UNITED STATES DISTRICT COURTFOR THE SOUTHERN DISTRICT OF OHIO
WESTERN DIVISION
IN RE MCSi, INC ., SECURITIES }LITIGATION }
}
Case No. 3 :03-ev-015(Ron. Walter Herbert Rice)
AMENDED AND .CONSOLIDATED CLASSACTION COMPLAINT
JURY TRIAL DEMANDED
AMENDED AND CONSOLIDATED CLASS ACTION COMPLAINT
TABLE OF CONTENTS
Page Number
NATURE OF THE ACTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
JURISDICTION AND VENUE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
PARTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ., . . . . . . 5
PLAINTIFFS' CLASS ACTION ALLEGATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
CONFIDENTIAL WITNESSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
SUBSTANTIVE ALLEGATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 5
A. MCSi's Cash Flow Crisis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 5
1 . MCSi ' s Supp liers Placed the Company on "Credit Hold"' . . . . . . . . . . . 15
a. Examples of Suppliers Imposing CreditHolds on MCSi . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
b. Supplier-Imposed Credit Holds Caused MCSito Lose Customers and also Threatened ExistingRelationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
c. MCSi Misrepresented its Cash Flows to Supp liers . . . . . . . . . . . 20
d. Stanley and Peppel Knew of the Supp lier-ImposedCredit Holds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . .
2. MCSi's Desperate Attempts to Raise Cash . . . . . . . . . : . . . . . . . 21
B. MCSi Falsely In flated Reported Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
1 . MCSi Prematurely Recogn ized Revenues in Violatio nof GAAP and SAB 101 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 3
a. MCSi Pre-Billed Maintenance/Service Contracts . . . . . . . . . . . . 24
b. MCSi Pre-Billed AIV Contracts . . . . . . . . . . . . . . . . . . . . . . . . . 2 5
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i. University of Kentucky . . . . . . . . . . . . . . . . . . . . . . . . . 29
ii . Northern Kentucky University . . . . . . . . . . . . . . . . . . . . . 30
iii. Sullivan College . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
C . MCSi Improperly Pre-Billed Clients for EquipmentOrders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3 1
2. MCSi Inflated Revenues Generated from CustomerSales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3 1
C. MCSi Overstated Rental Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
D. MCSi Understated O perational Expenses to Falsely InflateProfit Margins . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . : . . . . . .34
E. MCSi Created Fictitious Sales to In flate Revenues . . . . . . . . . . . . . . . . . . . . . . . 3 5
i. The Zengine Sham Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 5
2. The Mercatum Sham Transactions . . . . . . . . . . . . . . . . . . . . 36
F. MCSi's Inventory Value was Materially Misstated . . . . . . . . . . . . . . . . . . . . 39
1 . MCSi Improperly Manipulated Inventory . . . . . . . . . . . . . . . . . . . . . . . . 39
a. MCSi Wiped Out Inventory on the JD EdwardsSystem to Justify Unsubstantiated Sales Cause dby Pre-Billing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
2. MCSi Maintained Material Amounts of ObsoleteInventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . .42
a. Several ConfidentialWitnesses Observed MaterialAmounts of Obsolete Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . 42
b . The ClearOne Connection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
c. MCSi Failed to Record. Adequate InventoryReserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .45
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3 . MCSi Auctioned Off Obsolete Inventory After theClass Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .45
G. MCSi Created Sanitized Books and Records for PwC Auditors . . . . . . . . . . . . . 46
H. MCSi' s Internal Controls Were Materially Weak . . . . . . . . . . . . . . . . . . . . . . . 47
I . As a Result of PwC's 2001 Audit, MCSi 's AuditCommittee Knew of, and Failed to Remedy , InternalControl Weaknesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
2. MCSi Failed to Properly Integrate All Its Subsidiariesonto the ID Edwards System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
DEFENDANTS' MATERIALLY FALSE AND MISLEADING STATEMENT SDURING THE CLASS PERIOD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
THE TRUTH IS REVEALED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
ADDITIONAL SCTT NTER ALLEGATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
A. Defendants ' Actual Knowledge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
B. Insider Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .74
1 . Peppel Takes steps to Protect Personal Assets . . . . . . . . . . . . . . . . . . . . 7 5
C. Profit Margin is a Key Financial Ratio Used by CoveringAnalysts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . .
D. Defendants Possessed the Motive and Opportunity to InflateEBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .76
EBITDA Was a Key Covenant in the Credit Facility . . . . . . . . . . . . . . . 76
2 . EBITDA Was the Performance Standard on IndividualDefendants' Obligations to Repay Promissory Note stoMCSi . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .77
APPLICABILITY OF PRESUMPTION OF RELIANCE: FRAUD-ON-THE-MARTDOCTRINE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
STATUTORY SAFE HARBOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . So
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COUNT I
Violation of Section 10(b) Of The Exchange Act and Rule IOb-5Promulgated Thereunder Against All Defendants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 1
COUNT II
Violation of Section 20(a) Of the Exchange Act Against the Individua lDefendants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .85
PRAYER FOR RELIEF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
JURY DEMAND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . .87
MCSi/Lender Complaint . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exhibit A
Certification of Fuller & Thaler Asset Management, Inc . , . . . . . . . . . . . . . . . . . . . . . . Exhibit B
Certification of Paul Bykowski . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exhibit C
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UNITED STATES DISTRICT COURTFOR THE SOUTHERN DISTRICT OF OHIO
WESTERN DIVISION
IN RE MCSi,1NC., SECURITIE SLITIGATION )
l
lll
Case No. 3:03-ev-015(Ron. Walter Herbert Rice)
AMENDED ANDCONSOLIDATED CLASSACTION COMPLAINT
JURY TRIAL DEMANDED
AMENDED AND CONSOLIDATED CLASS ACTION COMPLAINT
Plaintiffs Fuller & Thaler Asset Management, Inc . ("Fuller & Thaler") and Pau l
Bykows :i, individually and on behalf of all others similarly situated, for their Amended
Consolidated Class Action Complaint, make the following allegations by and through their
undersigned attorneys :
NATURE OF THE ACTION
I . Until it filed for Chapter 11 bankruptcy protection on June 3, 2003, and the n
began to liquidate its operations in February 2004, MCSI, Inc . ("MCSi" or the "Company") was a. .. ........ . . ... .... . .. . . .. .. ... .. . .. .. . . . . . . . . .
provider of integrated technical services and audio-visual ("tom") presentation, broadcast, an d
computer technology products . MC Si did not manufacture any products of its own . Rather,
using equipment supplied by vendors, such as Sharp , Hitachi , NEC, and SONY, MCS i
assembled. integrated systems, primarily audio-visual systems, for its clients . MCSi's ability to
secure product from these suppliers was critical to its ability to perform its contracts wit h
customers and generate revenues .
2 . Once considered "high-flying" and "fast growing," MCSi twice made Fortune
Magazine's ranking of the 100 Fastest Growing Companies in America, in 2000 and 2001. Yet,
as alleged below, the Company ultimately collapsed under the weight of its own improper
accounting and other practices, resulting in . (i) the dismissal of defendant Michael E. Peppel,
MCSi's class period (defined below) Chief Executive Officer, President, and Chairman, and
defendant Ira H. Stanley, its class period Chief Financial Officer and Vice President ; (ii) an
investigation by the Securities and Exchange Commission (the "SEC") ; (iii) the resignation of its
outside auditor, PricewaterhouseCoopers, LLP (' PwC") ; and (iv) the Company's bankruptcy and
ongoing liquidation.
3. Both before and during the class period, the Company experienced a cash flow
crisis, caused in part by an aggressive campaign to acquire other companies . This cash flow
crisis strangled the Company's ability to generate revenues, and created a vicious cycle. Without
cash, the Company failed to timely pay suppliers for products purchased, and suppliers in turn
imposed credit holds on the Company, refusing to ship product without first receiving payment,
Without the product critical to its business, MCSi could not timely perform its contracts, if it
could perform them at all. As a result, the Company lost many customers and contracts, severely
impacting-its revenue stream . Jr an effort to raise cash, the Company, which was already highly
leveraged, held two public offerings during the class period within months of each other in 2001 .
These offerings did not solve the Company's cash crisis .
4 . The allegations herein show that, both before and throughout the class period,
Defendants knowingly and recklessly disseminated materially false and misleading statements
that were designed to give the appearance that MCSi was a profitable business operation. In
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reality, MCSi's reported financial results were based on improper accounting practices, leadin g
to the Company's overstatement of revenues, profit margins, goodwill, and rental and net
income, and the misstatement of inventory through the manipulation of its JD Edwards compute r
system (the "JD Edwards System") . The JD Edwards System, MCSi's central financial system ,
included, inter a.lia, the Company's general ledger and inventory tracking and reporting functions .
5 . Specifically, Defendants engaged in a fraudulent scheme of"pre-billing" contract s
and purchase orders before a job was completed or even started, thereby prematurely recognizin g
revenue in violation of generally accepted accounting principles {"GAAP") and SEC Staff
Accounting Bulletin No . 101, "Revenue Recognition in Financial Statements" ("SA .B 101") . In .
addition, the Company overstated rental income and understated . operational expenses to falsely
inflate profit margins . During 2002, the Company also overstated quarterly income for the first
three quarters by failing to write down goodwill for impairment, in violation ofGAAP .
6 . Tellingly, Defendants attempted to conceal these improper practices by creating a
duplicate, sanitized set of financial books and records to provide to PwC's auditors . Further, to .
validate the appearance of the increased revenues achieved through improper pre-billing ,
Defendants artificially wiped out inventory reported in the JD Edwards System.
. . .. . .. . . . . . .7. While Defendants were engaging in these practices , and knowingly issuing fals e
and misleading information about the Company, its financial condition, and results of operations ,
defendant Peppel unloaded 300,000 shares of MCSi stock at an artificially inflated price for more
than $6 .8 million. This illicit transaction was timed with the public dissemination of th e
materially false and misleading statements complained of herein .
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8. In February 2003, the SEC initiated an investigation of the Company, issuing a
subpoena seeking the production of certain documents . In March 2003, Peppel stepped down as
Chairman, and shortly afterward as President and as a director. In April 2003, defendant Stanley
stepped down as CFO and Vice President . In a May 2, 2003 press release (attached as an exhibi t
to a Form 8-K filed on the same date), MCSi announced that "investors should not rely on .
MCSi's historical financial information, including the unaudited information included in MCSi' s
press release dated February 26, 2003 and filed on a Current Report on Form 8-K dated such dat e
and the other 2002 quarterly and other financial information included in MCSi's reports file d
with the SEC ."
9. On June 19, 2003, two weeks after the Company filed for Chapter I I protection ,
PwC informed the Company's Board of Directors that it was resigning its position as th e
Company's external auditors . PwC's letter of resignation cited, rate= nlia, PwC's "inability to
conclude whether MCSI has taken appropriate and timely remedial action in response to th e
discovery of potential illegal acts at the Company. "
10. On April 19, 2004, M.CSi and the lenders participating in its Credit Agreement
(National City Bank., PNC Bank, National Association, LaSalle Bank, National Association,
Fifth Third Bank; The H tingto i National Bank, Provident Bank, and U.S. Bank, National
Association) filed a complaint in the Common Pleas Court of Montgomery County, Ohio, Civil
Division, against Peppel ; Stanley; ;har villa Rao ("Rao"), Vice President of Corporate
Communications ; Jim Ahms ("Ahros"), Corporate Controller ; and Scott Walther ("Walther") ,
Director of Financial Reporting (the "MCSi/Lender Complaint") . In the MCSi/Lende r
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Complaint, which is attached hereto as Exhibit A, the Company identi fies numerous examples of
the very types of misconduct alleged herein.
ELRI DICTION AND VEN UE
11 . The claims alleged herein arise under and pursuant to Sections 10(b) and 20(a) o f
the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. §§ 78j(b) and 78t(a), and
Rule I Ob-5, 17 C.F.R. § 240.1 Ob-5, promulgated under Section 10(b) of the Exchange Act .
12. This Court has jurisdiction over the subject matter of this action pursuant t o
Section 27 of the Exchange Act, 15 U.S.C. § 78aa, and 28 U.S.C . §§ 1331 and 1337 .
13 . Venue is proper in this District pursuant to Section 27 of the Exchange Act and 2 8
U.S.C. § 1391(b) . MCSi conducted business in this District, and many of the acts charge d
herein, including the preparation and dissemination of materially false and misleadin g
information, occurred in substantial part in this District .
14. In connection with the acts alleged in this Complaint, Defendants, directly or
indirectly, used the means and instrumentalities of interstate commerce, including, but no t
limited to, the United States mails, interstate telephone communications, and the facilities of th e
national securities exchanges and markets .
PARTIES
15. As shown in the certifications attached hereto as Exhibits B and C, lead plaintiff s
Fuller & Thaler and Paul Bykowski ("Plaintiffs") purchased MCSi common stock at artificiall y
inflated prices during the class period, and have been damaged thereby .
16 . Defendant Michael E . Peppel (`°Peppel") was at all relevant times MCSi 's Chief
Executive Officer, President, and Chairman of the Board . He was also a member of the
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Company's Executive Management Committee . Defendant Peppel sold $6,862,500 of MCS i
stock during the class period while in possession of material, adverse, nonpublic -information.
17 . Defendant Ira H. Stanley ("Stanley") was at all relevant times MCSI's Chief
Financial Officer and Vice President. He was also a member of the Company's Executiv e
Management Committee .
18. Defendants Peppel and Stanley are collectively referred to as the "Individua l
Defendants . "
19. During the class period, each of the Individual Defendants made variou s
statements regarding the Company's financial condition and results of operations in MCSi pres s
releases , SEC filings, and other public fora .
20. The Individual Defendants are liable as direct participants in, and a s
co-conspirators with respect to, the wrongs complained ofherein . In addition, the Individual
Defendants, as senior executive officers, are controlling persons within the meaning of Section
20(a) of the Exchange Act, and had the power and influence to cause the Company to engage i n
the unlawful conduct complained of herein . By reason of their positions of control at MCSi, th e
Individual Defendants were able to and did, directly or indirectly, in whole or in part, control th e
content of p bl zc statements issued by or on behalf of the Company. The Ind vidual Defendants
participated in and approved the issuance of such statements made throughout the class period ,
including the materially false and misleading statements identified herein .
21 . By reason of their positions with MCSi, the Individual Defendants had access an d
were privy to con fidential and proprietary information concerning MCSi, its operations , finances ,
and financial condition, including internal Company documents, reports, and other interna l
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information provided to them. See, ems., paragraphs 67-70, 77-78, 106-108, 114-116 , 130-133,
148-149, 152-153, and 157-160, below . Through conversations and communications with othe r
corporate officers and employees, and attendance at management and Board of Directors '
meetings and committees thereof, the Individual Defendants had access and were privy to, among
other things, the adverse, non-public information concerning the Company's fraudulent revenu e
recognition practices and other overstatements of incom e, its cash flow crisis, including the
supplier-imposed credit hold situation, improper inventory valuation and reporting practices, an d
its materially weak system of internal contro ls .
22. Because of their positions with the Company, the Individual Defendant s
controlled and/or possessed the authority to control the contents of MCSi's reports, pres s
releases, and presentations to securities analysts and, through them, to the investing public . The
Individual Defendants received copies of the Company's reports and press releases alleged herei n
to be misleading before or shortly after their issuance, and had the ability and opportunity t o
prevent their i ssuance or cause them to be corrected . Thus, the Individual .Defendants had the
opportunity to commit the fraudulent acts alleged herein .
23 . The Individual Defendants, as senior executive officers and/or directors, and as
controlling persons of a publicly-traded company whose common stock was, and is, registered
with the SEC pursuant to the Exchange Act, and which was traded on the N ASDAQ until it was
delisted on April 25, 2003, had a duty to promptly disseminate truthful and accurate information
with respect to MCS1's financial condition, results of operations, and financial statements, and to
promptly correct any previously issued statements by or on behalf of the Company that ha d
become false and misleading.
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24. Each of the Defendants knew or was reckless in not knowing that the misleading
statements and omissions complained of herein would adversely affect the integrity of the marke t
for MCSi's common stock and would cause the price of MCSi's common stock to become and/or
remain artificially inflated . Each of the Defendants acted knowingly and/or recklessly in such a
manner as to constitute a fraud and deceit upon Plaintiffs and the other members of the class
(defined below) .
25 . Defendants are liable as direct participants in, and co-conspirators with respect to ,
the fraudulent scheme and course of conduct that operated as a fraud or deceit on purchasers o f
MCSi's common stock, as complained of herein, by disseminating materially false an d
misleading statements and/or concealing material adverse facts . The scheme (i) deceived the
investing public regarding MCSI's financial condition, results of operations, financial statements ,
and the intrinsic value of MCSi common stock, and (ii) caused Plaintiffs and the other members
of the class to purchase MCSi's common stock at artificially in flated prices .
PLA1alFFS' CLASS ACTION ALLEGATJONS
26. Plaintiffs bring this action as a class action pursuant to Rules 23(a) and (b)(3) of
the Federal Rules of Civil Procedure on behalf of all persons who purchased MCSi securitie s
during the period July 24, 2001 through and including February 2 6 , 2003 (the "Class Period") ,
and who suffered damages thereby (the "Class") . Excluded from the Class are Defendants ,
senior officers and directors of the Company, members of the Individual Defendants' familie s
and their legal representatives, heirs, successors, or assigns, and any entity in which any exclude d
person has or had a controlling interest , or which is a parent or subsidiary of, or is controlled by,
the Company,
27. The members of the Class are so numerous that joinder of all members i s
impracticable . While the exact number of Class members is unknown to Plaintiffs at this tim e
and can be ascertained only through appropriate discovery, Plaintiffs believe there are hundreds ,
if not thousands, of members of the Class who have purchased MCSi common stock during th e
Class Period . During the Class Period, MCSi had more than 25 million shares of common stoc k
issued and outstanding, owned by hundreds, if not thousands, of geographically dispersed
shareholders .
28. There is a well-defined community of interest in the questions of law and fact
involved in this case. Questions of law and fact common to the members of the Class, whic h
predominate over questions that may affect individual Class members, include whether :
a. Defendants violated the federal securities laws as alleged herein ;
b. Defendants materially misrepresented MCSi's financial condition andresults of operations to the investing public;
c . Defendants omitted material facts necessary to make their statements, inlight of the circa tances under which they were made, not misleading ;
d. Defendants knew or recklessly disregarded that their statements werematerially false and misleading ;
e. the price of MCSi's publicly-traded stock was artificially inflated ; and
£ Plaintiffs and the Class sustained damages and, if so, the appropriatemeasure of damages .
29. Plaintiffs' claims are typical of the claims of the members of the Class because
Plaintiffs and the Class sustained damages arising out of Defendants' wrongful . conduct in
violation of federal law as complained of herein .
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30 . Plaintiffs will fairly and adequately protect the interests of the members of th e
Class and have retained counsel competent and experienced in class actions and securitie s
litigation. Plaintiffs have no interests antagonistic to, or in conflict with, those of the Class .
31 . A class action is superior to other available methods for the fair and efficien t
adjudication of this controversy since joinder of all members of the Class is impracticable .
Furthermore, because the damages suffered by individual class members may be relatively small ,
the expense and burden of individual litigation makes it impracticable for class members
individually to redress the wrongs done them. There will be no difficulty in the management o f
this action as a class action. The disposition of the, claims of the Class in a class action wil l
provide substantial benefits to the parties and the Court.
CONFIDENT WITNESSES
32. Numerous former MCSi employees have informed Plaintiffs of Defendants '
improper practices, including their overstatement of revenues, net income, and earnings per shar e
through various GAAP violations during the Class Period . These witnesses spoke to Plaintiffs '
counsel on a confidential basis, and each is designated as "CW "
33 . CWI was an MCSi programmer from 1999 through mid-2002 . CWI provided
programming for the JD Edwards System, MC 's primary financial system . CW1's
responsibilities included generating inventory reports from the JD Edwards System for inventory
control managers employed at MCSi 's headquarters . CW1 has information concerning th e
Zengine sham transactions (discussed below), improper manipulation of inventory, and th e
creation of duplicate financial books and records for PwC auditors .
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34, CW2 was an executive in MCSi's Midwest Region from 1999 through early 2004 .
CW2's responsibilities were supervisory in nature . CW2 has information concerning premature
revenue recognition and pre-billing .
35 . CW3 was a field engineer in MCSi 's Dallas office/branch from July 2000 to May
2002. CW3's responsibilities included installing multimedia systems for major c lients and are a
schools, as well as repairing and maintaining various types of equipment , including AMX
systems , audio systems , video systems, and paging systems . CW3 has information concerning
supplier imposed credit holds and the loss ofsales personnel .
36. CW4 was an account manager in MCSi's Kentucky office/branch from 1985 to
May 2003 . CW4's responsibilities included generating sales for the Company. CW4 has
information concerning premature revenue recognition and pre-billing, supplier-imposed credi t
holds, and the loss of customers due to MCSi's inability to perform its contracts .
37. CW5 was an administrative assistant in MCSi's Kentucky office/branch for 1fl
years, until February 2003 . CW5's responsibil ities included entering and billing customers '
orders and placing equipment orders to suppliers . CW5 has information concerning prematur e
revenue recognition and pre-billing, and supplier-imposed credit holds .
.38 . CW6 was an account executive in MCSi's Cincinnati office/branch fro m
September 1998 to September 2001 . CW6's responsibilities included computer equipment sales .
CW6 has inforrzm.ation concerning premature revenue recognition and pre-billing, the cash flo w
crisis, inflation of revenues on sales, the use of fictitious sales to increase revenues ,
supplier imposed credit holds, MCSi 's attempts to raise cash, the loss of sales personnel ,
1'
obsolete inventory, and the failure to properly integrate the financial records of acquired
companies onto the JD Edwards System .
39. CW7 had various functions in MCSi's Cleveland office/branch from December
2000 to March 2003, including AN purchasing, project installation, and project management .
CW7 has information concerning premature revenue recognition and pre-billing (to meet Wail
Street sales targets), supplier-imposed credit holds, and the man ipulation of inventory to justify
unsubstantiated sales resulting from pre-billing .
40. CW8 was an engineer in MCSi's Atlanta office/branch from January 2002 to
August 2002 . CW8's responsibilities included working with MCSi's sales staff in designing ,
researching, and preparing propos als for integrated technical services . These proposals generally
ranged from $100,000 to in excess of $7 million . CW8 has in€'ormation concerning supplier-
imposed credit holds and profit margins .
41 . CW9 was an accounting executive in MCSi's Southeast Region from Augus t
2002 to September 2003 . CW9 has information concerning supplier imposed credit holds, loss
of customers, overstatement of rental income, inflation of profit margins, obsolete inventory, the
failure to establish adequate inventory reserves, and the failure to properly integrate the financia l
records of acquired companies onto the JD Edwards System.
42. CW10 was an executive in MCSi's Southeast Region from June 20€ 0 to October
2003. CW10 has information concerning the overstatement of rental income , supplier- imposed
credit holds, loss of customers, obsolete inventory, the failure to establish adequate inventor y
reserves, and the failure to properly integrate the financial records of acquired companies onto
the 3D Edwards System .
12
43 . CW11 worked in financial reporting in MCSi's corporate headquarters in Ohio
from February 2002 to August 2003 . CWI 1's respon sibilities included compiling MCSi' s
regional budgets and forecasts, and preparing MCS1's consolidated monthly and quarterl y
financial statements . CW 11 has information concerning the failure to properly integrate th e
financial records of acquired companies onto the JD Edwards System, and the manual financia l
statement consolidation process for uni tegrated acquired companies.
44. CW12 was a manager in MCSi's Portland office/branch from July 1997 to July
2002. CW12' s responsibilities included, inter ia, overseeing AN installation and integration
contracts. CW12 has information concerning the failure to properly integrate the financia l
records of acquired companies onto the JD Edwards System.
45. CW13 was an account executive from 1985 to July 2002 at the Company' s
headquarters in. Ohio. CW13's responsibilities included selling computers and compute r
products . CW13 has information concerning the inflation of revenues on sales, inflation of profit
margins, supplier-imposed credit holds, and MCSi's attempts to raise cash .
46. CWT 4 was a technical sales engineer in MCSi's California Region for
approximately one and one-half years , until November .2000 . CW14 has information concerning
thefollowir g pre-Class Penod actiirities : premature revenue recognition and pre-billing, and
supplier-imposed credit holds .
47. CW15 worked in information Technology ("IT") in MCSi's corporate
headquarters in Ohio from April 1992 to October 2001 . CW 15's responsibilities included
working with the JD Edwards System and PeopleSoft, a human resources and payroll web-based
system. CW 15 has information concerning premature revenue recognition and pre-billing, the
13
improper manipulation of inventory, obsolete inventory, and the failure to properly integrate the
financial records of acquired companies onto the JD Edwards System .
48. CW16 was a sales executive from March 2000 to May 2003 in MCSi's Californi a
Region. CW16 has information concerning supplier-imposed credit holds and the Individua l
Defendants' knowledge thereof, Peppel's management style, and the loss of customers .
49. CW17 was an accounting manager in MCSi's Midwest Region from October
2003 to December 2003 . CW17 worked at MCSi after the Class Period, under its post-Class
Period leadership, and is able to confiurm, through his/her review of MCSi's books and records ,
the existence of premature revenue recognition and pre-billing during the Class Period .
50 . CW18 held various positions in MCSi's corporate headquarters in Ohio for 17
years, until October 2003 . CW I8's responsibilities included working in purchasing ,
warehousing, and information technology. CW 18 has information concerning the Zengine sham
transactions (discussed below) .
51 . CW19 worked in purchasing in MCSi' s corporate headquarters in Ohio from
September 1996 through June 2001 . CW19' s responsibilities included establishing and
maintaining relationships with MCSi suppliers , including the top 25 suppliers . CW19 has
information concerning supplier-imposed credit holds and the Individual Defendants' knowledg e
thereof, loss of customers, the Mercatum sham transactions (discussed below), obsolete
inventory, and the ClearOne inventory transactions (discu ssed below) .
52 . CW20 worked in human resources in MCSi's corporate headquarters in Ohio for
five years , until September 2002. CW20' s responsibilities included processing payroll, sales
14
commissions, bonuses , and employee benefits . CW20 has information concerning MCSi' s
acquisition ofMercatum, Ltd. C'Mercatum'D .
SUBSTANTIVE ALLEGATIONS
A. MCS1's CASH FLOW CRISI S
1. MC I's SuRRHers Placed the Company on "Credit Hold"
53. Both before and during the Class Period, MCSi's operations were crippled b y
poor cash flows, which were caused, in part, by the Company's aggressive acquisition campaign .
Between 1995 and 2000, MCSi acquired at least 26 companies . During the period 2000 through
2003, for example, the Company acquired Westek Presentation Systems, Midwest Visual ,
Intellisys Group Inc., Zengine Inc . ("?engine"), and Mercat€ m. .'.i he cash flow crisis resulting
from these and other acquisitions, as well as from other factors, created enormous financia l
obstacles to the Company's ability to perform its contracts -- contracts heavily dependent upon
MCS i's ability to obtain the audio and video equipment to "integrate " for its customers .
54. Specifically, MCSi's cash flow crisis impacted the Company's ability to pay
suppliers . As a result , suppliers placed the Company or. "credit hold" and refused to ship
product, frustrating the ability of MCSi engineers and technicians to provide quality, timely
service to the Company' s customers . For exxarrmple; MCSi's service contract with American
Airlines called for it to maintain the AV system used for pilot and flight attendant training.
When the projectors in the control room broke down, according to CW3, he/she was unable to
order replacement parts . As a result, beginning in May 2002, American Airlines was forced t o
perform its in-house training through the use of books and manuals only .
15
55 . According to CW6, management instructed MCSi account executives t o
misrepresent the reasons for the delays in service, "Accoun t executives were instructed to tell
customers that orders were late because of UPS delivery mix-ups, or to blame it on our bosses or
even ourselves for forgetting to put the order in . You got creative with the lies ."
(a) Examples of Suppliers Imposing Credit Holds on MCSi
56 Supplier-imposed credit holds existed both before and during the Class Period ,
starting no later than 1999 . According to CW14, by 2000 the three largest AN suppliers in the
country, AMX Control System, Extron . Electronics, and Sharp Electronics, had placed material
restrictions on product shipments to MCSi because of late payments . According to Plaintiffs '
confidential witnesses, the credi t holds continued in 2000 (CW3, CWIO), 2001 (CW3, CW6 ,
CW7, CW13, CW19), 2002 (CW3, CW5, CW7), and 2003 (CW7) .
57. Jennifer A. Bell ("Bell"), a Sales Executive/Branch Manager at MCSi' s
Cincinnati office, raised widespread concern about credit holds in 2001 . In a July 27, 2001 e-
mail to John Huffman, Marti Schumann ("Schumann"), Stacey Huntley, Patty Morga n
("Morgan" ), and Robert Westrich ("Westrich"), entitled "Credit Holds" (the "July 27, 2001 e-
mail"), she wrote : "The situation is getting worse with holds and not better and I have bee n
doing my best to ward off everyone's concerns . They seem to be miming out of patience with
me." Bell also noted thirteen supplier that had put MCSi on credit hold . Those suppliers, as wel l
as others identified by confidential witnesses, are identified in the chart below :
16
Supplier CW3
Cluj4
C W5
CW6
CW8
CW1 0
CW13
CW1 4
C W1 6
C W1 9
July 27,204 1e-mail
All Write Ribbon ✓
AMX Control System ✓ ✓ ✓
Azerty ✓
Chief Manufacturing ✓
Crestron Electronics ✓ ✓
Daisytek ✓ ✓
Digital Storage ✓
Electronic Business
Machines
✓
Extron Electronics ✓ ✓ ✓
Fujitsu ✓
Gates/Arrow ✓
InFocus ✓ ✓
Ingram ✓ ✓
MICR Source ✓
Middle Atlanti cProducts
✓
Mitsubishi ✓
NEC ✓
Panasonic ✓
Monica ✓
Rittenhouse ✓
Sharp Electroiiics ✓ .✓ ✓ ✓
Sony J J ✓
Techdata ✓ ✓
Technical Necessities ✓
Tiger Industries ✓
United Chair ✓
17
5 8 . CW 19 stated that in June 2001 he/she discussed the credit hold situation wit h
Panasonic, Sharp, and Infocus on a weekly basis .
59. Many suppliers, including many of those identified in the chart above, were owe d
substantial amounts of money when the Company filed for Chapter 11 protection in ,tune 2003 .
MCSi's "Consolidated List of Creditors Holding the 30 Largest Unsecured Claims," dated Jun e
2, 2003, includes, inter alia :
Sharp Electronics Corporation (the larges tunsecured claim)
$1,878,115 .2 6
Hitachi America Limited $1,694,704.44
NEC Solutions America $1,373,331 .6 8
Extron Electronics $637,605 .23
Sony Consumer, Sony Corporation of America $486,377 .86 .
Crestron Electronics, Inc . $305,697 .3 4
Hitachi Data Systems $294,317 .1 7
AMX $234,410 .7 3
Middle Atlantic $111,901 .3 2
(b) Supplier- imposed Credit Holds Caused MCSI to LoseCustomers and also Threatened Existing Relationships
60. Numerous witnesses -- including CW4, CW6, CW10, CW14, CW16, and CW1 9
. . . stated that credit : holds wreaked havoc on MCSi's customer relationships . In many instances, .
customers terminated their relationship with MCSi as a result of the Company's inability t o
service their accounts. The, problem was particularly acute after September 11, 2001, when ,
according to CW4, business conditions were especially difficult in the AN industry, and sales
hard to come by,
is
61 . In early fall, 2001, for example, Palm Beach County, Florida ("Palm Beach" )
blacklisted MCSi because of poor service resulting from the credit hold situation . According to
CW10, Palm Beach was a major customer, generating approximately $1 .5 million in revenues .
Nonetheless, supplier-imposed credit holds caused MCSi to amiss installation and delivery
deadlines . Palm Beach's Procurement/Purchasing Department sent a certified letter to Michael
Lever ("Lever"), MCSi's Florida president, citing MCSi's poor performance as the reason for it s
actions . CW 10 was shown this letter .
62 . CW6 stated that between approximately April 2001 and September 2001, MCS i
lost the following customers because of delays in product shipments (in this case, computer
supplies) :
a. Thomson Learning, a subsidiary of Thomson Financial ;
b. Proctor & Gamble in Cincinnati ;
c. Keidel Supply;
d. Hamilton County, Ohio Sheriff' s Department; and
e . SDRC.
63 . According to CW6 : "The credit hold situation was desperate . What happens i f
you've quoted prices on orders to your customers and you can't deliver? You lose you r
customers . The order would go on backhold, but the customer would expect it the next day or
the next day after, and when they didn't get it, we would call the supplier about the status and
find out that MCSi was on credit hold ."
64. As CW14 put it : "You simply can not install a system, or provide product to your
customers, when you are on credit hold. There are no spare parts (for the most part) included in a
19
AV integration, so if the credit hold does not get cleared up for weeks you are not going to make
your install window. Customers expect good service, and if you don't provide it (many times
more than once), pool:, you no longer have a customer. When the same problem exists nation
wide, a national company can go into a tailspin ."
(c) MCSi Misrepresented Its Cash Flows to Suppliers
65. According to C W4, MCSi misrepresented its cash flow to suppliers in order to
receive product shipments from them. "A lot of vendors were given false reporting so they
would extend credit to the company, and they would go ahead and ship end product and, o f
course, never receive payment on the product after the company said, `Oh yeah, we're fine .'"
66. According to CW3 and CW6, MCSi lost sales people in 2001 as a result of the
problems with credit holds and the resulting negative impact on sales commissions ,
(d) Stanley and Peppel Knew ofthe-Supplier-Imposed Credit Holds
67. According to CW 19, as a result of wide-spread credit holds in mid-2000, CW19
and other MCS1 managers from key departments were instructed to jointly prepare a list, on a
daily basis, detailing : (1) the names of suppliers who had placed the Company on credit hold ;
(2) the suppliers that were being paid; and (3) the suppliers that had the most critically needed
equipment. This list was compiled into a report that was prepared by the accounting and
purchasing departments, and Stanley . The report contained three sheets, showing : (1) back
orders of product (in June 2001 , according to CWI9, MCSi had between $ 10 million to $1 2
million in back orders) ; (2) suppliers that had issued credit holds and the amounts owe d
(prepared by CWI9); and (3) MCSi's cash receipts/available funds (prepared by accounting) .
20
Stanley would then determine which suppliers would be paid, even if it meant losing some orders
by not paying others .
68. CW 19 stated that Peppel was "always in the loop" and also received the report on
a daily basis because MCSi "was at a very critical point ." Further, Peppel and Stanley informed
C W 19 during discussions of the daily reports, "We don't have the cash . We have to wait until we
get more money from customers and then we can pay the vendors ."
69. This was confirmed by CW16, who, beginning in 2001, participated in dail y
telephone calls with Shadan Magdzi ("Magdzi"), a Regional President, Stanley, and Peppel when
the cash flow crunches and credit holds became most critical . "They knew about the situation .
They knew exactly what was going on ." CW16 also described Peppel as a "very hands-on
manager. "
70. During these calls, Stanley and Peppel were specifically told which jobs were
suffering due to credit holds. Stanley also continued to request and receive daily reports that
identified customer accountsljobs and the products needed for completion . Peppel and Stanley
routinely advised CW 16 and Magdzi that the entire company was under credit holds . At times,
they approved the release of cash for equipment needed on the most urgent jobs .
2 . . . MCSi's .Desperate Attempts to Raise Cash
71 . Both CW6 and CW13 stated that, before September 2001, an Ohio-based bank
denied a loan to MCSi that was to be used to pay-down, or pay-off, MCSi's debt to suppliers .
CW6 received this information from a regional sales manager. CW13 identified the bank as
National City Bank in Cleveland, and stated that the bank refused to approve the loan because of
the severity of the Company's credit holds .
21
72 . Desperate for cash to satisfy MCSi's debts to suppliers, or rectify th e
supplier-imposed credit holds that were choking the Company's ability to serve customers, MCSi
sought to raise capital th3rough the equity markets. For example, in August 2001, MCSi offered
4.0 million shares of common stock in a secondary public offering . The Company explained the
intended "use of proceeds" in its "Prospectus Supplement (To prospectus dated February 2,
2001)" on Form 424B2 filed with the SEC on August 15, 2001 (the "August 2001 off'ering') :
Of the $43 .2 million of net proceeds, we expect to use substantiallyall to repay a portion of our $181 million credit facility and theremainder will be used for general corporate purposes . Generalcorporate purposes include acquisitions, investments, camexpenditures , repurchase of our common stock and other corporatepurposes determined, from time to time in the future, bymanagement. [Emphasis added. ]
73 . Former employees have stated, however, that the proceeds of the offering wer e
not used for the publicly represented reasons, or to remove the debilitating credit holds, As CW6
explained: "The public offering was done, but it didn't take care of the problem, and we went on
credit hold again ." According to CW6, Schumann gave the following response when asked why
the money was not being used to pay down the debt owed to suppliers : "It's not going for that .
They're putting it toward new building furniture ." Schumann, who worked in MCSi' s
headquarters in Dayton, Ohio, and tracked MCSi's credit holds, reported directly to Peppel .
According to CW6, MCSi was moving into its new Dayton headquarters during this time frame.
B. MCSi FALSELY INFLATED REPORTED REVENUE
74. MCSi's cash crisis, and the resulting credit holds, made it almost impossible fo r
the Company to perform contracts and generate revenue. To create the illusion of profitability,
therefore, MCSi engaged in various improper practices, both before and during the Class Period ,
22
that were designed to falsely, and materially, inflate reported revenue . These practices included
the premature recognition of revenue through the creation of pre-bills in the JD Edwards System
- long before an actual invoice was sent to the customer - and internally increasing prices on
invoices after they had been billed to customers . These practices caused both revenues and net
income to be materially overstated .
1. MCSi Prematurely Recognized Revenu esin Violation of GAAP and SAB 10 1
75 . SAB 101, "Revenue Recognition in Financial Statements," is founded o n
numerous provisions of GAAP . For example, Statement of Financial Accounting Concepts No .
5, "Recognition and Measurement in Financial Statements of Business Enterprises" ("SFAC 5"),
183(b), issued by the Financial Accounting Standards. Boards ("FASB"), states : "revenue should
not be recognized until it is realized or realizable and earned ." In concert with SFAC 5, SAB
101 states :
revenue generally is realized or realizable and earned when all of thefollowing criteria are met :
• persuasive evidence of an arrangement exists ,
• delivery has occurred or services have been rendered,
• the seller's price to the buyer is fixed or determinabl e, and
• collectibility is assured .
76. Defendants knowingly, and/or w ith reckless disregard , violated SAB 101 and
GAAP by pre-billing maintenance/service contracts .
23
77. On July 24, 2002, Stanley and Peppel hosted MCSi's "Q2 2002 Financial Releas e
Conference Call," transcribed by the Fair Disclosure Financial Network (the "Q2 2002
Conference Call"), in which they explained MCSi's general pricing on products and services ,
78 . According to Defendants, the average AIV integration project generate d
approximately $250,000 in revenues, while the average AN broadcast job generated
approximately $3,600 in revenues, and the average order for computer products was $250 .
79 . By pre-billing AIV integration projects , in particular, MCSi was able to
improperly and materially inflate revenues by approximately one quarter of a million dollars per
AJV integration contract .
(a) MCSI Pre-billed Maintenance/Service Contract s
80. Stanley demanded that 100% of revenues generated by maintenance/servic e
contracts, particularly fo, AN jobs, be prematurely recognized without creating an accrual
account to recognize the revenue over the length of the contract. CW2 stated, "This was Ira's
mandate." Other confidential witnesses refer to this process as pre-billing . Significantly,
according to CW4, pre-billing occurred primarily at times when financial reporting was
occurring, usually at the end of the month, quarter, or year, to enhance reported revenue ,
81 . According to CW2, MCSi recognized 100% of the revenues associated with
one-year service/maintenance agreements when the equipment installation was completed .
Stanley required all maintenance contracts in MCSi's Mid-West region to be accounted for i n
this way. The region sold approximately $1 .5 million worth of service contracts per year .
82. CW2 stated that the correct accounting procedures required MCSi to reverse the
revenue, placing it into an accrual account, and then recognizing the revenue in one-twelft h
24
increments , as the maintenance agreement progressed from month to month. CW2's explanatio n
is consistent with the requirements of SAB 101 and GAAP . SAB 101 includes the following
Interpretive Response to Question 6, in 3. Delivery and Performance :
The Staff believes that, provided all other revenue recognitioncriteria are met, service revenue should be recognized on astraight-line basis . . . over the contractual term of the arrangementor the expected rzeriod during which those services will beperformed, which ever is longer . [Emphasis added. ]
83 . Before February 2001, according to CW2, the Mid-West region accounted for
service revenue over the life of the service contract in accordance with GAAP and SAB 101 .
That month, when the branch was integrated into the JD Edwards System , Stanley mandated that
all of the N id-West's accruals (i .e ., deferred revenue) be improperly accelerated and recognized
in the month of February 2001 . CW2 stated that there was no reason why the proper accounting
methodology, previously used by MCSi's Mid-West region, could not have been transferred ont o
the JD Edwards System ,
84. CW17 confirms that, under the Individual Defendants' managem ent, MCSi wa s
improperly recording revenue on its one - year service contracts . According to CW17, such
contracts were generally billed and revenues were recognized in full at the commencement of th e
job, in violation of GAA' .
(b) MCSi Pre-billed AN Contracts
85 . CWS stated that, in July 2002, shortly after MCSi had spun off its compute r
products division, MCSi began to "pre-bill" AIV contracts in the JD Edwards System . The
practice remained in effect in February 2003 . The directive came from an MCSi supervisor, Joh n
Melvin ("Melvin") . Melvin reported to Fred Lamm ("Larmn"), an MCSi district manager base d
25
in Nashville . Lamm reported to John Huffman ("Hu£i'man"), MCSi's then Chief Operating
Officer ("COO"), based in the Company's headquarters in Dayton, Ohio.
86, According to CW5, before July 2002, when a purchase order was received from a
customer, product was ordered and a "job" was created . The client was subsequently billed when
the job was completed. However, after July 2002, pre-billing (Le ., generating invoices and
recognizing revenue immediately upon receipt of a purchase order) increased . The Company' s
quarterly financial statements reveal the impact of this improper practice . MCSi's Form 10-Q for
the quarter ended June 30, 2042 (the "2Q 2002 10-Q"), filed with the SEC on August 14, 2002,
reported $123 .5 million in net sales . The Form 10-Q for the quarter ended September 30, 2002
(the "3Q 2002 10-Q"), filed with the SEC on November 14, 2002, reported net sales of $137 .5
million, representing a $13 .9 million , or 11 .3%, increase in quarter over quarter net sales .
87. According to CW4, pre-billing entailed "generating an invoice to show that
revenue did book during a certain month even though the job may not have been officiall y
started, before the customer received equipment, or before their product had been installed if i t
was an integration ." CW4 further stated that Melvin directed his staff to pre-bill certain jobs in
the JD Edwards System at 100% of the contract 's value to create the appearance of achieving
monthly sales quotas/goals . This caused the system to create corresponding accounts receivable s
for the prematurely recorded revenues, materially overstating current assets as well .
88 . Defendants ' practice of pre-billing, described by CW4 in $ 87, above , violated
SAB 101's delivery requirement for revenue recognition . SAB 101 defines delivery in the
Staffs Interpretive Response to Question 3, in 3. Delivery and Performance:
26
Delivery generally is not considered to have occurred unless theproduct has been delivered to the customer's place of business oranother site specified by the customer .
A seller should substantially complete or fulfill the terms s eciledin the arrangement in order for delive or performance to haveoccurred . When applying the substantially complete notion, thestaff believes that g Ely inconsequential or perfunctory actions mayremain incomplete such that the failure to complete the actionswould not result in the customer receiving a refund or rejecting thedelivered products or services performed to date.
If an arrangement requires the delivery or performance of multipledeliverables, or "elements," the delivery of an individual element isconsidered not to have occurred if there are undelivered elementsthat are essential to the functionality of the delivered elementbecause the customer does not have the full use of the deliveredelement . [Emphasis added . ]
89. CW5 confirmed that Melvin mandated pre-billing purchase orders for 100% o f
the contract's value, stating: "They knew good and well they didn't have that job scheduled unti l
the middle of January, but they would go ahead and bill it at December 31st . It would mak e
year-end numbers look better ." CW4 also stated, "Being a sales organization, there was always
a push to get as much billed as possible . From the company's standpoint, they needed to show . .
good numbers each quarter, each month . That had always been the case with MCSi . "
90. Invoices were not mailed until the job was completed, creating large gaps (e . >
one month, or more) between the invoice (and revenue recognition) date and when it was actuall y
mailed to the customer for payment. This practice violated all three examples of SAB 101' s
delivery requirement for revenue recognition, discussed at 188, above .
27
91, Additionally, if a job generating substantial revenue was close to completion,
MCSi would bill it in the JD Edwards System to create the revenue stream, but retain the invoice
until the job had been completed . Both CW4 and CW5 stated that, in some instances , a manual
invoice was created and sent to the customer because the computerized version (i .e., the pre-bill)
had such a premature bill date (ie_ ,the date it was actually pre-billed versus the job's true
completion date) . This practice violated SAB 101's "substantially complete" delivery criteria fo r
revenue recognition (see ¶C 88, above) because, had there been only "inconsequential o r
perfunctory actions" remaining to be performed, there would have been no material dat e
discrepancies between the pre-bill date and actual job completion date .
91 Pre-billing, in addition to falsely inflating revenues and accounts receivable, als o
caused a negative .by-product : the elongation of customer payment cycles recorded in the JD
Edwards System . This by-product negatively impacted reported days sales outstanding ("DSO") ,
causing it to increase, relative to the high revenues reported in MCSi's financial statements, The
DSO metric represents the average time it takes to collect a receivable following a credit sal e
during a specifi ed period. In other words, the DSO metric indicates how long, on average, it
takes for a company to turn its accounts receivable into cash .
93 . In the MCSiILender Complaint,... the Company confirms that "Stanley ' s creative
journal entries resulted in a large overstatement of MCSi's accounts receivable and income fo r
2002 ." However, as alleged in T 225-226, 243-244, and 264-265, below, MCSi made severa l
false and misleading statements during the Class Period concerning the reasons for the increas e
in its DSO, in an attempt to hide the true cause of the increase.
28
94. The University of Kentucky, Northern Kentucky University, and Sullivan
University are examples of clients whose AN installation contracts were improperly pre-billed
by MCSi, resulting in premature revenue recognition, before the projects/jobs were completed
and before actual invoices were sent to the clients, According to CW4, these customers did not
pay MCSi, nor were they invoiced any portion or percentage of the installation services, until the
jobs were completed in full . CW4 further stated that, throughout his/her employment, contracts
with all academic clients serviced out of MCSi's Louisville office did not require fall, or even
partial, pre-payment . Payment was required only when installation was completed.
95 . According to CW4, MCSi' s contracts with corporate customers, such as
Electronic Data Systems (EDS), J.C. Penney, Nortel, and Texas Instruments , required a 30 %
retainer at the commencement of a job, which was recognized as revenue upon receipt . Under
SAB '01, recognition of the 30% deposit as revenue is improper . indeed, SAB 101 states the
following in the Staff's Interpretive Response to Question 4, in 3. Deliveiy and Performance :
Because Company R retains the risks of ownership of themerchandise, receives only a deposit from the customer, and doesnot have an enforceable right to the remainder of the purchaseprice, the staff would object to Company R recogn izing asrevenue upon receipt of the cash deposit . [Emphasis added. ]
96. Specific examples of pre-billing include the following .
(i) University Of Kentucky
97. According to CW4, MCSi performed numerous installation jobs for th e
University of Kentucky, each of which generally ranged in price between $10,000 and $20,000 .
These were usually AIV installations of projectors , plasma screens , and sound systems withi n
classrooms .
29
98 . CWS stated that, in October 2002, MCSi's Louisville office was under contrac t
with the University of Kentucky, in Lexington , for three separate AN installation jobs, two of
which had not yet started, while the other was underway. That same month, Melvin demanded
that CW5 pre-bill the University of Kentucky for all three jobs . According to CW5, the
University of Kentucky was not sent an actual invoice until 60 days later on at least one of the
three jobs, because the installation was not actually finished until then .
99 . This was a violation of SAF3 101's "substantially complete" and "essential t o
functionality" delivery requirements for revenue recognition . See ¶ 88, above.
(ii) Northern Kentucky Universit y
100. According to CW4, around August or September of 2002, MCSi's Louisvill e
office received a purchase order valued at approximately $100,000 from Northern Kentuck y
University, in Highland Heights, Kentucky, for AJV installation work. The A/V installation
work included the installation of projectors, sound systems, and Creston control systems used to
operate a room environment (ems., turning on a projector, and raising and lowering volume, etc .) .
Several weeks before the job was completed and officially billed to Northern Kentuck y
University, all of the revenue was booked within the ,1D Edwards System. According to CW4,
this was done to "nieet monthly numbers ."
101. . This violated SAE 101's "substantially complete" and "essential to functionality"
delivery requi rements for revenue recognition . See 88, above.
(iii) Sullivan ColIgUe
102. CW4 stated that, at the end of May 2002, MCSi's Louisville office received a
$60,000 purchase order from Sullivan College in Lexington, Kentucky, for AN installation
30
services . The job required MCSi to install projectors, plasma screens, and broadcast equipment
in various classrooms . This job was completed, and an invoice mailed, in October 2002 .
According to CW4, however, MCSipre-billed the job and prematurely recorded 100% of the
revenue in September 2002, because the office was not meeting its revenue goals for that month .
103 . This violated SAB 101's "substantially complete" and "essential to functionality"
delivery requirements for revenue recognition . See' 88 , above.
(c) MCSi Improperly Pre-ladled Clients for E ui ment Orders
104. CW6 stated that MCSi booked 100% of the revenue on equipment orders fro m
customers before the product was shipped in full and before the customer was billed for th e
order. According to CW6, if, for example, a customer ordered 30 printers and only 15 were
available from the supplier at that time, MCSi would generate an invoice for all 30 printers i .e . ,
100% of the order), record the revenue from the entire order, and retain. the invoice. The
Company mailed the invoice only when the entire order was shipped, This practice allowed the
Company to materially inflate both reported revenues and net income .
105. The above practice violated SAB 101's "delivery to customer's place of business "
and "substantially complete" requirements for revenue recognition . See ¶ 88, above .
2 . MC 'i Inflated Revenues Generated From Customer Sale s
106. In June 2002, before the close of the second quarter, Stanley told Terina Jone s
("Jones"), a special projects manager, to change the price of merchandise sold to Retrobox, an
MCSi customer . According to CW6, the. invoice for 7,000 Dell computers, each priced at $300,
had already been billed and mail ed to Retrobox . Stanley ordered that the price on the invoice
(which was stored in the JD Edwards System) be increased to $900 . The $600 fictitious pric e
31
increase resulted in a $4.2 million .material inflation of revenues for the quarter ended June 30 ,
2002. CW6 further stated that the increased $900 price did not reflect the market value of the
Dell computers, which were stripped down, bottom-of-the-line models , without CD-ROM drives ,
These computers were initially intended to be sold to FedEx, but th e deal fell through. Retrobox
bought them at a reduced price to upgrade them.
107 . CW 13 confirmed this practice, stating that MCSi's senior managers , including the
Individu al Defendants , had data entry . people change the invoiced price of products to create the
appearance of higher sales .
108 . Further, MCSi admits in the MCSi/Lender Complaint that in March 2002, severa l
months before Stanley's June 2002 directive to Jones, Stanley also fabricated journal entry
56381, entitled "Retrobox to CTG." According to the MCSifLender Complaint, this was one of
five journal entries Stanley fabricated to accounts receivable, "totaling over $18 million ."
According to the MCSilLender Complaint, the other fabricated journal entries were : (1) Entry
56378, entitled "Correct date of sales"; (2) Entry 56379, for "Major Projects" ; (3) Entry 56380,
for "Major Projects #2" ; and (4) Entry 56381, entitled "Reclass of major prof . "
C. CSI OVERSTATED RENTAL INCOME
109, MCSi also rented equipment (g. g ., projectors) to customers . According to CW9,
MCSi violated GAAP and inflated rental income by failing to record periodic depreciatio n
expense for rental inventory . CW9 stated that rental inventory/equipment was overvalued for th e
year ended December 31, 2002 .
110 . Wiley GAAP 2003, by Delaney, Epstein, Nach and Weiss ("Wiley GAAP"),
defines depreciation as follows :
32
Depreciation. The periodic charge to income that results from asystematic and rational allocation of cost over the life of a tangibleasset . [Emphasis added . ]
111 . Wiley GAAP further states :
Depreciation of fixed assets. The costs of fixed assets areallocated to the periods they benefit through de reciation . The, . .method of depreciation chosen must result in , .a systematic andrational allocation of the cost of the asset (less its residual orsalvage value) over the asset's e. cpected usef .llife. Thedetermination of useful life must take a number of factors intoconsideration, including technological change, normaldeterioration, and actual physical usage. The method ofdepreciation is determined as a function of time (e .g., technolo calchange or normal deterioration) or as a function of actual physicalus_age . [Emphasis added . ]
112. MCSi intentionally and/or recklessly failed to depreciate rental assets, which were
subject to both technological change and actual physical usage, in addition to norma l
deterioration. For example, MCSi would buy a projector for $5 ,000 and continue to carry it on
the books as a $5 ,000 asset , whereas one year after purchase, according to CW9, "I'm lucky i f
that thing is worth $200 ." CW9 stated that MCSi failed to adjust its rental income for
depreciation expense . MCSi carried the equipment on the balance sheet at fa ll cost, and the P&L
(Le ., profit and loss) did not reflect the economic detriment i .e ., the loss of the value of the renta l
asset) over time. CW9 stated that this practi ce was occurring when he/she joined the Company
in August 2002 .
113 . CW9 reported the overvaluation of rental inventory (ems., projectors, video
screens, etc .) in writing to several finance executives in January or February 2003, indicating that
both the balance sheet and P&L statement for 2002 were overstated . The report emphasized that
approximately $800,000 of the $3 million inventory value was impaired . CW9 further stated,
33
"All together, there was $6 million between accounts receivable and inventory, and I told the m
they had a $1 .1 million impairment and that they needed to cover those things with reserves, "
The finance executives to whom CW9 sent his/her report included Daniel Knotts ("Knotts"),
MCSi's then COO, and Ahrns, Corporate Controller . Knotts reported directly to Stanley, Ahm.s
is a named defendant in the MCSi/Lender Complaint . CW9 characterized the response to his/her
report as hostile, and said that one of the recipients, Knotts, called him to ask, "Who's seen this?"
D. MCSi UNDERSTATED OPERATIONALEXPENSES TO FALSELY INFLATE. PROM MARGINS
114. CW13 was informed by Mary Stewart ("Stewart"), who reported directly to
Peppel and Stanley and was, at one time, MCSi's CFO, that Peppel and Stanley directed her no t
to record certain operational expenses on A/V installation contracts, including costs associated
with engineers and installers assigned to the job.
115. CWI 3 stated that MCSi falsely reported, on its website, that the Company wa s
obtaining a 30% profit margin on f contracts . According to CW9, MCSi, under Peppel ,
inflated profit margins on A/ V broadcast and installation contracts . MCSi's consolidate d
financial statements were reporting profits of 38%, while CW9's branch consistently recorded
pro fit margins of around 22%. CW8 also stated that normal profit margins on AN contracts
ranged from 23%-28% .
116 . This practice caused both profit margins and net income to be materiall y
overstated.
34
E. MCSM CREATED FICTITIOUS SALES TO INFLATE REVENUE S
117. MCSi admitted in the MCSi/Lender Complaint that, between August 2001 an d
December 2001, it had generated approximately $41 .137 million in fictitious revenues from
sham transactions . This caused the revenue and net income reported in the Form 10-Q for the
quarter ended September 30, 2001 (the "3Q 2001 10-Q") and the Form 10-K for the year ended
December 31, 2001 (the "2001 10-K") to be materially overstated .
L . The Zenzine Sham Transactions
118 . In the MCSi/Lender Complaint, MCSi admitted that, on August 31, 2001, befor e
its acquisition of Zengine in November 2001, MCSi and the Individual Defendants "sold "
approximately $4.037 million in inventory ( i.e., overhead projectors and "gyro mouse"
presentation pointers) to Zengine for which Zengine, a website developer , had no "business use,"
The sale also included "several hundred thousand do llars worth" of inventory from. ClearOne
Communications Inc. C'ClearOne") i .e ., Gentner brand audio visual and teleconferencing
equipment), which the Company had previously "purchased" from ClearOne . According to the
MCSi/Lender.Complaint, the inventory "never lei: MCSi's main warehouse in Erlanger,
Kentucky, and consistent with this pattern, Zengine never paid for the Inventory [described. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
abovel ." This ransact on caused revenues and income reported in MCSi's 3Q 2001 10-Q to b e
materially overstated .
119. In October 2001, soon after this "sale," MCSi announced its plans to acquir e
Zengine. According to a press release filed on Form 8-K with the SEC on October 5, 2001 ,
MCSi owned approximately 58 .5% of Zengine's outstanding shares .
35
120. CW6 stated that Zengine never really had a legitimate business , once it was
owned by the Company, Zengine was supposed to engage in website creation for customers, but
that never materialized and, according to CW6, "management would never give us the straight
answer as to what Zengine really did ." Instead, "°Zengine had an office and basically paperwork ,
but nothing really came out of Zengine."
121 . According to CW18, there was talk among MCSi employees "that the two
companies were doing a lot of transactions with one another to make the money look good," an d
that these "were not real transactions." CW18 stated that "there was a lot of adjusting on the
books back and forth to make the numbers look good where they needed to ." This was
confirmed by CW 1, who handled the internal programming for Zengine ' s integration onto the 1D
Edwards System after its acquisition by MCSi. CW 1 confirmed that Zengine was not generating
an order volume, stating, "It was like it was just a big scam, It seemed like a lot of smoke an d
mirrors to me to begin with"
2. The Mercatnm Sham Transactions
122. The fate of the $4 .037 million inventory sham sale to Zengine did not end wit h
that transaction. In early June 2001, while at an "Infocom 2001" trade show in Las Vegas ,
Peppel introduced € 'V 19 to David White ("White"), President of Mercatum. During this time,
CW19 became aware that Peppel and White "were putting some deal together" relating to th e
U.K . CW199 's employment with MCSi ended shortly thereafter .
123 .. MCSi admitted, in the MCSilLender Complaint, that, on December 4, 2001, th e
Company generated three invoices recording a total sale of $37.1 million in "surplus inventory"
to Mercat . According to shipping documents, this was the $4 .037 million Zengine inventory
36
previously billed to Zengine and recorded as revenue in August 2001 . This sale purportedly
represented MCSi's satisfaction of three July 2001 purchase orders from Mercatum, totaling
$37.1 million. Two of the purchase orders required "Misc AN [sic] products," and one required
"AN Accessories . "
124 . Ina December 11, 2001 letter, approximately five months after the Mercatu m
purchase orders were issued, and one week after they had been billed, Mercatum instructed MCSi
to "`hold and store our product' until `arrangements with our freight people' were confirmed ."
The inventory was stored at MCSi's Erlanger, Kentucky warehouse. MCSi further admitted that,
along with Mercatum, it falsely certified that the transaction was a "bill and hold' ' sale, in a letter
dated February 22, 2002 to MCS1's accountants . This was not, however, a valid bill and hold
arrangement under SAB 101 for the following reasons : (1) a "fixed schedule for delivery of the
goods" did not exist ; and (2) the "risks of ownership" did not pass to Mercatum because (i) as
alleged below, the inventory was never shipped to Mercatum, and (ii) Mercatum's President,
White, informed MCSi that Mercatum would not insure the inventory, and that shipment was at
MCSi's risk .
125 . In June 2002, in response to CW2Q's inquiry concerning Mercatum, Stanley stated
that MCSi was in the process of acquiring Mercatum in the U.K. CW20 then inquired of Stanley
what was needed to be done to move Mercatum's employees onto MCSi's payroll, a routine
practice for MCSi's acquisitions . Stanley informed C W 20 that Mercatum's staff would not be
included on MCSi's payroll, According to CW20, Stanley further stated, "We're dealing with
some products there. They have a warehouse. They're going to house products for us . We're not
37
really going to worry about sales people and commission structures and all that. . . . It's a whole
different situation than you are normally used to . "
126. MCsi acquired Mercatum on June 28, 2002. The Company described Mercatum
as a "distributor of audio visual equipment located in Leeds, England," in its Form 8-K filed with
the SEC on July 15, 2002 .
127. MCSi further admitted that, eight months after the Mercatum "purchase," the
inventory was not shipped to Mercatum in England, but instead addressed to a post office box in
Dubai, United Arab Emirates . A November 6, 2002 letter from Rao to the United State s
Customs Service confirms that the Zengine inventory was sent to MCSi's Dubai office. In Jun e
2002, MCSi acquired Mercatum .
128 . The MCSi/Lender Complaint states that, on September 13, 2002 , Lori Clifford
("Clifford"), who had responsibility over inventory control at the Company's headquarter s
(according to CWI), sent an e-mail to Walther entitled "SMercatum sale (Zengine) ." The e-mail
attached a list of the Zengine inventory sold to Mercatuin and improperly booked as revenue i n
December 2001 (the "September 13, 2002 e-mail"}. Clifford wrote, "Highlighted amounts relate
to goods sold to Mercatum in Feb/March time frame (sale booked in December 2001) . "
C lifford's September 13, 2002 e-mail also stated, "Invtry will be removed witb adjustment
(soon)."
129. MCSi further admitted, in the MCSi/'i ender Complaint, that on December 18 ,
2002, White documented a sale of the MCSi inventory to SAPP, a Dubai company, for $24 . 5
million . The owner of SAPP, Clive Fernandez ("Fernandez") was both a shareholder of
Mercat . and an employee of MCSi . On March 17, 2003, SAPP wrote a letter to Whit e
38
confirming that the "whole lot" of inventory purchased by SAPP was being returned to the
United States . An invoice, valuing the inventory at approximately $12 million, showed that i t
was shipped to Rao's attention at MCSi . The inventory was eventually stored at the Erlanger ,
Kentucky warehouse.
F. MCSI's INVENTORY VALUE WAS MAT ERIALLY MISSTATED
1 . MCSI Improperly Manipulated Inventory
130. CW I stated that MCSi was "purposely manipulating numbers to make thing s
come out the way they wanted." According to CWI, Clifford, at Stanley's direction, demande d
that inventory numbers at particular warehouse locations be altered within the JD Edward s
System. Clifford prefaced her directives to CWl with, "Ira wants this . . . ," and "Whatever Ira
wants. . . ." CW I stated, "inventory levels were altered before the numbers were being reporte d
[to outside accountants] . They were wiped out of the system. The total net effect of all this wa s
to reduce MCSi's currently-reported inventory." CWI also stated, "The numbers that they
evidently reported [to outside auditors] were not the true numbers ." The Company admitted
Clifford 's involvement in other inventory manipulation schemes in the MCSi/Lender Complaint,
as alleged in ¶ 128, above.
131 . According to CW L, the ;iv Edwards System maintained information about
inventory in "tables ," which listed each item, the inventory quantity, and the warehouse location
where the inventory was being stored . Each item was assigned a particular dollar value in the
system. The system rolled up the inventory data into the general ledger in the form of dollars ,
representing the inventory value reported in the Company's financial statements . According t o
39
CW1, "In terms of reporting, the 3D Edwards System was the Bible ." At December 31, 2001 ,
MCSi operated the following twelve warehouse facilities across the country :
Bensenville, Illinois Cypress, California Farmers Branch, Texas Norcross, Georgi a
Berkeley, California Dayton, Ohio Memphis, Tennessee Redmond, Washington
Brookfield, Wisconsin Erlanger, Kentucky New Berlin, Wisconsin Strongsville, Ohio
132 . CW.1 explained how the inventory numbers were altered upon Stanley's request :
"You go into the program and you add a zero back in, and it would be just like clearing it . "
Anyone in the IT Department had the capability to perform manual overrides to the inventory i n
the TD Edwards System.
133 . Further, CW15 stated that, beginning in January 2001, he/she observed Stanley
directing Dale Phillips ("Phillips"), Director of Information Systems (with oversight for the J D
Edwards), to manipulate numbers in the 3D Edwards System . These requests usually coincide d
with audits conducted by PwC. CW 1 5 overheard Stanley say to Phillips, "How do we get the
numbers to look like this?" In other instances , CW 15 observed Stanley showing Phillip s
something on paper and saying, "This is the number we have to come up with," or "This has to
be the bottom-line number," or "We nee to change this up here and this down there." These
exchanges occurred numerous times . CW15 also confirmed that PwC was not shown "live" JD
Edwards System data, only spreadsheets .
(a) MCSi Wiped Out inventory on the JD Edwards System toJustify Unsubstantiated Sales Caused by Pre-billing
134. Defendants had to manipulate MCSi's inventory values, as alleged in % 130-133 ,
to validate the appearance of the increased revenues Defendants prematurely and improperl y
40
created through their improper revenue recognition practices, (i .e ., pre-billing, alleged in ¶'174-
104, above) .
135 . For example , according to CW7, during the fall of 2001, before MCSI's secondar y
offering in December 2001, Michael Trebilcock ("Trebilcoek"), an MCSi Vice President an d
ChiefDevelopment Officer, directed an employee in the Cleveland office to clear out all of the
inventory on its books for a pending $1 million . AN installation job for Case Western Reserve
University ("Case Western") . CW7 stated, "Even though they hadn't billed the customer, an d
the customer hadn't paid, they were still clearing out completely all of the inventory in th e
system to show that it was actually on site . They basically were billing out products that wer e
still in the warehouse . "
136 . This was done to give the impression that the job had be completed and
revenues earned when, in reality, the Case Western job was experiencing significant delays .
According to CW7, inventory "is reflected in the [JD Edwards] system as a sale once they `close '
it out."
137, According to CW7, inventory sold through MCSi 's Cleveland office was stored in
its Strongsville, Ohio warehouse . Inventory was organized on shelves according to job . "Yoe.. . . . . . . . . . . . . .
could literally go back to the Strongsville warehouse and see the products on the shelf, and ye t
they were billed out of the system ." As CW7 stated, "they just pushed a button, closed it out of
the system, and billed it . It wasn't elaborate . "
138 . Approximately $500,000 of various AN products (i .e., switches, projectors ,
screens, and other AN equipment components) were improperly and prematurely billed . CW7
stated that the Case Western job was completed one year late .
41
139 . This practice violated SAB 101's revenue delivery and performance recognitio n
criteria, particularly Interpretive Response to Question 3, in 3. Delivery and Performance :
The staff believes that delivery generally is not considered to haveoccurred unless the customer has taken title and assumed the risksand rewards of ownership of the products speci fied in thecustomer 's purchase order or sales agreement . LMiqLlly thisoccurs when aproduct is delivered to the customer 's delive site(if the terms of the sale are "FOB destination") or when a productis shi ed to the customer (if the terms are "FOB shipping point") .[Emphasis added . ]
140. Because these products remained on the shelves and had not been shipped on a t
least "FOB shipping point" terms, the risks and rewards of ownership had not passed to th e
customer and revenue recognition was improper.
141 . CW7 stated that MCSi's management selected large revenue jobs , like the Case
Western job, to pre-bill in the D Edwards System .
2. MCSi Maintained Material Amounts of Obsolete Invento r
142. Several. confidential witnesses state that. MCSi maintained material amounts of
obsolete inventory during the Class Period . Further, MCSi admitted in the MCSifLende r
Complaint that the Company stored "slow-moving ClearOne inventory in MCSi's warehouse fo r
long periods of time." The Company also overstated its inventory value, and net income, by
failing to record adequate reserves , as alleged in IT 152-153, below .
(a) Several Confidential Witnesses ObservedMaterial Amounts of Obsolete inventor y
143. According to CW6, MCSi purchased significant quantities of projectors tha t
quickly became obsolete because manufacturers created newer products approximately every
four months . The Company failed to write off obsolete inventory that it maintained on its books
42
as having value, causing periodic net income to be materially overstated . According to CW9,
MCSi maintained "a lot of obsolete, damaged inventory" in the Southeast Region, where he/she
worked.
144. CW1O stated that MCSi acquired a lot of worthless inventory from the companie s
it acquired, including Central Audio . CW15 confirmed that MCSi purchased "millions of dollars
of junk" when it acquired companies such as Intellisys Group, Inc . {"I tellisys") . lntellisys had a
significant amount of obsolete AN equipment that was five and six years old, which CW1 5
observed when he/she visited Intellisys branches to set up e-mail and network systems after
MCSi's acquisition.
145 . Other acquisitions with obsolete inventory observed by CW15 were Imperial Data
Supply Corporation ("IDS"), located in Spokane, Washington, and Minnesota Western, located
in California . IDS was a computer supply dealer and Minnesota Western was an All integrator .
According to CW 15, inventory was marked with colored-coded dots representing the year(s) AN
equipment was counted as inventory. In many instances, boxes had eight different dots ,
signifying that they had been held in stock for at least eight years.
.146. CW 15 further stated that, before it was sold in July 2002, MCSI' s computer
products division maintained "a lot of old stuff they could never sell ." This included "print
heads" for printers that had not been manufactured for at least 10 years . Yet MCSi maintained
these parts in inventory as having value.
147. CW 19 stated that inventory wasn't moving due to a slowdown in customer jobs
and excess inventory resulting from MCSi's acquisitions . For example, with the CMS
acquisition, MCSI acquired approximately $2 to 3 million worth of slow-moving or dead
43
inventory . According to CWI9, by June 30, 2001, MCSi had approximately $43 to 45 million
worth of inventory in stored in its Erlanger, Kentucky warehouse, approximately one half o f
which the Company was trying to return because it could not be sold .
(b) The ClearOne Connection
148. In the MCSi/Lender Complaint, the Company admitted that certain "quid pro
quo" transactions with ClearOne contributed to the Company having to maintain "slow-moving"
inventory for "long periods of time." According to the MCSi/Lender Complaint, Peppel and
Francis Flood ("Flood"), ClearOne's Chairman, President, and CEO, agreed that MCSi woul d
purchase ClearOne product at inflated prices to inflate ClearOne's revenues, and then record
those purchases at regular prices on MCSi's books, with payment to be made only when, th e
merchandise was actually sold by MCSi . MCSi admitted that the value of this slow-moving ,
excess ClearOne inventory, reported in its financial statements, was "as much as $2 .5 million."
149. C l 9 stated that, in the first quarter of 2001, Flood visited Peppel . Shortly
thereafter , Matthew Curtis ("Curtis"), an MCSI buyer, issued a purchase order to ClearOne, for
over $ 1 million of conference telephones and telephone communication devices . According to
CW19, MCSi policy was that every order over $500,000 had to be approved and signed .by.eit er
Peppel or Stanley. C W19 further stated that, up to this point, MCSi usually purchase d
approximately $50,000 in product from ClearOne every month .
150 . CW19 confronted Peppel about the "totally out of the ordinary" order, indicatin g
that it was "not a good buy," and that MCSi did not have the "sales history" to move the volume
of product ordered from ClearOne. The products were eventually stored at the Erlanger ,
Kentucky warehouse, but sales were slow . CW19 attempted to return some of the exces s
44
inventory to ClearOne, but ClearOne refused to accept the returns . When CW 19 informed
Peppel of ClearOne' s refusal , Peppel said, "Well, keep trying to return it . "
15 1 . In June 2001, when CW19 left MCSi, the ClearOne inventory was still in the
Erlanger, Kentucky warehouse .
(c) MCSi Failed to Record Adequate Jnvento Reserves
152, CW9 stated that many accounting executives in MCSi's offices/branches were
sending reports to corporate headquarters, stating that inventory was overstated and that recorded
reserves were insufficient. It was policy at MCSi that regional accounting executives did not
have the authority to make necessary regional adjustments i .e ., write-offs and other adjustments
to inventory and accounts receivable) . All adjustments were made at the corporate level .
153 . This was confirmed by CW10, who learned from Lever, MCSi's Florida
president, that Lever repeatedly informed Stanley between October 2000 and October 2003 tha t
inventory reserves needed to be established. Stanley ignored this advice .
3. L4CS1 Auctioned Off Obsolete Inventory After the Class Period
154 . In the MCSi/Lender Complaint, MCSi admitted that, in a November 6, 2002 lette r
to the United States Customs Service , it stated that the Zengine inventory, sold to Mercaturn and. . . . . . . . . . . . . . .. . . . . . . . . . . . .
shipped to MCSi's Dubai office, consisted of "slow moving products" that were being returned .
155 . MCSi further admitted that the returned products were eventually auctioned of f
for approximately $4 million, after the Company filed for bankruptcy in June 2003 .
156, CW10 confirmed that, in August or September 2003, MCSi's corporate
headquarters requested that he/she prepare a list of unneeded, excess, and obsolete inventory for
purposes of auction. According to CVs 10, the on-line auction, which was conducted in Erlan ;er,
45
Kentucky, MCSi's main distribution center, occurred shortly after his/her employment with
MCSi ended, in October 2003, and included obsolete inventory gathered from all of MCSi' s
offices throughout the country.
G. MCSI CREATED SANITIZED BOOKSAND RECORDS FOR PwC AUDITOR S
157. In the MCSi/Lender Complaint, MCSi adrnitted that Stanley maintained a "secre t
inventory list," which tracked the differences between the Company's inventory and its genera l
ledger. Those differences resulted from Stanley's improper manipulations of both account s
receivable and inventory . MCSi also admitted that, on February 14, 2003, Ahrns sent Harol d
Lloyd ("Lloyd"), a programmer in MCSi's IT Department, an e-mail with a reconciled inventor y
list, edited by Stanley and Ahrns . Although this list matched the general ledger, it was sent "for
the sole purpose of creating a paper trail of the contrived inventory list. "
158. This practice also occurred during CWI' s tenure at the Company. CW1 learned
of Stanley's mandates to MCSi programmers to create different books and records - one fo r
internal records and one for the specific use of PwC auditors - from Lloyd, who was tasked with
creating the separate data set pursuant to Stanley's directives .
159. CW1 stated that , to maintain two sets of books, MCSi's IT staff created separate
financial records that mimicked the actual 7D Edwards System . CW l further stated that th e
second set of records was "dependent upon what data the auditors were asking to see ." CWI
stated that this included data relating to, inter alia, inventory, accounts receivable, and account s
payable . The auditors based their report(s) on this second, false set of financial records .
46
160. CW1 also stated that PwC auditors would see only the false, second set o f
financial records when they signed onto MCSi's internal program, using their MCSi user-IDs .
"They were, unknowingly, looking at a data set which was no longer live ." CW1 further stated
that, leading up to mid-2002, the last year he/she was at MCSi, PwC auditors were "constantly'
on the premises .
R. MCSi's INTERNAL CONTROLS WERE MATERIALLY WEA R
161 . MCSi's internal controls were materially weals beginning no later than 2001 .
1 . As result of PwC's 2001 Audit, MCSI's Audit CommitteeKnew of and Failed to Rern.ed Internal Control Weaknesse s
162 . On June 25, 2003, Defendants filed a Form 8-K with the SEC, dated June 19 ,
2003 (the "June 19, 2003 Form 8-K). The June 19, 2003 Form 8-K discussed a letter from PwC
to the Company's board of directors, received that same day, informing them of an "apparent
override of the control systems by Company's former senior management" In addition, PwC
revealed that, in connection with its 2001 audit, it had reported to the Company's then-audit
committee a "reportable condition concerning internal control and its operation ." According to
PwC (as revealed in the June 19, 2003 Form 8-K), however, "the lack of attention of prio r
management to this reportable condition had elevated it to a mater ial weakness." PwC also -
stated that it was not in a position to know whether the Company's post-Class Perio d
management had remedied these material weaknesses .
2. MCS! Failed to Properly Integrate All ItsSubsidiaries onto the JO Edwards Svste m
163 . According to CW15, the JD Edwards System was acquired in January 1999 and
installed in MCSi's Dayton, Ohio headquarters . Between January 1999 and January 2001, th e
47
Company attempted to integrate more than 30 acquired companies onto the JD Edwards System .
However, half of the Company's operations around the country were never integrated onto th e
system. Stewart was responsible for the 3D Edwards integration .
164. The companies never integrated onto the JD Edwards System included- .
Consolidated Media Systems (according to CW11 and CW 15) ; Technical Industries of Atlanta
(according to CW1 I and CW15) ; Dreher Business Products (according to CW6) ; and Intellisy s
(according to CW12) . According to CW1.0, MCSi was nine months late integrating Central
Audio .
165. According to CW15, these companies were responsible for separately closing
their books and reporting their numbers to MCSi corporate headquarters for manua l
consolidation- According to CW1 1, an un.integrated acquired company would submit its profit
and loss statement on spreadsheets to MCSi headquarters, which would make the eliminatin g
entries on intercompany sales, payables, and receivables . The numbers for consolidation were
then added, by hand, into the consolidated financial statements .
166. C W9 further stated, "The problem with . 3D Edwards was when they pulled th e
companies together, they . forgot the concept of coming np with a true atrial balance by entity . "
DEFENDS .9 ATE1 ALLY FALSE AND MISLEADINGSTATEMENTS DURING THE CLASS PERIOD
167. On July 24, 2001, MCSi issued a press release announcing the Company' s
financial results for the quarter ended June 30, 2001 . On August 2, 2001, the press release was
filed with the SEC on a Form 8-K, which was signed by Defendant Stanley . For the thre e
48
months ended June 30, 2001, MCSi reported net sales of $222 .2 million, gross margins of 27 .3%,
operating income of $12 .0 million, and earnings per share of $0 .30 .
168. The financial results referenced. in the previous paragraph were materially false
and misleading when made, as Defendants knew or recklessly disregarded that the Company :
(i) was losing customers as a result of its cash flow crisis and supplier-imposed credit holds, as
alleged in 1153-73 ; (ii) falsely inflated reported revenue, as alleged in 1174-108 ; (iii) overstated
rental income, as alleged in ¶ [ 109-113 ; (iv) understated operational expenses to falsely inflate
profit margins, as alleged in ¶ 114-116; (v) created fictitious sales to inflate revenues, as alleged
in 11117-129 ; (vi) improperly manipulated inventory, as alleged in¶ 130-141 ; (vii) maintained
material amounts of obsolete inventory and failed to record adequate reserves, as alleged in
IT 142-156 ; (viii) created duplicate financial records for PwC auditors, as alleged in 157-160 ;
and (ix) operated within a materially weak system of internal controls, as alleged in 161-166 .
169 . Defendants Peppel and Stanley commented on these second quarter results .
Peppel stated :
MCSi showed solid growth in the midst of a very challengingeconomy. During the quarter, MCSi continued its shift towarddriving profitable systems integration growth, which resulted in arecord increase in ss mar ins and n eratin income . [Emphasisadded . ]
Similarly, Stanley stated:
MCSi was able to improve oss margins to 27 .3% during thequarter, as we continue to focus on our systems integration projectsacross North America. [Emphasis added . ]
170. The statements by Peppel and Stanley referenced in the previous paragraph were
materially false and misleading when made for the reasons given in ¶ 168 .
49
171 . On August 1, 2001, Defendants issued a press release announcing the Board o f
Directors' rejection of "all proposals made by several private equity groups to purchase the
Company's outstanding Common Stock." The press release was later filed on Form 8-K with the
SEC, on August 2, 2001, and was signed by Defendant Stanley. Defendant Peppel made th e
following comments in the press release :
We provide value to our stockholders by building a Company thatdelivers world- class technology and services to our customers .The Board has decided that we must continue on our path ofcreating efficiencies in our business methodology andstrengthening our capital base in order to continue our record ofearnings growth. [Emphasis added. ]
172. Peppel's statement concerning MCSi's continued "record of earnings growth,, ,
referenced in the previous paragraph, was materially false and misleading when made for th e
reasons stated in ¶ 168, above .
173. On August 13, 2001, Defendants caused MCSi to file with the SEC its financia l
results for the second quarter of 2001, on Form 10-Q, for the period ended June 30, 2001 (th e
"2Q 2001 10-Q") . The 2Q 2001 10-Q was signed by Defendant Stanley. MCSi reported net
sales of $222.2 million, net income of $3 .8 million, earnings per share (basic and diluted) o f
$0.30, accounts receivable of $156 .9 million, and inventory of $67 .5 million.
174 . The financial results referenced in the previous paragraph was materially false an d
misleading when made, as Defendants knew or recklessly disregarded that the Company : (i) was
losing customers as a result of its cash flow crisis and supplier-imposed . credit holds, as alleged
in IN 53-73 ; (ii) .fslsely inflated reported revenue, as alleged in ¶ 74-108 ; (iii) overstated rental
income, as alleged in ¶~ 109-113 ; (iv) understated operational expenses to falsely inflate profi t
so
margins, as alleged in 11 114-116; (v) created fictitious sales, to inflate revenues, as alleged in
T1117-129 ; (vi) improperly manipulated inventory, as alleged in 11 130-141 ; (vii) maintained
material amounts of obsolete inventory and failed to record adequate reserves, as alleged i n
¶[ 142-156 ; (viii) created duplicate financial records for PwC auditors, as alleged in ¶1( 157-160;
and (ix) operated within a materially weak system of internal controls, as alleged in ¶11161-166 .
175. In the "Notes to Consolidated Financial Statements (Unaudited)" contained in the
2Q 2041 10-Q, Defendants represented that :
in the opinion of the management of MCSi, Inc . (the "Company"),the consolidated financial statements presented herein contain allad tments (consisting only of normal recurring adjustments)necessa to present fairly the financial position, results ofoperations and cash flows of the company and its consolidatedsubsidiaries . [Emphasis added . ]
176. The statements referenced in the previous paragraph were materially false an d
misleading when made, as Defendants knew or recklessly disregarded that : (i) MCSi created
duplicate financial records for PwC Auditors, as alleged in 11157-160 ; (ii) senior management
overrode the control systems, as alleged in .1 162; and (iii) the Company failed to properly
integrate all its acquired subsidiaries onto the JD Edwards System, as alleged in 11163-166 .
177. The 2Q 2001 10-Q also stated, in "Item 2 . Management's Discussion and
Analysis of Financial Condition and Results of Operations" :
Our competitive strengths include : . . . (ii) our technical servicespecialists that design, install and service sophisticated systems ;(iii) our strong relationship with over 500 original equipmentmanufacturers, includin Hewlett-Packard Shar Electronics,aC nFocus Proxima, Lexmark 'onBxtron and E son ;(iv) our selection of more than 75,000 different products . . . (v)our long-standing relationships with more than 50,000 activecustomers , which include small to medium sized businesses as wel l
51
as large corporations, governments and educational institutions ;(vi) and, the growing demand for complex integration projectsfrom blue-chip clients, such as Boeing, Hewlett-Packard ,McDonald's, Microsoft, Pfizer and AOL/Time-Warner . [Emphasisadded . )
178. The statements referenced in the previous paragraph concerning MCSi' s
purportedly strong relationship with its suppliers were materially false and misleading when
made , as Defendants knew or recklessly disregarded that : (i) many of MCSi's suppliers had
imposed credit holds, including Sharp Electronics , NEC, Infocus, Sony and, Extron Electronics,
as alleged in IN 56-59 ; and (ii) supplier-imposed credit holds caused the Company to lose
customers and threatened existing relationships, as alleged in 60-64 .
179. The 2Q 2001 10-Q also stated the following concerning accounts payable in it s
section on "Liquidity and. Capital Resources" :
Accounts payable increased $17 .5 million for the six month periodended June 30, 2001 . This increase was in part attributable toextended payable terms offered by certain vendors to MCSi inreturn for MCSi making certain inventory purchases . Certain ofMCSi's vendors permit MCSi to return slower selling inventoryunder inventory balancing programs and additionally offer MCSiprice protection on certain inventory items that are subject tovariations in price from the introduction of new models, aportionofthe .. increase is also attributable to accounts a able that werebuilt u ursuant to operating the Intellisys business . [Emphasisadded . ]
180 . The statements referenced in the previous paragraph were materially false and
misleading when made , as Defendants knew or recklessly disregarded that MCSi's cash flo w
crisis caused it to suffer from supplier-imposed credit holds as a result of nonpayment, as allege d
in 1, T 53-73 .
52
181 . On August 13, 2001, the day of the press release, MCSi stock traded at $11 .50 per
share on volume of 325,100 shares . On the following day, August 14, 2001, MCSi's stock pric e
increased $0.55, to $12 .05 per share, on 64.16% increased trading volume .
182 . On October 5, 2001, Defendants caused MCSi to issue a press release over th e
Business Wire entitled "MCSi to Acquire 41 .5% of Zengine, Inc . Not Already Owned for $24 . 5
Million in Stock ." The press release stated :
MCSi will have the ability to use Zengin.e's cash and net workingcapital which was approximately $36 million as of Jun e 30, 2001,in addition to its operating business . The transaction is expected tobe accretive to MCSi's earnings in 2002 .
183 . The statements referenced in the previous paragraph were materially false and
misleading when made, as Defendants knew or recklessly disregarded that the transaction would
not be accretive to earnings but for the sham transactions with Zengine, as alleged in ¶J 117-121 ,
above .
184. On October 25, 2001, Defendants caused MCSi to issue a press release over the
Business Wire reporting its financial results for the third quarter of 2001 . For the three months
ended September 30, 2001, MCSi reported net sales of $237 million , gross margins of 27.6%,
operating income of $1.2 .6 million, and earnings per share of $0 .32 .
185 . The financial results referenced in the previous paragraph were materially fals e
and misleading when made for the reasons stated in ¶ 168, above .
186. On October 25, 2001, the day of the press release, MCSi stock traded at $20 .25
per share on volume of 980,200 shares. On the following day, October 26, 2001, MCSi's stoc k
price increased $3 .69, to $23 .94 per share, on 22 .64% increased trading volume .
53
187 . On November 13, 2001, Bloomberg reported a 52-week high of MCSi's stock
price at $24.45 per share.
188. On November 14, 2001, Defendants caused MCSi to file with the SEC it s
financial results for the third quarter of 2001, ended September 30, 2001, on Form 10-Q (the "3Q
2001 10-Q"). The 3Q 2001 1.0-Q was signed by Defendant Stanley. MCSi reported net sales of
$237.2 million, net income of $4 .5 million, earnings per share (basic and diluted) of $0 .32 ,
accounts receivable of $160.5 million, and inventory of 582.6 million..
189. The financial results referenced in the previous paragraph were materially fals e
and misleading when made for the reasons stated in 11. 74, above .
190. In the "Notes to Consolidated Financial Statements (Unaudited)" contained in the
3Q 2001 10-Q, Defendants represented that :
the opinion of the management of MCSi, Inc. (the "Company"),the consolidated :Financial statements presented herein contain alladjustments (consisting only of normal recurring adjustments)necessaryr to present fairly the financial position, results ofoperations and cash flows of the company and its consolidatedsubsidiaries . [Emphasis added.]
191 . The statements referenced in the previous paragraph were materially false and
misleading when made for the reasons stated in 11176, above .
192. The 3Q 2001 10-Q also stated, in "Item 2. Management's Discussion and
Analysis of Financial Condition and Results of Operations":
Our competitive strengths include ; . . . (ii) our technical servicespecialists that design, install and service sophisticated systems ;(iii) our strong relationship with over 500 original equipmentmanufacturers . inciudin Hewlett-Packard Shao ElectronicsNEC In Focus . Proxima Lexmarl . Son Extron and Epson; (iv)our selection of more than 75,000 different products . . . (v) our
54
long-standing relationships with more than 50,000 activecustomers , which include small to medium sized businesses as wellas large corporations , governments and educational institutionsand; (vi) the growing demand for complex integration projectsfrom blue-chip clients, such as Boeing, Hewlett-Packard,McDonald's, Microsoft, Pfizer and AOL/Time-Warner. [Emphasisadded . ]
193. The statements referenced in the previous paragraph concerning MCSi's
purportedly strong relationship with its suppliers were materially false and misleading whe n
made for the reasons stated in x(178, above .
194. As a result of MCSi's acquisition ofZengine on November 16, 2001 , defendant s
Peppel and Stanley acquired a significant number of shares of MCSi's common stock.
According to the Form 4's filed with the SEC, "each share of Zengine, Inc . was converted in
0 .2259 shares of common stock of MCSi ." Accordingly, Peppel acquired 159,032 shares (o f
MCSi stock), and Stanley acquired 16, 969 shares .
195 . Immediately thereafter, Peppel disposed of significant blocks of MCSi stock ,
68,000 shares between November 16 and 21, 2001 .
196. On December 19, 2001, Defendants issued a press release announcing the pricin g
of the Company's follow-on offering of 5 .2 million shares at $22 .875 . per share :
MCSI, Inc, is selling 4,700,000 primary shares and certain of itsstockholders are selling 500,000 secondary shares . Net proceeds ofthe offering will be used by MCSi primarily to repay outstandingdebt. The managing underwriters of the offering were WilliamBlair & Company and Friedman, Billings, Ramsey & Co ., Inc .
197 . On December 21, 2001, Defendant Peppel sold 300,000 shares at $22 .875 per
share, for proceeds of $6,862 ,500. This sale represented 27% ofhis MCSi common stock an d
vested options .
55
198 . On February 26, 2002, Defendants issued a press release (the "February 26, 200 2
press release") announcing the Company's financial results for fourth quarter of 2001 . For the
three months ended December 31, 2001, MCSi reported net sales of $152.5 million, gross
margins of 30.2%, operating income of $12.7 mi llion, and earnings per share (diluted) of $0 .31 .
199 . The financial results referenced in the previous paragraph were materially false
and misleading when made for the reasons stated in 1168, above .
200. Defendant Peppel commented on the fourth quarter resu lts as follows:
By maintaining focus on improving our operating characteristics,---we now have a solid balance seet the best in the history of the
Company. [Emphasis added.]
201 . Peppel's statements referenced in the previous paragraph were materially fals e
and misleading when made for the reasons stated in 168, above .
202.. On February 26, 2002, the day of the press release, MCSi stock traded at $10 .40
per share on volume of 9,498,600 shares . On the following day, February 27, 2002, MCSi' s
stock price increased $0.25, to $10.65 per share .
203. On April 1, 2002, Defendants caused MCSi to file its annual report on Form
10-K405, which reported the Company' s results for the year ended December 31, 2001 (the. . . . . . . . . . . . . . . . . . . . . . . . . .
"200 10-K"). The 2001 1 O-K was signed by Peppel, Stanley, and others . For the year, MCSi
reported net sales of $810.4 million, a net loss of $10 .2 million, basic loss per share of $0 .71,
diluted loss per share of $0 .70, accounts receivable of $163 .7 million, and inventory of $72 .1
million.
204. The financial results referenced in the previous paragraph were materially fals e
and misleading when made for the reasons stated in 1174, above .
56
205 . In the "Notes to Consolidated Financial Statements" contained in the 2001 10-K,
Defendants represented :
USE OF ESTIMATE S
The preparation of financial statements in conformity withgenerally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosures of contingent assets andliabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting periods . . . .[Emphasis added . ]
206. The statements referenced in the previous paragraph were materially false an d
misleading when made for the reasons stated in 1176, above .
207. The 2001 10-K stated the following in "Note 2 . Summary of Significant
Accounting Policies" ("Note 2") :
CONSOLIDATION
The consolidated financial statements include the accountsof MCSi and its majority owned subsidiaries . . . . [Emphasisadded. ]
208. The 2001 10-K also stated the following concerning "Management Informatio n
Systems" :
We have continually invested in hardware ; software andprogramming upgrades to our management information systems,which are run primarily from an IBM AS/400 computer located inour Dayton, Ohio headquarters . We use sophisticated enterpriseresource planning distribution software, which has aided inconsolidating subsidiaries and has automated a large number of keybusiness functions using on-line, real time systems, includingelectronic commerce . These on-line systems provide managementwith information concerning sales, inventory levels, customerpayments and other operations essential for us to operate as a highefficiency product reseller and systems integrator . Each of our
57
offices has either a direct, full-time dedicated link to our in-housecomputer system, or may obtain such access throngh the Internet . .. . [Emphasis added.]
209. The statements referenced in the previous two paragraphs concerning
consolidation of all subsidiaries' financial information were materially false and misleading
when made , as Defendants knew or recklessly disregarded that the Company failed to properly
integrate all of its acquired subsidiaries onto the JD Edwards System, as al leged in 11163 .166 .
210. The 2001 l 0-K also stated in Note 2 :
REVENUE RECOGNITION
Revenue is recorded when realized, or realizable. and earned whenpersuasive evidence of a revenue generating arrangement exists,the products and/or se ices have been rov'ded to or Madeavailable to the customer, the sales rice is fixed and determinableand collectibility is reasonably assured . Revenue is derived fromtwo sources : product/equipment only sales and integrated systemscontracts (which include both product/equipment and services) .Revenue for product/eauipr ent only sales is recognized basedupon the shipping termer (primarily at the time of shipment), wheflthe title and risks and rewards of ownershi have passed to thecustomer. For integrated systems contracts, the Company applies amultiple-element accounting approach . For the products includedin integrated systems contracts, revenue is generally reco nizedwhen the product is shipped (consistent with product/equiprr~entsales Revenue relating to installation, design and integrationservices is recognized based on the percentage that labor costsincurred to date bear to total labor costs expected for the contract .Losses expected to be incurred are recorded when such losses areknown, [Emphasis added . ]
211 . The statements referenced in the previous paragraph were materially false and
misleading when made, as Defendants knew or recklessly disregarded that the Company
prematurely recognized revenue in violation of GAAP and SAB 101, a s alleged in TIT, 74-108 .
212. The 2001 10-K also stated the following concerning Inventory Management :
58
we have only minimal inventory valuation issues which areidentified on a timely basis through monthly monitoring ofinventory quantities on-hand . Once excess quantities areidentified, the inventories_ are either utill ed ., or are returned tovendors . Damaged products are insignificant and, unless claimscan be made against the carriers causing the damage, the relatedwrite-offs are expensed as incurred on a monthly basis . [Emphasisadded . ]
213. The statements referenced in the previous paragraph concerning "inventory
issues" were materially false and misleading when m ade, as Defendants knew or recklessl y
disregarded that the Company maintained material amounts of obsolete inventory and failed to
record adequate reserves , as alleged in ¶(142-156, above .
214. On April 23, 2002, Defendants issued a press release announcing the Company' s
financial results for the quarter ended March 31, 2002 . MCSI reported net sales from continuin g
operations of $184 .2 million, gross margins from continuing operations of 29.4%, and earnings
per diluted share from continuing operations of $0 .26, stating that the Company's Canadian.
computer products business was discontinued in 2001 and was "classified as a discontinue d
operation."
215 . The financial results referenced in the previous paragraph were materially fals e
and misleading when made for the reasons stated in [ 168, above . The statements were also
materially false and misleading when made, as Defendants knew or recklessly disregarded that
the Company failed to timely write down goodwill, as alleged in' 224, below .
216. Defendant Stanley convmented on the first quarter results as follows :
We observed a major trend this quarter that is favorable for ourfuture growth . Revenue from our services business was $8 millionthis c Garter. We anticipate that our services business that iscomprised of managed services, contract employees, maintenanc e
S9
contracts and rental opportunities will contribute an increasingportion of revenue moving forward . [Emphasis added . ]
217. Stanley's statement concerning reported revenue referenced in the previou s
paragraph was materially false and mislead ing when made for the reasons stated in T .1 68, above .
218 . On April 22, 2002, the day before the press release, MCS1 stock traded at $12.25
per share on volume of 570,800 shares . On April 23, 2002, the day of the press release, MCSi' s
stock price increased $1 .74, to $13 .99 per share.
219. On May 15, 2002, Defendants caused MCSi to file its financial results on Form
10-Q for the period ended March 31, 2002 (the "1Q 200210-Q") . The 1Q 200210-Q was signed
by Defendant Stanley. MCSi reported net sales of $184 . 2 million, net incom e of $5 .2 million,
earnings per share (basic and diluted) of $0 .22, accounts receivable of $186 .3 million, and
inventory of $80.6 million.
220. The financial results referenced in the previous paragraph were materially fals e
and misleading when made for the reasons stated in ¶¶ 174 and 224 .
221. In "Note 1--General" of the "Notes to Consolidated Financial Statement s
(Unaudited)" contained in the 1 Q 200210-Q, Defendants represented that ,
in the opinion of the management of MCSi, Inc . (the "Company"),the consolidated financial statements presented herein contain . alladjustments (consisting only of normal recurring adjustments)accessary to present fairly the financial position, results of
operations and cash flows of the Company and . its consolidatedsubsidiaries . [Emphasis added. ]
222. The statements referenced in the previous paragraph were materially false and
misleading when made for the reasons stated at 176, above .
60
223. The IQ 2002 10-Q also stated the following concerning MCSi's adoption o f
SFAS 142 in "Note 3 - Goodwill and Other Intangible Assets" :
The Company adopted Statement of Financial AccountingStandards No . 142, "Goodwill and Other Intangible Assets"("SFAS 142"), on January 1, 2002, and, in accordance with SFAS142, discontinued the amortization of goodwill upon adoption . . . .
As required by the adoption of SFAS 142, the Company hasassessed its goodwill as of January 1, 2002 and determined that noiMpainnent of goodwill exists. [Emphasis added .]
224. The statement concerning no impairment of goodwill referenced in the previou s
paragraph was materially false and misleading when made, as Defendants knew or recklessl y
disregarded that the Company failed to perform interim impairment testing , as required by SFAS
142. Defendants knew that this testing was required as a result of. (1) the "significant change"
in its business - i.e., the sale of its Canadian Computer supply division during the quarter ; and
(2) the adverse A/V business climate existing after September 11, 2001, as described by CW4 .
,fee 1j 60, above.
225, In the IQ 2002 10-Q, Defendants also stated the following concerning average
DSO in the section on "Liquidity and Capital Resources":
At March 31, 2002, our average days sales outstanding was 87days as . compared to 67 days at December :31, 2001 and 54 days atMarch 31, 2001 . The increase of our average days salesoutstanding is primarily the result of increased sales ofaudio-visual integration system project sales (which typically havelonger, collection cycles than product sales), extended patentterms to certain customers and slow-downs in collections fromcustomers . . . . [Emphasis added. ]
226. The statements referenced in the previous paragraph were materially false and
misleading when made, as Defendants knew or recklessly disregarded that the the reason why
61
DSO increased was because of the Company's improper pre-billing of integration and installatio n
service contracts and equipment orders, as alleged in IM 92-93 .
227. On July 24, 2002, Defendants issued a press release announcing the Company' s
financial results for the second quarter of 2002 . For the three months ended June 30, 2002,
MCSi reported net sales from continuing operations of $123.5 million, gross margins from
continuing operations of 34 .3%, income from continuing operations of $4 .2 million, and earnings
per diluted share from continuing operations of $0 .17.
225. The financial results referenced in the previous paragraph were materially fals e
and misleading when made for the reasons stated in 1215, above . The financial results
referenced in the previous paragraph were also materially false and misleading when made fo r
the reasons stated in ~ 240, below .
229. Defendant Stanley commented on the second quarter results as follows :
We are pleased with our second quarter results. In an economicenvironment that is challenging for a lot of companies, ourearnings per share from continuing operations grew 21 .4% fromlast year .
230. Stanley's statements concerning reported earnings referenced in the previous
paragraph were materially false and misleading when made for the reasons stated in 228, above .
231 . On July24, 2002, in its "Q2 2002 Financial Release Conference Call" transcribed
by the Fair Disclosure Financial Network ("FD&) (the "Q2 2002 Conference Call"), Defendant
Stanley stated:
This quarter, systems irate ation sales were $64 .8 million or 52 .5percent of total revenue. And service revenue, as Nile mentioned,was $10.4 million or 8 .5 percent of total revenue . The servicerevenue of10 .4 million r resents a se uential growth of over 30
62
ercent from last quarter's revenue of$8 million. It also ret resent san increase . Last quarter service revenue was 6 percent or revenue .This quarter it is 8 .5 percent of revenue and, as we mentionedpreviously, our goal is to ultimately have service revenue beapproximately 20 percent of our total revenue base . I remindeverybody, service revenue includes managed services,maintenance contracts ,. . .,, .acts, contract employees, and our rental . andspacing services . [Emphasis added . ]
232 . The statements referenced in the previous paragraph were materially false an d
misleading when made, as Defendants knew or recklessly disregarded that the Company falsel y
inflated revenue on service contracts, as alleged in 1180-84.
233 . Defendant Stanley also stated the following during the Q2 2002 Conference Call :
Total gross margin for 2nd quarter was 34 .3 percent, Again, weare continuing our trend of increasing margins as we increase themix of integration and service revenue into our sales base . Grossmargins for the product only business were 22.2 percent,it tegrat an margins were 37.7 percent and gross margins in theservice. business were 68.8 percent. [Emphasis added.)
234. The statements referenced in . the previous paragraph were materially false an d
misleading when made, as Defendants knew or recklessly disregarded that the Company
understated operational expenses to falsely in flate profit margins , as alleged in 11114-116 ,
235. On August 13, 2002, defendants Peppel (as CEO) and Stanley (as CFO) signe d
the cerdfcations required by Section 906 of the Sarbanes-Oxley Act of 2002 (18 U .S.C, 135) .
The certifications were filed on August 14, 2002, as Exhibit 99 .1 and Exhibit 99 .2 to the
Company's second quarter 2002 Form 10-Q (the "2Q 2002 i0-Q") . Each certification stated:
The undersigned executive officer of MCSI . Inc . (the "Registrant")hereby certifies that the Registrant's. Form I0-Q for the threemonths ended June 30, 2002 fully complies with the requirementsof Section 13(a) of the Securities Exchange Act of 1934 and thatthe information contained therein fairly presents, in all material
63
respects, the financial condition and results of operations of theRecant. [Emphasis added . ]
236. The statements referenced in the previous paragraph were materially false and
misleading when made for the reasons stated in 111 220 and 240 .
237 . In the 2Q 2002 10-Q, which was signed by Defendant Stanley, MCSi reported ne t
sales of $123 .5 million, net loss of $41 .2 million, loss per share (basic and diluted) of $1 .70 ,
accounts receivable of $96 . 6 million, inventory of $109 .1 million, trade accounts payable of
$56.4 million, and cash and cash equivalents of $2.2 million.
238. The financial results referenced in the previous paragraph were materially fals e
and misleading when made for the reasons stated in 236, above ,
239. The 2Q 2002 10-Q also stated, in "Note 3 - Goodwill and Other Intangibl e
Assets" (in the "Notes to Consolidated Financial Statements (Unaudited))" :
As required by the adoption ofSFAS 142, the Company hasassessed its goodwill as of January 1 , 2002 and determined that noim airment of oodwill exists . [Emphasis added . ]
240. The statement concerning no impairment of goodwill referenced in the previous
paragraph was materially false and misleading when made, as Defendants knew or recklessly
disregarded that the Company failed to perform interim impairment testing, as required by SFA S
142. Defendants knew that this testing eras required as a result of. (1) the "significant change"
in its business - i.e., the sale of its Computer Technology Product division ("CTG") during the
quarter; and (2) the adverse AN business climate in existence after September 11, 2001, as
described by CW4 and CW 16 in 153, above .
64
241 . In the "Notes to Consolidated Financial Statements (Unaudited)" contained in, th e
2Q 2002 10-Q, Defendants represented that:
in the opinion of the management of MCSi, Inc . (the "Company"),the consolidated financial statements presented herein contain alladjustments (consisting only of normal recurring adjustments)necess to resent fairs the financial position, results ofoperations and cash flows of the Company and its consolidatedsubsidiaries, [Emphasis added. ]
242. The statements referenced in the previous paragraph were materially false and
misleading when made for the reasons stated at 1J 176, above .
243 . The 2Q 2002 1 O-Q also stated the following concerning DSO in its "Liquidity and
Capital Resources" section :
At June 30, 2002, our days sales outstanding was 68 days ascompared to 63 days at June 30, 2001 . The increase of our dWsales outstanding is primarily the result of increased sales ofaudio-visual integration system project sales (which typically havelonger collection cycles than product sales), and slow-downs incollection from customers . . . . [Emphasis added. )
244. The statements referenced in the previous paragraph were materially false and
misleading when made for the reasons stated at 1226, above.
245. On August 14, 2002, Lynch, Jones & Ryan, Inc . analysts Elliot L. Schiang and.. ..
Gregory W. Halter, relying on ivi.CSi's reported financial results, issued the followin g
recommendation for MCSi's stock in the LTR . Great Lakes Review : "GRADUALLY
ACCUMULATE as a SPECULATION."
246. On. October 23, 2002, MCSi issued a press release announcing the Company' s
financial results for the third quarter of 2002. For the three months ended September 30, 2002 ,
MCSi reported net sales from continuing operations of $137.5 million , gross margins from
65
continu ing operations of 30.3%, net income of $2.5 million, and earnings per diluted share fro m
continuing operations of $0 .13 .
247. The financial results referenced in the previous paragraph were materially fals e
and misleading when made for the reasons stated in ¶ 228, above ,
248. Defendant Stanley commented on the third quarter results as follows :
Having now completed the divestiture of our computer productsbusiness, we can focus entirely on pursuing profitable audio visualand broadcast business . We continue to be a growing company, asevidenced by our 11 % increase in revenue for the third quarter overthe last quarter. [Emphasis added.]
249. The statements referenced in the previous paragraph were materially false and
misleading when made for the reasons stated in' 228, above .
250. On October 22, 2002, the day before the press release, MCSi stock traded at $4 .41
per share on volume of 276,000 shares . On October 23, 2002, the day of the press release ,
MCSi°s stock price increased $0.50, to $4 .91 per share, on 220 . 83% increased trading volume.
251 . On October 24, 2002, analyst Nigel P . Gonsalves of Gilford Securities, relying on
MCSi's reported financial results of October 22, issued a "Buy" recommendation for the
Company's stock . . . . . . . . . . . . . .
252. On November 13, 2002, defendants Peppel (as CEO) and Stanley (as CFO) signe d
the certifications required by Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C . 135) .
The certifications were filed on November 14, 2002, as Exhibit 99 .1 and Exhibit 99 .2 to the
Company's third quarter 2002 Form l0-Q (the "3Q 2002 10-Q") . Each certification stated :
The undersigned executive officer of MCSi, Inc . (the "Registrant")hereby certifies that the Registrant's Form I0-Q for the threemonths ended September 30, 200 . fully complies with the
66
requirements of Section 13(a) of the Securities Exchange Act of1934 and that the information contained therein fairly presents, inall material respects, the financial_ condition and results of theoperations of the Registrant. [Emphasis added. ]
253 . The statements in the signed certification, concerning the Company's financia l
condition and results of operation, were materially false and misleading when made, as alleged in
¶ 236, above.
254. In the 3Q 2002 10-Q, which was signed by Defendant Stanley, MOST reporte d
MCSi reported net sales of $137 .5 million, net income of $2 .5 million, earnings per share (basi c
and diluted) of $0.13, accounts receivable of $114.8 million , and inventory of $87 .3 million.
255. The financial results referenced in the previous paragraph were materially false
and misleading when made for the reasons stated in ¶ 238, above .
256. The 3Q 2002 1Q-Q also included 'die "Section 302 Certification of the Chie f
Executive Officer," signed by Peppel on November 13, 2002, and the "Section 302 Certificatio n
of the Chief Financial Officer," signed by Stanley that same day . Each certified that ,
1 . I [Peppel or Stanley] have reviewed this quarterly repo rt onForm 10-Q of MOST, .Inc . ;
2 . Based on my knowledge, this quarterly report does not containany untrue statement of a material fact or omit to state a materialfact necessary to make the statements made in light ofcircumstances under which such statements were made, notmisleading with respect to the period covered by this quarterlyreport;
3 . Based on my knowledge, the financial statements, and otherfinancial information included in this quarterly report, fad.present in all material respects the financial condition, results ofoperations and cash flows of the registrant as of, and for, theperiods presented in this .quarterly report;
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4. The registrant's other certi n officers and I are responsiblefor establishing and maintaining disclosure controls and procedures(as defined in Exchange Act Rules 13a-14 and 15d-14) for theregistrant . . . ;
6 . The registrant's other certifying officers and I have indicated 'inthis quarterly report whether or not there were significant changesin internal controls or in other factors that could significantly affectinternal controls subsequent to the date of our most recen tevaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses . [Emphasisadded.. ]
257. The statements referenced in the previous paragraph were materially false and
misleading when made for the reasons stated in 1 238, above .
258. The 3Q 2002 10-Q also stated the following concerning goodwill :
As required by the adoption of SFAS 142, the Company hasassessed its goodwill as of January 1, 2002 and determined that noimpairment of goodwill exists . [Emphasis added, ]
259. The statements concerning no impairment of goodwill referenced in the previou s
paragraph were materially false and misleading when made for the reasons stated in J 224 and
240, above,
. . . . . .. .. . .. .. . .. .. . ... . . . . . .. . . . . .. .. ... . .. .. .. . ... . . . .2 0 . t e "Notes to Consolidated Financial Statements (TJnaudited)" contained in th e
3Q 2002 10-Q, Defendants represented that :
in the opinion of the management of MCSi, Inc . (the "Company"),the consolidated financial statements presented herein contain alladjustments (consisting only of normal recurring adjustments)necessary to present fairly the financial position, results ofoperations and cash flows of the Company and its consolidatedsubsidiaries . (Emphasis added.]
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261 . The statements referenced in the previous paragraph were materially false an d
misleading when made for the reasons stated in 1176, above .
262. The 3Q 200214-Q also states , in "Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations":
Our competitive strengths include: . . . Our technical servicespecialists that design, install and service sophisticated systems .Our strong relation lu r 250 original equip~p with overmanufacturers, including Sharp Electronics, NEC InFocus,Proxima, Sony and Hitachi . Our selection of more than 30,000different products . . . . Our long-standing relationships with morethan 25,000 active customers, which include small to mediumsized businesses as well as large corporations, governments andeducational institutions. Our experience with large, complexintegration projects for blue-chip clients, such as Boeing,McDonald's, Microsoft and AOL/Time-Warner . [Emphasisadded.]
263 . The statements referenced in the previous paragraph concerning MCSi' s
purported strong relationship with its suppliers were materially false and misleading when mad e
for the reasons stated in 1178, above.
264. The 3Q 2002 10-Q also stated the following concerning DSO in its section o n
"Liquidity and Capital Resources" :
Our average days sales outstanding for the third quarter of 2002was 67 days as compared to 53 days for the same period in 2001 .The increase of our days sales outstanding is primarily the result ofslow-downs in collections from customers due to the difficulteconomic, environment. To date, management does not believethat the increase in the average days sales outstanding has resultedin increased credit risk .
265 . The statements referenced in the previous paragraph were materially false and
misleading when made for the reasons stated in 226, above .
69
THE TRUTH IS REVEALED
266 . On February 14, 2003 , the Business Wire , in a news article entitled "MCSi, Inc .
To Cooperate With SEC Investigation," reported :
DAYTON, Ohio-(Business Wire)-Feb. 14, 2003-MCSi, Inc .(Nasdaq : MCSF) today announced that it has learned of aninvestigation of the Company by the United States Securities andExchange Commission and has received a subpoena from the SECseeking production of documents . The Company intends tocooperate fully with the investigation . MCSi cannot now predictthe course or outcome of the investigation or whether additionalinformation will be sought .
267 . On February 19, 2003, Tim Tresslar of the Dayton Daily News. in an article
entitled "SEC PROBE SLASHES MCSI STOCK PRICE," reported :
KETTE TG - Shares of MCSi Inc . plummeted Tuesday duringthe first full day of trading since the company' s announcement lastweek that it is being investigated by securities regulators .
The stock fell 86 cents or 40 .6 percent, to close at $1 .26 per share,setting a now 52-week low . During Tuesday's session, nearly l jmillion shares changed hands, compared with an average dailyvolume of 166,909 shares .
268 . On February 26, 2003, Defendants issued a press release announcing th e
Company's financial results for the fourth quarter ended December 31, 2002 . MCSi reported. net
sales for the fourth quarter of $105 .2 million and operating loss, including goodwill impairment
and certain other charges for the fourth quarter , of $210 .9 million . The Company also reported a
noz j cash charge of $161 .7 million related to the impairment of goodwill associated with the
Cop an "s annual o, dwill impairment assessment , which was included in the quarter end and
year end net loss, The Company further reported that :
70
as a result of its financial results for the fourth quarter, it is inviolativ of certain mn cial covenants under its existin securedcredit facility. The Company is in discussions with its lendersregarding a waiver of the defaults and an amendment of certainfinancial covenants. No assurance can be given that the Companywill reach an agreement with its lenders or that the terms of anywaiver or amendment will be acceptable to the Company . In suchevent, the lenders will be entitled to exercise certain remedies,including an acceleration of all amounts due under the creditfacility. As of December 31, 2002, the balance outstanding underthe credit facility. net of offsetting cash reserves of $6 .7 million,was approximately $113 .3 million . [Emphasis added . )
269. On February 25, 2003, the day before the press release, MCSi stock traded at
$1.58 per share on volume of 1,139,390 shares . On February 26, 2006, the day of the pres s
release, MCSi's stock lost more than one-half of its value, trading down $0 .87 per share (or
-55.06%) to $0.71 per share, on 455 .15% increased trading volume .
270. On February 27, 2003, Tim Tresslar of the Da loon Daily News , in an articl e
entitled "MCSI STOCK PLUNGES ON LOSS NEWS," reported :
For the year, the company lost $222 million, or $9.56 per share,versus a loss of $9 .8 million, or 68 cents per share, during the yearago period. Annual net sales declined to $499 million from $560.5million in 2001 .
A year ago, MCSi reported 2001 sales of $810 million . Thecompany did not explain the change or return calls seekingelaboration .
271 . In. March 2003, Peppel stepped down as Chairman of the Company, and shortly
afterward as President and as a director . In April 2003, defendant Stanley stepped down as CF O
and Vice President . In a May 2, 2003 press release (attached as an exhibit to a Form 8-K filed o n
the same date), MCSi announced that "investors should not rely on MCSi's historical financial
information, including the unaudited information included in MCSi's press release date d
71
February 26, 2003 and filed on a Current Report on Form 8-K dated such date and the other 200 2
quarterly and other financial information included in MCSi's reports filed with the SEC . "
272 . On June 19, 2003, two weeks after the Company fled for Chapter 1 I protection ,
PwC informed the Company's Board of Directors that it was resigning its position as th e
Company's external auditors. PwC's letter of resignation cited, inter a1ia, its "inability t o
conclude whether MCSi has taken appropriate and timely remedial action in response to th e
discovery of potential illegal acts at the Company."
ADDITIONAL SCIENTER ALLEGATIONS
273. As alleged herein , Defendants acted with scienter in that they knew or recklessly
disregarded that the statements issued or disseminated in MCSi's name were materially false an d
misleading; knew or recklessly disregarded that such statements would be issued or disseminated
to the investing public ; and knowingly or recklessly participated in the issuance or dissezninatiorz
of such statements or documents as primary violators of the federal securities laws . As set forth
above in detail, the Individual Defendants, by virtue of their receipt of information reflecting the
true facts regarding MCSi and its financial condition, and their control over and/or thei r
associations with the Company (which made them privy to confidential proprietary information
concerning MCSi), participated in the fraudulent scheme alleged herein . Nevertheless ,
Defendants issued the materially false and misleading statements identified above, which were
contradicted by internal evidence, known or recklessly disregarded by them during the Clas s
Period .
72
A. Defendants' Actual Knowleft
274. Defendants had actual knowledge that the statements they were giving to th e
market through their press releases, interviews, and SEC filings during the Class Period wer e
materially false and misleading. Defendants' actual knowledge of the falsity of their statement s
is demonstrated by, among other things, the following : (a) before and during the Class Period ,
MCSi's cash flow crisis caused, inter alza suppliers to impose credit holds on the company, an d
customers to cancel contracts , as alleged in TT 53-73; (b) before and during the Class Period ,
MCSi falsely inflated revenues by recognizing them prematurely, in violation of GAAP and SAB
101, through its improper practice of pre-billing various client contracts , as alleged in ¶ 74-105;
(c) MCSI internally inflated revenues generated from customer sales by changing the pric e
charged to customers on invoices stored in the JD Edwards System, as alleged in 11106-108 ; (d)
MCSi overstated rental income, as alleged in 111.09-113 ; (e) MCSi understated operational
expenses to falsely inflate profit margins, as alleged in 11114-116 ; (f) MCSi created fictitious
sales to in flate revenues, as alleged in ¶¶ 117-129 ; (g) MCSi improperly manipulated inventory
to, inter alia, justify unsubstantiated sales caused by pre-billing, as alleged in 11 130-141 ; (h)
MCSi maintained material amounts of obsolete inventory and failed to maintain adequat e
reserves, in violation of GAAP, as alleged in 11142-156 ; (i) MCSi created duplicate financial
records for PwC auditors, as alleged in ¶' 157-160; (j) MCSi's Audit Committee failed t o
remedy internal control weaknesses, as alleged in TI i61-162; and (ic) MCSi failed to properly
integrate its subsidiaries onto the JD Edwards System, as alleged in 1 .63-166 .
73
B. Insider Sales
275 . Defendant Peppel was motivated to artificially inflate the market price of MCSi
common stock for his own personal gain . At the same time that Defendants were issuing
materially false and misleading statements about MCSi's business and financial results, Peppel
sold an enormous quantity of MCSi common stock at an artificially inflated price . Specifically,
Peppel sold 300,000 shares on December 21, 2001, at $22.875 per share, for proceeds of
$6,862,500. This sale - Peppel's first since joining the Company in May 1996 - represented
27% of his MCSi common stock and vested options . Peppel's only prior transactions, other than
his November 2001 non sale disposition of 68,000 shares, were pre-Class Period acquisitions .
276. Peppel 's sale was unusual and suspicious in timing, following the issuance o f
MCSi's false and misleading 3Q 2001 10-Q, filed with the SEC on November 14, 2001, and the
completion of its merger with Zengine on November 20, 2001 . Further, Peppel's sale occurred at
a price close to MCSi's Class Period high closing price of $24 .45 per share (on November 13,
2001) .
277. Peppel's sale did not go unnoticed . On January 10, 2002, Dow Jones Newswires
issued a news release entitled "MCSi Chmn/CEO Peppel Holds 3 .3% Co Stake," which stated :
CONTACT: Michael E. Peppel 937-291-8282 CLASS : COMMONSHARES OWNED : 784,327 PERCENT OF CLASS : 6 .1%WASHINGTON (Dow Jones)-MCSi Inc . (MCS I) Chairman andChief Executive Michael E . Peppel reported a 3 .3% stake in thecompany, according to an amended Schedule 13D filled Thursdaywith the Securities and Exchange Commission. Peppelbeneficially owns 813,087 common shares . On Dec . 21, 2001, hesold 300,000 shares in the company following a public offering .He also transferred 68,000 shares between Nov . 6, 2001, and Nov .21, 2001, to a relative . On Dec . 8, 2000, Peppel reported a 6 .1%stake, with beneficial ownership of 784,327 common shares .
74
278 . On January 28, 2002 , the Richmond Times -Dispatch stated the following about
MCSi in an article entitled "Insider Selling is Always a Concern, Despite a Company's Low
Visibility" :
From Nov. 14 through Dec. 21, three insiders sold 578,794 sharesbetween $22.26 and $23 .40 Baer share .
Among the sellers, Michael P=el, the company's chairman,president and CEO, sold 300,000 shares . For Peppel, who boughtin November 2000 at higher prices, the sale was a first since hejoined the company in 1996 and accounted for roughly 35 percentof his actionable position. Directors Robert Hecht and Harr yRadcliffe pitched in for 156,696 shares and 122,198 shares,respectively.
And make no mistake- MCSi insiders are ica . not heavysellers . Consider how the more than 575,000 shares sold in thefourth quarter compares with the 451,000 shares sold from 1996through 2000. It's not surprising, then that for all four sellers therecent sales were first or second sales to date . Moreover, while at30 to 40 percent, the holdings reductions are note e- o in theyare at least worthwatching. [Emphasis added. ]
1 . Peppel Takes Steps to Protect Personal Assets
279. Less than one month after the December 4, 2001 $37 .1 million sham sale of
inventory to .Mercatum see In 122-129, above), and less than two weeks after his sale of t e
3 00,000 shares of Si stock on December 21, 2001, Peppel transferred ownership ofhis and
his wife's hone, valued at $239,800, to the "Natalie M . Peppel Personal Trust" on January 3 ,
2002 .
C. Profit Margin is a Ka Financial Ratio Used by Covering AnalyFits
280. Further, Defendants were motivated to falsely inflate profit margins, as alleged i n
11114-116, above, because covering financial analysts, such as Mergen t .FIS, Multex.com, LJR
75
Great Lakes Review, and Friedman Billings Ramsey, relied on profit margin (or gross margin) as
a key financial ratio or criterion in rating, or providing investment recommendations on, th e
Company,
D. Defendants Possessed the Motive and O ortuni t s to Inflate EBJ TDA
281 . EBITDA is a measure of a Company's earnings before interest, taxes ,
depreciation, and amortization .
282 . Defendants were motivated to engage in the wrongful conduct alleged herein t o
ensure that MCSi did not violate its credit facility, and to facilitate the grant of personal loans to
both Peppel and Stanley. If the Company violated the covenants of its credit facility, including
the EBITDA provision, the default would have resulted in losing one of its principal sources of
cash, compounding the cash flow crisis discussed at ¶' 53-73, above ,
1 . EBITDA Was a Key Covenant in the Credit Facility
283. MCSi financed its operations through a long-term line of credit (the "credi t
facility') with a consortium of lenders ,
284. The Company's 3Q 2002 Form l0-Q revealed that , by the end of the quarter, the
Company had utilized 65% of its credit facility :. . .. . . . .. .. . .. . . . . . . . . . . . . . .. . . .. ... . . . . . . . . .
At September 30, 2002, our operations were financed with long-term lines of credit totaling $166 .7 million, of which we hadutilized $109 .0 million.
285 . ©n February 26, 2003, in its "Q4 2002 MCSi Earnings Conference Call - Final,"
transcribed by the F ;Fair Disclosure) Wire (the "Q4 2002 Conference Call"), Peppel stated th e
following concerning the covenants in MCSi's credit facility:
76
Our bank agreement in particular, the overwhelming covenant isthe debt to EBITDA number . If the EBITDA was negative for thequarter . So that is the prim covenant that we are focused on .Like I say, we are in the midst of actually working with the banksto amend things. Our agreement expires December 10th of thisyear, of `03 . We are looking to perhaps extend the agreement .[Emphasis added. ]
2. EBITDA Was the Performance Standard on IndividualDefendants' Obligations to Reggy Promissory Notes to MCSI
286. In February 2002, Individual Defendants each executed Promissory Notes . to
MCSi for personal loans received from the Company.
287 . The Individual Defendants were motivated to commit the fraud so that the
Company could satisfy certain performance covenants in the loan agreements, satisfaction of
which would result in the release of the Individual Defendants' obligation to repay their loans .
Peppel executed, as Maker, a Promissory Note for $750,000, while Stanley executed, as Maker, a
Promissory Note for $200,000 . Both Notes were filed with the SEC on August 14, 2002, as
Exhibit 99.4 and Exhibit 99.5, respectively, to the 2Q 2002 I0-Q .
288. Each Note included a section entitled "Performance Standards for Release," and
the only performance standard was EBITDA. Both Notes stated:
Maker shall be released from one-third 1/3 aftheoutstanding principal balance of the Nate plus gpy and all =paidinterest on'that portion of the principal amount ("ReleasedPortion") and the Company shall forgive and extinguish suchamounts each of the years 2002, 2003, and 2004 if the followingperformance standards are attained by the Company in the years asset forth below :
77
Performance Year
Base Year 2000200120022003
Performance Standard
Annual Earnings of the Company Before Interest,
Taxes, Depreciation and Amortization ("EBITY)A" ;.
$51,844,00 0Base Year times 1 .10 or $57,028,000 ("Year 1 EBITDA")Year I EBITDA. tines 1 .10 or $62,731,000 ("Year 2 EBITDA"Year 2 EBITDA times 1 .10 or $69,004,00 0
The Annual BBI .'DA shall be measured as of December 3 1of each year and determined in accordance with generally acceptedaccounting principles, consistently applied . The EBITDA for anyyear may be cumulated, so that if the performance standard is notattained in one year, but it is attained in a subsequent year to theextent that, if carried back the EBITDA for such year would, on acumulative basis, satisfy the performance standard for the currentand one or more past years, then the Maker shall be released andthe debt shall he extinguished in an amount equal to the ReleasedPort ion for the current year and for the current year and such mastyear_-s) (the "Performance Standard Carr, Back") . There shall be,however, no carry-forward of past Annual EBITDA for currentyears. [Emphasis added. ]
289. At December 31, 2001, the cumulative EBITDA for 2000 and 2001 was
$77,532,000, s a t i s f y i n g the p e r f o r m a n c e s t a n d a r d s f o r both . 200(} L. , $51,844,000), and 200 1
i .e . $57,028 ,000), in accordance with the Performance Standard Carry Back provision . As of
the date of this Complaint, a Form 10-K for the year ended December 31, 2002 has not been filed
with the SEC .
290. Further, in the MCSi/Lender Complaint, MCS1 alleged that :
Peppel's accounting schemes caused large oversatements ofMCSi's financial earnings for 2002. Upon information and belief,Perppel has not paid back the $750.0001oan past .
Stanley's accounting schemes which overstated MCSi's profits for2002 had the direct result of reducing the amount of money Stanle y
78
owed to MCSi. Upon information and belief, Stanley has notrepaid the $2004000 loan . [Emphasis added . ]
291 . MCSi also alleged that, in December 2001, MCSi advanced Stanley $100,000 i n
the form of an unsecured demand loan that was never repaid. MCSi stated further, in paragraphs
160 and 161 of the MCSi/Lender Complaint :
160. At no time has MCSi been engaged in banking or i n themaking of loans as a corporation.
161 . At the time the loans to Peppel and Stanley were made, amajority of disinterested directors did not vote for the loansor determine that the making of the loans could reasonablybe expected to benefit MCSi .
APPL CA&&LITY OF PRFSU'MPTION OF REL 1CE :F .tA -ON-ThE-M T DOCTRIN E
292. Pursuant to their claims under Section 10(b) of the Exchange Act and Rule 1Ob- 5
thereunder, Plaintiffs will rely, in part, upon the presumption of reliance established by th e
fraud-on-the-market doctrine, in that :
a, Defendants made public misrepresentations or failed to disclose materialfacts during the Class Period ;
b, the omissions and misrepresentations were material ;
c the securities of the Company traded in an open and efficient market ;
d. the misrepresentations and omissions alleged would tend to induce areasonable investor to misjudge the value of the Company's securities ; and
e. Plaintiffs and members of the Class purchased their MCSi stock betweenthe time Defendants failed to disclose or misrepresented material facts andthe time the true facts were disclosed, without knowledge of the omitted ormisrepresented facts .
79
293 . MCSi stock met the requirements for listing, and were listed and actively traded,
on the Nasdaq National Market System, a highly efficient market .
294. As a regulated issuer, MCSi filed periodic public reports with the SEC .
295 . MCSi stock was followed by securities analysts employed by major brokerage
firms, who wrote reports that were distributed to the sales force and certain customers of their
respective brokerage firms. These reports were publicly available and entered the public
marketplace ,
296. MCSi regularly issued press releases that were carried by national newswires .
Each of these releases was publicly available and entered the public marketplace .
297. As a result, the market for MCSi's securities promptly digested curren t
information with respect to MCSi from all publicly available sources and reflected such
information in MCSi's stock price . Under these circumstances, all purchasers of MCSi's
common stock during the Class Period suffered similar injury through their purchase of MCS i
stock at artificially inflated prices and a presumption of reliance applies .
STATUTORY SAFE . A OR
298 . 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 statements alleged herein referred to historical or existing conditions . The specific
statements pleaded herein were not identified as "forward-looking statements ." Nor was it stated
with respect to any of the statements forming the basis of this Complaint that actual results
"could differ from those projected." To the extent that there were any forward-looking
statements, there were no meaningful cautionary statements identifying important factors that
80
could cause actual results to differ materially from those in the purportedly forward-looking
statements . Alternatively, to the extent that the statutory safe harbor does apply to any
forward-looking statements pleaded herein, Defendants are liable for those forward-looking
statements because at the time each of those forward-looking statements was made, the particular
speaker knew that the particular forward-looking statement was false, and/or the forward-looking
statement was authorized and/or approved by an executive officer of MCSi who knew that thos e
statements were false .
COUNT I
Violation of Section 10(b) OfThe Exchange Act and Rule 10-5
Promulgated Thereunder Against All Defendant s
299. Plaintiffs repeat and reallege each and every allegation contained in the foregoin g
paragraphs as if fully set forth herein .
300. This Count is asserted against Defendants under Section 1 0(b) of the Exchange
Act, 15 U.S .C. § 78j (b), and Rule 1Ob-5 promulgated thereunder.
301 . During the Class Period, MCSi and the individual Defendants individually, and i n
concert, directly eugaged .in a common plan, scheme, and iiawfizl . course of conduct, pursuant t o
which they knowingly or recklessly engaged in acts, transactions, practices, and courses o f
business that operated as a fraud and deceit upon Plaintiffs and the other members of the Clas s
and that were intended to and did: (i) deceive the investing public, including Plaintiffs and the
other members of the Class, as alleged herein; (ii) artificially inflate and maintain the marke t
price of MCSi's securities ; and (iii) cause Plaintiffs and the other members of the Class to
81
purchase MCSi's securities at artificially inflated prices . In furtherance of this unlawful scheme
and course of conduct, Defendants took the actions set forth herein .
302. Defendants (a) employed devices, schemes, and artifices to defraud; (b) made
untrue statements of material fact and/or omitted to state material facts necessary to make the
statements not misleading; and (c) engaged in acts, practices, and a course of business tha t
operated as a fraud and deceit upon the purchasers of the Company's securities in an effort to
maintain artificially high market prices for MCSi's securities in violation of Section 10(b) of the
Exchange Act and Rule 1 Ob-5 . Plaintiffs sue Defendants either as primary participants in the
wrongful and illegal conduct charged herein or as controlling persons, as alleged below .
303 . The Individual Defendants, by virtue of their positions at the Company, had actual
knowledge of the materially false and misleading statements and material omissions alleged
herein, and intended thereby to deceive Plaintiffs and the other members of the Class . In. the
alternative, the Individual Defendants acted with reckless disregard for the truth in that they
failed or refused to ascertain and disclose such facts as would reveal the materially false and
misleading nature of the statements made, although such facts were readily available to
Defendants . These acts and omissions were committed willfully or with reckless disregard for
the truth, and Defendants knew or recklessly disregarded that material facts were being
misrepresented or omitted as described above-
304, Throughout the Class Period, MCSi acted through the Individual Defendants,
whom it portrayed and represented to the financial press and the public as its authorized
representatives . The willfulness, motive, knowledge, and recklessness of the Individual
Defendants are therefore imputed to MCSi, which is primarily liable for the securities law s
82
violations of the Individual Defendants while they were acting in their official capacities as
Company representatives .
305. As the senior managers and directors of the Company, the Individual Defendants
had knowledge of the details of the Company's internal affairs . In addition to the duties of ful l
disclosure imposed on Individual Defendants as a result of their making affirmative statements
and reports, or their participation in the making of affirmative statements and reports to the
investing public , the Individual Defendants had a duty to p romptly disseminate truthfu l
information that would be material to investors, in compliance with the integrated, disclosur e
provisions of the SEC, as embodied in SEC Regulation S-X (17 C.F.R. §§ 229 .10 et seq.) and
other SEC regulations . This included the duty to disseminate accurate and truthful information
with respect to the Company's operations, financial condition, and earnings, so that the marke t
price of the Company's securities would be based on truthful, complete, and accurat e
information .
306. The Individual Defendants are directly liable for the wrongs complained of herein .
Because of their positions of control and authority, the Individual Defendants were able to an d
did, directly or indirectly, control the content of the st atements of the Company . . As ofcers .and
directors of a publicly-held company, the Individual Defendants had a duty to disseminate timely ,
accurate, and truthful information with respect to the Company's businesses, operations, futur e
financial condition, and future prospects . As a result of the dissemination of the aforementione d
false and misleading reports, releases and public statements , the market price of MCSi securities
was artificially inflated throughout the Class Period . In ignorance of the adverse facts alleged
herein, Plaintiffs and the other members of the Class purchased MCSi securities at arti ficially
83
inflated prices and relied upon the price of the stock, the integrity of the market for the stock ,
and/or upon statements disseminated by Defendants, and were damaged thereby .
307. During the Class Period, MCSi common stock was traded on an active and
efficient market. Plaintiffs and the other members of the Class, relying on the materially fals e
and misleading statements described herein, which Defendants made, issued, or caused to be
disseminated, or relying upon the integrity of the market, purchased shares of MCSi common
stock at prices artificially inflated by Defendants' wrongful conduct . Had Plaintiffs and the other
members of the Class known the truth, they would not have purchased those shares or would not
have purchased them at the inflated prices that were paid. At the time of the purchases by
Plaintiffs and the other members of the Class, the true value of MCSi's stock was substantiall y
lower than the prices paid by Plaintiffs and the other members of the Class . The market price of
MCSI common stock declined sharply upon public disclosure of the facts alleged in this
Complaint.
308 . At the time of said misrepresentations and omissions, Plaintiffs and the other
members of the Class were ignorant of their falsity, and believed them to be true. Had Plaintiffs
and the other members of the Class and the marketplace known of the true financial conditio n
and results of operations of MCSi, which were not disclosed by Defendants, Plaintiffs and the
other members of the Class would not have purchased or otherwise acquired their MCS I
securities, or, if they had acquired such securities during the Class Period, they would not hav e
done so at the artificially inflated prices that they did .
309. By virtue of the foregoing, Defendants have violated Section 10(b) of the
Exchange Act, and Rule lOb-5 promulgated thereunder .
84
310, Asa direct and proximate of Defendants' wrongful conduct, Plaintiffs and the
other members of the Class suffered damages in connection with their respective purchases and
sales ofthe Company' s securities during the Class Period.
COUNT 1 1
Violation of Section 20(a) OfThe Exchange Act Against the Individual Defendants
311 . Plaintiffs repeat and reallege each and every allegation contained in the foregoing
paragraphs as if filly set forth herein .
312. During the Class Period , the Individual Defendants acted as controlling persons o f
MCSi within the meaning of Section 20(a) of the Exchange Act as alleged herein, in that they
participated in the operation and management of the Company, and conducted and participated,
directly and indirectly, in the conduct of MCSi's business affairs . By virtue of the individual
Defendants' high-level and senior positions as officers and/or directors of MCSi, they knew the
adverse, non-public information about the Company's results of operations and financial
condition. 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 Plaintiffs t o
be misleading before and/or shortly after these statements were issued, and had the ability to
prevent the issuance of the statements, or to cause the statements to be corrected, In particular,
the Individual Defendants had direct and supervisory involvement in the day-to-day operations of
the Company and, therefore, are presumed to have had the power to control or influence the
particular transactions giving rise to the securities violations alleged herein, and exercised the
same .
85
313. As directors and officers of a publicly-owned company, the individual Defendants
had a duty to disseminate accurate and truthful information with respect to MCSi's business,
operations, products, financial condition and prospects, and to promptly correct any public
statements issued by MCSi that had become materially false or misleading .
314. Through their positions of control and authority as senior officers and directors of
MCSi, the Individual Defendants had the power and authority, and exercised the same, to control
the contents of various reports and press releases that MCSi disseminated in the marketplace
during the Class Period concerning the Company's business, operations, products, financial
condition, and future prospects. Throughout the Class Period, the Individual Defendants
exercised their power and authority to cause MC S1 to engage in the wrongful acts complained of
herein. Therefore, each was a "controlling person" of MCSi within the meaning of Section 20(a)
of the Exchange Act for the violations of MCSi .
315. Asset forth above, MCSi and the Individual Defendants each violated Section
10(b) and Rule 1 Oh-5 by their acts and omissions as alleged in this Complaint . By virtue of their
positions as co ntroiling persons, the individual Defendants are liable pursuant to Section 20(a) of
the Exchange Act. Asa direct and proximate result of MCSi's and the Individual Defendants'
wrongful conduct, Plaintiffs and the other members of the Class suffered damages in connection
with their purchases of the Company's securities during the Class Period .
PRAYER FOR RELIEF
WHEREFORE, Plaintiffs pray for relief and judgment against Defendants as follows :
A. Declaring this action to be a proper class action pursuant to Rule 23 of the Federal
Rules of Civil Procedure;
86
B. Awarding compensatory damages in favor of Plaintiffs and the other members o f
the Class against all Defendants, for all damages sustained by Plaintiffs and the Class as a resul t
of the acts, transactions and wrongdoing alleged herein, in an amount to be proven at trial ,
including interest thereon ;
C. Awarding Plaintiffs and the members of the Class pre-judgment and
post judgment interest, as well as their reasonable attorneys' fees, expert fees, and other costs ;
D. Awarding such other and further relief as this Court may deem just and proper .
JURY DEMAND
Plaintiffs hereby demand a trial by jury.
Dated: April 26, 2004
sl Richard S . WayneAttorney Bar Number: 0022390Attorney for PlaintiffsSTRAUSS & TROY150 East Fourth StreetCincinnati, Ohio 45202-4018Telephone: (513) 621-2120Facsimile : (513-241-8259Email : r_sw_ aynenstrausstroy.com
BERNSTEIN LIEBHARD & LIFSHITZ, LLPJeffrey M. Haber, Esq .Mark M. Milkey, Esq .Andrew H. Williams, Esq .10 East 40th Stree tNew York, NY 10016Telephone: (212) 779-1.414Facsimile (212) 779-3218Lead Counsel for Plaintiffs
87
CERTIFICATE OF SERVIC E
I hereby certify that a copy of the foregoing has been filed electronically with the U .S .District Court ; has been sent electronically this 26th day of April 2004, Notice of this filing willbe sent to all parties by operation of the Court's electronic filing system . Parities may access thisfiling through the Court's system . If a party is not given notice electronically through theCourt's system a copy will be served by ordinary United States mail, first class postage prepaid,this 26th day of April 2004 :
Counselfor Plaintiffs
John Henry Stachler, Esq .JABLINSKI, FOLINO, ROBERTS &MARTIN
P .O. Box 1266214 W. Monument AvenueDayton, OH 45402-9766
S . Gene Cauley, Esq .CAULEY GELLER, ET AL.11001 Executive Center Drive, Suite 200P .O . Box 2543 8Little Rock, AR 7222 1
John R. Climaco, Esq .CLIMACO LESKOWITZ PECA WILCOX
& GAROFOLIHalle Building, Suite 9001228 Euclid AvenueCleveland, OH 4411 5
Charles J. Piven, Esq .LAW OFFICES OF CHARLES J . PIVENThe World Trade Center - Baltimore401 East Pratt Street, Suite 2525Baltimore, MD 21202
Darren Check, Esq .SCHIFFRIN & BARROWAY, LLPThree Bala Plaza East, Suite 400Bala Cynwyd, PA 19004
Lauren Antonin, Esq .CHITWOOD & HARLEY2300 Promenade II1230 Peachtree Street, NEAtlanta, GA 30309
Steven G. Schulman, Esq .MILBERG WEISS BERSHAD HYNES
& LERACH, LLPOne Pennsylvania Plaza, Suite 4915New York, NY 1011 9
Evan Smith, Esq .BRODSKY & SMITHTwo Bala Plaza, Suite 602Bala Cynwyd, PA 19004
Anthony Vozzolo, Esq .FARUQI & FARUQI, LLP320 East 39th StreetNew York, NY 1001 6
Tzivia Brody, Esq .STULL STULL & BRODY6 East 45th StreetNew York, NY 1001 7
88
Marc Henzel, Esq .LAW OFFICES OF MARC S . HENZEL273 Montgomery Avenue, Suite 202Bala Cynwyd, PA 19004
Sandy A. Liebhard, Esq .Mark T . Millkey, Esq .BERNSTEIN LIEBHARD & LIFSHITZ, LLP10 E . 40th Stree tNew York, NY 1001 6
Counsel for Defendants
Charles Joseph Faruki, Esq .FARUKI IRELAND & COX, PLL10 N. Ludlow StreetDayton, OH 45402-181 8
Amy M. SchollDinsmore & Shohl1900 Chemed Center255 East Fifth StreetCincinnati, OH 45202
428509 1 .DOc
David Scott, Esq .SCOTT & SCOTT, LLC108 Norwich AvenueColchester , CT 0641 5
Gerald V. Weigle, Jr.Dinsmore & Shohl1900 Chemed Center255 East Fifth StreetCincinnati, OH 4520 2
Roger J . Makley, Esq .Coolidge Wall Wornsley & Lombard33 W. Fifth Stree tSuite 600Dayton, OH 45402
sl Richard S . WayneAttorney Bar Number: 0022390Attorney for PlaintiffsSTRAUSS & TROY150 East Fourth StreetCincinnati, Ohio 45202-4018Telephone : (513) 621-2120Facsimile : (513-241-8259Email : rswayne(,strausstr,oycom
89
EXHIBIT A
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_ L1 .a k :d 1k : i2 '
IN THE COMMON FLEAjQO~I"
. . . NT : i IE ' COUNTY, OHIOk%11 HIP, N
NA` 0NALCI'I'Y RANK, PNC BANK, )ATION.r L ASSOCIATION, .LASA.LLE )
BANK, NATIONAL ASSOCIATiOi, IFTHIRD BANK, THE HUNTINGTONNATIONAL SANK, "WEPPOVJ DENT BAN' )U.& BANK, NATIONAL ASS OCIATION
AND
MMfCSi . IN C, CASE NO_
JUDGE :
JURY DEMAND
+(iCHA L PEPPEL, IRA STANLEY,SHARMILLA RAO, JIM .f NS, AND SCOT
T A.LTH R
COMPLAINT AND J URN' fl 1AND
NATURE OF T E ACTION
I, in tl 1 I ail' f ~s ~ (," a, .Ins, . { CSi- 0 ~° the
an extraos Ia xil y f , rc la company oven for 't hos e, beady this . Fe.U ving Its S p€e er
1996 in tW public of riig, T M SI reported doiib e-digit egg growth for v 'ee n
mn utiva quarters, Comporly prvks t leas touted $ record rz " on . reglilar basis, and
z n when the bu rineqi cycle m mod downward in 2000, MC i s record earnings eanii ucd, In .
-I-
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the 'td, how r.,. these outstanding f eia results , :ere flit result tsf iigittcmrtt s gu Thies
in husin r etTc ? d a of rat"s . In d "e rt to pip yep flagging eaming L%4CSi'r, offic
and employees orchestrat sham sale try' tisactions . quid pro qua ",deals" with p r .L Erie: ,
ltt ~ a "ad ~zs z & " booking of non-e tilt t rates mc, a of which resulted in
significantly infktad (*Min figures being reported to it estors and creditors from at I n% 2001
forward.
2. As is generally the case, the m aehinationa of the N IM i e eer.s and. em bbycus
t nl}r f+~r t f 6'ee flay inevit; l Indeed, their gni f-hatwiti s sm trr tent sent the Company
into a tailspin that o rninated in the filitt* fthstptet p tl rt s by i and five of its
affiliates Jtme of 20M .
. McSi ofd and employeeg violated their legal Obligations o 'caw and io lt y
to MC J and M CSit investors, leading to the eventual b krtspteyr of MCSi, t e trtther
tai ; 3cr of asset values while in. bankruptcy, and tens o mif ions ofdollars in lasses to their
creditor.
JURISDICTION D VE NUR
4. This. onrt has j -i dict on MET this sounder Ohio Rev. Code Ann, ; SSW ,
The amount its CO rovorav thr xce S 5O Ol . In fact, tlxr sal the and omissions of t the
Defendants, the Plaintiffs suffered millions ofdoUUars in damages ,
5. At all times rein;ant to the aJie Lions in this Complaint, three Dire Pig oti 'f ,
kaiiunl City Bank, Humington N i al & -ink iand Fi.th. Third Bank were headqunrwred in .
Ohio . Fu llem e, Plai:n .i. "s Provident Bank and U Z . Beak} Nation i Ass iati r, workaci e n
the negotiations leafing to the Credit Agreement, discussed Below r out of their Ohio ltwml .
o c. .
m~~
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q
1' t
6. At alt fimes relevant to the afie;g io€ in this Complaint, M'CSi was
Page 6 of 7 7
he-adq cart d in Dayton, Ohio_ The actions, dbscribed in this Complaint wcrc lardy committed
at these headquarters a thty e s d ffres€ able and severe hum to MCSi, its crethtors and
erne yes.
7. This Court has personal juri ict on over D m .,t€ts Pepp .d, Stanley, Rao,
Waiter and A.hrns, because they five i Ohio, transant i u e within Ohi acted as s c
-and employees of N4C i daring the time it was he ar c ua€tered ill Dayton, Ohio.and' have caused
acts and ronsej ernes to occur in Montgomery County, Oh
9. WOO in this €€rt is proper pursuan t t o O h i o iv. L. , 3( ) I) 3p)(1) and
3(10(6).
TH PA TIES
TI .r It t# ' in esters
9. On December 1, 1 M, MC-Si te" int an Animdtd and Rostated Cred'iu
LkE army with N irrt ffNation l qty Ban k, li eanquadered and itic rporatod in Ohi o, , as I-ender
and as doranumt :ion agctt (the "Credit A en= ') .
10. Three, additional bans headquartered and incotponab d In OErie, Main li 'k
tent n oil Natk t Bank, P [ai. nf'i"if1thThird Bank iutd Plait ti rrP~-Cvid 1 atink f artie .pated
as lend ers to the Credit Agreemem
1'1 . Ptai €ifPP NC Barg., 'Nati on l Association, h :g artered in Ponn .yIvanla, was. a
i t i r, tjj4L swing line l tiler, a let€ar of Gr it issuer and admin istrative agent of the Cmdi ,
Agreement,
11 Plait tiff L alt ant, National Association, an Il r .vis corporati:nr and NNairt.€i f
U.S . Want', National Assciation, aMinneso . con ny, also Joaned lands to MCSi pursuant to
the Credit Agr rn ut, ( onal City Battle . Huntington National Bank, Fifth "bird Bank, Pf' C
;xtt i4 rr sy~
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4.
Page 8 of77
Sank, National iai , U.S_ Bank, National Asw at on, vid t Bak and La a11e BzTkk.
ecoll fi-ei ; referard to h rci tr a t]Kc "P1air tiI " ~~s tura~' ;~ .
1 .3 . Through the Ce6dft Ageswtit , . the Plai jit1ff I ve tors p vided MCSi a genera
revolving credit facility im u€t7 of 125 miHiion less yun aunts Outstanding for Wfors of
credit (trp t co CE rn 1i 16iaa) the swing loan facility (up to 93 til on) (the "Credit. Line'') .
14. The Credit Agreement was periodically amended fifteen times from March 3t
, 1999to June 29.2 2.. Tqp&1 and Stanley signed gli of the irn t ncnts acs the Credi t
AAA nt. Each am m t ref nc t wit m nt g~ s t tk to Which verified
thai CSM S €.€ rioi& infonnation frrrnis ed to, the Plaintiff In es rs r1epict an ac on, to
repo sentation of 5 CSi°s financial sid ou., l y signing the am=dr rocra to 111e Credit
A mtt,. Pcppel and Stanley specifically agreed to provide a me fimncia1 infortration to
the Plaintiff investor.
The Plaintiff I ICS 1
13. M CSL origi Dy knnwri. u s .t .nii Commmputet €uppl { Corpora Lion, wn Ibmed i n
1990 i Dnyt r€ , Obi and bovame pabli : rnpany fhflawing its S atenther° 19% € iti.ai p ii c
offering, MCSI was headquartered in Dayton, Ohio at all times r,eliwr €t to the allegations in the
164 As of2001, M offered more than IP 7, (} different products for r aie,, had
more than 50,000 acti ve cuvorr ers and:ham offices t ri ugho-it the United Statas alld Canada ,
1.7, in Jenne 2003, after r terat years of'infated. inazcial state nts and €l rastati t g
auntin hems by MCSI's management, MCSi and several of its subsidiaries filed vo untary
this rtf't r r li €~ € r l t r 11 of the ankns tey Code in the United . States Bank ruptcy
Court for the District of Maryland . As .a l tr~r i l ~ s i n~ MM has t duty to protect and
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further din intcr t of the egat&s creditors, Tats, MC-Si bring s its claims in this law uit on
behalf of th e e static and in.pe 'far mo those d:ut;ies .
De `e dhrts
18- Michael E . Pgppei ( eppei") is an individual residing in Centerville, Ohio ,
Pt l joined MC i in May 1996 as t he Chief Financial Officer. o January 1, 1998, he was
elected President and Chief xecutivt c}# cer . He was rram Cbs. a of th l3oat. of
Directors on February 8, 2000. Peppel has he ar t ht-, positions of Pmids tt. Chia( Bxecu ive
Office- and , hair an tithe Board of Dimcion i all times relevant to the allegations io the
Complaint.
19, I:ra H . Stanley (Stanley' is an individual residing in Da on, Ohio. Stanley
joined NI'M as the Vice Presideat of Finance on April 1R l99 . . was sathsqn rtdy appointed
MGSi°s Vice President , ChiafFinanc€a} O eer and to CSt`s .3oaW of Di=tom Stanle
was the Vi ce Presid en t, CMef Financial Qfce acid on MM 's Boa rd of Directors at all fines
rel(waet tt the allegations in the Complaint,
20. harmiiila Rao C*Rae) is air i ndivrduai residing in Ctniae fl - Ohs, Rao wa s
hired by MCia in March 1 999 as a W sHe A.djuWarr ,ttor, In July 9% Rao was pro oted t o
the position of Director, Co lpo a c Ser vices, for pi's subsidiary. Zen ina, Inc . Z n.gitue ) .
In Mara 2000., Rao was again promoted to 'fir Ice President of Corpowe COMWOnitati*m, At a .1 1
times relevant try the allcga ns in the ,r plaint, a r Im the vice President ofCc"ate
C im acsnnts as MCSi .
21. Jim Alms f ".Ahiw) is an individual residing in Genie MMTkk, Ohio, Ahme, was
hired . MCSi as a a r : r on eMarch 1& 1999 . At all times relevant to sh t gg ti ,Is in the
Cam ai , A s was Ow Corporate Controller k€ir MC&
CM - 4 ?W3 3s «r -6m1
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22 Scott Wt.tther(" 'afthcr") is are individual residing in Springb o, Ohio . On
,t h 9, 2000, Walt her ,,mzs hired as the D3.re r of Financial R rdn for SI and served
in.th position at all iimes rr1e 't t the alb g aio in the C i p aunt.
BACKGROUND
The Growth ofMCS
23. Following its September 1996 initial public offering, MC Si erienced
me rnn.ous divuication and paur,~-ion< Originally a r seller of dio visual and computer
echaology products, l .CSi began to focus on putpodedl more t t " i ti tt se vi C
vith its t998 acquisition of lectrunie tra e System, I .e. Thew erv k r'eti CSi to
aro into o d'osi n and ins lation ofcust nrti r and integmted audio, visual ., data
d isplay, bro de tin , zotifacneing and networking systems designed for usa in boardrooms,
nferenee rooms, Lecture halls, theaters and oih similar facilities .
24, In its 2000 Annual Rcport, MC M repertod rt sales increases from $107,5 mifl;on
in 1997 to S82&6 mil ii. in 2000, and attributed the growth to "a combination o( Wrong infers al
growt and aecretivc acquiaitiom" Neu ales dropped to 5810 .4 million in 2001, however ..
According to s 200) Annual Report, the decrease in n et sales was due to significant s as t.
cut}rp iti on and price reductioTiIn the computer product market,
ongoift25 . While cr nizing flat . invento ry anagEment was crucial to
pro F ahi ity, .C is i ventcrry turnover on an manual basis dropped: from nine tie-rt s per year for
2000 to eight tithes per year in 2001 . Nova :h i a., CS.i touted that its strong refatiomsh€ s
with its i w story suppliers enabled it to take adva of discounts and rebates oftrt~d by the
vendors, well Obtain price protection zramrrecs are rights of return for slow vi n
i ventory .
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The 7 Million Sham Mere itu Bade am Zengh e- Tra€ s Lion
Page 14 of 7 7
26 . With not wf ee -,Hi pi9 :g and inventor} piing up in mid-2001 , c ertairl of iC is
of" sera marl ; iPIoy s, including Peppel, 1 iley, Ran and Walther, deei .ded to t .ce more
creative r ores tc prop up the bnl s Harz . On August 31, 2001 . MCSI- "sr td°' to Z g e
some 4 .Q37 million in nw tory (the "hiven;ery'). Zg nw was a wthsite developer located in
Ferro, (al ffmia and thus had little business use for the tee a thed tjv irh% prof or s
d "g ,ro mouse'preseatation painters it. ` pur aset," Also inched#J in the "sale" were see (
nd,md t ousatnd dollars woctM of ntne brand audio visual, and tel therm n equipment
that MCSi had previously p chase 1 from, one of its suppliers, CEearOne . °
27. The S4 .0Y1' :rmrl rn in tnve story was rot seeded by Zengine - in f"act, i
Inventory never left MC i's. omit warek Ouse in. l r, Kentucky, and consistent with this
pattem« Zeryg ne n nr paid for the fnveat ary . lrs€ , N{t i had even grander plans for it .
24- In Oct-Ober 2 01) 1, sltcrtiy after or estrating thl sul " of l cvontorv to Ze .nine,
Peppe1 . an:nouncud MCSft ictem ion to rego Zeng ine . On the date of the annauneemen€ ,
CSi'a corm n stock. was tra dhtg at S 16 .74 per slwew mad Peppel end Stanley soap took- thi s
merger to the "sheet," trts p in, it ns the k-ey to Ctrs coat i gtwth .
29 . In 1 Jr a her 2V I, Zen ii e mer d into MCSi, with MC & issuing
xi1MMei ..1 .4 million shares of its common stork in exchange for the remaining ptzbiicl y
hold shares-of' gia fir a vale f ~r ag axe a~~el r 23 million .
30. Based lar e y on the Agin:; merger M ixs stock value , t ped drmniotzhafly ,
tai . t `e{ be 2001, PeppeL taking . dv=anta of the Zermgl ae erg fit had so craftily
r Sec 1Pl 47.59 roe ufl ar o rep Jio -M f're's in p per tee[i g with CIturOne
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orchestrated, sold 200,000 Common Spars of MC Si stook µ « valued then at S22 75 a sharp - .
for Appr : n teak=acs S4,571 5,0M
31 . If the $4 million profit P pp4.t ='W as a sup[ of the Z i ane merger wwas not
eaeughx the engine merger also pmvided an easy cover for the earner sham .sale" 0 "the $4
million of rove-mart' tazmgine-
3 . MM's rnana t m d certain employn~ then trr g d fbrthe largest single
Sale in CSi's history: the sale of approximately $37 .1 mil on in inventory to 6 eAtum . This
sale was r emoriai zt. in three in oic s f mo MCSI to Mereatum, dated Dwember 4,2001, for
`"surplus irn nto " with terms of "stet. I5. u e €~ i d u ~t ts :r a that the
inventory Cr u purportedly p irchased for 37 .1 million was none. other than the Inventory
""sold" to ,engine for .037 million ,
33. Me at:ur issued th purchase orders total rtg ;37,J million, purport ly dal-c d
July 12, 8 . w'o of rich were for ;" :i AJu products" end one for "A//# t s ri s.s.
bite having ordered these items in Italy 2001, in a let er to .C i dated December 11, 2001 ,
lerctwyn inttruc't l Ms; C i t "hold and stare our product" and] "arrange .e:n1s with our f :. t
p ple' were conFirmed, Not s ure site y, at that time, the lnvento rw as still stored in th V
MCS irs Erlanger warehouse, having never left the facility, despite being "sat."'" months earlier.
34. A letter from M:C i to Merearum dated Noveiitber 30, 2001 pt rported to outlin e
the MC /Mercatum "Strategic PPrmers i .'x Me :atom was to be MCS1 "a exclusive di.stribnoar
ftr audio-visual- products in Europe and the Middle East, and Mematum agreed to order ;8
minim of SS mill on awry. qua ear. Curiously, the proposal was not forwarded to ercat rn
February 1, 2032 . Mercanxm's pr e n, David Whitt, axx t ad the "Strategicuw it ep
Parmors ip" proposal .s ari dated at fle x er 1 , 20M,. i n order to =ate a paper l i of
~RkF rc~?c~
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documents nridne tg a r em,e t between I M.CSi. aid M . s , asked White to fax Me
amt cc bank ter x eppel's !ax juntAyw and Lu overni t t. a copy by Federal Express to .CSiz
attention Rao-
35. in P nzary 2002, .MCSi s management and certain employees, fi. M1y dedid l to
ship the Inventory to Mei-catuin . On February 12, 2002, Ran sent a email tc MC i employee
Dale a er and .t hers with Hn aitached Invert y list cif "Zenginn h v Cory r, R2c .asked
Badger and the other employs : to call her so tha she coutd " cptairl" t ho fnv tory Hut. Shortly
tl erea cr, Badger began preparing the Inventory for s*meit to Mercat anr .
3 . On Febraary 25 .2002, an email eta nt Beer ithf t pet and Rao that he
had F itl Pulling the "Z tgine inven tory," the sane Inventory k! to Merzatum . and. pre arsng
it for shipmeni to England- Poppel caked badger 10 coordinate with ar aaatns President,
David White, fur fl e Blip t Of the invenLory,
37. Mematum and MCSi =fif ed to MCSi's accountants in a l t€er dated Februar y
22 2002 . that as of December if ., 2002 . Me'matu owed MCSi $37 .1 ti iflien tr the trwen€or ,y,
that NMereaturu had title to the products and the risk and reward, ; orownera aka f"~1~ ods ha f
passed to Mereanan. Furthermore the letter stated that the goods had been sdd on a "bi ll an d
hold basis, Neverthe ss, David White infbtm MCSSi' roger warehouse manager that
anin would not inst«r the Inventory and oat Shipment Was at Ic es risk Rertt . iy,
S i t rr t rat and Wl d MC i a ~„re to seed the inventory - supposedly $37 € llion wort h
- "''it n inguranc' .
3 . MC-Si's management and certain ploy , in 0 desperate attempt to CoTjcea,~ ilat
the sale: of itsvettroru to cr st ni was a sham, contrived a se er to hide the nventory by
shipping it to 41~-veral chi ..t=t countrit . On Mil 3, 2002, the Inventory urch ased y_
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Macawm a' ost eight months earlier finally left the Erlanger., Ket► cky w d use - - not for
Mercaturn`s ik ; i n in England - - but addr Ssui to a post offi i x in, Dubai . Wiwi AM
Emirates.
19 . In an unexpected w k le: to the platy by MCSi r a ement, on A ii 2, 2002,
Peppel received an email from. an ompfoyft of Gyration, a su rher to MCSi, imsc "Gyrrnou
nterS" were p Of the h- ;`CIItory $ Old to Mercaturi_ The eriptaYM tcar Gr ration informed
Pelt tt Qtr tior'sprcduet wns certified for Sale only in the United States and tha t
" port g this product is a lots ri of 1. .1aw," Weed, the products were dearly labeled
"Not forExprt." Ito ci#e' s, in early 2002, the Inventory began. its world travels .
40 . MM z WIthnatelypurclti ed Mercatum in June 21„ m wt than n ine a ton t:s after
t u supposed sale of I vent yi to Mcrcatum~ Fkwe r, M Si had stilt nit t & ved any money
from Mercattim for the lraverttoTy.
41 . Certain other Deferrdan were n[st inexorably involved in the Mer atum
it , Lion . On c iernher C', 2002, Waflhcr rc ev:. t on mail from Lori Clifford, MC i s
Inventory! Cs rtroi Specialist at all times relevant the aile ations i this Comnptbin . The chart
was r titled "Meatum laic (Zengine" Attached to the email w as a list of the et nne
€ nvn oty sold to Mercntwn and booked in December 2001 . The aua hment was entitled
"0906)? en int." Clifford's email stated that the `'. ]ighlighted amounts relate to goods sol d
to Mercntrnn in Feb/March time fi 'rne (sale booked in. December 2001)." Clifford also noted
that th' "1.nv.tr will be removed with adjmttrncr .t ( on),"
4Z On Novemb , 2M2, Rao wrote a letter to the United Stales Castors r'eg dhh g
the goo& contain in rho Si 1 l of Lading it DX: 170 . .~hr h oor s} . rata to ,engine
-t0
7-b at
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k. ~
Page 22 of 77
Inver tary"sOW to Mercatnna , Rao certified . that t k goods were sent to our off= In Dubai a
`e%, months ago and being turned sire :Uny are &&uw 1a1ovirt,gprod uets? '
43. On D :ember 18, 2002, Did White documented a as a of the Inventory
m rch ed from M C i to SAPP, a RIpany .in Dubai, United Arab C €iv tet, for $24.5 zillion,
The ownerof SA PP, Cl ive Ferrrvt~cz, was coiwc nietttiy a c5are(tokdr Mercatturt tu and, upon
rnfonnation and be lief, an etamploy Of'MCS.'t ,
44 . On March 17,2003, SA PP wrote a letter to David White cn nrr ming tl t thhe
"whole lot" of 1vento purr aed by SAPP from M atom bad now curiously been shippe d
back to the United Staw _
45. An invoice w SAP.P showed the InvVI) riry now valued at about S12 million ,
had been shipped to MCSi with Ran a the contact person .
46. Upon its return to the U .S, 2f M, the bventVry once a. n.i:m. io n,n4 it home at
MC&i'a Edanger~ Kentucky warehouse. The entire amcm nt of Inventory eventually sn1 for
apprmxi mnteIy $4 mil lion at an auction by MCSi after it fi for bankruptcy - - a far cry ft in the
3 7 ttlilion safe to Me=w l € rdby MCSi man genment over a ' r earlier w eia l hr
Inventory began its global . tour .
Quid Pro Quo Tra teen With CSi Sapp b .r, ClearGrje
47, Over theCourse of severni years . CLearQne xup$ led MC :i and its s«bai:di&rier,
wt ith various products for use in CS?=;s audiovisual and computer technology inslialiation
business. Franein Flood ("Flood') s the Ch a rtnwra of the oard, President and. aso of
ClearOne during the relevant period of time to these allegations .
48. Together, Flood and, Peppel devised a F'che ne wths y M SI a to purtha::c.
Clare smarts at inflated: pri eg . ClearOnowould record the inflated price of tht sale o f
Ids to MCSi which resulted in t h Material ~ r t [; nt of s v tt ec3u its r r~ and
_I I ..
PRO Image Page 24 of 77
income for CL=Ones I a ci l a[atrents . ~~ a ~~?e~l l rt r tl st€r t~ 4 rO e s
goods w the regular p-Rcie ,
49. Instead of paying ror the ClearOne ooh at the time they wv purchased fro m
C rO e, Peppei and Owd a. qTecd that M..CSi would say rbr the Cle rOr merchandise as
it wu sold ,
50. MCSi would then store the slow-moving at~arOnv inventory its M Si`s
war a rse for fang perkekk oftime .
5l : Upon nforxtia1inn and h lief C i carried as much as 2 ,5 million in excess
Cle, rte inventory on its a :ocunth .thg a rds based on the agreement real betwr MC I
and Ciearotne.
52, As cow- it: iorn .for MCSi',-q rticipaiion in the wgreement to purchase and story ;
ClenrOnr;°s inventory, wh eh restated in € vem-tatemettts of ClearOne"s e r lugs, Clear .Ore agreed
to "Puretas&P" so 'iw from I'VICS L
53. In Decomber 200 1, over the holiday season when few employs were in the
office. . Peppel called CSi a playce Joseph Dasco and i formed ben that MC.S=". was acing
TS, MCSi's, Sroprietary s i ~sr; to ClearOne , :t Pe~I 's imtrudion, Da3 sh ppcd T to
CIearOn€ that same day with .. purchase order faxed to him by ppel .
.54.. The QT . .~ al }" was recorded in : a's books in Decembor 200f for S2 million ,
P or to t is time} MCS I had never sj~jd .g product to Clearone, pause ACS i did not
c mnuf ure prodacts for sale but i tead integrated. products pur haled from supphers, In : fight
ttfle relationship between the two c ompani,es . the 1 aflhinn sale was weff outside tht . po of
an ordinary cou .r , e transaction.
12-
PRO Image Page 26 of 77
55, The sale was oven more problematic because, at the tie QT was sold, CfearO e
d r d w ~.~t t r rsf N 3_ its fit, lye "sak' Uf TS,: likely a trad e secret nested by
MC , . to CkkarOne , : its oo etitof, farther da n ;.d Ci s
S6. in order for ClearOne to utifte the complicated procedu ofQTS, Cfees :
employe neWed to contact D elte Anthony . h as inrtrum tal in the developm t . of the
QTS procedures, A.it of gh C! O "purchaseV TS Lbr. 52 m lE m , no ClearOne employees
ever con .cted Denetre Anthony for information maul , the mpliicated QTS p€ roodar s .
57. A.-Fw he sa le i,f QTS• to Cie One: C 1 s man raver re&ized they had no
docum ents or K ppQ for the $2 million vatuat n for the QTS 9~%Zem . e irrstrctwted M 1
employees to estimate the time they Teri workbag on Q sa that she cour?d draft an imprompti ,
inv .lice t.ect ss stri g the p oet's went ..
58. By drafting documents wlri e€ ted an after-the-fact mate of the vane o f
QTS . Rao helped to conceal the fact that tie $,I million sale of QT.S was a sham,
59. Not surprisingly, MCSi never received the 52 m ill inn paymert€ front Clearflrie ibr
QTS, The sham atie of softw e to ClearOne r suilted in an overstatement of rev u , ao uasnts
receivable and incorne for MCSL
Stank_ Fabricates 18 I Ilion Aee nts Re.vahiv Entry and Moues It To InventoryOwing a Large Inflation of KWs 24 ar m
(0. In a 1'utt ter, r lye e. rt io m late MC. s.. ings in March t~ }
fabricat ry e jnurr al ender totahing over 5i million for MCSi'g a ^, :u nt5 receivable in the
rirst 4 "'Mr- of 2002. The Five different an tries cartslsite of (a) Entry 5 6378, nest. ~C;orr t
ate of sMes ;" (b :Entry 507 0, for" ajar F j €s ;" (c) Entry 56380 rot '`Major Pri jecta : "
(d) Entry 56381. cai.titled "Retrobox to CTCr," and (e) ;nary 51i151 entity "5 lass of major
jr'oj ",
PRO Sage Page 28 of 77
6 1 . .A t o d.ef o(200'2, feyth€a $12 stiWoa of the fabricated Sib nxiTlion t o
MCS?'s iav foEy a e unts isy a scries of joi r ai ids eoti t:d "Major Prq tw,,' `Major
Pro jects # , ;` "Retrcbe.x to G,,amid "Red aas ornijar proj ." A orh 6 million ufr t: SiE
t ni hon entered if to a arints movable. %V eventually Wriluen oti .s an expense at the end of
2002,
62 . Siardeydid not act a[c e, Aims was .w that Stanley had made top-sid t
a jtstine.nts to MC I`s coasts Lei'vabie tot ing I S million . In Not, as the Corporate
Controller, Aims was aware that the journal entries for aecc is r .eivabt and inventory .VM
forged because he had revio i. yr conc l t the quart iy d ail d accounts .r e.ivab e. and
inventory repom to the general d ;r. err 2002 and the first quarter G f 2003 . D pite this
kwf ge, at no point did A :s make any effort: to inform the. Board of Directors or other
Dfih improper a(Vil.ustment N ,
63. Ahins was also aw; the Staffley, kept a secret . inventory hit de o stra it g how,
bas ,f . on Stanley's tap-side adju .ratents, the inventory report did not match up With the general
ledger. 4gp n- .kh s took no r niediat action ..
64. instead, on February 14, 200, Mum sent an em ail to Haro ld Loyd, a
p», to icr at Si at An tit a riievaut to the allegations in the Complaint, for warding a lar C .
inventory rile and inatmetb. tg Loyd to "please print ( lard fu(c)k" Upon info nation and heiit(,
ft- c ii atta meft wits tiiao reconciled inventory list matchhin the getieral ledger which bad
been, edited h Stanley and Ahrns, Ahrns sent this intF to C list for the sole purpose. of creatin g
a . paper trail cite. contri ed iwre tort' list .
65, Burley's creative jonmimi entries resulted in a large + u estate et r CMC i''
ac unts reeei vabk and income for 2002,
-14-~'Ftf~ . dr'~~36P5w~:~
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66. MC Si never r eivcd any inventory -for the . $12 pillion entry thmby over tin
MCSi S inventor le
67. Tire journal a tt c~ used by Burley t €nilatn CSi s ar ,owita r eivabiks an d
in tee c r~ r t wore e.€tretreiy Unusual ands t€ki Nave, raid significant noes w t'ft
those charged with reviewing MCSi's account.
Over 912 Million to Rebuts Booke d As Income In 2002 But Never Received
69- Stanley, with the help of Ahms, also contrived. entr4,5 reflecting non" ssteb t
rebates received by' MCSI from sor l of its suppliers,
69 . Ahr is contribuied. to the overs Lemont of C is income in . 2002 by booking.
are m d unu at rehat 'n W wore Pev co flecte .y MC i . For example, Ahms made
ntia aart r ite tri s into MCSi's systems at the end of the se nd . and ti. iird quarters of
2002, including: {i) a rebate entry for $1,6 million eaten on ltt€ 30, 2(02 fir ~` cr e ; r rMA
(ii) a rebate entry for S200 ,000 entered on Jute 3 * 2 for 'volume rebate aeri j ., " (iii) a
rebate entry for 500; entered on Septolibcr 0, 2002 for "acid rebate ac a est q3 ;" and (iv) a
rebate entry fibs S 1 .3 million entered on September 30, 2002 for "CCeanO€ e rebate,
70 . At the end of the, second and third q rtee of 2002, Stanley approved there Tarp
and unusual the extremely large rebate from Ckkarom of 13 million wihi .ci'
cum advd;y totaled al most 38% orCk de's sales to MCSI .
71 . Upon inf r aiioe and be total o .i' : o ~ t 1? € €Ilres€~ of rebates Wet
recorded in x002 and never collected by M i .
72. Recording these aisc rebates had the obviolts and anticipated of
dra«naticaEly o erszau g l Si's income, and (h us its c v gall enni a, for 2002, indeed, the
false r hatca represent d ever 11% of 'C i`a gross profit for 2002 ..
Al5:~31- 7o?z35 e
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Pe a and Stanley's u : o `1 ehh Fo itron s
73. Ina biog. to the acc urain sc c cs montior above , Peppel and &ua .k usod
their intricate knowledge, ofMCSi to orchestrate a tremendous persona! profit through various
Win es in 200 1. and 2001 Both also en oge att a pattern of crate waste and s, fxddalinn
while ofc rs or` MCs . For a company with stated net sa ks of S 10.4 million And a gross profit
of 229. . million in 2001, P gel and Maley s schemes we quite profitable . . eppet and
Stanley's increase o" heir own personal wealth at the expense of MC i, € eniuaf Hy carne at a high
price for the Cost pany. On February 66, 2003, the bubble burst . and MC Si reported a net loss of
5222.5 million, for year ending December 31, 2002 ,
Pep l P w Gabs At the Exjiesiseof MC
74 ins Oa6ber. 2001, relying on his pe=nal knowledge of Zerigine, P peJ
announced M.CSf's i tion to acquire Zen- Rine, P a and Stari1ey t hen public y trumpet th e
pmposed merger as an important stzp to MC is continued growth..
5. In Novemhier 2001, Zcng ine was t ed into MCS and based largely on the
puhliciiy surrounding the Zengine niergcrx MCS?"S stock value jnmx d d naticalt , I n
ember 2001, NppeL taking a vaa1t ge of the Zen im, merger he, had so era it oft rr Ct ~
solo 200 00( cor► neon shires Of CS sioc l - _ now at $22.875 a shaft - - for an tou i
7$- In Baer 2001, MM M advanced Pep e 2$O, 0 0 in the Iona} of an unsecur
deimwd loan . Upon inf ormation and b6ief, this loan h s never beet repaid .
7-7 . In 2001, at the e=xpense ofMM, Poppet eta nszed and approved a cruse for 200
plus e rpioy=e oI CSi as a "sai .es incentiv e-" Upon infosrnadon and el et MCSi's mar€cLing
manager., T ct= Sullivan . dinated the Trip .
tfr~-. ;inssxk*~? -c2tO)i
_;_
PRO Image Page 34 of 77
79, In February 2002. Pepped signed a "pr issory n ate" wthorizing him to receive
an &.ct a,;l "191n C lo~Itn p :roc -t Of 750,000 f`ron M'CS . Pe Wei was to be rcl s cl from cane.
third Of the priztcipai balance and afl interest accreted if .e Cor ny; attained certain
perfornnan standards each year. As discussed abov, Peppels. accounting schemes cau&ed jar p
*voratements of CSi,5 iinauoial n ings for 20G2 . Upon. infor riaiion and eliel'y Peppel has
not paid back the 750;0()0 loan payment .
79, Peppel'sEn ploymnnl Agmmentp o%dd that he would rive tta s walk
the per--cent the conanlidated pretax profits ofMCSi a ; a y~iarlybonus . By ist ltting MM.C a'S
pits ft w 2001 and 2002, Peppel helped inert : the 3at* do it he received from the
compa y. Upon inform .ation and bat c t ? pel also awarded himself uses from MCSI
without r ail the nine p r t r e en ii-i 200 i. and 4002 . Cyr xazrrpie, Peep received a
$675,000 bonus it A ria. 2 t}1 in addi ion, Peppei approved the folfvwing to-tall yearly- b aces
toh himself (a))$4t2,436 it 2000, )S6S7', 6 4in2(0t ; and (c $ t,246,741 In 2(X)Z-
80. According to ft Employment A; meat, POPP01 Was UuUw riz d to receiv e
$1 2O0M0 a 0nntlh ror tai cost ofan tomobi1e , Despite € r s agreement, Peppel sLthn ttted and
t sized r ~ bi? r c€ ~ of 51,52039 a month to C'. i from March 2002 to Match
2003,
81 . In 2002, Poppet. approved a trip to Can sn with atioihcr 200 pies Tp oyoe
which was again. pail for by MCS : Upon information and belief, PcppeI paid art attoniey, again
azt o > pocket, to comae 414oo on the 2001 and 2002; tips for the solo pr ose of"baj.l ;nor `
Pep e1 or any other empi.o c& o€ of trouble .
St t icy UU His Officer P ,rW ra at MCS! to ucretra i Perso,nd Profii
~7tJ6 ~17 - is:n.Klfyt
PRO Image Page 36 of 7 7
81 Stanley ia1sb gained persona' profits from It CS through scans, advaNes and by.
gaining directly from the iollaticri . OfMMMC i`sprofits.
83. tn.Dereniber 2001, MM r advanced SWAcy 3100.000 in t ht 1`*rr of at't un cured
demand lss° va . Upon in r mnation and Wit(, this loan has never been repaid.
~4. On. Fe ruary O, 20O2, Stanley execot d a *'promissory notes' awarding hiniW C
$200,000, irU ar to P p& scheme, the promissory note stated that Stanley wcndd be released
from :repaying one-third of the priftLipat halatiee if MCS achieved certain : p 'ot ance star to
for the try 2OO -2004 . S te.yl%ac in schemes which overstated MCSi'sprorm for
2001- had the direct rash , of 14u hhg the amount of nicney Stanley owed to MCSi. Upon
informsion and bell€ef, tStanley has not repaid the $200,000 "loan, "
$5. Upon infomatio-a and &eiiof, Stanley awarded himselfbonus pa inch's without
regard to the amount authonzed by MC SL 'For example, Stanley awarded hImself a S32,500
beaus for tire opt of Jute 2002 .
06. Upon at €or ati and bebef, tanley € isreepresented to M i the date that hi s
diivorc had become Gnal that he wild. collect additional befits i&am the Company for to
'months,
fle ec t Walther s. Pirdetpatitun in Sham Mereatum Tra actin i
87, At *I.{ times relevant t the alt gations in the C p tinL '' aither Was the Dix to r
o f Financial Reporting- this position, Walfficr was charged with ensuring the accuracy o f
dMCSi's fins cial statements relied .upon. by third parties inciua ing the Plgintif .zrwentnrs,
89 . As the Director of Financial Re r in , Walt t r In a unique position to catc h
the =counting schcnws by : Si m a emant before this in nation was re poned to and
relied up n by M 's Board of"Dimmrs, creditors and the Plaintiff twwe rorg .
PRO Image Page 38 of7 7
80, Ignoring his essentia l duties as the Director of Financial Rq~orting, Walthe r
l;cipd to irnaL- MMCSP`s rin aia.s 5 acct i ~)2J1 Cis t.i. 3~ and aiding in aeet , i ckt~r s
wit .o&cr MC Si employees. For example, Walther participated t 'Peppel, Stanley and Rao in
the. sham M.Prcatutn transaetir n, described obovv in' f 26-4 &
s : Aft-hough WJlh r had knowIedgu, that the Inventory "sol " to l erra arr was the
1ja re to ary € 1 by a i to Ze gin e earlier, Walther did not alert. anyone relyik% on i.CSa
fnmicial s€ to nents that the 37 million sale to Merl a vas a sham. Instead, Walfh~~r helped
to conceal the true nature of the sale, .
91 . Upon infonmiation and. belief. Walther also received payments from MCSi whic h
were approved by Feppei and Stanley . On June 14, 20t? 1, Stanley and Peppei +rotu a c :hcck to
Walther on bohAlf for $2)0, 186 .40, In add. t oi, on March 10, 2003, can the eve of
MMCSi s bankrupt y, W''nifl rwas awarded a S10,000 bonus from MC- Si .
92, By fail in to perform his job dati ves, 'aitb&:r's inaction resultedin the gross
overstatement oI ?s in me for 2001. and 2002, thereby lta iinc MCSL, its creditors and
third .pies who relied upon . the vepresenta lobs made in i - Si s finan l stn cents .
Defendant Ahrn?' Participation i A ournti Misdeeds at M : e
3_ At all tiny tnlevus t to the a t hg loons in the Complaint . Ads was the Co orate
Controller et l+ M S€ .
94. In this position. Minis wan =trusted by MC i with the important duty o f
ma-ptaging MC i`t iot a! amounting by losing track of iTs financial c e injs and makin g
journal and other accon ntin, entries.
95, Despite his duties to MCSi . Mans mitered false ee ntin entries for the prose
a;' rttl ii€a, pi's nanci& ,cements . For example, 4s d er sed below, Ahw participated
Cott-14070.iQ
PRO image Page 40 of 77
with and aided Sr"joyrn the top-side , usln ertts of $ I8 million in accounts rece vable. and t ho
r tt~ i pa i ~ ~ E? million in rebi to ia. :ome € at wag never recrivcd,
A0101 { iit Me . r it C0601r of $18 MMiti m t in .AcraMrn Receiva i
%G_ Stanley's `.right-Band an," Almis was aware that Staley had made sr -:; i
adjusne ns to MCSi's nowunts rwei .ble totaling $ 18 million, hi fact, the Cote
Controller, ,bats was aware that the jour al entries €~r aecotmti rece vabkk and inventory did,
not match MCSes genera(ledger be=se he- reeneikd the quay ly jou alt vies rer 2002 and
the first quarter of 2001
7. Ah ms was also awar that Stoat y kepi a ee et inv 1hry list di .omstr, tinng how ,
bused on Stanley's tc wsido adjusdme s, the inventory report die- not match tip with the gnen l
ledger- terns sent a di ff x and r ci d in entory list which s i dernor t t [1~~ :t t
inventory repnrl did match the general ledger to another M ` i employee for t! sole putpoi~c of
creating a paper trail of tJ e false inventory moat
98, Thrtagh these actions, Ahr is helped to aid and conceal the oven tatenie€zt of
MC S6 accounts recthta le in the amount Of .IS million rind MM'S as entory in tiLr- ame nt o f
iZ mtfticn ,
Aiir &' ` ' r i g a i r !n 2002 k u e Entries toned As lne4vme, rrs :NeV R ein
99, Alms also helped Stinky concoct: rebate entries in 2002 that were booker a s
income Wt€o :never received by MC& ,
100. A.hra s book ad large and uneaua rebates that sg ire never collected by Cam . For
x n 9 1 , ;1 z : Altms made odd rebate entries totaling over 5.3 mmmill eo into i .9 `s sss~tpr3 . at the
end of the second and third quarters of 24GI
-20-Gs~!air Oh
PRO Image Page 42 of 77
101 . Upent infOrMaion anti lief M.C Was never abIc to collect the a bout s for.
these bat entro booked t Ty Jim Minis ,
102. By these tiaw$ A s inflated MCS S i01eo to for I ~,.cond a 1 third qua ters
of 2002. by ov ' S3 ili.in1a_
Ppme ms laAftrnsfr i M S!
103 Ahms also profited personally as a result of tan[ey and .?eppe1' wanagt ne t .
ALtiau l3 he had Iii employment a r :ent authorizing such pa is t, k. rnas receive a 1000
brmi payment in April 2001 . I addition, on March 10, 2003, on the ever of MCSi's bankrupt ,
Ahr wnsawaMed an aiionat $1 C, bonus.
Defendant Rao's Role in the Accounting eh s
Morcatum Yrallsa ,iin
104. At all times relevant to the allegaxis in the Com iini, BLAO was the Vk..e
Presiden of Co rat om n icutio s for M :CSI,
105, Rao played an integral rate in the 3 s i11 r rr to erc .at u described
above in ' [ 26 46.
1 C . Rao sent wrresponrteutn to David While, Mer-car um's President, in order: t o
create a popes trail of €ic~~€ meat ~a € :€ the c tttivied ~IpartrjerabW between MCSi dd .
107 Rao also instrsoted Badger and other 7 C i emplc e s to prepare 11w entory
learn irked as "Zen in : "' for hipn e to Met to :.
10&. Rao teen received in1or jm tion that. t o inventory 4"Wid." to Moms#.ur was slipped
to tho. Dubai . United Arab E sm iirates . About nine me t later, wbe- the inventory wa shipped
bark: 1a the United States from .Dubai, Rm certified a haler to the United State: Cjpsao .$
de rihiog the havet toxy- as "91 w ..moving pre , c;ts .,,
SI)
PRO Image
109, By and through these actions, Rao cart ailed that tl $37 Million sale to
Page 44 of 77
maim w a sham vhici in#7aEcd the r, z ngs for MC& nu d .gaged ihv iaintiWa MC S i
and the, lnv ors .
Cf rcirn o hirare "Salu"t D lber 201
110, t ~~i is 1a 1. Ld n the sale ofthe QTS sore t 3 Ck Q its D ccn aer
2001 for Million, described above: in 11147-59 .
M . f. After the sale QTS to C1eOne, pi`s nian etn t real izcd they had no
documents or support dbr the ,%, million valualion for the QTS system . Rao instructed MCSi.
ploy=$ to estimate tit .me they Spew wo.tkitt on QTS so that she could draft an impromptu
invoi derrtonsinnting the psadtc is worth .
112. Sy drati ir documents which c-reazd an a fter- the-fact esti are of t ht Value. O F
OTS, Rao helped to conceal the fact that the . million tale of QTS Was a S taa .
113 . Upon informntioa d belief, Rao may also have been Paid for her paf :icipa on. i n
Pe pal and tatz9 ~ accounting s homes, M or Baerpromotio i to Vice President of Corporal en
ComIrt nic tions itt . lurch .000, Ras wag earning a yearly salary of$,50 0 , b e lay 2002,
Rao 's yv r€y salary increadi to 1 5,040 , th . no kno m. comesponding incre in Iter job
duties .
JOIN`" CLAIMS P 'UUE PLA 'F MCI AND INVESTOR S
114e f3Ilo f1~# ' clad s a i1I t4 k'i 7Cf~ , &i 3 1,~ e~Y&, ~+E C e Plaints
'Tnveste s:
l i5. The neglig , '+ s neehgence, breacho co raet, and brcschcs -of fiduciary
duties ofPc pel and tank card ono no«s de eriorati on in .L CSi s o naiie ai. and
financial performance, causing the vale ofIMC i to greatly decreas . 71hr, fli Inve e r , r
relyting on MCSi's Financial -et oats In 2001 and 2002, continued t o ''lead Si, without
"22-C1 11.1 -nci*
PRO Image Page 46 of 77
kn rwiad f the true value of the Company. Through the acts and wi iooa of ?epp l and
Stanley, fC.3 was Forced ii to a cosi ly and highly d€srtapiivc b u rapt y t tly v.,.-- Fespk and
Stanley had lined t it pockets at MCSi's exIiense, Tlieseand other acts caused enormous injury
And damage t MCSi and to the Plaintiff hw r pars who had supplie 1. r surna of n y to that?
Comtipany.
Count I - Breach Of `i uddary Duty Pi pel and . Stanley)
116. The Plaintiffs Mks" and theInm(ars reptat w i ncorpora by°referertcc erei a
the allegations set forth sbo .
117 . D-uriag the r taut . rime p *J, Pe.Mel and Stanley were ot"iccrs of M i. As
stick.? e1 Stanley OwedMCs# various fiduciary dutiies+ in ltiding the duties of ease and
loyalty,
118. t rth ~t w I 1 cad t € ia~l the F c ~ : zt ~ . In.
purkic tlar, they.
0 Conceal from MCSi employees, MC is Board. of Dir ors, € ePlainfiff h estors a d, Other third parties ful accurMe, and timel yi for .icn re ardiug MCSi"s true operational and financial condition ;
* Eli aged in improper busimss acc oantiug pl li that had the e ,t ofMCSi's ii aneidl coudi on ,
?amthtee themselves to + *rit loans and bonuses in such amounts andtinder sutol i ns and ircc, TUs anc as amounted to s6t'; esl ing an dc r t E st ; and
lit Elio ease of Peppe , orchestrated, a merger transaction that: allows €d himto reap a $4 rmi .1lion windfall .
119. The broach o .u .ty by Peppel and Stanley cause the continued deterjora ors o f
s C is fin=ial condi.ticr< and pre cute 1M : Si`s Board of Ditecters , the Plaintiff lirwvestors aT< l
otJer third p sties from taking a p-ropri ate steps to pa vm or minimize damage, based on 14 Si' s
deteriorating condition.
~i i • t~(tG~C! t
PRO Image Page 48 of 77
120 . But for this c a t, MCS a Board of Dir tuns, the Plaintiff rtv €ors rn ethe r
third pares would MMvc taken decisive ac€n n far earfier, and ritrimized the extensive . a.ni
caused by Peppel and Stanley. The breaches of duty by Peppel and tmtcy are a proximate
cause of the .fact . tha t MC Si was not able to do so .
Ili, The cofidttct of Pel arid twi ey was rues and grossly negligm7l ,
122 , Asa direct, foresee .e, and proxi€n to comeq nft the conduct of Peppel and .
Stanley, MCSi has been damged. hi addition, the P in€iff investors w gibers of :a United
class who relied on Peppel and Stanley to act as dirottors and ofeers. in € . best interests of
MCSL This rcla t ~ tt € r vis# r 1 €n i G ter 'fir #ian .
the Credit Agi omen€. As a diet, fo •es .ble, and pr x rae consequence ofFeppel an d
t iley's Bch, the F9ai. ti (investors have been danzaget. Accordin y, Peppe and . Stanley,
are liable F.ir actual, o ::p-en: of r.Y, and censegt entiiul dmnages i n an are o tv . to he de ermined a€
taL
Count II - Breach of Fiduciary Duty of Good Faith Under i Rev, C-eil-eAttu. 1701 .59 (Pepped and Stanley)
123, The plaintiffs M Si and €# Investors repeat and incorporate by r6crew~, herein
the n€]e €i s set forth 60v: ,
1-74. At all. firms s l =ant to the aJie ons in the Co plant, Peppel and Stanley were
an MCSi 's Board ot fDirecto€s . Under Ohio Rev, Code Ann. § 170169, as directors.,, Pepe and .
Stanley owed .M :i an obligalion to di harg h it duties in good t ith and in ~, mann r
r sonably believe. to be in the best iriler t of ICI.
125. set forth above, Pe pel and a:~ v i i t tl r .r r~ r via i . i n
art tular, thee:
01P- 14?1rr05V3
Y4
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Concealed from .Mt i. ea a foy es, MC i?s Board of Director, thePlaiaii "[nv ors and other. turd parties full., c .trat ., and timer=infom.atin i reprding McSi s true cap at~ional and tnaxrmiai condition ;
iwn aged in improper business accaunting practices that had the effect orr isr r s a r~ MP. Financial condition,
In the case Of 1ep 1, ore ostrated a merger transact k n that allowed, himto maps a 4 milli wi dfaIE ; and
Pe iit d theme eves to :t bt i loans and bonuses in such amounts arwunder such erns and circa matane as annou :rned to self-dealbig altol Orale waste-
t .2.6. The breach of duties by F eppel and . Stanley caused the candle d deterioration o f
MC i' f t~ rsc i C' n.diti . and premied MC i=s Board. a1Dir or .. tt k~ ai til n~~ t ra and
miter third paxties from taking i ropTime stops to prevent or minimize damage base: on M is
deteriorating cwwitioift-
!27,' Rat for this conduct, MMCSi`e hoard ofDir tors, the E aimif hiveswm and of er
l ird parties would have taken decisive action fir , earfter, and min-im.izcd die N tee ive. harm t
caused by Pepp l and Stanley , The beach of duty by poppet and -Stanley are a proximate
cause of the E`act that MCS1 was not able to do so ,
12g . The entided€ of Peppel and mm lcyw; reckless and grossly neghgent.
12 9- . Ma direct, f se able, and proximate consequence o 1 the conduct of leppel and
Starilcy, MM has been damaged, in addition, the P:fhinti `investors w ve tl S ol'a limit
class w% ,s relied on P eel and Stan ley to act as directorsand offcem in die heat interests of
MCSL his t liar speca t illy i, t ~t~. virtue # the # a ti f I i s s ~€~ i~°i ~ti are r
the Credit Ag~t-ement_ .s adire fps able, an pi xi t: nc cppel and
Staniey`s bretaclh, the Plaintiffinvestors have beem damaged . Aeeer € ngly, Pepped and Stanle y
are liable for actual, compensatory; t ~~.s t ti l z t its a~ to b € to fined at
trig l
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Count 11.1 « Bnach of n r d ( p k)
IN . The Plain1i. ~ N4(,Si an 'the inv tars mpeatand i oipom e by refer-rra .u }kvrciA
t ho allega tions set fbr r above..
131 . Defer dant Pe el signed an Employment Ageenen# that set forth the terns and
conditio c of his en i6 nt with i C i, hictud.ingtr lucrative compensation astd benefit
package that he would .rive. In fid0% the Employment -eery nt provided that Pep,-]
would. "perform such exe uti seMeea for the mplyyer as i consistent with his title of
Preaiidemt and Chief Executive Officer and d rcetc , from time to time, by the Board of
Dis c , includiftg but W, Nia c to, the supervision of t Corporation`s c y°to ay
132. As set forth abate, peel violated hi contractual obligations, In particular ,
Peet :
Engaged in i prrper accounting practic that had the effect ofmisrcpi warring MCSi`s linan htl condition ;
Concealed from MCSi's Bad of Directors and employees, the Pint ITwee€ ovs and othertZi rd parties "tilt, accurate, and timely i tfrrmatio nregarding W J 's true opcceitional and fire me .i.al cosdt on ; and
Engagingin improper se f-1e ixng by nrti e mo t i n g a m e r g c r tra ac ntlrt tllow i Mire to re a $4 million % inadfall and obiah iin tar . loneand leans in, .such a cants nand € de stctl tennis and eircr tmstari a at
wna>cat to o r t* waste.
133, t#e pel's brew; ofcontract caused the ctnttinued datertofimtiori of. MC&i`s (snu eial
condition an prevented MCSils Bo o flitectars. the Plaintiff fnvestcrs. and other third paries
from taking r :tt to p vent or kii.uiizc MC i':s r uncial t ter.ioration,.
134, As as dirm-t c rasp et € e Pappcl's conduct, MCSi has beer damaged. In
addition, the Plaintiff Investors were members of a limited cdas~ who relied on ?Cp el to carry
oar : kris ~ tract l € iigatia s a erector and o cer-of MCS . ` is rdiaoce as speci :ficali
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fb s n by virtue of thPlailitr'ff Tnverlon p ipat on. in. the Credit Agreement. As a dimt.
I rrrs i ie, a tid proximate oanseq ice ofPc of"s: each, the airatii 1n stars have been
data . Accord higly, Peppel i liable for actual contpensat ry . and corr ccIucntia d.erages ill
an amo t t to be determined at trial, including res6tudon of tbo amounts paid pursuant to the
spec ve c trac a .
Count IV * Qir , Mmdt nd Un, nst E r hme - Loans and Bandseg to, WaMer and A brasPeppel, .Stanley
135 . The Pkintui1' . tCSi and t Iiv tota repeat and ncorporateby refer nee herei n
the allegations set f .h above.
136 . As. set' Fort above, Fen e! received a 75O, ) l and a.$250, f) unseoure !
deed loan from MC L. Upon inftnmation znd1)tbcf, Pep 3 h r paid back either ihata .
137 . 3v inflating is lin ncia statan1ents, Peppe1 recei cd hi &r bonus ia ; t t
which Were tied to t v Cody' p fa€ iaince. Upon informa m and belief, St ey al to
ap ted tar. bunts s for himseLICwhichhc did not eam ti v.gh any sei ice tD M ;'i . For
exam.0 le, Pe et received a $675,{)00 bon . in April 2002 . In a dition , N~ppel approved the
following tats! y art y b irr~ l : (a) 5412 436 in 2000; (b) $ S7464e . 200 t ; aftd (c)
$1,246,741 Si also
aAe payinmtg, for Pepe&l's Mu mobile b lin ap roxvnaw,y
S3,900-00 which were not aulbodzed, lbys Peppet` nployinent Agrenten t
139, wiry also received a l* of 7# , `3 and as ns -ed demnd low, for
5l 00 0O0. fxont CS-L . Upon info ion. anal be hcf, these P ens ba c never been r al .
140. Upon h nmatkrn and li i, r c a t i7in'~ 1 bonus pay ent5 wit out
r : r to the amount aft rice . by MC i . For mample, Stanley a ar :1 himself a $31560
bonus, for the month of Ji 202L
-27 .
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Page 56 of 7 7
141 . In addition, Stanley also misrepre er ed . to MCSi the date ft his divorce had .
be ornc fib say that ha eould collect additional benefits Erse the C tnp t ny ro r t en months .
142_ A diwassod above, ms ceivcd a c .c€s of $ 10,000 in April 2009 . On June
14, 200 1, taniey and P p*t wrote a check to Walther oizbehaliof MC i for $20, 86AO, i n
addition, On Match lit, 2OO3g on the ev e of Mi i a bankruptcy, A.hra and Walther wera bot h
awarded a $10,000 b o=5 from MM ,
1.41 The promissory notes, bonuses , cash a f v es and other pti ent,L made to
Ptpo, Stanley, Ahr€ms and WaWier from MCM are v&d a i r Wo due to. the wis nduct an d
Circun ►st described cove.
p44 . Pnrst nt to these irw a[id ag mer€EE, Pep 1, t icy, Ahms and Walther wer e
paid substantia l sums . None cawed tilia money through eny sea to MC St o u ug before or
alter the nmie ~ w s pid .
445. ft would be unjust and inequitable irPeppeL Stan , Abres and Walt cr were
p lStte to retain the moneys described above ,
146, By reason t tip €a* pia , aaad pursu t to the pr mcip1es € f ~jjwwfjtxar n 0 10raft and
~r t € tc t €ent t'e a t€t€€i v~ A.hrns -anti Wa kip shoutd be ordered to payto the Pialntth
Ci and the ivies€or` 11t0 amount ofpayments described above ire j L79- 185, plus fr mmpriar e
late t .
Count V - Voidable and Recoverable ° f ~ Ohio Rev. Code Anti ..1336.01- The Bonus Payments to Walther and . Ahms
1 .47, The St0,000 banns payments awarded to both Wak er and hrns on March 10 ,
200), on the eye Of MIS bankruptcy: are coverab)e wider Ohio's t #nit"rrm Fraudulent
Trans3 Act, Ohio Rev, Coda Am 1356 .04 et seq. (,"OFTK'J in l hat-,
e€€~r~'r's~~~-.s
PRO Image Page 58 of 77
a) MCI did not receive r so ably c ,uivalent vats i n exc ane for the transfer ofthese r e- ien ors loan proceeds and
b) Mc i eItkier
() one ed or was about to engage in a .bwsiness or a transaction for whichthe wining ass s or . i were rn a enably sniali in relation to the businessof traaetiony o r
{ii) intended to incur, or beiiev or rtasou ably sho€ &d have iev that itworld incur, debts beyond its ability pay as they came due .
148 . al l times relevan t to this. claim„ there existed a creditor whose ch i t agiinst
MCSi arose behhre transfer oft he bonus paten to Wak€her a ►rtd Ahrns and MW & was either
insolvent at the time of the bonus payment; or became itiselvoru as a r i ft of the bonus
pay nnts .
149. By :in n o the foregoing, the bonus pa .rents to Walther and was are
avaida le t uwrers pt rs€ ant to Ohio Rev, Code Ann. § 1336 .04 and are recoverable by tht
Plaintiffs M.CSi and the Investors From Walther and Alms .
CLAIMS OUGHT BY TIM PL M TII F MCS i
150 . The: fallowing c'sines are brought by the Piaiifliff . C i .
151, At aft times rolev t to the aiiogati ns in the Complain(, P ppei and Sianley wer e
both directors and officers : of W&. Peppcl "d ua hh Y phased these Positions by BpDrovinv
and. re wing loans for theit own per. nal l crit which were not reason ably expeetr t tea benefi t
MCSL.
i52. At all times relevant to the al epatio ns in the m.a k iTII, Ra rw.vzas the Vice
President of Co otute Cerro nications . I this asi;tion, she w=as entr€uste by C Si t o
COM.M wrieate with €C ?s s ssidiarie and with its indep ndear auditors.
-29-
M47 -Q5t ;u!
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15.1 At all times relevant to the all-ogatirns in the Cottploi€tt, Ai =s was the Corporat
e In this pos€tio , A.h & wag o ligawd ti ovors C ai's it ma i
-ountin entries and lici a
€54. At a.i tit € rebbv ant o the allegations iti the Complaint, Walther _ 9 i tor °
of Financial Ropertmg for MCSi . Watcher w entrusted by MM a With . the import duty of
reporting the Companys i'inwiciai information to MC is indepe ident auditors and the, general
public,
1 .55- With eom tet. disregard to the their duty to act in the best ine sts off` 1C i, R go ,
Ahn am Walther b ach. d their fdoeiary dttties and acted neglig 1y1 by par icipaii g in
schemes to rctanip late Boutin; entries to inflate M Si's ftngnci i rein in 01 a d . 200?-
i inflating the into value of M i . Rao, rns and Walther prevented othem in. a position to
help the Company fro realizing the Late state of the Company's f hart s causing Ml C Si
damage .
Count VI - Fe pet and Stanley Approve and Receive JtIa i Lo s In .Violation ofOhio Rev. Code Ann, 1 , , () I )
1.56. Plaintiff CS., reps ks and t.€x 'r t :s by mkirerzce herein the lie ti4~r~ . :
raft a =w .
[.57. At all times relevant to this nTphint., Pep el and, Stanley were directors and
of"icers ofM `S.€ .
15 As sot forth, above, Peppei roceived a S')50,UW loan and z 250 )O0 ans-i=ir £
dornan loan from CSi.. Poppet wawas both, a director zn. an o c r• of MC € at the #srrne he
r ce ed the lo=$ . Poppet and Siantey approved the loans, outs de the usual Course, of
C~Fr 1 'YJ'7 *$1_3
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Page 62 of 77
busin ess, in their pa tiotts as di recxnni of M Si. U,m info m tiotx b fief .. Poppol has not
paid t r. either lean ,
15 . Stanley aJscx received a loan of S2O0,OII and an i secared deer l Than for
100,000 from MCSi . Stanley was both a director and an officer at the di rft he received these
Was. Peppol ~ 11W Smalay approved these loans, Outside tic usaa ; comse of business, in their
positions as directors of M i_ Upon Por tion and fief; these loa ns have never been re*&..
150, At no fimu.fta. MCSj been cnga ed in banking or in the making of loans as a
eorparatiouu :
161 . At the time tl loans to Peppei and Stanley were made, amajoirity of disinterested
directors did not vote for t e loam or determine that the rnaEag-of the loam cad reasonably be
expected to beaten M i.
102- By re sam of the . bre ,wing. parf,~iant to Ohio Rev Code Ann . 701.9 (A 1 X,_),
F'eppe and Stanley are jointly and saverally liable to I C for the loan pay rents an interest .
Count U - Brach of Fiduciary Duty (Rao )
163 . PlaintiffMCSi repeats and. incogx rotes by f erec herein the ?4lega€ions get
forth above..
1.64. As the. Vice Presidet t of Corporate Com u r6cattons, Ra WAS entrusted by MCS i
with a groat degree cif diserct to cany out important seta of the Company. In this
Supervisory role F M. given discretion to determine the best ways to develop and imAmvv,
co m atunications between r C and its s .,s diari s and to make the irti:tiail :t t With new
comp + after their marker WWI MCSi, Rau participated in, .xnongother I"rin . di usai s
with. M atom`s President, .David White and son1rencecalis with . eppee3 a a Stani'ey .
c~ ~~-ta~~ ;rs5,=~
PRO Image Page 64 of 77
165. MCS i entrusted Rao to Carry out the ittie in the i t interests of lie . Company.
By a cept -ng € e position of Vk P sfdent Of Ce sr tc cOnu nieations, Rao a n d to Wit: in
the best i .nerests of MCS i ,
166. Raz abused this p ilioit by aiding P ei and Stanley in. their sc re to innate
tv S Y e mir by completing Eabrt king the $4 w i l n sale of invmtary to Zen inc, the S37
nail' ion safe of ibwnft to Nercutum and the $2 Iflio n le of QTS to C earOn : .
16T Upon info is on . and belie lE :may also have been pa id for he urtl ;ipatio ik
Peppel an d S t . 3 gr~s ~c ~ ti scy After her pro nOtior to Vim Pethnt r I''C pot- Lion
Comnu€inications in March 2(100, iat w az eai h g a Y=rdy salary of 5 f0(0. In May 200-7,
Rno's ye y salary ins ~eased to S 12$,00 wi th no known c esp in .g incase in her job
€lutim
I&8. Bybrehirig her tdi as the Vice Pre idwt or cc¢ r .t 0011 u icativllsr . 40
damaged MCK.
Count `III - Negligence (Rao)
I, PtaintifM, Sa r to an I c rya r t r r c h r itt th4,- Oegations set
`s rth ; ve..
17t. A € e Via Pr1si tt DrCo plate Communications, Rae was caatrnsted by W S i
wit,, grit der ofd ret on to carry out important duties oft e C ompany. In thi s
supervisory role, Rao was d .e e ated with many crucial asks .
171- By accepting position of Vice resident olCorporate Com rani ions . Rae
agreed to act in tf ~ It s s s Of MCS .
PRO image Page 66 of 7 7
172, Rao sed this position by aidh Poppet and Stanley in Their' scheme to iorfite
MCSi's caminp by completing t srlcating the 4 mi llion sale of iiweiTh r to ngin , the S37
milli sate of inve story tc Mercattim and. the S2 rail liars We of QTS to ClearOrne.
173, By bt .thing her ,ties as the Vice President ofCorporate Com runicai ons, R
damaged MC K
Count IX - Breach of Fidu y Duty (Abrns)
174. P a t MCSi repeats and ire r iara:€r b r ► her it t i3 Q1 i t
Fortb above-
175 . As too Co orate Control r for R CSI, Ahrtis was entrusted with a great c n ee of
discretion to carry out important dutirs of he gas pant', In this sup Fisory role, ems wa s
charged th. managing MCI`s into al a ouunting a tri s aA policies .
176, MC Si viand Alms to wry on his position in 1411 honest and Lruusiworthy
n7 :rer and in the best inter is of the Company, By a pthn . the position- O " Corporate
Controller, Aht agreed to accept the dalies as€aciatcd with the position.
177. Gras abused his position by acting in coneen with Swilty to fabricate t sp s d
adjustments to 11C is accmtr is •biv le, in n ory and rebates .
ITh By breaching his chit ks as thhee .C arpermca Contmjle;r, 14C S, s f t. e
iti#1at ors Dm il insti ciai st ternerai far the yeaarn 2001 and 2002 .
Count X - Negligence ( w s)
I71 . ''1st f MCSi repeats d i orpor es yreference herein the alk t~ ns ,mo t
f nth above,
R
PRO Image Page 68 of 77
180 . As t .e C porata Controller for MM, Abr s was entrusted with a groat agree o f
dis t6on to carry out imporEarr duties of"€ C mpat y #n this supervisory role, Ahms. was
eh€arged with managing MM 's intc=l acooi tin entries and palicie s
181- MCS1 trustedAhras to miry tut his position in an hartest mid "two tli€y
manner and in the hest i€€te is of he Co many . By aecejrtivtg the pesit on of Cat orat e
Crnnroli ;rt Ahrns w eed to a ; t the duties associated with the position .
I S2 . Abma abused his position by tiug in concert with Stanley to concoct top-side
adjustments to MC is accounts rc vable, inventory and rebates .
183, By breaching his duties the Caqjomte C tr<iler, MCSi was damaged by the
inflation of its natnei i statements .For the years 2001 and 2002 .
Count . - Breach of Fiduciary Duty (Walther )
1$4_ Piainti i MCSi crews and incorpn t by rrefei n herein €hc tlegati ns set
forth above .
18$. As t be Director of Financial Reporting for MCSI, Walthe.r. ras entrusted by MCSI
with the impart duty 0f reporting the Company's tinanclat in Orn€at ou to MC i's indep d na ..
auditors .and the gencrai public . In. this supervisory role Walther w u given dis retion. by MC S
to carr out his duti es .
196 . MCS enntrus€ Waitl€tr to cto out his dotes in the best interests of th e
Com my. By accepting the pas ti n of the Director of Fi itr€cia ortin , Wait er a e t o
cats}' out Its duties in a hottest and. trustw€ - y manner.
1 ,37, Walther abused this position. by helping Pee 1, Bloater d R b06iti lire 7
million Sh'a a sale of invent ry to e.reatum aad the million sale of inventory t * Zengine,
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188 . By breaching his dhti .es as the Director of Fin neial . ,Quin, , Water &arnag d
MC i.
Count H - Negligence (Walther)
189 . Plaintiff r1'CSi repe and txetp ra es b raftr ce, herein the alleptior s s m
fotlh abo .
. 190. As the Director of Financial Reporting far C i, Walther wag entr tsd by Cr
with the I or t day of arhig the onipanys n riciai i uffr nation to Mcsi d CPe j1 dent
auditors and Hit general public . In this supervisory role, Waidier waa give discretion by M S i
to carryout his duties ,
191, MM entrusted Wafter to carry out his duties in the si intarests oftd e
Compny. By a ce ting the positis to ref the l)-im r o Ir`innnciat Reportir , WWaf-ther a ced to
carry out his duties in an !Dees{ acad. t a c ~thw~ s ner
192, Walther ahc LqM this poi on by helping f epp4 Stanley and Rao boa- the $37
million sham salt oFinvtjvtorv to Me=.tunr and the $4 Million sale Orinvet Cory 10 Zcn gine ..
191 . Vy brei4ching his duties as the Director of 'inaticial Rqorting, Walther datnta .
M ;)' .
THE PLAINTIFF INVESTORS CLAIMS
194. The iatlc~;~it cl i i roug t Icy khe Phti }til t€t ,
195 . 7hr € _Wi their a6cipation in the Credit s , mwt the Pl i~ t :ii hw sft~~; too d
Iarae sams of r Homey to MCSL In turn, .Poppet and Stanley were contras un ly Ohjjga~ed to
provide accurate iafisrmxtnion about the Financial standing df MC-Si . When M Si 1Ied for
aattkr ptty i June 200S~ the Plaintiff Itwestvt . icsst mill iotns of o lar's as the Value of fire
Company p unt meted .
-35-crst i re =ss~• . rr~law~
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Count - Breach of Lon Covenants (Peppel and Stanlq)
Page 72 of 77
1.96- The Plaintiff bvstors repw and inc rporat by ro erenee hetti ti tare al l: iot
set forth above .
197. De fendants Peppel and ,Stank y ; i, ned namerrow lean a r .trteht& with the
Plai11tif "bnWestOr r inedudingbut not hmitd to t fifteen Credit Agreement air ends tti ., Midi
Credit Agreement amendment signed by Pe(Spet and Stanl ve ifi that the condensed balance
sheers and censolidatedstatements ofincome and cash flows of M i ftsriished to the Plaintiff
hwtstors depicted accurat rr to€~ rat of i. financial positiern
198 . As cth ?'cp and S nlcy were ire, (hip balance sherd and c€a s iidat
5ta.4Oments of income of MCS were not accurate. In fact, both were intimately involved i n
making dries which resrtited. in a 1r inflation of IeS s to anciat r ition .
19.9. The `€ainti:fffnve tors m d damages as, a Mora l zind p rxsm ntc res dt O f
Repel and &&arnley s breathes oft he loan agreemnts.
200. M, a direct enr, equ n e of Peppei and Stanley"s breach of the ka a recmcr~~ :5 ,
41C l i t '1rs~ fitars have been damaged, Accordingly, Pepped and Stanley are liable for actual ,
comp tory, and consequential damage in an amount to be, determined. at trial, itteludi i,
restitution of those amounts paid. ursuaant to the pecti .rn lama. Agee t.
PRAYER. FOR RELIEF
WHEREFORE, for all the claims above, the Phii uiff MCSi and the Investors l and
judgment against each Def d t, jointly and sera ft , fojl'ua g:
A. Actual and compenaadnry damages, including direct and tr t ~ kia damages .
in an amount to be d Fem ined at trig.;
8, Disgorgement of money Wrongfully obtained from MCSi, and an award o f
prejudgment interest, in anionic. na to b e, de t =nninec at trial ;
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C.. An award ofwats to the P1aintiffi MC Si aftd the hwwac, in iudiz rwsonablo
t€ mey accountant, and other e cp ices and t ttr iisbursenwits ; and
D. Such ether i additional remed-ies, as the Cur may dew reins i l .e o r
JONES DAYRichard A. CJiesiey (OR 002 2)Jam L Woflin (IL 39805 )77 Weg WackerChimp, , ilmi 60601
JONES DA YMary R. T e ( 0046830suite 190041, Soar High StmetC' lu bus, Ohio 43216-619 3
A orne for Mai `f National Cite. Batik,FNC Bank-, .LaSalle Bark.. Fifth Tlfrd Bank,Ktnnfin tnn National Bai& . Provi . m Ban : .U.S. Bank
SHAT ! , I4ER, GL L NOT & ANULERJoel 1 . Sim ,
€ ite 2000, 36 South Charl es StratiEaItimor; M ykknd 21201-31-17
At1 ey. `ar Plaintiff MC$
-37
aya3 .asF
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U Y DEMAND
Hain i `s herthyrequest a Vial by Jury can all or the nratter~ set forth in its Complaint .
Atfame the Pla riffs Nafront i City 8arik,PNC Bala, l ii .al A tion, LaSalle Basil,National Asciat on, ith Th rr Bank, " theHintiiigtos Nai aai Bank, The Provident Bank,U. . Bank. form Association
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1 042 -1 .200 8 5 .25 $ 5,2924 .11/1112002 4.900 5 4.36 8 20,927.351 002 3.900 3 5.25 $ .460.03 1211012002 1, $ 4 .93 S L559.7710 002 Bop .$" 5 .2.5 $ 4,190.16 12/1 3 .100 8 4 .54 S 16,003.5410/ .'2002 SAO . .$. s.23 $ 3,14L.W 12/2W2 4 .500 $. 4 .32_ S 22.. .I87.42 _
70a- -$• 5.25'°$- -3,013 .39101812 S00 5 6.25 8 534 .77 21191200 6 OO .8 't .05 $ 0.714331018/20 3,200 $ 525 8 15,795. 211 003 4100 $ 1 .05 $43,678 .67'10/ 002 8,120 $ 5.245 $ 42,611 .32 WIM003 15,800 6 1 .05 $16,5®9,4 910/ 002 1.300 $ 5.25 9 5 .522.01 2/19J20 3 3,400 3 1 .05 8 3,589.991015/2002 8,000 $ 5.25 $ 41 .951$0 2/19)2003 99,700 .$' 1 .05 8101 .531.91705/M2 1,500 $ 9 . $ 7,871 .55 211912003 9,600 5 '1 .05 S 10,079 .6930 2 1 ,200 3 525 $ 0,297.24 1 3©3 29,100 $ 1 .05 $30, .0 710/812002 300 3 5 .25 $ 1,574,31 211 003 5,8049 5 1 .05 5 6,194 .8 1101812002 4 .600 $ 5 .23 $ 28,188 .96 2 1 03 22,60 $ 1 .CO 123,024 .20109/2002 11,300 $ 5.25 $ 55,299 .01 . 2120/2003 1 .300 $ 1 .16 $ 1, .P 110 002 7 .700 5 5 .25 $ 40,407 .29 2/1012545 8.60€1 $ 1 .18 $ ?,M.0 01013/2002 '6,600 S 5 .25 $ 29,387 .12 2/20/2003 2, 3 1 .€6 5 2.890.4 1'10/01 12 1, $ 6,25 $ 0.398 .32 012003 .50 6 1,19 $ 578.4381 .118/2002 1 .200 5 5 .26 5 8 .297 .24 2/2 003 19.400 1 1 .16 $ 17,804 .9310/8/2002 7013 8 5.25 S' 3 .873.39 212=00 1.800 .1 .96 4 1,849.86.0/0/2002 2,200 5 5.25 $ 11,544 .94 2/2€02003 4,800 S 1 .16 3 5.3183510/02 500 $ 5 .25 5 2,623.85 2120203 1,000 1 .1 6 $ 1,160.16101812002 2,300 3 5-25 $ (2,069.11 2120!2003 3,0/iD 6 1 .16 j 4,182.1 9101t,Z002 1,700 525 5 8.92 1 .09101012002 2200 $ -5 .25 S 11,544.94 -10/9/2002 700 5 6.25 $ 3.673.3511)/8/2002 700 3 5.25 6 3,x.39 -1 OW002 700 3' 5-47 $ 3,828661 002 4 ..100 4 5.55 S 22 .200 .1301002 2,400 $ SAT $ 13,127.52113/920 13200 $ 5 .55 S 73.250.0 011119/2002 500 3 5 .47 $ 2,734•.90110/9 002 2.000 $ 5 .55 : $ 15,5540,0010/9/2002 400 $ 5 .47 $ 2,107.9 210/9/2002 2,20 $ 5.52 S 12,210.0010402 400 5 5.47 $ 2,151 .5210 02 2,300 5 5.5 . 3 1 2 .765 .00 °101912002 10 0 5 5 .4.7 $ $46.9810/9,2()02 400 $ 5.55 5 Z220.001010/2002 2 .0011 3 5 .47 5 10:939.8091313124302 10, 100 $ 5 .55 $ 50,355.01115/9/26102 5,100 $ 5 .47 8 27,895 .98
. . ._
MCS1 In-BERM-UN MEBOARD & LkFSffiU1 L LP
A,-vg. PrIct: 0-53 -
t SE SALgs 53,1 8 FsT rm TIMATEDV AIR R P I t D -VAttd t c~
10t912 i02 2? ; 5 5 $ T5$,845 00111912002 8CIS1 5.47 '€,375,84101912002 4 .400 3 5. a 3 24,420 .0 010112002 5,000 $ 5 .47 3 27,349 .001019/2002 27,200 S 5 .55 8150,950,0010 1 _ . 00 ;S .9:A7-_ $-=-4 .922.82 - . - ' - . . . . . - - _ . .. -
s _ =it1 t2.5,20(3
~a~ 5 28,860.00
101/2002 5(30 5 5,47 3 4,$75.84 U1 019/2002 4,200 S 5 .55 $ 23,310,0010/9/2902 200 8 5-47 8 1,093-961 M2002 888 $ 5.55 3 4,440.0010/912092 . 3,000 3 5,47 8 164079 .4 01(119/2002 16,200 $ 5.55 3 89,910 .00 r`11919/200 2 7,080 3 5-47 $ 36,7 8 .18 g10w2002 38,6011 3 5 .56 5 .235.340-0 010/302002 4,800 $ 5 .47 0, 26,258 .041019/2002 26,1 0(3 $ 5.55 4144.M-0010/912002 34500 3 5 .47 3 19,144-13010i9J29 2 18,900 $ 5.55 S 104 .555,0070/912€1332 1 .000 S 5 .47 SA'S9 i310191700 2 5,607 S 5.65 3 31,684 .00101912002 700 $ 6.47' 3 3,828 .6610392002 4,000 3 5 .555 $ 22,200 .001919/2302 400 $ 5 .41 S 2,187 -1€ 912002 2,300 3 5 55 3 12,765,001 UM912092 1 ,400 3 5 .47 $ 7.55573 2101 12002 7,500 3 5 . $ 41,625 ,801 019/2002 300- 3 5 .47 ,$ 1 .640,10!9/2002 1,500 $ 5 .85 3 8,325-00101912002 1,400 3 5 .47 $ T,65T J,?10/ 02 7,800 3 5 .55 3 93,290.00310/9/2002 1,100 3 5 .47 $ 6,016 .78109952002 5,800 3 5 .55 3 32,190.001019/280 2 1,400 $ 5.47 3 7,657.7210/9/2002 7,50 0 5.5 3 42,180,9010002 400 3 5,47- 3 2,187-9211 T9/20(12 2,364 S 5 .55 3 12,T65 :t}Q109912002 400 3 5,47 3 2.187.9219/9!2002 2,301) .3 6 .55 3 12,765 .0!9
10110/ 02 1,300- 3 5 .33 $ 6,927 .18 sa10/10/2002 4,700 3 5.20 $ 24,742.5810/10/2002 4,100, 3 5 .33 3 21, 1 .261911 032002 15,300 $ 5 .28 $ 80,545.321€1110M02 39,000 $ 5.21 3 203,026.20
L"1 -ax Per1ed, 7/24 1-2125RJ3
BE ' 4' E]? LA-BROW & LIPMTi Y, LLPAvg. Prices Q.S3 -
OR1 1k5E SALES SAS 1 SflM4.) D E5x' I &TED
DATR WARM PM:
Ail c I3AT S1~~4` t~ fe4 RELD YALU F310112002 900 $ : 5,33 ffi 4,795.7410/1U 002 3,300 5 .26 $ 17 ,372 .5 210(10/20112 59,600 - 5 .2 1 $ 310, 285.6 610/10/2002 70€} $ 5 .3.3 $ 3,730,021010(202 2. 600 4 528 3 13,667,4 41011912002 700 3 5 .333 , yR 3 .730 .02 -4E~t1D/2 b2 - 2.740 $ 5,26 $ •14,213 .8810110/2002 ' 100 S 5.33 $ 532,0619/1012002 600 $ 5.26 $ 3 ,18 8,0410/10/2002 ISM $ 6.33 $ 18,650.1 010/' 0/2002 12, 900 $ 5.26 S 67,910.76i 0l1 012002 8,900 5 5.33 $ 47 ,424,3 410/111/2002 32,300 $ 5.26 $170040,1 210110/2002 1,400 $ 5. 33 3 ,7 ,480.0 410/1 01 2 3,100 S 5. 26 3 28,648.4410/10/2402 8,600 $ 5.33 . 3 45,625.9 610110/2002 31,600 $ 526 $155, 355.0 41010/2002 1,600 3 55 .33 3 6.525:7 610110/ 2 6, 100 5 .26 0 32,112.6410/1012002 1,300 3 5.33 $ 6.921,1 810111312002 5,000 . $ 5.26 S 26 . 3 22 .0010/10/2002 300 5 5 .33- $ 1 .598.8010/10/2, 002 1,100 S 5,26 S 6.790,541 0l1 0/20(12 5,101) $ 5.33 5 27 . 178,661011012002 18,E $ . 5.28 $ 99.497,1 5147110/2002 1 2,300 5 5 .33 3 65.541 .7610110/2002 44,700 .3 5. 26 3 234,316.681 0/10002 6,500 $ 5 .33 5 455,293 .1 010/10/2002 31,200 S 5 .26 $ 1 64,249.2610/10/2002 5,900 $ 5,33 3 31,43S-74lt)TT0/21102 21,900 4 526 3116,290.3610110/2002 42,000 3 5.21 S 218 ,643.6010/10/2002 26,000 $ 5.21 3135,3 $0.8010/10/21102 1 ,800 3 5-33 $ 9, 58 1 e4s10101 002 8 .500 $ 5. 26 S 39 , 218 .6010/10/2002 1,200 3 5 .33 6,394 .3210(10/2002 4.600 S 5 .26 $ 24,218.241811/312002 35,000 $ 5.21 • $ 182 , 203.00i 0/10f2 02 5, 400 3 5.21 $ 28 ,111 .3 210110/002 1309 s 5. 33 6 4,,252.8810/1012002 . 2,700 5 5,26 $ 14,218-6 810(10/2002 2 ,400 S 5,33 $ 12,788 . 6 41411012002 9,100 S 5.26 S 47,906.0410/15 002 5 6.33 $ 2, 954.39
t
-o
BET STE1?4 L1Z 1RJ 4 I %F~HI t .LP
Cim Period! IIA/Of-2/26/03
10/ 1012002 1,800 3 5-28 S 9,475.921011012002 2,400 4. 5.33 $ 12,788,841011012102 9,0 00 $ SAS $ 47,379.60911110/2 312 1,000 8 5 .33 $ 10,124 .341011 002 TWO $ 5 .26 $ 36,850.801 1(k"~4(12__ ?,dU.U_,,$ . .5 :33 .$ [2, 68.64_ -, . ._ _ ._ .10/10/2002 9,00 3 5 .26 $ 41 ,370 .8 01011 002 700 4 , 5.33 $ 3,730.021010/ 00,2 2.700 $ 5.25 $ 14,21383M W2002 700 $' 6.33 $ 3,730. C2MOM= 2,600 $ 5 .28 S 13,687.410/1112002 400 5 5 .23 $ 2,092.001011112002 1,400 4 5 .23 $ 7.322.01)1 1V111, 002 800 3 5 .23 ,$ 1 .859 .0510/11/.2002 200 3 6 .23 $ 1,046.0010/111 304 $ 5.23 6 1,589 .0 010111/2002 1,2010 5.23 $ 6,278 .001011112002 3,000 $ 5.23 $ 15,690 .00/0/1112002 500 $ 5,23 $ 2 .615.0010/11/2002 2,600 $ 8.23 S 15,167.0010/1112002 510 f 5.23 3 2 .816,0010/1112 500 6 5 .23 $ 2,815.001 Oil U2002 100 3 5 .23 .3 523.01113/1112002 1,700 3 5 .23 5 8. 891 .001 01 111,2002 4,300 3 523 $ 22.48 0 01011112002 2.900 $ 5 .23 $ 1 5,167.0010/11/2002 2,000• 3 5.23 3 10,460.001vrt 1tZOQ2 $ 5 .23 3 3.138.0 010111/2002 400 $ 5 .23 3 2,092.71010/11/2002 300 6. 5-23 5 1,569.0010/11r2002 81)1) 8 813 $ 6,184,0 010/111207012 200 $ 5.23 3 1 .048,0[)10111)2002 8 0 8 5 .23 $ •4,184,0(710/1112002 700 $ 5.23 $ 3,661, 0010111120002 800 . 5 5 .23 3 4,184 .0010111/2002. 200 $ 5.23 S 1 ,0 46.0010111/2002 200 S 5.23 $ 1,048 .0u1011412002 51)0 $ 5 . 1 $ 3 2,576.30101/1412002 1,500 3 3,16 S 7.794.3010119/2002 400 3 5 .18 5 2,062 .6410/14/20x32 30 3 $ 5.15 $ 1,546.081 [311412002 310 S ,5 .15 $ 1,546.9810114!2002 foci $ 5.16 $ 515.6 610/1412002 1,300 3 5.16 3 6,703.58
SALES STS 7Cag'FeATD 5TIA ATED.w HELD, . VAL
a
'•t
r
r
0
MCA jwlc~4 R 4ST~ LIErn AI &W= M LL'P
xg, WC: 0.53
C assk'erlad: 7F.M(O1-7/26/03
PTJRC}1A E SALES Ai 4 WI ATED1?d N_ dd3+ - k ,_ Egg ?1 nAr cm M, HEd i3 VALVE
16114)2002 3.300 $ 5.16 S 17,016,781Rtt412002 500 $ 5 . 16 2 , 57p .3 010/14/2002 3.200 3 5 .16 $ 16,551 .1 210114/2002 600 -5 5,16 ; 3,093 .91510114/2002 500 $ 5.16 S 2 .878.30T0fl4J2 Q2 100 ,$ 5.1 6 _ .$ - _.945 6 _,f 01W2 2 .000 5 - 5 .156 S -10,313 .20 • --
10t140002 4 .400 $' 5.16 $ 22,606.01 011412002" 3,200 5.13 S 16,501 .1 2414=02 2,200 S 5. 15 6 11,344-5219/1472 002 700 $ 5.16 S 3 ,605.6210/14/2002 500 $ 5.16 $ 2,578.301€111412002 300 $ : 5.18 $ 1 .546 .19/1412002 9€ 0 S . 5 .16 $ 4,640.8410/1412002 100 $ 5 .16 $ . 515.5 610/1 002 .900' $ $. 16 $ 4 .640 .9410114/2002 100 S 5 . 16 5 3 ,6 ..621111412002 900 5.18 $ 4,804+3.94101141202 , 300 3 5.0 5 1,546 .861 01 1412002 300 $ 5. 18 5 1 ,545.0 810/162002 300 S 4.92 $ 1 A74,8810I16/2002 1,100 5 4.92 S $A07,7 110116(2002 100 $ 4 .92 • 491 .0 110(1 002 1 00 S 44 .92 S 491 .5 110(1002 100 S 4 .92 $ 4916110/1€(2002 800 S 4 .92 S 3,932,6@10/1512012 2.500 $ 4,92 $ 12 .250 .2510116)2102 300 $ 4 .52 $ 1,474 .03101113/002 2,300 $ 4,92 1 11,307.031 0116/2002 500 $ 4 .9,2 $ 2,456 .0510/1 002 300 4 4 ,92 $ YN4 .8310//6/2002 1,300 $ 4 .92 $ 6.390 .9310115/2€342 3,300 $ 4 .92 $ : 16,223.1 31 1622002 2 , 000 5 4.92 S 9,832.201016/2002 1,500 S 4 .92 5 7 .374 .1 510118/2002 500 5 4 .92 3 2.45s.os10l'l Sd E?€Y2 300 5 4 .92 $ 1 ,474,631 0/16(2002 luo 5 4,92 5 491 .6110!1 902 600 $ 4,92 5 2,949.6 51011612002 1 00 5 4 .92 5 491 .6 1100W2002 601 5 4 .92 3 2.349.5010/16/2002 S 4-92 $ 2,458,0510116/2002 500 5 4, 92 5 2, 948.65111116/2002 100 5 4-92 5 491 .61
E 44A.T.E D
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BERN!STFJ?f T I,EMAR.D & LMSRUZ 7.T.?
Aa• F, fri : 0.33
C12SO Peraad, 71241U1- t '}3
1011012002 100 $ 4 .92 $ 491 .0 1IUl? 112007 00 5 34 $ 4,808.0 01 D/Z2/ 2 000 $ 4 .3O $ 3.44A.Q ll10122/2 002 2.000 $ 4 .30 $ 12,040.0 01012212002 000 s- 4-30 $ 2,580.001itf2?1 0 2 _ _ ,900_ S 1 .3E -$ ._ 2,150.00, _ . _. ---• _----• -1012Z7092 ? €~fl ~•$ 4,30 3 430:401M212002 5 . 900 $ 4 .20 8 25,370.001012212 002 100 ' .$ 4 -20 $ 3.070,0101202002 5,700 3 4 -30 • $ 24, 510.6 01012212002 1 ,100 3 4 , 30 S 4 , 730 .00101 002 3,400 $ 4-30 $ 14 .520,00I0127.12002 8,000 $ 4.301 S 34,400.001012212002 4000 $ 4,30 $ 17, 200 .0(130/22/200.2 1,200 $ 4 . 30 $ 5.180 :0040122(2002 800 5 4,30 4 3,440,04}1012212002 1 .800 $ 4,30 6 8. 800_0€11007,22/20022 1,500 $ 4 .30 $ 8,880.0010122/2002 Sap $ 4 .30 S 2,1 50.0 0101221 500 1 4 .30 3 2 , 150.001 [ /312 2,400 3 4 .9u $ 11 .748 .0 010(3112002 1,800 $ 4, 79 S 8 , 618 .€ 411)11(20*2 $00 3 4,3x5 $ 2, 175.7011111(2002 $04 • $ 4.35 3 ^2,17'3,7011111/2002 100 $ 4 ,35 5 435 .1 411/11/2002 5DO $ 4 .35 5 2.175 .? 011111/2002 400 g, 4 .35 $ 1 ,740.551111112002 5M S 4.35 i 2,173.701111112002 500 $ 4 .35 5 2, 1 75.70? 3l11f2002 5(1 5 4 .35 S 2,175,7071112/2002 3,400 3 4. 35 S 14,887 .2411112120OZ 16,100 $ 4 .40 5 - 70,840 .00111171200 2 25,600 $ 4,40 1 12,550.01)1111',212.002 3,700- 4.38 16,2(10,8211/12/2002 17,4 0 0 $ 4,447 S 78,550,0311/1 2J 2002 2 ,300 4.38 S 101,070.7811(12/20(12 11 .200 S 4,40 $ 4-0,200,0011/1 002 2,60 0 $ 4 .38 S 1 1,3843511112120133 12,440 S 4 .40 3 54, .580.01111 2/.21)02 50 } $ 4 .38 3 2,189,3*0114212002 2 ,3003 $ 4 .40 3 10 , 120.0(111(1312002 . 6,0000 $ 4,37 $ 21, 852.5411013/20012 8,400 $ 4 .37 $ 23,600.701 1(13! 3 ;500 5 4 . 37 8 15,2 0 .75
111URCR ASE SAL Eff"24 BSTVNIA1ED WI&TEiMIX Aga= 9451 . Amp F MAM ~L AM= U52V 1AAU LQ 1?s
0,w
Ut
Z
r- r
0ca
ci t
co
C1 ia2er od :
nAWMIKE
M001-21IM 3
11!131200211/13/200211114/200211/141200211(10021 r 4f?pw ,11(12111141' 1118/20(3211(161200 211(181211/1812002I 11181200271/18.7200211/19/200211 fi1912QD211!2/1(200211/20/20021 '1/201201121112012010211120(200211/2W20211/$ 00241/2012€10219/20/2002/1120200211/202002111201200211/10/206211/20012111201200211(20/200212)1012410212/.24/2.[10212/241200212124120021 X20021212 212/241200212124/200212/24/20(1217124/200217126(20}02121. 2
I CSt,1;ne.BE!U STEL 1:,UMURD . wwS *LLP
44' . Pth : 0.53
~S r+~ Me Fr" S1EF NM MELD VALUE3,9000 $ 4 .37 $ 17,044,45
€aJ
700 $ 4 . 37 $ 3.05M355,8l 0 $ 4.43. 3 25.713,1 4
10,800 s 4 .44: 3 47,899.66,400 $ , 4 .43 $ 28,373 .1 2
4,5 tT $ 443. 3 ' 19 .949 .85 _ . . . . _
804 3 &4 3. . a 3,548.646,700 4 .41 3 29,533 .80 ul
12,100 $ 4.41 $ 53,356-80 m7,300. $ 4 .41 $ 32,178.04,700 3 4 .11 $ 20,717.605,200 5 4,41 $ 22,921 .601 .000 $ 4 .41 $ 4,4M0 03,175 $ 4 .32 $ 13,708.2 1
300 $ 4,33 . 1,299 .6 3700 $ 4,33 $ 3 ,032 .47200 $ &33 $ 868.4 2200 $ 4 .33 $ . 966.42
2 .100 $ 4.33 $ 9,087.4 1300 $ 4 -33 $ 1,299.63
2,0/111 1 4 .33 $ 804 .2 0400 -3 433 3 1,782 .84
1,200 3 4 . 33 1 5,198.523,000 $ 4 .33 3 12,996.301,400 " 3 4 .33 3 6,064 .94
400 $ 4 .33 $ 1,732.84300 3 4.33 ,$ 1,299.636110 $ 4.33 5 2,599.2 6600 4.33 $ 2,699.2 6200 $ 4.33 € 866.4 2200 $ 433 3 806.4 2
6,800 $ 4.92 3 33,927.3 06110 3 4 .97 3 2.485-00
2,300 $ 4 .97 3 11.431 .0 01 .000 1 44-47 '3 4,970,00
200 $ 4.97 3 994.00 .5,800- '3 4.97 $ 28,826 .011
SOO 3 4 .97 $ 2.463 .00 -,c1,600 3 4 .97 $ 7,952 .00 Eg400 3 4 . 97 ,$ 1,988 .00
1,300 $ 4. 97 3 6.46 1 .00700 $ 5,38 4 3,765.82
2,300 $ 5. 38 $ 12,370.00
3+s, Xe.BRM5RL'ct3 d11 v&L IIITZ,LL?
- 7avg.~'rtc~t
C JT 'cdnil, 1124 31 -V26!03 GUJI
F1'3 .CFUASE SALS9 SL%RES E.' AT E.SM A.TIE DYf t4 A Ik~F I7 ES i m mm I}Ak ~{ H LIB YAUM T 4U
12126/200 2/ /
5D 5.30 S 2 . .IQ ••2812 2002 300 $ 5.3D $ 1,613,58
12128/2002 800 3 5 .33 .3 4 ,302.8812!262002 100 $ 5.33 3 531.8812118/2002 1,5130 4 5 ,3 $ 8 0 37 .9012J2MQQ 9p300 - _1?12 02 -- - -730
-5- .6,38.$ - 5,38 3 3;768.U2 2.
12128t200212!28m
4,70090 i
$ 5.3 3.3 5.38
3 25,279.4 2.3 4 ,840.74
€nEn
12/25 002 500 .3 Z .38 .3- 3 .227.1 512/26120 2 loo 5 .38 $ 637.86t 325 €ID2 , 00 3 5 . 38 S 15.697.94' £1` 2 6.300 3 5.38 .36.574 .49
s-i
12/26/2002 3, 1 3 5 .38 $ 20,976.5 4122.12002 3,200 3 5 . 36 S 17,211 .5 212/2612002 900 $ 66.38 .3 4 .8840,7412128(2002 - 700 3 138 .3 3,765.0212/20 D2 400 $ 5.38 .3 2 .151 ;4 -1226/2 002- 1, 000 3 5.38 $ 537&6012/28/2002 . 200 .3 5 .38 .3 1 ,076.721212612002 1,400 .3 5.38 .3 7,530,0 412/28/2002 900 .3 5. 38 .3 4 .8".7412/26/2002 1,300 .3 5 .38 .3 6,392.1 512/2812002 5013 .3 6-0 S . 2 .689 .30121.82002 400 .3 5 .38 $ 2,151 .44
1/6/2003 200 .3 4 .96 .3 991.00118/2003 MO $ 5.08 .3 3 ,047 .2 01 X003 852 S . 5.03 .3 3 1352.1 71/8/2003 1 .200 3 5 . 08 .3 6 ft 4 .551/8/2003 600 .3 5 .08 $ 4,063.04Zt t2DD3 1 700 $ 3 . 08 3 8,6n.96i/ 2003 00 3 9.06 .3 4,570.82 .1/9/2_003 600 3 5.01 .3 3 .04 1M193# 73 1,500 3 5.07 .3 1,804 .701/6/2003 400 3 5 . 07 .3 2,027.92 V t9/912003 300 . 9.07 S 1.520 .94 V a°°3/912003 600 3 5.0 7 .5 3.041 .8811912003 100 .3 5x T .5 5".981/912003 72013 .3 5.07 3 8,D 53.76IIW2003 3 .237€. .3 5117 $ 16,22335 V r•tfw2{DS}3 5 S 5,01 $ 3.04-1 . 68 6Si
119/2003 3,00 .3 5137 .3 15,209 .40 VVW2M 700 3 5.3 ' .3 3 ,548 .8 613 003 500 5- 5.07 2 , 534 .90
$ , MS 'M12L RMARD & LIFSHMA LP
Mass Period .- 7124191-2/26/13
a4s g. rt~c:. 0.5 3
1:IRCHASE • SALES SHARES 7C, & TE ESTT r,T$kl
P.JZ MARM QM AU( MR! QM AMA~ LD VALUE f Q -1/912003 IOU 5107 $ 503.9511912003 1,500 $ -5.07 $ 9,125 .511 003 4,500 $ 5.07 $ 22,814 .1 01! 000 Z M, 3 5.07 $ 14,702.421/9/2003 2,100 $ 5,07 $ 10,646-68WPP . . . . .704L a .07 _ - ,_3, 6. 6 . . .. - _. _ _ . ___-_--_ __-- ., _ _ ---- . - __r .,__ - .___-----•-°" --_ _,,__-_ .__- - ------- - E102003 600 S 5 .07 2,5534 .90 -ff 003 300 $ 6.OT 5 1,520 .94119!2003 8170 5 55, 07 $ . 4,055 .8 4119/2003 200 5 5.07 $ 1,€113.951 2003 1,000 $ 5.07 $ 5,053.8 01P912003 700 5 5, 07 5 3,54811 811912003 1,000 5 5,1)7 5 5,069.8 01193/2003 400 $ 5.07 5 2,027.9211812003 3 00 5 5,571 $ 1,5.20 .94
1110/2003 400 5 5.00 $ 1,938,4 01110,2003 1,000 S 3,00 5 4,996 .201/1012003 300 S 5 .09 5 1 .4-98 .86111//121)03 .400 $ 5-00 S 1, .4 81110/2003 2,300 3 5.00 5 11,491 .261/10/2003 400 3 5,00 $ 1 ,996 .4 51110/2003 2,100 $ 5 -W ' 10+492-02114012003 401) $ 5 .00 3 1,998.4 8,1(10(2003 1,300 $ 66 .00 $ 8,495 .08111012003 3,200 5 d,00 3 15, 997,841/10120 03 1,500 $ 5.00 -5 7,494 .301l11/2003 500 5 5.00 b 2,495,1 0q
0/2f3W~q
400Q
3g
5.00(,
$ 1,995.4 81(10/2 700 S . 5.09 .5 3;97,34itio/7003 700 5 5 .00 $ 3,4197.3 41/10(2003 300 5 5 .00 3 1,498.8 61/1012003 200 $ 5.00 S 999,2 41!1312003 400 5 5,02 5 2,006 .261113120 3 ,100 5 5.02 5 5,51T'279113/2003 300 5 5,02 $ 1 . .711/1312007 400 6 5.02 5 2,006.281/13[2003 100 $ 5 .1)2 5 50 1 .5 7W131203 2,3300. 3 5, 1)2 5 11,-36,1 1111312003 4030 5 5 .02 5 2 , 000.261(13/2003 . 2,200 $ 5,02 $ 11,034,541(13/2003 501) 5 5 .02 5 2 „507 .9551113J2003 1,400 $ 5,02 $ 7,021,00111312003 3,100 $ 5 .02 s 15,545 .071/1 003 1,500 $ 5.02 3 7,523.85
5 :CSI, Inc .BE.l T M LIEBRARD & LI1 R TZ,, LLP
Avg. Pate. 0.5 3
Cans ?erIQti. 7114J11 t-7126103
PURL 5E
1/13(`2003 500 $ 5.02 $ 3,009.42111372003 400 3 5.02 $ 2.006.281/1312003 - 6010 3 5.0.2 3 4,012 .56111312003 800 $ 5.02 $ 4,012.5 81(131.2000 , 3€ 3 5 5.02 3 1404.7 11/13/2003 200 3 6-0 S 1,003.1 4
. - 11§9 O~i3 ioH ' S 4.95' $ +498.4 89/14/2003 200 $ 4 .9 8 $ 990,951114/2003 100 8 4, S 499 .4 81/14120 03 400 3 4.98 S 1,993.92111412003 100 $ 4. 98 3 496 .4 81/1412003 1,700 $ 4.98 4 8 ,47 4 .161f1472003 $00 4.98 $ 2,4 92.4 0
'111412003 100 3 4 .98 $ 498.4 8111 412DW 809 3 4 .98 S 2,492 .4 01114/2003 109 8 4 .98 3 498 .4 81114/2.003 700 S 4.97 3 3 .489 .351 11412903 200 S 4.98 5 998.981/1412003 300 $ 4 .98 $ 1,496A4111412003 700 S 4. 98 , 3,489.361/1412003 4 . 300 .$ 4 .8 4 21 , 434 .641/14/2003 400 S 4 -96 , 1,093 .921/1412003 100 $ 4 ,95 8 498 .4 81(141.2003 100 4 .98 $ 19~3.d8141412003 400 3 4 .95 $ 1,993.82111412003 1,20 0 S 4.98 3 5,361 .76111412003 304 . S 4.98 $ 1,495.441/14/, 003 20 0 $ 4.93 . $ 996.98111472003 900 $ 4.96 4 4 .456.3 2111412003 - 200 5 4. 98 6 996.961(1412003 100 ; 4. 99 . $ 495.481/1412.003 100 S 4 .09 $ 498.481/15(2103 1 ,200 $ 4.27 $ 5,1255.9.2511512003 . 509 $ 4.27 S 2,135.9 01 11912€03 2,800 $ 4.27 $ 11,980.48V1542003 (300 S 4.27 4 3,417.281/15/203 800 $ 4 .27 S 3,417.281/ 1 012003 5,10 0 $ 3 .77 $ 19.229.451119(2003 1 8,100 3 3. 1 7 3 85,246 .051 1 1612003 3, 50 0 $ 3 .77 $ 13,198 . 751118/2003 2 ,700 $ 3. 17 $ 10 , 180 .35111812003 • 6,500 S 3.77 $ 20,731 .75111W203 BOO $ 3.77 $ 2,202.30IIIUM03 12,300 S 3,77 $ 40. 377.15
S1A .1g SI AB S . E, Y+f1l 17 ES I"EDPAIN QM AMI0u1.l JILT) VALUE
r
LI
0
Y
r
rMr
r
Ctc
p
Most Imt.81M1NS 'tI1 LMRA & LIFS1r'Z, LLP
C,CAn period; 7/41Ol •2r26t03
Pw1c %sEPA-1-6 MAW Off- AM= 4m ARAM jzw
1/1 612003 3$,500 5 3 .77 .$133,852-75
1 11612003 5,600- S 3 .77 S 21,114.60111 003 34.700 5 3-77 $ 130,836 .361116121103 6,800 5 3 .77 8 24,686 .301616/2003 4,-qM 5 3 .77 8 16,987 .2 5it' 0 .-._ .s_ . M3 -55-$- .O,tr, -~_ . . - -
- 1116/6 20,700 S . 3 .77 5--78,049 .3511161 83 49,360 5 3,71 188,111 .661118/2003 29,9(X) S 3 .78 S 112 ;737 .M5111812003 . 24,000 3 3 .77' S 00 .492 .00111512003 7,100 S 3 .77 S 26,770 551116/2003 5,000 5 3 .77 $ 18 .852.5011/612003 3 ;100 3 .77 S (1 .688 .551(15/2003 9,600 $ - 3.77 S 32,426.301(16/2003 1,900 S 3 .77 .S 7,183-+35
1115,12003 8 .900 $ 3-77 5 37,327.951715170073 6,600 5 3 .77 5 24,885 .312111512003 9,70(3 5 3.77 . 3 38, 673.851(16003 3,500 5 317 $ 13,196.7 61115l2003 3,oV0 5 3 .77 S 11,311 .5 01117121806 2700 $ 3.50 S 9,670.0 5111711(1(X3 9,100 5 3.08 5 32,593 .561117/201(#3 1, $ 3 .58 $ 6,804.8 5111712003 1,400 $ 3 .58 $ 5,1)14 .1 01117!31)03 2,906 3 3 .58 $ 111,386.351117/2W3 300 5 3 .58 S 1,074A51/17!6 6,940 5 .3 .68 $ 24,712 .3 51117(2033 19,000 5 3 .58 5 69,045 .501/1712003 3,000 3 .66 $ 10,744 .50111712003 18,400 $ 3 .58 S 85,699.60111712 003 3,500 3 .58 $ 12,535,251111!20 3 2.Itt~ 3 .68 $ 9,8141 .0 5111712003 500 $ 3,58 $ 1 .790 .751/17/20173 11,1 00 $ 3 .58 S 39 .754 .651/1712003 26,000 5 4.68 $ 03,119 .001117/2003 16,000 5 3 .56 $ 57;31 .11 01/17/2003 12,800 S 3.55 $ 45,M 2U1/17124[13 3,909 $ 3.58 5 13 .967-85)11712003 2,700 S - 3 .58 3 9,670.051117/2003 1 .600 S 3 .58 S 5,730 .4 0111712003 4,000 $ 3 .58 5 17,549 .351/17/2003 ODD 5 3.68 S . 3,561 .6€3111712((3 6,200 $ . 3,58 5 18,623.00111722003 3,711 0 5 3..58 S 13,251 .55
Avg. $z1ce; 0$3
SM SHARES E n AThD E TM&.NQ - MD VALUE Q5S
C
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MCS . Inc,BERKSTEIPt L ED & LIFSHIT 2 LL F
Avg, blie: . 4.33
C1m Period, RAM 1
PURCk1rA S.A4 .5 $HAPUVS 7 I:1 A'I4.1 E$ 7C 'iEDPATE SHABJE5 C 311 .31 VI.13P MMM AMU=
1117(2003 5,200 "3 .58 S 1a .6o£1(1712003 2,000 $ 3 .58 $ 7,163 .0 0
111712003 1,500 3 3.55 3 5,372 .251/22/2.003 400 9 3.13 S 1 .252 .00112312003 1,900 $ 3.13 S 5,947 .0 0
_jr1T23#ailt?3 1014 $ 113 313 .00t1 372003 4,700 $ 3 .13 $ 14,711 .00112312003 Soo $ 3 .13 $ 1,5S 0 01/23(2/303 1,400 5 3 .13 $ 4,3B2 .00 t112312003 300 $ 3 .13 $ 939 .0 0172312003 1 ,100 $ 3 .13 3 3,44300 ►/ 4~20O3 ' S 3 .02 $ 1 .911 .8 5
1/24(2093 700 $ 3 .03 S 2121,11131 1.2412003 1,700 S 3.02 S 5.140.291124/2003 2,300 $ 3 .03 $ 8,959.01!24 11003 400 $ 3.02 $ 1,209 .481!24!2003 00 3.03 3 1,515 .001124/2003 400 3. 02 S 1,209.4 81/2412403 500 S 3.73 5 1,515.0012412003 500 $ 3.02, 5 1,814 .2 2124 /20 03 700 3.03 5 2,121 .0 01/24/2003 1010 S 3.03 3 303.0 01124/203 1,900 S 3 .02 5 5,745 .03824/2003 2,700 S 3.03 $ 8 .18? 00112412003 3,500 S 3.02 5 10,592 .95112412003 5,000 $ 3 .03 $ 15,150 .001/.2412403 500 5 3 .02 $ 1,814-2212472003 70 S 3 .03 $ 2,121 .0011/24T,2003 3,400 3 3 .02 $ 10,280.661/24/2€003 4,900 3 3 .03 $ 14,347 .00112412€03 601) 5 3 .02 $ 1 .87422912/2003 900 5 3 .03 5 2,727 . 0 031(24/2003 700 S 3 .02 S 2,110.591/2412053 1,900 5 3.03 S 3.034.0011241203 200 $ 3 .02 $ 604 .741/2472003 200 $ 3.03 $ 1905 .0 9€/24 2003 2.100 3 2.02 $ 6,311,R .7 7112412093 2, $ 3 .03 3 0,757.0 01/24/003 4.8.00 3 3 .02 $ 14,5f 3-7S1!24/2003 7,200 $ 3 .03 $ 21,816.001(24/2003 4,500 $ 3 .92 5 13 .66.651/24/2903 6,500 $ 3 .03 $ 19,956.001/2412003 2,400 S 3 .02 S 7,256:88
B ERNSTEt LZ tMU1 & L17!Sk , LTA"Avg, i'r1cc; 0,53
CUSS Perfa d : 7136!131-2W03
PLc7[ U
112412003 3,400 $ 3 .03 5 10,3412.001/24/2003 700 5 3 .02 $ 2,118.59112.42003 1.000 $ . 3 .03 $ 3,1330 .001124/2443 $00 $ 3.02 S 1,511 .851/24120,33 700 $ 3.03 $ 2,121 .003(2/2003.- 404 .5. 342„ $ . .3 .209.48. .1/2412003 70 $ -3 .03 $ 2,121 .00112412003 1 .399 $ 3.02 $ 3,910.8 1112412M 1,900 5 3.03 $ 5,757 .0 01/24t2093 300 5 3 .02 3 907 .1 112412003 400 $ 3 .03 $ 1,212,001/24/2003 1,000 S 3 .02 5 3 023 .70162412003 1 .400 $ 3 .03 S 4,242,001/24/2003 L000 s 3 .02 $ 3,023,7 01124/2003 1 .400 $ 3.03 5 4,242 .001124/.2003 1,000 3 3 .02 3 3,023.701!24/2008 1,300 } 3.03 5 3,939.00112412003 400 $ 3 .02 $ 1,209.4 81/24/2003 0013 $ 3.03 5 1,515.001/24/2003 300 $ 3 .02 5 90T.1 1112412003 400 $ 3 .03 5 1,212 .00112712403 1,109 5 2. 89 $ 3,183.6 21/2112003 3,000 3 2.89 $ 10,419.1 21/27/2003 700 3 2 .80 $ 2,025.941!2712903 500 3 2 .89 3 1,447 .1 01/27/2093 1,100 3 2,89 . 3 3,183,62112701333 100 5 Z,B9 $ 289 .421/2712003 2,500 $ 2,89 3 7,23-6 .501/2120133 7,500 5 2 .89 $ 21,706,501/27/2000 1,200 $ 2.89 $ 3,473.0 41/2712003 7,309 2.89 3 21,127.6 8112712000 1,400 3 2,69 $ 4,051 .8 81/.21/2043 900 1 2. 83 $ 2,604 .7 81127323 300 3 2.89 3 578.8 41/27120143 4 .300 3 2 .89 $ 12415,061/2712003 10,400 $ 2 .89 3 30,099.81 8112712003 6,162 2 .89 1726 .06112 712003 5,000 S 2.89 $ 14,471 .091/27/2003 1,500 $ 2.89 $ 4 .341 .3 011Z112003 1,000 5 2 .89 5 2,894,20112 412003 900 5 2 .89 $ 1,736 .521127/2083 1,700 5 2,89 $ 4,920.1 41127/7.003 3tI{) s 2 .89 3 868 .261)271200 3 2.100 .5 2 .89 $ 0 ,071.8.2
SALES SS$$RF$ mr, AlT FAMMURD
VALE- W&MM S etMo 1 1EG 7 VALUE lam
R (~IYL P $IW&WOS Z, IL?
€ us Period : 7124101 -2126101
PURCHASE
V2712003 1,300 6 2 .69 3,762 .40112712003 2,000 $ 2 .89 S 5T9$.4 0V27120 M 790 1 2.89 5 2,025.9 44127/2403 800 $ 2M9 5 . 1,736.52112812003 600 4 2 .70 5 1,621 .6 21/2.812(03 _ 2,000 $ 2 .70 5r - .3,40 .. O1128/2003 400 5 210 $ 1,081 .08112 003 300 5 2.70 5 810,8 11/2 O03 000 $ 2 .70 $ 1,821 .62112812003 100 5 2 .70 S Z70.2 71(2812093 1,400 5 2 .70 .5 3,783.7 61(28/2003 4,100 $ 2 .71 .5 11,061 .07112 003 600 .$ 2.70 S 1,621 .621(2 O03 4,000 $ 2 .70 5 10,610 .8 01126 133 *100 5 2.76 $ 2,162 .1 01/20120 0 600 $ 2-7€1 $ 1,351 .381/28/2003 100 5 2 .70 5 270.2 71)28/200 2,4015 4 2 .70 3 6,486 .4 6112&'2003 5,700 2.70 $ 15,405 .3 91(28/2003 3,400 . .2.74 5 9,Y .S B112€312003 2.800 S 2,70 S 7,587.56112812003 9 $ 2 .74 5 2,102.1 6112Mo[}3 610[1 $ '2-70 5 1,621 .6 21/M403 300 $ 2,70 810 .8 1112812003 1 .000 $ 2 .70 $ 2,702 .7071201204 3 200 3 2 .70 6 540,941/2 3 1,100 $ 2 .704 .5 2 .972 .9 11/,28/2003 700 5. 170 $ 1,831,901/2012003 i,1QU S 2 .70 5 2,972.97112 003 400 $- 2 .70 $ 1 .01$1 .081/76/2003 300 $ 2,70 's 810 .6 11129/2003 400 5 2.60, S 1,049 .841/29/2003 1,400 $ 2 .62 S 3,870,94412912063 300 2 .62 .5 766.031129(2003 200 S 2.62 $ 524.421/282003 500 .2-62 x,31407 531 F003 1,000 .5 2 .62 S 2,622.109/29/2003 3,900 .4 2.62 $ 7,866,301128120 0 3 SOIL $ 2 .62 5 1,311,0 51/2912003 2.900 5 2 .62 5 7,604 .0 911292003 800 $ 2.92 $ 1,673.261/2 0033 400 5 2 .52 S 1,046 .8 411x9/2003 100 $ 2.6 5 262.2 11(2912003 1 .700 .5 Z62 S -4,457.67
SALES MAP" ESMI TEi6 TE, X,4."Db t% tJ 1 - V LE# I~f7 SI
3
9t'b5Q`1 $ £S"w -OQY £pCt~
b'15I1`i $ £97 9 00 £00 I /$ £9' $ A Z*4 Epi3?fef
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21312 0 1,300 $ 2 .63 S 3,416.2 721312003 3.453 5 2 .63 $ 8.14.3 .6621312003 1,500 3 2.63 S 3,941.852/3/2003 500 3 2.83 $ 1 .3119521312003 360 $ 2,63 9 788,37
13 2093- .-- : _ 700_ $. .2 .63 . _$ . . 1,839.53__ ._. . _ . _ .. - =_2/3/2003 600 - $' 2 .63 -1- -1,5576.7421312003 200 $ 2,83 925 .5821312003 200 $ 2.63 $ 525 .582/4/2003 B00 S 2 .63 5 2,104 .002/412003 2,300 2.63 6, 049 .002/4/2003 500 $ 2,633 8 1 .315 .00 .2/412003 400 $ 2 .63 1 .052,0021412003 800 S 2.63 S 2,104 .0 02/4/2003 100 $ 2.62. $ 262.44 -21412003 2,.000 $ 2.63 $ 5,280.0 021,412003 4, $ 2.142 S 12,859.5624(2003 800 8 2.62 5 2,099 .6221412003 4,800 8 2.62 $ 12 .597 .1 221412€103 900 5 2,62 5 2,361 .962/412003 800 3 2 .63: 3 2,104-0 02/412003 200 5 2.63 5. 5211.0 02/412003 2.903 $ 2.62 5 7,610 .7 6214/2003 $,TOO $ 2 .82 17,683,462/4/2003 4.304 $ 2.63 S 12,15246.00214/2003 3.300 5 2.62 $ 8,680 .52214/2003 1,100 S 2.82 . S 2,886,84714!2003 800 $ 2.62 3 2,099 .52214/2003 500 2.83 3 1,315,0021412003 '1,400 3 2 .63 $ 3,682 .002/4120 3 300 5 2 .63 3 768.002/412003 1,41111 $ 2.63 $ 3,574,1 62/4(2 1,100 $ 2.63 $ 2,833 .002!412003 1,400 5 2-62 $ 3,6741621412003 500 $ 2,62 S 1,312 .20214/2003 400 $ 2 .62 5 1 .049 .7621512003 500 $ 2 .63 3 1 .315.02/5/2403 1,700 5 . 2.63 5 4.471 .0021512003 400 3 2. 6.3 5 1,052 .0021512003 300 $ 2-53 5 757 .662/52003 500' . 253 6 1,315-0 02W2001 100 6 2 .€93 $ 263.0 02(5/2.003 1,400 . 5 2 .53 $ 3,535.8421512003 3,500 5 2.63 $ 9, ,00
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Aa g, trice-
Chu Period- 112"I-MM
PURCBASE ~ E5 S t4 ~~k`EB S Ih 1DLT AW T-I-Ex ? Q AMO-M LD VALUE
2faf2003 300 $ Z46. $ - 737 .9 12/6/2003 1,500 3 2,46 5 3,689.5 5216/2003 1,100 1 2.46 $ 2,705 .6 7216/2003 1 .500 . $ 2,46 -$ 3,689 .5 52(6/2003 500 $ 2 .45 $ 1,229.6 5W5120M • - .400 5 2:46 . 983 88 _ -- _. ... _ .- -• - - - -W7121703 800 5 2 .2$ 5 1,825,682712003 2.60u $ 2 .28 5 5.9M.462rn21703 600 5 2 .28 5 'f, .2621112003 400 6 2.26 5 912 .842(7(2003 900 $ 2 .28 $' 2 .053.89 .217f2003 100 $ 2-28 $ 228.2 12/7,2 003 2,200 5 218 $ . 5,020,6221712003 1,0 5 2 .18 2,162 .6 02/712003 4300- 5 2.26 5 9,8110 3
12003 900 •5 2 .28 5 2,053 .692/7£2003 1,008 5 2.15 $ 2,182.0021712043 4,100 5 2 .28 5 9,5556,0 1217IM3 1,100 5 2.28 S 2,510-3 1217/2003 900 $ 2.28 $ 2,053.89217/2003 200 0 2 .28 $ 456,422/712003 3,100 $ 2 .28 5 7,074,5 12)7/2003 1,000 5 2 .10 5 2,182.6021/72003 6,200 $ 22B $ 14,149 .022!712003 5,300 $ 228 $ 12,095 .4 35!712003 3,600 $ 218 3 8,215 .582/7/2003 1',100 $ 2.28 3 2,510,3 12177/2003 Sao .5 2 .28 1 .a2,5-682!7/2003 500 p 2.28 5 1,141 .0521712003 1,500 5 2.2/3 $ 3,42 .1 5217/2003 300 $ 2.28 $ 684.6,3217/2003 1,600 5 2.26 .5 Z,661 .3622/1/2003 1200 5 2 .20 3 2,138 .5221112003 1,600 9 2.26 $ 3,851 .3*32!712003 600 S 2.26 3 1,389.26217/2003 5011 S 2.26 3 1,141 .3
2/1012003 3011 5 2.115 $ 648 .8 7211012003 1,504 5 2 .16 - .5 3944,0 52110(2003 500 $ 2 .1$ S 1 .084 .352196/2003 100 $ 2 .16 5 2162721161.2003 3 .800 5 2.16 $ 7 .765,722110 03 3I60 5 2 .18 $ 646,8 12/10/2003 10 $ 2 .16 $ 2,182 .7021812003 200 $ 2 .16 $ 432 .64
3E 9 3 tE`t 009 ~00Z/E Utftl'Z 0 i S £(7'z ",I E00Z W(363U,9 Wz S ooo'E £00M
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Talsls : Zs1Q~S56 ~$ir639,b58 1
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289,300
289,200
350,65L(Q 2,211,656 1,180,59B .oo 9,13792241
1 sczmiLk0 Loses: 9,137,922.51
$
1
EXHIBIT C
Hl "Z r'"k1~ ua c (4t;rui r I Uni
' Harley LLP3P hr. e12 0i .'
. G 303097 y= 40"73-3900
'F :4O-87 4476
TM fON OF NAMM PLAXTM) F
. o~ (?T tom= being d `y cam, to ~ of b&r
s mcited mdt~ the W=9 s=-ad#its I ms aping MCSI all
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? fcii d notP o't nt is he wbjed of ft Ica. a
t a diwfion os counod or order pate its k toia• x r ~
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ludiug fig tet i o4y at depogititm and trd if nevzook'Y' .
4. mMff s times m seedy a the sub$ •of this to
d' G Class ? d a~e as s
'a =6162
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Date
4ar°•Z7-D3 II3 .4pm Fr
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`its ffm f3=3 ymm:
6• Plaintiff win not amt a pa mt for sexv€vag a i res B paty
on bcha r of cis bated pI 's pry araft sham of .y x vmy,, except ugh rem th j
szti mtpmLqw 1inc1 g it wages) dur4Jy mlating to t1i rzyCei az -of the class as
• . car ®d tbz
t ' lzm peval e w r t 8 the fc od
day of WAV-r-A 2003 inthix(City)
NAAM
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