1 Prior to October 26, 1999, Xcelera was named The Scandinavia Company, Inc. and traded on the American Stock Exchange under the Symbol SCF. Effective December 6. 2000, the Company again changed its name from Xcelera.com to Xcelera. The Company trades on the American Stock Exchange under the symbol XLA. UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MASSACHUSETTS IN RE: XCELERA.COM ) CIVIL ACTION NO. SECURITIES LITIGATION ) 00-C V-I 1649 (RWZ) ) THIS DOCUMENT RELATES TO: ) ALL ACTIONS ) JURY TRIAL DEMANDED ) CONSOLIDATED AMENDED CLASS ACTION COMPLAINT Plaintiffs, individually and on behalf of all other persons similarly situated, by their undersigned attorneys, allege upon personal knowledge as to themselves and their own acts, and information and belief as to all other matters, based upon, inter alia, the investigation conducted by and through their attorneys, as described in paragraph 10 below, as follows: NATURE OF THE ACTION 1. This is a class action filed on behalf of all persons who purchased the common stock of Xcelera.com, Inc. (Xcelera or the Company) 1 during the period April 1, 1999 through and including August 8, 2000 (the Class Period), to recover damages caused by defendants violations of the federal securities laws. 2. Xcelera is an Internet holding company based in the Grand Cayman Islands. On April 1, 1999, defendants announced Xcelera acquired a majority interest in Woburn, Massachusetts-based, Minor Image Internet, Inc. (Minor Image), an Internet caching company. Defendants failed to disclose, however, that a substantial portion of the funds used to acquire a majority interest in Minor Image, $3.24 million, was contributed by defendants joint venture partners
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Prior to October 26, 1999, Xcelera was named The Scandinavia Company, Inc. and traded on theAmerican Stock Exchange under the Symbol SCF. Effective December 6. 2000, the Company again changed itsname from Xcelera.com to Xcelera. The Company trades on the American Stock Exchange under the symbolXLA.
UNITED STATES DISTRICT COURTFOR THE DISTRICT OF MASSACHUSETTS
THIS DOCUMENT RELATES TO: ) ALL ACTIONS ) JURY TRIAL DEMANDED )
CONSOLIDATED AMENDED CLASS ACTION COMPLAINT
Plaintiffs, individually and on behalf of all other persons similarly situated, by their
undersigned attorneys, allege upon personal knowledge as to themselves and their own acts,
and information and belief as to all other matters, based upon, inter alia, the investigation
conducted by and through their attorneys, as described in paragraph 10 below, as follows:
NATURE OF THE ACTION
1. This is a class action filed on behalf of all persons who purchased the common
stock of Xcelera.com, Inc. (Xcelera or the Company)1 during the period April
1, 1999 through and including August 8, 2000 (the Class Period), to recover
damages caused by defendants violations of the federal securities laws.
2. Xcelera is an Internet holding company based in the Grand Cayman Islands.
On April 1, 1999, defendants announced Xcelera acquired a majority interest
in Woburn, Massachusetts-based, Minor Image Internet, Inc. (Minor Image),
an Internet caching company. Defendants failed to disclose, however, that a
substantial portion of the funds used to acquire a majority interest in Minor
Image, $3.24 million, was contributed by defendants joint venture partners
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Kahnberget Holding, Ltd. and JAM Investments Ltd. (Kahnberget/JAM).
Defendants failed to disclose that pursuant to the joint venture agreement, as of
April 1, 1999, Kahnberget/JAM was entitled to 50% of all Minor Image stock
claimed to be owned by Xcelera. Defendants failed to disclose that they had
wrongfully converted $3.24 million belonging to Kahnberget/JAM for
defendants use in acquiring Minor Image stock. Finally, defendants failed to
disclose that Kahnberget/JAM had claims against defendants for 50% of the
purchased Minor Image shares, in accordance with the joint venture agreement.
3. Later in April 1999, defendants induced their joint venture partner,
Kahnberget/JAM, to modify the 50%-50% joint venture agreement to a 60%-
40% joint venture agreement with defendants providing 60% of the capital
investment in Minor Image and Kahnberget/JAM providing 40%, and each
party receiving a corresponding equity stake in Minor Image. In exchange for
this modification, defendants agreed to issue 219,000 shares of Xcelera stock
to Kahnberget/JAM. Despite repeated requests by Kahnberget/JAM that
defendants deliver the Xcelera shares as agreed, defendants failed to deliver the
Xcelera shares in accordance with the 60%-40% joint venture agreement. As a
result of stock splits of Xcelera shares since the 60%-40% joint venture
agreement, the original 219,000 shares are now equivalent to approximately
5.2 million Xcelera shares. Thus, the issuance of Xcelera stock to
Kahnberget/JAM pursuant to the 60%- 40% joint venture agreement will result
in substantial dilution of Xceleras shareholders equity.
4. Defendants misappropriation of Kahnbergets/JAMs $3.24 million investment in
Minor Image and the failure to deliver Xcelera shares pursuant to the 60%-
40% joint venture agreement are the subject of litigation initiated on November
15, 2000 in the United States District Court for the Southern District of New
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York in JAM Investments, Ltd. and Kahnberget Holdings. Ltd. v. Alexander
Vik and VBI Corp., Civil Action No. 00-CV-8733.
5. It was not until August 4, 2000 more than a year and four months after the
Minor Image transaction and the 60%-40% joint venture agreement that
Xceleras Form 20-F Annual Report for the fiscal year ended January 31, 2000
became publicly available. In the fiscal year 2000 Form 20-F, defendants for
the first time made scant reference to the risk of dilution of Xcelera stock as a
result of defendants misappropriation of Minor Image stock and the 60%-40%
joint venture agreement. However, defendants disclosure was sorely inadequate
considering that on July 31, 2000 defendants entered into an agreement with
Kahnberget/JAM to tender Xcelera shares to Kahnberget/JAM. Investors and
the market were not aware of the July 31, 2000 agreement until November 29,
2000 when Xcelera filed a Form 6-K with the SEC and attached as Exhibit 1
the July 31, 2000 agreement.
6. On August 9, 2000, Bloomberg News reported Xcelera may have to hand
over what looks to be as much as $622 million worth of Xcelera.com stock. At
Xcelera.coms price of about $14 a share, that would require the issuance of
almost 45 million new shares in the company, diluting existing shareholders by
nearly 45 percent. This, too, is something U.S. shareholders are now learning
about from the company for the first time. (Emphasis added.)
7. On March 22,2000, Xcelera sold 15% of its Mirror Image subsidiary to
Exodus CommunicationsTM, Inc. (Exodus), for cash and stock valued at
approximately $637.5 million. At that time, Xcelera intentionally or recklessly
failed to disclose to the investing public that Xcelera met the stock ownership
prong of the Foreign Personal Holding Company (FPHC) rules and risked
having its U.S. shareholders subject to special income tax provisions and
2 All stock prices stated herein have been adjusted to reflect Xcelera's five stock splits during theClass Period, namely the Company's: September 22, 1999 three for two split; October 23, 1999 two for one split;January 8, 2000 two for one split; March 4, 2000 two for one split; and April 29, 2000 two for one split.
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income tax liability. In fact, the truth about the Exodus transaction, the
Companys FPHC classification and the tax ramifications were not revealed until
nearly four months following the announcement of the Exodus deal.
8. During the Class Period, defendants Alexander and Gustav Vik dumped more
than 3 million shares of Xcelera stock on the unsuspecting public, reaping
proceeds of over $250 million.
9. Xcelera's stock price traded as high as $112.50 during the Class Period before
falling to $11.75 at the end of the Class Period when the investing public
learned of the Companys classification as an FPHC and the potential tax
burden imposed on U.S. shareholders as well as the dilutive impact of the
Minor Image transaction in April 1999.2
LEAD PLAINTIFFS’ INVESTIGATION
10. Lead Plaintiffs’ allegations set forth herein are based on a thorough
investigation, conducted by and through their attorneys, of all reasonably
available sources of information, including, but not limited to, publicly available
relevant information, in order to obtain information necessary to plead Plaintiffs
claims with particularity. The nature and scope of Lead Plaintiffs' efforts to
obtain the information needed to plead with particularity included:
(a) Reviewing Xceleras filings with the U.S. Securities and Exchange
Commission (the SEC) during the relevant time period, including, but not limited to,
the Companys Annual Reports on Forms 20-F for fiscal years 1997 through 2000; the
Companys Schedule 14A Proxy filed on October 19, 1998, the Companys Schedule
1 3D/A filed on March 10, 2000 and the Companys Forms 6-K filed on November 16,
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1998, September 21, 1999, October 12, 1999, January 27, 2000, February 10, 2000.
June 2. 2000. and November 29, 2000;
(b) Reviewing the Company's press releases and other publicly
disseminated statements made by the Company during the relevant time period;
(c) Reviewing reports, articles, and discussions concerning the Company
and the subject matter of this Complaint contained in the print and electronic media and
computer data bases;
(d) Reviewing reports of securities analysts;
(e) Reviewing pleadings from the action filed in the United States District
Court for the Southern District of New York entitled: Jams Investments. Ltd., et al v.
Alexander Vik. et. al, 00-C V-8733;
(f) Reviewing pleadings from the action filed in the Court of Chancery of
the State of Delaware entitled: Parfi Holding. AB. v. Minor Image Internet, Inc.. C.A.No.
18457NC;
(g) Reviewing the Internal Revenue Code, in particular, provisions relating
to Foreign Personal Holding Companies;
(h) Reviewing the SEC's International Disclosure Standards; and
(i) Interviewing former employees of Mirror Image and Exodus.
11. Except as alleged in this Complaint, the underlying information relating to
defendants misconduct and the particulars thereof are not available to Lead
Plaintiffs and the public, and lie exclusively within the possession and control of
defendants and insiders of Xcelera, thus preventing Lead Plaintiffs from further
detailing defendants' misconduct.
JURISDICTION AND VENUE
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12. The claims alleged herein arise under Sections 10(b), 20(a) and 20A of the
Securities Exchange Act of 1934 (the Exchange Act), 15 U.S.C. §§ 78j(b),
78t(a), and 78t- 1. and SEC Rule 1 Ob-5, 17 C.F.R. § 240.1 Ob-5
promulgated thereunder.
13. This Court has jurisdiction over the subject matter of this action pursuant to
Section 27 of the Exchange Act, 15 U.S.C. § 78aa and 28 U.S.C. § 1331.
14. Venue is proper in this Judicial District pursuant to Section 27 of the Exchange
Act and 28 U.S.C. § 1391(b). Many of the acts and transactions constituting
the violations of law alleged herein, including the preparation and dissemination
to the investing public of false and misleading information, occurred in
substantial part in this Judicial District. In addition, allegations contained herein
concern Xcelera's Minor Image subsidiary, which maintains its principal place
of business within this Judicial District. Also, on December 18, 2000. January
9, 2001 and January 17, 2001, the Judicial Panel on Multi district Litigation
ordered that all relevant cases stemming from the same set of operative facts as
this Complaint, be transferred to this district. By Order dated January 31,
2001, this Court consolidated all related cases.
15. In connection with the acts, transactions and conduct alleged herein,
defendants, directly and indirectly, used the means and instrumentalities of
interstate commerce, including the United States mails, interstate telephone
communications and the facilities of the national securities exchanges.
THE PARTIES
16. By Order of the Court dated January 31, 2001, Doug Horan, Dana Kender,
Bernard and Miriam Raizner and Bahram Zamanian were appointed Lead
Plaintiffs in this action to represent the interests of the Class. Lead Plaintiffs
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acquired shares of Xcelera common stock at artificially inflated prices during
the Class Period and were damaged thereby.
17. Additional plaintiffs in this action include: Tom Atkin, Barry Family L.P., Gerald
Broder, Mingzhe Chen, Discovery International Association, Mitchell Z.
Grossman. Jerold Hoffman, Jeffrey Jaskol, Katy P. Kitchin, Herman Krangel,
Leonard Ladenheim. Scott Thomas Larson, David Lipshutz, Moses Mayer,
Glover Powell, Aree J. Rand. Brian Reed, Alex Steubler, and Peter
Wasserman. These additional plaintiffs purchased shares of Xcelera common
stock at artificially inflated prices during the Class Period and were damaged
thereby, as set forth on the Certifications annexed to their individual complaints
on file with this Court.
18. Plaintiffs W.E. Barnette, Ruth A. Benner, Mark Berger, Amer Chughtai,
Michael Conn. Ken Delfini, Jose Luis Enriquez. David Finkelstein, Troy Giles, Sarah J. Hall.
Jim Hicks. Bich Nguyen, Alan Kintopf, Kenneth Krishan, Suresh Kudipudi, Jack LaDue,
Martin and Grace Lamorena, Xia Li, Mitchell Orazvi, Hitesh Patel, Keither Shimizu, Michael
VonAllmen and Claudette Zelkha all purchased shares of the Company's common stock
contemporaneous with the Individual Defendants' sales of shares.
19. Defendant Xcelera is an Internet holding company incorporated and
headquartered in the Cayman Islands. Xcelera's principal subsidiary, Minor Image, is based in
Woburn Massachusetts. According to its press releases, Xcelera is an Internet holding
company, focused on "European Internet companies, Internet infrastructure companies. B2B
companies and companies that provide their complete service and value proposition digitally on
the Internet." The Company has a controlling interest in Minor Image, and several other
Internet-based companies. The Company is controlled by VBI Corporation, which as of July
14, 2000, owned 73% of the Company's outstanding voting securities. VBI Corporation has
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only three beneficial owners, Alexander, Gustav and Erik Vik. Alexander Vik is a director and
officer of VBI Corporation.
20. Defendant Alexander M. Vik ("Alexander Vik") was at all relevant times the
Company's controlling shareholder, Chairman and Chief Executive Officer. In addition,
Alexander Vik was, at all relevant times, the Chairman of Minor Image. According to Xceler&s
website, Alexander Vik "maintains his office in Greenwich, Connecticut." Upon information and
belief, Alexander Vik also resides in Greenwich, Connecticut. Alexander Vik was quoted in
and/or responsible for the preparation, approval or release of each statement plaintiffs allege
was false and misleading, including all press releases, interviews and regulatory filings. In
addition, by virtue of his position as Chief Executive Officer, Alexander Vik was under a
continuing duty to direct and control the operations of Xcelera, to exercise due care and
diligence in those operations, and to oversee and review all corporate operations, including the
filing of documents with the SEC and the making of public statements. According to Xcelera's
website, Alexander Vik "has spearheaded the company's move to acquiring interests that focus
on the movement of information across the Internet."
21. Defendant Gustav M. Vik ("Gustav Vik") was the Company's
secretary/treasurer during the Class Period, and is a resident of Princeton, New Jersey. Gustav
Vik was a director and secretary of Minor Image at all relevant times. GustavVik was also a
beneficial owner of VBI Corporation, together with his brothers Alexander and Erik Vik.
22. Defendants Alexander and Gustav Vik are sometimes referred to herein as the
"Individual Defendants" or "the Vik Brothers."
23. By reason of their positions with the Company, the Individual Defendants had
access to internal Company documents, reports and other information, including the adverse
non-public information concerning the Company's services, financial condition, and future
prospects, and attended management and/or board of directors meetings. As a result of the
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foregoing, they were responsible for the truthfulness and accuracy of the Company's public
reports and releases described herein.
24. Xcelera and the Individual Defendants, as officers and directors of a publicly
traded company, had a duty to promptly disseminate truthful and accurate information with
respect to Xcelera and to promptly correct any public statements issued by or on behalf of the
Company that had become false or misleading.
25. Each of the defendants knew or recklessly disregarded the fact that the
misleading statements and omissions complained of herein would adversely affect the integrity
of the market for the Company's stock and would cause the price of the Company's common
stock to become artificially inflated. Each of the defendants acted knowingly or in such a
reckless manner as to constitute a fraud and deceit upon plaintiffs and the other members of the
Class.
26. Defendants are liable, jointly and severally, as direct participants in and co-
conspirators of, the wrongs complained of herein.
CLASS ACTION ALLEGATIONS
27. Plaintiffs bring this action as a class action pursuant to Federal Rules of Civil
Procedure 23(a) and (b)(3) on behalf of a class consisting of all persons who purchased
Xcelera common stock during the period from April 1, 1999 through and including August 8,
2000 (the "Class Period"), and who suffered damages thereby (the "Class"). Excluded from the
Class are the defendants, any entity in which the defendants have a controlling interest or is a
parent or subsidiary of or is controlled by the Company, and the officers, directors, affiliates,
legal representatives, heirs, predecessors, successors and assigns of the defendants.
28. The members of the Class are so numerous that joinder of all members is
impracticable. While the exact number of Class members is unknown to the plaintiffs at this time
and can only be ascertained through appropriate discovery, the plaintiffs believe there are, at a
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minimum, thousands of members of the Class who traded during the Class Period. The
Company had in excess of 105.8 million shares of its common stock outstanding as of January
31, 2000.
29. Common questions of law and fact exist as to all members of the Class and
predominate over any questions affecting solely individual members of the Class. Among the
questions of law and fact common to the Class are:
i) whether the federal securities laws were violated by defendants' acts asalleged herein;
ii) whether the defendants issued false and misleading statements duringthe Class Period;
iii) whether defendants acted knowingly or recklessly in issuing false andmisleading statements;
iv) whether the market prices of the Company's securities during the ClassPeriod were artificially inflated because of the defendants' conductcomplained of herein; and
v) whether the members of the Class have sustained damages and, if so,what is the proper measure of damages.
30. Plaintiffs' claims are typical of the claims of the members of the Class as
Plaintiffs and members of the Class sustained damages arising out of defendants' wrongful
conduct in violation of federal law as complained of herein.
31. Plaintiffs will fairly and adequately protect the interests of the members of the
Class and have retained counsel competent and experienced in class actions and securities
litigation. Plaintiffs have no interests antagonistic to or in conflict with those of the Class.
32. A class action is superior to other available methods for the fair and efficient
adjudication of the controversy since joinder of all members of the Class is impracticable.
Furthermore, because the damages suffered by the individual Class members may be relatively
small, the expense and burden of individual litigation make it impossible for the Class members
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individually to redress the wrongs done to them. There will be no difficulty in the management of
this action as a class action.
FRAUD ON THE MARKET PRESUMPTION
33. Plaintiffs will rely, in part, upon the presumption of reliance established by the
fraud-on-the-market doctrine in that:
i) defendants made public misrepresentations or failed to disclose materialfacts during the Class Period;
ii) the omissions and misrepresentations were material;
iii) the securities of the Company traded in an efficient market;
iv) Xcelera traded on the American Stock Exchange and was followed byanalysts, including, Lazard Freres & Co., LLC. The price of Xcelera’sstock reflected the effect of news disseminated in the market;
v) the misrepresentations and omissions alleged would tend to induce areasonable investor to misjudge the value of the Company’s securities;and
vi) plaintiffs and members of the Class purchased their Xcelera stockbetween the time the defendants failed to disclose or misrepresentedmaterial facts and the time the true facts were disclosed, withoutknowledge of the omitted or misrepresented facts.
34. Based upon the following, plaintiffs and members of the Class are entitled to the
presumption of reliance upon the integrity of the market.
NO STATUTORY SAFE HARBOR
35. The statutory safe harbor provided for forward-looking statements under
certain circumstances does not apply to any of the false statements pleaded in this Complaint,
because none of the statements pleaded herein were identified as "forward-looking statements"
when made. Nor did meaningful cautionary statements identifying important factors that could
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cause actual results to differ materially from those in the statements accompany those
statements. To the extent that the statutory safe harbor does apply to any statements pleaded
herein deemed to be forward-looking, the defendants are liable for those false forward-looking
statements, because at the time each of those statements was made the speaker actually knew
the forward-looking statement was false and/or the statement was authorized and/or approved
by an executive officer of the Company, who actually knew that those statements were false
when made.
BACKGROUND
36. Xcelera was initially incorporated under the name "The Scandinavia Company,
Inc." and focused almost exclusively on hotel operations until 1999. In fact, from 1993 to 1999,
the Company's primary operating assets were confined to certain Spanish hotel properties.
37. On April 26, 1999, however, the Company announced its planned transition
from a hotel operating company into an international Internet holding company. On October 26,
1999, the Company changed its name to Xcelera.com Inc. "to better reflect [the company's]
Internet holdings."
38. Currently, Xcelera purports to be a European Internet technology company that
focuses on founding, developing, operating and financing technology companies in the Internet
infrastructure market. According to the Company's SEC filings, the Company's strategy is to
leverage its "core competencies in content management, content distribution, caching, storing,
searching and streaming by continuing to develop the Minor Image Content Access Point TM
system and to acquire interests in technology,
products, services, people and companies that augment or benefit from Mirror Image’s
technology system.”
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39. As part of the Company's changed business plan, on January 30, 2000, the
Company sold its Spanish real estate operations to concentrate solely on its Internet
investments. As of July 2000, the Company had investments in the following companies:
Minor Image, MNW Records Group, deo.com, e-game, Corechange, Active ISP, Dynamic
Imaging, HelpInHand, MarineProvider, Wideyes, i/o Publishing and Suntail (Xcelera's
"portfolio companies"). Xcelera's investments in the above-listed company's ranged from 5%
to 30% during the Class Period, with the exception of Minor Image.
40. Xcelera’s principal strategy during the Class Period was to develop and take
public its portfolio companies. The Company sought to induce shareholders to purchase
Xcelera stock with the promise of ground floor access to potential initial public offerings
("IPOs"). For example, on March 6, 2000, the Company announced a policy of granting its
public shareholders a preemptive right to subscribe for a portion of IPO shares, at the IPO
price, of each of its portfolio companies when, and if, the respective portfolio company has an
IPO of common stock.
41. The first test of Xcelera' s new business strategy involved the Company s
subsidiary. Minor Image.
Mirror Image Subsidiary
42. As discussed more fully below, in March 1999, Xcelera acquired control of
Minor Image. As described in the Company's Fiscal 2000 Form 20-F, Minor Image is a
Woburn, Massachusetts based company, that "is developing global content distribution services
that address the 'world wide wait' problem on the Internet, by providing Internet download
speed, quality to delivery and scalability through its massive architecture for content
distribution." The key to Minor Image's business is the development and expansion of its
production platform, the Content Access Point TM ("CAP") regional servers and system that
"store and deliver content within major Internet user basins, bypassing Internet congestion and
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reducing speed-of-light latency.” According to the Company's Fiscal 2000 Form 20-F, Minor
Image purports to "install CAPs at key Internet exchange locations worldwide, in proximity to
user populations. From such locations the CAPs serve content directly to Internet users and are
able to connect to thousands of ISP and corporate networks."
43. Minor Image's business strategy is to generate revenue based on data served
through the CAP System, specifically, through three main instaDeliverysrn services:
instaContentsrn, instaStreamsm, and instaSpeedsrn. Minor Image's instaContentsrn service is
intended to provide content distribution for customer's Web sites. In theory, Minor Image
would store a customer’s Web site at Minor Image CAP sites around the globe, so that
endpoint users could more rapidly access the customer’s content. Minor Image’s
instaStreamsrn service is intended to provide streaming media (audio and video) for Web sites.
Essentially, Minor Image customers could upload their media content to the Minor Image
regional CAPs, allowing their users to access the media directly from a closer CAP, rather than
through the customer's own remote, host site. Minor Image’s instaSpeedsrn service is
essentially a data caching service for Internet Service Providers ("ISPs"). In theory, ISPs
would pay Minor Image to store frequently requested data on a regional CAP, thus, reducing
the amount of outbound traffic and bandwidth costs for the
ISP.
44. A February 15, 2000 Internet World article concerning Mirror Image’s new
CEO Cosmos Santullo described Xcelera’s Mirror Image subsidiary as the “linchpin” of
Xcelera, in the Company’s transformation from a “loose conglomerate of hotels and real estate
holdings into a mini-CMGI.”
45. For the year-ended January 31, 2000, Xcelera generated its operating
revenues “primarily from Mirror Image’s services...” In total, the maximum revenue attributable
to Minor Image during Xcelera’s fiscal 2000 was only $37,135. In fact, in its fiscal 2000 Form
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20-F the Company acknowledged, “During the year ended January 31, 2000, Minor Image
was in the process of building out its system and did not generate significant revenues.”
46. In its Fiscal 2000, Form 20-F, the Company also stated that it expected a
“significant portion” of its post-January 31, 2000 revenues to come from Minor Image. The
potential for substantial revenue from Minor Image, however, was unlikely given the fact that
throughout the Class Period the majority of Minor Image’s instaDelivery services were not
commercially available. As of July 31, 2000, Minor Image had only launched its instaSpeed
service commercially, and, that service had only two to four major customers. A February 15,
2000, Internet World article reported that Minor Image “ha[d] signed up only a couple of
paying customers so far” while a July 2000 Lazard Freres analyst report noted that Minor
Image only had four majority ISP customers:
Canierl, PSINet London, C&W and Nildram. By comparison, Minor Image competitor
Akamia had approximately 1,000 customers. Moreover, the instaSpeed service was only
expected to generate, at most, twenty-five percent of Minor Image’s total revenues. According
to a July 2000 Lazard Freres Analyst report, as of July 2000, “Management
believes the instaContent and instaStream product will make up 75% to 80% of the business
going forward, despite the fact that they do not have a publicly released customer..."
Meteoric Stock Price Rise
47. Despite the fact that Minor Image’s CAP technology was not widely or
commercially available, and despite the fact that Minor Image had few, if any, customers or
revenues, Xcelera began a campaign of aggressively hyping the company and its potential, and
the market responded.
48. Xcelera has been described as a “zero-to-hero Internet darling” due to the
Company’s sky rocketing stock price gains during the Class Period. From an opening price of
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$0.208 per share on April 1, 1999. Xcelera’s stock price steadily climbed to a Class Period
high of $112.50 on March 22, 2000, a staggering gain of over 74,000 percent.
49. “From April 1, 1999, to March 23. 2000— a period just shy of one year — this
Cayman Islands based company that almost no one had previously heard of, with audited
financials a year-and-a-half out of date, had risen by 74,333 percent in value to $223 per share
[unadjusted for splits], putting an $1 1.7 billion market valuation on the company on the basis of
nothing but a deluge of self-serving press releases and the enthusiastic writings of two people on
the Web.” Christopher Byron, “Here’s A Wild Rise: Xcelera’s Increase Only 74,000
Percent!,” The New York Observer Aug. 8, 2000.
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XCELERA’S AND KAIINBERGET/JAM’S JOINT ACQUISITIONOF MIRROR IMAGE
50. Defendant Alexander Vik was introduced to the prospect of investing in Minor
Image AB, the parent company of Minor Image, in or about August 1998 by longtime friend
and business relation Tryggwe Karlsten (“Karlsten”). Karlsten was an agent of Kahnberget
Holding, Ltd. (“Kahnberget”), a private investment company owned by Karlsten’s wife, Kerstin
Karlsten. Kahnberget is a corporation organized and existing under the laws of, and with its
principal place of business in, the British Virgin Islands. At all times relevant to this action,
Karlsten was also an agent of JAM Investments Ltd. (“JAM”), a subsidiary of Kahnberget.
51. Throughout their nearly 20-year friendship and business relationship, Karlsten
and Vik engaged in numerous business ventures together on behalf of their various family-
controlled businesses. Among these joint business dealings was the joint acquisition, in or about
1986, of a controlling interest in the Scandinavia Fund (“Scandinavia”), the predecessor
company to Xcelera.
52. In approximately October 1987, Karlsten sold the Karlsten family- controlled
business’ shares in Scandinavia to VBI Corporation (“VBI”). Karlsten remained on the board
of directors of Scandinavia. however, until his resignation in or about April 1999.
Karlsten Family Purchases Approximately $1 MillionWorth of Mirror Image AB Shares
53. In or about June 1998, an investment broker (the “Broker”) approached
Karlsten about a potential investment in Minor Image AB, a privately owned Swedish
Internet technology company. Karlsten became interested in the prospect of a Karlsten family-
controlled business investment in Minor Image AB.
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54. On approximately July 30, 1998, Kerstin Karlsten purchased approximately $1
million worth of shares of Minor Image AB and subsequently sold the shares to Kahnberget.
Following this transaction, in August 1998, Karlsten and the Broker met with Sverker Lindbo
(“Lindbo”), Minor Image AB’s founder, and with David Wu (“Wu”), the company’s second
highest ranking officer just below Lindbo, to discuss Minor Image AB’s need for additional
financing and the possibility of further investment by Karlsten family-controlled businesses.
55. Following the August 1998 meeting, in late summer of 1998, during one of
Karlsten’s frequent telephone conversations with Alexander Vik, Karlsten spoke to Vik for the
first time about Minor Image AB. Karlsten told Vik about the investment that Kahnberget had
already made in Minor Image AB and told Vik that Kahnberget and other Karlsten family-
controlled businesses were considering investing additional funds in Minor Image AB. During
these same conversations, Karlsten discussed with Vik the possibility of Vik and Vik’s family-
controlled businesses investing in Minor Image with the Karlsten family-controlled businesses
on an equal joint venture and investment partnership basis, as they had done in previous
business ventures together.
56. Following Karlsten’s conversations with Vik, Karlsten arranged and attended a
number of business meetings with Lindbo, Wu and Vik. A number of these meetings took place
in Vik’s home in Greenwich, Connecticut, in or about September 1998. Although Vik
continued to express interest in Minor Image AB, he indicated at that time that he was not yet
prepared to invest in Mirror Image AB and wished to continue investigating the company.
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Karlsten Family Purchases Additional 3.6 Million Shares of Mirror Image AB
57. Karlsten, meanwhile, maintained frequent contact with Lindbo throughout the
fall of 1998. Lindbo continued to inform Karlsten that Minor Image AB was in need of
financing, and that in fact its need for capital was becoming desperate. Minor Image AB
subsequently held a $2.5 million stock offering, of which Kahnberget purchased 1.2 million
shares, for approximately $175,000, and of which Vik and Vik’s family- controlled business
purchased 500,000 shares for approximately $80,000.
58. Subsequently, Karlsten and Vik agreed that Kahnberget would purchase an
additional 2.4 million shares at a cost of $350,000, but that it would be held in the name of Vik
Europe Holdings, Ltd. for an agreed upon time and then transferred to Kahnberget. Karlsten
agreed to this arrangement under the premise that it would permit Vik to represent both
Karlsten’s and Vik’s businesses in the on-going negotiations with Lindbo and Mirror Image
AB.
59. The 2.4 million Mirror Image AB shares were transferred by Vik to
Kahnberget on or about June 23, 1999, pursuant to their agreement. Kahnberget’s stock
holdings in Mirror Image AB at that point totaled approximately 4.8 million shares, while Vik
family-controlled businesses held approximately 500,000 shares.
60. Throughout the fall and winter of 1998. Karlsten and Vik continued to discuss
their interest in a joint venture investment in or acquisition of Mirror Image AB, and spoke on
numerous occasions with Lindbo regarding Mirror Image AB’s continuing need for additional
financing. During this same time, Lindbo and Mirror Image AB began to take steps to
restructure Mirror Image AB’s operations in an effort to consolidate Mirror Image AB’s assets
in its Massachusetts-based subsidiary, Mirror Image.
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Karlsten and Vik Enter into Joint Venture Agreementto Acquire a Controlling Interest in Mirror Image
61. In January 1999, Karlsten and Vik agreed to and entered into a joint venture
agreement to attempt to acquire an equal share controlling interest in Minor Image. It was
agreed that the Scandinavia Fund, Xcelera’s predecessor company, would be used as the
vehicle for the acquisition of Minor Image from its parent company, Mirror Image AB. The deal
was structured such that Scandinavia would issue 2.5 million new shares and exchange these
for outstanding and issued shares of Minor Image. Karlsten and Karlsten’s family-controlled
businesses would then purchase exactly one- half of the Scandinavia shares that Vik and Vik
family-controlled businesses held.
62. In a carefully structured joint venture agreement, it was agreed that in the end
Scandinavia would own 100% of Mirror Image. Kerstin Karlsten would own 30% of
Scandinavia and the Vik family would own an equal 30% share. Mirror Image AB would own
approximately 30% of Scandinavia as a result of the stock swap, and approximately 10%
would be owned by public shareholders of Scandinavia. It was also agreed that Scandinavia
would divest itself of all properties and holdings so that Mirror Image became its only asset.
63. In February 1999, Mirror Image AB and Lindbo rejected Karlsten’s and Vik’s
proposal. However, Karlsten and Vik continued their efforts to acquire or invest in Mirror
Image on an equal basis. Karlsten and Vik agreed that their family-controlled
businesses would collectively purchase Mirror Image shares directly in a private placement so
as to enable the family-controlled businesses to acquire a controlling interest in Mirror Image.
The Mirror Image shares would be purchased in equal numbers by the Karlsten and Vik
family-controlled businesses, and registered separately in their respective family-controlled
businesses’ names.
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64. Karlsten entrusted Vik to act on behalf of the Karlsten family-controlled
businesses, JAM and Kahnberget, in his discussions and negotiations with Lindbo. Vik, in turn,
communicated with Lindbo as a representative of both Vik and Karlsten business interests. For
example, in an e-mail communication with Lindbo, Vik stated “we [meaning Vik’s and the
Karlsten family-controlled businesses] are the largest shareholders in the company.” At that
time, Kahnberget still owned at least 4.8 million shares of Minor Image AB and Vik businesses
owned approximately 500,000 shares. Vik had frequent direct communications with Lindbo,
and Vik forwarded these communications and business documents to Karlsten.
65. Meanwhile, Lindbo and Wu caused Minor Image to acquire the business and
substantially all of the assets of its Swedish parent, Minor Image AB.
Vik Negotiates to Acquire Controlling Interest of Mirror Image on Behalf of Vik Family Businesses and on Behalf of Karlsten Family Businesses: Kahnber~et and JAM Investments
66. In March 1999, Vik continued to negotiate with Mirror Image and Mirror
Image AB to acquire a controlling interest in Minor Image. Vik continued to represent to
Lindbo and others that he was negotiating on behalf of his and Karlsten’s family-controlled
businesses. An initial private placement was prepared pursuant to Karlsten’s and Vik’s joint
venture agreement which provided for Karlsten’s and Vik’s family-controlled businesses to
each purchase, as direct signatories to the private placement agreement, an equal number of
Mirror Image shares to be registered in their respective family-controlled businesses’ names,
resulting in the Karlsten and Vik family-controlled businesses collectively acquiring a controlling
interest in Mirror Image.
67. Karlsten was on vacation on March 29, 1999 when the Minor Image Private
Placement Agreement was signed. Without Karlsten’s knowledge, Vik deleted the name of
Karlsten’s family-controlled business from the agreement, leaving only Scandinavia as the
apparent participant in the $2 million private placement, and creating the appearance that only
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Scandinavia would acquire a minimum of 51% of Minor Image’s outstanding shares. Vik
telephoned Karlsten to tell him that “we” have done the deal. Karlsten expressed concern and
surprise to Vik that the private placement did not provide for a Karlsten family-controlled
business to purchase the shares of Mirror Image directly. Vik assured Karlsten that the
omission of a Karlsten family-controlled business as a direct purchaser of Minor Image shares
and a signatory to the Private Placement Agreement was only a formality and that a Karlsten
family-controlled business would receive its share of the Mirror Image shares offered in the
Private Placement Agreement.
68. After Vik’s reassurances, Karlsten permitted Vik to cause, through a series of
wire transfers, $1,436,850 of Kahnberget funds to be transferred from a Morgan Stanley
Account on behalf of JAM to Mirror Image in Massachusetts between April 1999 and
September 1999. Approximately $1,808,000 was transferred to Mirror Image from a separate
JAM account between July 15, 1999 and August 11, 1999, bringing JAM’s investment in
Mirror Image to a total of approximately $3,244,850.
69. It was Karlsten’s understanding at all times that these funds would be used to
acquire Mirror Image shares in JAM’s name in accordance with the parties’ joint venture
agreement. Unbeknownst to Karlsten, Kahnberget and JAM, however, Vik and VBI instead
used the money to acquire Minor Image shares only in Scandinavia’s/Xcelera’s name. As a
result of this misappropriation, Vik and VBI acquired a controlling interest in Mirror Image
under their name only, that did not reveal that the acquisition was executed on
Kahnberget’s/JAM’s and Scandinavia’s/Xcelera’s joint behalf.
70. Furthermore, in April 1999, Vik induced Karlsten to modify the previous 50%-
50% joint venture agreement to a 60%-40% agreement in which Vik and Scandinavia would
provide 60% of the capital investment and Karlsten 40%. In exchange for this modification,
Vik agreed to issue to Kahnberget 219,000 shares of Scandinavia stock for the price of $3.00
per share. Karlsten accepted this offer on behalf of Kahnberget.
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71. Although Karlsten, Kahnberget and JAM repeatedly requested that VBI and
Vik deliver the shares as agreed, Vik and VBI failed to deliver the shares in accordance with
the 60%-40% agreement.
72. Vik’s and Xcelera’s misappropriation of Kahnberget’s/JAM’s substantial
investment in Mirror Image is now the subject of litigation in the United States District Court for
the Southern District of New York in Jam Investments, Ltd. and Kahnberget Holding. Ltd., v.
Alexander Vik and VBI Corn., Civil Action No. 00-C V-8733.
DEFENDANTS’ FALSE AND MISLEADING STATEMENTSAND MATERIAL OMISSIONS REGARDING THEDILUTION OF THE VALUE OF XCELERA STOCK
73. On April 1, 1999, defendants issued a press release (the “April 1, 1999 Press
Release”) announcing Scandinavia’s/Xcelera’s acquisition of a majority interest in Mirror
Image. The April 1, 1999 Press Release extolled the benefits of Mirror Image’s technology and
predicted that the caching market was expected to grow to in excess of $4 billion in the next
three years and that “Mirror Image is well positioned in that space.” In particular, the April 1,
1999 Press Release stated:
Following nine months of investments and work TheScandinavia Company (AMEX: SCF) now owns a majorityinterest in a leading Internet caching company, Mirror ImageInternet, Inc.
The amount of the investment and ultimate ownershippercentage of The Scandinavia Company, Inc., cannot bedetermined at this time, but has been funded out of the TheScandinavia Company’s cash holdings. The ScandinaviaCompany is discussing arrangements whereby it would obtainfull ownership of Minor Image.
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74. The April 1, 1999 Press Release was false and misleading for the following reasons:
a. defendants failed to disclose that a substantial portion of the funds used to
acquire a majority interest in Mirror Image, $3,244,800, was Kahnberget/JAM money, not
“Scandinavia Company’s cash holdings”;
b. absent the Mirror Image shares defendants misappropriated from
Kahnberget/JAM, Scandinavia/Xcelera lacked a controlling interest or a majority interest in Mirror
Image;
c. defendants failed to disclose that they had wrongfully converted
$3,244,800 belonging to Kahnberget/JAM to their own use; and
d. defendants failed to disclose that Kahnberget/JAM had claims against defendants for 50% of
the purchased Minor Image shares, in accordance with the joint venture agreement between
defendants and Kahnberget/JAM.
75. The April 1, 1999 Press Release was the beginning of a campaign of press releases
issued by defendants declaring the value of Mirror Image’s technology to the Internet, and designed
to draw investors’ attention to Mirror Image.
76. On August 6, 1999, defendants issued a press release providing further information
relating to the acquisition of Mirror Image. Alexander Vik was listed as the contact person on the
August 6, 1999 press release which stated:
The company started working with Mirror Image about a year agotaking a major role in the company pursuant to an agreement datedMarch 24. (the “Agreement”), [sic] The Company acquired a 54.5%equity interest in Mirror Image Internet, Inc., a Delaware corporation(“Minor Image”). Since the date of the agreement, the company hasacquired an additional 32.0% of the outstanding equity of MirrorImage, such that, as the date hereof, the Company holds 86.5% ofthe issued capital stock of Mirror Image. The purchase price for theshares represented by the additional 32.0% interest is to bedetermined based upon the fair market value of Minor Image at dateswhich are 6 months, 12 months, and 18 months from the date of suchpurchase. To the extent that the fair market value of Mirror Imagemay increase over such 18-month period, the company may be
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required to make significant additional investments in Mirror Image inthe future. To date, the company’s total investment in Mirror Image isequal to $5.95 million.
77. The August 6, 1999 press release was materially false and misleading for the
following reasons:
a. the representations concerning the percentage ownership of Mirror
Image failed to disclose that pursuant to the April 1999 60o4~40% joint venture agreement
between Kahnberget/JAM and defendants, Kahnberget/JAM owned 40% of the Mirror Image
stock claimed to be owned by ScandinavialXcelera;
b. the representations concerning monies invested in Minor Image were
false and misleading because the $5.95 million included $3.24 million of Kahnberget’s/JAM’s
funds which defendants misappropriated to buy Mirror Image shares for themselves rather than
Kahnberget]JAM pursuant to the joint venture agreement.
c. absent the Minor Image shares defendants misappropriated from
Kahnberget/JAM, Scandinavia/Xcelera lacked a controlling interest in Mirror Image; and
d. defendants failed to disclose that pursuant to the 60%-40% joint
venture agreement in April 1999 they had agreed to issue 219,000 shares of
Scandinavia/Xcelera stock to Kahnberget/JAM, an amount constituting slightly less than 5% of
78. In August 1999, when Xcelera’s Form 20-F Annual Report for the fiscal year
ended January 31, 1999 became publicly available, Xcelera again stressed to the investing
public and Xcelera shareholders only the positive aspects of the Minor Image acquisition.
Xcelera failed to warn investors, however, that Xcelera shares would be significantly diluted
pending distribution of new Xcelera shares to Kahnberget/JAM as a result of
Kahnberget’s/JAM’s contributions to the Mirror Image acquisition.
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79. With respect to the structure of the transaction with Mirror Image, Xcelera’ s
1999 Annual Report stated:
Pursuant to the Agreement [between Xcelera and Minor Image datedMarch 24, 1999], the Company acquired a 54.5% equity interest inMirror Image. Since the date of the Agreement, the Company hasacquired an additional 32% of the outstanding equity of Mirror Imagesuch that, as of August 3, 1999, the Company holds 86.5% of theissued capital stock of Minor Image.
The Company’s total investment in Mirror Image, as of August 3,1999, is equal to $5.95 million, $3 million of which has beenadvanced to the Company by affiliated entities.
80. The above-referenced statements in Xcelera’s 1999 Form 20-F were
materially false and misleading for the following reasons:
a. defendants stated monies were “advanced by affiliated entities” when
in fact defendants knew these funds were a capital investment by Kahnberget/JAM
— defendants’ partner in the 60%-40% joint venture agreement not an Xcelera “affiliated
entity”;
b. as a result of the 60%-40% joint venture agreement and
Kahnberget’s/JAM’s $3.24 million investment, Kahnberget/JAM in fact owned at least 40% of
the Mirror Image stock claimed to be owned by Xcelera;
c. as a result of the 60%-40% joint venture agreement, defendants were
obligated to issue to Kahnberget/JAM as much as 5.2 million shares of Xcelera stock, thereby
substantially diluting investors’ equity; and
d. defendants failed to reveal their scheme to misappropriate control of
Mirror Image from Karlsten and Kahnberget/JAM.
81. Defendants made materially false and misleading statements and intentionally or
recklessly failed to disclose material information relating to the issue of stock dilution which
existed as a result of the acquisition of Minor Image and defendants 60%-40% joint venture
agreement with Kahnberget/JAM.
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THE TRUTH RELATING TO THE DILUTION OFSHAREHOLDERS’ EQUITY BEGINS TO EMERGE
82. Not until more than a year after the Minor Image transaction, when Xcelera’s Form
20-F Annual Report for the fiscal year ended January 31, 2000 became publicly available on
August 4, 2000, did Xcelera even refer to the risk of dilution of Xcelera stock as a result of
Kahnberget’s/JAM’s investment and defendants’ misappropriation of Minor Image stock.
Regarding the dilution of shareholder equity as a result of the Mirror Image acquisition and the
60%-40% joint venture agreement, the August 4, 2000 Annual Report stated the following:
We are also involved in another matter that may have a material adverseimpact. In connection with our acquisition of Minor Image commonstock during the year ended January 31, 2000, we may be required toissue new shares of our common stock to certain third parties.The amount of shares would be calculated based on approximately 32%of the value of Minor Image common stock at December 31, 1999. Wecannot, at this time, estimate the number of shares that we may berequired to issue. Although we are currently negotiating with such thirdparties to determine the valuation methodologies, there can be noassurances that any amount of shares that would be issued would notresult in material dilution to the number of outstanding shares ofour common stock and a corresponding material reduction in thevalue of our common stock, or have a material effect on ourconsolidated financial statements.... We have not included anyprovision for any liability that may result from the issuance of ourshares in our consolidated financial statements.
(Emphasis added.)
83. Publicly available a year and four months after the April 1999 Mirror Image
acquisition, defendants finally revealed that Xcelera may be required to issue new shares of its
common stock to “certain third parties.” One year and four months after the Mirror Image
acquisition, defendants finally divulged that this issuance of new shares of Xcelera could have a
material effect on Xcelera’s consolidated financial statements.
84. A Bloomberg News article on August 9, 2000 noted that Xcelera “may have to
hand over what looks to be as much as $622 million worth of Xcelera.com stock. At
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Xcelera.com’s price of about $14 a share, that would require the issuance of almost 45 million new
shares in the company, diluting existing shareholders by nearly 45 percent. This, too, is
something U.S. shareholders are now learning about from the company for the first time.”
(Emphasis added.)
85. Xcelera’s stock price fell from a closing price of $14.00 on August 8, 2000 to
$11.75 on August 9,2000, a 16% decline.
86. On November 29, 2000, more than three months after the publication of Xcelera’
Year 2000 Form 20-F, the Company filed a Form 6-K with the SEC and defendants revealed
more extensively the severity of the dilution of Xcelera shareholders’ equity. The November 29,
2000 Form 6-K disclosed that defendants had reached an agreement on July 31, 2000 to tender
to Kahnberget/JAM the shares of Xcelera common stock to which Kahnberget/JAM were entitled
in exchange for their $3.24 million investment used by Xcelera to acquire Mirror Image.
Defendants acknowledged that Kahnberget/JAM had invested more than $3.2 million in Mirror
Image, that such funds were used by Xcelera to purchase Mirror Image shares, and that
Kahnberget/JAM had not received any shares for its investment. Kahnberget’s/JAM’s more than
$3.2 million investment in Mirror Image constituted a 32.7% ownership interest in Mirror Image.
87. The July 31,2000 agreement between defendants and Kahnberget/JAM was
attached as Exhibit I to Xcelera’s November 29, 2000 Form 6-K and stated as follows:
Agreement, by and between Xcelera.com Inc., a publicly traded(AMEX) Cayman Islands corporation having an address of P.O. Box309, Ugland House, South Church Street, Grand Cayman, CaymanIslands (“Company” or “Xcelera”), and JAM Investments Ltd., andKahnberget Holding, Ltd., both British Virgin Islands corporations, withtheir addresses at Unit 18, Mill Mall, Wicharns Cay, P.O. Box 3339Road Town, Tortola, British Virgin, (collectively called herein “JAM”).
WITNESSETH
WHEREAS, JAM has invested $3,244,850 in aprivate placement, which funds were used by the Company to acquire
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shares of common stock of Mirror Image Internet, Inc. (“Mirror ImageInternet”) in an aggregate private placement representing 3 2.7% of alloutstanding shares of common stock (the “Mirror Image Shares”) ofMirror Image Internet as of December 31, 1999;
WHEREAS. JAM has not received delivery of anyshares for its investment of $3,244,850;
WHEREAS, JAM agrees to accept shares of commonstock of Xcelera for its investment in full settlement of this matter;
* * *
The parties agree that JAM for its investment and in satisfaction of thepurchase price obligation of Xcelera created hereby, Xcelera will issueto JAM shares of common stock of Xcelera valued as of December31, 1999 (“Xcelera Shares”) equal to the value of the 32.7% shareinterest in Mirror Image as of December 31, 1999.
* * *
As good faith collateral for performance of the obligations of theCompany to deliver the Xcelera Shares to JAM upon determination ofthe valuation of the Mirror Image Shares, Xcelera shall deliver, orcause to be delivered, within five (5) business days from the date hereof... that number of shares of Xcelera Common Stock which have anaggregate value of $100 million based on the closing price of Xcelera’spublicly traded common stock on December 31, 1999.
XCELERA SELLS 15 PERCENT OF MIRROR IMAGETO EXODUS COMMUNICATIONSFtM, INC.
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Xcelera’s Location In A Tax Haven
88. Xcelera is based in the Cayman Islands, a tax haven. Neither the Company nor
its U.S. shareholders are subject to taxation by the Cayman Islands government. According to
the Company’s Forms 20-F for the years ended January 31, 1998 through 2000: “There is
presently no taxation imposed on the income of a Cayman Islands’ company by the government
of the Cayman Islands. If any form of taxation were to be enacted, the Company has been
granted an exception thereupon to the year 2008.”
89. Companies, like Xcelera, that are primarily owned by United States investors
but organized in foreign tax havens, have attracted the attention of the Internal Revenue Service
and Congress. To prevent the situation where a U.S. taxpayer avoids or delays the tax
consequences of gains on certain investment assets, merely because the assets are technically
held by a foreign company, Congress passed several statutes setting forth rules for when U.S.
shareholders of foreign corporations will be directly taxed by the U.S. government for the
90. The key provisions of the Internal Revenue Code’s (“IRC”) anti-deferral rules
relate to foreign personal holding companies. The FPHC rules apply to foreign companies that
are predominately owned by five or fewer U.S. taxpayers and whose income is largely derived
from passive sources. Bloomberg News reported on August 9, 2000 in the article,
“Xcelera.com Holders Get a Surprise,” that the FPHC “special and restrictive rules” are
designed “to prevent the people who set such companies up from escaping taxes via the artifice
of letting the profits from stock deals, real estate transaction and so forth pile up abroad, in
foreign-based companies that are not subject to U.S. tax laws.”
91. Under the IRC, Congress has established a two-part test for determining
whether a foreign corporation is an FPHC:
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(1) Gross income requirement
At least 60 percent of [the corporation’s] gross income.., for the taxable year isforeign personal holding company income as defined in section 553; ... then, for eachsubsequent taxable year, the minimum percentage shall be 50 percent in lieu of 60percent, until a taxable year during the whole of which the stock ownershiprequirement by paragraph (2) does not exist, or until the expiration of threeconsecutive taxable years in each of which less than 50 percent of the gross incomeis foreign personal holding company income....
(2) Stock ownership requirement
At any time during the taxable year. not more than 50 percent of (A) the totalcombined voting power of all classes of stock of such corporation entitled to vote,or (B) the total value of the stock of such corporation, is owned (directly orindirectly) by or for not more than 5 individuals who are citizens or residents of theUnited States.”
26 U.S.C. § 552(a). The IRC definition of “foreign personal holding company income,”
includes gain on stock or securities transactions. 26 U.S.C. § 553(a).
92. Classification as a foreign personal holding company results in severe tax
consequences for any U.S. shareholder of such FPHC. Namely, a U.S. shareholder of an
FPHC will be required to include in their gross income the proportionate share of undistributed
foreign personal holding company income. 26 U.S.C. § 551. Thus, any U.S. taxpayer that
holds stock in an FPHC must declare as a dividend his or her pro rata
share of the FPHC’s taxable income, whether or not that income was actually paid out in the
form of a dividend.
Xcelera’s Tax Classification
93. At the time the Company announced the Exodus deal in March 2000, Xcelera
met the stock ownership prong of the FPHC rules and risked being classified as an FPHC if
more than 60% of the Company’s income came from passive sources.
94. As admitted by the Company, at all relevant times less than five individuals
owned more than 50% of Xcelera. In fact, VBI Corporation owned over 70% of Xcelera
throughout the Class Period. VBI was owned by and for the benefit of Alexander, Gustav and
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Erik Vik. Thus, under constructive ownership provision of the FPHC rules, more than 50% of
Xcelera was owned by Alexander, Gustav and Erik Vik, satisfying the stock ownership
requirement of the FPHC rules.
95. At the time of the Exodus deal, defendants knew or recklessly disregarded the
fact that Xcelera had little or no revenues from operations, no non-passive income. In fact, the
only revenue producing assets had been sold on January 30, 2000. Defendants also knew the
Exodus transaction resulted in a tremendous amount of passive income to Xcelera and
generated a purported gain of $385.1 million to the Company according to Exodus’s SEC
filings. On May 12, 2000, Exodus filed with the SEC its Form 10-Q for the quarter ended
March 31, 2000. In that filing, Exodus disclosed information concerning its investment in Mirror
Image, and stating:
In April 2000, the Company closed its investment in the commonstock of Mirror Image Internet, Inc. (“Mirror Image”), a privatelyheld company and provider of content distribution services. $75.0million of the investment was paid in cash, with the balance of theconsideration consisting of 7,516,536 shares of the Company’scommon stock. The total value of the investment on the closing datewas approximately $385.1 million, plus certain professional feesassociated with the investment. The Company holds less than 20%ownership and does not exert significant influence over operations.The investment is accounted for under the cost method.
96. At the time of the Exodus deal, defendants knew that they had only four major
customers as of the first quarter of 2000, Carrierl, PSINet London, C&W and Nildram and
only $37,135 in revenue for the entire fiscal year ending January 31, 2000. Defendants knew
that they were entirely dependant on Mirror Image for revenue, after the sale of their hotel in
Spain. Defendants knew that the products under development by Mirror Image,
instaContentsrn, instaStreamsrn, were still incomplete, and were not expected to be in existence
and available for sale to the public until the fourth quarter of the year. Defendants knew that
there was no possibility that they would be able to sell even $50 million of Mirror Image’s
products and services before the end of the fiscal year. In fact, however. Xcelera would need
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to generate over $120 million [40% of $300 million gain from Exodus transaction] of non-
passive income in order to avoid classification as an FPHC. According to a January 20, 2000,
i. As a result of the 60%-40% joint venture agreement, defendants were
obligated to issue to Kahnberget/JAM as much as 5.2 million shares of Xcelera stock, thereby
substantially diluting investors’ equity; and
j. Defendants failed to reveal their scheme to misappropriate control of
Mirror Image from Karlsten and KahnbergetlJAM.
103. On April 26, 2000, Xcelera and Exodus issued a follow-up press release (the
“April 26, 2000 Press Release”) announcing the completion of the “strategic investment” by
Exodus in Mirror Image. Specifically, the April 26, 2000 joint press release stated:
Under the terms of the three-party transaction involving Exodus,Xcelera.com and Mirror Image, Exodus has received a 15% equitystake in Mirror Image in exchange for $75 million in cash and3,758,268 Exodus common shares. When the agreement was signedon March 22, 2000, the Exodus investment in Mirror Image wasvalued at $637.5 million, implying a total valuation of $4.25 billion forMirror Image. Together, Xcelera and Mirror Image now own anapproximately 2.0% equity stake in Exodus. Mirror Image willreceive $50 million of the cash proceeds from the transaction, whichit will use to complete the worldwide build-out of its unique ContentAccess Point TM (CAP) network architecture, to further enhance itsservices and for general corporate purposes. The CAP network isexpected to be completed this year and to be available to more than95% of all Internet users.
104. The April 26, 2000 Press Release quoted Alexander Vik as stating:
This is an important step toward our goal of building a fast operatingsystem for the Internet. This transaction demonstrates the sharedvision of Xcelera, Mirror Image and Exodus to enhance websiteperformance for customers, consumers and e-Business websites bydelivering Internet content up to ten times faster and far lessexpensively than conventional methods. We are extremely pleased towelcome Exodus as a strategic partner in Mirror Image.
105. The statements contained in the April 26, 2000 Press Release were false and
misleading when issued for the same reasons listed above in paragraph 102.
106. On July 6, 2000, John J. Henry of “Team StreetS idelnvestor” interviewed
Alexander Vik. In the interview, Alexander Vik was questioned about the Exodus transaction,
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and provided a short response summarizing the investment and agreement, but not commenting
on the tax consequences. When asked about Xcelera’s profits, Alexander Vik said only, “I
expect that Xcelera will report positive earnings this year.”
107. Alexander Vik’s statements in the July 6, 2000 “Team StreetSidelnvestor”
interview were false and misleading when made because:
a. In discussing the Exodus transaction, Alexander Vik failed to disclose
the material and adverse tax consequences of the Exodus transaction on U.S. taxpayers, as
described above in paragraph 102; and
b. While Alexander Vik stated that Xcelera was poised for “positive
earnings” in fiscal 2001, he failed to disclose that the majority of those earnings would be from
passive sources, i.e., as the Exodus transaction, creating the risk that Xcelera would be
classified as an FPHC, thus, subjecting U.S. taxpayers to a severe tax burden.
THE TRUTH ABOUT XCELERA’S FPHC CLASSIFICATIONSLOWLY EMERGES
108. Xcelera did not reveal the tax ramifications of the Exodus transaction to U.S.
shareholders until several months after the March 22, 2000 announcement. When the Company
finally disclosed information through its non-electronic SEC filings, those filings were not made
publicly available until several days, or even weeks, after the documents were originally filed.
109. The Company’s Form 6-K filed with the SEC on June 2, 2000 was not
publicly available until July 12, 2000, three months after the announcement of the Exodus deal.
Xcelera did not file its SEC documents electronically, therefore, investors and analysts had to
rely upon Disclosure Inc., a public documents retrieval firm, to first obtain copies of all filings.
Investors would then have to pay a fee to Disclosure Inc. in order to
obtain copies of any Xcelera filings. This process made Xcelera’s belated disclosures even
more inadequate. For example, Xcelera’s June 2, 2000 Form 6-K was not retrieved by
Disclosure Inc. until July 12, 2000, over 40 days after the filing, and almost four months after
the announcement of the Exodus deal. Thus, as reported in Bloomberg News on August 9,
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2000, “[T]he investing public knew nothing of the tax cloud over Xcelera.com’s stock until four
months after the fact.”
110. In Xcelera’s Form 6-K made available through Disclosure Inc. on July 12,
2000, the Company admitted that “it is likely that Xcelera will.., be treated as an FPHC for the
current taxable year.” Xcelera explained:
While Xcelera is not subject to United States federal income tax, thegain realized on the sale of Mirror Image common stock to Exodusmust be taken into account in determining the characterization ofXcelera under United States foreign personal holding company(“FPHC”) rules. Under the Internal Revenue Code, a foreigncorporation will be classified as an FPHC if (i) at any time during thecorporation’s taxable year, five or fewer individuals, who are UnitedStates citizens or residents, directly or indirectly (through a series ofcomplex constructive ownership rules) own more than 50% of thecorporation’s stock by either voting power or value (the “ownershiptest”) and (ii) the corporation receives at least 60% of its grossincome (reduced to at least 50% after the initial year of qualification),as adjusted, for the taxable year from certain passive sources (the“income test”). Because of the constructive ownership rules, Xcelerawill meet the ownership test during the current year. and because thegain generated from the sale of Mirror Image common stock issignificant relative to Xcelera’s other income, it is likely that Xcelerawill also meet the income test and, therefore, be treated as an FPHCfor the current taxable year.
(Emphasis added.)
111. Defendants acknowledged the tax consequences to U.S. shareholders for the
first time in Xcelera’s June 2. 2000 Form 6K:
If Xcelera is an FPHC, each [United States] shareholder ofXcelera... who is a shareholder on December 31, 2000, or on thelast day during Xcelera’s taxable year on which the ownership test issatisfied, must include in income, as a dividend subject to tax atordinary income rates, an amount equal to its share of Xcelera’sFPHC income that is not distributed to Xcelera’s shareholders.Xcelera’s FPHC income will generally equal its taxable incomedefined under United States principles, with certain adjustments, andwill include gains and losses from the sale of assets, including the
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Mirror Image common stock. If Xcelera ceases to meet theownership test during the taxable year, then only a percentage (equalto the number of days Xcelera met the ownership test divided by thenumber of days in the taxable year) of the undistributed FPHCincome will be includible as ordinary income to United StatesShareholders.
United States Shareholders must take their pro rata share ofundistributed FPHC into income in their taxable year in which thetaxable year of Xcelera ends. Any amount included in the income of aUnited States Shareholder will increase such shareholder’s basis inthe stock by the same amount. If Xcelera is an FPHC, United Statespersons who acquire their Xcelera shares from decedents will notreceive a “stepped-up” basis in such shares. Instead, such personswill have a tax basis equal to the lower of fair market value or thedecedent’s basis.
Each United States Shareholder who owns more than five percent ofthe outstanding Xcelera stock must also file an information report (asan attachment to its regular tax return) to the Internal RevenueService disclosing the gross income, deductions, credits, taxableincome, FPHC income and undistributed FPHC income of Xcelera.
The Form 6-K was signed by Alexander Vik.
112. On July 31, 2000, the Company issued a press release announcing its fiscal
2000 financial results, for the year ended January 31, 2000 (“Fiscal 2000”). The Company
reported net income of $12.4 million, or $0.11 per basis and diluted share, a 300% gain over
fiscal 1999 income. The rise in income, however, was attributable to gains from the sale of
discontinued real-estate operations. Without that one time gain, the Company would have
reported a loss of $0.06. The July 31, 2000 press release also provided a laundry list of post-
fiscal 2000 events that were in effect a summary of press releases. The list provided a vague
summary of the Company’s April 26, 2000, press release announcing the deal with Exodus. In
addition, Alexander Vik was quoted as stating:
Mirror Image entered into a strategic partnership with Exodus todeliver superior Internet performance through next-generation globalcontent distribution. As part of this strategic partnership, Exodus willoffer its customers the Mirror Image instaContentSM Global
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Distribution Service. Additionally, Exodus and Mirror Image willdeploy some of Mirror Image’s CAPs throughout the ExodusInternet Data Center network.
113. Xcelera’s Form 20-F Annual Report filed with the SEC on July 31, 2000, and
signed by Alexander Vik, was not available from Disclosure Inc., for a fee, until August 4,
2000. The Company’s June 2, 2000 Form 6-K disclosures concerning the tax ramifications of
the Exodus deal were repeated in the July 31, 2000 Form 20-F, which stated:
We expect to be classified as a foreign personal holding company forthe taxable year ending December 31, 2000... [and U.S.shareholders]... would be required, regardless of [their] percentageownership, to include in income, as a dividend, [U.S. Shareholder’s]pro rata share of [Xcelera’s] undistributed foreign personal holdingcompany income — generally, taxable income with certain adjustments— if [they] hold shares on the last day of [Xcelera’s] taxable year or, ifearlier, the last day on which [Xcelera was] a foreign personal holdingcompany.
If [Xcelera is] a passive foreign investment company for any taxableyear during which [U.S. shareholders] hold [its] stock, [U.S.shareholders] will generally be subject to special tax rules withrespect [sic] any “excess distributions” that [U.S. shareholders]receive and any gain. .. from a sale or other disposition, including, apledge of [Xcelera’s] stock.
114. On August 1, 2000, Lazard Freres & Co., LLC (“Lazard Freres”) issued a
report on Xcelera discussing the possible per share tax penalty resulting from the Exodus
transaction. Specifically, the Lazard Freres report stated:
Potential $280 million tax bill for U.S. shareholders: We ran into thistax issue a few weeks ago when Xcelera.com filed its 6K. We faxedthe company a list of questions — this being central among them andwe response. This is our best assessment of the tax consequences forU.S. shareholders of Xcelera.com.... If the full $713 million [from theExodus transaction] is taxable to U.S. Investors, less a negligible taxbasis in the shares, that would mean approximately $700 million innon-cash gains to the public shareholders of XLA. This means that
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each shareholder of XLA would be forced to report a gain ofapproximately $7 per share in ordinary income of ‘undistributedforeign personal holding company income.’ Taxed at a 40% rate, thismeans approximately $280 million in taxes to the shareholders ofXLA from the EXDS [Exodus] transaction alone. As we understandthe filing, these taxes would have to be paid regardless of whether ornot the gains were distributed.
(emphasis in original). Recognizing the poor disclosure and release of information, the Lazard
Freres report “urge[d]” its subscribers who are Xcelera shareholders “to ask for clarification..,
from the company.”
115. On August 9, 2000, at approximately 10:47 a.m., Bloomberg News published
an article by Christopher Byron entitled, “Xcelera.com Holders Get a Surprise,” which, for the
first time, provided widespread dissemination of the fact that Xcelera shareholders were subject
to an onerous tax based on the Company’s tax classification as an FPHC. The Bloomberg
News article reported that due to the Exodus transaction, more that 60 percent of Xcelera’ s
fiscal 2001 income would come from passive sources. Bloomberg News further reported that
the Vik Brothers constructively own more than 50% of Xcelera and, therefore meet the stock
ownership requirement under FPHC rules. As a result, Bloomberg News reported that U.S.
shareholders are required to pay taxes on their pro-rata share of the Company’s taxable
income, regardless of whether or not a dividend is paid out. Bloomberg News reported the
possible per share tax burden at anywhere between $6.18 and $7 per share.
116. Summarizing the tax predicament, Bloomberg News noted:
[Amy investor who bought a round-lot (100 shares) of Xcelera.comwhen the stock was selling in March for $100 a share, would havepaid $10,000 only to see, as of this writing, $8,500 of it disappear inXcelera.com’ s collapse. Of the $1,500 of value that remains, almosthalf of it, or as much as $615 [$6.15 tax per share multiplied by 100shares = $615], may wind up at year’s end being taxed as ordinaryincome even though the investor never received a dime of cash andactually suffered an 85 percent loss on the investment.
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In describing the reason for the gain, Bloomberg News reported:
In the [Exodus] deal itself, Xcelera.com sold roughly 17 percent of itsmore than 90 percent ownership interest in Mirror Image to ExodusCommunications for $75 million in cash and $562.5 million ExodusCommunications stock. Since Xcelera.com had acquired its MirrorImage stake, as of Jan. 31, for less than $17 million, the sale toExodus Communications of 17 percent of that stake for $637.5million represented a stock sale in which almost 100 percent of thepurchase price was a capital gain.
117. Despite the Company’s piece-meal and insufficient statements about the
Exodus deal and its accompanying tax consequences, the market became aware of the tax
implications on August 9, 2000, when Bloomberg News reported on the possible per share tax
liability. In response, the price of Xcelera stock rapidly fell from a closing price of $14.00 on
August 8,2000 to $11.75 on August 9, 2000.
118. On August 9, 2000, CBS MarketWatch.com published an article on Xcelera’s
U.S. stockholder tax liability, noting: “Investors are expected to pay $2.35 a share in taxes at
the end of the year, due to the roughly $300 million in gains that Xcelera recognized after
striking a deal with... .Exodus.” Commenting on the Company’s lack of disclosure. CBS
MarketWatch.com reported:
Xcelera disclosed late last month in a form filed with the Securitiesand Exchange Commission that it likely will be given foreign personalholding company status. The company didn’t issue a press releaseabout the matter. Seemingly, the company left it to analysts andreporters to explain the tax implications to investors.
119. Finally, on August 9, 2000, Xcelera issued a press release to “respond[] to
information being circulated in the marketplace that management believes is inaccurate and may
cause confusion among its shareholders.” The Company disclosed:
Xcelera is concerned about inaccurate statements in the marketplaceregarding the tax implications, if any, for U.S. shareholders
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surrounding the 15% strategic investment by Exodus Communicationsin Mirror Image Internet, Inc. The gain recognized by Xcelera on theExodus transaction was less than $300 million, or less than $2.85 pershare, rather than clearly erroneous reported estimates as high as$7.00 per share.
120. On August 11, 2000, the Company began its damage control campaign by
issuing a press release to announce that Xcelera “intends to declare a special dividend to
shareholders to address income taxes, if any, that may be due by a U.S. shareholder as a result
of Xcelera’s potential classification as a foreign personal holding company for the taxable year
ending December 31, 2000.” The August 11, 2000 press release provided:
Xcelera intends to declare the divided, if necessary, to shareholdersof record on December 31, 2000 or on such other date deemed therecord date for classification as a foreign personal holding company.If a special dividend is declared, it will represent approximately 40%of Xcelera’s undistributed foreign personal holding company incomefor the [calendar] year 2000. The highest marginal U.S. federalincome tax rate is 40% for individuals.
The August 11, 2000 press release also quoted Alexander Vik, who stated:
This action is consistent with our continuous efforts to protect andenhance shareholder value. If the Company is determined to be aforeign personal holding company, the tax treatment of an investmentin Xcelera will be similar to that of a typical U.S. fund. Xceleragreatly appreciates the continued support of its shareholders and willcontinue to look out for their best interests.
121. On December 4, 2000, the Company issued a press release announcing that, at
the Company’s annual stockholders’ meeting, the Board of Directors:
[r]eiterated its intention to declare a special dividend to shareholdersto address income taxes, if any, that may be due by a U.S.shareholder as a result of Xcelera’s potential classification as aforeign personal holding company for the taxable year endingDecember 31,2000. The Company expects that this potentialclassification would only apply for the current tax year. Xceleraintends to declare the dividend to shareholders of record on
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December 31, 2000 or on such other date deemed the record datefor classification as a foreign personal holding company. If a specialdividend is declared, it should represent approximately 40% ofXcelera’s undistributed foreign personal holding company income forthe year 20000. The highest marginal U.S. federal income tax rate is40% for individuals.
122. On December 22, 2000, the Company issued a press release announcing that it
had set December 31, 2000 as the record date for a special cash dividend to shareholders to
address income taxes that may be due by the U.S. shareholders. The press release also stated
“Xcelera will announce the amount of the dividend and the payment date after it calculates the
amount of its undistributed foreign personal holding company income for the year 2000.”
123. Xcelera knew at the time of the Exodus transaction or recklessly disregarded
the fact that the massive gain to Xcelera from the Exodus transaction brought Xcelera within the
definition of an FPHC. This material fact should have been revealed at the time of the
transaction in March 2000.
124. Defendants had a duty to disclose material facts about the tax ramifications of
the Exodus deal in order to make the statements about the transaction, in light of the
circumstances under which they were made, not misleading to the public. The SEC provides
that corporate disclosures of material facts must be disclosed in a timely fashion. SEC Rel. No.
34-8995, 3 Fed. Sec. L. Rep (CCH) ¶ 23, 120A, at 17,095, 17 C.F.R. § 241.8995 (Oct.
15, 1970). Specifically, the SEC has stated, “Corporate releases which disclose personnel
changes, the receipt of new contracts, orders and other favorable developments but do not
even suggest existing adverse corporate developments do not serve the public needs and may
violate the antifraud provisions of the Securities Exchange Act of 1934.” Id. The defendants’
disclosures about the tax ramifications of the Exodus deal were not made publicly available until
almost four months after Xcelera’s March 22, 2000 press release. As one commentator noted,
by not disclosing the tax ramifications through a press release, Xcelera “left it to analysts and
reporters to explain the tax implications to investors.” It was not until analysts and news reports
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investigated, that the public became aware of the per share tax penalty. Because these
disclosures were material, because these disclosures were necessary to make the Company’s
statements not misleading, and because these disclosures adversely affected the value of the
Company’s stock, defendants were under a duty to disclosure the tax ramifications as early as
March 22, 2000.
INTERNATIONAL DISCLOSURE STANDARDS
125. During the Class Period, Xcelera, as a foreign private issuer, filed its Annual
Reports on SEC Form 20-F. The instructions to Form 20-F required, in part, that registrants:
“Outline briefly all taxes, including withholding provisions, to which United States security
holders are subject under existing laws and regulations of the foreign country in which the
registrant is organized.”
126. In September 1998, the International Organisation of Securities Commissions
(“IOSCO”) endorsed a core set of standards for non-financial statement disclosures for foreign
companies, entitled, “International Disclosure Standards for Cross-Board Offerings and Initial
Listings by Foreign Issue~s.” The goal of the IOSCO standards was to “enur[ej a high level of
investor protection” and to develop “a generally accepted body of non-financial statement
disclosure standards that could be addressed in a single disclosure document” for foreign
issuers. Under the requirement X, “Additional Information,” the IOSCO expressly lists taxation
as one of nine key disclosure items. Specifically, the International Disclosure Standards provide:
E. Taxation. The Company shall provide information regarding taxes(including withholding provisions) to which shareholders in the hostcountry may be subject....
The IOSCO defines “host country” as the ‘jurisdictions, other than the home country, in which
the company is seeking to offer, register or list its securities.” For Xcelera, the U.S. was the
“host” country. The IOSCO issued the International Disclosure Standards with the
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recommendation that IOSCO members implement similar disclosure requirements in their own
jurisdictions.
127. In the U.S., the SEC responded to the IOSCO’s recommendation and
promulgated Final Rule S7-3-99 concerning “International Disclosure Standards.” In adopting
the IOSCO standards, the SEC commented, “We believe the international disclosure standards
endorsed by IOSCO achieve those goals and that the best way to promote use of the
standards is to incorporate them filly into our existing foreign issuer integrated disclosure
system.” The SEC adopted the disclosure of the ten “core” items identified by the IOSCO,
including taxation disclosures language. Specifically, the SEC added the following disclosure
requirements to the SEC’s Form 20-F, under “Item 10. Additional Information”:
E. Taxation. The Company shall provide information regarding taxes(including withholding provisions) to which shareholders in the hostcountry may be subject....
The SEC first published a Notice of Proposed Rulemaking on February 2, 1999,
providing a draft of the proposed rule and requesting comments on or before April 12,
1999. Final Rule S 7-3-99 was promulgated by the SEC on September 28, 1999, with an
effective date of September 30, 2000.
128. In adopting Final Rule S7-3-99, as quoted above, the SEC underscored the
importance of taxation disclosures, by rejecting certain commentator suggestions that the
requirements under Item 1 0.E (Taxation) be limited to registration statements and annual
reports relating only to equity securities. The SEC
expressly rejected this suggestion, refusing to water down the tax provision and underscore the
importance of tax disclosures under all circumstances.
129. During the Class Period, defendants had a duty to disclose, under Section
10(b) of the Exchange Act and Rule 1 Ob-5, the material, non-public tax ramifications of the
Exodus transaction. The IOSQC rules that were in effect throughout the Class Period, as well
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as SEC Rule S7-3-99 that was promulgated in September 1999, merely confirm the obvious
materiality of tax disclosures to the investing public.
ADDITIONAL SCIENTER ALLEGATIONS
130. As alleged herein, defendants acted with scienter in that Xcelera, by and
through the Individual Defendants, knew or recklessly disregarded that the public documents
and statements issued or disseminated during the Class Period were materially false and
misleading; knew or recklessly disregarded that such statements or documents would be issued
or disseminated to the investing public; and knowingly and substantially
participated or acquiesced in the issuance or dissemination of such statements or documents as
primary violations of the federal securities laws.
131. During the Class Period, the Individual Defendants were senior executives
and/or directors of Xcelera, were privy to confidential and propriety information concerning
Xcelera, its operations, its transactions with Mirror Image and Exodus, its finances, its financial
condition, tax situation and business prospects. Alexander Vik was at all relevant times the
Company’s controlling shareholder, Chairman and Chief Executive Officer, and was quoted in
and/or responsible for the preparation, approval or release of each statement plaintiffs allege
was false and misleading, including all press releases, interviews and regulatory filings.
Alexander Vik also “spearhead[s]” the company’s Internet strategy. In addition to his role at
Xcelera, Alexander Vik was, at all relevant times, the Chairman of Mirror Image Internet and a
director and officer of VBI Corporation. Similarly, Gustav Vik was the Company’s
secretary/treasurer during the Class Period, and also served as a director and secretary of
Mirror Image at all relevant times. Gustav Vik was also a beneficial owner of VBI Corporation.
By virtue of their positions at both Xcelera and Mirror Image, the Vik Brothers were under a
continuing duty to direct and control the operations of Xcelera, to exercise due care and
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diligence in those operations, and to oversee and review all corporate operations, including the
filing of documents with the SEC and the making of public statements.
132. According to a former senior employee of Mirror Image, the sales development
manager, the reason that the Company had no revenue, at least through the fiscal year ending
January 31, 2000, was that they did not have a viable product. The Company had been
purchasing and reselling equipment purchased from a company named Vixie Enterprises, which
did not work. In about 1999 the Company ended its relationship with Vixie Enterprises and
began to purchase equipment from Cisco Systems for resale.
133. Despite Alexander Vik’s knowledge of the lack of a viable product, he spent a
great deal of time speaking with journalists attempting to convince them to write favorable
articles concerning the Company. According to two former senior employees of the Mirror
Image, the regional sales manager and the sales development manager, Vik furnished options
on Company stock to the journalists in exchange for their attention to the Company. At least
one journalist, George Gilder, published a favorable report on February 17, 2000, and received
stock options in the Company.
Dilution Issue
134. As alleged above, defendants knew or recklessly disregarded the fact that the
Company gained control of Mirror Image through the fraudulent misappropriation of
Kahnberget/JAM funds. Throughout the Class Period, defendants knew that approximately
$3.24 million of the funds used to acquire a “majority” interest in Mirror Image were
Kahnberget/JAM monies, not “Scandinavia Company’s cash holdings.” Defendants knew or
recklessly disregarded the fact that pursuant to the 50%-50% joint venture agreement, as of
April 1, 1999, Kahnberget/JAM was entitled to 50% of all Mirror Image stock claimed to be
owned by Xcelera. Further, defendants knew or recklessly disregarded as a result of the
subsequent 60%-40% joint venture agreement, Kahnberget/JAM was entitled to at least 40%
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of the Mirror Image stock claimed to be owned by Xcelera in various public filings and
statements. Defendants knew or recklessly disregard that as a result of the 60%-40% joint
venture agreement, defendants were obligated to issue to Kahnberget/JAM 219,000 shares of
Xcelera stock which now, split adjusted, is equivalent to as many as 5.2 million shares of
Xcelera stock, thereby substantially diluting investors’ equity. Defendants’ knowledge of the
material facts, contrary to the Company’s public statements, is shown by the direct role
defendants played in the misappropriation of Kahnberget’s/JAM’s funds, including the fact that:
a. defendants entered into a joint venture agreement with
Kahnberget/JAM to acquire an equal controlling interest in Mirror Image;
b. Vik communicated directly with Lindbo, Mirror Image AB’s founder,
on behalf of both himself and Kahnberget/JAM in conversations and via e-mail;
c. Vik routinely forwarded communications and documents to
Kahnberget’JAM concerning their proposed joint venture purchase of Mirror Image;
d. Vik knowing or recklessly deleted the name of Karlsten’s family-
controlled business from the Private Placement Agreement, in order for Scandinavia/Xcelera to
appear to be the sole participant in the $2 million private placement;
e. Following the completion of the Mirror Image deal, Vik telephoned
Karlsten to tell him that “we” have done the deal, meaning Kahnberget/JAM and Vik, despite
the fact that Vik had deleted Karlsten’s family businesses from the Private Placement
Agreement;
f. Vik falsely assured Karlsten that the deletion of KahnbergetlJAM was
a mere formality;
g. Vik caused Kahnberget/JAM funds to be wire transferred from a
Morgan Stanley Account on behalf of Kahnberget/JAM to Mirror Image between April and
September 1999;
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h. defendants later induced KahnbergetlJAM to modify the prior 50%-
50% joint venture agreement to a 60%-40% joint venture agreement, in exchange for
Kahnberget/JAM receiving 219,000 shares of Scandinavia stock, defendants repeatedly failed
to deliver on the 60%-40% agreement.
FPHC Issue
135. The Vik Brothers knew or recklessly disregarded the fact that the publicly
available information about Mirror Image’s earnings and the potential tax consequences of the
Exodus deal were materially false and misleading and!or omitted to state material facts in order
to make the statements not misleading. Namely:
a. Alexander and Gustav Vik knew or recklessly disregarded that
Xcelera, as a foreign based company, was subject to certain special tax provisions, including a
tax to U.S. shareholders given the Company’s classification as a foreign personal holding
company;
b. VBI Corporation owned more than 70% of Xcelera at all relevant
times. The Individuals Defendants knew, or recklessly disregarded the fact that they are the
owners of the VBI shares for legal and tax purposes;
c. By means of their position and roles in Xcelera and Mirror Image,
Alexander and Gustav Vik knew or recklessly disregarded that during fiscal year ended
January 31. 2001, Xcelera did not and would not have material operating revenues, largely
attributable to the fact that Mirror Image’s technology was not widely commercially available.
The Vik Brothers knew or recklessly disregarded that instaSpeed was the only Mirror Image
service available at the time of the Exodus deal, and that Mirror Image had only four major
customers for that service, and generated only $37,135 for the service in the prior fiscal year.
In addition, the defendants knew that the other products and services then under development
were not expected to be ready for sale until the end of the year, and the maximum projected
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sales were only $10 million for the year. Therefore, when the Company entered into the Exodus
deal in March 2000, defendants knew or recklessly disregarded the fact that the sale of 15% of
Mirror Image would trigger the FPHC classification.
136. The Individual Defendants had the opportunity to commit and participate in the
wrongful conduct complained of herein. Each is, or was, a senior executive officer and/or
director of the Company and, accordingly, controlled the information disseminated to the
investing public in the Company’s press releases, SEC filings, and communications with
analysts. Thus, each could falsify, and did falsify, the information that reached the public about
the Company’s business and financial results.
137. The Individual Defendants engaged in such a scheme and course of conduct to
inflate the price of the Company’s common stock in order to, among other things: (a) profit
from insider sales; and (b) to prepare to “spin-off’ Mirror Image.
Insider Trading
138. During the Class Period, Alexander and Gustav Vik, through VBI Corporation,
sold an exorbitant amount of Xcelera common stock at artificially inflated prices prior to the
disclosure of the adverse information revealed to the public at the end of the Class Period. All
totaled, defendants sold 3.2 million shares to the unknowing public at artificially inflated prices
for proceeds of a staggering $250.5 million.
139. VBI Corporation is a private Company owned and controlled for the benefit of
Alexander, Gustav and Erik Vik, as Alexander Vik acknowledged in a February 28, 2000
interview with CNBC’s Mark Haines. Alexander Vik is VBI’s sole director and executive
officer, and signed VBI’s March 7, 2000 Schedule 1 3D/A filing as VBJ’s President.
According to a July 2000 analyst report by Lazard Freres, “VBI Corp.... is synonymous with
Alexander Vik and his two brothers, Gustav and Erik.” As of July 14, 2000, VBI owned
approximately 73.2% of Xcelera’s common stock.
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140. On February 24, 2000, the Vik Brothers, through VBI Corporation, filed with
the SEC a Form 144 indicating their intention to sell 500,000 shares of Xcelera.
141. On March 10, 2000, VBI Corporation filed with the SEC a Form 1 3D/A in
which VBI disclosed that as of March 7, 2000, VBI beneficially owned 40,472,608 voting
shares of Xcelera, or 76.62% of the outstanding shares of the Company. The Form 1 3D/A
also acknowledged “Alexander M. Vik is the sole director and executive officer of VBJ.”
Finally, the Form l3D/A provided a list of VBI’s insider sales of Xcelera stock on February 22,
2000, February 23, 2000, March 6, 2000 and March 7, 2000. These sales represented a total
sale of 1,266,400 split-adjusted shares for gross proceeds of approximately $92,463,982.
Alexander Vik signed the March 10, 2000 Form 13 D/A.
142. On March 16, 2000, the Vik Brothers, through VBI Corporation, filed with the
SEC a Form 144 indicating their intention to sell 500,000 shares of Xcelera. This filing also
disclosed VBI’s prior open market sales from February 22, 2000 through and
including March 9,2000. In that time period, VBI had sold approximately 1,402,200 split-
adjusted shares for gross proceeds of $103,598,911.
143. On April 3, 2000, the Vik Brothers, through VBI Corporation, filed with the
SEC a Form 144 indicating their intention to sell 100,000 shares of Xcelera. This filing also
disclosed VBI’s prior open market sales from February 22, 2000 through and including March
23, 2000. In that time period, VBI had sold approximately 2,402,200 split-adjusted shares for
gross proceeds of $206,096,871.
144. On April 17, 2000, the Vik Brothers, through VBI Corporation, filed with the
SEC a Form 144 indicating their intention to sell 500,000 shares of Xcelera. This filing also
disclosed VBI’s prior open market sales from February 22, 2000 through and including April
7, 2000. In that time period, VBI had sold approximately 2,602,200 split- adjusted shares for
gross proceeds of $220,937,552.
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145. On July 17, 2000, the Vik Brothers, through VBI Corporation, filed with the
SEC a Form 144 with the SEC indicating their intention to sell 1,000,000 shares of Xcelera.
This filing also disclosed VBI’s prior open market sales from April 10, 2000 through and
including June 22, 2000. In that time period, VBI had sold approximately 624,600 split-
adjusted shares for gross proceeds of $29,578,614. The July 17, 2000 Form 144 became
publicly available on July 27, 2000, and was soon withdrawn by the Viks in response to intense
public criticism and shareholder inquiries.
146. The Individual Defendants’ Xcelera stock sales during the Class Period are as
follows:
Transaction Date Split AdjustedShares Sold
Split AdjustedPrice/Share
Gross Proceeds from Sale
2/22/00 464,400 $65.86 $30,584,712
2/23/00 340,000 $64.15 $21,812.479
3/6/00 262,000 $87.42 $22,903,791
3/7/00 200,000 $85.82 $17,163,000
3/8/00 54,200 $79.34 $4,300,292
3/9/00 81,600 $83.76 $6,834,637
3/13/00 248,000 $94.65 $23,472,286
3/14/00 86,000 $96.64 $8,311,275
3/15/00 2,800 $95.40 $267,125
3/22/00 240,000 $105.94 $25,426,668
3/23/00 423,200 $106.38 $45,020,506
4/3/00 31,000 $78.78 $2,442,150
4/5/00 20,000 $66.43 $1,328,500
4/6/00 59,000 $70.59 $4,164,800
4/7/00 90,000 $76.72 $6,905,231
4/10/00 92,000 $73.16 $6,730,989
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4/11/00 48,000 $60.84 $2,920,313
4/13/00 41,200 $56.32 $2,320,200
4/19/00 44,000 $41.41 $1,822,206
4/24/00 30,200 $34.94 $1,055,281
4/25/00 80,000 $37.77 $3,021,775
4/27/00 23,000 $38.94 $895,575
4/28/00 26,000 $44.40 $1,154,494
5/1/00 5,000 $47.51 $237,531
5/2/00 6,000 $48.18 $289,063
5/4/00 18,500 $41.20 $762,194
5/5/00 12,000 $41.23 $494,737
5/12/00 12,100 $38.72 $468,500
5/15/00 28,000 $38,81 $1,086,719
5/16/00 28,000 $41.36 $1,158,000
5/17/00 9,200 $36.58 $336,506
6/6/00 17,100 $42.80 $731,900
6/7/00 6,000 $40.77 $244,625
6/8/00 6,100 $39.93 $243,575
6/9/00 7,000 $39.45 $276,175
6/12/00 8,000 $40.22 $321,750
6/13/00 43,000 $38.92 $1,673,712
6/14/00 20,200 $39.03 $788,481
6/21/00 12,000 $38.96 $467,563
6/22/00 2,000 $38.38 $76,750
TOTALS 3,226,800 $250,516,166
147. Defendants’ stock trades during the Class Period were unusual and suspicious
in timing and amount, because:
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a. The March 22, 2000 announcement of the Exodus transactions, as
well as Alexander Vik’s hyping of a possible Mirror Image initial public offering which the
valued at $20 billion, coincided with some of VBI’s most significant selling, including a $25.4
million block on the date of the announcement; a $45 million block on March 23, 2000, and a
$20 million sale on March 28, 2000.
b. Prior to February 2000, VBI and the Individual Defendants had not
sold any shares of Xcelera.
148. The Individual Defendants’ positions with the Company and Mirror Image
made them privy to confidential, proprietary information concerning the Company’s business,
services, markets, financial conditions and future business prospects.
149. Notwithstanding their duty to refrain from trading Xcelera stock under these
circumstances, or to disclose the insider information prior to trading, defendants sold, prior to
disclosure of the material adverse facts described above, shares of Xcelera stock at prices that
had been artificially inflated by defendants’ materially false representations and material
omissions.
150. The Individual Defendants engaged in a scheme to inflate the price of Xcelera
common stock to enhance the value of their holdings in Xcelera common stock.
Desire to Spin Off Mirror Image
151. A key aspect to Xcelera’s purported business strategy was to purchase,
develop and spin off successful Internet start-ups. The first test of Xcelera’s ability, and the
described “linchpin” to the Company’s Internet strategy, was to be the Company’s plan for an
initial public offering of Mirror Image.
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152. Throughout the Class Period, defendants sought to inflate the price of Xcelera
stock by inducing investors to purchase Xcelera with the promise of permitting them ground-
floor access to the Mirror Image IPO. For example:
a. On March 6, 2000, Xcelera issued a press release announcing its
“shareholders rights policy” that would enable Xcelera shareholders to get allocations at the
IPO price for any IPO of a company in Xcelera’s portfolio. In response to this announcement
Xcelera’s stock soared from $81.25 to $95, before closing at $85.
b. On March 22, 2000, Bloomberg News quoted Alexander Vik
discussing the possible spin-off of Mirror Image as follows: “We don’t have a specific date [to
sell shares in Mirror Image]. We’re certainly planning for it this year. We expect to have a
valuation greater than Akamai [Technologies Inc.].” A separate Bloomberg News article issued
on the same day entitled “Xcelera.com’s Mirror Image IPO to Have $20 Bln Market Value,”
reported:
Xcelera.com Inc.’s Mirror Image Internet... will have a market valueof at least $20 billion after it sells shares later this year, Xcelera.com’schief executive said. The initial public offering of a “small” stake inMirror Image will give it a value greater than that of AkamiaTechnologies Inc., which has a market capitalization of $20 billion,said Alexander Vik.
At the time these comments were made, Xcelera’s market value was approximately $11.5
billion.
153. Upon the defendants’ announcement of the Mirror Image/Exodus transaction,
the stock was trading at an all time high, and public awareness of the Company and Mirror
Image continued to grow.
Xcelera’s Buy Back Program
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154. On July 17, 2000, defendants issued a press release announcing that Xcelera’s
Board of Directors had approved a share repurchase program that gave the Company authority
to buy up to two million shares of its stock from the open market. In commenting on the buy
back plan, Alexander Vik stated:
We believe that Xcelera is undervalued at current prices and view theshare repurchase program as a financial opportunity that is a gooduse of the company’s resources. Xcelera is confident in thetechnology and tremendous potential of the Mirror Image business, inwhich we maintain our approximate 78% ownership stake, and theother companies in our portfolio.
The Company also stated that the “timing of the purchases and the number of shares to be
bought at any one time will depend on market conditions.”
155. The July 17, 2000 press release concerning the buy back program was false
and misleading when made because Xcelera’s stock as not “undervalued” because the market
was still unaware of the severe tax consequences stemming from the Exodus transaction that
was already completed at the time the buy back program was announced. Further, the market
was still unaware of the possible dilution of Xcelera’s stock stemming from litigation over the
Mirror Image acquisition in March 1999.
156. At the time the Company announced its buy back program, defendants failed to
disclosure that insiders, through VBI Corporation, had actually registered to sell Xcelera
shares. On July 10, 2000, Alexander Vik, on behalf of VBI, filed a Form 144 for the sale of 1
million Xcelera shares. The Form 144 was filed with the SEC in paper form and was not
picked up by the news wires until July 27, 2000. Thus, at the time that the Company issued its
July 17, 2000 press release concerning the “buy back” program, Alexander Vik had already
filed to sell 1 million shares. Only after the Form 144 became public and investors began
inquiring about and criticizing the Vik Brothers’ suspicious action, did Alexander Vik withdraw
the original Form 144.
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COUNT I
(AGAINST ALL DEFENDANTS)
VIOLATION OF SECTION 10(b)OF THE EXCHANGE ACT AND SEC RULE lOb-5
157. Plaintiffs repeat and reallege each and every allegation contained in the
foregoing paragraphs as if fully set forth herein.
158. This Count is asserted against the defendants and is based upon Section 10(b)
of the Exchange Act, 15 U.S.C. § 78j(b). and SEC Rule lOb-S promulgated thereunder.
159. During the Class Period, the defendants directly engaged in a common plan,
scheme, and unlawful course of conduct, pursuant to which they knowingly or recklessly
engaged in acts, transactions, practices, and courses of business which operated as a fraud and
deceit upon plaintiffs and the other members of the Class, and made various deceptive and
untrue statements of material facts and omitted to state material facts in order to make the
statements made, in light of the circumstances under which they were made, not misleading to
plaintiffs and the other members of the Class. The purpose and effect of said scheme, plan, and
unlawful course of conduct was, among other things, to induce plaintiffs and the other members
of the Class to purchase Xcelera common stock during the Class Period at artificially inflated
prices.
160. During the Class Period, the defendants, pursuant to said scheme, plan, and
unlawful course of conduct, knowingly or recklessly issued, caused to be issued, and/or
participated in the preparation and issuance of deceptive and materially false and misleading
statements to the investing public as particularized above.
161. As a result of the dissemination of the false and misleading statements set forth
above, the market price of Xcelera common stock was artificially inflated during the Class
Period. In ignorance of the false and misleading nature of the statements described above and
the deceptive and manipulative devices and contrivances employed by said defendants,
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plaintiffs and the other members of the Class relied, to their detriment, on the integrity of the
market price of the stock in purchasing Xcelera common stock. Had plaintiffs and the other
members of the Class known the truth, they would not have purchased said shares or would not
have purchased them at the inflated prices that were paid.
162. Plaintiffs and the other members of the Class have suffered substantial damages
as a result of the wrongs herein alleged in an amount to be proved at trial.
163. By reason of the foregoing, defendants directly violated Section 10(b) of the
Exchange Act and SEC Rule lOb-S promulgated thereunder in that they: (a) employed devices,
schemes, and artifices to defraud; (b) made untrue statements of material fact or omitted to
state material facts in order to make the statements made, in light of the circumstances under
which they were made, not misleading; or (c) engaged in acts, practices, and a course of
business which operated as a fraud and deceit upon plaintiffs and the other members of the
Class in connection with their purchases of Xcelera common stock during the Class Period.
COUNT II
(AGAINST THE INDIVIDUAL DEFENDANTS)
VIOLATION OF SECTION 20(a)OF THE EXCHANGE ACT
164. Plaintiffs repeat and reallege each and every allegation contained in each of the
foregoing paragraphs as if set forth fully herein.
165. The Individual Defendants, by virtue of their positions, stock ownership and
specific acts described above, were, at the time of the wrongs alleged herein, controlling
persons within the meaning of Section 20(a) of the Exchange Act.
166. The Individual Defendants had the power and influence and exercised the same
to cause Xcelera to engage in the illegal conduct and practices complained of herein.
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167. By reason of the conduct alleged in Count I of the Complaint, the Individual
Defendants are liable for the aforesaid wrongful conduct, and are liable to plaintiffs and to the
other members of the Class for the substantial damages which they suffered in connection with
their purchases of Xcelera common stock during the Class Period.
COUNT III
(AGAINST THE INDIVIDUAL DEFENDANTS)
VIOLATIONS OF §20AOF THE EXCHANGE ACT
168. Plaintiffs incorporate by reference and reallege all preceding paragraphs as if
fully set forth herein.
169. This Count is asserted against the Individual Defendants for violations of § 20A
of the Exchange Act, 15 U.S.C. § 78t- 1, and the rules and regulations promulgated thereunder
for insider trading. This Count is asserted by all persons who purchased Company common
stock contemporaneously with the insider sales of the Individual Defendants, through VBI
Corporation, which took place on and between February 22, 2000 and June 22. 2000.
170. During the Class Period, as detailed above, the Individual Defendants sold over
3.22 million shares of Xcelera common stock to the public in amounts set forth at paragraph
146 herein while in the possession of material, non-public information as set forth above. At the
time of their insider sales, the Individual Defendants knew or recklessly disregarded that they
possessed materially adverse non-public information regarding the Company’s ownership of
Mirror Image, the adverse tax consequences of the Exodus deal, and that they had acquired
Mirror Image as part of a scheme to attract public interest in their internet subsidiary, inflate the
Company’s stock price and sell their own shares to the public, and that this information had not
been disclosed to the investing public. The Individual Defendants each violated Section 10(b) of
the Exchange Act and SEC Rule lOb-5 promulgated thereunder, as alleged hereinabove. As a
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direct and proximate result of these violations, the Individual Defendants’ stock sales violated
Section 20A of the Exchange Act.
171. During the Class Period, the Individual Defendants, while in possession of
material, non-public information, sold, through VBI, Xcelera common stock while certain
members of the Class, including Lead Plaintiffs Kender and Raiz.ner, as well as named Plaintiffs
W.E. Barnette, Barry Family L.P., Ruth A. Benner, Mark Berger, Amer Chughtai, Michael
Conn, Ken Delfini, Discovery International Association, Jose Luis Enriquez, David Finkelstein,
Troy Giles, Sarah J. Hall, Jim Hicks, Bich Nguyen, Alan Kintopf, Kenneth Krishan, Suresh
Kudipudi, Jack LaDue, Martin and Grace Lamorena, Xia Li. David Lipshutz, Mitchell Orazvi,
Hitesh Patel, Aree J. Rand, Brian Reed, Keither Shimizu. Michael Slape, Alex Steubler,
Prechaporn Suwatnodom, Ken Sweeten, Beverly Tamashiro, Thian Keat Tay, James
VonAllmen and Claudette Zelkha, contemporaneously purchased shares of the Company~s
stock, as summarized in the following chart:
VBI Sale Date Contemporaneous Plaintiff Purchaser
2/22/00 Kintopf
2/23/00 Lead Plaintiff Kender and Raizner, DiscoveryInternational Association
3/6/00 Lead Plaintiff Kender, Rand
3/7/00 Lead Plaintiff Kender
3/8/00 Lead Plaintiff Kender
3/9/00 Lamorena
3/13/00 Conn, Hall
3/14/00 Hicks
3/15/00 Lead Plaintiff Kender, Hicks
3/22/00 Lead Plaintiff Kender, Lipshutz
3/23/00 Lead Plaintiff Kender, Barnette
4/3/00 Delfini, Sweeten
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4/5/00 Barnette, Sweeten, Patel
4/6/00 Kintopf, Tamashiro, Giles
4/7/00 Barnette, Kintopf, Li, Tamashiro, Sweeten
4/10/00 Barry Family, L.P.
4/11/00 Li
4/13/00 Lead Plaintiff Raizner, Sweeten
4/19/00 Barnete, Sweeten
4/24/00 Barnete
4/25/00 Benner
4/27/00 Zelkha
4/28/00 Suwatnodom, Sweeten
5/1/00 Benner
5/2/00 Barnette, Reed
5/4/00 Delfini
5/5/00 VonAllmen
5/12/00 Bener, Discovery International Association
5/15/00 Sweeten, LaDue, Orazvi
5/16/00 Berger
5/17/00 Patel, Kudipudi, Krishan, Nguyen
6/6/00 Kudipudi
6/7/00 Enriquez
6/8/00 Berger, Tay
6/9/00 Benner
6/12/00 Li
6/13/00 Slape, Shimizu, Chaughtai
6/14/00 Finkelstein
6/21/00 Reed
6/22/00 Steuble,r Suwatnodom, Enriquez
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172. As a result of the foregoing, the Individual Defendants have violated Section
20A of the Exchange Act and plaintiffs and other members of the Class have suffered
substantial damages.
WHEREFORE, plaintiffs, on their own behalf and on behalf of the Class, pray
for judgment as follows:
A. Declaring this action to be a proper class action and certifying plaintiffs
as class representatives under Rule 23 of the Federal Rules of Civil Procedure;
B. Awarding compensatory damages in favor of plaintiffs and the other
members of the Class against the defendants for the damages sustained as a result of the
wrongdoings of the defendants, together with interest thereon;
C. Awarding plaintiffs the fees and expenses incurred in this action,
including reasonable allowance of fees for plaintiffs’ attorneys and experts;
D. Granting extraordinary equitable and/or injunctive relief as permitted by
law, equity and federal and state statutory provisions sued on hereunder, including attaching,
impounding, imposing a constructive trust upon or otherwise restricting the proceeds of
defendants’ trading activities or their other assets so as to assure that plaintiffs have an effective
remedy; and
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E. Granting such other and further relief as the Court may deem just and
