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THIRD AMENDED CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATIONS OF FEDERAL SECURITIES LAWSCase No. C-00-3645 JCS
REDACTED 3RDAMENDED.03 29 2002.wpd
LIONEL Z. GLANCY #134180ROBIN B. HOWALD #110280MICHAEL GOLDBERG #188659GLANCY & BINKOW LLP1801 Avenue of the Stars, Suite 311Los Angeles, CA 90067Telephone: (310) 201-9150Facsimile: (310) 201-9160
JEFFREY H. SQUIREIRA M. PRESSKIRBY MCINERNEY & SQUIRE, LLP830 Third Avenue, 10th FloorNew York, NY 10022Telephone: (212) 371-6600Facsimile: (212) 751-2540
Co-Lead Counsel for Plaintiffs
UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF CALIFORNIA
SAN FRANCISCO DIVISION
In re RAMP NETWORKS, INC.SECURITIES LITIGATION
________________________________
This Document Relates to:All Actions.
Master File No. C-00-3645 JCS
CLASS ACTION
Hon. Joseph Spero
REDACTEDTHIRD AMENDED CONSOLIDATEDCLASS ACTION COMPLAINT FORVIOLATIONS OF FEDERALSECURITIES LAW
JURY TRIAL DEMANDED
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THIRD AMENDED CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATION OF FEDERAL SECURITIES LAWSCase No. C-00-3645 JCS
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Plaintiffs, by their attorneys, for their Third Amended Consolidated Class Action
Complaint (the "Complaint") allege the following upon personal knowledge as to themselves and
their own acts, and upon information and belief based upon the investigation of Plaintiffs’
attorneys as to all other matters. The investigation includes the thorough review and analysis of
public statements, publicly-filed documents of Ramp Networks, Inc. ("Ramp" or the
"Company"), press releases, interviews of former Ramp employees and customers, internal Ramp
documents, news articles and the review and analysis of accounting rules and related literature.
SUMMARY OF ACTION
1. This is a securities class action on behalf of public investors who purchased the
common stock of Ramp during the period from November 15, 1999 through September 29, 2000
(the "Class Period"). Pursuant to the Court’s Order Granting Defendants’ Motion to Dismiss
Second Amended Complaint With Limited Leave to Amend, dated March 1, 2002, the claims
remaining in this case are claims on behalf of purchasers of Ramp common stock during the
period from January 24, 2000 through September 29, 2000.
2. During the Class Period, Ramp was headquartered in Santa Clara, California, with
research and development facilities in Hyderabad, India. Ramp, which after commencement of
this action was acquired by Nokia Corp., developed, designed, manufactured and marketed
multiuser Internet access devices for medium to small businesses and homes.
3. Defendants manipulated the Company’s financial and accounting systems and
materially overstated Ramp’s publicly-reported financial results throughout the Class Period,
which material overstatement was admitted by Ramp, with respect to the first and second
quarters of fiscal 2000, by virtue of its later restatement of the Company’s financial results for
those quarters. The restatement was necessary because numerous violations of Generally
Accepted Accounting Principles (“GAAP”) during the first and second quarters of fiscal 2000
caused Ramp to misrepresent to the Securities and Exchange Commission (“SEC”) and the
investing public that Ramp’s financial results for these quarters were stated in accordance with
GAAP, when in fact they were not. In particular, defendants improperly recognized revenues in
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THIRD AMENDED CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATION OF FEDERAL SECURITIES LAWSCase No. C-00-3645 JCS
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violation of Statement of Financial Accounting Standard ("SFAS") No. 48, which states that
when a buyer has the right to return merchandise purchased, the seller may not recognize income
from the sale, unless all of the following conditions are met: (a) the price between the seller and
the buyer is substantially fixed or determinable; (b) the seller has received full payment, or the
buyer is indebted to the seller and the indebtedness is not contingent on the resale of the
merchandise; (c) physical destruction, damage, or theft of the merchandise would not change the
buyer's obligation to the seller; (d) the buyer has economic substance and is not a front, straw
party or conduit, existing for the benefit of the seller; (e) no significant obligation exists for the
seller to help the buyer resell the merchandise and; (f) a reasonable estimate can be made of the
amount of future returns. With respect to the last requirement, the following factors may impair
a seller’s estimation of product returns: (1) possible technological obsolescence or changes in
demand for the merchandise; (2) the length of the period that the customers have to exercise the
right of return; (3) little or no past experience in determining returns for specific types of
merchandise; (4) little or no past experience in determining returns for similar types of
merchandise; and (5) a good chance that future marketing policies of the seller and/or the
relationship with its customers will change. As defendants admitted when they restated earnings
during the Class Period, defendants improperly booked revenues on “sales” where one or more of
the six requirements of SFAS 48 was not satisfied, wrongfully accruing revenue where the
likelihood of returns made such accrual improper.
4. For example, defendants’ revenue figures for the first and second quarters of 2000
unreasonably failed to take into account expected returns of products:
a. which Ramp dumped on distributors who were paid to accept and store
Company merchandise for revenue recognition purposes and then
instructed to remove the shrink wrap from Ramp products (to convey the
false impression that the products had been “sold through” or used) before
returning them to the Company as defective;
b. shipped to other companies for revenue recognition purposes near the end
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THIRD AMENDED CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATION OF FEDERAL SECURITIES LAWSCase No. C-00-3645 JCS
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of quarterly or monthly reporting periods with the understanding that the
“buyers” would simply store the merchandise at Ramp’s expense before
returning the merchandise for full credit after the close of the Company’s
reporting period; and
c. temporarily removed from Ramp’s DisCopy Labs (“DCL”) warehouse
facility in Fremont, California by “sweeper” trucks which arrived on the
last day of each quarter to move product off the loading docks in order to
book the “sales” of these products as revenue for the quarter. The
“sweeper” trucks returned the product to the DCL facility after holding it
for about a week.
5. Additionally, in violation of SFAS 48's requirement that a sale cannot be booked
as revenue until the product’s price is substantially fixed or determinable:
a. Ramp shipped product on the “slightest of verbal commitments”;
b. Ramp shipped product before a prospective buyer had tested Company
equipment or agreed to price and payment terms; and
c. In some cases, this merchandise was “sold” to a local distributor who was
paid to store the merchandise for months, pending execution of a deal. If
the deal was not consummated, Ramp either continued to pay the
distributor to store the merchandise or treated the merchandise as returns.
6. In violation of SFAS 48's requirement that contingent sales not be booked as
revenue, Ramp consistently booked revenue on products shipped to distributors such as Ingram
Micro, Tech Data, Merisel, Merit, Synnex and others, even though such distributors, pursuant to
agreements between Ramp and its distributors, had the unfettered right to return such products to
Ramp if not resold and were not obligated to pay Ramp for the product until sold to resellers or
ultimate consumers.
7. In violation of SFAS 48, on at least one large deal with Telsource, a computer
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THIRD AMENDED CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATION OF FEDERAL SECURITIES LAWSCase No. C-00-3645 JCS
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products distributor, valued at between $900,000 and $1,000,000, Ramp recognized revenues on
a sale where the buyer’s payment obligation was expressly contingent upon resale of the product.
According to Frank Orga, then Telsource’s Vice President of Sales, who participated in
negotiating the transaction with Ramp’s senior management, Telsource’s obligation to pay for
the Ramp products was expressly contingent upon Telsource’s ability to sell the product through
to end users who, according to former Ramp employee, Confidential Witness No. 8, were to be
located pursuant to leads that Ramp was obligated to provide to Telsource. According to Walter
Allen, Ramp’s former Director of Western Region Enterprise Sales, when buyers were not
procured, approximately $900,000 worth of product was returned and Confidential Witness No.
8 was demoted.
8. As reported in Ramp’s Form 10-Q for the Second Quarter of 2000, Ramp
recognized revenue from a transaction with myCIO.com, a Networks Associates company.
However, according to Walter Allen, Confidential Witness No. 10, and Confidential Witness No.
6, defendant Mahesh Veerina (Ramp’s Chief Executive Officer and President during the Class
Period) directly negotiated this deal by himself and, according to Confidential Witness No. 6,
kept the terms of the deal “hush hush.” Confidential Witness No. 6 further indicated that, to his
knowledge, the product was never shipped to myCIO.com. Indeed, a complaint filed against
Network Associates alleges that Ramp paid Network Associates $250,000 to issue purchase
orders for $2 million worth of products it never intended to purchase so that Ramp could book
the revenue.
9. In the Second Quarter of 2000, Ramp also recognized revenue from a transaction
to a Chinese company called Xiao Tong. However, according to Confidential Witness No. 2,
who was responsible for shipping the Xiao Tong order, the products were never sent to Xiao
Tong in the Second Quarter; instead, they were temporarily sent to an “out-source warehouse”
(while Ramp recorded the transaction as revenue) and the entire shipment was then returned to
Ramp.
10. Throughout the Class Period, defendants falsely portrayed Ramp as a booming
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company which was experiencing and would continue to experience rapidly rising product sales.
Thus, the reason that Ramp booked consignment sales as revenues, paid distributors and
“sweepers” to fraudulently store unwanted excess product, undertook resale obligations, and
allowed for generous rights of return, was to convey the impression that substantial sales of
Ramp products were being made to end-users. As a result of the success of this scheme during
the Class Period, defendants led investors to believe, in SEC filings and press releases
announcing record or increasing revenues, that there was expanding market acceptance of
Ramp’s products. However, by representing that Ramp’s revenue figures were calculated in
accordance with GAAP requirements, including SFAS 48, defendants defrauded the investing
public, who were not aware that many of the Company's reported "sales" of Ramp products
including without limitation the Telsource, myCIO.com and Xiao Tong transactions discussed
above, were not actual sales unless and until the product shipped to distributors was purchased by
resellers or ultimate consumers.
11. Defendants' material omissions and their dissemination of materially false and
misleading financial statements and materially false and misleading statements regarding the
demand for and market acceptance of Ramp's products drove Ramp's stock price to an artificial
Class Period high of $25.75 per share on March 10, 2000. By the end of the Class Period -- after
Ramp finally revealed its abysmal financial problems -- Ramp’s stock price plummeted to barely
$2.00 per share. Shortly after close of the Class Period, Ramp issued revised quarterly reports
for the first and second quarters of 2000 in which the Company significantly and materially
restated earnings.
JURISDICTION AND VENUE
12. This Court has jurisdiction over this action pursuant to §27 of the Securities
Exchange Act of 1934 (the "1934 Act"), 28 U.S.C. §§1331 and 1337. The claims asserted herein
arise under, §§10(b) and 20(a) of the 1934 Act, 15 U.S.C. §§78j(b), 78(n), and 78t(a), and Rule
10b-5, 17 C.F.R. §240.10b-5, promulgated thereunder by the SEC.
13. Venue is proper in this District pursuant to §27 of the 1934 Act, 15 U.S.C. §78aa,
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THIRD AMENDED CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATION OF FEDERAL SECURITIES LAWSCase No. C-00-3645 JCS
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and 28 U.S.C. §1391(b). Defendants reside in this District. Many of the acts giving rise to the
violations complained of, including the dissemination of false and misleading public statements
and financial information, occurred in this District.
14. In connection with the wrongs alleged herein, defendants used the
instrumentalities of interstate commerce, including the United States mails, interstate wire and
telephone facilities, and the facilities of the national securities markets.
THE PARTIES
15. Lead Plaintiffs Intelligent Var Technology, Inc., Darrell Johnson, Douglas J.
Deutsch and Ronald Vincent (“plaintiffs”) purchased shares of Ramp common stock during the
Class Period at artificially inflated prices and were damaged thereby.
16. Defendant Ramp was formerly a Delaware corporation with Headquarters at 3100
De La Cruz Blvd., Santa Clara, California 95054. Throughout the Class Period, Ramp portrayed
itself as a leading provider of shared Internet access solutions for the small-office market. The
Company claimed that its WebRamp product family allowed multiple users in a small office
simultaneously to share the same Internet connection. The Company further asserted that the
WebRamp product family provided software-based routing and bridging functions to deliver
Internet-enabled applications and services.
17. As of October 2, 2000, Ramp had 21.7 million shares of stock outstanding.
During the Class Period, Ramp's shares traded on the NASDAQ National Market System, an
efficient market, under the symbol "RAMP." At all times relevant to this Complaint, Ramp
common stock traded actively in a well-developed and efficient market as that term is construed
under the federal securities laws. In January 2001, Ramp was acquired by Nokia Corporation
and ceased to trade on the NASDAQ.
18. Defendant Ramp, a corporation, acted through its officers, directors and
employees; their knowledge is imputed to Ramp for the purposes of any claims alleged herein
which require plaintiffs to demonstrate that Ramp acted with scienter.
19. Defendant Mahesh Veerina ("Veerina") is and was at all relevant times hereto
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THIRD AMENDED CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATION OF FEDERAL SECURITIES LAWSCase No. C-00-3645 JCS
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Chief Executive Officer, President, Chairman of the Board and/or a director of Ramp.
20. As an officer, director and/or controlling person of a publicly-held company
whose common stock is registered with the SEC under the Exchange Act and traded on the
NASDAQ, defendant Veerina had a duty promptly to disseminate accurate and truthful
information with respect to the Company's operations, finances, financial conditions, and present
and future business prospects, to correct any previously issued statement from any source that
had become untrue, and to disclose any trends that would materially affect earnings and the
present and future operating results of Ramp, so that the market price of the Company's publicly-
traded securities would be based upon truthful and accurate information.
21. During the Class Period, defendant Veerina was a senior executive and director of
Ramp and was privy to confidential and proprietary information concerning Ramp, its operations,
finances, financial condition, products, and present and future business prospects. Because of his
possession of such information, defendant Veerina knew or, with deliberate recklessness,
disregarded the fact that the adverse facts specified herein had not been disclosed to and were
being concealed from the public. Because of his Board membership and executive and
managerial position with Ramp, defendant Veerina had access to adverse material non-public
information about Ramp's operations, finances, financial condition, products, inventories and
present and future business prospects. He had such access via internal corporate documents,
conversations and connections with other corporate officers and employees, attendance at
management and Board of Directors meetings and committees thereof, and via reports and other
information provided to them in connection therewith. Because of his possession of such
information, defendant Veerina knew or, with deliberate recklessness, disregarded the fact that
the adverse facts specified herein had not been disclosed to and were being concealed from the
public.
22. Defendant Veerina, because of his position of control and authority as an officer
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and director of the Company, was able to and did control the contents of the various quarterly
reports, SEC filings, press releases and presentations to securities analysts pertaining to the
Company.
23. Defendant Veerina was provided with copies of Ramp's management reports,
press releases and SEC filings. Armed with, and in control of such information, Veerina granted
interviews to newspaper reporters. The newspaper articles based on those interviews, as well as
the Company's other publicly disseminated information are alleged herein to have been
materially misleading to the investing public. Significantly, defendant Veerina had the ability
and opportunity to either prevent their issuance in the first place or to have caused them to be
corrected shortly after their issuance. Defendant Veerina, for instance, signed the Company’s
1999 annual report on Form 10-K filed in March of 2000. As a result, defendant Veerina was
responsible for the accuracy of the public reports and releases detailed herein as "group
published" information, and is therefore responsible and liable for the representations contained
therein.
24. Defendant Timothy J. McElwee was, until March 31, 2000, a Vice President of
Worldwide Sales for Ramp. Defendant McElwee reported directly to defendant Veerina. During
the Class Period, defendant McElwee sold approximately 92,000 shares of Ramp common stock
at artificially inflated prices, while in possession of undisclosed, materially adverse information
about the Company. These sales yielded defendant McElwee total proceeds of approximately
$1,346,832.
25. As an officer and/or controlling person of a publicly-held company whose
common stock is registered with the SEC under the Exchange Act and traded on the NASDAQ,
defendant McElwee had a duty to promptly disseminate accurate and truthful information with
respect to the Company's operations, finances, financial conditions, and present and future
business prospects, to correct any previously issued statement from any source that had become
untrue, and to disclose any trends that would materially affect earnings and the present and future
operating results of Ramp, so that the market price of the Company's publicly-traded securities
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would be based upon truthful and accurate information.
26. During the Class Period, defendant McElwee was a senior executive of Ramp and
was privy to confidential and proprietary information concerning Ramp, its operations, finances,
financial condition, products, and present and future business prospects. Because of his
possession of such information, defendant McElwee knew or, with deliberate recklessness,
disregarded the fact that the adverse facts specified herein had not been disclosed to and were
being concealed from the public. Because of his executive and managerial position with Ramp,
defendant McElwee had access to adverse material non-public information about Ramp's
operations, finances, financial condition, products, inventories and present and future business
prospects. He had such access via internal corporate documents, conversations and connections
with other corporate officers and employees, attendance at management and Board of Directors
meetings and committees thereof, and via reports and other information provided to them in
connection therewith. Because of his possession of such information, defendant McElwee knew
or, with deliberate recklessness, disregarded the fact that the adverse facts specified herein had
not been disclosed to and were being concealed from the public. As Vice President of World
Wide Sales, McElwee was further aware or recklessly disregarded that his improper sales
practices as set forth below would result in the improper inclusion of false sales figures into
Company filings and press releases and that these figures would be widely disseminated to
investors.
27. Each of the defendants is liable as a direct participant with respect to the wrongs
complained of herein. In addition, defendants Veerina and McElwee, by reason of their stock
ownership and their status as officers and/or directors of Ramp, were "controlling persons"
within the meaning of Section 20 of the Exchange Act and had the power and influence to cause
Ramp to engage in the unlawful conduct complained of herein. Because of their positions of
control, defendants Veerina and McElwee were able to and did, directly or indirectly, control the
conduct of Ramp's business, the information contained in its filings with the SEC, and the public
statements about its business.
28. Defendants Veerina and McElwee are hereinafter referred to collectively as the
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281 In accordance with the Court’s Opinion and Order, dated March 1, 2002, the revised
Class Period referenced herein is January 24, 2000, through September 29, 2000.
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“Individual Defendants.” Ramp, Veerina and McElwee are hereinafter referred to collectively as
the “defendants.”
29. During the Class Period, defendants, individually and in concert, directly and
indirectly, engaged and participated in a continuous course of conduct to misrepresent the results
of Ramp's operations, and to conceal adverse material information regarding the finances,
financial condition, and results of operations of Ramp as specified herein. Defendants employed
devices, schemes, and artifices to defraud, and engaged in acts, practices, and a course of
conduct, as herein alleged, in an effort to increase and maintain an artificially high market price
for Ramp common stock. These activities included the formulating, making, and/or participating
in the making of untrue statements of material facts, and the omission to state material facts
necessary in order to make the statements made, in light of the circumstances under which they
were made, not misleading: such activities operated as a fraud or deceit upon plaintiffs and the
other members of the Class.
CLASS ACTION ALLEGATIONS
30. Plaintiffs bring this action as a class action pursuant to Rules 23(a) and 23(b)(3) of
the Federal Rules of Civil Procedure, individually and on behalf of all other persons or entities
who purchased or acquired Ramp stock during the Class Period (November 15, 1999, through
September 29, 2000)1 and were damaged thereby, excluding the defendants herein, their affiliates
and any officers or directors of Ramp or its affiliates, and any members of their immediate
families and their heirs, successors and assigns (the "Class").
31. The Class is so numerous that joinder of all the members of the Class is
impracticable. Plaintiffs believe there are hundreds of record holders of the Company's common
stock located throughout the United States.
32. Plaintiffs’ claims are typical of the claims of absent Class members. Members of
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the Class have sustained damages arising out of defendants' wrongful conduct in violation of the
federal securities laws in the same way as the plaintiffs have sustained damages from the
unlawful conduct.
33. Plaintiffs will fairly and adequately protect the interests of the Class. They have
retained counsel competent and experienced in class action and securities litigation.
34. A class action is superior to other available methods for the fair and efficient
adjudication of the controversy. The Class is numerous and geographically dispersed. It would
be impracticable for each member of the Class to bring a separate action. The individual
damages of any member of the Class may be relatively small when measured against the
potential costs of bringing this action, and thus make the expense and burden of this litigation
unjustifiable for individual actions. In this class action, the Court can determine the rights of all
members of the Class with judicial economy. Plaintiffs do not anticipate any difficulty in the
management of this suit as a class action.
35. Common questions of law and fact exist as to all members of the Class and
predominate over any questions affecting solely individual members of the Class. These
questions include, but are not limited to, the following:
a. Whether defendants' conduct as alleged herein violated the federal
securities laws;
b. Whether the SEC filings, press releases and statements disseminated to the
investing public during the Class Period misrepresented Ramp's financial
condition and results;
c. Whether defendants acted knowingly or with deliberate recklessness in
omitting and/or misrepresenting material facts;
d. Whether the market price of Ramp common stock during the Class Period
was artificially inflated; and
e. Whether the members of the Class have been damaged, and if so, what is
the proper measure of damages.
36. Plaintiffs will rely, in pertinent part, upon the presumption of reliance established
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by the fraud-on-the-market doctrine. The market for Ramp common stock was at all times an
efficient market for the following reasons, among others:
a. As a regulated issuer, Ramp filed periodic public reports with the SEC;
b. Ramp’s average daily trading volume during the Class Period was in
excess of 100,000 shares and it had market capitalization during the Class
Period in excess of $180 million;
c. Ramp disseminated information on a market-wide basis over various
electronic media services such as the Bloomberg newswires and also
issued press releases over PRNewswire; and
d. The market price of Ramp’s securities reacted efficiently to new
information entering the market;
e. According to the investor relations information available on the
Company’s website, during the Class Period a number of analysts
provided investors with research reports on Ramp, including Banc Boston
Robertson Stephens, Dain Rauscher Wessels, Pacific Crest, Chase H&Q
and Kaufmann Brothers.
FACTUAL BACKGROUND
37. On June 22, 1999, Ramp completed an IPO of 3,853,000 shares at $11.00 per
share. Before its acquisition by Nokia, Ramp primarily marketed and sold products through a
two-tier distribution structure which employed several national distributors who sold products to
a network of resellers, including value-added resellers (“VARs”), selected retail outlets, mail
order catalogs and ISPs, who then sold the products to end-users. As of December 31, 1999, the
Company had 142 employees of which 105 were located in the United States.
38. Prior to and during the Class Period, Ramp sold its products to distributors, such
as Ingram Micro, Tech Data, Merisel, Merit, Multiple Zones, Inc. (“MZI”) and Synnex who then
resold Ramp products to value-added resellers, selected retail outlets, mail order catalogs and
Internet Service Providers (ISPs). Ramp also sold its products to original equipment
manufacturers (OEMs) and companies working directly with Digital Subscriber Line (DSL)
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2 As a result of the decreasing importance of the Company’s analog products, investorreports issued by Kaufman Bros. L.P. during the Class Period reported that the investmentcommunity valued the Company primarily based on its broadband and security business.
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service providers or carriers.
39. Ramp’s quarterly report for the quarter ending June 30, 1999 reported that Ramp’s
revenue was derived primarily from its WebRamp family of products. In 1998, according to this
report, sales to Ingram Micro and Tech Data of these products accounted for 26% and 24%,
respectively, of Ramp’s revenues. Ramp recognized revenue from these sales, the report
continued, “upon transfer of title and risks of ownership which generally occurs upon product
shipment.” The quarterly report added that “we defer revenue on sales to certain distributors if
we determine that their inventory exceeds normal stocking levels.”
40. Ramp’s report for the quarter ended September 30, 1999 also reported that
Ramp’s revenue was derived primarily from its WebRamp family of products. For the first 9
months ending September 30, 1999, according to this report, sales to Ingram Micro and Tech
Data of these products accounted for 30% and 20%, respectively, of Ramp’s revenues. Ramp
recognized revenue from these sales, the report continued, “upon transfer of title and risks of
ownership which generally occurs upon product shipment.” The quarterly report added that “we
defer revenue on sales to certain distributors if we determine that their inventory exceeds normal
stocking levels” dependent only on timely and accurate information from distributors to make
such a determination.
41. During and following the introduction of the Company’s second generation of
WebRamp products, broadband technologies like DSL and cable modems began for the first time
to become viable options for small offices. In order to make its broadband technology more
attractive, in late 1999, Ramp began offering broadband platforms that incorporated security
features designed to prevent unauthorized access to small-office networks using shared Internet
connections. During the Class Period, demand for the Company’s analog products began to
soften as end-users turned their attention to the emerging broadband technologies.2 According to
Walter Allen, a former sales executive employed by Ramp for most of the Class Period, at the
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same time as its product line was changing, Ramp’s sales strategy changed, away from inside
sales to smaller customers, the majority of Ramp’s customer base, to broadband sales to larger
customers.
42. As a result of these sea changes, Ramp was required to carefully focus upon the
requirements of SFAS 48 as applied to Ramp’s accrual of revenues, with respect to both sales of
new products and sales to new customers. Specifically, SFAS 48 states that when a buyer has the
right to return merchandise purchased, the seller may not recognize income from the sale, unless
all of the following conditions are met:
a. The price between the seller and the buyer is substantially fixed or
determinable;
b. The seller has received full payment, or the buyer is indebted to the seller
and the indebtedness is not contingent on the resale of the merchandise;
c. Physical destruction, damage, or theft of the merchandise would not
change the buyer’s obligation to the seller;
d. The buyer has economic substance and is not a front, straw party or
conduit, existing for the benefit of the seller;
e. No significant obligation exists for the seller to help the buyer resell the
merchandise; and
f. A reasonable estimate can be made of the amount of future returns.
43. Only if all the above conditions are met, can the seller recognize revenue on a sale
for which a right of return exists subject to an appropriate provision for costs or losses that may
occur in connection with the return of product from the buyer. If all of the conditions of SFAS
48 are not met, a seller cannot recognize sales revenue until the right-of-return privilege has
substantially expired or the provisions of SFAS 48 are subsequently met based on changed
circumstances.
44. Even where all of the above conditions are met, a seller is only entitled to
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3 On July 27, 2000, for instance, Dain Rauscher Wessels issued an investor report onRamp estimating that the Company had little more than two quarters of cash remaining to fundoperations.
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recognize sales revenue as long as the seller’s revenue figures take into account a reasonable
estimate of returns. A seller in Ramp’s position in late 1999 – introducing a new product line
and shifting its focus to new, larger customers – needed to take into careful consideration both its
customers and the types of merchandise involved. Under SFAS 48, a number of the following
factors were likely to impair the ability of a seller in Ramp’s position to make the reasonable
estimate of returns necessary to enable Ramp to accrue revenue in accordance with GAAP:
a. Possible technological obsolescence or changes in demand for the
merchandise;
b. The length of the period that the customers have to exercise the right of
return;
c. Little or no past experience in determining returns for specific types of
merchandise;
d. Little or no past experience in determining returns for similar types of
merchandise;
e. A good chance that future marketing policies of the seller and/or the
relationship with its customers will change.
45. Throughout the Class Period, Ramp was dependent upon raising funds through the
sale of equity to fund its operations.3 As of December 31, 1999, the Company had an
accumulated deficit of $47.1 million. To attract desperately needed funds, it was therefore
essential that the Company continue to provide the appearance of a company with increasing
sales and revenues, particularly with regard to new products. Since Ramp had no long-term
customers of significant size except for distributors, it was necessary for Ramp both to convince
distributors to carry its products and to generate sufficient demand among small-office users of
Internet services to enable those distributors to sell Ramp products to resellers and ultimate
consumers. Commencing no later than the third quarter of 1999, defendants embarked on a
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scheme to create the appearance of market acceptance of its broadband products in order to
artificially inflate the price of its common stock. This scheme involved knowing or reckless
disregard of the requirements of GAAP which resulted in false and inflated reporting of revenues
both to the SEC and the investing public.
THE (ORIGINAL) CLASS PERIOD BEGINS
46. In a November 16, 1999 Company press release, entitled "Ramp Networks Survey
Reveals Small Businesses' Strong Demand for DSL Service," defendant Veerina hyped the
prospects for Ramp's forthcoming sales growth by stating:
Small businesses and branch offices depend on Internet-based applications to runtheir businesses and are increasingly choosing DSL as a cost effective, high-speedconnection for bandwidth-intensive needs. . . . This survey confirms theoverwhelming commitment from ISPs, carriers and VARs to bring DSL service totheir small business customers, and validates Ramp's partners, Ramp is solvingthe DSL provisioning puzzle for small businesses worldwide.
47. That same November press release went on to overstate the potential sales growth
related to the analog customer market:
Upgrading the installed base of analog customers to DSL is another virtuallyuntapped market for carriers and ISPs. Survey results indicate that 50 percent ofcustomers are good candidates to upgrade to DSL. Previous surveys conducted byRamp showed that 60 percent of its U.S. small business customers are interestedin adopting DSL service and equipment when it becomes available in their area,putting Ramp in an excellent position to benefit from upgrading the equipment ofa large proportion of its analog and ISDN customers.
48. In the Company's February 9, 2000 press release, entitled "Ramp Networks
Announces Fourth Quarter And Fiscal Year 1999 Results", the defendants stated:
Revenues for the fourth quarter of 1999 were $4.8 million, an increase of 62%over revenues of $3.0 million for the fourth quarter of 1998. For the year endedDecember 31, 1999, Ramp reported revenues of $18.2 million, an 85% increaseover revenues of $9.9 million reported for the year ended December 31, 1998.
49. In that same February press release, defendant Veerina misleadingly commented
on those results:
We are pleased with our year over year growth of 85% and with achieving a greatmilestone for the company in reaching the 100,000th customer mark . . . We alsosaw strong progress in the fourth quarter in expanding our broadband productportfolio, adding the WebRamp 600i ADSL router and the WebRamp 450i IDSLrouter to complement the WebRamp 500i and 510i SDSL products that we beganshipping Q3. This gives Ramp the broadest, most fully-featured family of DSLCPE in the industry, completely interoperable with more than 75% of all deployed
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DSLAMs.
50. On March 30, 2000, Ramp filed its annual report for the year ended December 31,
1999 on Form 10-K. In its 1999 10-K, Ramp again stated that its “revenue increased 85% to
$18.2 million for the year ended December 31, 1999 from $9.9 million for the year ended
December 31, 1998.” According to Ramp, the “increase was primarily due to increased sales of
the Company's WebRamp 200 and 300 series of analog products as well as sales of the new
ISDN WebRamp 410i product and the WebRamp 700 series for security” and “revenue growth
was reported in all geographic regions, with particular strength in North America.” However,
Ramp also reported that sales to Ingram Micro and Tech Data still accounted for 26% and 18%,
respectively, of Ramp’s revenue.
51. Regarding its revenue recognition policy, Ramp’s 1999 Form 10-K assured
investors that Ramp’s revenue accrual was accurate and in compliance with GAAP because the
Company had the ability to make reasonable estimates of returns, specifically stating that:
Ramp's revenue consists principally of amounts earned from the sale ofmanufactured products. Revenue is recognized upon transfer of title and risks ofownership, which generally occurs upon product shipment. Certain agreementswith distributors and retailers provide for rights of return, co-op advertising, priceprotection, and stock rotation rights. Ramp has reviewed the requirements ofSFAS No. 48, "Revenue Recognition When Right of Return Exists", and hasconcluded that they have sufficient history and experience to quantify reservesrequired for these provisions. Accordingly, Ramp provides an allowance forreturns and price adjustments and provides a warranty reserve at the point ofrevenue recognition. Reserves are adjusted periodically based upon historicalexperience and anticipated future returns, price adjustments, and warranty costs.
52. The statements contained in the foregoing press release and Form 10-K, regarding
revenues and increased sales of Ramp’s products were false and materially misleading because
defendants knew or recklessly disregarded that the Company's reported financial statements were
materially overstated. Ramp did not experience year-over-year revenue growth of 85% and the
market was not characterized by increased actual sales of WebRamp products. In fact, Ramp was
engaged in a deliberate and massive scheme involving fake sales, inflated sales, sales that were
incomplete due to unfettered rights of return and other contingencies and sales to distributors for
which no reasonable person would expect the product to “sell-through” to an end-customer.
Plaintiffs contend that Ramp’s results for the third and fourth quarters of 1999 were materially
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overstated and that Ramp should have restated its earnings to reflect the effect of its accounting
irregularities. A number of sources indicate that the true state of affairs in late 1999 was
different than presented by Ramp in the above press releases, such that Ramp’s recognition of
revenue for such sales violated the very GAAP principles Ramp claimed to be in compliance
with:
a. Confidential Witness No. 2, an operations specialist who worked at Ramp
from September 1999 until September 2000, and who was responsible for
shipping orders, indicated that on the last night of each quarter his
supervisor, Frank Ducker, remained at Ramp’s DCL warehouse facility in
Fremont, California ensuring that shipments were moved off the docks by
the end of the quarter. Ducker told Confidential Witness No. 2 that
revenue could only be booked if the product actually left the Company’s
loading docks. At each quarter’s end, so-called “sweeper” trucks would
come to temporarily take the product away from the docks, for about a
week, so that Ramp could book the shipment as revenue. After their
temporary removal by the “sweepers,” the products were returned to Ramp
within a week;
b. Confidential Witness No. 3, a technical support engineer at Ramp from
April 1999 until September 2000, similarly revealed that Ramp had
problems with its numbers because “it had a lot of product at the docks;”
c. Confidential Witness No. 4, who worked in Ramp’s business development
department from January until August 1999, revealed that Ramp’s sales
were “not great” during that time period and that Ramp “did not have any
big customers.” Ramp’s return policy for its sales to distributors during
that period, including Tech Data, Ingram Micro and Merisel , was that
returns were “left to the discretion of the distributor;”
d. Confidential Witness No. 5, a regional sales manager employed by Ramp
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from August 1998 until November 1999 revealed that Ramp’s distributors
during that period included Merisel, Ingram Micro, and Tech Data and that
he also heard that Ramp was sending product to the distributors and that
the distributors were sending it back;
53. In addition to the above facts, which establish that Ramp was aware that highly
questionable accounting practices, rather than actual sales, fueled Company growth in 1999, the
following facts demonstrate that throughout the Class Period both Ramp and the Individual
Defendants either knew that the true facts were different than they represented above or that they
recklessly disregarded the true facts in making their statements.
a. Defendant Timothy McElwee was directly responsible for “sales” to
distributors, with broad rights of return, which should not have been
booked as revenue; McElwee regularly discussed such sales and returns
with other senior executives:
(1) According to Confidential Witness No. 6, a hardware
engineer who worked at Ramp during the first four months
of 2000, Defendant McElwee, who was terminated by
Veerina just one month after the glowing February 2000
press release was issued, had been personally responsible
for “dumping” unwanted product at distributors in
exchange for payment of a fee to the distributors for storing
the merchandise. Confidential Witness No. 6 also said that
McElwee attended weekly executive management meetings
(whenever he was in town) where the subjects of product
returns, product development and product sales were
discussed. After each meeting, a list of returned product,
by product name, was circulated to senior management by
the customer service department. When McElwee was
“nailed” for all of the returns at the executive meetings, he
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tried to deflect the criticism by laughing it off.
Nevertheless, Veerina complained about the high returns
and eventually fired McElwee; and
(2) Walter Allen, a former Regional Sales Director, confirmed
that at weekly meetings between Veerina, Ramp’s Chief
Financial Officer and the Vice Presidents, McElwee
discussed the special deals he made and the various product
returns. Confidential Witness No. 6 indicated that
McElwee’s “bad deals” were with Ingram Micro, Tech
Data, Merisel, and a few other distributors.
b. Defendant Veerina was intimately involved in all aspects of the sales
process, including both sales and returns, and was therefore aware of the
facts which established that large numbers of “sales” did not qualify for
revenue recognition under SFAS 48:
(1) According to Allen, Veerina directly negotiated “many
shady deals,” including two deals which represented 64%
of Ramp’s sales for the second quarter of 2000 (one of the
quarters for which financial results later needed to be
restated);
(2) According to Confidential Witness No. 6, McElwee, as
former Vice President of worldwide sales, reported directly
to Veerina. As stated above, Veerina held weekly
executive meetings to discuss product sales and returns and
the deals made by McElwee;
(3) According to Confidential Witness No. 7, an employee who
worked in Ramp’s marketing department from March to
September 2000 and who reported to Sean Lewis, Ramp’s
chief of distribution, two of Ramp’s distributors, Ingram
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Micro and Tech Data, sent monthly sales reports which
showed their “sell through” figures for each month.
Confidential Witness No. 7 disclosed that Lewis reported
all sales information, such as these “sell through” numbers
directly to Veerina;
c. Defendant Veerina ran the Company as if it were his own small business,
rather than a public company, always manipulating the flow of
information:
(1) Walter Allen said that Veerina was a “micromanager” and
that “nothing happened without [Veerina’s] input;”
(2) Confidential Witness No. 6, indicated that Veerina had
been around the industry for a long time and made deals
with friends in the industry who later returned products.
Allen confirmed that Veerina made deals with his industry
friends whereby inventory would leave the premises, to
enable Ramp to meet its quarterly projections, and be
returned to Ramp after having been stored off-site at
Ramp’s expense;
(3) Confidential Witness No. 6, revealed that Veerina was a
“firm believer of nepotism,” in that Veerina’s wife, Sheila,
was the manager of systems testing, another relative was in
charge of Ramp’s office in India and yet another relative
was a Vice President in charge of new products.
Confidential Witness No. 6 also revealed that Sheila
Veerina who was responsible for quality control, “played
with the records” involving product returns of items from
which the shrink wrap had not been removed. Sheila
Veerina also kept the failure rate a secret, keeping that
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information from senior management;
(4) The weekly “return sheet” never had customer names on it.
When Confidential Witness No. 6 asked about the names of
customers returning products, he was told to stop asking
questions. In his opinion, everything was “super secret” at
Ramp. Consequently, because customer names were not
provided in connection with product returns, Confidential
Witness No. 6 indicated that it was possible that customers
never even existed and that “Ramp could have been
shipping everything to an empty parking lot.”
DEFENDANTS MATERIALLY OVERSTATE RAMP’S FINANCIALRESULTS FOR THE FIRST QUARTER OF FISCAL 2000
54. The first quarter of 2000 was the first quarter that the Company was able to ship
volume production of its complete line of WebRamp product designed for DSL. On January
24, 2000, Ramp issued a release on the PRNewswire touting its newly formed business
relationship with Telsource:
Telsource can take advantage of value-added Internet accesssolutions by offering the WebRamp to its customers.
“As the demand for small office high-speed Internet accesscontinues to grow, the need for single-source DSL installation,support and services has never been greater” said Jerry Jalaba,senior vice president of worldwide sales and support for RampNetworks. “Telsource is an ideal partner for Ramp because of itsstrong nationwide presence and leadership providing turn-keyprovisioning programs to a substantial list of carriers and largecorporate customers. This partnership is part of our continuingstrategy to broaden our channels in the important carrier andservice provider markets.”
“Telsource has built a reputation for reliability and expediency indelivering advanced network integration and support solutions,”said Frank Orga, vice president of sales and marketing forTelsource. “We want to be the nation’s leading DSL installationprovider by the end of this year. After evaluating a number of DSLequipment providers, we chose Ramp for its broad product line andvalue-added software offerings.”
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55. On January 25, 2000, Ramp issued another announcement concerning its
relationship with Telsource. Specifically, Ramp announced that Confidential Witness No. 8,
formerly of Telsource, had joined Ramp as an Area Vice President of Sales and would report to
Jerry Jalaba, Senior Vice President of Worldwide Sales and Support.
56. In an April 25, 2000, press release, entitled "RAMP Networks Announces First
Quarter Fiscal Year 2000 Financial Results" and subtitled "Company Reports Record DSL
Orders and Shipments," the defendants stated the following about the Company' sales
performance:
Revenues for the first quarter of 2000 were $5.6 million, an increase of 44% overrevenues of $3.9 million for the first quarter of 1999. Net loss was $5.5 million or$0.26 per basic and diluted share for the first quarter of 2000, compared to a netloss of $3.0 million or $0.71 per basic and diluted share for the same quarter ofthe prior year.
DSL orders and shipments drove our revenue growth this quarter . . . Orders forour broadband solutions exceeded our expectations and we are increasingproduction to meet the demand.
57. On May 11, 2000, Ramp filed its Form 10-Q for the first quarter of fiscal 2000,
ended March 31, 2000. As in the press release issued the previous month, Ramp reported that:
Revenue increased 44% to $5.6 million in the three months ended March 31,2000 from $3.9 million in the three months ended March 31, 1999. The increasewas primarily due to continued growth in the WebRamp 700 series of securityproducts and the introduction of our DSL products dominated by the Company'snew line of SDSL and ADSL products servicing the "broadband" market.Revenue growth was reported in all geographic regions, with particular strengthin North America reflecting the growth in the security and broadband products.
58. As admitted by defendants on November 14, 2000, after the close of the Class
Period, the foregoing statements were materially false and misleading and Ramp’s results of
operations were not properly reported to investors and the SEC in accordance with GAAP, even
though defendants had expressly claimed that their financial presentation complied with GAAP,
in general, and SFAS 48, in particular:
a. As Ramp later admitted, revenues for the first quarter of fiscal 2000 were
only $3.5 million, thus the May 11, 2000 announcement overstated first
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quarter revenues by an astonishing 60%;
b. Internal documents reveal that Ramp had virtually no POS DSL sales to
end users during the first quarter of 2000. Similarly, Ramp’s DSL sales
for the second quarter were abysmally paltry.
(i) POS DSL sales results reveal that Tech Data sold one (1) unit in
January of 2000; five (5) in February of 2000; seven (7) in March
2000; four (4) in April of 2000; and five (5) units in May of 2000.
The total revenue for these five months from DSL products sold
through Tech Data was $11,000.
(ii) For the month of January of 2000, Ingram Micro sold five (5) DSL
units; for the month of February of 2000 they sold two (2) units;
for the month of March 2000 they sold eleven (11) units; for the
month of April they sold three (3) units; for May of 2000 they sold
two (2) units; and for June of 2000 they sold eighteen (18) units.
The total revenue for the first six months of POS sales for DSL
products from Ingram, Ramp’s largest distributor, was a paltry
$17,000.
(iii) For the week ending May 5, 2000, Ramp had negative sales of one
(1) unit of DSL sales. For the weeks ending May 12th and May
26th, Ramp had dismal POS DSL sales of just two (2) units. In
addition, for the week ending May 19th, Ramp had POS DSL sales
of just four (4) units.
Given these dismal sales results, which Ramp was aware of, Ramp’s
preceding April 25th and May 11th statements regarding DSL markets were
knowingly false and/or consciously reckless, because Ramp was aware
that the Ramp’s DSL sales to distributors who were not obtaining any
meaningful sell-through. Moreover, for Ramp to have recognized virtually
any revenue with respect to DSL sales in the first quarter of 2000, given
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284 This is evidenced, in part, by Ramp’s first-time inclusion in its amended Form 10-
Q/A for the First Quarter, filed November 2000, of $5.214 million in “deferred revenues.”
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the dismal sell-through and lack of historical experience in this market,
was consciously reckless.
59. The admitted material misstatements of Ramp’s first quarter revenues were the
product of knowing or deliberately reckless misconduct by defendants. The sheer magnitude of
the admitted overstatement is itself determinative of defendants’ culpable intent herein. Ramp
was engaged in a scheme to artificially inflate its revenues by improperly accruing, in violation of
SFAS 48, fake sales, inflated sales, premature sales, and sales that were incomplete due to
unfettered rights of return and other contingencies and sales to distributors for which no
reasonable person would expect the product to “sell-through” to an end-customer.4 Specifically,
during the first quarter of fiscal 2000, Ramp recorded revenue under circumstances where
compliance with GAAP would not have permitted revenue accrual, including the following:
a. Walter Allen, who joined Ramp in early 2000, immediately noted that
Ramp regularly shipped products before there were signed purchase
orders. Allen revealed that he had never seen a company, other than
Ramp, that would ship product based upon the “slightest of verbal
commitments.” As a result, according to Allen, Ramp received numerous
returns. Similarly, Confidential Witness No. 8, a former Vice President of
sales employed by Ramp from January to August 2000, indicated that
Ramp would announce deals in press releases before there were any
purchase orders. However, because of “the nature of the DSL market,”
deals that initially “looked good often did not go anywhere;”
b. Confidential Witness No. 6, whose employment commenced in January
2000, revealed that McElwee (who was himself terminated at the end of
the quarter) “dumped” unwanted product at several distributors. To
induce them to take the product, McElwee paid a fee to the distributors
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for product storage. Confidential Witness No. 6, recalled that two of these
distributors were located in Seattle, Washington and San Jose, California.
Allen confirmed that Ramp’s distribution chief, Sean Lewis, paid both the
cost of storage and 1.5% interest to distributors ADP, Tech Data, MZI and
Ingram Micro so that they would take excess product;
c. Walter Allen disclosed that to induce them to take vastly more product
than they needed or could sell through to end-users, distributors such as
Ingram Micro, Tech Data, Merisel and others were granted the right to
return merchandise at any time. Allen also stated that Ingram Micro was
granted 100 days to make payment. This is particularly significant
because “sales” to Ingram Micro and Tech Data represented 56% of
Ramp’s sales for the first quarter of 2000, with each company’s sales
generating 28% of Ramp’s sales for the quarter. Allen further revealed
that certain deals with Ingram Micro were backdated. It was Allen's
opinion that Ramp intentionally inflated its numbers for Wall Street so that
the stock price would continue to rise;
d. During the first quarter of fiscal 2000, Confidential Witness No. 6 saw that
Ramp was receiving returns of $40,000 to $70,000 worth of product each
month, much of which was returned as purportedly defective. When
Confidential Witness No. 6 and others in the engineering department
began to test them, there were almost no product failures and there was no
justification for the $40,000-$70,000 return figures;
e. In conjunction with their testing of returned products, Confidential
Witness No. 6 and the other engineers noted that many returned products
had not even been opened. Confidential Witness No. 6 – who had already
become suspicious about the fact that returned merchandise was not
attributed on Ramp’s weekly “return sheets” to particular customers – was
told to stop asking questions about these returns. Both Allen and
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5 Ramp’s original Form 10-Q, filed May 11, 2000, reported the Telsource transactionas 14% of its revenues for the First Quarter. Whereas First Quarter revenues were originallyannounced as $5.6 million, 14% of this figure is approximately $784,000. Without discovery,plaintiffs do not have access to documents indicating the precise amount of the sale. However,plaintiffs can and do allege that Allen -- who did not personally negotiate the sale, but was aware ofboth the sale and the later return of nearly all of the product -- valued the sale at between $900,000and $1,000,000. Additionally, according to its Form 10-Q filed for the Second Quarter, Rampincreased its provision for doubtful accounts in the Second Quarter by $800,000. As acknowledgedin the Court’s March 1, 2002 Opinion at 21, defendants represented in their motion to dismiss theSecond Amended Complaint that the increase in doubtful accounts was related to this transaction.Therefore, in light of the fact that no witness indicated that there were two sales to Telsource – and,indeed, if there were, combined sales would have amounted to more than 14% of revenues –plaintiffs are informed, and believe, that the transaction referenced herein is the one for which Ramprecognized and reported revenues, as set forth in the Form 10-Q.
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Confidential Witness No. 6 later discovered that McElwee then devised a
scheme whereby he induced various distributors (such as the distributor in
San Jose who was willing to purchase excess inventory with an unfettered
right of return) to agree to hold inventory for 90 days and instructed them
to remove the shrink wrap from products they were returning to Ramp to
make it appear as if the product had sold through the distribution channels
to an ultimate end-user;
f. Confidential Witness No. 6 stated that Sheila Veerina manipulated the
return data such that Ramp reported a smaller amount of unopened
products had been returned than actually had been returned;
g. A large sale to Telsource, valued by Allen at between $900,000 and
$1,000,000, constituted a material portion of Ramp’s reported accrued
revenues of $5.6 million for the First Quarter of fiscal 2000.5 According
to Allen and Confidential Witness No. 8 (who had just joined Ramp and
had previously worked at Telsource), the terms of the deal required Ramp
to assist in the resale of the merchandise by Telsource. Specifically,
according to Confidential Witness No. 8, Ramp was to provide Telsource
with customer leads. According to Allen, when Ramp was unable to locate
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buyers for Telsource, $900,000 worth of product was returned and
Confidential Witness No. 8 was demoted. Allen’s and Confidential
Witness No. 8’s accounts are confirmed by Frank Orga, who, during the
Class Period, was Vice President of Sales at Telsource (and was quoted in
the Ramp press release of January 24, 2000 announcing the Telsource
transaction). Orga stated that he personally was involved in the
negotiation of Ramp’s First Quarter 2000 contract with Telsource, dealing
directly with Vice President of Business Development Bob Kondamoori
(defendant Veerina’s brother-in-law) and Senior Vice President of Sales,
Jerry Jalaba (who, according to the January 5, 2000, press release
announcing his appointment, reported directly to defendant Veerina).
According to Orga, pursuant to the terms of the deal, Telsource was not
obligated to pay for Ramp products unless Telsource could sell the product
through to end users. Also according to Orga, by the terms of the parties’
agreement, Ramp was obligated to provide sales assistance to Telsource,
in the form of Ramp providing customer leads for Telsource. (In fact,
Telsource had little sales force of its own and any Ramp products sold by
Telsource were sold pursuant to customer leads provided to Telsource
from Ramp.) Ultimately, Telsource sold very little of the Ramp product;
the vast majority was returned; and Telsource did not have to pay for the
returned products.
h. Based upon large distributors’ weekly reports to Ramp of “sell through”
figures, according to figures provided by Allen, Ramp was able to
determine that two of its largest distributors, Tech Data and Ingram Micro,
had, on average, a Class Period high of 24.3 weeks of inventory on hand or
“on order” during the first quarter of fiscal 2000. In light of the rapidly
changing nature of the technology at issue, these distributors would not
reasonably pay for both six months worth of product and the cost of
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storing said product. In addition, balance sheet data on the Company
showed steadily increasing accounts receivable days sales outstanding
(DSOs) from 63 in September of 1999 to 141 in June of 2000.;
i. Confidential Witness No. 2, revealed that on the last night of each quarter
his supervisor, Frank Ducker, remained at Ramp’s DCL warehouse facility
in Fremont, California ensuring that products were moved off the docks by
the end of the quarter. Ducker told Confidential Witness No. 2 that
revenue could only be booked if the product actually left the Company’s
loading docks. At each quarter’s end, so-called “sweeper” trucks would
come to take the product away from the docks temporarily, for about a
week, so that Ramp could book the shipment as revenue. After their
temporary removal by the sweepers, the products were returned to Ramp
within a few days;
j Confidential Witness No. 9, a former Ramp regional sales manager,
employed for five months in mid-2000, revealed that during the first
quarter of fiscal 2000, it was Ramp’s policy to book revenue when the
product left Ramp’s loading docks;
k. Confidential Witness No. 3, similarly revealed that Ramp had problems
with its numbers because “it had a lot of product at the docks;” and
l. Confidential Witness No. 10, a senior sales executive employed by Ramp
during fiscal 2000, disclosed that it was common practice at Ramp to book
shipments to distributors as revenue even though there was no end-user for
the product and the distributor had a right to return the products.
60. Despite these clear violations of GAAP, Ramp’s report for the quarter ended
March 31, 2000 represented that the Company’s financial statements for that period had been
prepared both in compliance with GAAP, generally, and, specifically, in compliance with SFAS
48:
The condensed consolidated financial statements have been prepared by Ramp,
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pursuant to the rules and regulations of the Securities and Exchange Commissionand include the accounts of Ramp Networks, Inc., and its wholly-owned subsidiary (collectively the "Company"). Certain information and footnotedisclosures, normally included in financial statements prepared in accordance withaccounting principles generally accepted in the United States, have beencondensed or omitted pursuant to such rules and regulations. In the opinion of theCompany, the unaudited financial statements reflect all adjustments, consistingonly of normal recurring adjustments, necessary for a fair presentation of thefinancial position at March 31, 2000 and the operating results and cash flows forthe three months ended March 31, 2000 and 1999.
Ramp's revenue consists principally of amounts earned from the sale ofmanufactured products. Revenue is recognized upon transfer of title and risks ofownership, which generally occurs upon product shipment. Certain agreementswith distributors and retailers provide for rights of return, co-op advertising, priceprotection, and stock rotation rights. Ramp has reviewed the requirements ofSFAS No. 48, "Revenue Recognition When Right of Return Exists", and hasconcluded that they have sufficient history and experience to quantify reservesrequired for these provisions. Accordingly, Ramp provides an allowance forreturns and price adjustments and provides a warranty reserve at the point ofrevenue recognition. Reserves are adjusted periodically based upon historicalexperience and anticipated future returns, price adjustments, and warranty costs.
61. Each of these statements was false and materially misleading because defendants
knew or recklessly disregarded that the Company routinely entered into deals with distributors
where the title and risks of ownership did not transfer upon product shipment because Ramp was
paying to store the merchandise with the customer and/or had agreed to ship the merchandise
with knowledge that the “buyer” intended to return the merchandise for full credit following the
end of the quarterly reporting period. Reported financial statements were materially overstated
due to the reasons set forth above. The statement that the Company had reviewed the
requirements of SFAS 48 and had determined that it was appropriate to book revenue on
shipments of Ramp products to such customers was also false and misleading because defendants
knew or recklessly disregarded that revenue recognition on sham transactions entered into solely
to boost quarterly revenue and sales numbers is a clear violation of GAAP. Even for those
customers who had agreed to attempt to resell Ramp’s merchandise to resellers, it was false and
misleading for the Company to represent that revenue recognition on these transactions was
acceptable under GAAP because such transactions were actually consignment sales and cannot
be booked as actual sales under any applicable accounting rules.
62. In addition to the above facts, which establish that Ramp was aware that highly
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questionable revenue recognition/consignment sales, rather than actual sales, fueled Company
growth during the first quarter of 2000, the following facts, in addition to those set forth in ¶¶63-
64, demonstrate that throughout the Class Period both Ramp and the Individual Defendants either
knew that the true facts were different than they represented above or that they recklessly
disregarded the true facts in making their statements:
a. Defendants were either aware or recklessly disregarded the fact that
distributors were carrying unreasonably high levels of Ramp products. By
defendants' own admission in the Company's 1999 10-K, Ramp had highly
automated internal support systems including database tracking
technologies. As set forth above, Ramp also had access to the POS reports
generated by, among others, Ingram Micro, Tech Data, Merisel, Merit and
Synnex which tracked weekly sell-through of Ramp products at these
distributors by dollar amount and unit quantity. Both Ingram Micro and
Tech Data also provided or made available to their vendors real-time
information regarding the sale of their products to resellers. Ingram
Micro, for instance, offered manufacturers like Ramp the opportunity to
receive detailed vendor buyer reports that track the sales of their products
by SKU and warehouse. Ingram Micro also has a scalable, full-featured
information system called IMpulse which enables it to provide worldwide,
real-time information to both suppliers like ramp and to reseller customers.
Through an on-line service, Tech Data customers can also obtain remote
access to Tech Data’s data processing system to check on real-time
product availability.
b. The sales and inventory information available to Ramp executives, as set
forth above, was supplemented by support services provided to resellers
and end-users which enabled the Company to identify purchasers of
WebRamp products. For broadband WebRamp products, as explained on
the Company’s Internet website, the Company required purchasers to
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apply to the Company before authorizing their initial purchase of DSL
routers from a distributor. These support services assisted Ramp in
gathering current information regarding the sales of its products to both
distributors like Ingram Micro, Tech Data, Merisel, Merit and Synnex and
by distributors to VARs and ultimate end-users.
c. Ramp primarily sold its products in North America through Ingram Micro
and Tech Data, which in 1999 accounted for 26% and 18%, respectively,
of the Company’s revenue. The Company’s 1999 S-1's filed with the SEC
attached copies of the distribution agreements between Ramp and Tech
Data and Ingram Micro. Significant terms, such as those relating to the
right of return, however, have been partially redacted from these
agreements on confidentiality grounds, but the terms remaining imply that
each distributors’ right of return is limited by time and/or quantity. The
Company’s publicly filed documents do not disclose that these limitations
have been modified or altered, either in writing or orally. According to
Tech Data’s 1999 Annual Report, however, the contracts between
manufacturers like Ramp and Tech Data generally contain stock rotation
and price protection provisions designed to protect the distributor from
risk of loss due to slow moving inventory, price reductions, product
updates or obsolescence. Tech Data’s 1999 Annual Report further notes
that industry practices regarding vendor relations “are sometimes not
embodied in agreements....” Ingram Micro’s 2000 Annual Report on
Form 10-K also reports that the distributor enters into agreements with
suppliers like Ramp to protect it from risk of loss due to technological
change and price reductions. Ingram Micro’s Annual Report further
discloses that industry practices regarding products and suppliers “are
sometimes not embodied in written agreements....”
d. On its website, Ingram Micro also explains to interested manufacturers the
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process by which it decides which products to carry in its inventory. As
part of that explanation, Ingram Micro states:
The role of a distributor varies, depending onwhether your products target new or establishedmarkets. Overall, our role is to broaden and/oraccelerate penetration into the reseller channel–notto create initial product demand. In establishedmarkets our role is primarily to provide productavailability and quick delivery, assume credit riskand leverage you with our large reseller base.It’s important not to view us as the final sale. The final sale is the transaction between thereseller and the end user. (Emphasis added)
63. Defendant McElwee was directly responsible for “sales” to distributors, with
broad rights of return, which should not have been booked as revenue. McElwee regularly
discussed such sales and returns with other senior executives:
a. According to Confidential Witness No. 6, McElwee, who was terminated
by Veerina in late March 2000, had been responsible for “dumping”
unwanted product at distributors in exchange for payment of a fee to the
distributors for storing the merchandise. Confidential Witness No. 6 also
indicated that McElwee attended weekly executive management meetings
(whenever he was in town) where the subjects of product returns, product
development and product sales were discussed. After each meeting, a list
of returned product, by product name, was circulated to senior
management by the customer service department. When McElwee was
“nailed” for all of the returns at the executive meetings, he tried to deflect
the criticism by laughing it off. Nevertheless, Veerina complained about
the high returns and eventually fired McElwee; and,
b. Walter Allen, a former Regional Sales Director during the first nine
months of 2000, confirmed that at weekly meetings between Veerina,
Ramp’s Chief Financial Officer and the Vice Presidents, McElwee
discussed the special deals he made and the various product returns.
Confidential Witness No. 6 indicated that McElwee’s “bad deals” were
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with Ingram Micro, Tech Data, Merisel, and a few other distributors.
64. Defendant Veerina was intimately involved in all aspects of the sales process,
including both sales and returns, and was therefore aware of the facts which established that large
numbers of “sales” did not qualify for revenue recognition under SFAS 48:
a. According to Allen, Veerina negotiated many of Ramp’s deals, including
many “shady deals”;
b. According to Confidential Witness No. 6, McElwee, as former Vice
President of Worldwide Sales, reported directly to Veerina. As stated
above, Veerina held weekly executive meetings to discuss product sales
and returns and the deals made by McElwee;
c. According to Confidential Witness No. 7, two of Ramp’s distributors,
Ingram Micro and Tech Data, sent monthly sales reports which showed
their “sell through” figures for each month. Confidential Witness No. 7
indicated that Lewis reported all sales information, such as these “sell
through” numbers directly to Veerina;
d. Defendant Veerina ran the Company as if it were his own small business,
rather than a public company, always manipulating the flow of
information:
(1) Allen stated that Veerina was a “micromanager” and that
“nothing happened without [Veerina’s] input;”
(2) Confidential Witness No. 6, indicated that Veerina had
been around the industry for a long time and made deals
with friends in the industry who later returned products.
Allen confirmed that Veerina made deals with his industry
friends whereby inventory would leave the premises, to
enable Ramp to meet its quarterly projections, and be
returned to Ramp after having been stored off-site at
Ramp’s expense;
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(3) Confidential Witness No. 6, indicated that Veerina was a
“firm believer of nepotism,” in that his wife was the
manager of systems testing, another relative was in charge
of Ramp’s office in India and yet another relative was a
Vice President in charge of new products. Confidential
Witness No. 6 also indicated that Veerina’s wife, who was
in charge of quality control, “played with the records”
involving product returns of items from which the shrink
wrap had not been removed. Sheila Veerina also kept the
failure rate a secret, keeping that information from senior
management;
(4) The weekly “return sheet” never had customer names on it.
When Confidential Witness No. 6 asked about the names of
customers returning products, he was told to stop asking
questions. In his opinion, everything was “super secret” at
Ramp. Consequently, because customer names were not
provided in connection with product returns, Confidential
Witness No. 6 indicated that it was possible that customers
never even existed and that “Ramp could have been
shipping everything to an empty parking lot.” Consistent
with this witness’s account, Allen indicated that all returns
were shipped to Ramp’s headquarters, rather than directly
back to the warehouse.
65. Shortly after the close of the Class Period, on November 14, 2000, Ramp filed an
amended quarterly report for the quarter ended March 31, 2000. Although Ramp had originally
reported a revenue increase of 44% from $3.9 million in the first three months of 1999 to $5.6
million in the three months ended March 31, 2000, “primarily due to continued growth in the
WebRamp 700 series of security products and the introduction of our DSL products dominated
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by the Company's new line of SDSL and ADSL products servicing the ‘broadband’ market” and
that “revenue growth was reported in all geographic regions, with particular strength in North
America,” the amended quarterly report showed a revenue decrease of 9% to $3.5 million based
on “lower revenues in U.S. distribution coupled with lower revenue to resellers in the U.S. and
Asia... reflect[ing] the transition in the market place of a move by customers to the purchase of
Broadband /DSL technologies.” The radically revised factual analysis of Ramp’s results for the
first quarter of 2000 shows diametrically opposite results of operations. This demonstrates that
Defendants’ GAAP violations which resulted in false and material misstatements of the
Company’s financial results for the quarter, were not just simple accounting errors. Rather, they
were made with either knowledge that Ramp’s SEC filing would thus be false and materially
misleading or with reckless disregard as to the truth or falsity of the figures contained in the
public filing. In particular, either there was a revenue increase attributable to “the introduction of
. . . DSL products dominated by the Company's new line of SDSL and ADSL products servicing
the ‘broadband’ market,” such that Ramp was required to “increase production to meet the
demand” for these products, as Veerina stated in the April 25, 2000, press release announcing
first quarter results, or, as later admitted, there was a decline in sales due to a period of transition
from analog to broadband products. Either there was “particular strength” in revenue growth in
North America (as initially reported) or there were lower revenues in sales and distribution in the
United States (as later reported). Because the revised figures reveal a drastic difference, between
continued success and a sales slump, defendants’ initial statements cannot be characterized as
mere accounting errors but false and misleading misstatements made with scienter.
66. Further evidence of defendants’ scienter is the manner in which Ramp described
its revised revenue recognition policies. Ramp’s amended quarterly report for the quarter ended
March 31, 2000, stated the following:
The condensed consolidated financial statements as of March 31, 2000 and for thethree months ended March 31, 2000 have been restated to reflect variousadjustments to the Company's previously reported financial statements for thethree month period ended March 31, 2000. These adjustments reflect a cumulativeeffect of accounting change as of January 1, 2000 for a change in the Company'srevenue recognition policy as well as adjustments to revenues previouslyrecorded to reflect the revised accounting policy for revenue recognition.
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In the first quarter of 2000, the Company launched a new sales and marketingcampaign that involved sales of new technology and products to both existing anda variety of new types of customers, including new customers serving therelatively new Digital Subscriber Loop (DSL) market. The DSL marketexperienced significant fluctuations in supply and demand in 2000. As a result,current customers and potential customers experienced delays in the provisioningof this marketplace which delayed demand for the Company's products. During2000, the Company has experienced changing business conditions and demand forproduct from its distributors. Specifically, the Company experienced lowerdemand for both new and existing products and a trend of increasing past dueaccounts receivable from its current distributors as well as from some of theCompany's new customers. The Company has now decided that this increase inpast due accounts receivable from distributors was a result of the distributors notpaying the Company until product was ultimately "sold through" to the customer.Additionally, certain new customers returned a significant portion of previouslysold product in amounts greater than had been estimated by the Company. In2000, the Company continued to apply revenue recognition accounting policies inaccordance with past practices. Revenue recognition was based on historicalexperience with long-term customer payment patterns and returns andconventional industry practices. In the third quarter of 2000, the Companyreassessed its receivable collection history and product returns history with itsmajor distributors as well as new customers, based upon the current marketdemand for the Company's products. As a result of this reassessment, theCompany determined that the negative trends in product sales demand anddelayed collection of receivable amounts was not a temporary trend. Thesesignificant changes in circumstances have necessitated a change in accountingpolicies for its current sales activity. The Company has decided to restate earlierquarters so that the accounting for revenue is consistent for all interim periods in2000.
The Company determined that given the current market, a more preferable methodof revenue recognition would be to defer the recognition of revenue. Under thisnew method, the Company will now record revenue on product shipped todistributors when the product is ultimately "sold through" to the customer.Additionally, the Company will now defer revenues for all other customers wherecollection and returns history is not proven until such activity reflects the "sellthrough" of products by Value Added Resellers ("VAR") and Managed ServiceProviders ("MSP").
The Company has changed its revenue recognition policy retroactive to January 1,2000. The result of the change in the revenue recognition policy was an increasein net loss of $1.3 million and an increase in deferred revenues. This amountrepresents the net amount of gross margin on shipments previously recorded forproduct shipped to the distributors, but not "sold through" to customers, as ofJanuary 1, 2000. This amount is included as a cumulative effect of change inaccounting policy in the accompanying financial statements for the three monthsended March 31, 2000. As such, the Company has restated amounts previouslyrecorded in its Forms 10-Q for the quarterly periods ended March 31, 2000 andJune 30, 2000 to reflect the changes in the revised revenue recognition policy andto properly account for certain third quarter 2000 returns of product that hadpreviously been recognized as revenue under the prior revenue recognition policy.
Previously the Company had reported revenue upon transfer of title and risk ofownership, which generally occurred upon product shipment. In the third quarterof 2000, the Company experienced negative trends of collections for one of its
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newer customers and determined that its past collection history with othercustomers was not a sufficiently reliable indicator of future collections on currentshipments to new customers. In addition, during the third quarter, anothercustomer returned product it had purchased in the first quarter in amountssignificantly greater than the Company had provided for at the time of sale. Ascollectibility could not be reasonably assured, the Company has revised itsrevenue recognition policy for new customers to defer revenue until amounts arecollected and a customer specific collection history has been established.
67. In the original Form 10-Q, filed for the quarter ended March 31, 2000, Ramp
specifically represented that the Company “has reviewed the requirements of SFAS No. 48,
‘Revenue Recognition When Right of Return Exists’, and has concluded that they have sufficient
history and experience to quantify reserves required for these provisions.” This statement was
falsely made even though defendants were fully aware that Ramp was just rolling out its new line
of broadband products and that it was redirecting its sales focus on new, larger customers -- two
major factors which precluded Ramp’s ability to accrue revenue because there was no reasonable
basis for the estimate of product returns when there was neither a history nor experience with
respect to new products and new customers. Thus, defendants’ after-the-fact revision based upon
the fact that they miscalculated the return rate of “new technology and products” sold, in part, to
“a variety of new types of customers,” was not based upon an honest miscalculation in the first
instance but rather an admission that defendants expressly ignored the requirements of SFAS 48
– which they claimed to be applying – when defendants initially reported Ramp’s first quarter
results.
68. Moreover, in the context of expanding sales to new customers, Ramp’s earlier
statement that it had “sufficient history and experience to quantify reserves” represented to the
market and potential investors that Ramp’s calculations took into account its overall past
experience with respect to product returns and collection of amounts due from new customers.
The restated Form 10-Q admitted that Ramp’s “history and experience” did not refer to its past
experience with its new customers but rather its history with established customers.
Consequently, in complete violation of SFAS 48, Ramp admitted that it accrued revenues when it
had no reasonable basis for determining either the payment rate for or the return rates of new
products being sold to new customers.
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69. Similarly, it was inconceivable that a company whose policy, on paper, is a
payment term of 30 days, only “decided” during the third quarter that an increase in past due
accounts during the First Quarter was based upon both existing and new customers withholding
payment until the product sold through. Clearly, at close of the First Quarter, Ramp was aware
of the fact that it had not yet collected payment on products sold in January and February.
Similarly, six weeks later, when it was preparing its Form 10-Q for the First Quarter, filed in
mid-May 2000, before Ramp booked sales, it had a duty to determine the reason why payment
for product which was sold during the First Quarter (with an outside payment date of April 30th,
for sales made on the last day of the quarter) was not yet received.
70. Finally, Ramp’s characterization of deferment of revenue recognition until a
product is sold through to an end-user as “a more preferable method” to the accrue-upon-
shipment method previously employed by Ramp falsely implied that it was proper for Ramp to
select either method. However, because Ramp specifically represented to investors that its
accounting methods complied with GAAP, there was never any such option. In order to comply
with the requirements of SFAS 48, particularly those concerning reasonable estimation of
returns, in a situation where brand new products were being sold to brand new customers, Ramp
was obligated from the outset to defer accrual of revenue until product sold through to end-users.
Given Ramp’s own representation that it understood and complied with the requirements of
SFAS 48, Ramp’s use of an accrual method which did not comply with SFAS 48 was knowingly
or consciously reckless.
DEFENDANTS MATERIALLY OVERSTATE RAMP’S FINANCIALRESULTS FOR THE SECOND QUARTER OF FISCAL 2000
71. On May 8, 2000, the Company issued a press release announcing a partnership
between Ramp and myCIO.com, a Network Associates, Inc. business, specializing in providing
managed network security and availability services for corporate e-business infrastructures. As
reported in Ramp’s Form 10-Q for the Second Quarter of 2000, the myCIO.com deal represented
29% of Ramp’s reported accrued revenues of $5.8 million for the Second Quarter, or $1,682,000.
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72. A May 31, 2000 analyst report prepared by Dain Rauscher Wessels strongly
reflected the distorted projections that the defendants disseminated to the investing public. That
report stated:
We caught up with Ramp's management to discuss the status of the company'sJune quarter along with some of the recently announced product and salesinitiatives. We believe the quarter is tracking ahead of expectations and weremain very comfortable with our June-quarter and fiscal 2000 estimates.
Stock Opinion: We remain optimistic with respect to the opportunities availableto Ramp and believe that the company is executing on its plan of becoming asignificant provider of value-added DSL CPE equipment. We anticipate that thecompany will continue to win business from large enterprise customers andbelieve some announcements will be made public in conjunction with theupcoming SUPERCOMM Conference in early June. We are upgrading RAMPshares to Strong Buy-Aggressive from Buy-Aggressive with a $24 price target,which represents 4.6x our 2001 revenue estimate. This valuation represents asignificant discount compared to other DSL equipment manufacturers and webelieve represents a significant buying opportunity for investors.
73. On July 25, 2000, the Company issued a press release announcing that it would be
postponing its release of its Second Quarter financials from July 25 to July 26. In its July 25,
2000, press release, the Company announced that it would be postponing its announcement of its
Second Quarter 2000 financial results to “allow Ramp's senior management and its auditors
additional time to complete the financials for the quarter ended June 30, 2000.” In its July 26,
2000 press release, entitled “Ramp Networks Announces Second Quarter Fiscal Year 2000
Financial Results” and subtitled “Company Reports Record DSL Orders and Shipments,” the
defendants again misstated the true picture of Ramp's sales performance and prospects by stating:
Ramp shipped a record $8.3 million of product in the second quarter of 2000. Thecompany posted more than 60% sequential growth in broadband/security productrevenue quarter over quarter. Revenues recorded for the second quarter were $5.8million, an increase of 27% over revenues of $4.5 million for the second quarterof 1999, and an increase of 4% over revenues of $5.6 million for the first quarterof 2000. For the six months ended June 30, 2000, Ramp reported revenues of$11.3 million, an increase of 35% over revenues of $8.4 million reported for thesix months ended June 30, 1999. Net loss was $7.1 million or $0.33 per basic anddiluted share for the second quarter of 2000, compared to a net loss of $2.5million or $0.45 per basic and diluted share for the same quarter of the prior year. Net loss for the six months ended June 30, 2000 was $12.6 million or $0.59 perbasic and diluted share, compared to a net loss of $5.4 million or $1.12 per basicand diluted share for the six months ended June 30, 1999.
74. On August 14, 2000, Ramp filed its quarterly report on Form 10-Q for the quarter
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ended June 30, 2000. For the Second Quarter of 2000, Ramp again stated that:
Revenue increased 27% to $5.8 million in the three months ended June 30, 2000from $4.5 million in the three months ended June 30, 1999. The increase wasprimarily due to continued growth in the WebRamp 700 series of securityproducts and growth in our Broadband products dominated by the Company's lineof SDSL and ADSL products servicing the “broadband” market.
Ramp also reported that 35% of its revenues for the Second Quarter were derived from sales to
Xiao Tong Electronics Company, the largest networking products distributor in China.
75. As admitted by defendants on November 14, 2000, after close of the Class Period,
the foregoing statements were materially false and misleading and Ramp’s results of operations
were not properly reported to investors and the market. As Ramp later admitted, revenues for the
Second Quarter of fiscal 2000 only increased approximately 9.8%, even though defendants
originally reported a revenue increase nearly three times greater.
76. The admitted material misstatements of Ramp’s Second Quarter revenues were
the product of knowing or deliberately reckless misconduct by defendants. Ramp was engaged in
a deliberate and massive scheme involving fake sales, inflated sales, premature sales, sales that
were incomplete due to unfettered rights of return and other contingencies and sales to
distributors for which no reasonable person would expect the product to “sell-through” to an end-
customer. Specifically, during the Second Quarter of fiscal 2000, Ramp recorded revenue or
reported “deferred revenue” under circumstances where compliance with GAAP would not have
permitted revenue accrual, including the following:
a. Confidential Witness No. 2 disclosed that a six-figure order was placed in
either April or May 2000 by a customer named Micromatix. The order
was supposed to be shipped from the DCL warehouse to Micromatix. The
order was shipped in two parts. The second part of the order was returned
to Ramp at a later date because Micromatix “had nowhere to hold” the
remaining merchandise. Nevertheless, Confidential Witness No. 2
revealed that the canceled portion of the order was “counted as revenue”
by Ramp. Confidential Witness No. 10, a senior sales executive during
most of the Class Period, confirmed that Micromatix was indeed a small
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company and that a six-figure order was a big order for a company of that
size. According to this witness, the order was placed by Micromatix
because its Chief Executive Officer was a friend of Veerina. This witness
was under the impression that the second portion of the order was shipped
back to Ramp after being held for a period of time which spanned two
different quarters and that Micromatix was given a partial credit for the
portion of the order returned;
b. Confidential Witness No. 9, revealed that agreements with distributors
made during this period included an “RMA” provision, the acronym for
“return merchandise authorized.” Similarly, Confidential Witness No. 10
indicated that it was common practice at Ramp to accrue revenue on
shipments to distributors who had a right of return;
c. Evaluating the situation created by McElwee’s product dumping activities
(which were conducted until his termination at the end of the first quarter
of fiscal 2000), Confidential Witness No. 10 commented to Allen that
McElwee had so “stuffed the channels” with inventory that Ramp may
never recover from it;
d. According to Walter Allen, during the Second Quarter of fiscal 2000,
deals were made with the following distributors which Ramp booked as
revenue even though the products were sent to the distributors’ channels
with rights of return: MZI, myCIO.com, Ingram Micro, Tech Data,
Merisel, Northpoint, and several others. With respect to the MZI and
myCIO.com deal the end-users specifically provided that they did not need
to purchase large quantities all at once and would prefer to purchase
smaller quantities as needed. Because Ramp needed a large revenue
infusion up front to make up for prior returns of product previously
dumped by McElwee, there was pressure brought to bear by Ramp’s senior
management to close deals for larger amounts than the customer desired or
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else Allen would face termination. The Ponzi scheme was kept alive as
long as the witness was able to induce larger purchases by offering free
financing, warehousing space, joint marketing funds and other discounts.
e. Even though Ramp reported that 35% of its $5.8 million in accrued
revenues for the Second Quarter of 2000, ended June 30, 2000, was
attributable to sales to Xiao Tong Electronic Company, had Ramp actually
complied with SFAS 48 – which Ramp falsely claimed to have done –
Ramp could not have properly accrued such revenues in the Second
Quarter. Specifically:
(i) A July 18, 2000, press release issued by Ramp to announce
the deal, stated that the parties had held a private signing
ceremony for the deal in Beijing earlier in the month.
Consequently, Ramp booked revenues from the transaction
in June 2000, before the contract was actually signed;
(ii) Allen revealed that Veerina and his brother-in-law, Vice
President of Business Development, Bob Kondamoori
negotiated this deal. Based upon a meeting Allen attended
with Veerina and Kondamoori where the deal was
discussed, Allen concluded that this deal was one of those
deals where a friend of Veerina’s agreed to hold
merchandise for Ramp so that Ramp could book the
revenue.
(iii) Confidential Witness No. 2 -- who had worked at Ramp
from September 1999 until September 2000 and was
responsible for shipping international orders, including,
specifically, the Xiao Tong order -- indicated that Ramp
products were never scheduled to be shipped to Xiao
Tong’s facility in China during the Second Quarter of 2000.
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According to Confidential Witness No. 2, at midnight on
the last day of that quarter, the equipment was shipped from
Ramp’s facilities with the help of “sweeper” trucks. (As
explained above, according to Confidential Witness No. 2,
“sweepers” were situations in which Ramp would hire an
outside shipping company, usually a San Jose-based
company called Viking, to take the product from Ramp’s
facility on trucks and store it in an “out-source warehouse,”
so that Ramp could recognize revenue from the
transaction.) Confidential Witness No. 2 recalls that
Viking took the Xiao Tong product late at night on the last
night of the Second Quarter in a “sweeping” transaction.
The product was stored at an out-source warehouse that
Ramp used, and the product was never shipped to China
during the Second Quarter of fiscal 2000.
.f. Even though Ramp reported that 29% of its $5.8 million in accrued
revenues for the Second Quarter of 2000, ended June 30, 2000, was
attributable to sales to myCIO.com, a Networks Associates company, had
Ramp actually complied with SFAS 48 – which Ramp falsely claimed to
have done – Ramp could not have properly accrued such revenues in the
Second Quarter. Specifically:
(i) According to both Allen and Confidential Witness No. 10, the
myCIO.com deal was another deal engineered exclusively by
Veerina, who negotiated directly with the myCIO.com
representatives. According to Allen, Veerina “wined and dined”
the myCIO.com executives and excluded senior sales personnel
from the meeting where the deal was closed. According to
Confidential Witness No. 10, Veerina negotiated the deal with one
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of his friends;
(ii) Another Ramp employee, Confidential Witness No. 6, a hardware
engineer who worked at Ramp confirms that Veerina negotiated
the myCIO.com deal by himself and kept all the terms of the deal
“hush hush;”
(iii) Allen revealed that the myCIO.com deal was an instance where the
purchaser “warehoused” Ramp merchandise so that Ramp could
accrue the transaction as revenue. Similarly, Confidential Witness
No. 6 states that to his knowledge the products that were allegedly
“sold” to myCIO.com in the Second Quarter of 2000 were never
actually shipped to the customer. Confidential Witness No. 6
believes, by virtue of his position with Ramp at the time, he would
have known had the product actually been shipped to the customer;
(iv) A class action complaint filed in this Court on or about September
24, 2001, In re Network Associates, Inc. II Securities Litigation,
No. CV-00-4849-MJJ, supports the accounts of the witnesses
referenced above. The allegations contained therein aver:
(A) Network Associates’ officers agreed “to issue purchase
orders for products that Network Associates had no
intention of purchasing in exchange for a substantial fee;”
(B) Details of a meeting between defendant Veerina, and
Prabhat Goyal, Network Associates’ CFO. It is alleged that
“[d]uring the meeting, Veerina asked Goyal if Network
Associates could ‘hold’ $2 million in Ramp Network’s
inventory so that Ramp Networks could book revenue on
such a sale. Veerina further explained that Ramp Networks
would accept a return of the products in a ‘couple of
months.’” The complaint further alleges: “However,
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Goyal insisted that he would only agree to accept Ramp
Network’s inventory if Ramp Networks would pay
$250,000 to Network Associates and $250,000 to its
subsidiary, myCIO.com. Goyal referred to these payments
during this meeting as ‘blood money.’”
(C) The same day, Goyal instructed Network Associates to
issue a purchase order for $2 million in Ramp Networks
product. Goyal also instructed Veerina to have Ramp
Networks issue two separate purchase orders: one to be
delivered to Network Associates and the other to
myCIO.com.
(D) Goyal then instructed Gay Lockwood, a Network
Associates sales representative, and another high ranking
Network Associates employee to pick up the “blood
money” from Ramp; and
(v) Confidential Witness No. 11, former director of marketing for
Ramp, was responsible for setting up a marketing strategy for the
myCIO.com relationship after myCIO.com signed a letter of intent
to enter a joint marketing relationship with Ramp sometime around
April or May 2000. Confidential Witness No. 11 states that her
phone calls and emails to myCIO.com went unreturned and she
formed the opinion that “they had no interest” in finding end users
for Ramp’s products. She said, “you could just tell that
[myCIO.com] had no desire to sell the stuff.”
77. Despite these clear violations of SFAS 48, Ramp’s quarterly report for the period
ended June 30, 2000 represented that the Company’s financial statements for that period had
been prepared both in compliance with GAAP, generally, and, specifically, in compliance with
SFAS 48:
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The condensed consolidated financial statements have been prepared by Ramp,pursuant to the rules and regulations of the Securities and Exchange Commissionand include the accounts of Ramp Networks, Inc., and its wholly-ownedsubsidiary (collectively the "Company"). Certain information and footnotedisclosures, normally included in financial statements prepared in accordance withaccounting principles generally accepted in the United States, have beencondensed or omitted pursuant to such rules and regulations. In the opinion of theCompany, the unaudited financial statements reflect all adjustments, consistingonly of normal recurring adjustments, necessary for a fair presentation of thefinancial position at June 30, 2000 and the operating results and cash flows for thethree months and six months ended June 30, 2000 and 1999.
Ramp's revenue consists principally of amounts earned from the sale ofmanufactured products. Revenue is recognized upon transfer of title and risks ofownership, which generally occurs upon product shipment. Certain agreementswith distributors and retailers provide for rights of return, co-op advertising, priceprotection, and stock rotation rights. Ramp has reviewed the requirements ofSFAS No. 48, "Revenue Recognition When Right of Return Exists", and hasconcluded that they have sufficient history and experience to quantify reservesrequired for these provisions. Accordingly, Ramp provides an allowance forreturns and price adjustments and provides a warranty reserve at the point ofrevenue recognition. Reserves are adjusted periodically based upon historicalexperience and anticipated future returns, price adjustments, and warranty costs.
78. Each of these statements were false and materially misleading because defendants
knew or recklessly disregarded that the Company routinely entered into deals with distributors
where the title and risks of ownership did not transfer upon product shipment because Ramp was
paying to store the merchandise with the customer and/or had agreed to ship the merchandise
with knowledge that the “buyer” intended to return the merchandise for full credit following the
end of the quarterly reporting period. Reported financial statements were materially overstated
due to the reasons set forth above. The statement that the Company had reviewed the
requirements of SFAS 48 and had determined that it was appropriate to book revenue on
shipments of Ramp products to such customers was also false and misleading because defendants
knew or recklessly disregarded that revenue recognition on sham transactions entered into solely
to boost quarterly revenue and sales numbers is a clear violation of GAAP. Even for those
customers who had agreed to attempt to resell Ramp’s merchandise to resellers, it was false and
misleading for the Company to represent that revenue recognition on these transactions was
acceptable under GAAP because many of these transactions were actually contingent sales which
could not be booked as actual sales because there was no historical basis from which to
reasonably estimate returns.
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79. The above facts, as well as those alleged in ¶62, establish that Ramp was aware
that sham transactions, rather than actual sales, fueled Company growth during the Second
Quarter of 2000. In addition to the facts alleged in ¶64, the following facts demonstrate that both
Ramp and Veerina either knew that the true facts regarding Ramp’s Second Quarter revenues and
Ramp’s compliance with GAAP -- or lack thereof -- were different than they represented above
or that they recklessly disregarded the true facts in making their statements:
a. As alleged above, Veerina was the primary negotiator on the myCIO.com
and Xiao Tong deals as to which Ramp recognized 64% of its revenues for
the Second Quarter;
b. According to Allen, Veerina knew that both of these deals were no more
than inventory parking for the purposes of revenue recognition;
80. On November 14, 2000, Ramp filed its amended quarterly report for the quarter
ended June 30, 2000. Although Ramp had originally reported a revenue increase of 27% to $5.8
million from $4.5 million in the three months ended June 30, 1999 “primarily due to continued
growth in the WebRamp 700 series of security products and growth in [Ramp] Broadband
products dominated by the Company’s line of SDSL and ADSL products servicing the
‘broadband’ market,” the amended quarterly report showed a revenue increase of only 9.8% to $5
million in the three months ended June 30, 2000.
81. Evidence of defendants’ scienter with respect to the initial misrepresentation of
revenue is found in Ramp’s curious reporting of customers whose sales represent more than 10%
of Ramp’s revenues for the second quarter. In the Form 10-Q initially filed, Ingram Micro was
listed at 12% of revenues, Tech Data at 9% of revenues, myCIO.com at 29% of revenues and
Xiao Tong at 35% of revenues. In the restated and amended Form 10-Q, no customers are
identified by name. Instead, they are only referred to as “Customers A-C.” Based upon the fact
that Customers A and B represented 31% and 19% of Ramp’s revenues for the six months ended
June 30, 1999, and, as alleged in ¶38 above, Ingram Micro and Tech Data, respectively,
represented 30% and 20% of Ramp’s revenues for the nine months ended September 30, 1999,
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Customers A and B are in fact Ingram Micro and Tech Data. The only conceivable reason that
the identities of the various significant customers is cloaked in secrecy is that only one of the two
largest sources of revenue reported in the initial filing, either Xiao Tong (34%) or myCIO.com
(29%) remained significant, i.e. above 10% after the restatement, and that defendants sought to
hide this fact.
82. Further evidence of defendants’ scienter is the manner in which Ramp described
its revised revenue recognition policies. Ramp’s amended quarterly report for the quarter ended
June 30, 2000 also stated the following:
The condensed consolidated financial statements as of June 30, 2000 and for thethree and six month period ended June 30, 2000 have been restated to reflect various adjustments to the Company's previously reported financial statements forthe three and six month period ended June 30, 2000. These adjustments reflect acumulative effect of accounting change as of January 1, 2000 for a change in the Company's revenue recognition policy as well as adjustments to revenuespreviously recorded to reflect the revised accounting policy for revenuerecognition.
In the first quarter of 2000, the Company launched a new sales and marketingcampaign that involved sales of new technology and products to both existing anda variety of new types of customers, including new customers serving therelatively new Digital Subscriber Loop (DSL) market. The DSL marketexperienced significant fluctuations in supply and demand in 2000. As a result,current customers and potential customers experienced delays in the provisioningof this marketplace which delayed demand for the Company's products. During2000, the Company has experienced changing business conditions and demand forproduct from its distributors. Specifically, the Company experienced lowerdemand for both new and existing products and a trend of increasing past dueaccounts receivable from its current distributors as well as from some of theCompany's new customers. The Company has now decided that this increase inpast due accounts receivable from distributors was a result of the distributors notpaying the Company until product was ultimately "sold through" to the customer.Additionally, certain new customers returned a significant portion of previouslysold product in amounts greater than had been estimated by the Company. In2000, the Company continued to apply revenue recognition accounting policies inaccordance with past practices. Revenue recognition was based on historicalexperience with long-term customer payment patterns and returns andconventional industry practices. In the third quarter of 2000, the Companyreassessed its receivable collection history and product returns history with itsmajor distributors as well as new customers, based upon the current marketdemand for the Company's products. As a result of this reassessment, theCompany determined that the negative trends in product sales demand anddelayed collection of receivable amounts was not a temporary trend. Thesesignificant changes in circumstances have necessitated a change in accountingpolicies for its current sales activity. The Company has decided to restate earlierquarters so that the accounting for revenue is consistent for all interim periods in2000.
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The Company determined that given the current market, a more preferable methodof revenue recognition would be to defer the recognition of revenue. Under thisnew method, the Company will now record revenue on product shipped todistributors when the product is ultimately "sold through" to the customer.Additionally, the Company will now defer revenues for all other customers wherecollection and returns history is not proven until such activity reflects the "sellthrough" of products by Value Added Resellers ("VAR") and Managed ServiceProviders ("MSP").
The Company has changed its revenue recognition policy retroactive to January 1,2000. The result of the change in the revenue recognition policy was an increasein net loss of $1.3 million and an increase in deferred revenues. This amountrepresents the net amount of gross margin on shipments previously recorded forproduct shipped to the distributors, but not "sold through" to customers, as ofJanuary 1, 2000. This amount is included as a cumulative effect of change inaccounting policy in the accompanying financial statements for the six monthsended June 30, 2000. As such, the Company has restated amounts previouslyrecorded in its Forms 10-Q for the quarterly periods ended March 31, 2000 andJune 30, 2000 to reflect the changes in the revised revenue recognition policy andto properly account for certain third quarter 2000 returns of product that hadpreviously been recognized as revenue under the prior revenue recognition policy.
Previously the Company had reported revenue upon transfer of title and risk ofownership, which generally occurred upon product shipment. Provisions were alsomade for estimated normal returns. The adjustment represents the net effect ofchanging the revenue recognition method to a preferable method of recordingrevenue after the distributor has "sold through" the product to the ultimate enduser. The Company believes this method more accurately reflects revenue due tothe changes in market conditions and actual payment patterns of distributioncustomers using the criteria set forth under the SAB No. 101 interpretations andthe requirements of SFAS No. 48.
These adjustments represent the net impact of the Company revising its revenuerecognition policy related to new customers. Previously the Company hadreported revenue upon transfer of title and risk of ownership, which generallyoccurred upon product shipment. In the third quarter of 2000, the Companyexperienced negative trends of collections for one of its newer customers anddetermined that its past collection history with other customers was not asufficiently reliable indicator of future collections on current shipments to newcustomers. In addition, during the third quarter, another customer returned productit had purchased in the first quarter in amounts significantly greater than theCompany had provided for at the time of sale. As collectibility could not bereasonably assured, the Company has revised its revenue recognition policy fornew customers to defer revenue until amounts are collected and a customerspecific collection history has been established.
At June 30, 2000 the Company has recorded deferred revenue of $7.5 million. Thedeferred revenue represents shipments of product to customers where title haspassed and the Company has invoiced the customer. However, to the extent thatproduct is returned to the Company or credits are approved, this deferred revenuewill not result in revenue to the Company. As stated, this deferred revenue willresult in revenue when sold through by the distributors or to the extent VAR's andMSP's pay on their account based on sales to their customers.
83. In the Form 10-Q, initially filed for the second quarter, Ramp specifically
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represented that the Company “has reviewed the requirements of SFAS No. 48, ‘Revenue
Recognition When Right of Return Exists,’ and has concluded that they have sufficient history
and experience to quantify reserves required for these provisions.” This statement was falsely
made even though defendants were fully aware that Ramp had just rolled out its new line of
broadband products and that it was redirecting its sales focus on new, larger customers, two
major factors which impair one’s ability to accrue revenue because there is no reasonable basis
for the estimate of product returns when there is neither history nor experience with respect to
new products and new customers. Thus, defendants’ after-the-fact revision based upon the fact
that they miscalculated return rate of “new technology and products” sold, in part, to “a variety of
new types of customers,” was not based upon an honest miscalculation in the first instance but
rather an admission that defendants expressly ignored the requirements of SFAS 48 – which they
claimed to be applying – when defendants initially reported Ramp’s first quarter results.
84. Moreover, in the context of expanding sales to new customers, Ramp’s earlier
statement that it had “sufficient history and experience to quantify reserves” represented to the
SEC and potential investors that Ramp’s calculations took into account its overall past
experience with respect to product returns and collection of amounts due from new customers.
The restated Form 10-Q shockingly revealed that Ramp’s “history and experience” did not refer
to its past experience with new customers but rather its history with established customers.
Consequently, in complete violation of SFAS 48, Ramp admitted that it accrued revenues when it
had no reasonable basis for determining the either the payment rate for or the return rates of new
products being sold to new customers. This point is made strikingly clear with respect to the
missing “Customer D” whose returns and/or failure to pay for product dropped its percentage as
a source of Ramp’s revenues from either 29% or 34% to less than 10% (the minimum reporting
percentage) of the lower restated earnings figure.
85. Similarly, it is inconceivable that a company whose policy, on paper, is a payment
term of 30 days, only “decided” during the third quarter that an increase in past due accounts
during the first quarter was based upon both existing and new customers withholding payment
until the product sold through. Clearly, at close of the Second Quarter, Ramp was aware of the
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fact that it had not yet collected payment on products sold in April and May. Similarly, six
weeks later, when it was preparing its Form 10-Q for the first quarter, filed in mid-August 2000,
before Ramp booked sales, it had a duty to determine the reason why payment for product which
was sold during the first quarter (with an outside payment date of July 31st), for sales made on
the last day of the quarter) was not yet received.
86. Finally, Ramp’s characterization of deferment of revenue recognition until a
product is sold through to an end-user as “a more preferable method” to the accrue-upon-
shipment method previously employed by Ramp falsely implies that it was proper for Ramp to
select either method. However, because Ramp specifically represented to investors that its
accounting methods complied with GAAP, there was never any such option. In order to comply
with the requirements of SFAS 48, particularly those concerning reasonable estimation of
returns, in a situation where brand new products were being sold to brand new customers, Ramp
was obligated from the outset to defer accrual of revenue until product sold through to end-users.
Given Ramp’s own representation that it understood and complied with the requirements of
SFAS 48, Ramp’s use of an accrual method which did not comply with SFAS 48 was knowing or
consciously reckless.
87. In fact, during the Second Quarter of 2000, defendants were well aware or
recklessly disregarded that Ramp was shipping its products to distributors on a consignment basis
at the time of shipment. Defendants were also aware, as alleged above, that other shipments
were merely sham transactions entered into merely to artificially inflate the Company’s revenues
and share price. As a result, the Company did not suddenly determine, based on subsequent
events, that recent changes in distributor practices and sales trends required a change in
accounting policies; instead, the defendants knew or recklessly disregarded that during the
entirety of the Class Period that its accounting policies were not in accordance with GAAP for
the reasons set forth above. The restatement of the second quarter’s financial results, as set forth
above, resulted not from a failure to make accurate estimates of returns but from an intentional or
reckless misapplication of GAAP.
RAMP’S SEPTEMBER 29, 2000 ANNOUNCEMENT
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88. In its September 29, 2000 press release, entitled "Ramp Expects Significantly
Lower Third Quarter Revenue and Earnings; Announces Restructuring to Support Product
Transition," defendants began to describe the disastrous results that they previously
misrepresented throughout the Class Period:
Ramp Networks (Nasdaq:RAMP) today announced that it expects revenues andearnings for the third quarter ending September 30, 2000 to be significantly lowerthan the revenue and earnings recorded in the prior quarter ended June 30, 2000.The company also announced a restructuring of its operations, including a 21%workforce reduction and a focus on broadband managed security products.
The Company indicated that it expects to report third quarter revenues no higherthan $1 million, and that the final number could be substantially lower. As aresult, the Company expects the third quarter loss per basic and diluted sharebetween $0.50 and $0.53, compared with a loss of $0.33 per basic and dilutedshare in the quarter ended June 30, 2000.
89. The expected loss announced in the Company's September 29 press release greatly
exceeded the consensus analyst estimate compiled by First Call which was for a 30
cents-per-share loss for the third quarter 2000.
90. In that same September press release, defendant Veerina failed to disclose the fact
that these disastrous results were due to the Company's misrepresentation of financial results,
instead, wrongly attributing them to ". . . DSL deployment delays and slower than expected
rollouts in enterprise remote offices."
91. An October 2, 2000 analyst report prepared by Dain Rauscher Wessels stated:
Ramp pre-announced another disappointing quarter. The company announced onFriday that they expect revenues and earnings to be substantially below June-quarter levels. Revenues are expected to come in below $1 million, which issignificantly below our recently reduced expectation of $5.7 million. Earnings areexpected to come in between a loss of $0.50-$0.53 per share.
Stock Opinion: Ramp Networks has continually disappointed Wall Street and thispoor performance is reflected in the company's depressed stock price.
92. As a result of the Company's shocking late September 29th announcement of a
substantial shortfall in third quarter 2000 earnings, Ramp's stock price plummeted from its
Friday, September 29th close of $3.5312 to open on Monday, October 2nd at $2.375 and to close
even lower that day at $2.0625, on massive trading volume of 918,800 shares.
DEFENDANTS' FALSE AND MISLEADING STATEMENTS
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93. During the Class Period, defendants materially misled the investing public,
thereby inflating the price of Ramp securities, by publicly issuing false and misleading
statements and omitting to disclose material facts necessary to make defendants' statements, as
set forth herein, not false and misleading. Said statements and omissions were materially false
and misleading in that they failed to disclose material adverse information and misrepresented
the truth about the Company.
94. Throughout the Class Period, the Company falsely booked revenue on sham
transactions, such as set forth in ¶¶ 53, 63-64, 76 and 79, where friends of defendant Veerina or
other companies purchased Ramp products simply to falsely inflate the Company’s quarterly
revenue with the expectation on both sides that the product would be returned following the close
of the quarter for full credit.
95. Pursuant to SFAS 48, it was not appropriate for the Company to book revenue on
transactions, such as set forth in ¶ 76, where the buyer and Ramp had not agreed to price and
other payment terms in that the price was not fixed or determinable and the product was not
shipped to the customer during the fiscal quarter in which the revenue was accrued.
96. Pursuant to SFAS 48, it was not appropriate for the Company to book revenue on
transactions, such as set forth in ¶¶ 59 and 76, where the buyer had the unfettered right to return
products to Ramp if they did not sell through to ultimate users and did not have an obligation to
pay Ramp until and only to the extent that product had been sold by the distributor to ultimate
consumers or resellers.
97. Even where the customers’ right to return product may have been limited in some
significant way, it was not appropriate to recognize revenue on sales of the Company’s DSL
products because, according to the Company’s initial quarterly report for the period ended March
31, 2000, the First Quarter of 2000 was the first quarter that the Company had shipped volume
production units of all its new DSL products, namely: ADSL - WebRamp 600I , SDSL
WebRamp 500I and WebRamp 510I, and IDSL - WebRamp 450i. The same document referred
to DSL technology as an “emerging access technology.” In addition, the Company was aware of
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aggressive pricing by competitors in the market for the more costly DSL-based products. Finally,
in the Company’s own Third Quarter report, it stated that, in the First Quarter of 2000, it had
“launched a new sales and marketing campaign that involved sales of new technology to both
existing and a variety of new types of customer, including new customers serving the relatively
new Digital Subscriber Loop (DSL) market.” These factors, among others, prevented Ramp
from making a reasonable estimate of returns for DSL products under SFAS 48 and dictated, at
shipment, that the Company only recognized revenue as the product was sold to resellers and
end-users.
98. The statements in the Company’s financial reports regarding net sales and
revenues were false and misleading in that the Company entered into material transactions solely
for revenue recognition purposes and with the knowledge that the products purportedly “sold”
would be returned for full credit in subsequent quarters by the buyer. Even where the agreement
to ship product was not entirely a sham transaction for revenue recognition purposes, Ramp also
consistently and improperly recognized revenue on sales subject to broad rights of return in
violation of GAAP as set forth above or in circumstances where the Company knew that no sale
had yet been consummated on agreed pricing or terms.
99. The statements contained in the Form 10-Qs filed for the First and Second
Quarters of 2000, claiming that Ramp only recognized revenue “upon transfer of title and risks of
ownership which generally occurs upon product shipment,” were false and materially misleading
because defendants knew or recklessly disregarded that the Company routinely entered into deals
with distributors where the title and risks of ownership did not occur upon product shipment
because Ramp was paying to store the merchandise with the customer and/or had agreed to ship
the merchandise with knowledge that the “buyer” intended to return the merchandise for full
credit following the end of the quarterly reporting period. Reported financial statements were
materially overstated due to the reasons set forth above. The statement that the Company had
reviewed the requirements of SFAS 48 and had determined that it was appropriate to book
revenue on shipments of Ramp products to such customers was also false and misleading
because defendants knew or recklessly disregarded that sham transactions had been entered into
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solely to boost quarterly revenues. Even for those customers who had agreed to attempt to resell
Ramp’s merchandise to resellers, it was false and misleading for the Company to represent that
revenue recognition on these transactions was acceptable under GAAP because such transactions
were actually consignment sales and could not be booked as actual sales under any applicable
accounting rules.
POST-CLASS PERIOD REVELATIONS RELEVANT TO THE COMPLAINT
100. Ramp’s report for the quarter ended September 30, 2000 represented the
following:
The condensed consolidated financial statements have been prepared by Ramp,pursuant to the rules and regulations of the Securities and Exchange Commissionand include the accounts of Ramp Networks, Inc., and its wholly-ownedsubsidiary (collectively the "Company"). Certain information and footnotedisclosures, normally included in financial statements prepared in accordancewith accounting principles generally accepted in the United States, have beencondensed or omitted pursuant to such rules and regulations. In the opinion of theCompany, the unaudited financial statements reflect all adjustments, consisting ofnormal recurring adjustments, and adjustments to reflect the restatement ofamounts for changes in revenue recognition accounting as noted below which arenecessary for a fair presentation of the financial position at September 30, 2000,and the operating results and cash flows for the three months and nine monthsended September 30, 2000 and 1999.
101. Ramp’s report for the quarter ended September 30, 2000 also stated the following:
Ramp's revenue consists principally of amounts earned from the sale ofmanufactured products. Historically, revenue has been recognized by theCompany upon transfer of title and risks of ownership, which generally occurredupon product shipment. Certain agreements with distributors and retailers providefor rights of return, co-op advertising, price protection, and stock rotation rights.Under the guidelines and requirements of Statement of Financial AccountingStandards ("SFAS") No. 48, "Revenue Recognition When Right of ReturnExists", the Company concluded that it had sufficient history and experience toquantify reserves required for these provisions. Accordingly, Ramp provided anallowance for returns and price adjustments and provided a warranty reserve at thepoint of revenue recognition. These reserves have been adjusted periodicallybased upon historical experience and anticipated future returns, price adjustments,and warranty costs.
In the first quarter of 2000, the Company launched a new sales and marketingcampaign that involved sales of new technology and products to both existing anda variety of new types of customers, including new customers serving therelatively new Digital Subscriber Loop (DSL) market. The DSL market
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experienced significant fluctuations in supply and demand in 2000. As a result,current customers and potential customers experienced delays in the provisioningof this marketplace which delayed demand for the Company's products. During2000, the Company has experienced changing business conditions and demand forproduct from its distributors. Specifically, the Company experienced lowerdemand for both new and existing products and a trend of increasing past dueaccounts receivable from its current distributors as well as from some of theCompany's new customers. The Company has now decided that this increase inpast due accounts receivable from distributors was a result of the distributors notpaying the Company until product was ultimately "sold through" to the customer.Additionally, certain new customers returned a significant portion of previouslysold product in amounts greater than had been estimated by the Company. In2000, the Company continued to apply revenue recognition accounting policies inaccordance with past practices. Revenue recognition was based on historicalexperience with long-term customer payment patterns and returns andconventional industry practices. In the third quarter of 2000, the Companyreassessed its receivable collection history and product returns history with itsmajor distributors as well as new customers, based upon the current marketdemand for the Company's products. As a result of this reassessment, theCompany determined that the negative trends in product sales demand anddelayed collection of receivable amounts was not a temporary trend. Thesesignificant changes in circumstances have necessitated a change in accountingpolicies for its current sales activity. The Company has decided to restate earlierquarters so that the accounting for revenue is consistent for all interim periods in2000.
102. The initial complaint in this matter was filed on or about October 3, 2000.
Although the Company’s September 29, 2000 press release had stated that Ramp expected to
report Third Quarter revenues no higher than $1 million, and perhaps substantially lower,
Ramp’s report for the quarter ended September 30, 2000, issued just little more than six weeks
later on November 14, 2000, represented that the Company had revenues of $3 million in the
three months ended September 30, 2000. Although this figure was down 41% from $5 million in
the three months ended September 30, 1999, it was significantly higher than the numbers
reported in the Company’s September 29, 2000 press release. The reason that defendants made
lower earnings estimates on September 29, 2000, was that they knew they were going to have to
restate their earnings downward for the first and second quarters. Consequently, when all three
Form 10-Qs were filed on November 14, 2000, Ramp attempted to “soften the blow” of the
restatements by announcing that revenues for the Third Quarter were much higher than Ramp’s
initial predictions.
ADDITIONAL ALLEGATIONS OF SCIENTER
103. As alleged above, defendants' false representations and material omissions were
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made with scienter in that defendants: (1) knew or, with deliberate recklessness, disregarded that
the public documents and statements issued or disseminated by Ramp were materially false and
misleading as described above; (2) knew or were deliberately reckless in not knowing that the
false financial results would be issued or disseminated to the investing public; and (3) knowingly
and substantially participated in the preparation and/or issuance or dissemination of such
statements or documents.
104. By restating its revenues for the quarterly periods ended March 31, 2000 and June
30, 2000, Ramp admitted that it had:
a. Recorded revenues for shipments of products to the distributors identified
above that did not meet the recognition criteria set forth in SFAS 48 and
therefore had made an error in the application of accounting rules or
principles that required restatement of prior quarters;
b. The shipments on which Ramp should not have recorded revenue were
material to the prior quarterly results as of March 31, 2000 and June 30,
2000; and
c. The correction of the error in prior quarterly periods would materially
affect a trend in earnings between both prior periods and following
periods.
105. The reasons given publicly for the restatement of revenues for the first two
quarters of 2000 did not comport with the true facts in that defendants were aware, well before
the Third Quarter of 2000, that its distributors only had to pay for Ramp products as they were
sold to ultimate consumers or resellers and that Ramp products were not selling through to such
buyers. In fact, defendants were aware that the distributors listed above had only agreed to take
large levels of Ramp products because Ramp had offered to defray storage costs or offered other
consideration designed to insure that the distributors would not return the merchandise to Ramp.
As a result, defendants were aware or recklessly disregarded that, no later than the first quarter of
2000, that stocking levels at Ramp distributors grossly exceeded the level of inventory necessary
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to service normal customer needs.
106. Defendants also intentionally or recklessly entered into transactions near the end
of quarterly reporting periods simply to manipulate the accounting rules relating to revenue
recognition. The Company’s own SEC filings indicate that Ramp’s executives were well-aware
of the revenue recognition requirements of SFAS 48 but intentionally or recklessly disregarded
its provisions.
107. Defendant McElwee sold over 90,000 shares of Company stock at inflated prices
during the Class Period, at a time when he knew or recklessly disregarded the fact that the price
of Company stock was inflated due to his own efforts to falsely inflate the sales of Ramp
products as set forth above.
108. According to Confidential Witness No. 6, Veerina continually told Ramp
employees that Cisco Systems was planning to buy the Company. Veerina kept a high level of
intensity and “pumped things up” at the Company by telling people that Ramp would eventually
be purchased by another company. In fact, Ramp was purchased by Nokia in January of 2001.
109. Terry Gibson served as Vice President of Finance and Chief Financial Officer of
Ramp from March of 1999. According to Confidential Witness No. 6, Gibson and Veerina
disagreed over what the Company could and could not do in its financial reporting and, after
hours, Gibson and Veerina could be heard arguing in Gibson’s office. On June 1, 2000, the
Company issued a press release announcing that, effective immediately, Terry Gibson had
resigned as Chief Financial Officer of Ramp and had been replaced by Perry Grace, acting head
of finance.
110. Veerina’s salary of $140,000 in 1998 and 1999 was relatively modest for the
President and Chief Executive Officer of a publicly-traded company. A number of executives at
Ramp, in fact, had higher salaries than Veerina during 1998 and 1999. Veerina’s main
compensation was stock, and Veerina’s bonuses and stock option award were therefore
dependent on increasing revenues for the Company. In 1998, Veerina did not receive a bonus or
stock options. In 1999, Veerina was awarded a bonus of $39,000 and 96,000 stock options as a
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result of the artificially inflated revenues and stock prices described above.
111. As a sales executive, McElwee’s compensation was heavily dependant on the
sales of Company products. During 1999, as a result of the artificially inflated revenues and
stock prices described above, McElwee was awarded a bonus of $78,000 and 119,000 stock
options. Moreover, and despite the improper sales practices set forth above, the Company
entered into an agreement with McElwee, dated February 1, 2000, in which the Company agreed
to pay McElwee his monthly base salary and benefits for a period of six months following his
termination by the Company without cause. Pursuant to the same agreement, the Company
agreed that any unvested stock options or shares of restricted stock held by McElwee as of the
date of his termination would become immediately vested and exercisable as though he had
maintained his employment or consulting relationship with the Company for a year following his
termination. The Company’s April 24, 2000 Proxy Statement on Form 14A notes that, as of
March 31, 2000, McElwee was no longer an employee of the Company without noting whether
the circumstances of his termination permitted McElwee to claim the benefit of his February 1,
2000 agreement. Plaintiffs are informed that the Company purported to terminate him without
cause because McElwee subsequently sold over 92,000 shares of Company stock as alleged
above during May and July of 2000.
COUNT I
VIOLATIONS OF §10(b) OF THE EXCHANGE ACTAND RULE 10b-5 PROMULGATED THEREUNDER
AGAINST ALL DEFENDANTS
112. Plaintiffs repeat and reallege each and every allegation contained in the
paragraphs above as if fully set forth herein.
113. At all relevant times, defendants, individually and in concert, directly and
indirectly, by the use and means of instrumentalities of interstate commerce and/or of the mails,
engaged and participated in a continuous course of conduct whereby they knowingly and/or with
deliberate recklessness made and/or failed to correct public representations which were or had
become materially false and misleading regarding Ramp's financial results and operations. This
continuous course of conduct resulted in the defendants causing Ramp to publish public
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statements which they knew, or were deliberately reckless in not knowing, were materially false
and misleading, in order to artificially inflate the market price of Ramp stock and which operated
as a fraud and deceit upon plaintiffs and the members of the Class.
114. Defendant Ramp was a direct participant in the wrongs complained of herein.
The Individual Defendants are liable for the wrongs complained of herein as a direct participant
in and as controlling persons of the Company. By virtue of their position of control and authority
as senior officers and/or directors of Ramp, the Individual Defendants were able to and did,
directly or indirectly, control the preparation, issuance and/or content of the aforesaid public
statements relating to the Company, the Individual Defendants’ failure to correct those
statements in timely fashion once they knew, or was deliberately reckless in not knowing that
those statements were no longer true or accurate, renders them liable for those statements.
115. The Individual Defendants had actual knowledge of the facts making the material
statements false and misleading, or deliberately acted with reckless disregard for the truth in that
they failed to ascertain and to disclose such facts, even though same were available to them.
116. In ignorance of the adverse facts concerning Ramp's business operations and
earnings, and in reliance on the integrity of the market, plaintiffs and the members of the Class
acquired Ramp common stock at artificially inflated prices and were damaged thereby.
117. Had plaintiffs and the members of the Class known of the materially adverse
information not disclosed by the defendants, they would not have purchased Ramp common
stock at all or not at the inflated prices paid.
118. By virtue of the foregoing, defendants, and each of them, have violated §10(b) of
the 1934 Act and Rule 10b-5 promulgated thereunder.
COUNT II
VIOLATION OF §20(a) OF THE EXCHANGEACT AGAINST THE INDIVIDUAL DEFENDANTS
119. Plaintiffs repeat and reallege each and every allegation contained in the
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paragraphs above as if fully set forth herein.
120. This count is asserted against the Individual Defendants and is based upon Section
20(a) of the 1934 Act.
121. The Individual Defendants, by virtue of their office, directorship, and/or specific
acts were, at the time of the wrongs alleged herein and as set forth in Count I, each a controlling
person of Ramp within the meaning of §20(a) of the 1934 Act. The Individual Defendants had
the power and influence and exercised the same to cause Ramp to engage in the illegal conduct
and practices complained of herein by causing the Company to disseminate the false and
misleading information referred to above. Moreover, during the Class Period, the Individual
Defendants owned or controlled substantial amounts of the Company's stock.
122. The Individual Defendants’ positions made them privy to and provided them with
actual knowledge of the material facts concealed from plaintiffs and the Class.
123. By virtue of the conduct alleged in Count I, the Individual Defendants are liable
for the aforesaid wrongful conduct and are liable to plaintiffs and the Class for damages suffered.
PRAYER FOR RELIEF
WHEREFORE, Plaintiffs demand judgment:
1. Determining that the instant action is a proper class action maintainable under
Rule 23 of the Federal Rules of Civil Procedure;
2. Awarding compensatory damages and/or rescission as appropriate against
defendants, in favor of plaintiffs and all members of the Class for damages sustained as a result
of defendants' wrongdoing;
3. Awarding plaintiffs and members of the Class the costs and disbursements of this
suit, including reasonable attorneys’, accountants’ and experts’ fees; and
4. Awarding such other and further relief as the Court may deem just and proper.
Dated: March ____, 2002 GLANCY & BINKOW LLP
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THIRD AMENDED CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATION OF FEDERAL SECURITIES LAWSCase No. C-00-3645 JCS
REDACTED 3RDAMENDED.03 29 2002.wpd Page 63
________________________________Lionel Z. GlancyRobin B. HowaldMichael Goldberg
1801 Avenue of the Stars, Suite 311Los Angeles, California 90067Telephone: (310) 201-9150Facsimile: (310) 201-9160
JEFFREY H. SQUIRE IRA M. PRESS
KIRBY MCINERNEY & SQUIRE, LLP830 Third Avenue, 10th FloorNew York, NY 10022Telephone: (212) 371-6600Facsimile: (212) 751-2540
Co-Lead Counsel for Plaintiffs
MICHAEL D. BRAUNSTULL, STULL & BRODY10940 Wilshire Blvd, Suite 2300Los Angeles, California 90024Telephone: (310) 209-2468Facsimile: (310) 209-2087
KEVIN YOURMANWEISS & YOURMAN10940 Wilshire Blvd 24th FloorLos Angeles, California 90024Telephone: (310) 208-2800Facsimile: (310) 209-2348
Attorneys for Plaintiffs
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THIRD AMENDED CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATION OF FEDERAL SECURITIES LAWSCase No. C-00-3645 JCS
REDACTED 3RDAMENDED.03 29 2002.wpd Page 64
JURY DEMAND
Plaintiffs hereby demand a trial by jury.
Dated: March __, 2002 GLANCY & BINKOW LLP
________________________________Lionel Z. GlancyRobin B. HowaldMichael Goldberg
1801 Avenue of the Stars, Suite 311Los Angeles, California 90067Telephone: (310) 201-9150Facsimile: (310) 201-9160
JEFFREY H. SQUIREIRA M. PRESSKIRBY MCINERNEY & SQUIRE, LLP830 Third Avenue, 10th FloorNew York, NY 10022Telephone: (212) 371-6600Facsimile: (212) 751-2540
Co-Lead Counsel for Plaintiffs
MICHAEL D. BRAUNSTULL, STULL & BRODY10940 Wilshire Blvd, Suite 2300Los Angeles, California 90024Telephone: (310) 209-2468Facsimile: (310) 209-2087
KEVIN YOURMANWEISS & YOURMAN10940 Wilshire Blvd 24th FloorLos Angeles, California 90024Telephone: (310) 208-2800Facsimile: (310) 209-2348
Attorneys for Plaintiffs
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