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BERMAN DeVALERIO PEASE TABACCOBURT & PUCILL O
Christopher T. Heffelfinger (118058)425 California Street , Suite 202 5San Francisco, CA 94104Telephone: (415) 433-3200Facsimile : (415) 433-638 2Email : cheffelfingernhermanesq .com
COHEN, MILSTEIN , HAUSFELD& TOLL, P.L.L.C.Steven J . TollDaniel S . SommersJason M. Leviton1100 New York Ave ., N. W .West Tower, Suite 500Washington, D.C. 20005Telephone: (202) 408-4600Facsimile : (202) 408-4699Email : stoll(d cmht .comEmail: dsommers(cmht .comEmail : ileviton(r7cmht.com
Attorneys for Plaintiffs
l c_
.Q ;,~` (L Cs/,
SBAUNITED STATES DISTRICT COUR T
NORTHERN DISTRICT OF CALIFORNIAi
0 5 303 0REBECCA FRENCH , Individuall y and On ) Case No. :Behalf of All Others Similarly Situated, )
}
Plaintiff, ) CLASS ACTION COMPLAIN Tvs . FOR VIOLATION OF FEDERAL
SECURITIES LAW SDITECH COMMUNICATIONS CORP . ,TIMOTHY K. MONTGOMERY, and ) JURY TRIAL DEMANDED
WILLIAM J. TAMBLYN, )
Defendants .
CLASS ACTION COMPLAINT
Plaintiff Rebecca French alleges the following based upon the investigation of plaintiff' s
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counsel , which included, among other things, a review of the defendants' public documents,
conference calls and announcements made by defendants, United States Securities and Exchange
Commission ("SEC") filings, wire and press releases published by and regarding Ditech
Communications Corporation ("Ditech" or the "Company") securities analysts ' reports and
advisories about the Company, and information readily obtainable on the Internet .
NATURE OF THE ACTION AND OVERVIEW
1 . This is a federal class action on behalf of purchasers of the publicly trade d
11 securities of Ditech between August 24, 2004 and May 26, 2005 (the "Class Period"), seeking t o
J pursue remedies under the Securities Exchange Act of 1934 (the "Exchange Act") .
2. Ditech is a Mountain View-based designer and marketer of telecommunication s
I equipment and provides network operators with echo cancellation and voice processing systems .
3 . Plaintiff alleges that defendants' Class Period representations regarding Ditec h
were knowingly or recklessly materially false and misleading when made for the following
reasons : (1) the highly-touted Voice Quality Assurance ("VQA") orders were, in fact, hugely
disappointing because VQA orders were not as secure as defendants represented because the
purported new clients were under no obligation to purchase Ditech's services ; thus, Ditech's
positive statements about its VQA success lacked any reasonable basis when made ; (2) the
Sprint/Nextel merger would not be a positive development for Ditech; and (3) the Sprint/Nextel
merger presented a serious threat to Ditech's business because it was reasonably foreseeable that
Ditech would experience a shortfall in revenue received from Nextel because of the merger .
4. On November 3, 2004, Ditech issued a press release announcing poor second
quarter results due to a "delay" in shipping the highly-touted VQA orders from Asia and weaker
domestic demand for wireless products . On November 4, 2004, the price of Ditech stock
dropped $5 .69 per share, or 25 .53 percent, to $16 .60 per share, on unusually heavy trading
volume. On May 26, 2005, Ditech announced that orders from Nextel declined substantially as a
result of the Nextel-Sprint merger, and would continue to do so . On news of this development,
LASS ACTION COMPLAINT -1-
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C' on May 27, 2005 shares of Ditech fell $4 .80 per share, or 38 .13 percent, to close at $7 .79 per
11 share on unusually heavy trading volume .
5 . The claims asserted herein arise under and pursuant to Sections 10(b) and 20(a) of
the Exchange Act (15 U .S.C. §§ 78j(b) and 78t(a)), and Rule lOb-5 promulgated thereunder (17
C.F .R. § 240 .10b-5) .
6 . This Court has jurisdiction over the subject matter of this action pursuant to § 27
of the Exchange Act (15 U .S .C. § 78aa) and 28 U .S.C. § 1331 .
7. Venue is proper in this Judicial District pursuant to § 27 of the Exchange Act, 15
U.S.C. § 78aa and 28 U.S .C. § 1391(b) . Many of the acts and transactions alleged herein,
including the preparation and dissemination of materially false and misleading information,
occurred in substantial part in this Judicial District . Additionally, the Company maintains a
principal executive office in this Judicial District.
8 . In connection with the acts, conduct and other wrongs alleged in this complaint,
defendants, directly or indirectly, used the means and instrumentalities of interstate commerce,
including but not limited to, the United States mails, interstate telephone communications and
the facilities of the national securities exchange .
PARTIES
9. Plaintiff Rebecca French as set forth in the accompanying certification
incorporated by reference herein, purchased Ditech securities at artificially inflated prices during
the Class Period and has been damaged thereby .
10 . Defendant Ditech is a Delaware corporation with its principal place of business
located at 825 East Middlefield Road, Mountain View, California 94043 .
11 . Defendant Timothy K. Montgomery ("Montgomery") was, at all relevant times,
the Company's Chief Executive Officer, President and Chairman .
12. Defendant William J . Tamblyn ("Tamblyn") was, at all relevant times, th e
Company's Chief Financial Officer .
13 . Defendants Montgomery and Tamblyn are referred to hereinafter as the
`Individual Defendants ." The Individual Defendants, because of their positions with th e
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Company, possessed the power and authority to control the contents of Ditech's quarterly
reports, press releases and presentations to securities analysts, money and portfolio managers and
institutional investors, i .e ., the market . Each defendant was provided with copies of the
Company's reports and press releases alleged herein to be misleading prior to or shortly after
their issuance and had the ability and opportunity to prevent their issuance or cause them to be
corrected. Because of their positions and access to material non-public information available to
them, each of these defendants knew that the adverse facts specified herein had not been
disclosed to and were being concealed from the public and that the positive representations
which were being made were then materially false and misleading . The Individual Defendants
are liable for the false statements pleaded herein, as those statements were each "group-
published" information, the result of the collective actions of the Individual Defendants .
SUBSTANTIVE ALLEGATION S
Background
14. Ditech is a designer and marketer of telecommunications equipment and provides
network operators with echo cancellation and voice processing systems . Ditech's business is
highly dependent on a few customers, with Verizon Communications and Nextel
Communications, Inc . accounting for approximately 49 percent and 42 percent of Ditech's
revenues, respectively, during the Class Period .
Materially False And MisleadingStatements Issued During The Class Perio d
15 . The Class Period commences on August 24, 2004 . At that time, Ditech reporte d
results for its fiscal 2005 first quarter , ended July 31, 2004 . Revenues for the first quarter were
$25 .5 milIion,,an increase of 11% from the prior qua rter revenue of $23 . 1 million and up 138%
from revenues of $ 10 .7 million in the same quarter of the prior fiscal year . Commenting on
these results , defendant Montgomery stated:
We're very proud of the results we're reporting today as they represent greatexecution and further validate our investment decisions . . . We invested inbuilding a leaner, more scalable organization and it has paid off in lowercosts and greater profitability, achieving nearly 40 percent operating income .
CLASS ACTION COMPLAINT -3-
Our increased revenue is evidence that we've made the right investments innew technology, new products and in the sales infrastructure .
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16 . Also on August 24, 2004, Ditech announced that it had secured orders to deplo y
its VQA solutions with two new customers in Asia . The orders, totaling in excess of five million
dollars, represented Ditech's first large deployments of its VQA technology in this region and
underscored those carriers' acceptance of Ditech's powerful voice processing technology to
improve call clarity and enhance the performance of mobile networks, especially during peak
calling periods . Commenting on this, defendant Montgomery stated :
We are very pleased to announce these significant orders representing newcustomers for Ditech in this high growth geography . Our focused investmentin VQA sales and support personnel in Asia is showing additional results asevidenced by these large new orders . We're seeing momentum for our VQAsolutions as carriers seek to cost-effectively expand their mobile networkswhile maintaining superior voice quality .
17. Additionally, defendants held a conference call with analysts and investors o n
I August 24, 2004 . During the call, defendant Montgomery represented that Ditech had received
two large orders in excess of $5 million for the second quarter of 2004 :
Although we don't know yet precisely where Q2 VQA revenues will be,given our Q4 revenues and orders in excess of $5 million already in Q2, youcan see the beginning of a trend line that gives us real confidence in our VQAbusiness .
18 . On November 3, 2004, Ditech reported that, based on preliminary financial data ,
it expected revenue for its second quarter of fiscal 2005 ended October 31, 2004 to b e
approximately $24 million. Pre-tax income from continuing operations was expected to be $0.28
or $0 .29 per share for the second quarter . Commenting on this, defendant Montgomery stated :
Although our revenues were 67 percent higher than the same quarter last yearwe did not achieve our revenue goal . . . The revenue shortfall was the resultof two factors. First, we experienced a delay in shipping a major VQA orderin the .quarter to an Asian customer. We are taking steps to facilitate thesmooth delivery of this order in the second half of this year . The secondreason for lower revenue numbers was an apparent softening of demand inthe North American wireless marketplace, as evidenced by our decline inshipments in the quarter .
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Overall, our company performance remained quite strong . Preliminary datasuggests exemplary gross margins of approximately 78% with pre-taxincome from continuing operations of $0.28 or $0.29 per share . Ouroperating profit will approximate 40 percent of revenue, and we have added$10 million of cash to our balance sheet in the quarter . We continue toexpand our sales and support teams to grow our international and domesticcustomer base . We are also targeting larger market opportunities with ourVQA initiative while simultaneously investing in future packet-based voiceproducts . Finally, we've built a lean operations and manufacturing modelthat has helped us deliver five straight quarters of profitability .
19. Defendants hosted a conference call later that day . On the call, defendant
Montgomery attributed the delay in shipping to management changes at one of the purchasers ,
and represented that a new shipping schedule was "reconfirmed" for the second half of the year ,
stating in relevant part :
In August we announced that we'd secured VQA orders in excess of $5million from customers in Asia . During the Ql conference call, we indicatedthat we thought we would ship $2 to $3 million in VQA in the secondquarter. Due to management changes within the largest of these firms,subsequent to booking the order, the delivery schedule changed . Thecustomer has now reconfirmed the new shipping schedule and we're takingsteps to ensure smooth delivery of these orders in the second half of thisfiscal year .
20. In response to analysts' questions, defendant Montgomery reiterated that th e
VQA issue was one of timing and that the Company had not lost the transactions :
Not trying to be too granular here, but the - issue of VQA is not a matter oflosing transactions. It's a matter of delays . Delays associated with themagnitude of the opportunities and the - shall we say - the magnitude of thecompetitive landscape .
21 . On November 4, 2004, the price of Ditech stock dropped $5 .69 per share, o r
25 .53 percent, to $16 .60 per share, on unusually heavy trading volume .
22. On December 14, 2004, one day before the official announcement of th e
Sprint/Nextel merger, Ditech, recognizing the threat that the merger posed to Ditech, issued a
press release announcing that "its Board of Directors has approved the repurchase of up to an
aggregate of $35 million of its common stock ." Commenting on this, defendant Montgomery
stated : "We believe that the repurchase program is a prudent investment of available funds and
underscores our commitment to enhancing shareholder value ."
CLASS ACTION COMPLAINT -5-
23 . On February 17, 2005, Ditech issued a press release and reported its results for it s
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fiscal 2005 third quarter, ended January 31,2005 . Revenues for the third quarter were $21 .3
million, flat with the same quarter of the prior fiscal year . Net income was $7 .5 million, or $0 .21
per share, including an income tax benefit from a release of a deferred tax valuation allowance of
$0.7 million . Net income in the third quarter of fiscal 2004, in which there was no income tax
benefit, was $6 .9 million, or $0.20 per share. Commenting on this, defendant Montgomery
stated :
We're pleased with our performance this quarter[ .J . . . We achieved ourrevenue target and delivered significant profitability . At the same time, wehave invested for our future growth by increasing our sales and marketingresources with clear goals of diversifing our customer base . And we haveinvested in new products that we believe will expand our opportunity beyondtoday's circuit switch voice market into tomorrow's world of packet voice .
24. Defendants hosted a conference call later that same day . During the call ,
defendant Montgomery depicted the Sprint/Nextel merger as good for Ditech :
Concerning - I appreciate your reference to these accounts so we don't haveto talk to them by name. There is some data that I can share with you . Firstof all, we have - we have a historical relationship with the wireline side ofSprint that goes back some years . They've not been a revenue producer forus for a couple of years now, but we did a couple of transactions that wererather large with them historically, and we've learned what it was to dobusiness with them. We've built some products that they were enamoredwith and we've worked on dealing with the element management system thatwas associated with installing in their account, as well as the process ofpurchasing and the acquisition and installation with them, so we're notneophytes there .
The Nextel-Sprint merger is actually, we think, quite goad for us in that thekey strategic people on the technical side are actually going to be the Nextelplayers, and this is what we've seen publicly announced . So we think that'spositive, but we also have an account team calling on Sprint directly inKansas City, which we're hopeful the two point lead to the right end .[Emphasis added .]
25 . The statements contained in ¶¶] 1, 15-20, and 22-24 were materially false an d
misleading when made because defendants knowingly or recklessly failed to disclose or indicat e
the following : (1) that the highly-touted VQA orders were hugely disappointing because VQA
28 11 orders were not as secured as defendants represented, because the purported new clients wer e
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under no obligation to purchase Ditech's services ; thus, Ditech's positive statements about its
VQA success lacked in any reasonable basis when made; (2) that the Sprint/Nextel merger would
not be a positive development for Ditech ; and (3) that the Sprint/Nextel merger presented a
serious threat to Ditech's business because it was foreseeable that Ditech would experience a
shortfall in revenue received from Nextel because of the merger .
The Truth Begins to Emerge
26. On May 26, 2005, Ditech reported results for its fiscal 2005 fourth quarter and
year ended April 30, 2005 . Revenues for the fourth quarter were $23 .0 million, essentially flat
from revenues of $23 .1 million in the same quarter of the prior fiscal year and up 8% from
revenues of $21 .3 million in the third quarter of fiscal 2005 . Revenues for the year were $94 .1
million, an increase of 35% from revenues of $69 .6 million in fiscal 2004. Net income for the
fourth quarter was $7 .6 million, a decrease compared to net income of $8 .3 million in the fourth
quarter of fiscal 2004 but an increase from third quarter net income of $7 .1 million . Fiscal 2005
full year's net income was $71 .1 million, including a net tax benefit of $36 .1 million due to the
release of a tax valuation allowance, compared to net income of $8 .2 million in fiscal 2004 .
27. In the release, defendant Montgomery warned that orders from Nextel woul d
decline as a result of Nextel's merger with Sprint, and that the decline would have a materiall y
negative impact on Ditech's business :
In the first quarter of fiscal 2006, we expect a decline in orders from oursecond largest customer as they complete their merger with anothercompany. This unavoidably impacts our short-term outlook . Lookingbeyond the quarter, we're confident that we've been investing in the rightareas. We believe we've achieved critical mass in key product developmentareas, as well as in the marketing and sales personnel required to bring thesenew products to market both here in North America and abroad . Therefore,we remain committed to our plan and the people required to grow thebusiness .
28 . While defendants did not directly address the issue, the promised VQA sales t o
the new customers in Asia still did not materialize, almost a year after defendants supposedl y
-'secured" their orders . As noted by securities firm First Albany in a research note published
\4ay 27, 2005: "VQA has been a huge disappointment . Investors have been expecting the order
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11 from ` a large Asian customer ' . . . to be shipped for the last few quarters . Given the VQA results
11 we have seen so far, we do not have a great deal of confidence in the company's ability to pos t
11 consistent VQA sales . "
29. On news of this, shares of Ditech, on May 27, 2005, fell $4 .80 per share or 38 .13
percent, to close at $7 .79 per share on unusually heavy trading volume .
PLAINTIFF'S CLASS ACTION ALLEGATION S
30. Plaintiff brings this action as a class action pursuant to Federal Rule of Civi l
Procedure 23(a) and (b)(3) on behalf of a Class, consisting of all those who purchased the
securities of Ditech during the Class Period and were damaged thereby . Excluded from the Class
are defendants, the officers and directors of the Company, at all relevant times, members of their
immediate families and their legal representatives, heirs, successors or assigns and any entity i n
I which defendants have or had a controlling interest.
31 . The members of the Class are so numerous that joinder of all members i s
impracticable. Throughout the Class Period , Ditech ' s securities were actively traded on the
NASDAQ. While the exact number of Class members is unknown to Plaintiff at this time and
can only be asce rtained through appropriate discovery, Plaintiff believes that there are hundreds
or thousands of members in the proposed Class . Record owners and other members of the Class
may be identified from records maintained by Ditech or its transfer agent and may be notified of
the pendency of this action by mail, using the form of notice similar to that customarily used in
securities class actions .
32. Plaintiff's claims are typical of the claims of the members of the Class as all
members of the Class are similarly affected by defendants' wrongful conduct in violation of
federal law that is complained of herein .
33 . Plaintiff will fairly and adequately protect the interests of the members of th e
Class and has retained counsel competent and experienced in class and securities litigation .
34 . Common questions of law and fact exist as to all members of the Class and
predominate over any questions solely affecting individual members of the Class . Among the
questions of law and fact common to the Class are :
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(a) whether the federal securities laws were violated by defendants' acts as
alleged herein ;
(b) whether statements made by defendants to the investing public during the
Class Period misrepresented material facts about the business, operations and
management of Ditech; and
(c) to what extent the members of the Class have sustained damages and th e
proper measure of damages.
35. A class action is superior to all other available methods for the fair and efficient
adjudication of this controversy since joinder of all members is impracticable . Furthermore, as
the damages suffered by individual Class members may be relatively small, the expense and
burden of individual litigation make it impossible for members of the Class to individuall y
I redress the wrongs done to them . There will be no difficulty in the management of this action a s
a class action .
UNDISCLOSED ADVERSE FACTS
36 . The market for Ditech's securities was open, well-developed and efficient at all
relevant times. As a result of these materially false and misleading statements and failures to
disclose, Ditech's securities traded at artificially inflated prices during the Class Period . Plaintiff
and other members of the Class purchased or otherwise acquired Ditech's securities relying upon
the integrity of the market price of Ditech's securities and market information relating to Ditech ,
and have been damaged thereby .
37. During the Class Period, defendants materially misled the investing public,
thereby inflating the price of Ditech's securities, by publicly issuing false and misleading
statements and omitting to disclose material facts necessary to make defendants' statements, a s
set forth herein, not false and misleading, Said statements and omissions were materially false
and misleading in that they failed to disclose material adverse information and misrepresented
the truth about the Company, its business and operations, as alleged herein .
38 . At all relevant times, the material misrepresentations and omissions particularize d
in this Complaint directly or proximately caused or were a substantial contributing cause of th e
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damages sustained by plaintiff and other members of the Class . As described herein, during the
Class Period, defendants made or caused to be made a series of materially false or misleadin g
If statements about Ditech's business, prospects and operations . These material misstatements an d
omissions had the cause and effect of creating in the market an unrealistically positive
assessment of Ditech and its business, prospects and operations, thus causing the Company's
securities to be overvalued and artificially inflated at all relevant times . Defendants' materiall y
false and misleading statements during the Class Period resulted in plaintiff and other member s
I of the Class purchasing the Company 's securities at artificially inflated prices, thus causing the
damages complained of herein .
LOSS CAUSATION
39. Defendants' wrongful conduct, as alleged herein, directly and proximately caused
the economic loss suffered by plaintiff and the Class .
40. During the Class Period, plaintiff and the Class purchased securities of Ditech at
artificially inflated prices and were damaged thereby . The price of Ditech common stock
declined when the misrepresentations made to the market, and/or the information alleged herei n
to have been concealed from the market, and/or the effects thereof, were revealed, causin g
investors' losses .
ADDITIONAL SCIENTER ALLEGATION S
41 . As alleged herein, defendants acted with scienter in that defendants knew that the
public documents and statements issued or disseminated in the name of the Company were
materially false and misleading; knew that such statements or documents would be issued or
disseminated to the investing public ; and knowingly and substantially participated or acquiesced
in the issuance or dissemination of such statements or documents as primary violations of the
federal securities laws . As set forth elsewhere herein in detail, defendants, by virtue of their
receipt of information reflecting the true facts regarding Ditech, their control over, and/or receip t
and/or modification of Ditech allegedly materially misleading misstatements and/or their
associations with the Company which made them privy to confidential proprietary informatio n
concerning Ditech, participated in the fraudulent scheme alleged herein .
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42. Defendants knew and/or recklessly disregarded the falsity and misleading nature
of the information which they caused to be disseminated to the investing public . The ongoing
fraudulent scheme described in this complaint could not have been perpetrated over a substantial
period of time, as has occurred, without the knowledge and complicity of the personnel at the
highest level of the Company, including the Individual Defendants .
43 . Moreover, defendants were motivated to commit the fraudulent scheme alleged
herein so that Ditech insiders, including the Individual Defendants, could sell their personally
held Ditech stock at artificially inflated prices . All told, Ditech insiders sold a total of 320,000 of
their personally held shares for gross proceeds of $6,715,650 .
Applicability Of Presumption Of Reliance :
Fraud-On-The-Market Doctrine
44. At all relevant times, the market for Ditech securities was an efficient market fo r
the following reasons, among others :
(a) Ditech stock met the requirements for listing , and was listed and actively
traded n the NASDAQ, a highly efficient and automated market ;
(b) As a regulated issuer , Ditech filed periodic public repo rts with the SEC and
the NASDAQ ;
(c) Ditech regularly communicated with public investors via established market
communication mechanisms, including through regular disseminations of press releases on the
national circuits of major newswire services and through other wide-ranging public disclosures,
such as communications with the financial press and other similar reporting services ; and
(d) Ditech was followed by several securities analysts employed by majo r
brokerage firms who wrote reports which were distributed to the sales force and certain
customers of their respective brokerage firms. Each of these reports was publicly available and
entered the public marketplace .
45. As a result of the foregoing, the market for Ditech securities promptly digested
,urrent information regarding Ditech from all publicly-available sources and reflected suc h
28 11 information in Ditech stock price . Under these circumstances, all purchasers of Ditech securitie s
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during the Class Period suffered similar injury through their purchase of Ditech securities at
artificially inflated prices and a presumption of reliance applies .
NO SAFE HARBO R
46. The statutory safe harbor provided for forward-looking statements under certain
circumstances does not apply to any of the allegedly false statements pleaded in this complaint .
Many of the specific statements pleaded herein were not identified as "forward-looking
statements" when made . To the extent there were any forward-looking statements, there were no
meaningful cautionary statements identifying important factors that could cause actual results to
differ materially from those in the purportedly forward-looking statements. Alternatively, to the
extent that the statutory safe harbor does apply to any forward-looking statements pleade d
herein, defendants are liable for those false forward-looking statements because at the time each
of those forward-looking statements was made, the particular speaker knew that the particula r
forward-looking statement was false, and/or the forward-looking statement was authorized
and/or approved by an executive officer of Ditech who knew that those statements were false
when made .
FIRST CLAIM
Violation Of Section 10(b) Of The Exchange Act Against And Rule lOb-5Promulgated Thereunder Against All Defendants
47 . Plaintiff repeats and realleges each and every allegation contained above as if
fully set forth herein .
48 . During the Class Period, defendants carried out a plan, scheme and course of
conduct which was intended to and, throughout the Class Period, did : (i) deceive the investing
public, including plaintiff and other Class members, as alleged herein; and (ii) cause plaintiff and
other members of the Class to purchase Ditech securities at artificially inflated prices . In
furtherance of this unlawful scheme, plan and course of conduct, defendants, and each of them ,
took the actions set forth herein .
49. Defendants : (a) employed devices, schemes, and artifices to defraud ; (b) made
untrue statements of material fact and/or omitted to state material facts necessary to make th e
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statements not misleading ; and (c) engaged in acts, practices, and a course of business which
operated as a fraud and deceit upon the purchasers of the Company's securities in an effort to
maintain artificially high market prices for Ditech securities in violation of Section 10(b) of the
Exchange Act and Rule lOb-5 . All defendants are sued either as primary participants in the
wrongful and illegal conduct charged herein or as controlling persons as alleged below.
50. Defendants, individually and in concert, directly and indirectly, by the use, mean s
I or instrumentalities of interstate commerce and/or of the mails, engaged and participated i n
continuous course of conduct to conceal adverse material information about the business ,
operations and future prospects of Ditech as specified herein .
51 . These defendants employed devices, schemes and artifices to defraud, while i n
possession of material adverse non-public information and engaged in acts, practices, and a
course of conduct as alleged herein in an effort to assure investors of Ditech value and
performance and continued substantial growth, which included the making of, or the
participation in the making of, untrue statements of material facts and omitting to state material
facts necessary in order to make the statements made about Ditech and its business operations
and future prospects in the light of the circumstances under which they were made, not
misleading, as set forth more particularly herein, and engaged in transactions, practices and a
course of business which operated as a fraud and deceit upon the purchasers of Ditech securities
during the Class Period .
52 . Each of the Individual Defendants' primary liability, and controlling perso n
liability, arises from the following facts : (i) the Individual Defendants were high-level executives
and/or directors at the Company during the Class Period and members of the Company's
management team or had control thereof, (ii) each of these defendants, by virtue of his
responsibilities and activities as a senior officer and/or director of the Company was privy to and
participated in the creation, development and reporting of the Company's internal budgets, plans,
projections and/or reports; (iii) each of these defendants enjoyed significant personal contact and
familiarity with the other defendants and was advised of and had access to other members of the
Company's management team, internal reports and other data and information about th e
CLASS ACTION COMPLAINT - 13 -
Company's finances, operations, and sales at all relevant times ; and (iv) each of these defendants
was aware of the Company' s dissemination of information to the investing public which the y
knew or recklessly disregarded was materially false and misleading .
53. The defendants had actual knowledge of the misrepresentations and omissions o f
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material facts set forth herein, or acted with reckless . disregard for the truth in that they failed to
ascertain and to disclose such facts, even though such facts were available to them . Such
defendants' material misrepresentations and/or omissions were done knowingly or recklessly and
for the purpose and effect of concealing Ditech's operating condition and future business
prospects from the investing public and supporting the artificially inflated price of its securities .
As demonstrated by defendants' overstatements and misstatements of the Company's business,
operations and earnings throughout the Class Period, defendants, if they did not have actual
knowledge of the misrepresentations and omissions alleged, were reckless in failing to obtain
such knowledge by deliberately refraining from taking those steps necessary to discover whether
those statements were false or misleading .
54 . As a result of the dissemination of the materially false and misleading informatio n
and failure to disclose material facts, as set forth above, the market price of Ditech securities was
artificially inflated during the Class Period . In ignorance of the fact that market prices of
Ditech's publicly-traded securities were artificially inflated, and relying directly or indirectly on
the false and misleading statements made by defendants, or upon the integrity of the market in
which the securities trades, and/or on the absence of material adverse information that was
known to or recklessly disregarded by defendants but not disclosed in public statements by
defendants during the Class Period, plaintiff and the other members of the Class acquired Ditech
securities during the Class Period at artificially high prices and were damaged thereby .
55 . At the time of said misrepresentations and omissions , plaintiff and other members
of the Class were ignorant of their falsity, and believed them to be true . Had plaintiff and the
other members of the Class and the marketplace known the truth regarding the problems that
Ditech was experiencing, which were not disclosed by defendants, plaintiff and other members
)f the Class would not have purchased or otherwise acquired their Ditech securities, or, if the y
CLASS ACTION COMPLAINT -14-
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had acquired such securities during the Class Period, they would not have done so at the
artificially inflated prices which they paid .
56. By virtue of the foregoing, defendants have violated Section 10(b) of the
Exchange Act, and Rule lOb-5 promulgated thereunder .
57. As a direct and proximate result of defendants' wrongful conduct, plaintiff and
the other members of the Class suffered damages in connection with their respective purchases
and sales of the Company's securities during the Class Period .
SECOND CLAIM
Violation Of Section 20(a) O fThe Exchange Act Against the Individual Defendant s
58 . Plaintiff repeats and realleges each and every allegation contained above as i f
fully set forth herein .
59. The Individual Defendants acted as controlling persons of Ditech within the
meaning of Section 20(a) of the Exchange Act as alleged herein. By virtue of their high-leve l
positions, and their ownership and contractual rights, participation in and/or awareness of the
Company's operations and/or intimate knowledge of the false financial statements filed by the
Company with the SEC and disseminated to the investing public, the Individual Defendants had
the power to influence and control and did influence and control, directly or indirectly, the
decision-making of the Company, including the content and dissemination of the various
statements which plaintiff contend are false and misleading . The Individual Defendants were
provided with or had unlimited access to copies of the Company's reports, press releases, public
filings and other statements alleged by plaintiff to be misleading prior to and/or shortly after
these statements were issued and had the ability to prevent the issuance of the statements o r
cause the statements to be corrected .
60. In particular, each of these defendants had direct and supervisory involvement in
the day-to-day operations of the Company and, therefore, is presumed to have had the power to
control or influence the particular transactions giving rise to the securities violations as allege d
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CLASS ACTION COMPLAINT - 15 -
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61 . As set forth above, Ditech and the Individual Defendants each violated Sectio n
I0(b) and Rule I Ob-5 by their acts and omissions as alleged in this Complaint . By virtue of their
positions as controlling persons, the Individual Defendants are liable pursuant to Section 20(a) of
the Exchange Act. As a direct and proximate result of defendants' wrongful conduct, plaintiff
and other members of the Class suffered damages in connection with their purchases of the
Company 's securities during the Class Period .
WHEREFORE, plaintiff prays for relief and judgment , as follows :
(a) Determining that this action is a proper class action , designating plaintiff
as Lead Plaintiff and cert ifying plaintiff as a class representative under Rule 23 of the Federal
Rules of Civil Procedure and plaintiffs counsel as Lead Counsel ;
(b) Awarding compensatory damages in favor of plaintiff and the other Class
members against all defendants , jointly and severally, for all damages sustained as a result of
defendants ' wrongdoing , in an amount to be proven at trial , including interest thereon ;
(c) Awarding plaintiff and the Class their reasonable costs and expense s
incurred in this action, including counsel fees and expert fees; and
(d) Such other and further relief as the Court may deem just and proper.
JURY TRIAL DEMANDE D
Plaintiff hereby demands a trial by jury .
DATED: July 26, 2005 BERMAN DEVALERIO PEASE TABACCOBURT & PUCILL O
Christopher effel finger425 California Street, e 2100San Francisco , CA 94104-Telephone : (415) 433-3200Facsimile : (415) 433-638 2
CLASS ACTION COMPLAINT -16-
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CLASS ACTION COMPLAINT
COHEN , MILSTEIN , HAUSFELDTOLL, P.L.L.CSteven J . TollDaniel S . SommersJason M . Leviton1100 New York Avenue, N .W.West Tower, Suite 500Washington, D.C. 20005Telephone : (202) 408-4600Facsimile : (202) 408-4699
Attorneys for Plaintiffs
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V7/08/2095 10;59 TRY FRENCH ?7e-75e-4402 4 912624064699 NO .18
CERTIPTCATION OF PLAINTIFF
PURSUANT TO FEDEML SEC mES LAW S
I,-
&P rra &4 , (`Plaintiff) declare, as to the claims assertedunder the federal securities laws, that :
1 . 1 have reviewed a class action complaint asserting securities claims against DitechCommunications Corp . and wish to join as a plaintiff retaining Cohen, Milstein, Hausfe ld & Toll,P.I. .L .C . as my counsel ,
2. Plaintiffdid not purchase the securi ty that is the subject of this action at the direction, ofplaintiffs counsel or in order to participate in this private action .
3 . Plaintiff Is willing to serve as a representative party on behalf of the class , includingproviding testimony at deposition and trial, if necessary .
4. My transactions in Ditech Communications Corp . during the Class Period of August 24,2004 through May 26, 2005 were as follows :
DATE TRANS ACTUQN &"/ on NO, 01 SHARES
1 ti
tS of f d~~ sloe
1 ZS o SG ~„I ~do
PRICE ER Sff6RB
$15.3-0
f3 ./d -#/~? u
5. During the three years prior to the date of this Certificate, Plaintiff has not sought to serveor served as a representative party for a class in any action under the federal securities laws except asfollows,
6. Plaintiff will not accept any payment for serving as a representative party on behalf of theclass beyond plaint's pro rata share of any recovery, except such reasonable costs and expenses(including lost wages) directly relating to the representation of the class as ordered or approved by thecourt,
I declare under penalty of perjury that the foregoing true and correct,
P0 1
Executed this Day of '2005,
