based systems that allow physicians and personal care practitioners to treat various cosmetic

and medical conditions worldwide, including: (i) scars, stretch marks, warts, port wine stains and

hemangiomas; (ii) hair removal; (iii) removal of benign pigmented lesions, such as age spots,

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freckles and tattoos; (iv) skin rejuvenation and wrinkles; (v) acne and acne scars; (vi) psoriasis; and

(vii) other skin treatments.

27. Medical lasers and light-based devices use the unique characteristics of light to

achieve precise and efficacious therapeutic effects, often in a non-invasive manner. The precise

color, concentration, and controllability of different types of light provide for the delivery of a wide

range of specialized treatments. First introduced in the 1960’s, the use of lasers for medical

applications grew rapidly in the 1990’s as technical advances made medical lasers more effective

and reliable. Medical lasers and light-based devices are used for numerous types of procedures,

falling into four broad categories: ophthalmic surgery, aesthetic and cosmetic procedures, general

surgery, and dental procedures. Candela competes within the market for lasers and light-based

devices for performing aesthetic and cosmetic procedures.

28. From the late 1980’s to the mid 1990’s, the market for laser procedures was focused

on vascular conditions, such as port wine stains and hemangiomas, and the development of

treatments for pigmented lesions, such as tattoos. In addition, laser applications addressed the needs

of relatively small patient populations, served by a narrow group of specialists. Candela’s

“traditional” or “core” customer base consists of dermatologists and plastic and cosmetic surgeons.

These customers were often specialists who purchased a machine that focused on a single type of

treatment, such as hair removal.

29. By the start of the Class Period, Candela’s industry had experienced a shift in both

types of customers and competition. A new and very large “non-traditional” or “non-core” market

had emerged as an untapped customer base for Candela and its competitors. As reimbursement rates

dropped over the past several years, many primary care physicians (family and general practice,

OB/GYN) have begun to seek new services to offer to their patients. Cosmetic laser and light-based

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procedures represent a new service that is appealing to their patients, and adds a new “cash-pay”

revenue stream to their practice. This non-traditional market represented a significant growth

opportunity for Candela and its competitors.

30. In the U.S., according to the American Medical Association and various professional

societies, during 2005, there were approximately 10,000 dermatologists, 8,000 plastic and cosmetic

surgeons and 11,000 ear, nose and throat specialists. Practitioners in other specialties who were

beginning to buy aesthetic and cosmetic laser and light-based systems included 70,000 general and

family practitioners, 35,000 OB/GYN practitioners, and 28,000 general and vascular surgeons. In

addition, the aesthetic and cosmetic laser and light-based system market includes non-medical

practitioners, notably electrologists, of which there are an estimated 6,000 in the U.S.

31. Candela sells its products to traditional customers and non-traditional customers.

Candela sells its products in the U.S. through its direct sales force to its traditional customer base of

dermatologists and cosmetic surgeons. Outside the U.S., Candela sells its products in Western

Europe, Japan, Latin and South America, the Middle East, and the Pacific Rim through seven direct

sales offices and more than 50 independent distributors.

Candela Enters Into Distribution Agreement with McKesson

32. During the first week of November 2005, Candela began a distribution arrangement

with McKesson Medical-Surgical Inc. (“McKesson”) in order to attempt to sell products to non-

traditional markets. The arrangement with McKesson arose because Candela sought to move from

its core set of customers, i.e., dermatologists and plastic surgeons, to a non-core, wider customer

category that was the faster growing segment of the market and included family practice doctors,

general practitioners, and OB/GYN practitioners. Under the terms of the agreement, McKesson

sales people would attempt to sell Candela’s products to the non-traditional market.

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33. Candela paid McKesson a considerable amount for each sale and sales through

McKesson personnel necessitated an increase in the price for Candela’s products, rendering Candela

less competitive on price. According to CW2, as a result of this deal with McKesson, Candela “took

itself out of the ballpark on pricing,” and the lost deals led to its loss of market share. CW2

characterized the McKesson deal as a “comedic blunder.” Furthermore, even though Candela

entered into an agreement with McKesson in hopes of making sales to the non-traditional market,

Candela’s failure to offer a multi-function device hurt sales because McKesson did not have a viable

product to sell. According to CW8, Candela expected McKesson to open the doors with non-core

potential customers, but the problem remained that Candela did not have an Intense Pulse Light

(“IPL”) platform product to sell to these customers.

Candela Lost Market Share and Its Business Suffered Because It Did Not Sella Multi-configuration/Multi-application Device

34. During the Class Period, Candela sold devices that were targeted on a single type of

application. Candela manufactured and sold a variety of lasers, each of which had a single head

(which determines the “spot size” or area of focus on the skin) and generated a single wave-length

and color of light, to be used for a specific purpose, such as tattoo removal, vein removal or hair

removal. For example, Candela sold the GentleLASE, which was used for hair removal, vascular

lesions and wrinkles and also sold the C-beam for the treatment of psoriasis and surgical scars.

35. Candela’s target market, however, was demanding a multi-application device, which

would enable these customers to purchase one machine that could perform multiple functions. These

customers were demanding light-based systems, such as IPL systems. Indeed, the large non-

traditional market of general practitioners sought to buy one machine to enable them to provide

various services to their patients.

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36. Lasers are substantially more costly to manufacture than an IPL device because they

incorporate a laser rod as the medium used to generate the power necessary to provide the treatment.

Additionally, lasers have a limited range of suitable applications. In contrast, IPL devices have

broad utility and offer the opportunity for a variety of services, enabling the users (customers) to

provide patients with diverse treatments, including removal of hair, veins, acne scars, tattoos, and

similar unwanted cosmetic marks. Such a single device substituted for a set of six or seven different

lasers, each of which cost upwards of $100,000. A buyer of an IPL product could then compete with

practitioners who own as many as seven lasers.

37. While Candela did not have a multi-application device to sell to customers, Candela’s

major competitors, such as Palomar, Cynosure and Syneron, did have multi-application devices to

sell to these customers. Candela’s competitors manufactured and sold IPL technology products that

generate a variety of power options (ranging, for example, from 700 to 100 nanometers) in a single

system, capable of serving a variety of applications. These companies also put a variety of filters on

their IPL-based devices (similar to a vacuum cleaner), and the filters further varied the instrument’s

power. The devices sold by Candela’s competitors could be used for multiple clinical applications

due to their ability to use multiple wavelengths of light, making those products more versatile than

Candela’s single-wavelength products.

38. Candela lost market share to competitors during 2005 and continued losing market

share in 2006 because, during the Class Period, Candela experienced significant and undisclosed

demand problems for its products. This demand shift was due in part to the non-traditional customer

base being a larger portion of the customer base than in the past. The market was demanding multi-

configuration devices, but Candela did not have any of those types of products to offer to customers.

These buyers preferred more versatile multi-wavelength devices for maximizing utility and return on

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investment in their practices. Candela’s competitors were able to meet the market’s needs, but

Candela was not. According to CW8, Candela had been left behind and had no viable remedy.

39. According to CW9, from 2003-2005, Candela had slowed down development on

innovative products and CW9 realized that Candela’s business was softening during 2005.

According to CW 1, the aesthetic medical market’s demand for a more versatile product derived from

the customer’s (e.g., the doctor providing the service to the patient) desire for a flexible device that

permits the doctor to serve a broader clientele, with a variety of medical/cosmetic needs. According

to CW8, in the 2004-2005 time-frames, competitors began to fill the space left empty by Candela’s

inability to market a multi-functional IPL device and Candela struggled to maintain itself in the face

of very difficult competition.

40. Several former Candela employees confirmed that Candela lost market share due to

its failure to sell a multi-application product to customers. According the CW 1, Candela did not

make a timely entry into the market with a multi-wavelength laser and this failure hurt the

Company’s ability to compete and maintain market share. According to CW 1, in late 2005 and early

2006, Candela was losing market share because it did not have a multi-application laser system out

in the market and “Candela came late to that party and it cost them.” According to CW6, Candela

was at a competitive disadvantage during the Class Period because it did not keep pace with changes

in the types of products the market was demanding, i.e., Candela did not offer a multi-purpose

device, and it relied primarily on lasers rather than IPL systems. Further, according to CW7,

Candela lost out in sales because it did not produce a multi-use platform laser and even though the

market shifted its demand towards multi-application devices, Candela was initially unreceptive to

this shift. CW7 emphasized that during the Class Period, the market was demanding a multi-

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application product which gave the competition room to move into the space, and Candela’s tardy

response to changing market conditions gave rise to a decrease in market share.

41. Similarly, CW4 attributed Candela’s loss of market share to competitors in part due to

the Company’s failure to sell a multi-application device since competitors that offered multi-

wavelength products had made the environment very challenging for Candela. According to CW5,

during 2006, Candela’s lack of a multi-application product hurt sales and strengthened Candela’s

competitors in the marketplace.

42. Defendants knew, or recklessly disregarded, during the Class Period, that their

customers were demanding multi-configuration devices and that Candela’s failure to offer a device

had already led, and would continue to lead, to a reduction in sales and demand for its products and a

loss of market share. Indeed, CW8 repeatedly informed the Senior Vice President of Sales at

Candela of this market reality, telling him that Candela’s customers told sales representatives that

they were very interested in a multi-configuration device. CW8 made such statements at quarterly

sales meetings during the Class Period held at the Company headquarters in Wayland,

Massachusetts, which the other Regional Sales Managers also attended. CW8 asserted in these

meetings that Candela should begin marketing multi-function platform IPL devices so Candela could

better compete for sales. According to CW8, these requests were ignored.

43. Similarly, according to CW9, the fact that competitors were shifting to multi-

application platform products, and that this was hurting Candela’s sales efforts, was discussed at

sales meetings during 2004-2006. CW9 initiated some of these discussions and learned Company

executives were not interested in continuing the discussion.

44. Finally recognizing the importance of offering a multi-application device, Candela

ramped up spending on research and development during the Class Period. The product that

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Candela developed in an attempt to offer a competing product was eventually called GentleMax.

According to CW6, the Engineering Department increased its staff in order to work on the

GentleMax device. The GentleMax, however, was not expected to be sold until January 2007, at the

earliest.

Other Company-Wide Problems Hurt Candela’s Sales

45. Candela suffered from other problems as well, which led to a loss in market share.

Candela sold products that would be viewed by people who were obtaining cosmetic surgery, so the

“look” of the machine was important to customers, but Candela failed to update the look of its

products to remain competitive. According to CW2, Candela’s products were unattractive and

overpriced, which made them difficult to sell, and Candela’s technology supported devices that had

limited functionality and were “big, bulky, cumbersome and overpriced for what they can do.” CW6

stressed the importance of a good-looking product; something that Candela did not offer customers

during the Class Period. According to CW7, the Company’s products were “not aesthetically

pleasing” and lacked a “hi-tech” look, and the design and other visual features of the machines

presented a definite disadvantage.

46. Candela’s business also suffered during the Class Period because Candela failed to

properly train its service technicians and sales representatives. This led to complaints and

dissatisfaction by customers, which hurt Candela’s competitive position in the marketplace. This

failure was exacerbated by the fact that Candela experienced a large amount of turnover by people in

these positions. According to CW2, Candela did not adequately train its sales reps because the

Company did not want to spend the money, and this made it difficult to compete with companies

such as Palomar. According to CW3, there was very high turnover of field service engineers caused

by inadequate training, unsafe working conditions and questionable compensation practices, which

resulted in customer dissatisfaction. Indeed, several field service engineers filed formal complaints

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with the Occupational Safety and Health Administration (“OSHA”), resulting in an investigation by

OSHA and penalties imposed on Candela.

47. CW4 learned from customers that they had to endure a notable decline in the quality

of the Company’s technical support, field support and customer service, which negatively impacted

Candela’s success in the marketplace.

48. Another problem that hurt sales was the fact that Candela did not provide financing

for its customers, while Candela’s competitors did. Prospective customers sought to obtain

financing for the purchase of these products in order to avoid laying out a large amount of money up

front in connection with the purchase. Since Candela did not provide financing, sales representatives

would be forced to arrange the financing through a third party.

49. Finally, Candela was also losing market share because its sales of products focusing

on hair removal – Candela’s biggest revenue driver – were eroding. During the Class Period, the

hair removal market had matured and demand had slowed down.

50. As discussed below, Defendants failed to disclose the numerous problems with

Candela’s business. In fact, according to Defendants and contrary to the facts, Candela’s business

was strong and the Company was growing at least as fast as the overall market and the prospects for

the non-traditional market were extremely favorable. This, however, was untrue.

Palomar Aggressively Sought to Enforce Its Patents and Filed SuitAgainst Many of Candela’s Competitors

51. Palomar and its subsidiaries engage in the research, development, manufacture,

distribution, and sale of laser and light-based products and related disposable items and accessories

for medical and cosmetic treatments.

52. For years before the beginning of the Class Period, Palomar made a decision to

attempt to generate revenue and protect its patents by seeking to aggressively enforce its patents.

- 19 -


Palomar contacted its competitors, offered to enter into licensing agreements with respect to its

patents, and filed suit for patent infringement if the particular company refused to enter into a

licensing agreement. Palomar’s strategy proved to be successful, yielding Palomar millions of

dollars in royalty payments from their competitors.

53. On February 15, 2002, Palomar commenced an action for patent infringement against

Altus Medical, Inc., now known as Cutera, Inc. (“Cutera”), seeking both monetary damages and

injunctive relief. The complaint alleged Cutera’s CoolGlide and CoolGlide Excel laser systems

willfully infringed on Palomar’s U.S. patent No. 5,735,844 (the “’844 patent”).

54. On March 1, 2004, Palomar announced that it received a favorable ruling on February

27, 2004 in a Pre-trial hearing in its case against Cutera. The announcement stated, in pertinent part,

as follows:

The ruling represents a major step in Palomar’s efforts to enforce its patent portfolioand will have considerable impact on the case as it proceeds toward trial. If Palomarprevails at trial, Cutera may be ordered to pay millions in damages for past sales andmay also be ordered to stop selling any products that perform hair removal.

In the ruling, the District Court largely embraced Palomar’s position, finding forPalomar on critical issues dealing with U.S. patent 5,735,844.

55. On June 22, 2004, Palomar announced that it had settled a patent infringement lawsuit

against Lumenis Ltd. (“Lumenis”). Under the terms of the settlement, Lumenis was to pay $4.09

million over the subsequent six quarters for royalties due on one of its products for sales made

between July 1, 2002 and December 31, 2003. Beginning on January 1, 2004, Lumenis was to pay

Palomar a 5 % royalty on sales of that product and other professional laser hair removal devices and

modules. In the press release announcing the settlement with Lumenis, Joseph P. Caruso, President

and CEO of Palomar, expressed Palomar’s commitment to enforce its patents and stated: “Palomar

intends to continue its strategy of vigorously enforcing its patent portfolio.”

- 20 -


56. On April 7, 2005, Palomar commenced another action against Cutera for infringement

of two patents: U.S. Patent No. 5,595,568 (the “’568 patent”), entitled “Permanent Hair Removal

Using Optical Pulses,” and the ’ 844 patent, entitled “Hair Removal Using Optical Pulses.” The ’568

and ’844 patents are the same patents that Palomar claims Candela infringed upon and are the

subject of Palomar’s patent infringement action against Candela.

57. On December 13, 2005, Palomar announced that the United States District Court for

the District of Massachusetts issued several rulings in Palomar’s favor in connection with the patent

infringement lawsuit filed by Palomar against Cutera, including denial of Cutera’s motion for

summary judgment of invalidity and non-infringement. Palomar’s press release announcing the

rulings described the significant risks Cutera faced if it lost the suit, including being ordered to pay

millions of dollars in damages for past sales and triple damages as a result of willful infringement of

the ’844 patent, and ordered Cutera to stop selling infringing products. In that press release, Joseph

Caruso, Palomar’s President and CEO, reiterated Palomar’s commitment to enforcing its patents:

We are very pleased with the Court’s ruling, and we are looking forward to having atrial as soon as possible. We have always believed in the strength of the ‘844 patentas well as its corresponding patent family members, and we will continue toaggressively enforce all of our patents.

58. On June 5, 2006, Palomar announced the resolution of its on-going patent

infringement lawsuits against Cutera. In connection with the settlement, Cutera was to pay Palomar

$15.5 million as an 8.5% royalty on sales of their laser and lamp based hair removal systems,

beginning with their initial sales in 2000 through March 31, 2006, $2.5 million in interest on past

sales, and $4 million to cover Palomar’s legal costs incurred while enforcing these patents.

Beginning April 1, 2006, Cutera was to pay Palomar a 7.5% royalty on future sales of these systems

and any new light-based hair removal systems later developed.

- 21 -


59. In Palomar’s press release announcing the settlement with Cutera, Joseph Caruso

again emphasized Palomar’s strategy to enforce its patents:

Palomar pioneered the cosmetic light based industry with the first high powered lightbased hair removal system in 1997. Since then, this industry has become one of thefastest growing segments in the medical industry with hair removal procedures beingthe most popular cosmetic light based procedure performed today. Many companieshave taken advantage of this high growth by offering products covered by theAnderson Patents, and Palomar intends to license such companies or preventcontinued infringement. This strategy has and should continue to provide significantfinancial benefit to Palomar and its shareholders.

Potential Patent Infringement Litigation byPalomar Created Substantial Risks for Candela

60. A potential patent infringement lawsuit against Candela by Palomar created

significant risks to Candela. The litigation itself would be costly; in the event that Candela lost the

suit, it could be required to pay millions of dollars to Palomar for past usage of products with

Palomar’s patents, Candela could be forced to license the patents going forward and share revenue

on products with Palomar going forward, and Candela could be prohibited from selling certain of its

products.

61. Candela admitted before and after it was sued by Palomar that a patent infringement

lawsuit could be extremely harmful to Candela. Candela filed a Form 10-K with the SEC on

September 30, 2005 and admitted before it was sued by Palomar that patent litigation could be

harmful to Candela. The Form 10-K stated, in pertinent part:

Claims by others that our products infringe their patents or other intellectualproperty rights could prevent us from manufacturing and selling some of ourproducts or require us to incur substantial costs from litigation or developmentof non-infringing technology.

Our industry has been characterized by frequent litigation regarding patent and otherintellectual property rights. Patent applications are maintained in secrecy in the U.S.until such patents are issued and are maintained in secrecy for a period of timeoutside the U.S. Accordingly, we can conduct only limited searches to determinewhether our technology infringes any patents or patent applications of others. Anyclaims of patent infringement would be time-consuming and could:

- 22 -


• result in costly litigation

• divert our technical and management personnel

• cause product shipment delays

• require us to develop non-infringing technology

• require us to enter into royalty or licensing agreements.

Although patent and intellectual property disputes in the laser industry have oftenbeen settled through licensing or similar arrangements, costs associated with sucharrangements may be substantial and often require the payment of ongoing royalties,which could hurt our gross margins. In addition, we cannot be sure that thenecessary licenses would be available to us on satisfactory terms, or that we couldredesign our products or processes to avoid infringement, if necessary. Accordingly,an adverse determination in a judicial or administrative proceeding, or the failure toobtain necessary licenses, could prevent us from manufacturing and selling some ofour products, which could hurt our business, results of operations, and financialcondition. On the other hand, we may have to start costly and time consuminglitigation in order to enforce our patents, to protect trade secrets, and know-howowned by us or to determine the enforceability, scope, and validity of the proprietaryrights of others.

(Emphasis in original).

62. Candela filed a Form 10-K with the SEC on September 13, 2006 and admitted after it

was sued by Palomar that the patent infringement action by Palomar could be harmful to Candela.

The Form 10-K stated, in pertinent part:

Public announcements concerning [the Palomar] litigation that are unfavorable to usmay result in significant declines in our stock price. An adverse ruling or judgmentin this matter could cause our stock price to decline significantly.

Litigation with Palomar will be expensive and protracted, and our intellectualproperty position may be weakened as a result of an adverse ruling or judgment.Whether or not we are successful in the pending lawsuits, litigation consumessubstantial amounts of our financial resources and diverts management’s attentionaway from our core business.

* * *

An adverse outcome in Palomar’s case against could materially hurt our business,financial condition, results of operations and cash flows.

- 23 -


Palomar Repeatedly Notified Candela That It Infringed on Palomar’s Patentsand Then Filed a Patent Infringement Action Against Candela

63. On May 21, 1999, Palomar sent Candela a letter notifying Candela that it violated

certain Palomar patents. This letter was sent certified mail return receipt requested on behalf of

Palomar by its counsel, Wayne Stoner of Hale and Dorr, to Defendant Puorro. The letter stated, in

pertinent part, as follows:

Palomar is the exclusive licensee from the Massachusetts General Hospital of twoUnited States patents issued to Dr. R. Rox Anderson, et al., U.S. Patent No.5,595,568, entitled “Permanent Hair Removal Using Optical Pulses,” and US. PatentNo. 5,835,844, entitled “Hair Removal Using Optical Pulses.” Palomar is also thelicensee from Coherent, Inc. of U.S. Patent No. 5,527,350, entitled “Pulsed InfraredLaser Treatment of Psoriasis,” and U.S. Patent No. 5,707,403, entitled “Method forthe Laser Treatment of Subsurface Blood Vessels.” Copies of all of these patents areenclosed.

Palomar has noticed from Candela’s product literature that Candela markets a devicefor hair removal and/or leg vein treatment using laser optical pulses called“GentleLASE.” Palomar is interested in discussing with Candela the grant ofnonexclusive licenses to Candela under the above-referenced patents. Palomar hasalready granted Coherent, Inc. such a license under the referenced Anderson patents.

64. Palomar communicated with Candela and sent several follow up notices to Candela in

an attempt to enforce its patents over the next seven years. In addition to putting Candela on notice

of the patent infringement, Palomar also attempted to negotiate a licensing agreement with Candela

concerning Palomar’s patents. As stated by Joseph Caruso on a conference call with analysts on

October 26, 2006, “[a]fter years of writing letters and attempting to negotiate a license failed on

August 9th, we filed suit against Candela, accusing certain of their systems of infringing the same

patent we asserted in our first lawsuit against Cutera.”

65. Thus, Candela was put on notice through the May 1999 letter and subsequent

warnings that Palomar sought to enforce its patents against Candela. After Candela received

warnings from Palomar about Candela’s violations of Palomar’s patents, Candela dedicated

Company resources to perform an evaluation of the patents in dispute and Palomar’s claims.

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66. After Palomar filed suit against several competitors, including Cutera in April 2005, it

became clear that Palomar sought to aggressively enforce it patents through litigation. Nevertheless,

Candela failed to disclose any of the warnings from Palomar to investors during the Class Period. In

fact, Defendants expressly denied that Candela had been contacted by Palomar or that it might be

sued by Palomar.

67. In addition to sending letters to Candela, Palomar also sent similar letters to other

companies concerning a potential lawsuit for violation of Palomar’s patents. For example, Palomar

sent letters to Cynosure. Even though Palomar had not sued Cynosure at the time, contrary to

Candela’s refusal to disclose to investors that it had been repeatedly notified that Palomar was

seeking to enforce its patents, Cynosure disclosed to investors that it had been contacted by Palomar

and advised investors about the risks involved with a potential lawsuit by Palomar. On August 11,

2005, Cynosure filed a Form S-1 with the SEC that stated, in pertinent part:

A third party has asserted that we need a license to its patents in order for us tocontinue selling many of our products.

On July 2, 2004, Palomar Medical Technologies, Inc. sent us a letter proposing toenter into negotiations with us regarding the grant of a nonexclusive license underspecified United States and foreign patents owned or licensed by Palomar withrespect to our Apogee Elite, Apogee 5500, PhotoLight and Acclaim 7000 products,and also with respect to our SmartEpil II product, which we no longer offer. Insubsequent letters from Palomar dated September 14, 2004 and March 24, 2005,Palomar reiterated its willingness to negotiate a license under these patents and, in itsMarch 24, 2005 letter, stated that it continues to believe that we need a license underthese patents for each of the products listed in the July 2, 2004 letter, as well as forour PhotoSilk, PhotoSilk Plus, Cynergy, Cynergy PL and Cynergy III systems. Wehave not entered into negotiations with Palomar with respect to such a license.

In February 2002, Palomar filed a lawsuit against one of our competitors, Cutera,Inc., alleging that by making, using, selling or offering for sale its hair removalproducts, Cutera willfully and deliberately infringed one of the patents that Palomarhas asserted against us in its letters to us. This litigation between Palomar and Cuterais ongoing. Palomar may also bring suit against us claiming that some or all of ourproducts violate patents owned or licensed by Palomar. Litigation is unpredictable,and we may not prevail in successfully defending or asserting our position. IfPalomar takes legal action against us, and if we do not prevail, we may be ordered to

- 25 -


pay substantial damages for past sales and an ongoing royalty for future sales ofproducts found to infringe Palomar’s patents or we could be ordered to stop sellingany products that are found to infringe Palomar’s patents.

(Emphasis in original).

68. On August 9, 2006, Palomar filed suit against Candela in the United States District

Court for the District of Massachusetts, asserting infringement by Candela of the ’844 patent. The

suit was amended to also include a claim for violation of the ’568 patent. This lawsuit did not come

as a surprise to Candela, due in part to the fact that Palomar repeatedly accused Candela of violating

its patents and due to Palomar’s history and expressed strategy of suing competitors for patent

infringement. Not only was Candela aware of a potential suit by Palomar, but Candela itself had

prepared a response to Palomar’s lawsuit in the form of its own suit against Palomar, which Candela

filed on August 10, 2006, the very next day.

69. As discussed below, Defendants made materially false and misleading statements and

omitted material facts about the potential of patent infringement litigation against Candela by

Palomar.

Pre-Class Period Statements

70. Before the Class Period even began, Defendants denied that Palomar had notified

Candela about infringing on Palomar’s patents and misled investors about the risk of a potential

patent infringement lawsuit against Candela by Palomar. On an August 24, 2005 conference call

with analysts, Defendant Puorro denied that Palomar contacted Candela about a violation of

Palomar’s patents:

Richard Rinkoff – Craig-Hallum – Analyst

I will do that. One other question, Cutera is being sued by Palomar, and has Palomarcontacted you about infringing on any of their patents?

Gerard Puorro – Candela Corporation – President, CEO

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We don’t infringe on their patents.

Richard Rinkoff – Craig-Hallum – Analyst

Have they contacted you about it?

Gerard Puorro – Candela Corporation – President, CEO

They haven’t contacted us.

71. Candela also disclosed to investors that Candela’s business was especially strong and

that it was increasing its market share compared with its competitors. On an August 24, 2005

conference call with analysts, Defendant Puorro stated, in pertinent part, as follows:

Good evening again everybody. There are a lot of good things going on, andCandela is not standing still. And there are a few quick topics I would like toaddress. First, let me talk about the market that we’re in, our competition, and theshare we have of that market, and then where we think that market is going. And letme give you some factual data from the publicly recorded companies on the last 12months.

Twelve months ago when we started our fiscal year Laserscope had 10% of thismarket; they now have 7. Palomar had 13; they now have 12. Cutera had 14; theyare flat at 14. Syneron had 17; they have 16. Lumenis had 21; they have 20.Candela had 25; we now own 31% of this market when the twelve-month periodclosed.

Going forward with our new partner McKesson and continued growth of our directsales force, we expect to grow our share again this coming year.

MATERIALLY FALSE AND MISLEADINGSTATEMENTS MADE DURING THE CLASS PERIOD

Fiscal 1Q06

72. Defendants’ pre-Class Period statements remained alive and uncorrected during the

Class Period. The Class Period begins on November 1, 2005. On that date, Candela issued a press

release announcing the results for 1Q06, ending on October 1, 2005 (the “11/1/05 Press Release”).

The 11/1/05 Press Release was filed with the SEC on Form 8K on November 1, 2005 and the 8K

was signed by Defendant Broyer. The 11/1/05 Press Release stated, in pertinent part, as follows:

- 27 -


Gerard E. Puorro, Candela’s President and Chief Executive Officer, said: “We arepleased with the results in what is traditionally our slowest quarter. During thequarter, we received new SFDA (State Food and Drug Administration) approvals inChina, and last week at the opening of the American Society of DermatologicSurgery (ASDS) Annual Meeting in Atlanta, we launched a news pulsed dyeplatform that was well received.” Puorro added: “The year is off to a good startand we remain optimistic with our opportunities in these markets.”

(Emphasis added).

73. The statements referenced above in 172 were each materially false and misleading

when made because they omitted to disclose that: (i) Candela’s growth was slowing, it was losing

market share to competitors, and it was growing slower than its peers; (ii) Candela was experiencing

slower sales and demand problems for its products due to its failure to sell a multi-application

product to the marketplace and competitors were gaining market share through the sale of multi-

application products, such as IPL products; (iii) Candela experienced slower sales because it failed to

update the look of its machines to match those of its competitors, which were more aesthetically

pleasing and cost less; (iv) Candela poorly trained its customer service personnel and service

engineers, resulting in high turnover and customer satisfaction problems; and (v) the hair removal

market had become saturated, resulting in slower growth for Candela.

74. The statements referenced above in 172 were materially false and misleading when

made because they omitted to disclose that: (i) Palomar had repeatedly notified Candela that

Candela violated Palomar’s patents; (ii) Palomar had repeatedly put Candela on notice that Palomar

sought to enforce its patents; and (iii) there was a reasonable risk that Palomar would file suit against

Candela for patent infringement.

75. Furthermore, the statements referenced above in 172 that “the year is off to a good

start” and that Puorro “remain[s] optimistic with... opportunities in these markets” were materially

false and misleading when made because the year was not off to a good start and there was little

- 28 -


reason to be optimistic about Candela’s opportunities in its markets because of the reasons set forth

in ¶¶73 and 74.

76. On November 1, 2005, Candela held a conference call with analysts (the “11/1/05

Conf Call”) to discuss the financial results for 1Q06 contained in the 11/1/05 Press Release. On the

11/1/05 Conf Call, Defendant Broyer misrepresented the condition and prospects of Candela’s hair

removal products:

Anthony Vendetti – Maxim Group – Analyst

Would you say that 40% of your sales was still for hair removal or did you give that(indiscernible)?

Paul Broyer – Candela Corporation – CFO

Hair removal continues to be the driving force not just for Candela but for theindustry.

77. The statements referenced above in ¶76 were materially false and misleading when

made because Defendants knew, or recklessly disregarded, that the hair removal market had become

saturated, resulting in slower growth for Candela and the industry as a whole.

78. On the 11/1/05 Conf Call, Defendant Puorro misrepresented that seasonality was the

reason for a slowdown in sales, as opposed to a decline in demand by the marketplace for Candela’s

products:

Andy Schopick – Nutmeg Securities – Analyst

Gerry, or Paul, we would like to ask you why this Company seems to beexperiencing the degree of seasonality, relative to your competitors? Because yourcompetitors and I’m sure you have seen these recent results in Q-Terra (ph) was outtoday at the same time you were are just seeing much more linear performance andgrowth. And it’s seeming absence of seasonality. Why is (MULTIPLESPEAKERS)

Gerry Puorro – Candela Corporation – CEO

I think I can answer for two reasons. First of all as you know and most of the folksonline know this, the quarter was just reported has always been a seasonally low

- 29 -


quarter for us. We have – outside of the United States, in particular – we felt the coremarkets doctors, and when you get into the summer months, they’re not as availableas we would like them to be and they never have been. To some degree in the UnitedStates that is true, as well, although with the mix they now have in the noncore it issomewhat mitigated.

That said, our June year end and our beginning year of July and our compensationplans are such that it has become ingrained in our culture that we finish(indiscernible) in July and start off slow – excuse me in June and start off slow inJuly and continue to growth over the coming quarters. And that’s been the history ofthe Company for a number of years.

The dynamic of the physicians certainly is changing in the States but hasn’t changedoutside the States yet.

79. The statements referenced above in ¶78 were each materially false and misleading

when made because of the reasons set forth in ¶73. Furthermore, the statements referenced above in

¶78 were each materially false and misleading when made because the Company’s slow growth was

not due to seasonality issues, but was due to the reasons set forth in ¶73.

80. On the 11/1/05 Conf Call, Defendant Broyer misrepresented the financial condition

and outlook of the Company:


In terms of fiscal – your fiscal second quarter coming up or full year – I don’t thinkyou’ve provided any formal guidance. I mean, sometimes, I think last year what yousaid is you expect to grow at the rate of the industry or slightly better. Is thatsomething that we can expect for the full year or did you want to get a little morespecific regarding the second quarter?


No, I think that is reasonable with our strength both in product and distribution thatwe feel that we can grow at least as strong as the overall industry.


when made because of the reasons set forth in ¶73. The statements that Candela had strength in

products and that Candela “can grow at lest as strong as the overall industry” were each materially

false and misleading when made because Defendants knew, or recklessly disregarded, that Candela

- 30 -


had a significant weakness in its product mix because it did not offer a multi-application product and

would not grow as least as strong as the overall industry for the reasons set forth in ¶73.

82. In response to Defendants’ materially false and misleading statements concerning the

condition of Candela and its prospects going forward, Candela’s stock price rose on November 2,

2005 to $10.55 per share from its close of $9.33 per share before the statements – an increase of

more than 13%, on extremely heavy volume. Company insiders took advantage of this artificial

inflation in Candela’s stock price by selling $3.1 million worth of stock between November 4, 2005

and December 12, 2005.

83. On November 9, 2005, Candela filed a Form 10-Q with the SEC for the first fiscal

quarter of 2006, ending October 1, 2005 (the “1Q06 10Q”), which stated, in pertinent part, as

follows:

Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

* * *

Our traditional customer base includes plastic and cosmetic surgeons anddermatologists. More recently we have expanded our sales to a broader group ofpractitioners consisting of general practitioners and certain specialists includingobstetricians, gynecologists and general and vascular surgeons.


when made because of the reasons set forth in ¶73.

85. The 1Q06 10Q stated on p. 14, in pertinent part, as follows:

Consolidated revenue increased $5.7 million, to $28.1 million for the three monthsended October 1, 2005, from $22.4 million for the three months ended October 2,2004. The increase was due primarily to uniform increase in demand for ourproducts and related service on a worldwide basis, coupled with our expandingreach into new markets.

* * *

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The increase in revenue from lasers and other products for the three months endedOctober 1, 2005, compared to the three-month period ended October 2, 2004 resultedprimarily from an increase in the sales volume of our GentleYag TM product line,continued strength of our GentleLaseTM line, and the introduction during the thirdquarter of last year of the EllipseTM product line.

(Emphasis added).


when made because of the reasons set forth in ¶73. The statements referenced above concerning

sales of GentleYag and GentleLase were each materially false and misleading when made because

those products were hair removal products and the hair removal market had become saturated,

resulting in slower growth for Candela.

87. The 1Q06 10Q stated on p. 17, in pertinent part, as follows:

• Our failure to respond to rapid changes in technology and intense competitionin the laser industry could make our lasers obsolete.

* * *

;ropertyClaims by others that our products infringe their patents or other intellectual

rights, or that the patents which we own or have licensed rights to areinvalid, could prevent us from manufacturing and selling some of our products orrequire us to incur substantial costs from litigation or development of non-infringingtechnology.


when made because of the reasons set forth in ¶¶73 and 74.

89. The 1Q06 10Q contained a Legal Proceedings section, but omitted to disclose any

facts concerning the potential Palomar lawsuit. The 1Q06 10Q stated on p. 19, in pertinent part, as

follows:

From time to time, the Company is a party to various legal proceedings incidental toits business. Except for the bankruptcy preference claims in the DVI matter, theCompany believes that none of the legal proceedings that are presently pending, ifadversely decided to the Company, will have a material adverse effect upon itsfinancial position, results of operations, or liquidity.

- 32 -


90. The statements referenced above in 1[89 were each materially false and misleading

when made because of the reasons set forth in 1[74.

91. Defendants Puorro and Broyer filed certifications with the SEC along with the 1Q06

10Q, certifying that the 1Q06 10Q did “not contain any untrue statement of a material fact or omit to

state a material fact necessary to make the statements made, in light of the circumstances under

which such statements were made, not misleading with respect to the period covered by the [1Q06

10Q].”


when made because of the reasons set forth in 1[1[73 and 74.

Fiscal 2Q06

93. On January 31, 2006, Candela issued a press release announcing the results for 2Q06,

ending on December 31, 2005 (the “1/31/06 Press Release). The 1/31/06 Press Release was filed

with the SEC on Form 8K on January 31, 2006, and the 8K was signed by Defendant Broyer. The

1/31/06 Press Release stated, in pertinent part, as follows:

Gerard E. Puorro, Candela’s President and Chief Executive Officer, said: “We areobviously delighted with these results, especially given that the December quarter istraditionally our second slowest.” Puorro added: “As we head into the second halfof our fiscal year, we remain confident of our ability to execute our business planand continue to be the leader in this space.”

(Emphasis added).



95. On January 31, 2006, Candela held a conference call with analysts (the “1/31/06 Conf

Call”) to discuss the financial results for 2Q06 contained in the 1/31/06 Press Release. On the

1/31/06 Conf Call, Defendant Puorro misrepresented the condition of Candela’s business, products

and prospects:

- 33 -


Gerard Puorro – Candela Corporation – President and CEO

Thank you, Paul. Obviously, a lot of good news there. We’re pleased with theresults for the quarter, and we are also pleased with the 30% growth for the first sixmonths of our fiscal year.

. . . We are also happy with the activity from McKesson, our partner in the noncoremarkets. . . .

. . . We have an extensive and unparalleled product portfolio. We have a strong andperhaps the strongest distribution structure in the industry. As such, as we head intothe second half of our year, we are optimistic and we’re confident that we cancontinue to take advantage of the opportunities that present themselves right in frontof us. . . .

96. The statements referenced above in N95 were each materially false and misleading

when made because of the reasons set forth in NN73 and 74. The statements that Candela had an

“extensive and unparalleled product portfolio” and that it could “continue to take advantage of . . .

opportunities” were each materially false and misleading when made because unlike its competitors,

Candela did not offer a multi-application product and would be unable to take advantage of the

primary opportunity in the form of the non-traditional market. The statement that Candela was

“happy with the activity from McKesson” was materially false and misleading when made because

McKesson was not performing well and unable to generate significant sales.

97. On the 1/31/06 Conf Call, Defendant Puorro misrepresented facts about a potential

lawsuit against the Company for patent infringement by Palomar:


I wonder if you can update us on the McKesson relationship, just how that isprogressing. And also any comment you might have on the Palomar-Cuteralitigation, as it moves to a trial; and what, if any, exposures you have in terms of thatparticular patent.

* * *


- 34 -


This is Jerry. As we have answered before on this topic, Andy, and you have beenthere, in relation to Palomar, one, we do not any infringe on any of their patents.Two, we have not received any formal notification from them.


Any other comment about how it will affect the industry in general, depending onhow – what – how that outcome?


Well, I think you and I have spoken about this in various venues. At the moment Ithink it’s a jump ball. But I’m not a lawyer in terms of the Cutera-Palomar litigation.As I said a moment ago, effectively, we don’t have a dog in that hung. So we willjust have to wait and see how it comes out.


when made because of the reasons set forth in ¶74. The statements that Candela had “not received

any formal notification from [Palomar]” and that Candela didn’t “have a dog in that hung” were each

materially false and misleading when made because Palomar had repeatedly notified Candela since

1999 that it was seeking to enforce its patents against Candela and that Candela had been contacted

by Palomar in the same way that other companies had been contacted by Palomar prior to being

sued.

99. On the 1/31/06 Conf Call, Defendant Broyer misrepresented facts known at that time

about the Company’s spending on research and development:

Dalton Chandler – Needham & Company – Analyst

Then sort of a follow-up on the operating items, the R&D was also better thanexpected. Can we carry that forward at the rate from the December quarter?

Paul Broyer – Candela Corporation – CFO, VP Finance & Administration

You know, for the most recent quarter it was about 4.7%, 4.8% of revenue. I thinkthat is in the area that we talked about for the full year, 4% to 5%.


when made because at that time Defendants knew, or recklessly disregarded, that research and

- 35 -


development spending would increase due to the Company’s development of a multi-application

product.

101. On the 1/31/06 Conf Call, Defendant Broyer misrepresented facts known at that time

about the Company’s hair removal products and the hair removal industry:


. . . But I was wondering if you can give the breakout, Paul, like you usually do, asbest you can, of the percentage of revenues in the therapeutic categories? Hairremoval, vascular lesions, photo rejuvenation, and so forth.


. . . So what I will say is that hair removal, I believe, and you will hear from the otherpeople in the industry, will tell you is still the driving force here.


Paul, would you still say that across the industry hair removal still probably accountsfor 40% or so of revenues?


40% is, I think, a very fair number.


when made because of the reasons set forth in ¶73. The statements referenced above concerning the

hair removal segment, including that hair removal is the “driving force,” were materially false and

misleading when made because the hair removal market had become saturated, resulting in slower

growth for Candela, and the driving force was the sale of multi-application products.

103. On the 1/31/06 Conf Call, Defendant Puorro misrepresented facts about Candela’s

prospects:


Let me answer it (indiscernible) Anthony, as it relates to the second half of the year.Traditionally, as you know, it’s been this way for 10 or 15 years, Candela, the thirdand fourth quarter have been stronger than the first and second.

- 36 -


As it relates to the entire industry, 30% growth in the first six months we think is avery, very competitive number. All of the significant competitors are December 31competitors. They will all be out in the next 15 days. We expect with those numbersthat we will be able to update our market share analysis that we do. We have beenthe market share leader for over two years and nine months that we know of, andwe don’t expect that to change.

(Emphasis added).



105. On the 1/31/06 Conf Call, Defendant Puorro misrepresented facts about Candela’s

competitive landscape:

Patrick Winton – Sterne, Agee & Leach – Analyst

Congratulations, good quarter. I just wanted to touch base on kind of a follow-on,what you were just discussing in terms of the competitive landscape. Were weseeing any increased competition, etc.?

We have some new entrees into the market. I’d say new from a brokerage standpointor a publicly traded standpoint. But can you give us some insight as to what you areseeing out in the trenches?


We haven’t seen much different geographically. We see different people. The newentrant that you’re referring to is the only one of the entrants that has a pulsed dyecomponent as we do. But that is nothing new. They have had it for a number ofyears.

They have done a good job bringing that company to market. We have theirnumbers. We will post them as part of the market share, (indiscernible) we willknow from the past two years when they were private. But we really haven’t seenmuch different, Patrick. It is the same meaningful competitors in differentgeographies.

* * *


Really, most of my follow-on questions were effectively answered. But I wouldwant to ask you, Jerry, just about the general pricing environment; whether you areseeing any underlying changes or trends in terms of the competitive landscape.

- 37 -



Well, we’re pleased to tell you that our ASPs are holding firm.

* * *


Thank you, operator, and thank you all for calling in. As I said, we very much likethe quarter and the first half we are seeing. We remain very positive and optimisticand confident going forward. Again, thanks for your participation.



107. In response to Defendants’ materially false and misleading statements concerning the

condition of Candela and its prospects going forward, including the risk of a patent infringement

lawsuit against Candela by Palomar, Candela’s stock price rose on November 2, 2005 to $10.55 per

share from its close of $9.33 per share before the statements – an increase of more than 13%, on

extremely heavy volume. Company insiders took advantage of this artificial inflation in Candela’s

stock price by selling $9.5 million worth of stock between February 2, 2006 and February 28, 2006.

108. On February 8, 2006, Candela filed a Form 10-Q with the SEC for the second fiscal

quarter of 2006, ending December 31, 2005 (the “2Q06 10Q”). The 2Q06 10Q was signed by

Defendant Broyer. The 2Q06 10Q stated on p. 18, in pertinent part, as follows:

Research and Development Expense. Research and development spendingincreased to $1.8 million for the three-month period ended December 31, 2005, from$1.6 million for the three-month period ended January 1, 2005, due primarily to anincrease in the number of active projects and an increase in employee costs.Spending in this area increased to $3.4 million for the six-month period endedDecember 31, 2005, from $3.0 million for the six-month period ended January 1,2005 due primarily to the aforementioned increase in project spending and anincrease in employee-related costs.


when made because of the reasons set forth in ¶73. The statements referenced above in ¶108 were

- 38 -


each materially false and misleading when made because research and development spending

increased, and would continue to increase, due to the Company’s development of a multi-application

product.

110. The 2Q06 10Q disclosed certain risks to the Company and stated on p. 20, in



* * *






facts concerning the potential Palomar lawsuit. The 2Q06 10Q stated on p. 22, in pertinent part, as

follows:

From time to time, the Company is a party to various legal proceedings incidental toits business. Except for the bankruptcy preference claims in the DVI matter, theCompany believes that none of the legal proceedings that are presently pending, ifadversely decided to the Company, will have a material adverse effect upon itsfinancial position, results of operations, or liquidity.



114. Defendants Puorro and Broyer also filed certifications with the SEC along with the

Company’s 2Q06 10Q, certifying that the Company’s 2Q06 10Q “[did] not contain any untrue

- 39 -


statement of a material fact or omit to state a material fact necessary to make the statements made, in

light of the circumstances under which such statements were made, not misleading.”



Fiscal 3Q06

116. On May 2, 2006, Candela issued a press release announcing the results for the third

fiscal quarter of 2006, ending April 1, 2006 (the “5/2/06 Press Release”). The 5/2/06 Press Release

was filed with the SEC on Form 8K on May 2, 2006, and the 8K was signed by Defendant Broyer.

The 5/2/06 Press Release stated, in pertinent part, as follows:

Gerard E. Puorro, Candela’s President and Chief Executive Officer, said: “Weobviously are pleased with these record results. Our growth continues to be strongand we remain the market share leader. The introduction of our Vbeam platform hasbeen well received and we remain optimistic about our opportunities going forward.”



118. On May 2, 2006, Candela held a conference call with analysts (the “5/2/06 Conf

Call”) to discuss the financial results for 3Q06 contained in the 5/2/06 Press Release.

119. On the 5/2/06 Conf Call, Defendant Puorro responded to a question about a lawsuit

by Palomar, as follows:


And I was wondering, Jerry, if you could comment on the litigation that Palomar ispursuing against Cutera. Sort of, how that potentially affects you, not affect you?


Okay, Anthony, I think at least on one or more occasions, we’ve spoke about this.On the last call, as I recall, Andy Schopick asked me, and the call before thatsomebody else did. And I’ll answer it the very same way. One, as it relates toPalomar, we do not infringe any of their intellectual property. Two, as we likeothers, have gotten one of their fliers in the mail, but we have not at any time

- 40 -


received official notification that they think we infringed from an official point ofview. If you listened to their call the other day, when specifically asked the questionabout us, they answered that they were reviewing their strategy overall. As it relatesto the fight they’re having with Cutera, as I said before, I’m not a lawyer and as alayman, I could tell you it’s a jump ball when you have a jury and I don’t have adog in that hunt, so Candela is litigation adverse, but we are also not going to takeour licenses for something we did not infringe.

(Emphasis added).

120. The statements referenced above in ¶1 19 were each materially false and misleading

when made because of the reasons set forth in ¶74. The statements that Candela had “not received

any official notification that they think we infringed from an official point of view” and that Candela

didn’t “have a dog in that hunt” were each materially false and misleading when made because

Palomar had repeatedly notified Candela since 1999 that it was seeking to enforce its patents against

Candela and Candela had been contacted by Palomar in the same way that other companies had been

contacted by Palomar prior to being sued. The statement “one of their flyers” was materially false

and misleading when made because Palomar had sent Candela an official letter from their outside

counsel and not just a “flyer,” and Palomar corresponded with Candela more than once. In fact,

Palomar corresponded with Candela for seven years.

121. On the 5/2/06 Conf Call, Defendant Puorro stated, in pertinent part, as follows:

Obviously, a lot of good looking numbers, a lot of good news. What is also obvious,certainly from this revenue level, is that our customers continue to speak. And whatthey say is they like what they see from Candela. They like our products which theyare telling us are the most efficacious among the ones they buy from us and ourcompetitors. They like the value proposition that we provide them with theseproducts. Our practitioners continue to tell us that our service and support is secondto none. . . . It is our expectation that we will also continue to execute both our longand short term goals to further your shareholder value. We remain very confidentand very optimistic as we move forward.


when made because of the reasons set forth in ¶73. The statements that customers said that they

“like what they see from Candela” and that “practitioners continue to tell us that our service and

- 41 -


support is second to none” were materially false and misleading because customers had expressed to

Candela employees that they wanted a multi-application device and that they were not pleased with

the quality of the Company’s technical support, field support and customer service.

123. On the 5/2/06 Conf Call, Defendants Broyer and Puorro commented on the huge

opportunity for Candela in the non-traditional market and stated, in pertinent part, as follows:


. . . we have been shifting our efforts into the much larger markets than what weoriginally referred to as core. We’re trying to get away from that term because themarkets outside of that, the plastics, are tenfold.

* * *


Yeah, I think as a practical matter going forward, we’re going to need to redefinewhat our core markets are given that in North America alone, what we hadhistorically called core during the plastic and, if you will, all the other office spacenon-core, are relatively equal at this point. So in the coming quarters, you’llprobably be hearing us creating a redefinition of what truly are our core markets andcandidly, they are larger than what had historically been our markets.



125. On May 10, 2006, Candela filed a Form 10-Q with the SEC for the third fiscal quarter

of 2006, ending April 1, 2006 (the “3Q06 10Q”). The 3Q06 10Q was signed by Defendant Broyer.

The 3Q06 10Q stated on p. 18, in pertinent part, as follows:

Research and Development Expense. Research and development spendingincreased to $2.4 million for the three-month period ended April 1, 2006 from $1.9million for the three-month period ended April 2, 2005 due primarily to an increasein the number of active projects and an increase in employee costs. Spending in thisarea increased to $5.9 million for the nine-month period ended April 1, 2006 from$4.9 million for the nine-month period ended April 2, 2005 due primarily to theaforementioned increase in project spending and an increase in employee-relatedcosts.

- 42 -



when made because of the reasons set forth in ¶73. The statements referenced above in ¶125 were

each materially false and misleading when made because research and development spending

increased, and would continue to increase, due to the Company’s development of a multi-application

product.

127. The 3Q06 10Q disclosed certain risks to the Company and stated on p. 21, in



* * *






facts concerning the potential Palomar lawsuit. The 3Q06 10Q stated on p.23, in pertinent part, as

follows:

The Company believes that none of the legal proceedings that are presently pending,if adversely decided against the Company, will have a material adverse effect uponits financial position, results of operations, or liquidity.



131. Defendants Puorro and Broyer also filed certifications with the SEC along with the

Company’s 3Q06 10Q, certifying that the Company’s 3Q06 10Q “[did] not contain any untrue

- 43 -


statement of a material fact or omit to state a material fact necessary to make the statements made, in

light of the circumstances under which such statements were made, not misleading.”



Defendants Sold Millions of Dollars Worthof Candela Stock During the Class Period

133. The Individual Defendants and numerous other Candela directors and officers, in

connection with their fraudulent scheme alleged herein, sold millions of dollars worth of Candela

stock and large percentages of their total stock holdings during the Class Period, for proceeds of

more than $13 million and gains of more than $8.4 million. Defendant Puorro sold more than $1.8

million worth of stock, representing more than 40% of his total stock holdings in the Company

during the Class Period, for gains of nearly $1.2 million. Defendant Broyer sold more than $1.3

million worth of stock, representing 99% of his total stock holdings in the Company during the Class

Period, for gains of nearly $700,000.

134. The following table lists sales of Candela stock by Candela officers and directors

during the Class Period:

% ofSharesOwned

Last Name First Name Date Shares Price Proceeds Total Gain Sold ABE GEORGE 11/22/2005 10,000 $14.28 $142,800Director 2/27/2006 371 $20.00 $7,420

2/28/2006 4,629 $20.00 $92,580

15,000 $242,800 $194,050 100%

BAILEY BEN 11/22/2005 15,000 $14.05 $210,750Director 2/2/2006 38,752 $18.51 $717,300

2/2/2006 6,248 $18.50 $115,588

60,000 $1,043,638 $494,788 100%

BERNSTEIN ERIC 5/9/2006 1,723 $19.96 $34,391Director, Chair, Sci. Advisory Bd. 5/9/2006 1,000 $20.00 $20,000

5/9/2006 800 $19.97 $15,976

- 44 -


% ofSharesOwned

Last Name First Name Date Shares Price Proceeds Total Gain Sold 5/9/2006 800 $20.02 $16,016

5/9/2006 600 $19.98 $11,988

5/9/2006 600 $19.99 $11,994

5/9/2006 573 $19.90 $11,403

5/9/2006 500 $19.93 $9,965

5/9/2006 400 $19.95 $7,980

5/9/2006 204 $20.03 $4,086

5/9/2006 200 $20.01 $4,002

5/9/2006 100 $19.91 $1,991

7,500 $149,792 $78,542 100%

BROYER PAUL 11/17/2005 17,500 $12.80 $224,000SVP, CFO 11/17/2005 7,500 $12.74 $95,550

11/17/2005 5,000 $12.73 $63,650

11/17/2005 5,000 $12.68 $63,400

2/2/2006 8,300 $18.60 $154,380

2/3/2006 40,000 $18.19 $727,600

83,300 $1,328,580 $690,780 99%

CARDARELLI PAUL 11/10/2005 12,500 $12.85 $160,625VP Marketing 2/9/2006 22,903 $18.52 $424,164

2/9/2006 747 $18.51 $13,827

36,150 $598,616 $324,645 100%

HERMAN DENNIS 2/3/2006 20,000 $19.00 $380,000SVP, N. American Sales & Mktg 2/27/2006 20,000 $19.00 $380,000

5/4/2006 25,000 $20.52 $513,000

65,000 $1,273,000 $879,350 97%

HSIA JAMES 2/21/2006 11,000 $18.50 $203,500Chief Technical Officer 2/21/2006 5,000 $18.60 $93,000

2/21/2006 4,000 $18.48 $73,920

2/24/2006 10,000 $18.75 $187,500

2/27/2006 10,000 $19.70 $197,000

40,000 $754,920 $754,920 54%

MCGRAIL WILLIAM 11/4/2005 10,000 $10.81 $108,100SVP, Operations 12/5/2005 7,800 $14.75 $115,050

12/6/2005 2,200 $14.75 $32,450

12/12/2005 8,600 $15.00 $129,000

12/12/2005 6,400 $14.96 $95,744

2/6/2006 45,000 $19.00 $855,000

2/27/2006 10,000 $19.75 $197,500

90,000 $1,532,844 $983,244 100%

MCMILLAN KATHLEEN 11/15/2005 10,300 $12.81 $131,943

- 45 -


% ofSharesOwned

Last Name First Name Date Shares Price Proceeds Total Gain Sold VP, Research 11/15/2005 9,500 $12.80 $121,600

11/15/2005 5,200 $12.81 $66,612

11/15/2005 5,000 $12.79 $63,950

30,000 $384,105 $253,805 100%

MORI TOSHIO 11/7/2005 7,500 $11.00 $82,500Pres., Candela KK; 11/17/2005 10,000 $12.90 $129,000VP, Candela Corp. 11/22/2005 10,000 $14.00 $140,000

2/21/2006 20,000 $18.50 $370,000

2/27/2006 5,000 $18.88 $94,400

52,500 $815,900 $420,425 100%

NAGER NANCY 11/21/2005 12,500 $13.65 $170,625Director 11/21/2005 7,500 $13.67 $102,525

2/2/2006 7,429 $18.57 $137,957

2/2/2006 5,071 $18.31 $92,850

2/2/2006 2,500 $18.33 $45,825

35,000 $549,782 $174,932 100%

PUORRO GERARD 2/2/2006 67,061 $18.58 $1,245,993Pres., CEO, Director 2/2/2006 15,647 $19.00 $297,293

2/2/2006 10,000 $18.24 $182,400

2/2/2006 6,182 $18.53 $114,552

98,890 $1,840,239 $1,198,839 45%

QUINN ROBERT 11/28/2005 10,000 $14.11 $141,100Treasurer, Corporate Controller 2/3/2006 25,000 $18.08 $452,000

35,000 $593,100 $240,600 100%

ROBERTS KENNETH 12/2/2005 18,400 $14.51 $266,984Chairman of the Board 12/2/2005 4,401 $14.52 $63,903

12/2/2005 3,000 $14.50 $43,500

12/2/2005 2,803 $14.52 $40,700

12/2/2005 1,300 $14.54 $18,902

12/2/2005 96 $14.56 $1,398

2/28/2006 20,683 $19.18 $396,700

2/28/2006 4,900 $19.25 $94,325

2/28/2006 3,297 $19.19 $63,269

2/28/2006 1,120 $19.31 $21,627

60,000 $1,011,307 $889,107 69%

WILBER ROBERT 11/9/2005 10,000 $12.25 $122,500SVP, Int'l Operations 11/30/2005 10,000 $14.50 $145,000

2/8/2006 15,049 $18.75 $282,169

2/8/2006 14,951 $18.77 $280,630

2/15/2006 8,800 $17.50 $154,000

- 46 -


% ofSharesOwned

Last Name First Name Date Shares Price Proceeds Total Gain Sold

2/15/2006 6,200 $17.57 $108,934

2/21/2006 15,000 $18.00 $270,000

80,000 $1,363,233 $908,633 94%

Total: 788,340 $13,481,855 $8,486,660

135. The timing of these stock sales is very suspicious. Insiders sold $3.1 million worth of

stock shortly after Defendants’ misrepresentations on November 1, 2005, sold $9.5 million worth of

stock shortly after Defendants’ misrepresentations on January 31, 2006, and sold $662,000 worth of

stock around the time of Defendants’ misrepresentations on May 2, 2006. Notably, while these

individuals sold huge amounts of stock during the Class Period, they sold very little, if any, shares

during the eight months before or after the Class Period, as reflected in the below chart:

Class Period:1111105-8121/06

180,000

160,000

140,000

120,000

100,000

80,000

60,000

40,000

20,000

0 I ^I

L" U10 ^ ^ QP co CP 4p QP w wQ Q ^ Q Q Q Q Q Q Q QQ Q Q Q Q Q Q Q Q QN N N N N N N N N N N N Nco co co co co co CO G4 OR 90 co G4 cor_ r r_ z: r_ r_ r_ r r_ r_ r_ r_ r_

r r

- 47 -


The Truth Emerges

136. On the 5/2/06 Conf Call, Candela, for the first time, admitted that it had been

contacted by Palomar about the infringement of Palomar’s patents. Defendant Puorro, however,

misrepresented the nature of, and attempted to minimize the importance of, this communication so

Defendants had still not revealed the full extent, nature or likelihood of the risk that Palomar would

sue Candela for patent infringement. Even though the full extent of Palomar’s warnings to Candela

were not revealed at this time, this disclosure did cause Candela’s stock to decline because it

revealed new information to the market and increased the risk of a potential suit against Candela by

Palomar. In response to the news about receiving one “flyer” from Palomar, on May 3, 2006,

Candela’s stock declined to $21.73 per share from $22.70 per share on May 2, 2006 – a decline of

more than 4%, on very heavy volume.


Court for the District of Massachusetts, asserting infringement by Candela of U.S. Patent No.

5,735,844, i.e., the ’844 patent – the same patent that was the subject of Palomar’s suit with Cutera.

On August 10, 2006, Palomar issued a press release announcing the lawsuit against Candela. In its

press release announcing the lawsuit against Candela, Palomar stated: “For over 7 years, Palomar

has sent Candela letters notifying Candela that its products need a license to the ’844 Patent and

offering to grant Candela such a license.”

138. As a result of the revelation about the patent infringement lawsuit against Candela by

Palomar and the fact that Palomar had sent letters to Candela for seven years about Candela’s patent

infringement, the price of Candela’s stock dropped precipitously on very heavy volume, falling from

$14.76 per share on August 9, 2006 (the last trading day prior to the announcement of the lawsuit by

Palomar) to $12.47 per share on August 10, 2006 – a decline of $2.29 per share, or nearly 15.51%.

- 48 -


139. The day after Palomar sued Candela, on August 10, 2006, Candela had already

prepared and filed its own patent infringement lawsuit against Palomar in response.

140. On August 21, 2006, after the close of trading, Candela issued a press release

announcing the results for the fourth fiscal quarter of 2006, ending July 1, 2006 (the “8/21/06 Press

Release”). The 8/21/06 Press Release was filed with the SEC on Form 8-K on August 21, 2006 and

revealed that Candela had extremely disappointing financial results for the fourth quarter and lost

market share to competitors. The 8/21/06 Press Release stated, in pertinent part, as follows:

Candela Corporation (NASDAQ: CLZR) announced today that revenues for itsfourth fiscal quarter and full fiscal year were $41.3 million and $149.5 million,increases of 7% and 21% when compared to the same fiscal periods a year earlier.

The Company reported net income for the quarter was $ 2.4 million or $0.10 centsper share versus $3.2 million or $0.14 cents per share a year earlier. For the fullyear, the Company reported net income of $14.9 million or $0.62 cents per shareversus $7.3 million of $0.32 per share last year.

141. In the 8/21/06 Press release, Candela reported that spending on research and

development increased to $3,006,000 in Fiscal 4Q06 from $2,024,000 in Fiscal 4Q05, in increase of

almost 50%.

142. On August 21, 2006, Candela held a conference call with analysts (the “8/21/06 Conf

Call”) to discuss the financial results contained in the 8/21/06 Press Release and Candela’s business.

On the 8/21/06 Conf Call, Defendant Broyer admitted that Candela lost market share because it did

not have a multi-application product to sell to customers. In fact, while Candela lost six percentage

points of market share year over year for the June quarter 2006, each of its four public competitors

gained 1.0-1.5 percentage points of share for the period. There was also decelerating growth in the

hair removal segment. Defendant Broyer responded to a question about the reason Candela lost

market share to competitors, in pertinent part, as follows:

Eli Cameron – Cowen – Analyst

- 49 -


Two questions please. First of all, what factor or factors would you cite as the mostlikely reasons why you lost market share in the quarter? And secondly, were therecertain product categories where you actually had a year-over-year decline in sales?


Your first question I think is a fair question. And I think that is why Jerry went intoquite a bit of detail that we haven’t in the past as far as where we’re spending ourR&D dollars.

I think our products have always been the most efficacious. And there have beenother more recent players out there that have combined these products, and thereforecreated a different market that I don’t think we have up to this point really been – hada product to offer. And that is going to change.

143. On the 8/21/06 Conf Call, Candela revealed for the first time that it steeply ramped up

spending in research and development in the last few quarters in an attempt to develop a multi-

application device to compete with competitors. Defendant Puorro called this product – for purposes

of the conference call – Candela 3630 because he said that it was supposed to have “36

configurations and a total of 30 applications across all those configurations in a single footprint.”

Defendant Puorro stated that even though they planned to launch this multi-application device, it

would not be launched until January 2007.

144. On the 8/21/06 Conf Call, Candela revealed the negative ramifications of the patent

infringement lawsuit brought against Candela by Palomar. Candela also revealed that it was

contacted by Palomar about patent infringement and that after Candela was contacted, it performed

an evaluation of Palomar’s claims. Defendant Puorro stated, in pertinent part, as follows:

I need to turn to the recent litigation brought by Palomar, and responded to by a suitof our own. While we cannot and will not speculate how long this’ll take or howmuch it will cost, we do expect this to be a prolonged litigation, the outcome ofwhich will be decided in court.

Further, we anticipate the cost of this litigation to be substantial. As you know, webelieve none of the Candela products infringe upon the 844 patent. We determinedthis through an evaluation of the 844 patent. Such determination was done as a resultof Palomar contacting us via their mass mailings to the 30 companies in the industry,in an effort to persuade us, as to persuade others, to acquire a license from them. We

- 50 -


did not acquire a license, nor did we discuss terms of such a license, because we didnot believe, and still do not believe, we infringed on the 844 patent. As I said, wecontinue to believe that, and we will defend our position through the judicial process.

145. Furthermore, Andy Schopick, an analyst on the 8/21/06 Conf Call, expressed his

belief that Candela should have anticipated a lawsuit by Palomar. Andy Schopick stated, in pertinent

part, as follows:

Jerry, I have got to ask you. How surprised are you by Palomar’s actions? It seemsto me to some extent you should have been anticipating the possibility of somethinglike this happening. I know we have discussed these things over some periods oftime on various calls.

146. As a result of the revelations from the Company’s 8/21/06 Press Release and Conf

Call about, among other things, the poor condition of Candela’s business, its loss of market share

due to its failure to sell a multi-application product, the fact that it would not be in position to sell a

multi-application product until January 2007 at the earliest, and ramifications of the suit by Palomar,

the price of Candela’s stock dropped precipitously on very heavy volume of more than 8.1 million

shares, falling from $14.49 per share on August 21, 2006 (the last trading day prior to the August 21,

2006 announcements) to $10.33 per share on August 22, 2006 – a decline of $4.16 per share, or

nearly 29%.

147. Indeed, Wall Street analysts covering Candela’s stock were both surprised and

disappointed with Candela’s financial results and statements. On August 22, 2006, Cowen &

Company downgraded Candela from Outperform to Neutral and issued a research report on Candela

titled “Sales and EPS Shortfall, Lowering Estimates and Rating.” The Cowen research report stated,

in pertinent part, as follows:

Given the patent litigation overhang from the recent lawsuit filed by Palomar againstCandela and the significantly lower sales growth relative to CLZR’s peers, webelieve the shares no longer offer an attractive risk/reward tradeoff.

* * *

- 51 -


Lowering Sales Estimates Due to Market Share Losses. We have lowered oursales growth estimate for FY07 from 18% to 9%, with our new sales estimate now at$163MM, down from our prior estimate of $185MM. Competitors in the aestheticlaser market recently reported significantly more robust growth than Candela.

New Products Planned for Early 2007. Disappointing 4Q sales were attributable tocustomers choosing competitive multi-configuration/multiapplication devices. Thecompany plans to launch a major new product in January 2007 which will have 36possible configurations, allowing physicians to perform multiple procedures with asingle unit. We believe the extended timetable for the launch of this and other newsystems could result in additional market share losses.

148. On August 22, 2006, a research report on Candela by Needham & Co. stated, in


We have believed Candela has grown slower than most of its competitors becausethese other companies have done a better job of marketing the workstation approach,especially in non-traditional markets.

* * *

It was very surprising to see a 7% Y/Y growth rate out of Candela after Cutera,

Cynosure, Palomar and Syneron all put up numbers in the 37-41% range.Management does not provide product level detail, but their responses to questionson last night’s conference call suggest the weakness was pretty much across theboard, although they did single out the SmoothBeam for acne and the IPL asespecially disappointing.

* * *

Based on available data from the publicly traded companies in the industry weestimate in the quarter Candela’s share declined to 25% from 27% last quarter and28% in the year-ago period.

* * *

We have also trimmed our margin expectations for three reasons. First, the grossmargin was below our expectation in the quarter and management acknowledged thatimprovement in that measure has been slower than they expected. Second, R&Dspending has ramped up as the company prepares for significant new productintroductions in early CY07, and thirdly, we expect higher SG&A expense as a resultof the law suits with Palomar.

149. Candela’s considerable loss of market share was first made clear to the market on

August 21, 2006. As known by Defendants, however, Candela’s business was suffering and Candela

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was losing market share throughout the Class Period. A September 5, 2006 research report on

Candela issued by Cowen & Co. stated, in pertinent part:

Conclusion: After Candela’s recent 4Q earnings disappointment, we have reviewedmarket share trends within the aesthetic laser/light market and concluded that theerosion of share for Candela has been gradual and consistent. Candela’s low 4Qsales growth was due to sales rising more slowly than the overall market, rather thana slowdown in the market growth rate. We believe that the loss of market share forCandela is attributable to a confluence of factors including a shift in the types ofphysicians targeted by sales reps, slowing growth for a key market segment and thesteady emergence of new, competitive devices that incorporate multiple wavelengthsof light.

150. After the end of the Class Period, Candela’s business continued to worsen, due to the

problems alleged herein, including Candela’s failure to offer a multi-application product. For the

quarter ended December 30, 2006, net income decreased to $1,023,000 for the three-months ended

December 30, 2006 from $4,510,000 for the three-months ended December 31, 2005, a decrease of

more than 77%. Total revenue decreased to $37,406,000 for the three-months ended December 31,

2006 from $37,720,000 for the three-months ended December 31, 2005, a decrease of 1%. Research

and development spending increased to $4.6 million for the three-month period ended December 30,

2006, from $1.8 million for the three-month period ended December 31, 2005, due primarily to an

increase in the number of active projects and an increase in employee costs. Candela’s stock price

steadily decline until the date of the filing of this Complaint. On August 22, 2008, Candela’s stock

closed at $2.90 per share.

ADDITIONAL SCIENTER ALLEGATIONS

151. As alleged herein, Defendants acted with scienter in that Defendants knew, or

recklessly disregarded, that the public documents and statements issued or disseminated in the name

of the Company (or in their own name) were materially false and misleading; knew, or recklessly

disregarded, 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

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

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

and/or receipt and/or modification of Candela’s allegedly materially misleading misstatements, were

active and culpable participants in the fraudulent scheme alleged herein.

152. Defendants knew and/or recklessly disregarded the falsity and misleading nature of

the information which they caused to be disseminated to the investing public. The ongoing

fraudulent scheme described herein could not have been perpetrated during the Class Period without

the knowledge and complicity or, at least, the reckless disregard of the personnel at the highest levels

of the Company, including the Individual Defendants.

153. As alleged herein, each of the Individual Defendants was aware of the problems with

Candela’s business, the slowing of Candela’s growth due to the Company’s lack of a multi-

application product to sell to customers, the fact that Candela was losing market share to

competitors, and the fact that there was dissatisfaction among customers about Candela’s customer

service personnel and service engineers. As alleged herein, these problems at Candela were widely

known by Candela employees, including the confidential witnesses referenced in this Complaint.

Further, according to CW8, Candela executives were repeatedly notified about the need for a multi-

application product to compete in the marketplace because customers demanded such a product.

Further, the problems with customer service and service engineers were widely known throughout

Candela.

154. Similarly, Defendants knew, or recklessly disregarded, that Palomar repeatedly

notified Candela of Candela’s patent violation and the real risk that Palomar would seek legal action

to enforce its patents. Defendant Puorro knew that Palomar had sent the notice letter in May 1999

because that letter was addressed to Defendant Puorro himself and Defendants knew, or recklessly

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disregarded, Palomar’s warnings over the next seven years. Defendants also knew, or recklessly

disregarded, the extent of the risk that Palomar would seek legal action to enforce its patents.

Palomar had repeatedly and publicly expressed its intent to aggressively enforce its patents.

Furthermore, by the time the Class Period began, Palomar had already filed suit against several

competitors of Candela for patent infringement.

155. Indeed, an August 18, 2006 article on the Motley Fool.com website titled “Candela

Singed by Patent Lawsuit,” pointed out that Defendants knew they were contacted by Palomar and

that they should have known it was likely that Palomar would sue Candela. This article stated, in


The news that cosmetic laser maker Candela (Nasdaq: CLZR) was the target of apatent infringement lawsuit caught shareholders by surprise the other day,particularly since they had been assured by management for months that thecompany did not infringe on the patents in question. Management, it seems, waswell-prepared for the possibility; it fired off its own countersuit within hours of theannouncement.

Palomar Medical Technologies (Nasdaq: PMTI) has been very aggressive inprotecting its patents. Over the years, it has brought suit against rival lasermanufacturers Laserscope, Cutera (Nasdaq: CUTR), and Lumenis, and moreimportantly, it’s succeeded. It has settled claims with all three, leaving them payingroyalties to Palomar. In its press release announcing the lawsuit against Candela, thecompany said, “For over 7 years, Palomar has sent Candela letters notifying Candelathat its products need a license to the ‘844 Patent and offering to grant Candela sucha license.”

That has to be news to most Candela shareholders. During conference calls whereCEO Gerard Puorro has been directly asked about Candela infringing on Palomar’spatents, he has assured analysts that not only did the company not infringe on thepatents, but that Palomar hadn’t notified Candela that it did.

Just this past January, for example, Puorro said in response to a question, “We havenot received any formal notification from them.” In May, he said that the companyreceived merely a “Palomar flyer” like other players in the industry, but reiteratedthat Candela does not infringe on the patents. Apparently, investors need to parsethis executive’s statements a little more closely.

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156. Furthermore, the Individual Defendants and other Company directors and officers

were motivated to engage in the fraudulent conduct alleged herein in order to reap millions of dollars

from the sale of their stock holdings in the Company, as reflected above. These stock sales during

the Class Period raise a strong inference of scienter.

LOSS CAUSATION/ECONOMIC LOSS

157. During the Class Period, as detailed herein, Defendants engaged in a scheme to

deceive the market and a course of conduct that artificially inflated Candela’s stock price and

operated as a fraud or deceit on Class Period purchasers of Candela stock by misrepresenting

Candela’s business and its financial and competitive condition, the prospects for Candela and its

products, its competitive position in the marketplace and the risk of a patent infringement lawsuit by

Palomar. Defendants achieved this façade of success, growth and strong future business prospects

by blatantly concealing the fraudulent conduct and making materially false and misleading

statements during the Class Period. Later, however, when Defendants’ prior misrepresentations

were disclosed and became apparent to the market, Candela’s stock fell precipitously as the prior

artificial inflation came out of Candela’s stock price. As a result of their purchases of Candela stock

during the Class Period, Lead Plaintiffs and other members of the Class suffered economic loss, i.e.,

damages under the federal securities laws.

158. By improperly concealing their conduct, Defendants presented a misleading picture of

Candela’s business and prospects. Thus, instead of truthfully disclosing during the Class Period that:

(i) Candela’s prospective customers were demanding a multi-application product; (ii) Candela was at

a disadvantage in the marketplace because it did not offer a multi-application product; (iii) Candela

was losing market share to its competitors and its sales were suffering because Candela did not offer

a multi-application product; (iv) McKesson was experiencing difficulty selling Candela’s products

because Candela did not offer a multi-application product; (v) Candela ramped up research and

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development spending in order to develop a multi-application product to catch up to its competitors;

(vi) Candela’s sales were suffering because of the relatively unappealing look of their products; (vii)

customers were dissatisfied with Candela customer service representatives and service engineers;

and (viii) Palomar had repeatedly notified Candela that it violated Palomar’s patents and that there

was a reasonable risk that Palomar would file a patent infringement lawsuit against Candela,

Defendants caused Candela to conceal the problems.

159. Defendants’ materially false and misleading statements and material omissions

concerning Candela’s business and potential litigation with Palomar alleged herein caused and

maintained the artificial inflation in Candela’s stock price throughout the Class Period and until the

truth was revealed to the market.

160. Defendants’ false and misleading statements had the intended effect and caused

Candela’s stock to trade at artificially inflated levels throughout the Class Period, reaching as high as

$23.53 per share on May 1, 2006.

161. On May 2, 2006, Defendants publicly disclosed for the first time that Candela had

received a “flyer” from Palomar about the infringement of Palomar’s patents by Candela. On May

3, 2006, Candela’s stock declined to $21.73 per share from $22.70 per share on May 2, 2006 – a

decline of more than 4%, on very heavy volume. This drop partially removed the inflation from

Candela’s stock price, causing real economic loss to investors who had purchased the stock during

the Class Period. Candela’s stock price was still artificially inflated at this time, however, because

Defendants misrepresented the nature of Palomar’s communication and the extent of the risk of

potential litigation.


Court for the District of Massachusetts, asserting infringement by Candela. As a direct result of the

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revelation about the patent infringement lawsuit against Candela by Palomar, the price of Candela’s

stock dropped precipitously on heavy volume, falling from $14.76 per share on August 9, 2006 (the

last trading day prior to the announcement of the lawsuit by Palomar) to $12.47 per share on August

10, 2006 – a decline of $2.29 per share, or nearly 15.51%. This drop partially removed the inflation

from Candela’s stock price, causing real economic loss to investors who had purchased the stock

during the Class Period.

163. Finally, on August 21, 2006, Defendants revealed that Candela had extremely

disappointing financial results for the fourth quarter, lost market share to competitors since it did not

offer a multi-application product to competitors and provided additional detail about the negative

implications of the lawsuit with Palomar. As a direct result of the revelations about, among other

things, the poor condition of Candela’s business, its loss of market share due to its failure to sell a

multi-application product, the fact that it would not be in a position to sell a multi-application

product until January 2007 at the earliest, and ramifications of the suit by Palomar, the price of

Candela’s stock dropped precipitously on very heavy volume of more than 8.1 million shares, falling

from $14.49 per share on August 21, 2006 (the last trading day prior to the August 21, 2006

announcements) to $10.33 per share on August 22, 2006 – a decline of $4.16 per share, or nearly

29%. This drop partially removed the inflation from Candela’s stock price, causing real economic

loss to investors who had purchased the stock during the Class Period.

164. In sum, as the truth about Defendants’ fraud was revealed, the Company’s stock price

plummeted, the artificial inflation came out of the stock and Lead Plaintiffs and other members of

the Class were damaged and suffered economic losses.

165. The sharp declines in Candela’s stock price at the end of the Class Period were a

direct result of the nature and extent of Defendants’ fraud finally being revealed to investors and the

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market. The timing and magnitude of Candela’s stock price declines negate any inference that the

loss suffered by Lead Plaintiffs and other Class members was caused by changed market conditions,

macroeconomic or industry factors or Company-specific facts unrelated to the Defendants’

fraudulent conduct. The economic loss, i.e., damages, suffered by Lead Plaintiffs and other

members of the Class was a direct result of Defendants’ fraudulent scheme to artificially inflate

Candela’s stock price and the subsequent significant decline in the value of Candela’s stock when

Defendants’ prior misrepresentations and other fraudulent conduct was revealed.

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

166. Pursuant to their claims under Section 10(b) of the Exchange Act and Rule 10b-5

promulgated thereunder, Lead Plaintiffs will rely, in part, upon the presumption of reliance

established by the fraud-on-the-market doctrine such that:

167. Defendants made public misrepresentations or failed to disclose material facts during

the Class Period;

(a) the omissions and misrepresentations were material;

(b) the securities of the Company traded in open and efficient markets;

(c) the misrepresentations and omissions alleged would tend to induce a

reasonable investor to misjudge the value of the Company’s securities; and

(d) Lead Plaintiffs and the other members of the Class purchased or otherwise

acquired their Candela securities between the time Defendants failed to disclose or misrepresented

material facts and the time the true facts were disclosed, without knowledge of the omitted or

misrepresented facts.

168. At all relevant times, the market for Candela’s securities was an efficient market for

the following reasons, among others:

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(a) Candela’s shares met the requirements for listing, and were listed and actively

traded on the NASDAQ, which is a highly efficient and automated market;

(b) as a regulated issuer, Candela filed periodic public reports with the SEC;

(c) Candela regularly communicated with public investors via established market

communication mechanisms, including through regular dissemination 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) Candela 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.

169. As a result of the foregoing, the market for Candela’s securities promptly digested

current information regarding Candela from all publicly available sources and reflected such

information in Candela’s stock price. Under these circumstances, all purchasers of Candela’s shares

during the Class Period suffered similar injury through their purchases of Candela’s stock at

artificially inflated prices, and a presumption of reliance applies.

INAPPLICABILITY OF STATUTORY SAFE HARBOR

170. The statutory safe harbor provided for forward-looking statements under certain

circumstances does not apply to any of the allegedly false statements pleaded in this Complaint. The

statements alleged to be false and misleading herein all relate to then-existing facts and conditions.

Moreover, the specific statements pleaded herein were not identified as “forward-looking

statements” when made. To the extent that any of the statements identified herein as materially false

and misleading are held by the Court to be forward-looking statements, there were no meaningful

cautionary statements identifying important then-present factors that could, and indeed did, cause

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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 materially 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 or director of Candela who knew

that those statements were false when made.

CLASS ACTION ALLEGATIONS

171. Lead Plaintiffs bring this action as a class action pursuant to Federal Rules of Civil

Procedure 23(a) and (b)(3) on behalf of themselves and all persons who purchased or otherwise

acquired the securities of Candela during the Class Period. Excluded from the Class are Defendants,

the members of the Individual Defendants’ families, any entity in which any Defendant has a

controlling interest, or which is a parent or subsidiary of, or which is controlled by, the Company,

and the officers, directors, affiliates, legal representatives, heirs, predecessors, successors, or assigns

of any of the Defendants.

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

impracticable. Throughout the Class Period, Candela’s shares were actively traded on the

NASDAQ, which is a well-developed and efficient market. As of February 2, 2007, the Company

had more than 23 million shares outstanding. While the exact number of Class members is unknown

to Lead Plaintiffs at this time and can only be ascertained through appropriate discovery, Lead

Plaintiffs believe that there are hundreds, if not thousands, of members of the proposed Class.

Record owners and other members of the Class may be identified from records maintained by

Candela 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.

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173. Lead Plaintiffs’ claims are typical of the claims of the members of the Class they seek

to represent because Lead Plaintiffs and the Class members sustained damages which arose out of

Defendants’ unlawful conduct complained of herein.

174. Lead Plaintiffs are representative parties who will fairly and adequately protect the

interests of the Class, and have retained counsel competent and experienced in class action and

securities litigation. Lead Plaintiffs do not have interests antagonistic to or in conflict with those of

the other Class members they seek to represent.

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

adjudication of this controversy since joinder of all members of the Class is impracticable.

Furthermore, as the damages suffered by individual members of the Class 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.

176. There are questions of law and fact common to the Class, which predominate over

any questions which may affect individual members. Among the questions of law and fact common

to the Class are:

(a) whether the Exchange Act was violated by Defendants as alleged herein;

(b) whether statements made by Defendants to the investing public during the

Class Period misrepresented and/or omitted material facts;

(c) whether Defendants acted with scienter in issuing materially false and

misleading statements;

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(d) whether the market prices of securities during the Class Period were

artificially inflated due to the material nondisclosures and/or misrepresentations complained of

herein; and

(e) whether the members of the Class have sustained damages, and, if so, the

appropriate measure of damages.

COUNT I

Violations of Section 10(b) of the Exchange Actand Rule 10b-5 Promulgated Thereunder

(Asserted Against All Defendants)

177. Lead Plaintiffs repeat and reallege each and every allegation contained in the

foregoing paragraphs as if fully set forth herein.

178. This Count is asserted against all Defendants for violations of Section 10(b) of the

Exchange Act and Rule 10b-5 promulgated thereunder.

179. 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 Lead Plaintiffs, as alleged herein; (ii) enable the Individual Defendants to reap substantial

gains as a result of the disposition of Candela stock worth millions of dollars; and (iii) cause Lead

Plaintiffs and other members of the Class to purchase Candela’s securities at artificially inflated

prices. In furtherance of this unlawful scheme, plan and course of conduct, Defendant Candela and

the Individual Defendants, and each of them, took the actions set forth herein.

180. 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 Candela’s shares in violation of Section 10(b) of the Exchange Act and Rule 10b-5.

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All Defendants are sued either as primary participants in the wrongful and illegal conduct charged

herein or as controlling persons as alleged below.

181. Defendants, individually and in concert, directly and indirectly, by the use, means or

instrumentalities of interstate commerce and/or the mails, engaged and participated in a continuous

course of conduct to conceal adverse material information about the business, operations and future

prospects of Candela as specified herein.

182. 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 Candela’s value and performance and continued

substantial growth, which included the making of, or the participation in the making of, untrue

statements of material facts and omitting to state material facts necessary in order to make the

statements made about Candela and its business operations and future prospects, in the light of the

circumstances under which they were made, not misleading, as set forth more particularly herein,

and engaged in transactions, practices and a course of business which operated as a fraud and deceit

upon the purchasers of Candela’s shares during the Class Period.

183. 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 and/or major shareholders at the Company during the Class Period and members of the

Company’s management team or had control thereof; (ii) each of the Individual 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; and (iii) each of the Individual Defendants enjoyed

significant personal contact and familiarity with the other Defendants and was advised of and had

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access to other members of the Company’s management team, internal reports and other data and

information about the Company’s finances, operations, and sales at all relevant times; and (iv) each

of the Individual 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.

184. Defendants had actual knowledge of the misrepresentations and omissions of material

facts set forth herein, or acted with reckless disregard for the truth in that they failed to ascertain and

to disclose such facts, even though such facts were available to them. Such Defendants’ material

misrepresentations and/or omissions were done knowingly or recklessly and for the purpose and

effect of concealing Candela’s operating condition and the potential lawsuit for patent infringement

by Palomar against Candela from the investing public and supporting the artificially inflated price of

its securities. As demonstrated by Defendants’ misstatements of the Company’s business,

operations, and prospects 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.

185. 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 Candela’s shares was

artificially inflated during the Class Period. In ignorance of the fact that market prices of Candela’s

publicly traded securities were artificially inflated, and relying directly or indirectly on the false and

misleading statements made by Defendants, or upon the integrity of the market in which the

securities trade, and/or on the absence of material adverse information that was known to or

recklessly disregarded by Defendants, but not disclosed in public statements by Defendants during

the Class Period, Lead Plaintiffs and the other members of the Class acquired Candela securities

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during the Class Period at artificially high prices and were damaged as a result of the securities law

violations alleged herein.

186. At the time of said misrepresentations and omissions, Lead Plaintiffs and the other

members of the Class were ignorant of their falsity, and believed them to be true. Had Lead

Plaintiffs and the other members of the Class and the marketplace known the truth regarding

Candela’s business and the potential lawsuit by Palomar, which were not disclosed by Defendants,

Lead Plaintiffs and the other members of the Class would not have purchased or otherwise acquired

their Candela shares, or, if they had purchased such securities during the Class Period, they would

not have done so at the artificially inflated prices which they paid.

187. By virtue of the foregoing, Defendants violated Section 10(b) of the Exchange Act,

and Rule 10b-5 promulgated thereunder.

188. As a direct and proximate result of Defendants’ wrongful conduct, Lead Plaintiffs and

the other members of the Class suffered damages.

COUNT II

Violations of Section 20(a) of the Exchange Act(Asserted Against the Individual Defendants)

189. Lead Plaintiffs repeat and reallege each and every allegation contained above as if

fully set forth herein.

190. The Individual Defendants acted as controlling persons of Candela 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 and misleading 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 decision-

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making of the Company, including the content and dissemination of the various statements which

Lead Plaintiffs contend 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 Lead Plaintiffs to be misleading prior to and/or shortly after these statements

were issued and had the ability to prevent the issuance of the statements or cause the statements to be

corrected.

191. In particular, each of the Individual 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 actions giving rise to the securities violations as

alleged herein, and exercised the same.

192. As set forth above, Candela 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, Lead Plaintiffs

and other members of the Class suffered damages in connection with their purchases of the

Company’s securities during the Class Period.

PRAYER FOR RELIEF

WHEREFORE, Lead Plaintiffs, individually and on behalf of the Class pray, for relief and

judgment, as follows:

A. Declaring this action is a proper class action and certifying Lead Plaintiffs, among

others, as Class representatives and their counsel as Class counsel under Rule 23 of the Federal

Rules of Civil Procedure;

B. Declaring and determining that Defendants violated the federal securities laws by

reason of their conduct as alleged herein;

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C. Awarding compensatory damages in favor of Lead Plaintiffs and the other Class

members against all Defendants, jointly and severally, for all damages sustained as a result of

Defendants’ wrongdoing, in an amount to be proven at trial, including interest thereon;

D. Awarding Lead Plaintiffs and the Class their reasonable costs and expenses incurred

in this action, including counsel fees and expert’s fees; and

E. Granting such other and further relief as the Court may deem just and proper.

JURY DEMAND

Lead Plaintiffs hereby demand a trial by jury.

DATED: August 25, 2008 SHAPIRO HABER & URMY LLP

/s/ Adam M. Stewart Thomas G. Shapiro (BBO#454680)Adam M. Stewart (BBO#661090)53 State StreetBoston, MA 02109Telephone: (617) 439-3939Facsimile: (617) [email protected]@shulaw.com

Liaison Counsel

COUGHLIN STOIA GELLERRUDMAN & ROBBINS LLP

SAMUEL H. RUDMANEVAN J. KAUFMAN58 South Service Road, Suite 200Melville, NY 11747Telephone: (631) 367-7100Facsimile: (631) [email protected]@csgrr.com

Lead Counsel for Plaintiffs

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CERTIFICATE OF SERVICE

I hereby certify that on August 25, 2008, this document filed through the ECF systemwill be sent electronically to the registered participants as identified in the Notice of ElectronicFiling (NEF) dated August 25, 2008.

/s/ Adam M. Stewart Adam M. Stewart

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