SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of Earliest Event Reported) - October 24, 1995
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COMPUMED, INC.
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(Exact name of registrant as specified in its charter)
Delaware 0-14210 95-2860434
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(State or other (Commission File Number) (IRS Employer
jurisdiction of Identification
Incorporation) No.)
1230 Rosecrans Avenue, Suite 1000
Manhattan Beach, California 90266
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(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code - (310) 643-5106
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<PAGE>
ITEM 5. OTHER EVENTS
On October 23, 1995, CompuMed, Inc., a Delaware
corporation (the "Registrant") filed a Current Report on Form 8-K
disclosing that certain securities class action complaints were
filed against it in the United States District Court for the
Central District of California. Since the date of such Form 8-K
the following related complaints (collectively referred to herein
as the "Complaints") were served upon the Registrant:
1. JDA Systems Corp. Pension Plan Trust v. CompuMed,
Inc., Rod N. Raynovich, DeVere B. Pollom, Howard
Mark, M.D., Robert G. Funari, Robert Stuckelman,
and Russell Walker, filed on October 20, 1995
(Civ. No. 95-7034);
2. Ronald M. Sherin v. CompuMed, Inc and Rod N.
Raynovich, filed on October 23, 1995 (Civ. No. 95-
7164);
3. Leon Berger v. CompuMed, Inc., Rod N. Raynovich,
DeVere B. Pollom, Robert G. Funari, Howard L.
Mark, Robert Stuckelman, Russell Walker, Robert
Goldberg, Winston Millet and John Minnick, filed
on October 23, 1995 (Civ. No. 95-7175);
4. Kensington Trading-ABE II, et. al. v. CompuMed,
Inc., Robert Stuckelman, Rod N. Raynovich, DeVere
B. Pollom, Howard Mark and Robert G. Funari, filed
on October 23, 1995 (Civ. No. 95-7171);
5. Pano Stephens v. CompuMed, Inc., Rod N. Raynovich,
DeVere B. Pollom, Robert G. Funari, Howard Mark,
Robert Stuckelman and Russell Walker, filed on
October 24, 1995 (Civ. No. 95-7207);
6. Stuart Schacter, Myron Kavalgin, and Reba A
Pressman v. CompuMed, Inc., Robert Stuckelman, Rod
N. Raynovich, DeVere B. Pollom, Howard Mark, and
Robert G. Funari filed on October 31, 1995 (Civ.
No. 95-7424); and
7. Charles Robert Farr, derivatively on Behalf of
CompuMed, Inc. v Robert Stuckelman, Robert G.
Funari, Howard L. Mark, Russell Walker, DeVere B.
Pollom and Rod N. Raynovich and CompuMed, Inc. (as
nominal defendant) filed on November 3, 1995 (Civ.
No. 95-7538) (the "Farr Complaint").
The Complaints were filed by the named plaintiffs on
behalf of persons who purchased the Registrant's common stock
during various time periods spanning from June 27, 1995 through
October 20, 1995 with the exception of the Farr Complaint which
is brought derivatively on behalf of the Registrant.
The Complaints allege violations of federal and state
securities laws by the Registrant and certain of its officers and
directors. The Complaints generally relate to the disclosure of
certain caps on the royalties receivable by the Registrant under
the terms of its Technology License Agreement, dated September
22, 1995, with Merck & Co., Inc., pursuant to which the
Registrant, effective September 27, 1995, licensed its
proprietary technology in the OsteoGram(R), a test which assists
physicians in detecting osteoporosis.
The complaints are included as Exhibits 99.1, 99.2 ,
99.3, 99.4, 99.5, 99.6. and 99.7, respectively.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(c) Exhibits.
Exhibit
Number Page
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99.1 JDA Systems Corp. Pension Plan Trust v.
CompuMed, Inc., Rod N. Raynovich, DeVere B.
Pollom, Howard Mark, M.D., Robert G. Funari,
Robert Stuckelman, and Russell Walker, filed
on October 20, 1995 (Civ. No. 95-7034);
99.2 Ronald M. Sherin v. CompuMed, Inc and Rod N. Raynovich,
filed on October 23, 1995 (Civ. No. 95-7164);
99.3 Leon Berger v. CompuMed, Inc., Rod N. Raynovich, DeVere
B. Pollom, Robert G. Funari, Howard L. Mark, Robert
Stuckelman, Russell Walker, Robert Goldberg, Winston
Millet and John Minnick, filed on October 23, 1995
(Civ. No. 95-7175);
99.4 Kensington Trading-ABE II, et al. v. CompuMed, Inc.,
Robert Stuckelman, Rod N. Raynovich, DeVere B. Pollom,
Howard Mark and Robert G. Funari, filed on October 23,
1995 (Civ. No. 95-7171);
99.5 Pano Stephens v. CompuMed, Inc., Rod N. Raynovich,
DeVere B. Pollom, Robert G. Funari, Howard Mark, Robert
Stuckelman and Russell Walker, filed on October 24,
1995 (Civ. No. 95-7207);
99.6 Stuart Schacter, Myron Kavalgin, and Reba A Pressman v.
CompuMed, Inc., Robert Stuckelman, Rod N. Raynovich,
DeVere B. Pollom, Howard Mark, and Robert G. Funari
filed on October 31, 1995 (Civ. No. 95-7424);
99.7 Charles Robert Farr, derivatively on Behalf of
CompuMed, Inc. v Robert Stuckelman, Robert G. Funari,
Howard L. Mark, Russell Walker, DeVere B. Pollom and
Rod N. Raynovich and CompuMed, Inc. (as nominal
defendant) filed on November 3, 1995 (Civ. No. 95-
7538);
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned hereunto duly authorized.
Date: December 6, 1995 COMPUMED, INC.
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(Registrant)
/s/ Rod N. Raynovich
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Rod N. Raynovich
President and Chief Executive Officer
<PAGE>
EXHIBIT INDEX
Exhibit Page
------- ----
99.1 JDA Systems Corp. Pension Plan Trust v.
CompuMed, Inc., Rod N. Raynovich, DeVere B.
Pollom, Howard Mark, M.D., Robert G. Funari,
Robert Stuckelman, and Russell Walker, filed
on October 20, 1995 (Civ. No. 95-7034)
99.2 Ronald M. Sherin v. CompuMed, Inc and Rod N.
Raynovich, filed on October 23, 1995 (Civ.
No. 95-7164)
99.3 Leon Berger v. CompuMed, Inc., Rod N.
Raynovich, DeVere B. Pollom, Robert G.
Funari, Howard L. Mark, Robert Stuckelman,
Russell Walker, Robert Goldberg, Winston
Millet and John Minnick, filed on October 23,
1995 (Civ. No. 95-7175)
99.4 Kensington Trading-ABE II, et al. v.
CompuMed, Inc., Robert Stuckelman, Rod N.
Raynovich, DeVere B. Pollom, Howard Mark and
Robert G. Funari, filed on October 23, 1995
(Civ. No. 95-7171)
99.5 Pano Stephens v. CompuMed, Inc., Rod N.
Raynovich, DeVere B. Pollom, Robert G.
Funari, Howard Mark, Robert Stuckelman and
Russell Walker, filed on October 24, 1995
(Civ. No. 95-7207)
99.6 Stuart Schacter, Myron Kavalgin, and Reba A
Pressman v. CompuMed, Inc., Robert
Stuckelman, Rod N. Raynovich, DeVere B.
Pollom, Howard Mark, and Robert G. Funari
filed on October 31, 1995 (Civ. No. 95-7424)
99.7 Charles Robert Farr, derivatively on Behalf
of CompuMed, Inc. v Robert Stuckelman, Robert
G. Funari, Howard L. Mark, Russell Walker,
DeVere B. Pollom and Rod N. Raynovich and
CompuMed, Inc. (as nominal defendant) filed
on November 3, 1995 (Civ. No. 95-7538)
Exhibit 99.1
GOLD BENNETT & CERA
PAUL F. BENNETT, ESQ. (63318)
SOLOMON B. CERA, ESQ. (99467)
SUSAN D. RESLEY, ESQ. (161808)
595 Market Street, Suite 2300
San Francisco, California 94105
Telephone: (415) 777-2230
RABIN & GARLAND
I. STEPHEN RABIN, ESQ.
BRIAN MURRAY, ESQ.
275 Madison Avenue
New York, NY 10016
Telephone: 212/682-1818
Attorneys for Plaintiffs and
All Others Similarly Situated
UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
JDA Systems Corp. Pension Plan ) Case No. 95-7113 JGD (SHx)
Trust, on Behalf of Itself and )
All Others Similarly Situated, ) CLASS ACTION
) ------------
Plaintiff, ) COMPLAINT FOR VIOLATIONS OF THE
) SECURITIES EXCHANGE ACT OF 1934
v. ) -------------------------------
) JURY TRIAL DEMANDED
CompuMed, Inc., Rod N. ) -------------------
Raynovich, Devere B. Pollom, )
Howard Mark, M.D., Robert G. )
Funari, Robert Stuckelman, and )
Russell Walker )
)
Defendants. )
-----------------------------------
For its complaint, plaintiff makes the following allegations on
information and belief, except and to those allegations contained in
Paragraph 7, which are alleged upon personal knowledge. Plaintiff's
information and belief is based inter alia, upon the investigation made
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by and through its attorneys.
1. This is a securities class action brought against CompuMed,
Inc. ("CompuMed" or the "Company") and its top officers and directors
(referred to herein as "the Individual Defendants"). Over an approximate
one and one-half month period, defendants misrepresented the Company's
future prospects. In particular, during the Class Period, CompuMed and its
top officers misrepresented and omitted material facts concerning the terms
of the Company's right to receive royalties from granting a license to its
OsteoGram technology to Merck & Co., Inc. ("Merck"). Moreover, the
defendants made or adopted forecasts of CompuMed's earnings which at the
time such forecasts were made defendants knew or recklessly disregarded
information which seriously undermined such optimistic forecasts.
2. On October 17, 1995, CompuMed revealed that instead of
receiving a specific royalty payment for each OsteoGram test performed over
the next five years, Merck had placed a cap on the amount of royalties
which CompuMed would receive during the final two years of the five year
licensing agreement. Upon this revelation, CompuMed's stock price
collapsed, in a single day falling from $16 to $8-1/4 -- a 48% drop on
extremely high volume of 4.3 million shares.
JURISDICTION AND VENUE
----------------------
3. This Court has jurisdiction of this action pursuant to
Section 27 of the Securities Exchange Act of 1934 (the "Exchange Act") [15
U.S.C. Section 78aa]. The claims asserted herein arise under Sections
10(b) and 20(a) of the Exchange Act [15 U.S.C. Sections 78j(b), 78t(a) and
78t-1(a)] and Rule 10b-5 [17 C.F.R. Section 240.10b-5] promulgated
thereunder.
4. This action is brought to remedy violations of the Exchange
Act in connection with the purchase of the common stock of CompuMed by
plaintiff and the members of the plaintiff Class for the period between
August 31, 1995 and October 17, 1995, inclusive (the "Class Period").
During this period, defendants prepared or substantially participated in
the preparation of false and misleading statements, reports and releases
which were disseminated to the members of the plaintiff Class and to the
investing public generally.
5. Venue is proper in this District pursuant to Section 27
of the Exchange Act. Many of the acts charged herein, including the
dissemination of various statements which contained materially false
and misleading information, occurred in this District. At all relevant
times herein, CompuMed was a Delaware corporation with its principal
executive office located at 1230 Rosecrans Avenue, Suite 1000, Manhattan
Beach, California. In addition, at all relevant times herein, the
Individual Defendants transacted substantial business or lived in this
District and many of potential witnesses reside in this District.
6. In connection with the acts alleged in this Complaint,
defendants, directly or indirectly, used the means and instrumentalities
of interstate commerce, including, but not limited to, the mails,
interstate telephonic communications and the facilities of the national
securities markets.
THE PARTIES
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7. Plaintiff JDA Systems Corp. Pension Plan Trust purchased
500 shares of CompuMed common stock on October 16, 1995 at $15-1/4 per
share, which price was artificially inflated as a result of defendants'
wrongful acts as alleged herein.
8. Defendant CompuMed is a Delaware corporation which currently
maintains its principal executive offices at 1230 Rosecrans Avenue, Suite
1000, Manhattan Beach, California. At all times, CompuMed was a reporting
company under the Exchange Act. CompuMed stock is listed and traded on the
NASDAQ small cap market system under the symbol "CMPD".
9. Defendant Rod N. Raynovich ("Raynovich") is President and
Chief Executive Officer of CompuMed. Raynovich signed the licensing and
royalty agreement between CompuMed and Merck.
10. Defendant DeVere B. Pollom ("Pollom") is Vice President and
Chief Financial Officer of CompuMed. During the Class Period and, at a
time when he knew of or recklessly disregarded the adverse information
regarding CompuMed set forth below, defendant Pollom sold 5,000 shares of
CompuMed stock.
11. Defendant Howard Mark, M.D. ("Mark") is the Medical Director
of the Company and serves as a Director of CompuMed. During the Class
Period and, at a time, when he knew of or recklessly disregarded the
adverse information regarding CompuMed set forth below, defendant Mark sold
22,800 shares of CompuMed stock.
12. Defendant Robert G. Funari ("Funari") serves as a Director
of CompuMed. During the Class Period and, at a time when he knew or
recklessly disregarded the adverse information regarding CompuMed set forth
below, defendant Funari sold 19,542 shares of CompuMed stock.
13. Defendant Robert Stuckelman ("Stuckelman") serves as
Chairman of the Board of CompuMed. During the Class Period and, at a time
when he knew or recklessly disregarded the adverse information regarding
CompuMed set forth below, defendant Stuckelman sold 90,000 shares of
CompuMed stock.
14. Defendant Russel Walker ("Walker") serves as a Director of
CompuMed. During the Class Period and, at a time when he knew or
recklessly disregarded the adverse information regarding CompuMed set forth
below, defendant Walker sold 913 shares of CompuMed stock.
THE ROLE OF THE INDIVIDUAL DEFENDANTS
-------------------------------------
15. The defendants named in paragraphs 9-14 above are
collectively referred to herein as the "Individual Defendants." Each of
the Individual Defendants by reason of their stock ownership, management
positions and/or membership on CompuMed's Board of Directors were, during
the time they owned such stock and/or held said positions, "controlling
persons" of the Company within the meaning of Section 20(a) of the Exchange
Act. The Individual Defendants had the power and influence, and exercised
the same, to cause CompuMed to engage in the illegal practices complained
of herein.
16. The Individual Defendants participated in the drafting and
preparation of the various public and shareholder reports and other
communications alleged herein to be false and misleading. Because of their
Board membership and/or executive and managerial positions with CompuMed,
each of the Individual Defendants had access to the adverse non-public
information about the Company's business prospects and financial condition
as particularized herein and knew those adverse facts rendered the
statements made or adopted by defendants during the Class Period false and
misleading.
17. The Individual Defendants, because of their positions of
control and authority as officers and/or directors of the Company, were
able to and did control the contents of the various reports, press releases
and presentations to securities analysts pertaining to the Company. Each
of these defendants was provided with copies of CompuMed's press releases
alleged herein to be misleading prior to or shortly after their issuance
and had the ability and opportunity to prevent their issuance or cause them
to be corrected. As a result, each of the Individual Defendants is
responsible for the accuracy of the public releases detailed herein and is
therefore liable for the representations contained therein.
18. A common enterprise and common course of conduct commenced
sometime prior to the Class Period involving the Individual Defendants and
CompuMed. These defendants pursued the common enterprise and common course
of conduct until, at least, the end of the Class Period. The purpose and
effect of the common enterprise and common course of conduct was, inter
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alia, to inflate and maintain the price of CompuMed common stock at
----
artificially inflated levels in order to protect the Individual Defendants'
substantial interest in CompuMed common stock, to enable the Individual
Defendants to profit from stock options and to maintain the Individual
Defendants' lucrative and prestigious management and/or directorial
positions with CompuMed. Defendants accomplished their common enterprise
and common course of conduct by, inter alia, artificially inflating the
----- ----
price of CompuMed common stock by issuing, or causing to be issued, a
series of false and misleading press releases and other statements,
including those particularized herein. The Individual Defendants also
provided materially false and misleading information to securities
analysts. In addition, Individual Defendants Pollom, Mark, Funari,
Stuckelman, and Walker directly benefitted from their illegal course of
conduct by selling CompuMed common stock at artificially inflated prices
without disclosing the adverse material, non-public and confidential facts
about CompuMed to which they and the Company were privy. Each defendant
named herein was a direct, necessary and substantial participant in the
common enterprise and common course of conduct complained of herein.
19. Each of the named defendants participated in the wrongdoing
complained of herein. In taking the action, as particularized herein, each
defendant acted with an awareness of the wrongdoing and realized that
its/his conduct contributed to and furthered the common enterprise and
common course of conduct.
20. During the Class Period, each of the Individual Defendants
occupied positions with CompuMed which made him privy to confidential and
proprietary information concerning CompuMed and its operations, finances,
contractual agreements, financial condition and future prospects. Because
of their positions and access to non-public information about the Company,
all of the Individual Defendants knew or recklessly disregarded the adverse
material facts about the Company specified herein which had not been
disclosed to the investing public, including plaintiff and the other
members of the Class.
21. Each of the defendants herein knew, or recklessly
disregarded such facts, that the materially false and misleading statements
and omissions particularized herein would adversely affect the integrity of
the market for CompuMed's common stock and would serve to artificially
inflate or maintain the price of such stock. Each of the defendants, by
acting as described herein, did so knowingly or in such a reckless manner
as to constitute a deceit and fraud on plaintiff and the other members of
the class.
FRAUD ON THE MARKET DOCTRINE
----------------------------
22. The market for CompuMed common stock is an efficient market
for the following reasons, among others:
a. CompuMed met the requirements for listing, and was
listed on the NASDAQ Small Cap market, an efficient market;
b. As a regulated issuer, the Company filed periodic
public reports with the SEC;
c. The Company's trading volume was substantial, averaging
over 100,000 shares per day during the Class Period, thereby reflecting
numerous trades each day; and
d. The Company was followed by analysts employed by
brokerage firms who wrote reports which were distributed to the sales force
and certain customers of their respective brokerage firms and which became
available, directly or indirectly, to the public.
COMPUMED'S USE OF SECURITIES ANALYSTS TO FEED FALSE
INFORMATION TO THE SECURITIES MARKETS
-------------------------------------
23. During the Class Period, CompuMed was followed by securities
analysts employment by investment banking firms and brokerage houses which
issue reports and make recommendations concerning CompuMed's common stock
to their clients.
24. In writing their reports about CompuMed, analysts relied, in
substantial part, upon information provided to them by and statements and
reports made public by the Company, information provided to them privately
by the Company through the Individual Defendants, and assurances by the
Company that information in the analysts reports was not at material
variance from the Company's internal knowledge of its operations and
prospects.
25. CompuMed's stock price was particularly sensitive to the
Company's and analysts' statements regarding the Company's income, earnings
and profits. CompuMed used its communications to analysts to assure them
-- and through them the investing public -- that CompuMed's business was
strong, that its licensing agreement with Merck would provide substantial
income which would steadily increase its earnings, that demand for services
was excellent and that the Company was on track to achieve strong earnings
per share growth.
26. As part of the fraudulent scheme complained of and the
course of business that operated as a fraud on the purchasers of CompuMed's
stock during the Class Period, CompuMed had its members of management,
including the Individual Defendants, communicate with various securities
analysts, such as Montgomery Securities, Inc. to discuss, among other
things, the Company's prospects, products, licensing agreements, operating
results and expected income, and to provide detailed "guidance" and
direction to these analysts with respect to the Company's business and
projected income and earnings. These communications included, but were not
limited to, conference calls, meetings, and analysts' briefings. CompuMed
knew that by participating in these communications with the analysts, the
Company could disseminate false information to the investment community and
investors would rely and act upon such information. The defendants had
these communications with analysts in order to cause or encourage them to
issue favorable reports on CompuMed and used these communications to
falsely present CompuMed's prospects to the marketplace and keep the market
price of CompuMed's common stock artificially inflated.
27. In addition to the false statements made directly to the
investing public, CompuMed also misled investors indirectly, by feeding
false or misleadingly incomplete information to securities analysts. By
manipulating the information which the defendants, including the Individual
Defendants, provided to securities analysts, CompuMed was able to
artificially inflate and maintain the price of CompuMed's stock to deceive
the investing public and to induce investors to purchase CompuMed stock at
fraudulently inflated prices.
28. By intentionally or recklessly misleading securities
analysts, CompuMed directly or indirectly caused the analysts to issue
false and misleading reports that contained the false and misleading
information that CompuMed provided. In addition, CompuMed caused the
analysts to express misleading opinions and to make misleading
recommendations and projections, each of which was misleading because it
was based on false or misleading information that CompuMed provided to the
analysts as a basis for those opinions, recommendations and projections.
29. CompuMed and the Individual Defendants used the analysts as
conduits of misinformation, causing the securities analysts to mislead
investors with false or misleading statements that the defendants
intentionally or recklessly induced the analysts to make. By these acts,
defendants manipulated the price of CompuMed stock and defrauded investors
by intentionally or recklessly misleading analysts in order to cause those
analysts to issue favorable reports that in turn caused investors to
purchase CompuMed stock at artificially inflated prices.
30. The role of the securities analysts who wrote reports on
CompuMed became that of conduits by and through which CompuMed provided
false information to the marketplace in order to deceive investors and
artificially inflate the price of CompuMed stock. Acting through or by the
means of securities analysts, these defendants thus were able to manipulate
the price of CompuMed stock and to deceive investors in contravention of
Section 10(b) of the Exchange Act which makes it unlawful to employ any
manipulative or deceptive device or contrivance -- without regard to
whether the manipulation or deception is accomplished "directly or
indirectly," and without regard to whether the defendant acts personally or
"through or by means of any other person." 15 U.S.C. Section 78t(b).
31. The information about CompuMed contained in securities
analysts' reports, as alleged herein, was obtained from or based on
information obtained from CompuMed, as discussed above, and copies of
drafts of these reports were provided to CompuMed and its top officers
(including, but not limited to, the Individual Defendants) before they were
released, and those drafts were reviewed and approved by them. CompuMed
knew of these reports, their contents, that they were based on information
provided by CompuMed, and that they would be issued to members of the
investing public, be circulated throughout the investing community, and
would affect the trading price of CompuMed's common stock. CompuMed
endorsed these reports, adopted them as its own, and placed its imprimatur
on them as well as the projections, forecasts and statements contained
therein. Despite their duty to do so, the defendants failed to correct
these statements during the Class Period.
32. The investment community, and in turn, investors, relied and
acted upon the information communicated in these written reports and that
recommended that investors purchase CompuMed common stock. CompuMed
manipulated and inflated the market price of CompuMed stock by falsely
presenting to analysts, through regular meetings and during both telephonic
and written communications, the prospects of the Company and by failing to
disclose the true adverse information about the Company that was known only
to them.
33. The investment community, and in turn, investors, relied and
acted upon the information communicated by CompuMed management to
securities analysts.
PLAINTIFF'S CLASS ALLEGATIONS
-----------------------------
34. Plaintiff brings this action as a class action pursuant to
Federal Rules of Civil Procedure 23(a) and (b)(3) on behalf of all persons
and entities that purchased the common stock of CompuMed between August 31,
1995 and October 17, 1995 (the "Class Period"). Excluded from the Class
are the defendants, their family members and any entity in which any
defendant has a controlling interest.
35. 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 plaintiff at this time, plaintiff believes that there are, at
least, thousands of members of the class who traded CompuMed common stock
during the Class Period. As of August 9, 1995, CompuMed has approximately
6.8 million shares of common stock outstanding.
36. Plaintiff's claims are typical of the claims of the Class
because plaintiff and the Class members sustained damages as a result of
defendants' wrongful conduct.
37. Plaintiff will adequately protect the interests of the
Class. Plaintiff has retained counsel who are experienced and competent in
class action securities litigation. Plaintiff has no interests which are
in conflict with those of the Class.
38. A class action is superior to other available methods for
the fair and efficient adjudication of this controversy. No difficulty
will be encountered in the management of this action as a class action.
39. Questions of law and fact common to the members of the Class
predominate over any questions which may affect only individual members.
Among the common questions of law and fact are:
i) whether the federal securities laws were violated
by defendants;
ii) whether CompuMed's public statements during the
Class Period omitted and/or misrepresented material facts;
iii) whether statements made or adopted by CompuMed
officers during the Class Period regarding the Company's expected financial
results were false and misleading;
iv) whether defendants participated in the common
course of conduct complained of;
v) whether defendants acted willfully or recklessly;
vi) whether the market price of CompuMed's stock was
artificially inflated due to the non-disclosure and/or misrepresentations
complained of; and
vii) the extent of the injuries sustained by the
members of the Class and the appropriate measure of damages.
THE NATURE OF COMPUMED'S BUSINESS
---------------------------------
40. CompuMed purports to be a medical systems company which is
engaged in the application of computer technology to medicine. The Company
designs, assembles, services and distributes its own line of computer-based
cardiopulmonary medical instruments for use by physicians, hospitals,
clinics and other health care facilities. Additionally, CompuMed computer
processes electrocardiograms on line for approximately 1,600 health care
providers in the United States. In March 1994, CompuMed acquired the
rights to a pharmaceutical product, Detoxahol.
41. The Company also operates a medical laboratory for the
diagnosis of osteoporosis (the thinning and weakening of the bone).
CompuMed developed the OsteoGram technique for measuring bone density,
utilizing a technology known as radiographic absorptiometry ("RA"), in
which a standard hand x-ray is taken with a CompuMed calibration wedge in
the field of view utilizing standard x-ray equipment. The developed film
from the x-ray is then sent to the CompuMed laboratory where bone density
is analyzed with proprietary software. The OsteoGram technique is
purportedly the only osteoporosis detection technique which may be
performed without any specialized medical equipment other than the
calibration wedge.
42. In CompuMed's Form 10-K for its fiscal year ending September
30, 1994, the Company represented that:
CompuMed expects its major near-term growth to come
from the distribution and processing of this bone
density test, called the OsteoGram.
* * *
While the Company's [osteoporosis diagnosis systems]
business represents about one quarter of the Company's
total current revenues, it is expected to account for a
significant portion of the Company's revenues in future
years.
43. In his letter to CompuMed shareholders in the Company's
Annual Report for the fiscal year ending September 30, 1994, defendant
Raynovich stated:
With our OsteoGram technology, we hope to expand our
collaborations with Merck...and other strategic
partners to further the market acceptance of our
testing approach....The osteoporosis diagnostic and
therapeutic markets are expected to undergo significant
growth and our market share of testing is forecast to
be 34 percent by 1998.
As you have heard in previous communications from
CompuMed, we are currently participating in
collaborative clinical studies with Merck.
The annual report was disseminated to the public on or about April 27,
1995.
44. In Management's discussion and Analysis or Plan of Operation
contained in CompuMed's Annual Report for fiscal year ending September 30,
1994, the Company reported losses and stated that "[t]he Company
anticipates further losses until a significant market for the OsteoGram is
developed." As stated above, the Annual Report to Shareholders for fiscal
year 1994 was disseminated on or about April 27, 1995.
45. The June 27, 1995 edition of Reuters reported that CompuMed
-------
was in talks with a potential corporate partner regarding licensing of
CompuMed's OsteoGram bone density test." The Reuters article went on to
-------
report that the Company made that announcement in response to high trading
volume and increasing share price, which had increased from below $1 per
share to above $5.50 in an approximate two week period of time.
DEFENDANTS' ILLEGAL SCHEME TO INFLATE COMPUMED'S STOCK PRICE
------------------------------------------------------------
46. The Class period begins on August 31, 1995, when Merck
issued a press release announcing that CompuMed had entered into a
licensing and royalty agreement with Merck with respect to the OsteoGram
technology and explained:
Under the agreement, Merck will obtain the worldwide,
exclusive rights to the OsteoGram from CompuMed... In
exchange, CompuMed will receive a licensing fee and
-----------------------------------------
royalties on all OsteoGram tests performed over a
-------------------------------------------------
period of five years.
---------------------
* * *
The closing of the agreement is contingent upon the
---------------------------------------------------
satisfaction of certain conditions by September 22,
---------------------------------------------------
1995. (Emphasis added.)
-----
Defendant Raynovich was named in the release as the contact person for
CompuMed. Defendants approved the contents of the above press release
prior to its dissemination to the investing public.
47. On August 31, 1995, Merck issued a separate press release
announcing that it was establishing a nonprofit organization called the
"Bone Measurement Institute" to, among other things, "conduct activities to
help increase the availability of bone measurement technologies." The
release also reported that the Bone Measurement Institute would "administer
Merck's agreement with CompuMed [for the OsteoGram technology]."
48. On September 27, 1995, CompuMed issued a press release which
announced "the completion of its agreement granting Merck [] exclusive
worldwide rights to operate and market CompuMed's OsteoGram bone density
testing service." The press release reiterated that:
Under the terms of the agreement, Merck will pay
--------------
CompuMed a licensing fee and royalties on all OsteoGram
-------------------------------------------------------
tests performed for the next five years.
----------------------------------------
49. The October 6, 1995 edition of the San Francisco Chronicle
-----------------------
reported that the president of SoundView Asset Management ("SoundView")
described CompuMed as "his favorite holding," citing to the CompuMed-Merck
five year licensing and royalty agreement. The SoundView president said
that in light of the agreement, he expected the Company to break even in
1996, earn $2 per share in the following year, earn $5 per share in 1998,
and earn $10 in 1999. In accordance with the usual practice within the
securities industry, SoundView obtained the information it used to project
earnings from public information disseminated by CompuMed.
50. On October 11, 1995, Montgomery Securities issued a press
release announcing that it was initiating coverage of CompuMed with a "Buy"
rating. The release stated that Montgomery Securities expected CompuMed to
earn $0.10 per share in fiscal year 1996 and $0.83 per share in fiscal year
1997. Additionally, Montgomery Securities reported a one-year target price
of $25 and described the Company's OsteoGram system. In accordance with
the usual practice within the securities industry, Montgomery Securities
obtained the information it used to project fiscal year earnings and target
price from CompuMed.
51. The October 12, 1995 edition of the San Francisco Chronicle
-----------------------
reported that as a result of the October 11, 1995 announcement by
Montgomery Securities, the price of CompuMed stock had jumped $2-3/4 to
$17-1/8, an increase of 22%.
52. The market reacted to these positive announcements about
CompuMed's growth potential in light of its licensing and royalty agreement
with Merck. During the six week period between August 31, 1995, the day
that the CompuMed-Merck agreement was first publicly announced, and October
16, 1995, CompuMed's stock price increased from approximately $9-1/16 to
$16-7/8 and traded as high as $19-1/8 during the Class Period.
53. On October 17, 1995, nearly three weeks after CompuMed made
its September 27, 10995 announcement concerning its completion of
negotiations with Merck, and less than one week after Montgomery Securities
had initiated coverage of the stock, the Company issued a statement which
announced the terms of the CompuMed-Merck licensing and royalty agreement.
In the statement, which was filed with the Company's Form 8-K, CompuMed
explained:
Under the license agreement for the first generation
OsteoGram, Merck will pay CompuMed royalties for each
revenue-producing test using the OsteoGram technology
during the years 1996 through 2000. The royalties will
escalate from $2 to $4 per test over that period.
These royalty payments have no maximum amount during
----------------------------------------------------
1996 through 1998, but they are subject to a maximum in
-------------------------------------------------------
1999 equal to the lesser of 10 percent of Merck's total
-------------------------------------------------------
collected revenues or $3 million and a maximum in 2000
------------------------------------------------------
equal to the lesser of 10 percent of Merck's total
--------------------------------------------------
collected revenues or $4 million. (Emphasis added.)
--------------------------------
54. The Company's Form 8-K filed on October 17, 1995 included
the September 22, 1995 CompuMed-Merck licensing and royalty agreement. The
agreement provided that Merck shall pay CompuMed the following for each
OsteoGram test: 1) $2 per test in Year 1; 2) $2.50 per test in Year 2; 3)
$3 per test in Year 3; 4) $3.50 per test in Year 4; and 5) $4 per test in
Year 5. The agreement did, however, place the cap on royalty payments
which CompuMed could receive during Years 4 and 5, as described in the
previous paragraph.
55. The October 17, 1995 revelation of the true terms of the
CompuMed-Merck agreement stunned the investing public. CompuMed's shares,
which had traded as high as $19-1/8 during the Class Period plummeted 48%
on October 17, 1995. The price of CompuMed stock opened at $16 and fell to
as low as $7 before closing at $8-1/4 per share on trading volume in excess
of 4.3 million shares.
56. The October 18, 1995 edition of the San Francisco Chronicle
-----------------------
reported that Merck had sought the royalty caps late in the negotiations
between CompuMed and Merck. Thus, CompuMed had agreed upon the royalty
caps for Years 4 and 5 prior to September 22, 1995.
57. The defendants' public statements and others of similar
import described above regarding CompuMed's licensing agreement with Merck
were materially false, misleading and lacking a reasonable basis in that
defendants materially misrepresented and/or failed to disclose, inter alia,
----- ----
that:
(a) The September 22, 1995 agreement between Merck and CompuMed
provided a cap on the amount of royalty payments which CompuMed could
receive from Merck during the fourth and fifth years of the five year
royalty period, and the defendants were aware of this fact prior to October
17, 1995;
(b) As a result of the fourth and fifth year caps on the royalty
payments to CompuMed, CompuMed could not meet income expectations;
(c) Because of the fourth and fifth year cap on royalties under
the CompuMed-Merck licensing agreement, CompuMed could not meet growth and
earnings expectations.
58. As a result of the dissemination of the aforementioned false
and misleading public documents and statements, the market price of
CompuMed's common stock was artificially inflated through the Class Period.
In ignorance of the adverse facts which were concealed by defendants,
plaintiff and the members of the Class purchased CompuMed common stock at
artificially inflated prices. Had plaintiff and the other members of the
Class known of the materially adverse information not disclosed by the
defendants, they would not have purchased CompuMed common stock at the
artificially inflated prices which they did.
INSIDER TRADING
---------------
59. During the Class Period, defendant Pollom was Executive Vice
President and Chief Financial Officer of the Company and, as a result of
such position, was privy to confidential, proprietary information
concerning the Company's business, markets, contractual agreements,
financial condition and future business prospects. Notwithstanding his
duty to abstain from trading CompuMed common stock under the circumstances,
or to disclose the material nonpublic information prior to trading,
defendant Pollom sold 5,000 shares of CompMed common stock between
September 21, 1995 and September 29, 1995 at prices between $10.38 and
$12.25 per share.
60. In all, the gross proceeds which Pollom realized from his
sales were made prior to the disclosure of the material adverse facts
described above and at a time when CompuMed common stock was artificially
inflated in price as a result of defendants' illegal conduct as alleged
above.
61. During the Class Period, defendant Mark was the Company's
Medical Director and served as a Director of CompuMed and, as a result of
such position, was privy to confidential, proprietary information
concerning the Company's business, markets, contractual agreements,
financial condition and future business prospects. Notwithstanding his
duty to abstain from trading CompuMed common stock under the circumstances,
or to disclose the material nonpublic information prior to trading,
defendant Mark sold 22,800 shares of CompuMed stock during the Class Period
and prior to the Company's negative announcement on October 17, 1995.
Defendant Mark sold the 22,800 shares at prices between $12.63 and $12.75
on September 25, 1995.
62. In all, the gross proceeds which Mark realized from his
sales of CompuMed stock were made prior to the disclosure of the material
adverse facts described above and at a time when CompuMed common stock was
artificially inflated in price as a result of defendants' illegal conduct
as alleged above.
63. During the Class Period, defendant Funari served as a
Director of CompuMed and, as a result of such position, was privy to
confidential, proprietary information concerning the Company's business,
markets, contractual agreements, financial condition and future business
prospects. Notwithstanding his duty to abstain from trading CompuMed
common stock under the circumstances, or to disclose the material nonpublic
information prior to trading, defendant Funari sold 19,542 shares of
CompuMed stock during the Class Period and prior to the Company's negative
announcement on October 17, 1995. Defendant Funari sold the 19,542 shares
at $11.52 per share on September 28, 1995.
64. In all, the gross proceeds which Funari realized from his
sales of CompuMed stock were made prior to the disclosure of the material
adverse facts described above and at a time when CompuMed common stock was
artificially inflated in price as a result of defendants' illegal conduct
as alleged above.
65. During the Class Period, defendant Stuckelman served as
Chairman of the Board of CompuMed and, as a result of such position, was
privy to confidential, proprietary information concerning the Company's
business, markets, contractual agreements, financial condition and future
business prospects. Notwithstanding his duty to abstain from trading
CompuMed common stock under the circumstances, or to disclose the material
nonpublic information prior to trading, defendant Stuckelman sold 90,000
shares of CompuMed stock during the Class Period and prior to the Company's
negative announcement on October 17, 1995. Defendant Stuckelman sold the
90,000 shares at prices between $10.38 and $12.25 per share between
September 21, 1995 and September 29, 1995.
66. In all, the gross proceeds which Stuckelman realized from
his sales of CompuMed stock were made prior to the disclosure of the
material adverse facts described above and at a time when CompuMed common
stock was artificially inflated in price as a result of defendants' illegal
conduct as alleged above.
67. During the Class Period, defendant Walker served as a
Director of CompuMed and, as a result of such position, was privy to
confidential, proprietary information concerning the Company's business,
contractual agreements, markets, financial condition and future business
prospects. Notwithstanding his duty to abstain from trading CompuMed
common stock under the circumstances, or to disclose the material nonpublic
information prior to trading, defendant Walker sold 913 shares of CompuMed
stock during the Class Period and prior to the Company's negative
announcement on October 17, 1995. Defendant Stuckelman sold the 913 shares
at $11.38 per share on September 28, 1995.
68. In all, the gross proceeds which Stuckelman realized from
his sales of CompuMed stock were made prior to the disclosure of the
material adverse facts described above and at a time when CompuMed common
stock was artificially inflated in price as a result of defendants' illegal
conduct as alleged above.
69. During the Class Period, while they were in possession of
material adverse information concerning the CompuMed-Merck agreement, but
the investing public was not, Individual Defendants Pollom, Mark, Funari,
Stuckelman, and Walker sold in the aggregate 138,255 shares of CompuMed
stock for over $1.512 million in gross proceeds.
COUNT I
VIOLATION OF SECTIONS 10(b) OF THE EXCHANGE ACT
AND SEC RULE 10b-5
------------------------------------------------
70. Plaintiff incorporates by reference and realleges Paragraphs
1-69, above.
71. This Count is asserted by plaintiff and the Class against
all named defendants, and is based upon Section 10(b) of the Exchange Act,
15 U.S.C. Section 78j(b), and Rule 10b-5 promulgated thereunder.
72. During the Class Period, the defendants engaged in a plan,
scheme and unlawful course of conduct, pursuant to which they knowingly and
recklessly engaged in acts, transactions, practices, and courses of
business which operated as a fraud upon plaintiff and the other members of
the Class, and made various untrue statements of material facts and omitted
to state material facts necessary in order to make the statements made, in
light of the circumstances under which they were made, not misleading to
plaintiff and the other class members. The purpose and effect of said
scheme was to artificially inflated the price of CompuMed common stock in
order to, inter alia, induce plaintiff and the Class to purchase CompuMed
----------
common stock during the Class Period at artificially inflated prices.
73. Each of the defendants knew or recklessly disregarded the
fact that the aforesaid acts and practices, misleading statements and
omissions would adversely affect the integrity of the market in CompuMed
common stock and would artificially inflate or maintain the price of such
stock.
74. By reason of the foregoing, defendants directly violated
Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder in
that they, or a person whom they controlled (a) employed devices, schemes
and artifices to defraud, (b) made untrue statements of material facts or
omitted to state material facts necessary 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 or deceit upon plaintiff and the other members of
the Class in connection with their purchases of CompuMed common stock
during the Class Period.
75. As a result of the foregoing, the market price of CompuMed
common stock was artificially inflated during the Class Period. In
ignorance of the false and misleading conduct described above, plaintiff
and the other members of the Class relied, to their damage, on the
integrity of the market set price for CompuMed common stock.
76. The price of CompuMed common stock declined materially upon
the public disclosure of the true facts which had been misrepresented or
concealed as alleged in this Complaint. Plaintiff and the other members of
the Class have suffered substantial damages as a result of the wrongs
herein alleged.
77. Plaintiff and the other members of the Class, at the time of
the false misrepresentations and omissions as alleged herein, were ignorant
of the falsity of these statements, and believed them to be true. In
reliance upon said misrepresentations, the integrity of the market and the
fidelity, integrity and superior knowledge of defendants, and in ignorance
of the true facts, plaintiff and the other Class members were induced to
and did purchase CompuMed common stock. Had plaintiff and other members of
the Class known the true facts, they would not have taken such action.
COUNT II
VIOLATION OF SECTION 20(a) OF THE EXCHANGE ACT
----------------------------------------------
78. Plaintiff incorporates by reference and realleges Paragraphs
1-77, above.
79. This count is asserted by plaintiff and the Class against
the Individual Defendants, as defined in Paragraph 15, supra, and is based
-----
upon Section 20(a) of the Exchange Act [15 U.S.C. Section 78t(a).
80. Defendants Raynovich, Pollom, Mark, Funari, Stuckelman, and
Walker, by reason of their stock ownership, management positions and/or
membership on CompuMed's board of directors, and by reason of their acts
alleged herein, controlled CompuMed within the meaning of Section 20(a) of
the Exchange Act.
81. The Individual Defendants violated Section 20(a) of the
Exchange Act and are liable for the acts of CompuMed which caused damage to
the plaintiff and members of the Class.
JURY DEMAND
-----------
Plaintiff hereby demands a trial by jury.
Dated: October 19, 1995 GOLD BENNETT & CERA
By: /s/ Paul F. Bennett
-----------------------
Paul F. Bennett
and
RABIN & GARLAND
Attorneys for Plaintiff and
All Others Similarly Situated
PRAYER FOR RELIEF
-----------------
WHEREFORE, plaintiff prays for judgment as follows:
1. Declaring this to be a class action pursuant to Rules 23(a)
and (b)(3) of the Federal Rules of Civil Procedure.
2. Awarding plaintiff and the members of the Plaintiff Class
damages;
3. Awarding plaintiff and the members of the Class pre- and
post-judgment interest, as well as attorneys' fees, experts' fees, and
costs;
4. Awarding plaintiff and the members of the Class
extraordinary equitable and/or injunctive relief, including attaching,
impounding and imposing a constructive trust upon or otherwise restricting
the proceeds of defendants' trading activities or their other assets so as
to assure that the Class has an effective remedy; and
5. Awarding such other relief as this Court may deem proper.
Dated: October 19, 1995 GOLD BENNETT & CERA
By: /s/ Paul F. Bennett
-----------------------
Paul F. Bennett
and
RABIN & GARLAND
Attorneys for Plaintiff and
All Others Similarly Situated
Exhibit 99.2
Patrick J. Grannan (SBN 115693)
Tina B. Nieves (SBN 134384)
CHIMICLES, JACOBSEN & TIKELLIS
First Interstate World Center
633 West Fifth St., Suite 3300
Los Angeles, CA 90071
(213) 623-8100
C. Keith Greer (SBN 135537)
COLTON, ROESSER & GREER
445 Marin View Avenue, Suite 105
Del Mar, CA 92014
(619) 259-1100
Attorneys for Plaintiffs
IN THE UNITED STATES DISTRICT COURT
FOR THE CENTRAL DISTRICT OF CALIFORNIA
RONALD M. SHERIN, on behalf of )
himself and all others )
similarly situated, ) Case No. 95-7164 MRP (MCx)
)
Plaintiff, ) CLASS ACTION
)
v. ) COMPLAINT FOR VIOLATION
) OF FEDERAL SECURITIES
CompuMed Inc. and Rod N. Raynovich ) LAWS, FRAUD AND
) NEGLIGENT MISREPRE-
Defendants. ) SENTATION
)
) DEMAND FOR JURY TRIAL
________________________________________)
All allegations made in this Complaint are based on information and
belief except those allegations which pertain to the named plaintiff and
his counsel, which are based on personal knowledge. Plaintiff's
information and belief is based, inter alia, on the investigation made by
----------
and through his attorneys.
NATURE OF THE ACTION
--------------------
1. This is a securities class action on behalf of all persons, other
than defendants, who purchased or otherwise acquired the common stock of
CompuMed, Inc. (hereinafter "CompuMed" or "the company" between June 27,
1995 and October 20, 1995, the "Class Period") and were damaged as a result
of defendants' materially false and misleading positive statements and/or
omissions about the company in violation of section 10(b) and section 20 of
the Exchange Act of 1934, as amended (the Exchange Act), 15 U.S.C. Sections
78(j) and 78(t). These statements or omissions, which defendants knew had
no reasonable basis when made, operated to artificially inflate the price
the plaintiff and other class members paid for the company's stock.
2. CompuMed is a Manhattan Beach, California-based Delaware
corporation which uses computer technology to devise solutions to health
care problems. One of its major products is a telecommunications network
for providing electrocardiograms on a real-time basis. This year, CompuMed
sought to market the OsteoGram as a low cost, easy to use bone density test
to diagnose osteoporosis. OsteoGram uses x-rays and computer image
analysis to help assess patient risk of osteoporosis, a thinning and
weakening of the bone found mainly in older women.
3. During the class period and shortly prior thereto, defendants
issued, caused to be issued and endorsed a series of favorable public
statements and quarterly reports to shareholders, press releases, S.E.C.
filings and communications with securities analysis regarding the company,
its business management, financial performance, and condition.
Specifically, on June 27, 1995, defendants reported to its shareholders and
the public that it was in talks with a potential corporate partner
regarding licensing of CompuMed's OsteoGram bone density test. On or about
August 31, 1995, it was revealed that the potential corporate partner was
pharmaceutical giant Merck & Co., Inc. At that time Merck was awaiting,
and later during the class period received, U.S. Food and Drug
Administration approval to market Fosamax, a drug to treat osteoporosis.
CompuMed's stock price rose from less than $2.50 per share on June 13,
1995, the date it first announced it was looking for a strategic partner to
market the OsteoGram, to $12 per share on September 27, 1995, the date the
deal with Merck was consummated. Share value continued to rise sharply
thereafter to a high of $19, on October 13, 1995, following a "buy"
recommendation by a market analyst and strong predictions of future
earnings by Lawrence A. Bowman who led financing of a private placement of
CompuMed stock in August, 1995. At no time prior to October 17, 1995, did
defendants disclose the material adverse facts which were known to the
defendants, and which defendants knew, or should have known, would be
discovered once the terms of the Merck deal were made public. Because of
this knowledge, defendants knew, or should have known, that the transaction
with Merck announced on September 27, 1995, would not yield royalties on
all OsteoGram tests performed over a five-year period, as publicly stated
by CompuMed on that date. These statements had the effect of artificially
inflating the market price of the company's securities during the Class
Period.
4. The true facts regarding CompuMed's deal with Merck became known
to the public starting on or about October 17, 1995, when the company
surprised the market by announcing in a press release disseminated to the
investment community through Reuters, Ltd., a financial wire service that
utilizes interstate telephone facilities, that CompuMed would receive no
minimum royalties under its licensing agreement with Merck. Instead
CompuMed said that Merck would pay royalties, on an "escalating" basis of
$2 to $4 per test, only on each revenue-producing test using OsteoGram
technology between the years 1996 and 2000. CompuMed also disclosed that
Merck capped the royalties to be pay over the last two years of the
contract to just a few millon dollars. Finally, CompuMed reported that the
delay not only granted Merck a perpetual exclusive license of the OsteoGram
technology but that Merck was assigned the software copyright and OsteoGram
trade name as well. In response, the market price of the company's stock
plunged on October 17, 1995 by 48.4%. CompuMed stock dropped $7.75 to
$8.25 in NASDAQ trading of almost 5.2 million shares, resulting in losses
to plaintiff and to other members of the class. Finally, on October 19,
1995, the Investor's Business Daily reported that no royalties were to be
--
paid to CompuMed by Merck during the last two years of the agreement. The
stock is currently trading at approximately $6.25 per share.
JURISDICTION AND VENUE
----------------------
5. This Court has original jurisdiction over this action pursuant to
section 27 of the Exchange Act (15 U.S.C. Section 78(aa), Sections 1331 and
1337 of Title 28 (28 U.S.C. Sections 1331 and 1337) and principals of
supplemental jurisdiction (28 U.S.C. Section 1367)
6. This action is brought under sections 10(b) and 20 of the
Exchange Act (15 U.S.C. Sections 78j and 78t) and Rule 1085 of the
Securities and Exchange Commission promulgated thereunder (17 C.F.R.
Section 240.10b-5).
7. Venue is proper is this district because the company has its
principal place of business in this district at 1230 Rosecrans Avenue,
Suite 1000, Manhattan Beach, CA. Defendants transacted business in this
district, and many of the acts, omissions and transactions described below,
including the dissemination of materially false and misleading reports,
press releases and other statements and information, occurred in this
district.
8. In connection with the acts, conduct and other wrongs alleged in
this Complaint, defendants directly or indirectly, continuously used the
means and instrumentalities of interstate commerce, including the mails and
interstate telephone and interstate wire communications, and the facilities
of National Securities markets.
PARTIES
-------
9. On October 13, 1995, during the class period, plaintiff Ronald M.
Sherin purchased 2,20 shares of CompuMed at a per share price of $18.50
relying upon the integrity of the market. Following the disclosure of the
true facts regarding the Merck licensing agreement he has suffered a loss
thereby.
10. Defendant CompuMed is a Delaware corporation based in Manhattan
Beach, California. As of August 9, 1995, the company had 6,886,556 current
outstanding shares of its common stock. The company's common stock was, at
all times during the class period, actively traded on the National
Association of Securities Dealer Automated Quotation System, NASDAQ.
11. Defendant Rod N. Raynovich was at all relevant times a member of
the board, President and chief executive officer of CompuMed. Defendant
Raynovich was one of the company's spokespersons for various press reports
during the class period.
CONTROL PERSON AND SCHEME ALLEGATIONS
-------------------------------------
12. Defendant Raynovich is liable as a direct participant in the
wrongs complained of and is secondarily liable as a control person.
13. Defendant Raynovich is a "control person" within the meaning of
Section 20a of the Exchange Act by virtue of his ability to exercise
control over the conduct of the company and its officers.
14. Defendant Raynovich's control is demonstrated by his position or
association with the company which made him privy to adverse non-public
information about the company, including the company's operations,
finances, financial condition and future prospects; his involvement in the
company's operations; his particular involvement in, or authority over, the
content and dissemination of the false and/or misleading statements as set
forth in this complaint; and/or his status as president and a director of
the company. He therefore, has the power to influence, and did influence
directly or indirectly, the decision-making of the company, including the
content of the various statements which plaintiff contends are false and
misleading. Moreover, defendant was provided with or had access to copies
of the company's reports, press releases, public filings or other
statements alleged by plaintiff to be misleading prior to and shortly after
these statements were issued. Defendant Raynovich had the ability to
prevent the issuance of these statements or cause the statements to be
corrected.
15. Plaintiffs incorporate by reference the allegations set forth
elsewhere in this Complaint, particularly, in Paragraphs 27 through 39,
regarding the acts, practices, artifices, devices, and misleading
statements that constitute primary wrongs in violation of federal
securities law and state law and which adversely affect the integrity of
the market for the company's stock and artificially inflated or maintained
the price of such securities.
16. Defendant Raynovich knew, or in a reckless or grossly negligent
manner, disregarded, that the false and misleading statements set forth in
this Complaint existed and that the true facts had not been disclosed to
the public.
17. Defendant Raynovich is primarily responsible for the wrongs
described in this Complaint in that he was able to and did, directly or
indirectly, control the content of various financial reports, financial
statements and press releases of the company. Defendant Raynovich knew in
what respects the company's various filings, financial reports, financial
statements and press releases were false and misleading and furthered the
fraud by authorizing the dissemination to the public of the false and
misleading information complained of by plaintiffs. Moreover, as an
officer and director of a publicly held company, defendant Raynovich had a
duty to promptly disseminate truthful information which would be material
to investors in compliance with integrated disclosure provisions of the SEC
as embodied in the SEC regulation S-X (17 C.F.R Sections 210.01 et seq.)
-- ---
and S-K (17 C.F.R. Sections 229.10 et seq.) and other SEC regulations,
including accurate and truthful information with respect to the company's
operations, financial conditions and earnings so that the market price of
the company's common stock would be based on truthful, complete and
accurate information.
18. In taking the actions particularized in this Complaint, defendant
Raynovich acted with an awareness of the primary wrongdoing, realized that
his conduct would substantially assist the accomplishment of the fraud and
was aware of his overall contribution to, and furtherance of, the
fraudulent course of conduct.
19. Defendant Raynovich participated in the unlawful conduct alleged
in this Complaint in order to enrich himself at the public's expense
raising money from the investing public through the sale of securities in
violation of the anti-fraud provisions of the federal securities laws.
Defendant Raynovich prolonged the illusion of the company's continued
dramatic rise in profitability, and concealed the adverse facts concerning
the company's operations and prospects relating to the Merck licensing
agreement so that he could: (1) protect his position and the substantial
compensation and prestige he obtained thereby; (2) inflate the company's
earnings and thereby obtain extra and/or bonus compensation; and (3)
inflate the price of the company's common stock in order to profit upon
sale thereof.
CLASS ACTION ALLEGATIONS
------------------------
20. Plaintiff brings this action as a class action pursuant to
Federal Rules of Civil Procedure 23(a) and (b)(3) on behalf of all persons
who purchased or otherwise acquired the securities of CompuMed between June
27, 1995 and including October 20, 1995, inclusive ("class period").
Excluded from the class are the defendants named in this complaint, the
members of the immediate family of the individual defendant, any entity in
which any defendant has a controlling interest, and the legal
representatives, heirs, successors and assigns of any such excluded party.
21. The members of the class are so numerous that joinder of all
members is impracticable. While the exact number of the class members can
be determined only by appropriate discovery, plaintiff believes that the
class members are numbered in the thousands. Approximately 5 million
shares of the company's stock were outstanding and actively traded in the
"float" during the class period.
22. Plaintiff's claims are typical of the claims of the members of
the class. Plaintiff and all members of the class sustained damages as a
result of defendants wrongful conduct as complained of in this action.
Plaintiff will fairly and adequately protect the interests of the members
of the class and has retained counsel competent and experienced in class
and securities litigation.
23. A class action is superior to other available methods for the
fair and efficient adjudication of this controversy. Since the damages
suffered by individual Class Members may be relatively small, albeit
significant, the expense and burden of individual litigation makes it
virtually impossible for the Class Members individually to seek redress for
the wrongful conduct alleged.
24. 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:
(a) Whether the federal securities laws were violated by
defendants' acts as alleged in this Complaint;
(b) Whether defendants employed any device, scheme and artifice
to defraud the members of the Class;
(c) Whether the documents, releases and statements disseminated
to the investing public and the shareholders made any untrue statements of
material fact concerning the business affairs and prospects of the Company;
(d) Whether the documents, releases and statements disseminated
to the investing public and the shareholders omitted to state material
facts necessary to make the statements made about the Company not
misleading;
(e) Whether defendants engaged in acts, practices or a course of
business that operated or would operate as a fraud or deceit upon the
members of the Class;
(f) Whether defendants acted willfully or recklessly in omitting
to state and/or misrepresenting material facts, or in conspiring in the
making of such misstatements;
(g) Whether the market prices of the Company's common stock
during the Class Period were artificially inflated due to the
non-disclosure and/or misrepresentations complained of;
(h) Whether the members of the Class have sustained damages,
and if so, the proper measure of damages.
25. Plaintiffs know of no difficulty which will be encountered in the
management of this litigation which would preclude its maintenance as a
Class Action.
26. The names and addresses of the record owners of the Company's
common stock purchased during the Class Period are available from the
Company's transfer agent. Notice can be provided to such record owners via
first-class mail using techniques and a form of notice similar to those
customarily used in Class Actions arising under the federal securities
laws. Further notice to beneficial owners can be provided, as may be
required by the facts and circumstances, though techniques and form of
notice similar to those customarily used in Class Actions arising under the
federal securities laws.
FALSE AND MISLEADING STATEMENTS AND
-----------------------------------
UNDISCLOSED ADVERSE INFORMATION
-------------------------------
27. During the Class Period, and during a period of time preceding
the class period, defendants, acting individually and in concert with each
other, in connection with the purchase or sale of the securities and by use
or means of instruments of transportation or communication in interstate
commerce or by use of the mails (a) employed a device, scheme and artifice
to defraud; (b) made untrue statements of material fact and omitted to
state material facts necessary to make the statements made not misleading;
and (c) engaged in acts, practices, or a course of business that operates
or would operate as a fraud or deceit, all by the acts, means and
statements, among others, alleged below.
28. During the Class Period and prior thereto, in an effort to
precondition the market, defendants issued, caused to be issued, and
endorsed a series of false and overly optimistic statements contained in
press releases, announcements, business wire communications and filings
intended by defendants to be made public. In addition, throughout the
Class Period, the Company was in contact with stock market professionals,
securities analysts and similar members in the professional investment
community in efforts to promote the Company and to inform the investment
community that the Company would achieve increased revenues and earnings
during the Class Period as a result of the much touted agreement with
pharmaceutical giant Merck. Analysts employed by securities firms prepare
written reports and make recommendations from time to time about public
companies such as CompuMed. In writing their reports and making their
recommendations, these analysts rely in substantial part upon information
provided by and statements and reports made publicly by the Company,
information provided to them privately by the Company, and assurances by
the Company that the information in the analyst reports does not materially
vary from the Company's internal knowledge of its operations and prospects.
Defendants' statements, catalogued below, were disseminated with the
intention that the investing public would read the statements, the market
would be influenced by the statements, the price of the Company's stock
would reflect the market information, and plaintiffs and other Class
Members, as well as other investors, ignorant of the true facts, would
purchase the Company's securities at inflated prices.
29. Defendants used their communications to analysts to ensure that
CompuMed (a little known company in the months prior to the class period)
could command top dollar -- and then some -- for its stock before the true
terms of its Merck agreement would be discovered. The securities analysts
following CompuMed reiterated these representations in their research
reports.
30. The information about CompuMed contained in the securities
analysts report, was obtained from or based on information obtained from
CompuMed. Defendants knew of this report, its contents, that it was based
on information provided by the company, and that it would be issued to
members of the investing public, be circulated throughout the investment
community and impact the trading price of CompuMed common stock. The
company endorsed this report, adopted them as its own and placed its
imprimatur on them as well as the projections, and forecasts and statements
contained therein. Despite their duty to do so, the defendants failed to
correct these statements during the Class Period.
31. The investment community, and in turn, investors, relied and
acted upon the information communicated in the written report that
recommended that investors purchase CompuMed common stock.
32. On June 27, 1995, CompuMed stated, as reported by Reuters, that
it was in talks with a potential corporate partner regarding the licensing
of the company's OsteoGram bone density test. The OsteoGram uses computer
image analysis to help asses patient risk of osteoporosis. Reuters
reported that the company made the statement in response to recent high
trading volumes in CompuMed stock. The stock had been trading at above
average volume for about two weeks, the company reported, and its shares
had risen from below $l.00 per share to above $5.50 per share in the two
weeks preceding the class period.
33. On August 31, 1995, Business Wire, Inc. reported that Merck would
obtain the worldwide, exclusive rights to the OsteoGram, for which CompuMed
would receive a "licensing fee and royalties on all OsteoGram (R) tests
performed over a period of five years." On September 8, 1995, Financial
Times Limited Pharmaceutical Business News reported that Merck's
osteoporosis drug Fosamax, was still awaiting final Food and Drug
Administration approval. The Pharmaceutical Business News also reported
that once the drug is available, Merck will want to increase public
osteoporosis awareness and insure that the means to screen for the
condition are widely available. It was further reported that under the
agreement with CompuMed, Merck would manage the OsteoGram Analysis Center
which performs computer analysis as part of the test on a non profit basis,
through Merck's Bone Measurement Institute.
34. On September 27, 1995, Business Wire, Inc. and Reuters, Ltd.
reported that CompuMed had announced the completion of its agreement to
grant Merck exclusive worldwide rights to operate and market the company's
OsteoGram bone density testing service. Under the terms of the agreement,
CompuMed stated that Merck would pay CompuMed a licensing fee and royalties
on all OsteoGram tests performed for the next five years. According to the
--- ----
Business Wire, CompuMed also stated that Merck would also work to develop
OsteoGram product improvement.
35. As of September 27, 1995, no mention had been made by defendants
or anyone at CompuMed that under the terms of the agreement signed that day
that: (a) royalties were not to be paid on all tests, but only on "revenue
producing" tests; and (b) Merck had actually capped the royalties it would
pay in the final two years of the contract, to only a few million dollars,
as later reported by CompuMed, or that no royalties would be paid in the
last two years, as was reported on October 19, 1995, by Investors Business
Daily. These non-disclosures are particularly critical in light of the
information reported September 8, 1995 that Merck would utilize the
OsteoGram test on a non-profit basis through Merck's Bone Measurement
Institute. Instead, defendants herein chose to remain silent knowing that
disclosure of the royalties reduction would have an adverse impact on
analysts estimates of the company's share value and would thus reverse what
had been in the prior two months, on news of the licensing agreement, an
overwhelming upward trend.
36. At the same time that defendants were withholding this material
adverse information from the public, individual officers and directors
herein were selling their stock at what only they knew were artificially
inflated prices. On September 21, 1995 Robert Stuckelman, former president
and a current director, sold 20,000 shares (which had been trading at under
$l.00 three months earlier) for $10.38. On September 22, 1995, Stuckelman
sold another 30,000 shares -- 10,000 shares at $11.50 and 20,000 at $12.25.
On September 27, 1995, Stuckelman sold another 7,000 shares at $12.13 and
on September 29, he sold an additional 20,000 shares at $10.75. Director
Howard Mark sold over 22,000 shares on September 25, 1995; 10,000 shares at
$12.75 per share and 12,800 shares at $12.63 per share. Vice President
Devere B. Pollum also sold over 5,000 shares during the class period,
including 500 shares on August 14, 1995 at $8.88 per share, 1500 shares on
September 8, 1995 at $9.00 per share, and 3,500 shares at $9.63 per share
on September 13, 1995. Director Robert G. Funari sold 19,542 shares at a
per share price of $11.52. Vice Rod Pitre Sold 500 shares on August 14,
1995 at 8.88 per share. Collectively company insiders have received
proceeds of $1,600,316.70 from the sale of their personal CompuMed holdings
during the class period.
37. On October 6, 1995, the San Francisco Chronicle quoted Lawrence
A. Bowman, president of SoundView Asset Management, which led the financing
of a $5.1 million private placement of 1.2 million shares of CompuMed in
August, 1995, as stating that CompuMed is his favorite "tech" stock
holding. Bowman told the Chronicle that he expected the company to earn $2
per share next year, $5 per share in 1998 and $10 per share in 1999.
Bowman concluded that the stock should eventually hit 45, "if all goes
well." On October 11, 1995 Montgomery Securities initiated coverage of
CompuMed Inc. with a "buy" rating. Montgomery Securities analyst David
Crossen estimated the company to earn $0.10 per share in fiscal year
(September) 1996 and $0.83 in fiscal year (September) 1997. His one-year
target price was $25.00 or 74% above current levels. CompuMed stock rose
one to 15 3/8 on October 11, 1995, eventually reaching a high of $19.125
per share on October 13, 1995.
38. On October 17, 1995, after insiders had profited from defendants'
fraudulent silence, the company disclosed, for the first time, that it did
------------------
not have the immediate profit potential it had reported in prior statements
relating to the September 27 licensing agreement with Merck. On that day,
adverse material information regarding the true details of the September
27, 1995, licensing agreement signed by Merck and CompuMed began to be
disclosed to the public, causing damage to plaintiff and other members of
the class herein. On October 17, 1995, CompuMed released a statement
detailing the terms of the agreement in which it stated that Merck would
pay royalties only for each revenue-producing test using the OsteoGram
------- ---------
technology between 1996 and the year 2000. CompuMed revealed that the
royalties would "escalate" from $2.00 to $4.00 per test during that period.
The company reported for the first time that under the agreement Merck was
granted a perpetual, exclusive license of CompuMed's OsteoGram technology
and was assigned CompuMed's software, copyright and OsteoGram trade name.
(CompuMed did retain the right to make major enhancements to the technology
and to use or license the enhancements, however, subject to providing Merck
with first opportunities to license or acquire them from CompuMed on
negotiated terms. Contrary to its prior public statements, CompuMed
further disclosed that Merck had kept the royalties it would pay at just a
few million dollars in the final two years of the contract. In response to
this new news, CompuMed stock plunged 48% to 8.25 and in the few days
following this announcement and when it was later reported that no
--
royalties would be paid during the last two years of the agreement, has
continued to trade downward, as of October 20, to close at approximately
$6.25 per share.
39. The undisclosed adverse information concealed by defendants
during the Class Period is the type of information which, because of SEC
regulations, regulations of the national stock exchanges and customary
business practice, is expected by investors and securities analysts to be
disclosed and is known by corporate officials and their legal and financial
advisors to be the type of information which is expected to be and must be
disclosed. For example:
a. Under Item 303 of the Regulation S-K, promulgated by the SEC
under the Exchange Act, there is a duty to disclose in periodic reports
--------
filed with the SEC "known trends or any known demands, commitments, events
or uncertainties" that are reasonably likely to have a material impact on a
company's sales revenues, income or liquidity, or which cause previously
reported financial information not to be indicative of future operating
results. 17 C.F.R.-229.303(a)(1)-(3) and Instruction 3. In addition to
the periodic reports required under the Exchange Act, management of a
public company has a duty promptly "to make full and prompt announcements
of material facts regarding the company's financial condition." Release
No. 34-8995 (October 15, 1970) 3 Fed. Sec. L. Rep. (CCH)^23,120A, at
17,095, 17 C.F.R._241.8995. The SEC has repeatedly stated that the anti-
fraud provisions of the federal securities laws, which are intended to
ensure that the investing public is provided with "complete accurate
information about companies whose securities are publicly traded," apply to
all public statements by persons speaking on behalf of the publicly traded
companies "that can reasonably be expected for each investors and the
trading markets, whoever the intended primary audience." Release No. 33-
6504 (January 13, 1984) 3 Fed. Sec. L. Rep. (CCH)^23,120B at 17,095-3, 17
C.F.R._241.20560. The SEC has emphasized that "[i]nvestors have legitimate
expectations that public companies are making, and will continue to make,
prompt disclosure of significant corporate developments." Release No.
18271 (November 19, 1981) [1981-1982 Transfer Binder] Fed. Sec. L. Rep.
(CCH)^83,049, at 84,618; and
b. Schedule D of the National Association of Securities Dealers
("NASD") Manual, which governs companies whose securities are included in
the NASDAQ National Market System, requires a NASDAQ company to "make
prompt disclosure to the public through the press of any material
information that may affect the value of its securities or influence
investors' decisions." NASD Manual, Schedule D, Part
II,_1(c)(13)[1803(c)(13)].
COUNT I
-------
Violation of Section 10(b) and 20(a) of the
-------------------------------------------
Exchange Act and Rule 10b-5 Promulgated Thereunder
--------------------------------------------------
Against All Defendants
-----------------------
40. Paragraphs 1 through 39 are incorporated by reference.
41. Defendants have violated Sections 10(b) and 20(a) of the Exchange
Act, 15 U.S.C. Section 78j(b) and 78t(a) and Rule 10b-5.
42. Throughout the Class Period, defendants, individually and in
concert, directly and indirectly, engaged and participated in a continuous
course of conduct and/or conspired to conceal adverse material information
about the business, finances, financial condition, prospects and
projections of the Company as described in this Complaint. Utilizing the
United States mail and interstate telephone and wire communications,
defendants (a) employed a device, scheme and artifice to defraud; (b) made
untrue statements of material fact and omitted to state material facts
necessary to make the statements made not misleading and (c) engaged in
acts, practices or a course of business which operated as a fraud and
deceit upon the purchasers of the Company's stock during the Class Period.
43. The purpose and effect of the defendants' conduct was to inflate
artificially the price of the Company's stock during the Class Period and
to induce plaintiff and the members of the Class to purchase the Company's
securities at artificially inflated prices so that defendants could enrich
themselves at the expense of the public purchasers of the Company's
securities. Defendants purchased their scheme by issuing, causing to be
issued, or endorsing the issuance of false and misleading favorable public
statements which were contained in various public reports, filings, and
press releases.
44. Defendants acted with scienter in that defendants knew that the
public documents and statements issued or disseminated in the name of the
Company were materially false and misleading, or recklessly disregarded
that the statements were materially false and misleading; knew or were
reckless in not knowing 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.
45. Defendant CompuMed, as the issuer of many of the public
statements that were false and misleading as described above, is liable as
a primary violator of Section 10(b) and Rule 10b-5 promulgated thereunder.
46. Defendant Raynovich is responsible for the Company's public
disclosures and is liable to the Class as a direct participant, and/or
control person, in the wrongs set forth in this Complaint. Because of his
executive and managerial position with the Company during the Class Period,
he was responsible for the disclosures made in the press releases, public
reports and other publicly disseminated documents described more fully in
this action in that he either caused the disclosures to be made or
permitted the disclosures to be made. Defendant Raynovich knew, or, in
reckless disregard of the facts, should have known about the true future
prospects and financial operating condition and future prospects of the
Company during the Class Period. This information was concealed from the
members of the Class.
47. As a result of the violations of Section 10(b) and Rule lOb-5 as
alleged in this Complaint, the market price of the Company's common stock
was artificially inflated and maintained during the Class Period due to the
fact that accurate information about the Company was withheld from and
misrepresented to the investing public by defendants as set forth above.
48. As a result of the foregoing misrepresentations and omissions,
the members of the class purchased the company's common stock and made such
purchases for excessive consideration during the Class Period and thereby
were damaged.
49. Each of the misstatements and/or omissions set forth above was
interconnected and each of them, singly and cumulatively, concealed from
the Class the true financial and operating condition and future business
prospects of the Company. All such acts had the effect of supporting the
market and/or issuance prices for the Company's common stock at
artificially high levels throughout the Class Period, although such
artificial inflation was at different degrees at different times during the
Class Period.
50. In purchasing the Company's stock during the Class Period,
plaintiffs and other members of the Class relied directly or indirectly on
the financial and other statements of defendants and/or on the integrity of
the market based on the supposition that the market prices of the Company's
common stock were validly set and that no unknown manipulation had omitted
facts material to the determination of the market price of the Company's
stock. Had such materially omitted facts been known, plaintiffs and other
members of the Class would not have purchased the Company's common stock or
not have done so at the prices for which they paid.
51. As a result of foregoing, plaintiff and the other members of the
Class have been damaged.
WHEREFORE, plaintiff, on his own behalf and on behalf of the Plaintiff
Class, prays for judgment as follows:
A. Declaring this action to be a proper class action;
B. Awarding plaintiff and all members of the Plaintiffs Class
compensatory damages in an amount which may be proven at trial, together
with interest thereon;
C. Awarding extraordinary, equitable and/or injunctive relief as
permitted by law, equity and the federal statutory provisions sued
hereunder, pursuant to Rules 64 and 65 of the Federal Rules of Civil
Procedure and any appropriate state law trust on or otherwise restricting
the proceeds of defendantst wrongdoing necessary to provide the class an
effective remedy;
D. Awarding plaintiff and the Class members pre-judgment and
post-judgment interest and their costs and expenses incurred in this
action, including reasonable attorneys' fees; and
E. Such other and further relief as the plaintiff and the Class
are entitled to pursuant to Fed. R. Civ. P. 54(c).
Dated: October 23, 1995 CHIMICLES, JACOBSEN & TIKELLIS
Patrick J. Grannan
Tina B. Nieves
Robin B. Howald
By: /s/ Patrick J. Grannan
-----------------------
First Interstate World Center
633 West Fifth Street, Suite 3300
Los Angeles, California 90071
(213) 623-8100
COLTON, ROESSER & GREER
C. Keith Greer
445 Marin View Avenue, Suite 105
Del Mar, CA 92014
(619) 259-1100
Attorneys for Plaintiffs
JURY DEMAND
-----------
Plaintiff respectfully demands a trial by jury on all issues of the
fact.
Dated: October 23, 1995 CHIMICLES, JACOBSEN & TIKELLIS
Patrick J. Grannan
Tina B. Nieves
Robin B. Howald
By: /s/ Patrick J. Grannan
-----------------------
First Interstate World Center
633 West Fifth Street, Suite 3300
Los Angeles, California 90071
(213) 623-8100
COLTON, ROESSER & GREER
C. Keith Greer
445 Marin View Avenue, Suite 105
Del Mar, CA 92014
(619) 259-1100
Attorneys for Plaintiffs
Exhibit 99.3
MARC M. SELTZER (State Bar No. 54534)
CHRISTINA A. SNYDER (State Bar No. 56118)
EARL P. WILLENS (State Bar No. 030329)
CORINBLIT & SELTZER
A Professional Corporation
3700 Wilshire Boulevard, Suite 820
Los Angeles, California 90010-3085
Telephone: (213) 380-4200
ROBERT S. SCHACHTER
JEFFREY C. ZWERLING
JOSEPH LIPOFSKY
ZWERLING, SCHACHTER, ZWERLING
& KOPPELL, LLP
767 Third Avenue
New York, New York 10017
Telephone: (212) 223-3900
Attorneys for Plaintiff
UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
WESTERN DIVISION
LEON BERGER, on behalf of himself ) Case No. 95-7175 WDK (MCx)
and All Others Similarly Situated, )
)
Plaintiff, ) CLASS ACTION
) ------------
vs. )
) COMPLAINT FOR VIOLATIONS
COMPUMED, INC.; ROD N. RAYNOVICH; ) OF THE FEDERAL SECURITIES
DEVERE B. POLLUM; ROBERT G. ) LAWS
FUNARI; HOWARD L. MARK, ROBERT )
STUCKELMAN, RUSSELL WALKER, ) JURY TRIAL DEMANDED
ROBERT GOLDBERG, WINSTON MILLET ) ---- ----- --------
and JOHN MINNICK )
)
Defendants. )
-----------------------------------)
Plaintiff, individually and on behalf of all other persons similarly
situated, by his undersigned attorneys, for his complaint, alleges upon
personal knowledge as to himself and his own acts, and upon information and
belief as to all other matters, based upon the investigation made by and
through his attorneys, which investigation included, among other things, a
review of the public documents analyst reports and news releases of
CompuMed Inc. ("CompuMed" or the "Company"):
NATURE OF THE ACTION
--------------------
1. Plaintiff brings this action as a class action on behalf of
himself and all other persons who purchased CompuMed stock on the open
market during the Class Period (as defined below in Paragraph 13, to
recover damages caused by defendants' violations of the federal securities
laws with regard to the preparation and dissemination of false and
misleading statements.
2. The materially false and misleading statements concerned an
agreement entered into between CompuMed and Merck & Co. ("Merck") for the
marketing of a CompuMed's OsteoGram technology. The false and misleading
statements were contained in public statements and press releases issued by
CompuMed which caused the market price of the Company's securities to be
artificially inflated.
JURISDICTION AND VENUE
----------------------
3. Plaintiffs bring this action pursuant to Sections 10(b) and 20(a)
of the Securities Exchange Act of 1934 (the "Exchange Act") (15 U.S.C.
Sections 78j(h), and 78(t)(a)) and Rule 10b-9 promulgated thereunder, 17
C.F.R. Section 240.10b-5.
4. This Court has jurisdiction over the subject matter of this
action pursuant to Section 27 of the Exchange Act (15 U.S.C. Section 78aa)
and 28 U.S.C. Section 1331, as amended.
5. Venue is proper in this District pursuant to Section 27 of the
Exchange Act, 15 U.S.C. Section 78aa and 28 U.S.C. Section 1391(b). Many
of the acts and transactions giving rise to the violations of law
complained of herein, including the preparation and dissemination to the
investing public of false and misleading information, occured in this
District. Further Defendant CompuMed has its principal place of business
in the District at Manhattan Beach, California.
6. In connection with the acts, conduct and other wrongs complained
of herein, the Defendants, directly or indirectly, used the means and
instrumentalities of interstate commerce, including the United States mails
and interstate telephone communications, and the facilities of the national
securities exchange.
THE PARTIES
-----------
7. Plaintiff Leon Berger purchased 1,000 shares of CompuMed common
stock on September 13, 1995 at a price of $15 per share, and has been
damaged thereby.
8. Defendant CompuMed is a corporation organized under the laws of
the state of Delaware with its principal offices at 1230 Rosecrans Avenue,
Suite 1000, Manhattan Beach, California. CompuMed develops the utilization
of computer technology for the assistance in the treatment and diagnosis of
medical problems. As of August 30, 1995, CompuMed had 6.886,556 shares of
common stock outstanding. During the Class Period, the Company's common
stock was actively traded on the NASDAQ, an efficient market.
9. (a) Defendant Rod N. Raynovich ("Raynovich") was the President
and Chief Executive Officer of CompuMed at all times relevant hereto. By
reason of his stock ownership, executive positions, and his ability to make
public statements in the name of the Company, Defendant Raynovich was
controlling person of the Company and had the power and influence to cause
the Company to engage in the unlawful conduct complained of herein.
Because of his executive positions with the Company, Defendant Raynovich
had access to the adverse, material non-public information about the
Company's business, finances, products, markets and present and future
business prospects particularized herein via access to internal corporate
documents, conversations or connection with corporate officers or
employees, attendance at Company management and/or Board of Directors
meetings and committee thereof and/or via reports and other information
provided to him in connection therewith.
(b) Defendant Devere B. Pollom ("Pollom") is, and at all times
relevant hereto has been, Vice President and Chief Financial Officer of the
Company. By reason of his stock ownership, executive positions, and his
ability to make public statements in the name of the Company, Defendant
Pollom was controlling person of the Company and has the power and
influence to cause the Company to engage in the unlawful conduct complained
of herein. Because of his executive positions with the Company, Defendant
Pollom had access to the adverse, material non-public information about the
Company's business, finance, products, markets and present and future
business prospects particularized herein via access to internal corporate
documents, conversations or connections with corporate officers or
employees, attendance at Company management and/or Board of Directors
meetings and committees thereof and/or via reports and other information
provided to him in connection therewith. While in possession of material,
non public information. Pollom sold 5,000 shares of CompuMed stock,
substantial portion of his holdings, for approximately $50,000 during the
Class Period.
(c) Defendant Robert C. Punari ("Punari") is, and at all times
relevant hereto has been a Director of CompuMed. By reason of his stock
ownership and membership on the Company's Board of Directors, and his
ability to make public statements in the name of the Company, Defendant
Punari was controlling person of the Company and had the power and
influence to cause the Company to engage in the unlawful conduct complained
of herein. Because of his Board membership, Defendant Punari had access to
the adverse, material non-public information about the Company's business,
finances, products, market and present and future business prospects
particularized herein via access to internal corporate documents,
conversations or connections with corporate officers or employees,
attendance at Company management and/or Board of Directors meetings and
committees thereof and/or via reports and other information provided to him
in connection therewith. Based on inside information, Punari sold 19,542
shares of CompuMed stock, his entire holdings, for almost $215,000 during
the Class Period.
(d) Defendant Howard Mark ("Mark") is, and at all times relevant
hereto had been, a Director of CompuMed. By reason of his stock ownership
and membership on the Company's Board of Directors, and his ability to make
public statements in the name of the Company, Defendant Mark was a
controlling person of the Company and had the power and influence to cause
the Company to engage in the unlawful conduct complained of herein.
Because of his Board membership with the Company, Defendant Mark had access
to the adverse, material non-public information about the Company's
business, finances, products, markets and present and future business
prospects particularized herein via access to internal corporate documents,
conversations or connections with corporate officers or employees,
attendance at Company management and/or Board of Directors meetings and
committees thereof and/or via reports and other information provided to him
in connection therewith. While in possession of material, non-public
information, Mark sold 22,800 shares of CompuMed stock, a substantial
portion of his holdings, for over $287,000 during the Class Period.
(e) Defendant Robert Stuckelman ("Stuckelman") is at all times
relevant hereto and has been a director of CompuMed. By reason of his stock
ownership and membership on the Company's Board of Directors, and his
ability to make public statements in the name of the Company, Defendant
Stuckelman was a controlling person of the Company and had the power and
influence to cause the Company to engage in the unlawful conduct complained
of herein. Because of his Board membership with the Company, Defendant
Stuckelman had access to the adverse, material non-public information about
the Company's business, finances, products, market and present and future
business prospects particularized herein via access to internal corporate
documents, conversations or connections with corporate officers or
employees, attendance at Company management and/or Board of Directors
meetings and committee thereof and/or via reports and other information
provided to him in connection therewith. While in possession of material,
non-public information, Stuckelman sold 90,000 shares of CompuMed stock, a
substantial portion of his holdings, for over $1 million during the Class
Period.
(f) Defendant Russell Walker ("Walker") is, and at all times
relevant hereto has been a director of CompuMed. By reason of his stock
ownership and membership on the Company's Board of Directors, and his
ability to make public statements in the name of the company, Defendant
Walker was controlling parson of the Company and had the power and
influence to cause the Company to engage in the unlawful conduct complained
of herein. Because of his Board membership with the Company, Defendant
Walker had access to the adverse, material non-public information about the
Company's business, finances, products, markets and present and future
business prospects particularized herein via access to internal corporate
documents, conversations or connections with corporate officers or
employees, attendance at Company management and/or Board of Directors
meetings and committees thereof and/or via reports and other information
provided to him in connection therewith. Based on inside information,
Walker sold 918 shares of CompuMed stock, his entire holdings, for over
$l0,000 during the Class Period.
(g) Defendant Robert Goldberg ("Goldberg") is a Director of
CompuMed.
(h) Defendant Winston Millet ("Millet") is a Director of
CompuMed.
(i) Defendant John Minnick ("Minnick") is a Director of
CompuMed.
10. Defendants Raynovich, Pollom, Funari, Mark, Stuckelman, Walker,
Goldberg, Millet and Minnick are referred to herein collectively as the
"Individual Defendants."
11. Defendants had a duty to promptly disseminate accurate and
truthful information regarding the Company's operations and financial
condition, or to cause and direct that such information be disseminated and
to promptly correct any previously disseminated information that was
misleading to the market. As result of their failure to do so, the value
of CompuMed common stock was artificial inflated during the Class period,
causing injury is Plaintiff and the Class.
12. The Defendants participated in and consciously or recklessly
pursued the unlawful conduct alleged herein in order to enrich themselves
at the public's expense, to protect their emoluments and privileges of
corporate office, to maintain the value of their stock holdings in CompuMed
and to sell some of the shares at inflated prices.
CLASS ACTION ALLEGATIONS
------------------------
13. Plaintiff brings this action as a class action pursuant to Rules
23(a) and 23(b)(3) of the Federal Rules of Civil Procedure on behalf of a
class (the "Class") consisting of all persons who purchased the common
stock of CompuMed during the period from August 31, 1995 through October
17, 1995, inclusive (the "Class Period"). Excluded from the Class are the
Defendants names herein, members of the immediate family of the individual
Defendants, any entity in which any Defendant has a controlling interest,
and the legal affiliates, representatives, heirs, controlling persons,
successors, and predecessors in interest or assigns of any such excluded
party.
14. Members of the Class are sufficiently numerous that joinder of
all members is impractical. As of August 30, 1995, there were 6,866,556
shares of the Company's common stock outstanding. Throughout the Class
Period, the Company's common stock was actively traded on the NASDAQ
Exchange, an open, developed and efficient market. While the exact number
of Class members can only be determined by appropriate discovery,
Plaintiffs believe that Class members number in the thousands, that they
are geographically dispersed, and may be identified from records maintained
by CompuMed or its transfer agent and notified of this action.
15. Plaintiff's claim are typical of the claims of the members of the
Class. Plaintiff and all members of the Class sustained damages as a
result of Defendants' wrongful conduct complained of herein.
16. Plaintiff will fairly and adequately protect the interests of the
members of the Class and has retained counsel competent and experienced in
class and securities litigation.
17. A class action is superior to other available methods for the
fair and efficient adjudication of this controversy. Since the damages
suffered by individual Class members may be relatively small, the expense
and burden of individual litigation makes it virtually impossible for the
Plaintiff Class members individually to seek redress for the wrongful
conduct alleged.
18. 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:
a. whether Defendants violated federal securities law by
Defendants' act as alleged herein;
b. Whether Defendant participated in and pursued the common
course of conduct complained of herein;
c. Whether the public statements disseminated to the investing
public and to the members of the Class omitted or
misrepresented material facts about the agreement between
CompuMed and Merck, or became materially false and
misleading during the Class Period;
d. Whether defendants had a duty to correct such statements
when they learned they had become false and misleading;
e. Whether defendants acted knowingly or recklessly in making
materially false and misleading statements or in failing to
correct such statements upon learning that they were
materially false and misleading;
f. Whether the market prices of the Company's securities during
the Class Period were artificially inflated because of the
defendants' conduct complained of herein; and
g. Whether the members of the Class have sustained damages and,
if so, what is the proper measure of damages.
SUBSTANTIVE ALLEGATIONS
-----------------------
19. CompuMed is a medical systems company engaged in the application
of computer technology to medicine. One of its important new products is
the OsteoGram, which measures bone mass with standard x-ray equipment
through the use of radiographic absorptiometry ("RA") technology thereby
aiding the diagnosis and monitoring of osteoporosis.
20. In a June 13, 1995 press release, CompuMed stated how important
the OsteoGram is to the Company's future. Defendant Raynovich highlighted
the ongoing effort to locate a strategic partner for the successful
development of this product:
The company is . . . well positioned in the emerging
field of osteoporosis diagnostics, which is expected to
grow rapidly with the arrival of promising new drugs to
treat osteoporosis, said Raynovich. CompuMed is
pursuing its key objective for this year in seeking a
strategic partner for its Osteogram, a low-cost, easy-
to-use bond density test. The OsteoGram is accessible
to all potential patients because it uses computer
analysis of simple hand X-rays performed in a
physician's office.
21. CompuMed reported on June 27, 1995, that it was involved in
negotiations with another company to license the Osteogram. It did not
disclose who the potential partner was or when an agreement might be
reached. The announcement had a substantial impact on the Company's stock
price, which rose as much as 1-1/8 to 6-3/16 on trading of more than
503,000 shares.
22. On August 1, 1995, Forbes reported that Merck might emerge as
------
CompuMed's marketing partner, as Merck's new osteoporosis drug, Fosamax,
would benefit by the use of the OsteoGram to identify osteoporosis.
23. CompuMed issued a press release on August 11, 1995 in which it
reported its results for the third quarter ending June 30, 1995. In that
release, Raynovich stated: "The company is currently in the final stage of
negotiation for licensing of the Osteogram. This was previously announced
on June 27, 1995."
24. CompuMed and Merck reached an agreement on the licensing of the
OsteoGram at the end of August. In a joint press release on August 31,
1995, the companies declared:
Under the agreement, Merck will obtain the worldwide,
exclusive rights to the Osteogram from CompuMed, a
Manhattan Beach, Calif., firm. In return, CompuMed
will receive a licensing fee and royalties on all
OsteoGram tests performed over a period of five years.
Specific financial terms of the agreement were not
disclosed.
25. The companies stated that the closing of the agreement was
contingent upon the satisfaction of certain conditions by September 22,
1995.
26. Defendant Raynovich also stated that:
RA technology is a safe, valuable, inexpensive option
for measuring bone mass, particularly for the thousands
of physicians who already have standard X-ray equipment
in their offices.
27. For the next month there were no further announcements regarding
the impending transaction. On September 27, 1995, it was announced that an
agreement between March and CompuMed had been completed. The Defendants
stated:
Under the terms of the agreement, Merck will pay CompuMed a
licensing fee and royalties on all OsteoGram tests performed for
the next five years. Merck will also work to develop OsteoGram
product improvements.
Raynovich was listed as the contact person for CompuMed in the press
release.
28. While it was learned later that the agreement had actually been
signed on September 22, 1995, specifics of the deal were announced other
than that Merck would pay CompuMed a licensing fee and royalties for five
years. The announcement did not disclose that for the last two years of
the five-year agreement that the payments received by CompuMed would be
capped at the lesser of $3 million or 10% of collected revenues for year
four and the lesser of $4 million or 10% of collected revenues for year
five.
29. Thus, the statements made in the August 31, 1995 and the
September 27, 1995 announcements were materially false and misleading
because, while they highlighted that CompuMed would receive fees and
royalties on all tests performed over a period of five years, they failed
to disclose that in the last two years of the contract the amount of fees
and royalties which CompuMed could receive would be capped to a level
substantially limiting the Company's potential earnings from the agreement.
CompuMed's statement in the August press release that the specific
financial terms of the agreement were not being disclosed did not offset
the misleading nature of the information that was disclosed.
30. With the knowledge that there was a "cap" on the payments to be
paid by Merck and the resultant affect this would have on CompuMed's stock
price, the Individual Defendants began to sell shares of CompuMed stock,
before the public dissemination of the news of the "cap."
31. The following insiders sold shares of CompuMed as follows:
Name Position Date Shares
---- -------- ---- ------
Devere Pollom V.P. and CEO 09/8/95-09/12/95 5,000
Robert Funari Director 09/28/95 19,542
Howard Mark Director 09/25/95 22,800
Robert Stuckelman Director 09/21/95-09/29/95 90,000
Russell Walker Director 09/28/95 913
-------
Total 138,255
32. On October 11, 1995, apparently without the knowledge that the
agreement with Merck capped CompuMed's earnings upside potential.
Montgomery Securities rated CompuMed a "buy." On that day, CompuMed's
shares rose almost $3 per share on extraordinarily large volume from a
closing price of $14.375 on October 10, 1995 to close at $17.135 on October
11th.
33. On October 17, 1995, CompuMed finally disclosed the true details
about its agreement with Merck, when it filed with the SEC. In its press
release CompuMed stated that as to the agreement, signed on September 22,
1995:
Under the license agreement for the first generation
Osteogram, Merck will pay CompuMed royalties for each
revenue-producing test using the OsteoGram technology
during the years 1996 through 2000. The royalties will
escalate from $2 to $4 per test over that period.
These royalties have no maximum amount during 1996
through 1998, but they are subject to a maximum in 1999
equal to the lesser of 10 percent of Merck's total
collected revenues or $3 million and maximum in 2000
equal to the lesser of 10 percent of Merck's total
collected revenues or $4 million. There are no minimum
royalties under the agreement.
34. The previously undisclosed cap on royalty payments under the
agreement was highly material. According to the August 31, 1995 press
release, only a small percentage of women in the United States who are over
59 have had tests measuring their bone mass. The indication is that a huge
potential exists if women can be encouraged to take such tests. It is also
suggested that it may take a period of years before a substantial number of
women begin being tested. Thus, the cap placed on CompuMed's earnings will
come into play just when it would have been in a position to benefit the
most from the contract.
35. The materiality of this news is evidenced by the reaction of the
market. By the end of the day on October 17, CompuMed stock had closed
down 48% declining by 7 3/4 to 8 1/4 per share on trading of 5.15 million
shares. CompuMed lost all of the gains made since the announcement of the
agreement on August 31, 1995.
36. On October 18, 1995, the slide continued, with the stock price
falling another 19%, dropping by 1-9/16 to 6-11/16. According to
Bloomberg's summary of the day's results, this stock price fell "on news
that Merck & Co. will pay less then expected for its osteoporosis test."
37. As demonstrated by the market's sharp reaction to CompuMed's
announcement, the investing public had clearly been misled by the Company.
As reported by Bloomberg on October 17:
James Broadfoot, a CompuMed investor and chief
investment officer at $1.6 billion-asset Ivy Management
Inc., in Boca Raton, Florida, said the royalty rap
hadn't been expected. Today's stock slide, he said,
suggests "everybody is saying the company has misled us
and the company has lied to us." Neither CompuMed or
Merck had revealed financial arrangements when first
announcing the agreement on Aug. 31. Several of
CompuMed's directors and a vice president have sold a
total of 137,342 shares since then.
38. At the time of both the August 31, 1995 and September 27, 1995
press releases, defendants clearly knew, but intentionally or recklessly
failed to disclose, the material terms of their agreement with Merck,
including one of the most critical items -- the cap on CompuMed's royalty
earnings for the last two years of the contract. In making, authorizing or
acquiescing in the statements contained in the press releases, defendants
therefore knew or recklessly disregarded the fact that they were misleading
the market, thereby artificially inflating the price of the Company's
common stock in violation of the federal securities laws.
39. From September 3, 1995 through September 29, 1995, Company
insiders sold a total of over 138,000 shares of CompuMed stock while with
knowledge of, and access to, material non-public information concerning the
terms of the CompuMed/Merck agreement. In so doing, the Individual
Defendants who made such sales, made substantial profits by selling their
shares at prices which had been artificially inflated as a result of the
Company's misrepresentations and omissions.
40. The sales by the Individual Defendants alleged herein are not
only sufficient facts from which to infer the defendants scienter in making
the alleged misrepresentations and omissions identified herein, they also
created a duty on the part of defendants to disclose all material non-
public information in their possession at the time of such sales.
FRAUD-ON-THE MARKET-ALLEGATIONS
-------------------------------
41. (a) The common stock of CompuMed was actively traded, throughout
the Class period, on the NASDAQ Exchange and has reflected throughout the
Class period, all publicly available information concerning the Company.
(b) The NASDAQ Exchange is recognized as a highly liquid,
efficient and information sensitive market.
(c) CompuMed was followed by securities analysts employed by
brokerage firms, who wrote reports which were distributed to the sales
force and certain customers of such firms and which were available to
various automated data retrieval services.
(d) As required under the Exchange Act, the Company files
quarterly, annual and current reports with the Securities and Exchange
Commission, which reports are a matter of public record. Thus, the price
of the Company's common stock, at all times, reflected the information that
was publicly available about the Company in the financial news media.
Accordingly, Plaintiff and the Class, are entitled to a presumption of
reliance on the misrepresentations and omissions described herein.
COUNT 1
-------
FOR VIOLATIONS OF SECTION 10(b) and 20(a)
OF THE EXCHANGE ACT AND RULE 10(b)-5
PROMULGATED THEREUNDER AGAINST ALL DEFENDANTS
---------------------------------------------
42. Plaintiff incorporates by reference and realleges all paragraphs
previously alleged herein, and asserts these claims against all Defendants.
43. During the Class Period, Defendants issued and disseminated
various documents and statements to the investing public, as set forth
above, which failed to disclose the terms of the CompuMed/Merck Agreement
and which had the effect of artificially inflating the market prices of
CompuMed's securities. The Individual Defendants, by reason of their
position as Directors and officers of CompuMed had actual knowledge of the
omission set forth above and intended thereby to deceive plaintiff and the
other members of the Class, or, in the alternative, acted with reckless
disregard for the truth when they failed to disclose the true facts.
44. Defendants were under a duty to disclose the material adverse
non-public information in light of the fact that persons within the Company
were trading on inside information and in light of the fact that undertook
such duty when they made any statements at all regarding the Merck/CompuMed
Agreement.
45. The Individual Defendants manifested a conscious and continuous
intent to distort the truth and other wise mislead the plaintiff and the
other members of the Class in order to artificially support and maintain
the market price of CompuMed's securities.
46. As a result of the above described acts, defendants, severally
and in concert, directly and indirectly, by use of the means and
instrumentalities of interstate commerce, violated section 19(b) and 20(a)
of the exchange Act and Rule 10b-5 promulgated thereunder in that they
knowingly or recklessly (a) employed devices, schemes and artifices to
defraud; (b) made untrue statements of material facts or omitted to state
material facts necessary in order to make the statement made, in light of
the circumstances in which they were made, not misleading; or (c) engaged
in acts, practices and a course of business that operated as a fraud or
deceit upon plaintiffs and the Class in connection with their purchase of
the Company's common stock.
47. Because of their positions of control and authority as officers
and directors of the Company, the individual Defendants had power and
influence, and exercised the same, over the Company, and were able to and
did, directly or indirectly, control the content of the aforesaid
statements relating to the Company. Therefore, they were controlling
persons of the Company within the meaning of Section 20(a) of the Exchange
Act and liable thereunder. Because of their positions with the Company,
the Individual Defendants had access to adverse non-public information
about the financial condition, operations and future business prospects of
the Company as particularized herein and acted to misrepresent and conceal
the same.
48. With knowledge and/or reckless disregard of the truth, the
individual Defendants caused or controlled the issuance of the public
statements containing misstatements and omissions of material facts as
alleged herein.
49. As a result of the deceptive practices and false and misleading
statements and omission described above, the market price of the Company's
stock was artificially inflated throughout the Class Period.
50. Plaintiff and the Class, relying on the integrity of the market
in the Company's stock and/or defendants' misrepresentations, purchased
Company stock during the Class Period at artificially inflated prices. Had
the plaintiff and the Class known the truth concerning the misrepresented
and omitted facts described herein, they would not have purchased the
Company's stock at the prices they did, if at all. At the time of
purchases by plaintiff and members of the Class, the true value of the
Company's stock was substantially less than the prices paid by plaintiff
and the Class.
51. The price of the Company's common stock declined materially upon
the public disclosure of the facts that had been misrepresented or
concealed as alleged in this Complaint. Plaintiff and other members of the
Class have suffered substantial damages as a result.
WHEREFORE, Plaintiff, on Plaintiff's own behalf and on behalf of the
Class, prays for judgement as follows:
A. Declaring this action to be a class action pursuant to Rules
23(a) and 23(b)(3) of the Federal Rules of Civil Procedure on behalf of the
Class defined herein;
B. Awarding plaintiff and all members of the Class damages suffered
as a result of the wrongs complained of herein, together with prejudgment
interest at the maximum rate allowable by law;
C. Awarding plaintiff his costs and expenses incurred in this
action, including reasonable attorneys', accountants', and experts' fees
and expenses; and
D. Awarding plaintiff and the Class such other and further relief as
the Court deems just and proper.
MARC M. SELTZER
CHRISTINA A. SNYDER
EARL P. WILLENS
CORINBLIT & SELTZER
A Professional Corporation
ROBERT S. SCHACHTER
JEFFREY C. ZWERLING
JOSEPH LIPOFSKY
ZWERELING, SCHACHTER, ZWERLING
& KOPPELL, LLP
By /s/ Marc M. Seltzer
-----------------------------
Marc M. Seltzer
Attorneys for Plaintiff
DEMAND FOR JURY TRIAL
---------------------
Plaintiff hereby demands a trial by jury.
MARC M. SELTZER
CHRISTINA A. SNYDER
EARL P. WILLENS
CORINBLIT & SELTZER
A Professional Corporation
ROBERT S. SCHACHTER
JEFFREY C. ZWERLING
JOSEPH LIPOFSKY
ZWERLING, SCHACHTER, ZWERLING
& KOPPELL, LLP
By /s/ Marc M. Seltzer
-----------------------------
Marc M. Seltzer
Attorneys for Plaintiff
Exhibit 99.4
MILBERG WEISS BERSHAD
HYNES & LERACH
WILLIAM S. LERACH (68581)
ALAN SCHULMAN (128661)
600 West Broadway, Suite 1800
San Diego, CA 92101
Telephone: 619/231-1058
Attorneys for Plaintiffs
[Additional counsel appear on signature page.]
UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
KENSINGTON TRADING-ABE II, RIVIE P. ) No. 95-7171 JSL
GELMAN, RICHARD P. POGOZELSKY, and )
ARTHUR BIRNBAUM, On Behalf of ) CLASS ACTION
Themselves and All Others Similarly ) ------------
Situated, )
)
Plaintiffs, )
) CLASS ACTION COMPLAINT FOR
) VIOLATION OF THE FEDERAL
vs. ) SECURITIES LAWS
)
COMPUMED, INC., ROBERT )
STUCKELMAN, ROD N. RAYNOVICH, )
DeVERE B. POLLOM, HOWARD MARK, )
and ROBERT G. FUNARI, )
)
Defendants. ) Plaintiffs Demand A
) Trial By Jury
----------------------------------------) -------------------
CLASS ACTION COMPLAINT
----------------------
All allegations made in this Complaint are based on information and
belief except those allegations which pertain to the named plaintiffs and
their counsel, which are based upon personal knowledge. Plaintiffs'
information and belief is based, inter alia, on the investigation made by
----- ----
and through their attorneys and it is believed that substantial evidentiary
support for their allegations will exist after a reasonable opportunity for
discovery.
JURISDICTION AND VENUE
----------------------
1. Count I of this Complaint arises under Sections 10(b) and 20(a)
of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C.
Sections 78j(b) and 78t(a), and Rule 10b-5 promulgated thereunder by the
Securities and Exchange Commission ("SEC").
2. Venue is proper in this District pursuant to 28 U.S.C. Sections
1391(b) and 1391(c), as well as under Section 27 of the Exchange Act, 15
U.S.C. Section 77aa. All defendants either reside or transact business in
this District, and the claims asserted herein arose in substantial part in
this District.
3. In connection with the wrongful acts and conduct alleged herein,
the defendants, directly and indirectly, used the means and
instrumentalities of interstate commerce, including the United States mails
and the facilities of a national securities market to accomplish the
unlawful conduct complained of herein.
THE PARTIES
-----------
4. Plaintiffs Kensington Trading-Abe II, Rivie P. Gelman, Richard P.
Pogozelsky and Arthur Birnbaum purchased shares of CompuMed, Inc. common
stock during the Class Period, and suffered damages as a result of the
violations of law alleged herein.
5. Defendant CompuMed, Inc. ("CompuMed" or the "Company") is a
corporation organized and existing under the laws of the State of Delaware,
with principal executive offices located at 1230 Rosecrans Avenue, Suite
1000, Manhattan Beach, California 90266. As of August 9, 1995, CompuMed
had 6,886,556 shares of common stock issued and outstanding, which trade on
the NASDAQ national market system.
6. At all times relevant hereto, defendant Robert Stuckelman
("Stuckelman") was Chairman of the Board of Directors of CompuMed.
Stuckelman, who founded the Company in 1973 and served as its President
through 1982, rejoined the Company in 1989 and served as its President and
Chief Executive Officer until October 1994. As of January 20, 1995,
Stuckelman owned or controlled 406,689 shares, or 7.2% of the Company's
common stock outstanding.
7. At all times relevant hereto, defendant Rod N. Raynovich
("Raynovich") was President and Chief Executive Officer of CompuMed. On
October 18, 1994, Raynovich replaced Stuckelman as President of the
Company.
8. At all times relevant hereto, defendant DeVere B. Pollom
("Pollom") was Vice President and Chief Financial Officer of CompuMed.
9. At all times relevant hereto, defendant Howard Mark ("Mark") was
a member of CompuMed's Board of Directors and a member of the Company's
Medical Advisory Board. As of January 20, 1995, Mark owned or controlled
428,087 shares, or 7.6% of the Company's common stock outstanding.
10. At all times relevant hereto, defendant Robert G. Funari
("Funari") was a member of CompuMed's Board of Directors. As of January
20, 1995, defendant Funari owned or controlled 29,165 shares of the
Company's common stock outstanding.
11. By reason of their senior positions with the Company, their close
personal and working relationships, and access to confidential information
respecting the Company's businesses, defendants Stuckelman, Raynovich,
Pollom, Mark and Funari (the "Individual Defendants") were able to and did,
directly or indirectly, in whole or in material part, control the content
of the Company's public statements which constituted group published
information. By virtue of their positions of power and influence, the
Individual Defendants controlled all aspects of the Company's operations,
including the dissemination of information to investors and the securities
markets. In addition, the Individual Defendants' course of conduct during
the Class Period included, but was not limited to, meeting with securities
analysts, participating in conference calls with analysts, sending written
reports to analysts, and commenting upon securities analysts' reports.
This court of conduct was undertaken by the Individual Defendants knowing
-------------------------------------------------------------------------
that their written and oral statements, reports and adoption of or
------------------------------------------------------------------
acquiescence in analysts' reports would influence and inflate the price
-----------------------------------------------------------------------
that plaintiffs and other investors paid for CompuMed common stock.
-------------------------------------------------------------------
12. The Individual Defendants engaged in this common course of
misconduct to inflate the market price of CompuMed common stock in order to
perpetuate the appearance of CompuMed as a growth company with excellent
future prospects based upon a lucrative technology licensing agreement with
Merck & Co., Inc. ("Merck") that would warrant that the Individual
Defendants retain their executive and directorship positions, high
compensation and other substantial perquisites of executive employment,
allow the Individual Defendants to sell CompuMed stock at artificially
inflated prices, and enable the Company to complete a sizeable private
placement of its common stock.
CLASS ACTION ALLEGATIONS
------------------------
13. This action is brought by plaintiffs pursuant to Rules 23(a) and
23(b) of the Federal Rules of Civil Procedure, on behalf of a class (the
"Class") consisting of all persons who purchased CompuMed common stock
between August 11, 1995 and October 17, 1995, inclusive (the "Class
Period"), and who suffered damages as a result thereof. Excluded from the
Class are the named defendants, members of the immediate families of each
defendant, any entity in which any defendant has a controlling interest,
and the legal representatives, heirs, successors, predecessors in interest,
or assigns of any of the defendants.
14. The Class is so numerous that joinder of all members is
impracticable. As of August 9, 1995; there were approximately 6.9 million
shares of CompuMed common stock outstanding. It is believed that thousands
of persons purchased CompuMed common stock on the NASDAQ national market
system, which is an efficient market, during the Class Period.
15. Plaintiffs' claims are typical of the claims of the members of
the Class. Plaintiffs purchased CompuMed common stock during the Class
Period at an artificially inflated price, and sustained damages as a
result.
16. Plaintiffs will fairly and adequately protect that interests of
the members of the Class. Plaintiffs have retained competent counsel,
experiences in class and securities litigation, to ensure such protection.
The claims asserted on behalf of the Class are typical of the claims of all
members of the Class. Plaintiffs have no interest that is antagonistic to
or in conflict with the interests of those he represents.
17. A class action is superior to other available methods for the
fair and efficient adjudication of this controversy. It would be
impracticable and undesirable for all members of the Class to bring
separate actions in various parts of the country. Such actions would put
substantial and unnecessary burdens on the judicial system.
18. The prosecution of separate actions by individual Class members
also would create a risk of inconsistent and varying adjudications
concerning the subject of this action, which adjudications could establish
incompatible standards of conduct for defendants under the laws alleged
herein. Further, questions of law and fact common to the members of the
Class predominate over any questions which may affect only individual
members in that, at least by use of publicly filed reports, defendants have
acted on grounds generally applicable to the entire Class. The common
questions of law and fact include, among others:
(a) whether defendants filed and issued false and misleading
filings with the SEC;
(b) whether defendants made false and misleading statements
concerning, inter alia, the Company's business and financial prospects and
----- ----
the terms of CompuMed's agreement with Merck to license a bone mass
measurement technology;
(c) whether defendants violated Sections 10(b) and 20 of the
Exchange Act, and rule 10b-5 promulgated thereunder; and
(d) the extent of damages sustained by plaintiffs and the Class,
and the proper measure of said damages.
19. Plaintiffs do not contemplated any difficulty in managing a class
action in this forum. The class action method is superior to any other
available means for the fair and efficient adjudication of this
controversy.
SUBSTANTIVE ALLEGATIONS
------------------------
20. CompuMed designs, manufactures, distributes and services a line
of computer-based cardiopulmonary medical equipment. In addition to its
cardiac telemedicine business, the Company currently markets the
OsteoGram(R), a test that utilizes computer image analysis of simple hand
x-rays to assess bone mineral density. The OsteoGram(R) assists physicians
in diagnosing osteoporosis and monitoring the course of disease progression
or the effect of treatment. According to the Company's Form 10-K for the
1994 fiscal year ended September 30, 1994, filed with the SEC on January
13, 1995 ("1994 Form 10-K"), the Company expects "major near-term growth to
----------------------
come from the distribution and processing" of the OsteoGram(R).
21. In the 1994 Form 10-K, the Company stated that it had adopted a
marketing plan designed to create long term value in the OsteoSystems
business and thus, in 1993, the Company entered into a strategic
partnership agreement with Rhone-Poulenc Rorer ("RPR"). Under the terms of
this agreement, RPR's sales force had introduced the OsteoGram(R) to those
doctors who already prescribe RPR's Calcimar for the treatment of
osteoporosis. Significantly, it was further disclosed in the 1994
Form 10-K that "CompuMed is also seeking additional pharmaceutical company
strategic partners . . . to develop the osteoporosis testing and treatment
market faster, thus benefiting all involved companies."
22. Thus, on June 27, 1995, the Company announced that it was "in
negotiations with another company to license its OsteoGram(R) bone density
test." Although the Company did not disclose who the potential partner
was, the market's reaction to this announcement was swift, as the price of
CompuMed's common stock rose 1-1/8 to $6-3/16 per share on heavy trading
volume.
23. On August 1, 1995, Fortune Magazine reported that pharmaceutical
----------------
giant Merck had emerged as a marketing partner for CompuMed's OsteoGram(R)
test. According to the article, one of Merck's in-house researchers, John
Yeats, "had practically endorsed" the OsteoGram(R) in a February supplement
to the American Journal of Medicine. According to that same article, a
potential licensing agreement with Merck would "bode well for the tiny
medical technology company that lost $3.9 million on sales of $2.4 million
last fiscal year . . . [and that a] deal with Merck would be sure to
strengthen" the price of CompuMed common stock.
DEFENDANTS' WRONGFUL COURSE OF CONDUCT
--------------------------------------
24. On August 11, 1995, the first day of the Class Period, CompuMed
announced improved revenue and earnings for the third quarter of the 1995
fiscal year ended June 30, 1995. Total service and product revenues were
$832,000, up 37% from the revenues of $605,000 in the same period last
year. In the press release, the Company also announced that it had
completed a 1.2 million share private placement of common stock with gross
proceeds of $5.1 million. Defendant Raynovich, in touting the benefits
that the proceeds would provide the Company, stated that "[t]he Company is
----------------
currently in the final stage of negotiation for licensing of the
----------------------------------------------------------------
OsteoGram(R)."
------------
25. Indeed, prior to the private placement, the Company faced
extraordinary cash flow difficulties. According to the Company's Form 10-Q
for the third quarter ended June 30, 1995, filed with the SEC on August 14,
1995, the Company reported cash holdings of only $256,000. Without the
private placement, therefore, the Company would face significant
difficulties continuing as a going concern.
26. On August 31, 1995, it was announced that Merck had entered into
an agreement to license CompuMed's bone mass measurement technology. In
endorsing the announcement, defendant Raynovich, the Company's President
and Chief Executive Officer, was listed as a contact person on the press
release. The press release stated that under the agreement, Merck would
obtain the worldwide, exclusive rights to the OsteoGram(R) tests from
CompuMed. In return, CompuMed would receive a licensing fee and royalties
on all OsteoGram(R) tests performed over a period of five years. However,
no specific financial details of the Merck agreement were provided, and
there was no mention that the royalties that CompuMed was set to receive
would be severely limited by a "royalty cap."
27. On September 27, 1995, CompuMed announced the completion of its
agreement granting Merck exclusive worldwide rights to operate and market
the Company's OsteoGram(R) bone density testing service. Under the terms
of the agreement, the Company confirmed that Merck will pay CompuMed a
licensing fee and royalties on all OsteoGram(R) tests performed for the
next five years. Once again, there was no mention of any cap on royalties
that CompuMed would receive under its agreement with Merck.
28. On or about October 11, 1995, based upon information provided by
the Company concerning the revenue and earnings potential of CompuMed's
royalty and fee agreement with Merck, Montgomery Securities ("Montgomery")
analyst David Crossen ("Crossen") initiated coverage of CompuMed with a
"BUY" rating. In a Montgomery research report dated October 6, 1995,
analyst Crossen noted that:
Merck has completely licensed CompuMed's test and is now running the
entire operation. CompuMed is paid an escalating royalty on each
test. The OsteoGram provides as accurate a measurement of bone
density as the big machines (called DEXA machines) sold by Lunar and
Hologic do. We project that 64% of densitometry tests
-----------------------------------------
will be performed with OsteoGram, generating royalties to CompuMed
------------------------------------------------------------------
of $66 million in calendar year 2000. (Emphasis added.)
------------------------------------
In setting a price target for CompuMed's stock for the next twelve months
of $25 per share, Montgomery estimated earnings per share of $0.10 in
fiscal 1996, $0.83 in fiscal 1997 and $1.99 in fiscal 1998. Analyst
Crossen noted that "[t]hese numbers are quite conservative in our opinion."
29. Fueled by defendants' glowing statements about CompuMed's
agreement with Merck to the investing public, on October 12, 1995, CompuMed
common stock traded as high as $17 5/16 per share -- a 52-week high -- in
anticipation that the Company's agreement with Merck would provide
unlimited royalties and fees for the duration of the agreement.
30. On or about October 16, 1995, Montgomery issued another analyst
report concerning CompuMed, in which Montgomery reiterated its "BUY" rating
in CompuMed stock to dispel certain rumors circulating among the securities
markets that Merck had imposed an absolute cap on royalties to be paid to
CompuMed. Based upon additional conversations with Company management,
analyst Crossen stated that there would be "no cap" on royalties and that
------
royalties for the last two years of the Merck contract would be subject to
a "formulaic definition" based upon "a matrix of different milestones,"
-------------------- --------------------------------
emphasizing that the royalty per list earned by CompuMed would increase by
100% from $2 to $4 over the life of the contract.
31. On October 17, 1995, CompuMed announced that it was filing a Form
8-K with the SEC containing its technology license agreement with Merck,
which was completed on September 27, 1995. Under the agreement, as
previously announced on September 27, Merck purportedly will pay CompuMed
royalties for each revenue-producing test using the OsteoGram(R) technology
during the years 1996 through 2000. However, in the press release, the
Company disclosed for the first time that:
------------------
These royalty payments have no maximum amount during 1996 through
1998, but they are subject to a maximum in 1999 equal to a lesser of
10 percent of Merck's total collected revenues or $3 million and a
maximum in 2000 equal to the lesser of 10 percent of Merck's total
collected revenues or $4 million.
As reported by Dow Jones News, defendant Raynovich explained that "Merck
--------------
had asked for the cap late in the negotiations for the licensing
agreement."
32. Following the disclosure that there would be a strict "cap" on
royalties that definitively limits the Company's royalty payments to a
maximum of $3 million in 1999 and $4 million in 2000 -- contrary to
-------
defendants' previous representations that, among other things, the
agreement would generate royalties of $66 million in the year 2000 -- the
price of CompuMed's stock collapsed from its close the previous day of $16
per share to $8 1/4 per share, losing 48 percent of its value in heavy
trading of about 5.18 million shares. As reported on Bloomberg Business
------------------
News on October 17, 1995, James Broadfoot, a CompuMed investor and chief
----
investment officer at Ivy Management, Inc. stated that the royalty cap had
not been expected and that the stock slide suggested that "the Company has
---------------
misled us and the Company has lied to us."
----------------------------------------
33. On October 18, 1995, Montgomery issued another analyst report
concerning CompuMed, in which Montgomery reported the details of the
Company's agreement with Merck. Significantly, analyst Crossen noted that
"to our surprise," royalties would be capped in 1999 and 2000 at $3 million
---------------
and $4 million and that CompuMed had signed an "unquestionably weak" deal
-------------------
with Merck and management had failed to "disclose accurate details"
-------------------------
regarding the Merck contract. "In particular, management's repeated
------------------------------------
citation of an escalating royalty from $2-4 during the forecast license
-----------------------------------------------------------------------
period, mentioned again in yesterday's release, served to screen the
--------------------------------------------------------------------
existence of a cap. . . ."
------------------
34. The October 18, 1995 Montgomery report also stated:
In our previous note, we stated that management described to us a
formulaic cap on royalties beyond 1998 that would prevent growth in
calendar 1999 and 2000 compared to 1998. . . . Last night, we were
-------------------
surprised to hear that the cap in fact is not based on a formula, but
---------------------------------------------------------------------
is a hard number: $3 million in 1999 and $4 million in 2000.
------------------------------------------------------------
Management's credibility has been damaged since no indication of
----------------------------------------------------------------
a cap was given by [CompuMed] despite persistent questioning and the
--------------------------------------------------------------------
sharing of our aggressive EPS assumptions (emphasis added).
-----------------------------------------
Notably, Crossen summarized by stating:
[W]e were unpleasantly surprised that CompuMed would sign such a deal
with Merck given our repeated conversations with the company about
the escalating royalty and about our financial projections.
35. Following these additional disclosures in which Montgomery went
so far as to question the Company's credibility, the price of CompuMed's
common stock plummeted further. On October 18, 1995, CompuMed common stock
closed at $6 11/16 per share, causing substantial damage to plaintiffs and
the Class.
DEFENDANTS' INSIDER SELLING
---------------------------
36. During the Class Period, defendants Stuckelman, Pollom, Mark, and
Funari each occupied positions with CompuMed that made them privy to
confidential, proprietary information concerning the Company's business,
products, markets, and financial conditions and future business prospects.
Notwithstanding their duty to refrain from trading CompuMed's stock under
these circumstances, or to disclose the inside information prior to
trading, these defendants sold, prior to disclosure of the material adverse
facts described herein, in excess of 135,000 shares of CompuMed common
stock at prices that had been artificially inflated by defendants'
materially false and misleading representations, reaping proceeds of over
$1.5 million. Insider trading during the Class Period was as follows:
(a) From September 21, 1995 through September 29, 1995,
defendant Stuckelman sold 90,000 shares of CompuMed common stock at prices
between $10.38 and 12.25 per share, reaping proceeds of approximately
$1,000,000.
(b) From September 8, 1995 through September 12, 1995, defendant
Pollom sold 5,000 shares of CompuMed common stock at prices between $9.63
and 9.88 per share, and on August 14, 1995, Pollom sold 500 shares at
$8.88. Pollom reaped total proceeds of at least $52,590.
(c) On or about September 25, 1995, defendant Mark sold 22,800
shares between $12.83 and 12.75 per share, reaping proceeds of
approximately $290,000.
(d) On or about September 28, 1995, defendant Funari sold 19,542
shares at $11.52, reaping proceeds of $225,123.84.
COUNT I
-------
Sections 10(b) And 20 of The
Exchange Act and SEC Rule 10b-5
-------------------------------
37. Plaintiffs repeat and reallege each of the foregoing paragraphs
as if set forth fully herein. This Count is asserted against all
defendants.
38. Defendants have violated Sections 10(b) and 20 of the Exchange
Act, 15 U.S.C. Sections 78j(b) and 78t, and SEC rule 10b-5, 17 C.F.R.
Section 240.10b-5.
39. Defendants individually and pursuant to a common scheme have
directly and indirectly, by the use of means or instrumentalities of
interstate commerce and/or of the mails, engaged and participated in a
continuous course of conduct to make false statements about CompuMed, the
details of the Merck Agreement and CompuMed's financial performance.
Defendants employed devices, schemes and artifices to defraud, while in
possession of material adverse non-public information and engaged in acts,
practices, and a course of conduct as alleged herein which included the
making of, or the participation in the making of, untrue statements of
material facts and omitting to state material facts necessary in order to
make the statements made about the Company, the long-term profitability of
its OsteoGram(R) tests, and its financial results and performance in the
light of the circumstances under which they were made, not misleading, and
engaged in transactions, practices and a course of business which operated
as a fraud and deceit upon the purchasers of the Company's common stock
during the Class Period, in that defendants issued press releases and made
other false and misleading statements with regard to CompuMed's business
prospects and financial performance, as described above, which were
materially false and misleading and omitted, inter alia, the following
----- ----
material adverse information:
(a) Defendants' representations, in their August 11, 1995 and
August 31, 1995 public statements were materially false and misleading when
issued in that they failed to disclose that, during the late stage of the
negotiations, Merck was insisting upon a strict cap on royalties to be paid
to CompuMed under the agreement to license a bone mass measurement
technology;
(b) Defendants' representations in their September 27, 1995
press release were materially false and misleading when issued in that they
failed to disclose that CompuMed's licensing agreement with Merck would not
pay royalties on "all" OsteoGram(R) tests during the last two years of the
contract as the contract contained a strict cap on royalties for 1999 and
2000;
(c) CompuMed's agreement with Merck contained a "cap" which
severely limits royalties under the fourth and fifth years of the
agreement;
(d) That the "cap" would result in diminished revenue and
earnings capacity for CompuMed; and
(e) The facts concealed by the defendants meant that the
projected royalties under the agreement and the 1995, 1996 and 1997
earnings per share estimates would not be able to reach the levels
defendants had forecast.
40. The defendants had actual knowledge of the misrepresentations and
omissions of material facts set forth herein, or acted with reckless
disregard for the truth in that they failed to ascertain and to disclose
such facts, even though such facts were available to them. Such
defendants' misrepresentations and/or omissions were done knowingly or
recklessly to conceal adverse facts from the investing public, to give the
appearance that CompuMed's agreement with Merck would provide the Company
with unlimited royalties, so that the Individual Defendants could retain
their corporate positions, receive substantial compensation, sell CompuMed
stock at artificially inflated prices, and enable the Company to complete a
private placement of its common stock for $5.1 million during the Class
Period.
41. Defendants' misconduct constituted a fraud on the market for
CompuMed common stock, artificially inflating the market price of those
securities. Absent the defendants' misconduct, the Class members would not
have purchased CompuMed common stock at the artificially inflated prices
created by defendants. By purchasing those securities at artificially
inflated prices, plaintiffs and members of the Class sustained damages.
42. The Individual Defendants are liable not only because of their
own misrepresentations and omissions, but also because they controlled the
Company. The Individual Defendants held principal executive positions
within CompuMed and/or an important positions on its Board during the Class
Period and, therefore, were responsible for the Company's public
disclosures and misstatements during the Class Period.
43. Pursuant to Section 20(a) of the Exchange Act, the Individual
Defendants also were "control persons" with respect to CompuMed and were
responsible for the disclosures made in press releases, public reports and
other publicly disseminated documents. The Individual Defendants knew or,
in reckless disregard of the facts, should have known the true financial
and business prospects of the Company's licensing agreement with Merck,
which terms of said agreement were concealed from plaintiffs and the
members of the Class during the Class Period. The scienter of the
Individual Defendants is based upon their access to non-public information
about the Company's financial performance and industry position,
participation in group published information and public statements, and
participation in the review and drafting of the Company's SEC filings.
44. The Class is entitled to recover its damages from the defendants.
WHEREFORE, plaintiffs, on behalf of themselves and the members of the
Class, pray for judgment as follows:
1. Declaring this action to be a proper class action pursuant to
Rules 23(a) and 23(b)(3) of the Federal Rules of Civil Procedure and
declaring plaintiffs to be proper representatives of the Class;
2. Awarding plaintiffs and the other members of the Class
compensatory damages, as well as pre-judgment and post-judgment interest,
as a result of the wrongs alleged in the Complaint;
3. Awarding plaintiffs and the other members of the Class their
costs and expenses in this litigation, including reasonable attorneys'
fees, expert witness fees and other costs and disbursements;
4. Awarding extraordinary, equitable and/or injunctive relief as
permitted by law, equity and the federal statutory provisions sued
hereunder, pursuant to Rules 64, 65 and any appropriate state law remedies,
including attaching, impounding, imposing a constructive trust on or
otherwise restricting the proceeds of the December 9, 1993 stock offering
in the hands of defendants to assure that plaintiffs have an effective
remedy; and
5. Awarding such other and further relief as the Court may deem just
and proper.
JURY DEMAND
-----------
Plaintiffs demand a trial by jury.
DATED: October 23, 1995 MILBERG WEISS BERSHAD
HYNES & LERACH
WILLIAM S. LERACH
ALAN SCHULMAN
/s/ William S. Lerach/by Kevin P. Reddy
---------------------------------------
WILLIAM S. LERACH
600 West Broadway, Suite 1800
San Diego, CA 92101
Telephone: 619/231-1058
BERNSTEIN LITOWITZ BERGER &
GROSSMAN
VINCENT R. CAPPUCCI
IVAN J. DOLOWICH
1285 Avenue of the Americas
33rd Floor
New York, NY 10019
Telephone: 212/554-1400
BERGER & MONTAGUE, P.C.
SHERRIE R. SAVETT
1622 Locust Street
Philadelphia, PA 19103
Telephone: 215/875-3000
WEISS & YOURMAN
KEVIN J. YOURMAN
MOSHE BALSAM
10940 Wilshire Blvd.
24th Floor
Los Angeles, CA 90024
Telephone: 310/208-2800
WOLF HALDENSTEIN ADLER
FREEMAN & HERZ, LLP
FRANCIS M. GREGOREK
600 West Broadway, Suite 1800
San Diego, CA 92101
Telephone: 619/338-4599
LAW OFFICES OF ALFRED G.
YATES, JR.
ALFRED G. YATES, JR.
519 Allegheny Building
429 Forbes Avenue
Pittsburgh, PA 15219
Telephone: 412/391-5164
EDELSTEIN & FAEGENBURG
GLENN K. FAEGENBURG
26 Court Street, Suite 1503
Brooklyn, NY 11242
Telephone: 718/625-3500
Attorneys for Plaintiffs
Exhibit 99.5
LIONEL Z. GLANCY #134180
LAW OFFICES OF LIONEL Z. GLANCY
1299 Ocean Avenue
Suite 323
Santa Monica, California 90401
(310) 319-3277
JOSEPH J. TABACCO
BERMAN, DEVALERIO, PEASE
& TABACCO
235 Montgomery Street, Suite 2510
San Francisco, CA 94104
(415) 433-3200
STANLEY M. GROSSMAN
D. BRIAN HUFFORD
POMERANTZ HAUDEK BLOCK
& GROSSMAN
100 Park Avenue
New York, NY 10017
DAVID JAROSLAWICZ
JAROSLAWICZ & JAROS
150 Williams Street
New York, NY 10038
(212) 227-2780
Attorneys for Class Plaintiffs
UNITED STATES DISTRICT COURT
FOR THE CENTRAL DISTRICT OF CALIFORNIA
PANO STEPHENS, on behalf of ) Case No.
himself and on behalf of all )
others similarly situated, ) SECURITIES FRAUD CLASS
) ACTION COMPLAINT
)
Plaintiff, )
)
v. ) Jury Trial Demanded
) -------------------
COMPUMED, INC., ROD N. RAYNOVICH, )
DEVERE B. POLLOM, ROBERT G. FUNARI, )
HOWARD MARK, ROBERT STUCKELMAN and )
RUSSELL WALKER, )
)
Defendants. )
)
----------------------------------------)
Plaintiff, individually and on behalf of all other persons similarly
situated, by his undersigned attorneys, for his complaint, alleges upon
personal knowledge as to himself and his own acts, and upon information
and belief as to all other matters, based upon, inter alia, the
----- ----
investigation made by and through his attorneys, which investigation
included, among other things, a review of the public documents, analyst
reports and news releases of CompuMed Inc. ("CompuMed" or the "Company"):
NATURE OF ACTION
----------------
1. Plaintiff brings this action as a class action on behalf of
himself and all other persons who purchased CompuMed stock on the open
market during the Class Period, as defined below, to recover damages caused
by defendants' violations of the federal securities laws with regards to
the preparation and dissemination to the investing public of false and
misleading information.
2. The materially false and misleading statements, which are
described in detail below, concerned an agreement entered into between
CompuMed and Merck & Co. for the marketing of a key technology of the
Company, called the OsteoGram. These false and misleading statements were
contained in public statements and press releases issued by CompuMed which
caused the market price of the Company's securities to be artificially
inflated.
JURISDICTION AND VENUE
-----------------------
3. The claims alleged herein arise under Sections 10(b), 20 and
20A of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C.
Section 78j(b), 78t and 78t-1, and Rule 10b-5, 17 C.F.R. Section 240.10b-5
promulgated thereunder.
4. The jurisdiction of this Court is based on Section 27 of the
Exchange Act, 15 U.S.C. Section 78 aa and 28 U.S.C. Section 1331 (federal
question jurisdiction).
5. Many of the acts alleged herein, including the dissemination
to the investing public of the misleading statements at issue, occurred in
substantial part in this District.
6. In connection with the acts, transactions and conduct
alleged herein, defendants used the means and instrumentalities of
interstate commerce, including the United States mails, interstate
telephone communications and the facilities of national securities
exchanges and markets.
THE PARTIES
-----------
7. Plaintiff Pano Stephens purchased shares of CompuMed common
stock during the class period.
8. Defendant CompuMed develops the use of computer technology
for assisting in the treatment and diagnosis of medical problems. It is
based in Manhattan Beach, California.
9. Defendant Rod N. Raynovich is the President and Chief
Executive Officer of Compumed.
10. Defendant Devere B. Pollom is a Vice President of CompuMed.
From September 8, 1995 through September 12, 1995, Pollom sold 5,000 shares
of Compumed common stock at artificially inflated prices while in the
possession of material non-public information concerning the terms of the
Company's agreement with Merck. This sale represented a substantial
portion of his holdings.
11. Defendant Howard Mark is a Director of CompuMed. On
September 25, 1994, Mark sold 22,800 shares of CompuMed common stock at
artificially inflated prices while in the possession of material non-public
information concerning the terms of the Company's agreement with Merck.
This sale represented a substantial portion of his holdings.
12. Defendant Robert G. Funari is a Director of Compumed. On
September 28, 1995, Funari sold 19,542 shares of CompuMed common stock
while in the possession of material non-public information concerning the
terms of the Company's agreement with Merck. This sale represented his
entire holdings in Company stock.
13. Defendant Robert Stuckelman is a Director of CompuMed. From
September 21, 1995 through September 29, 1995, Stuckelman sold 90,000
shares of CompuMed common stock while in the possession of material non-
public information concerning the terms of the Company's agreement with
Merck. This sale represented a substantial portion of his holdings.
14. Defendant Russell Walker is a Director of CompuMed. On
September 28, 1995, Walker sold 918 shares of Compumed common stock while
in the possession of material non-public information concerning the terms
of the Company's agreement with Merck. This sale represented his entire
holdings in Company stock. Defendants Raynovich, Pollom, Funari, Mark,
Stuckelman and Walker are referred to herein collectively as the
"Individual Defendants."
15. Throughout the Class Period, CompuMed acted through the
Individual Defendants, whom it portrayed and represented to the financial
press and the public as its valid representative. The wilfulness, motive,
knowledge and recklessness of the Individual Defendants are therefore
imputed to Compumed, which is primarily liable for the securities law
violations of the Individual Defendants while acting in their official
capacities as Corporate representatives.
16. Throughout the Class Period the Individual Defendants were
portrayed and represented by themselves and CompuMed as being the true and
valid representatives of the Company. In making the alleged
misrepresentations and omissions, the Individual Defendants thereby acted
within the scope of the actual or apparent authority of CompuMed. As such,
the Company is liable for the acts of the Individual Defendants under the
doctrine of respondeat superior.
---------- --------
17. The Individual Defendants, as officers and directors of the
Company, are controlling persons of CompuMed within the meaning of Section
20 of the Exchange Act. By reasons of their positions with the Company,
they were able to and did, directly or indirectly, in whole or in material
part, control the content of public statements issued by or on behalf of
the Company. They participated in and approved the issuance of such
statements at or about the time of their issuance. By reason of their
positions with the Company, the Individual Defendants had access to
internal Company documents, reports and other information, including
information concerning the details of the agreement between CompuMed and
Merck, and attended management and/or board of directors meetings. As a
result of the foregoing, they were responsible for the truthfulness and
accuracy of the Company's public reports and releases described herein.
18. The Company and the Individual Defendants, as officers and
directors of a publicly-held company, had a duty to promptly disseminate
truthful and accurate information with respect to the Company and to
promptly correct any public statements issued by or on behalf of the
Company which had become false or misleading.
19. The Individual Defendants who sold shares of common stock
during the Class Period had a duty not to make such sales while in the
possession of material, nonpublic information, including the terms and
conditions of the CompuMed/Merck agreement. By selling such shares while
in the possession of such material, nonpublic information, the Individual
Defendants thereby violated the federal securities laws.
20. Each of the defendants knew or recklessly disregarded 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 plaintiff and the other
members of the Class.
21. Defendants are liable, jointly and severally, as direct
participants in or co-conspirators of the wrongs complained of herein.
CLASS ALLEGATIONS
-----------------
22. Plaintiff brings 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 the Company's common stock during
the period from August 31, 1995 through October 17, 1995, inclusive (the
"Class Period"), and who suffered damages thereby (the "Class"). Excluded
from the Class are the defendants, members of the Individual Defendants'
families, any entity in which any defendant has a controlling interest or
is a parent or subsidiary of or is controlled by the Company, and the
officers, directors, employees, affiliates, legal representatives, heirs,
predecessors, successors and assigns of any of the defendants.
23. The members of the Class are located in geographically
diverse areas and are so numerous that joinder of all members is
impracticable. During the Class Period there were millions of shares of
CompuMed common stock outstanding. While the exact number of Class members
is unknown to the plaintiff at this time and can only be ascertained
through appropriate discovery, the plaintiff believes there are, at a
minimum, thousands of members of the Class who traded Company stock during
the Class Period.
24. 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:
a. Whether defendants engaged in acts or conduct in
violation of the federal securities laws as alleged herein;
b. Whether defendants participated in and pursued the
common course of conduct complained of herein;
c. Whether the challenged publici statements disseminated
to the investing public and to the members of the Class omitted or
misrepresented material facts about the agreement between CompuMed and
Merck, or became materially false and misleading during the Class Period;
d. Whether defendants had a duty to correct such
statements when they learned they had become false and misleading;
e. Whether defendants acted knowingly or recklessly in
making materially false and misleading statements or in failing to correct
such statements upon learning that they were materially false and
misleading;
f. Whether the market prices of the Company's securities
during the Class Period were artificially inflated because of the
defendants' conduct complained of herein; and
g. Whether the members of the Class have sustained damages
and, if so, what is the proper measure of damages.
25. The plaintiff's claims are typical of the claims of the
members of the Class as plaintiff and members of the Class sustained
damages arising out of defendants' wrongful conduct in violation of federal
law as complained of herein.
26. The plaintiff will fairly and adequately protect the
interests of the members of the Class and has retained counsel competent
and experiences in class and securities litigation. The plaintiff has no
interests antagonistic to or in conflict with those of the Class.
27. A class action is superior to other available methods for
the fair and efficient adjudication of this controversy since joinder of
all members of the Class is impracticable. Furthermore, because the
damages suffered by individual Class members may be relatively small, the
expense and burden of individual litigation make it impossible for the
Class members individually to redress the wrongs done to them. There will
be no difficulty in the management of this action as a class action.
28. Plaintiff will rely, in part, upon the presumption of
reliance established by the fraud-on-the-market doctrine in that:
(a) defendants made public misrepresentations or failed to
disclose material facts during the Class Period;
(b) the omissions and misrepresentations were material;
(c) the securities of the Company traded in an efficient market;
(d) the misrepresentations and omissions alleged would tend to
induce a reasonable investor to misjudge the value of the Company's
securities; and
(e) plaintiff and the members of the Class purchased their
Company stock between the time the defendants failed to disclose or
misrepresented facts and the time the true facts were disclosed, without
knowledge of the omitted or misrepresented facts.
29. Based upon the foregoing, plaintiff and the members of the
Class are entitled to a presumption of reliance upon the integrity of the
market.
SUBSTANTIVE ALLEGATIONS
-----------------------
BACKGROUND
----------
30. CompuMed designs methods by which computer technology can be
used to assist in the treatment and diagnosis of medical problems. One of
its most important potential products is the OsteoGram, which assists in
the diagnosis of osteoporosis by measuring bone mass with standard x-ray
equipment through the use of radiographic absorptiometry ("RA") technology.
31. In a June 13, 1995 press release, CompuMed emphasized the
significant of the OsteoGram to the Company's future and highlighted its
ongoing effort to locate a strategic partner for the successful development
of the product:
"The company is . . . well positioned in the emerging
field of osteoporosis diagnostics, which is expected to
grow rapidly with the arrival of promising new drug to
treat osteoporosis," said Raynovich. "CompuMed is
pursuing its key objective for this year in seeking a
strategic partner for its OsteoGram, a low-cost, easy-
to-use bone density test. The OsteoGram is accessible
to all potential patients because it uses computer
analysis of simple hand X-rays performed in a
physician's office."
32. On June 27, 1995, CompuMed reported that it was involved in
negotiations with another company to license its OsteoGram bone density
test. Although it did not disclose who the potential partner was or when
an agreement might be reached, the announcement nevertheless had a
substantial positive impact on the Company's stock price, which rose as
much as 1-1/8 to 6-3/16 on trading of more than 503,000 shares, or more
than three times its three-month daily trading average of 141,000 shares.
33. Forbes magazine subsequently reported on August 1, 1995 that
------
Merck might emerge as CompuMed's marketing partner, as Merck's new
osteoporosis drug, Fosamax, was believed to be benefitted substantially by
the use of the OsteoGram to identify the underdiagnosed disease of
osteoporosis by measuring bone density using computer analysis of standard
X-rays.
34. CompuMed issued another press release on August 11, 1995 in
which it reported its results for the third quarter ending June 30, 1995.
In that release, Raynovich stated: "The company is currently in the final
stage of negotiation for licensing of the OsteoGram. This was previously
announced on June 27, 1995."
THE COMPUMED/MERCK AGREEMENT
----------------------------
35. After much anticipation, CompuMed and Merck finally reached
agreement on the licensing of the OsteoGram by the end of August. In a
joint press release dated August 31, 1995, the companies declared:
Under the agreement, Merck will obtain the worldwide,
exclusive rights to the OsteoGram from CompuMed, a
Manhattan Beach, Calif, firm. In return, CompuMed will
receive a licensing fee and royalties on all OsteoGram
tests performed over a period of five years. Specific
financial terms of the agreement were not disclosed.
They then stated that the closing of the agreement was contingent upon the
satisfaction of certain conditions by September 22, 1995.
36. Raynovich went to state in the release that "RA technology
is a safe, valuable, inexpensive option for measuring bone mass,
particularly for the thousands of physicians who already have standard x-
ray equipment in their offices."
37. On September 27, 1995, CompuMed announced that it had
completed its agreement with Merck, stating:
Under terms of the agreement, Merck will pay CompuMed a
licensing fee and royalties on all OsteoGram tests
performed for the next five years. Merck will also
work to develop OsteoGram product improvements.
Raynovich was listed as the contact person for CompuMed in the press
release.
38. The statements made in both the August 31, 1995 and the
September 27, 1995 press releases were materially false and misleading
because, while they highlighted that CompuMed would receive fees and
royalties on all tests performed over a period of five years, they failed
to disclose that in the last two years of the contract the amount of fees
and royalties which CompuMed could receive would be capped to a level
substantially limiting the Company's potential earnings from the agreement.
CompuMed's statement in the August press release that the specific
financial terms of the agreement were not being disclosed did not offset
the misleading nature of the information that was disclosed.
THE REVELATION OF THE FRAUD
---------------------------
39. On October 17, 1995, CompuMed finally disclosed the true
details about its agreement with Merck, stating in a press release:
Under the license agreement for the first-generation
OsteoGram, Merck will pay CompuMed royalties for each
revenue-producing test using the OsteoGram technology
during the years 1996 through 2000. The royalties will
escalate from $2 to $4 per test over that period.
These royalties have no maximum amount during 1996
through 1998, but they are subject to a maximum in 1999
equal to the lesser of 10 percent of Merck's total
collected revenues or $3 million and a maximum in 2000
equal to the lesser of 10 percent of Merck's total
collected revenues or $4 million. There are no minimum
royalties under the agreement.
40. The previously undisclosed cap on royalty payments under the
agreement was highly material. According to the Merck/CompuMed press
release issued on August 31, 1995, only a small percentage of the 38
million women on the United States who are over 59 have had tests measuring
their bone mass, with analysts stating that less than 5 percent of American
women over 50 having been tested for osteoporosis. While this indicates
that a huge potential exists if women can be encouraged to take such tests,
it also suggests that it may take a period of years before a substantial
number of women do begin doing so. Thus, the cap placed on CompuMed's
earnings could well exist just when it would have been in a position to
benefit the most from the contract. In addition, by the end of the five
year agreement, competitors could well be in a position to take away much
of the business from CompuMed.
41. The materiality of the news concerning the cap on the
royalties which CompuMed could expect to receive is evidenced by the
reaction of the market. By the end of the day on October 17, CompuMed
stock had closed down 48 percent, declining by 7-3/4 to 8-1/4 per share on
trading of 5.15 million shares, losing all of the gains made since the
announcement of the agreement on August 31, 1995. This represented the
12th most active stock in U.S. composite trading and the single largest
percentage decliner. As reported that day by Bloomberg, the plummeting
stock price reflected investors' "disappointment over the terms of a
licensing agreement with Merck & Co. for CompuMed's osteoporosis test."
42. On October 18, 1995, the slide continued, with the stock
price falling another 19 percent, dropping by 1-9/16 to 6-11/16. According
to Bloomberg's summary of the day's results, this stock price fell "on news
that Merck & Co will pay less than expected for its osteoporosis test."
43. As demonstrated by the market's sharp and efficient reaction
to CompuMed's announcement, the investing public had clearly been misled by
the Company. As reported by Bloomberg on October 17:
James Broadfoot, a CompuMed investor and chief
investment officer at $1.8 billion-asset Ivy Management
Inc. in Boca Raton, Florida, said the royalty cap
hadn't been expected. Today's stock slide, he said,
suggests "everybody is saying the company has misled us
and the company has lied to us." Neither CompuMed or
Merck had revealed financial arrangements when first
announcing the agreement on Aug. 31. Several of
CompuMed's directors and a vice president have sold a
total of 137,342 shares since then.
THE FALSE AND MISLEADING NATURE OF DEFENDANTS' REPRESENTATIONS
--------------------------------------------------------------
44. At the time of both the August 31, 1995 and September 27,
1995 press releases, defendants clearly knew, but intentionally or
recklessly failed to disclose, the material terms of their agreement with
Merck, including one of the most critical items -- the cap on CompuMed's
royalty earnings for the last two years of the contract. In making,
authorizing or acquiescing in the statements contained in the press
releases, defendants therefore knew or recklessly disregarded the fact that
they were misleading the market, thereby artificially inflating the price
of the Company's common stock in violation of the federal securities laws.
INSIDER SALES
-------------
45. From September 8, 1995 through September 29, 1995 Company
insiders sold a total of over 137,000 shares of CompuMed stock while with
knowledge of, and access to, material non-public information concerning the
terms of the CompuMed/Merck agreement. In so doing, the Individual
Defendants who made such sales, including defendants Pollom, Mark, Funari,
Stuckelman and Walker, made substantial profits by selling their shares at
prices which had been artificially inflated as a result of the Company's
misrepresentations and omissions. The plaintiff purchased his shares of
Company stock contemporaneously with these sales by the Individual
Defendants.
46. The sales by the Individual Defendants alleged herein are
not only sufficient facts from which to infer the defendants scienter in
making the alleged misrepresentations and omissions identified herein,but
they also created a duty on the part of defendants to disclose all material
non-public information in their possession at the time of such sales.
COUNT I
-------
(AGAINST ALL DEFENDANTS FOR VIOLATIONS OF
SECTIONS 10(B) AND RULE 10B-5 AND AGAINST THE INDIVIDUAL
DEFENDANTS PURSUANT TO SECTION 20 OF THE EXCHANGE ACT)
47. Plaintiff repeats and realleges the foregoing paragraphs.
48. Throughout the Class Period, defendants caused to be issued
or participated in the preparation and issuance of the materially
misleading public statements described above and certain of the Individual
Defendants identified herein sold shares of Compumed common stock while in
the possession of, or with access to, material non-public information.
49. Defendants had actual knowledge of the misrepresentations
and omissions of material facts sets forth herein, or acted with reckless
disregard for the truth in that they failed to ascertain and to disclose
such facts, even though they were available to them.
50. A compelling inference of defendants' knowing and/or
reckless participation in a fraud arises from the trading by certain of the
Individual Defendants of Company stock at prices artificially inflated by
defendants' misleading statements and by the nature of the omitted facts
concerning the CompuMed/Merck agreement, facts of which it can be inferred
that Company officers and directors would have been aware at the time the
agreement was entered into.
51. As a result of the above described acts, defendants,
severally and in concert, directly and indirectly, by use of the means and
instrumentalities of interstate commerce, violated Section 10(b) of the
Exchange Act and Rule 10b-5 promulgated thereunder in that they knowingly
or recklessly (a) employed devices, schemes and artifices to defraud; (b)
made untrue statements of material facts or omitted to state material facts
necessary in order to make the statements made, in light of the
circumstances in which they were made, not misleading; or (c) engaged in
acts, practices and a course of business that operated as a fraud or deceit
upon plaintiffs and the Class in connection with their purchases of the
Company's common stock.
52. Because of their positions of control and authority as
officers and directors of the Company, the Individual Defendants had power
and influence, and exercised the same, over the Company, and were able to
and did, directly or indirectly, control the content of the aforesaid
statements relating to the Company. Therefore, they were controlling
persons of the Company within the meaning of Section 20(a) of the Exchange
Act and are liable thereunder. Because of their positions with the
Company, the Individual Defendants had access to adverse non-public
information about the financial condition, operations and future business
prospects of the Company as particularized herein and acted to misrepresent
and conceal the same.
53. With knowledge and/or reckless disregard of the truth, the
Individual Defendants caused or controlled the issuance of the public
statements containing misstatements and omissions of material facts as
alleged herein.
54. During the Class Period, the Company's common stock was
traded in an active and efficient securities market by means of a
nationwide electronic trading network which instantly and simultaneously
reflects, on thousands of trading screens, computerized market information
concerning stock price and trading activity as well as displaying relevant
current data concerning the Company supplied by news wire services. In
addition, the Company disseminated the false statements by the wire
services and financial press.
55. As a result of the deceptive practices and false and
misleading statements and omission described above, the market price of the
Company's stock was artificially inflated throughout the Class Period.
56. Plaintiff and the Class, relying on the integrity of the
market in the Company's stock and/or defendants' misrepresentations,
purchased Company stock during the Class Period at artificially inflated
prices. Had the plaintiff and the Class known the truth concerning the
misrepresented and omitted facts described herein, they would not have
purchased the Company's stock at the prices they did, if at all. At the
time of the purchases by plaintiff and the members of the Class, the true
value of the Company's stock was substantially less than the prices paid by
plaintiff and the Class. Accordingly, plaintiff and the members of the
Class have been damaged as a result of the defendants' wrongdoing.
COUNT II
--------
(AGAINST DEFENDANTS POLLOM, FUNARI, MARK, STUCKELMAN, AND WALKER
FOR VIOLATIONS OF SECTION 20A OF THE EXCHANGE ACT)
57. Plaintiff repeats and realleges the foregoing paragraphs.
58. Defendants Pollom, Funari, Mark, Stuckelman and Walker sold
shares of CompuMed during the Class Period while in possession, or with
access to, material non-public information. These sales of CompuMed stock
by the Individual Defendants described herein were made contemporaneously
with plaintiff's purchase of the Company's common stock. As such, these
defendants are liable to the plaintiff and the Class for violations of
Section 20A of the Exchange Act.
WHEREFORE, plaintiff on behalf of himself and the Class pray for
judgment as follows:
1. Declaring this action to be a proper class action maintainable
pursuant to Rule 23 of the Federal Rules of Civil Procedure and plaintiff
to be a proper class representative;
2. Awarding plaintiff and the Class compensatory damages, together
with appropriate prejudgment interest at the maximum rate allowable by law;
3. Awarding plaintiff and the Class their costs and expenses for
this litigation including reasonable attorneys' fees and other
disbursements; and
4. Awarding plaintiff and the Class such other and further relief as
may be just and proper under the circumstances.
Dated: October 24, 1995 LAW OFFICES OF LIONEL Z. GLANCY
By /s/ Lionel Z. Glancy
------------------------------
Lionel Z. Glancy, Esquire
Attorney for Plaintiffs
1299 Ocean Avenue
Suite 323
Santa Monica, CA 90401
(310) 319-3277
BERMAN, DEVALERIO, PEASE
& TABACCO
By /s/ Joseph J. Tabacco lzg
------------------------------
Joseph J. Tabacco
235 Montgomery Street
Suite 2510
San Francisco, CA 94104
(415) 433-3200
POMERANTZ HAUDER BLOCK
& GROSSMAN
By /s/ Stanley M. Grossman lzg
------------------------------
Stanley M. Grossman, Esq.
D. Brian Hufford, Esq.
100 Park Avenue
New York, NY 10017
JAROSLAWICZ & JAROS
David Jaroslawicz, Esq.
150 Williams Street
New York, NY 10038
(212) 227-2780
DEMAND FOR JURY TRIAL
---------------------
Plaintiffs hereby demand a jury trial pursuant to Federal Rules of
Civil Procedure Rule 38(b) and Local Rule 3.4.10.
Dated: October 24, 1995 LAW OFFICES OF LIONEL Z. GLANCY
By /s/ Lionel Z. Glancy
------------------------------
Lionel Z. Glancy, Esquire
Attorney for Plaintiffs
1299 Ocean Avenue
Suite 323
Santa Monica, CA 90401
(310) 319-3277
BERMAN, DEVALERIO, PEASE
& TABACCO
By /s Joseph J. Tabacco lzg
------------------------------
Joseph J. Tabacco
235 Montgomery Street
Suite 2510
San Francisco, CA 94104
(415) 433-3200
POMERANTZ HAUDER BLOCK
& GROSSMAN
By /s/ Stanley M. Grossman lzg
------------------------------
Stanley M. Grossman, Esq.
D. Brian Hufford, Esq.
100 Park Avenue
New York, NY 10017
JAROSLAWICZ & JAROS
David Jaroslawicz, Esq.
150 Williams Street
New York, NY 10038
(212) 227-2780
Exhibit 99.6
MILBERG WEISS BERSHAD
HYNES & LERACH
WILLIAM S. LERACH (68581)
ALAN SCHULMAN (128661)
600 West Broadway, Suite 1800
San Diego, CA 92101
Telephone: 619/231-1058
BERGER & MONTAGUE, P.C.
SHERRIE R. SAVETT
1622 Locust Street
Philadelphia, PA 19103
Telephone: 215/875-3000
BERNSTEIN LIEBHARD & LIFSHITZ
MEL E. LIFSHITZ
274 Madison Avenue
New York, NY 10016
Telephone: 212/779-1414
BERNSTEIN LITOWITZ BERGER &
GROSSMANN, LLP
VINCENT R. CAPPUCCI MAGER LIEBENBERG & WHITE
IVAN J. DOLOWICH ROBERTA D. LIEBENBERG
1285 Avenue of the Americas Two Penn Center Plaza
33rd Floor Tenth Floor
New York, NY 10019 Philadelphia, PA 19102
Telephone: 212/554-1400 Telephone: 215/569-6921
Attorneys for Plaintiffs
UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
WESTERN DIVISION
STUART SCHACHTER, MYRON KAVALGIN, ) No. 95-7424 ER (CTx)
and REBA A. PRESSMAN, On Behalf of )
Themselves and All Others Similarly ) CLASS ACTION
Situated, ) ------------
Plaintiffs, )
)
vs. ) CLASS ACTION COMPLAINT FOR
) VIOLATION OF THE FEDERAL
COMPUMED, INC., ROBERT STUCKELMAN, ) SECURITIES LAWS
ROD N. RAYNOVICH, DeVERE B. POLLOM )
HOWARD MARK, and ROBERT G. FUNARI, )
)
) Plaintiffs Demand A
Defendants. ) Trial By Jury
----------------------------------------) --------------------
CLASS ACTION COMPLAINT
----------------------
All allegations made in this Complaint are based on information and
belief except those allegations which pertain to the named plaintiffs and
their counsel, which are based upon personal knowledge. Plaintiffs'
information and belief is based, inter alia, on the investigation made by
----- ----
and through their attorneys and it is believed that substantial evidentiary
support for their allegations will exist after a reasonable opportunity for
discovery.
JURISDICTION AND VENUE
----------------------
1. Count I of this Complaint arises under Sections 10(b) and 20(a)
of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C.
Sections 78j(b) and 78t(a), and Rule 10b-5 promulgated thereunder by the
Securities and Exchange Commission ("SEC").
2. Venue is proper in this District pursuant to 28 U.S.C. Sections
1391(b) and 1391(c), as well as under Section 27 of the Exchange Act, 15
U.S.C. Section 77aa. All defendants either reside or transact business in
this District, and the claims asserted herein arose in substantial part in
this District.
3. In connection with the wrongful acts and conduct alleged herein,
the defendants, directly and indirectly, used the means and
instrumentalities of interstate commerce, including the United States mails
and the facilities of a national securities market to accomplish the
unlawful conduct complained of herein.
THE PARTIES
-----------
4. Plaintiffs Stuart Schachter, Myron Kavalgin, and Reba A.
Pressman, purchased shares of CompuMed, Inc. common stock during the Class
Period, and suffered damages as a result of the violations of law alleged
herein.
5. Defendant CompuMed, Inc. ("CompuMed" or the "Company") is a
corporation organized and existing under the laws of the State of Delaware,
with principal executive offices located at 1230 Rosecrans Avenue, Suite
1000, Manhattan Beach, California 90266. As of August 9, 1995, CompuMed
had 6,886,556 shares of common stock issued and outstanding, which trade on
the NASDAQ national market system.
6. At all times relevant hereto, defendant Robert Stuckelman
("Stuckelman") was Chairman of the Board of Directors of CompuMed.
Stuckelman, who founded the Company in 1973 and served as its President
through 1982, rejoined the Company in 1989 and served as its President and
Chief Executive Officer until October 1994. As of January 20, 1995,
Stuckelman owned or controlled 406,689 shares, or 7.2% of the Company's
common stock outstanding.
7. At all times relevant hereto, defendant Rod N. Raynovich
("Raynovich") was President and Chief Executive Officer of CompuMed. On
October 18, 1994, Raynovich replaced Stuckelman as President of the
Company.
8. At all times relevant hereto, defendant DeVere B. Pollom
("Pollom") was Vice President and Chief Financial Officer of CompuMed.
9. At all times relevant hereto, defendant Howard Mark ("Mark") was
a member of CompuMed's Board of Directors and a member of the Company's
Medical Advisory Board. As of January 20, 1995, Mark owned or controlled
428,087 shares, or 7.6% of the Company's common stock outstanding.
10. At all times relevant hereto, defendant Robert G. Funari
("Funari") was a member of CompuMed's Board of Directors. As of January
20, 1995, defendant Funari owned or controlled 29,165 shares of the
Company's common stock outstanding.
11. By reason of their senior positions with the Company, their close
personal and working relationships, and access to confidential information
respecting the Company's businesses, defendants Stuckelman, Raynovich,
Pollom, Mark and Funari (the "Individual Defendants") were able to and did,
directly or indirectly, in whole or in material part, control the content
of the Company's public statements which constituted group published
information. By virtue of their positions of power and influence, the
Individual Defendants controlled all aspects of the Company's operations,
including the dissemination of information to investors and the securities
markets. In addition, the Individual Defendants' course of conduct during
the Class Period included, but was not limited to, meeting with securities
analysts, participating in conference calls with analysts, sending written
reports to analysts, and commenting upon securities analysts' reports.
This court of conduct was undertaken by the Individual Defendants knowing
-------------------------------------------------------------------------
that their written and oral statements, reports and adoption of or
------------------------------------------------------------------
acquiescence in analysts' reports would influence and inflate the price
-----------------------------------------------------------------------
that plaintiffs and other investors paid for CompuMed common stock.
------------------------------------------------------------------
12. The Individual Defendants engaged in this common course of
misconduct to inflate the market price of CompuMed common stock in order to
perpetuate the appearance of CompuMed as a growth company with excellent
future prospects based upon a lucrative technology licensing agreement with
Merck & Co., Inc. ("Merck") that would warrant that the Individual
Defendants retain their executive and directorship positions, high
compensation and other substantial perquisites of executive employment,
allow the Individual Defendants to sell CompuMed stock at artificially
inflated prices, and enable the Company to complete a sizable private
placement of its common stock.
CLASS ACTION ALLEGATIONS
------------------------
13. This action is brought by plaintiffs pursuant to Rules 23(a) and
23(b)(3) of the Federal Rules of Civil Procedure, on behalf of a class (the
"Class") consisting of all persons who purchased CompuMed common stock
between August 11, 1995 and October 17, 1995, inclusive (the "Class
Period"), and who suffered damages as a result thereof. Excluded from the
Class are the named defendants, members of the immediate families of each
defendant, any entity in which any defendant has a controlling interest,
and the legal representatives, heirs, successors, predecessors in interest,
or assigns of any of the defendants.
14. The Class is so numerous that joinder of all members is
impracticable. As of August 9, 1995, there were approximately 6.9 million
shares of CompuMed common stock outstanding. It is believed that thousands
of persons purchased CompuMed common stock on the NASDAQ national market
system, which is an efficient market, during the Class Period.
15. Plaintiffs' claims are typical of the claims of the members of
the Class. Plaintiffs purchased CompuMed common stock during the Class
Period at an artificially inflated price, and sustained damages as a
result.
16. Plaintiffs will fairly and adequately protect the interests of
the members of the Class. Plaintiffs have retained competent counsel,
experienced in class and securities litigation, to ensure such protection.
The claims asserted on behalf of the Class are typical of the claims of all
members of the Class. Plaintiffs have no interest that is antagonistic to
or in conflict with the interests of those he represents.
17. A class action is superior to other available methods for the
fair and efficient adjudication of this controversy. It would be
impracticable and undesirable for all members of the Class to bring
separate actions in various parts of the country. Such actions would put
substantial and unnecessary burdens on the judicial system.
18. The prosecution of separate actions by individual Class members
also would create a risk of inconsistent and varying adjudications
concerning the subject of this action, which adjudications could establish
incompatible standards of conduct for defendants under the laws alleged
herein. Further, questions of law and fact common to the members of the
Class predominate over any questions which may affect only individual
members in that, at least by use of publicly filed reports, defendants have
acted on grounds generally applicable to the entire Class. The common
questions of law and fact include, among others:
(a) Whether defendants filed and issued false and misleading
filings with the SEC;
(b) Whether defendants made false and misleading statements
concerning, inter alia, the Company's business and financial prospects and
----- ----
the terms of Compumed's agreement with Merck to license a bone mass
measurement technology;
(c) Whether defendants violated Sections 10(b) and 20 of the
Exchange Act, and Rule 10b-5 promulgated thereunder; and
(d) The extent of damages sustained by plaintiffs and the Class,
and the proper measure of said damages.
19. Plaintiffs do not contemplate any difficulty in managing a class
action in this forum. The class action method is superior to any other
available means for the fair and efficient adjudication of this
controversy.
SUBSTANTIVE ALLEGATIONS
-----------------------
20. CompuMed designs, manufactures, distributes and services a line
of computer-based cardiopulmonary medical equipment. In addition to its
cardiac telemedicine business, the Company currently markets the
OsteoGram(R), a test that utilizes computer image analysis of simple hand
x-rays to assess bone mineral density. The OsteoGram(R) assists physicians
in diagnosing osteoporosis and monitoring the course of disease progression
or the effect of treatment. According to the Company's Form 10-K for the
1994 fiscal year ended September 30, 1994, filed with the SEC on January
13, 1995 ("1994 Form 10-K"), the Company expects "major near-term growth to
----------------------
come from the distribution and processing" of the OsteoGram(R).
21. In the 1994 Form 10-K, the Company stated that it had adopted a
marketing plan designed to create long term value in the OsteoSystems
business and thus, in 1993, the Company entered into a strategic
partnership agreement with Rhone-Poulenc Rorer ("RPR"). Under the terms of
this agreement, RPR's sales force had introduced the OsteoGram(R) to those
doctors who already prescribe RPR's Calcimar for the treatment of
osteoporosis. Significantly, it was further disclosed in the 1994 Form
10-K that "CompuMed is also seeking additional pharmaceutical company
strategic partners . . . to develop the osteoporosis testing and treatment
market faster, thus benefiting all involved companies."
22. Thus, on June 27, 1995, the Company announced that it was "in
negotiations with another company to license its OsteoGram(R) bone density
test." Although the Company did not disclose who the potential partner
was, the market's reaction to this announcement was swift, as the price of
CompuMed's common stock rose 1-1/8 to $6-3/16 per share on heavy trading
volume.
23. On August 1, 1995, Fortune Magazine reported that pharmaceutical
----------------
giant Merck had emerged as a marketing partner for CompuMed's OsteoGram(R)
test. According to the article, one of Merck's in-house researchers, John
Yeats, "had practically endorsed" the OsteoGram(R) in a February supplement
to the American Journal of Medicine. According to that same article, a
potential licensing agreement with Merck would "bode well for the tiny
medical technology company that lost $3.9 million on sales of $2.4 million
last fiscal year . . . [and that a] deal with Merck would be sure to
strengthen" the price of CompuMed common stock.
DEFENDANTS' WRONGFUL COURSE OF CONDUCT
--------------------------------------
24. On August 11, 1995, the first day of the Class Period, CompuMed
announced improved revenue and earnings for the third quarter of the 1995
fiscal year ended June 30, 1995. Total service and product revenues were
$832,000, up 37% from the revenues of $605,000 in the same period last
year. In the press release, the Company also announced that it had
completed a 1.2 million share private placement of common stock with gross
proceeds of $5.1 million. Defendant Raynovich, in touting the benefits
that the proceeds would provide the Company, stated that "[t]he Company is
----------------
currently in the final stage of negotiation for licensing of the
----------------------------------------------------------------
OsteoGram(R)."
------------
25. Indeed, prior to the private placement, the Company faced
extraordinary cash flow difficulties. According to the Company's Form 10-Q
for the third quarter ended June 30, 1995, filed with the SEC on August 14,
1995, the Company reported cash holdings of only $256,000. Without the
private placement, therefore, the Company would face significant
difficulties continuing as a going concern.
26. On August 31, 1995, it was announced that Merck had entered into
an agreement to license CompuMed's bone mass measurement technology. In
endorsing the announcement, defendant Raynovich, the Company's President
and Chief Executive Officer, was listed as a contact person on the press
release. The press release stated that under the agreement, Merck would
obtain the worldwide, exclusive rights to the OsteoGram(R) tests from
CompuMed. In return, CompuMed would receive a licensing fee and royalties
on all OsteoGram(R) tests performed over a period of five years. However,
no specific financial details of the Merck agreement were provided, and
there was no mention that the royalties that CompuMed was set to receive
would be severely limited by a "royalty cap."
27. On September 27, 1995, CompuMed announced the completion of its
agreement granting Merck exclusive worldwide rights to operate and market
the Company's OsteoGram(R) bone density testing service. Under the terms
of the agreement, the Company confirmed that Merck will pay CompuMed a
licensing fee and royalties on all OsteoGram(R) tests performed for the
next five years. Once again, there was no mention of any cap on royalties
that CompuMed would receive under its agreement with Merck.
28. On or about October 11, 1995, based upon information provided by
the Company concerning the revenue and earnings potential of CompuMed's
royalty and fee agreement with Merck, Montgomery Securities ("Montgomery")
analyst David Crossen ("Crossen") initiated coverage of CompuMed with a
"BUY" rating. In a Montgomery research report dated October 6, 1995,
analyst Crossen noted that:
Merck has completely licensed CompuMed's test and is now running
the entire operation. CompuMed is paid an escalating royalty on
each test. The OsteoGram provides as accurate a measurement of
bone density as the big machines (called DEXA machines) sold by
Lunar and Hologic do. We project that 64% of densitometry tests
-----------------------------------------
will be performed with OsteoGram, generating royalties to
---------------------------------------------------------
CompuMed of $66 million in calendar year 2000. (Emphasis added)
---------------------------------------------
In setting a price target for CompuMed stock for the next twelve months of
$25 per share, Montgomery estimated earnings per share of $0.10 in fiscal
1996, $0.83 in fiscal 1997 and $1.99 in fiscal 1998. Analyst Crossen noted
that "[t]hese numbers are quite conservative in our opinion."
29. Fueled by defendants' glowing statements about CompuMed's
agreement with Merck to the investing public, on October 12, 1995, CompuMed
common stock traded as high as $17 5/16 per share -- a 52-week high -- in
anticipation that the Company's agreement with Merck would provide
unlimited royalties and fees for the duration of the agreement.
30. On or about October 16, 1995, Montgomery issued another analyst
report concerning CompuMed, in which Montgomery reiterated its "BUY" rating
in CompuMed stock to dispel certain rumors circulating among the securities
markets that Merck had imposed an absolute cap on royalties to be paid to
CompuMed. Based upon additional conversations with Company management,
analyst Crossen stated that there would be "no cap" on royalties and that
------
royalties for the last two years of the Merck contract would be subject to
a "formulaic definition" based upon "a Matrix of different milestones,"
-------------------- --------------------------------
emphasizing that the royalty per list earned by CompuMed would increase by
100% from $2 to $4 over the life of the contract.
31. On October 17, 1995, CompuMed announced that it was filing a Form
8-K with the SEC containing its technology license agreement with Merck,
which was completed on September 27, 1995. Under the agreement, as
previously announced on September 27, Merck purportedly will pay CompuMed
royalties for each revenue-producing test using the OsteoGram(R) technology
during the years 1996 through 2000. However, in the press release, the
Company disclosed for the first time that:
------------------
These royalty payments have no maximum amount during 1996 through
1998, but they are subject to a maximum in 1999 equal to a lesser
of 10 percent of Merck's total collected revenues or $3 million
and a maximum in 2000 equal to the lesser of 10 percent of
Merck's total collected revenues or $4 million.
As reported by Dow Jones News, defendant Raynovich explained that "Merck
--------------
had asked for the cap late in the negotiations for the licensing
agreement."
32. Following the disclosure that there would be strict "cap" on
royalties that definitively limits the Company's royalty payments to a
maximum of $3 million in 1999 and $4 million in 2000 -- contrary to
-------
defendants' previous representations that, among other things, the
agreement would generate royalties of $66 million in the year 2000 -- the
price of CompuMed's stock collapsed from its close the previous day of $16
per share to $8 1/4 per share, losing 48 percent of its value in heavy
trading of about 5.18 million shares. As reported on Bloomberg Business
------------------
News on October 17, 1995, James Broadfoot, a CompuMed investor and chief
----
investment officer at Ivy Management, Inc. stated that the royalty cap had
not been expected and that the stock slide suggested that "the Company has
---------------
misled us and the Company has lied to us."
----------------------------------------
33. On October 18, 1995, Montgomery issued another analyst report
concerning CompuMed, in which Montgomery reported the details of the
Company's agreement with Merck. Significantly, analyst Crossen noted that
"to our surprise," royalties would be capped in 1999 and 2000 at $3 million
---------------
and $4 million and that CompuMed has signed an "unquestionably weak" deal
-------------------
with Merck and management had failed to "disclose accurate details"
-------------------------
regarding the Merck contract. "In particular, management's repeated
------------------------------------
citation of an escalating royalty from $2-4 during the forecast license
-----------------------------------------------------------------------
period, mentioned again in yesterday's release, served to screen the
--------------------------------------------------------------------
existence of a cap. . . ."
------------------
34. The October 18, 1995 Montgomery report also stated:
In our previous note, we stated that management described to
us a formulaic cap on royalties beyond 1998 that would prevent
growth in calendar 1999 and 2000 compared to 1998. . . . Last
----
night, we were surprised to hear that the cap in fact is not
------------------------------------------------------------
based on a formula, but is a hard number: $3 million in 1999 and
-----------------------------------------------------------------
$4 million in 2000.
------------------
Management's credibility has been damaged since no
--------------------------------------------------
indication of a cap was given by [CompuMed] despite persistent
--------------------------------------------------------------
questioning and the sharing of our aggressive EPS assumptions
-------------------------------------------------------------
(emphasis added).
Notably, Crossen summarized by stating:
[W]e were unpleasantly surprised that CompuMed would sign such a
deal with Merck given our repeated conversations with the company
about the escalating royalty and about our financial projections.
35. Following these additional disclosures in which Montgomery went
so far as to question the Company's credibility, the price of CompuMed's
common stock plummeted further. On October 18, 1995, CompuMed common stock
closed at $6-11/16 per share, causing substantial damage to plaintiffs and
the Class.
DEFENDANTS' INSIDER SELLING
---------------------------
36. During the Class Period, defendants Stuckelman, Pollom, Mark, and
Funari each occupied positions with CompuMed that made them privy to
confidential, proprietary information concerning the Company's business,
products, markets, and financial conditions and future business prospects.
Notwithstanding their duty to refrain from trading CompuMed's stock under
these circumstances, or to disclose the inside information prior to
trading, these defendants sold, prior to disclosure of the material adverse
facts described herein, in excess of 135,000 shares of CompuMed common
stock at prices that had been artificially inflated by defendants'
materially false and misleading representations, reaping proceeds of over
$1.5 million. Insider trading during the Class Period was as follows:
(a) From September 21, 1995 through September 29, 1995,
defendant Stuckelman sold 90,000 shares of CompuMed common stock at prices
between $10.38 and 12.25 per share, reaping proceeds of approximately
$1,000,000.
(b) From September 8, 1995 through September 12, 1995, defendant
Pollom sold 5,000 shares of CompuMed common stock at prices between $9.63
and 9.88 per share, and on August 14, 1995, Pollom sold 500 shares at
$8.88. Pollom reaped total proceeds of at least $52,590.
(c) On or about September 15, 1995, defendant Mark sold 22,800
shares between $12.63 and 12.75 per share, reaping proceeds of
approximately $290,000.
(d) On or about September 28, 1995, defendant Funari sold 19,542
shares at $11.52, reaping proceeds of $225,123.84.
COUNT I
-------
Sections 10(B) And 20 Of The
Exchange Act, and SEC Rule 10b-5
--------------------------------
37. Plaintiffs repeat and reallege each of the foregoing paragraphs
as if set forth fully herein. This Count is asserted against all
defendants.
38. Defendants have violated Sections 10(b) and 20 of the Exchange
Act, 15 U.S.C. Sections 78j(b) and 78t, and SEC Rule 10b-5, 17 C.F.R.
Section 240.10b-5.
39. Defendants individually and pursuant to a common scheme have
directly and indirectly, by the use of means or instrumentalities of
interstate commerce and/or of the mails, engaged and participated in a
continuous course of conduct to make false statements about CompuMed, the
details of the Merck Agreement and CompuMed's financial performance.
Defendants employed devices, schemes and artifices to defraud, while in
possession of material adverse non-public information and engaged in acts,
practices, and a course of conduct as alleged herein which included the
making of, or the participation in the making of, untrue statements of
material facts and omitting to state material facts necessary in order to
make the statements made about the Company, the long-term profitability of
its OsteoGram(R) tests, and its financial results and performance in the
light of the circumstances under which they were made, not misleading, and
engaged in transactions, practices and a course of business which operated
as a fraud and deceit upon the purchasers of the Company's common stock
during the Class Period, in that defendants issued press releases and made
other false and misleading statements with regard to CompuMed's business
prospects and financial performance, as described above, which were
materially false and misleading and omitted, inter alia, the following
----- ----
material adverse information:
(a) Defendants' representations, in their August 11, 1995 and
August 31, 1995 public statements were materially false and misleading when
issued in that they failed to disclose that, during the late state of the
negotiations, Merck was insisting upon a strict cap on royalties to be paid
to CompuMed under the agreement to license a bone mass measurement
technology;
(b) Defendants' representations in their September 27, 1995
press release were materially false and misleading when issued in that they
failed to disclose that CompuMed's licensing agreement with Merck would not
pay royalties on "all" OsteoGram(R) tests during the last two years of the
contract as the contract contained a strict cap on royalties for 1999 and
2000;
(c) CompuMed's agreement with Merck contained a "cap" which
severely limits royalties under the fourth and fifth years of the
agreement;
(d) That the "cap" would result in diminished revenue and
earnings capacity for CompuMed; and
(e) The facts concealed by the defendants meant that the
projected royalties under the agreement and the 1995, 1996 and 1997
earnings per share estimates would not be able to reach the levels
defendants had forecast.
40. The defendants had actual knowledge of the misrepresentations and
omissions of material facts set forth herein, or acted with reckless
disregard for the truth in that they failed to ascertain and to disclose
such facts, even though such facts were available to them. Such
defendants' misrepresentations and/or omissions were done knowingly or
recklessly to conceal adverse facts from the investing public, to give the
appearance that CompuMed's agreement with Merck would provide the Company
with unlimited royalties, so that the Individual Defendants could retain
their corporate positions, receive substantial compensation, sell CompuMed
stock at artificially inflated prices, and enable the Company to complete a
private placement of its common stock for $5.1 million during the Class
Period.
41. Defendants' misconduct constituted a fraud on the market for
CompuMed common stock, artificially inflating the market price of those
securities. Absent the defendants' misconduct, the Class members would not
have purchased CompuMed common stock at the artificially inflated prices
created by defendants. By purchasing those securities at artificially
inflated prices, plaintiffs and members of the Class sustained damages.
42. The Individual Defendants are liable not only because of their
own misrepresentations and omissions, but also because they controlled the
Company. the Individual Defendants held principal executive positions
within CompuMed and/or an important positions on its Board during the Class
Period and, therefore, were responsible for the Company's public
disclosures and misstatements during the Class Period.
43. Pursuant to Section 20(a) of the Exchange Act, the Individual
Defendants also were "control persons" with respect to CompuMed and were
responsible for the disclosures made in press releases, public reports and
other publicly disseminated documents. The Individual Defendants knew or,
in reckless disregard of the facts, should have known the true financial
and business prospects of the Company's licensing agreement with Merck,
which terms of said agreement were concealed from plaintiffs and the
members of the Class during the Class Period. The scienter of the
Individual Defendants is based upon their access to non-public information
about the Company's financial performance and industry position,
participation in group published information and public statements, and
participation in the review and drafting of the Company's SEC filings.
44. The Class is entitled to recover its damages from the defendants.
WHEREFORE, plaintiffs, on behalf of themselves and the members of the
Class, pray for judgment as follows:
1. Declaring this action to be a proper class action pursuant to
Rules 23(a) and 23(b)(3) of the Federal Rules of Civil Procedure and
declaring plaintiffs to be proper representatives of the Class;
2. Awarding plaintiffs and the other members of the Class
compensatory damages, as well as pre-judgment and post-judgment interest,
as a result of the wrongs alleged in the Complaint;
3. Awarding plaintiffs and the other members of the Class their
costs and expenses in this litigation, including reasonable attorneys'
fees, expert witness fees and other costs and disbursements;
4. Awarding extraordinary, equitable and/or injunctive relief as
permitted by law, equity and the federal statutory provisions sued
hereunder, pursuant to Rules 64, 65 and any appropriate state law remedies,
including attaching, impounding, imposing a constructive trust on or
otherwise restricting the proceeds of the December 9, 1993 stock offering
in the hands of defendants to assure that plaintiffs have an effective
remedy; and
5. Awarding such other and further relief as the Court may deem just
and proper.
JURY DEMAND
-----------
Plaintiffs demand a trial by jury.
DATED: October 30, 1995
MILBERG WEISS BERSHAD
HYNES & LERACH
WILLIAM S. LERACH
ALAN SCHULMAN
/s/ Alan Schulman
----------------------------
ALAN SCHULMAN
600 West Broadway, Suite 1800
San Diego, CA 92101
Telephone: 619/231-1058
BERGER & MONTAGUE, P.C.
SHERRIE R. SAVETT
/s/ Sherrie R. Savett AS
----------------------------
SHERRIE R. SAVETT
1622 Locust Street
Philadelphia, PA 19103
Telephone: 215/875-3000
BERNSTEIN LITOWITZ BERGER &
GROSSMANN
VINCENT R. CAPPUCCI
IVAN J. DOLOWICH
1285 Avenue of the Americas
33rd Floor
New York, NY 10019
Telephone: 212/554-1400
BERNSTEIN LIEBHARD & LIFSHITZ
MEL E. LIFSHITZ
274 Madison Avenue
New York, NY 10016
Telephone: 212/779-1414
MAGER LIEBENBERG & WHITE
ROBERTA D. LIEBENBERG
Two Penn Center Plaza
Tenth Floor
Philadelphia, PA 19102
Telephone: 215/569-6921
Attorneys for Plaintiffs
Exhibit 99.7
ROBERT C. SCHUBERT (#62684)
JUDEN JUSTICE REED (#153748)
LAW OFFICES OF ROBERT C. SCHUBERT
One Embarcadero Center, Suite 370
San Francisco, California 94111
Telephone: (415) 788-4220
Attorneys for Plaintiff
UNITED STATE DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
CHARLES ROBERT FARR, )
Derivatively on Behalf of )
COMPUMED, INC. )
)
Plaintiff ) No. 95-7538 RMT (VARx)
)
vs. ) VERIFIED DERIVATIVE COMPLAINT
) -----------------------------
ROBERT STUCKELMAN, ) PLAINTIFF DEMANDS
ROBERT G. FUNARI, HOWARD L. ) A TRIAL BY JURY
MARK, RUSSELL WALKER, ) -----------------
DEVERE B. POLLOM and )
ROD N. RAYNOVICH, )
)
Defendants )
)
and )
)
COMPUMED, INC., a )
Delaware corporation )
)
Nominal Defendant )
______________________________
Plaintiff, through his attorneys, for his derivative action
complaint ("Complaint") alleges upon information and belief,
except as to the allegations contained in paragraph 2, which are
alleged upon personal knowledge, as follows:
I
INTRODUCTION
------------
1. This is a derivative action brought on behalf of
CompuMed, Inc. ("CompuMed" or "the Company"), a Delaware
corporation whose headquarters and principal place of business
are in Manhattan Beach, California. CompuMed's shares are
publicly traded on the NASDAQ market, with hundreds or thousands
of public shareholders. In this action, plaintiff, on behalf of
CompuMed, alleges that defendants have damaged CompuMed by
causing or permitting CompuMed to commit securities fraud, by
damaging or destroying the Company's reputation and by engaging
in insider trading. These acts occurred between August 11, 1995,
and October 17, 1995 ("the Relevant Period"). As alleged herein,
defendants' actions and omissions were grossly negligent,
fraudulent, and constituted breaches of their fiduciary duty.
II
PARTIES
-------
2. Plaintiff Charles Robert Farr resides in the
Commonwealth of Pennsylvania. Plaintiff acquired common stock of
CompuMed in or about 1992. He has been a shareholder of CompuMed
continuously from then until the present.
3. At all times relevant hereto, defendant Robert
Stuckelman ("Stuckelman") was a Director and Chairman of the
Board of CompuMed. Stuckelman, who founded the Company in 1973
and served as its President through 1982, rejoined the Company in
1989 and served as its President and Chief Executive Officer
until October 1994. As of January 20, 1995, Stuckelman owned or
controlled 406,689 shares, or 7.2% of the Company's common stock
outstanding.
4. At all times relevant hereto, defendant Robert G.
Funari ("Funari") was a member of CompuMed's Board of Directors.
As of January 20, 1995, Funari owned or controlled 29,165 shares
of the Company's common stock outstanding.
5. At all times relevant hereto, defendant Howard L. Mark
("Mark") was a member of CompuMed's Board of Directors and a
member of the Company's Medical Advisory Board. As of January
20, 1995, Mark owned or controlled 428,087 shares, or 7.6% of the
Company's common stock outstanding.
6. At all times relevant hereto, defendant Russell Walker
("Walker") was a Director of the Company. Walker was an employee
of the Company from 1985 to 1983, and served as the Company's
Vice President of Operations from 1988 to 1993. From 1993 to the
present he has served as the Company's Senior Scientist. As of
January 20, 1995, Walker owned or controlled 14,697 shares of the
Company's common stock.
7. At all times relevant hereto, defendant DeVere B.
Pollom ("Pollom") was Vice President and Chief Financial Officer
of the Company.
8. At all times relevant hereto, defendant Rod N.
Raynovich ("Raynovich") was President and Chief Executive Officer
of CompuMed. On October 18, 1984, Raynovich replaced Stuckelman
as President of the Company.
9. Stuckelman, Funari, Mark and Walker are hereinafter
sometimes referred to as "the Director Defendants."
10. Stuckelman, Funari, Mark, Walker, Pollom and Raynovich
are sometimes collectively referred to as "Defendants" or "the
Individual Defendants".
11. All of the Defendants are residents of the State of
California.
III
JURISDICTION AND VENUE
-----------------------
12. This court has jurisdiction and venue over this action
pursuant to 28 U.S.C. Sections 1332(a)(1) and 1367(a). Venue is
proper pursuant to 28 U.S.C. Sections 1391(a)(1) and (2) because
all of the defendants reside in the State of California and some
if not all of the defendants reside in this judicial district,
and because a substantial part of the events or omissions giving
rise to the claims set forth herein occurred in this judicial
district.
IV
SUBSTANTIVE ALLEGATIONS
------------------------
13. CompuMed designs, manufactures, distributes and
services a line of computer-based cardiopulmonary medical
equipment. In addition to its cardiac telemedicine business, the
Company currently markets the OsteoGram(R), a test that utilizes
computer image analysis of simple hand x-rays to assess bone
mineral density. The OsteoGram(R) assists physicians in
diagnosing osteoporosis and monitoring the course of disease
progression or the effect of treatment. According to the
Company's Form 10-K for the 1994 fiscal year ended September 30,
1994, filed with the SEC on January 13, 1995 ("1994 Form 10-K"),
the Company expects "major near-term growth to come from the
distribution and processing" of the OsteoGram(R).
14. In the 1994 Form 10-K, the Company stated that it had
adopted a marketing plan designed to create long term value in
the OsteoSystems business and thus, in 1993, the Company entered
into a strategic partnership agreement with Rhone-Poulenc Rorer
("RPR"). Under the terms of this agreement, RPR's sales force had
introduced the OsteoGram(R) to those doctors who already
prescribe RPR's Calcimar for the Treatment of Osteoporosis. It
was further disclosed in the 1994 Form 10-K that "CompuMed is
also seeking additional pharmaceutical company strategic partners
. . . to develop the osteoporosis testing and treatment market
faster, thus benefiting all involved companies."
15. On June 27, 1995, the Company announced that it was "in
negotiations with another company to license its OsteoGram(R)
bone density test." As a direct result, the price of CompuMed's
common stock rose 1-1/8 to $6-3/16 per share on heavy trading
volume.
16. On August 1, 1995, Fortune Magazine reported that
----------------
pharmaceutical giant Merck had emerged as a marketing partner
for CompuMed's OsteoGram(R) test. According to the article, one
of Merck's in-house researchers, John Yeats, "had practically
endorsed" the OsteoGram(R) in a February supplement to the
American Journal of Medicine. According to the same article, a
----------------------------
potential licensing agreement with Merck would "bode well for
the tiny medical technology company that lost $3.9 million on
sales of $2.4 million last fiscal year . . . [and that a] deal
with Merck would be sure to strengthen" the price of CompuMed
common stock.
17. On August 11, 1995, CompuMed announced improved revenue
and earnings for the third quarter of the 1995 fiscal year ended
June 30, 1995. Total service and produce revenues were $832,000,
up 37% from the revenues of $605,000 in the same period last
year. The Company also announced that it had completed a 1.2
million share private placement of common stock with gross
proceeds of $5.1 million. Raynovich also stated: "[t]he Company
is currently in the final stage of negotiation for licensing of
the OsteoGram(R)."
18. On August 31, 1995, it was announced that Merck had
entered into an agreement to license CompuMed's bone mass
measurement technology. In endorsing the announcement, Raynovich,
the Company's President and Chief Executive Officer, was listed
as a contact person on the press release. The press release
stated that under the agreement, Merck would obtain the
worldwide, exclusive rights to the OsteoGram(R) tests from
CompuMed. In return, CompuMed would receive a licensing fee and
royalties on all OsteoGram(R) tests performed over a period of
five years. However, no specific financial details of the Merck
agreement were provided, and there was no mention that the
royalties that CompuMed was set to receive would be severely
limited by a "royalty cap."
19. On September 27, 1995, CompuMed announced the
completion of its agreement granting Merck exclusive worldwide
rights to operate and market the Company's OsteoGram(R) bone
density testing service. Under the terms of the agreement, the
Company confirmed that Merck will pay CompuMed a licensing fee
and royalties on all OsteoGram(R) tests performed for the next
five years. Once again, there was no mention of any cap on
royalties that CompuMed would receive under its agreement with
Merck.
20. On or about October 11, 1995, based upon information
provided by the Company concerning the revenue and earnings
potential af CompuMed's royalty and fee agreement with Merck,
Montgomery Securities ("Montgomery") analyst David Crossen
("Crossen") initiated coverage of CompuMed with a "BUY" rating.
In a Montgomery research report dated October 6, 1995, analyst
Crossen noted that:
"Merck has completely licensed CompuMed's test and is now
running the entire operation. CompuMed is paid an escalating
royalty on each test. The OsteoGram provides as accurate a
measurement of bone density as the big machines (called DEXA
machines) sold by Lunar and Hologic do. We project that 64%
of densitometry tests will be performed with OsteoGram,
generating royalties to CompuMed of $66 million in calendar
year 2000." (Emphasis added.)
In setting a price target for CompuMed's stock for the next twelve months
of $25 per share, Montgomery estimated earnings per share of $.10 in fiscal
1996, $.83 in fiscal 1997, and $1.99 in fiscal 1998. Analyst Crossen noted
that "[t]hese numbers are quite conservative in our opinion."
21. As a direct result of these extremely positive statements
regarding the Merck agreement, on October 12, 1995, CompuMed common stock
traded as high as $17 5/16 per share -- a 52-week high -- in anticipation
that the Company's agreement with Merck would provide unlimited royalties
and fees for the duration of the agreement.
22. On or about October 16, 1995, Montgomery issued another analyst
report concerning CompuMed, in which Montgomery reiterated its "BUY" rating
on CompuMed stock. Based upon additional conversations with Company
management, analyst Crossen stated that there would be "no cap" on
-- ---
royalties and that royalties for the last two years of the Merck contract
would be subject to a "formulaic definition" based upon "a matrix of
different milestones," emphasizing that the royalty per list earned by
CompuMed would increase by 100% from $2 to $4 over the life of the
contract.
23. On October 17, 1995, CompuMed announced that it was filing a Form
8-K with the SEC containing its technology license agreement with Merck,
which was completed on September 27, 1995. Under the agreement, as
previously announced on September 17, Merck purportedly will pay CompuMed
royalties for each revenue-producing test using the OsteoGram(R) technology
during the years 1996 through 2000. However, in the press release, the
Company disclosed for the first time that:
"These royalty payments have no maximum amount during 1996
through 1998, but they are subject to a maximum in 1999
equal to a lesser of 10 percent of Merck's total collected
revenues or $3 million and a maximum in 2000 equal to the
lesser of 10 percent of Merck's total collected revenues or
$4 million."
As reported by Dow Jones News, Raynovich explained that "Merck had asked
--------------
for the cap late in the negotiations for the licensing agreement."
24. Following the disclosure that there would be a strict "cap" on
royalties that definitely limits the Company's royalty payments to a
maximum of $3 million in 1999 and $4 million in 2000 -- contrary to
defendants' previous representations that, among other things, the
agreement would generate royalties of $66 million in the year 2000 -- the
price of CompuMed's stock collapsed from its close the previous day of $16
per share to $8 1/4 per share, losing 48 percent of its value in heavy
trading of over 5 million shares. As reported on Bloomberg Business News
-----------------------
on October 17, 1995, James Broadfoot, a CompuMed investor and chief
investment officer at Ivy Management, Inc., stated that the royalty cap had
not been expected and that the stock slide suggested that "the Company has
misled us and the Company has lied to us."
25. On October 18, 1995, Montgomery issued another analyst report
concerning CompuMed, in which Montgomery reported the details of the
Company's agreement with Merck. Analyst Crossen noted that "to our
surprise," royalties would be capped in 1999 and 2000 at $3 million and $4
million and that CompuMed had signed an "unquestionably weak" deal with
Merck and management had failed to "disclose accurate details" regarding
the Merck contract. "In particular, management's repeated citation of an
escalating royalty from $2-4 during the forecast license period, mentioned
again in yesterday's release, served to screen the existence of a cap. . ."
26. The October 18, 1995 Montgomery report also stated:
"In our previous note, we stated that management described
to us a formulaic cap on royalties beyond 1998 that would
prevent growth in calendar 1999 and 2000 compared to 1998
. . . . Last night we were surprised to hear that the cap in
fact is not based on a formula, but is a hard number: $3
million in 1999 and $4 million in 2000.
Management's credibility has been damaged since no
indication of a cap was given by [CompuMed] despite
persistent questioning and the sharing of our aggressive EPS
assumptions."
Crossen summarized by stating:
"[W]e were unpleasantly surprised that CompuMed would sign
such a deal with Merck given our repeated conversations with
the company about the escalating royalty and about our
financial projections."
27. Following these additional disclosures in which Montgomery
questioned the Company's credibility, the price of CompuMed's common stock
plummeted further. On October 18, 1995, CompuMed common stock closed at $6
11/16 per share.
28. As a direct result af the fraud, recklessness and gross
negligence of the Individual Defendants who caused and permitted CompuMed
to engage in this course of conduct, the Company has been subjected to huge
liabilities for claims brought against the Company under the federal
securities laws and will incur substantial liabilities to defend itself
against those claims. The Company's reputation in the medical equipment
industry and securities markets has also been severely damaged, thereby
hampering the Company's ability to secure future business partners and
financing.
DEFENDANTS' INSIDER SELLING
---------------------------
29. During the Relevant Period, Stuckelman, Funari, Mark, Walker and
Pollom each occupied positions with CompuMed that made them privy to
confidential, proprietary information concerning the Company's business,
products, markets, financial conditions and future business prospects.
Notwithstanding their duty to refrain from trading CompuMed's stock under
these circumstances, or to disclose the inside information prior to
trading, these defendants sold, prior to disclosure of the material adverse
facts described herein, in excess of 138,000 shares of CompuMed common
stock at prices that had been artificially inflated by defendants'
materially false and misleading representations, reaping proceeds of $1.6
million. Insider trading during the Relevant Period was as follows:
(a) From September 21, 1995 through September 29, 1995, Stuckelman
sold 90,000 shares of CompuMed common stock at prices between $10.38 and
$12.35 per share, reaping proceeds of $1,015,450.
(b) From August 14, 1995 through September 12, 1995, Pollom sold
5,500 shares of CompuMed common stock at prices between $8.88 and $9.88 per
share. Pollom reaped total proceeds of $52,965.
(c) On or about September 25, 1995, Mark sold 22,800 shares between
$12.63 and $12.75 per share, reaping proceeds of $289,164.
(d) On or about September 28, 1995, Funari sold 19,542 shares at
$11.52, reaping proceeds of $225,124.
(e) On or about September 28, 1995, Walker sold 913 shares at $11.38
per share, reaping proceeds of $10,390.
DEFENDANTS' CONTROL OVER THE COMPANY
-------------------------------------
AND ITS DISSEMINATION OF INFORMATION
-------------------------------------
30. Each of the Individual Defendants by reason of his stock
ownership, management positions, and/or membership on the Company's Board
of Directors, was, during the time they owned such stock and/or held said
positions, a "controlling person" of CompuMed within the meaning of
Section 20 ofthe Securities and Exchange Act of 1934. The Individual
Defendants had the power and influence, and exercised the same, to cause
CompuMed to engage in the illegal practices complained of herein.
31. The Individual Defendants participated in the decision to release
the August 11, 1995, August 31, 1995, and September 27, 1995 press releases
and/or were aware of, or recklessly disregarded, the misstatements
contained therein and omissions therefrom and were aware of their
materially misleading nature. Because of their Board membership, and/or
executive and managerial positions with CompuMed, each of the Individual
Defendants had access to the adverse non-public information about
CompuMed's contractual arrangements with Merck, as particularized herein.
Each of the Individual Defendants knew that those adverse facts rendered
the positive statements made by and about CompuMed false and misleading and
that those adverse facts were inconsistent with the positive statements
made by and about CompuMed in the press releases and analysts' reports.
32. The Individual Defendants, because of their positions of control
and authority as officers and/or directors of the Company were able to and
did control the contents of the Securities and Exchange Commission ("SEC")
filings and press releases pertaining to the Company. Each of the
Defendants was provided with copies of CompuMed's press releases and SEC
filings alleged herein to be misleading prior to or shortly after their
issuance and had the ability and opportunity to prevent their issuance or
cause them to be promptly corrected.
33. Defendants engaged in a course of conduct which was designed to
and did (i) deceive the investing public regarding CompuMed's contractual
arrangements with Merck and the financial impact thereof; (ii) artificially
inflate the market price of CompuMed's securities; (iii) cause members of
the public to purchase or otherwise acquire CompuMed securities at inflated
prices; and (iv) make the stock and options of some of the Defendants more
valuable. In furtherance of this course of conduct, defendants took the
actions as set forth herein.
34. Defendants engaged in a conspiracy and common course of conduct,
commencing at least by August 11, 1995, the purpose and effect of which
was, inter alia, to cause CompuMed to deceptively present the Company's
----- ----
contractual arrangements with Merck and the financial impact thereof. The
Individual Defendants did this so that they could inflate the price of the
Company's stock in order to: (i) protect and enhance their executive
positions and the substantial compensation and prestige they obtained
thereby; (ii) enhance the value of their CompuMed stock holdings and their
options to buy CompuMed stock; and (iii) permit them to sell their own
shares at inflated prices.
35. Defendants accomplished their conspiracy and common course of
conduct through the issuance of the inter-related and inter-dependent
deceptive and misleading press releases to the public, thereby creating a
deceptive and misleading impression of continued growth and future
profitability.
36. Each of the Individual Defendants aided and abetted and rendered
substantial assistance in the wrongs complained of herein. In taking the
actions to substantially assist the commission of the fraud complained of,
each defendant acted with knowledge of the primary wrongdoing,
substantially assisted the accomplishment of that fraud, and was aware of
his overall contribution to and furtherance of the fraud.
37. Defendants either knew or recklessly disregarded the fact that
the illegal acts and practices and misleading statements and omissions
described herein would adversely affect the integrity of the market for
CompuMed securities and would artificially inflate the prices of those
securities. Defendants, by acting as herein described, knowingly or
recklessly exposed CompuMed to liability under the federal securities laws
for violations thereof, which exposed CompuMed to massive damage claims and
substantial expenses to defend actions brought against it for violation of
the federal securities laws.
V
DERIVATIVE ACTION ALLEGATIONS
-----------------------------
38. Plaintiff brings this action, pursuant to Rule 23.1, Federal
Rules of Civil Procedure, on behalf of CompuMed to enforce claims of
CompuMed against defendants, which may properly be asserted by CompuMed and
which CompuMed has failed to enforce.
39. Plaintiff has owned his CompuMed shares at all times material
hereto, and continues to own these shares. Plaintiff has standing to bring
this derivative action on behalf of CompuMed to recover damages for all of
the conduct described in this complaint.
40. Demand on CompuMed to bring this action has not been made and is
not necessary because such demand would be futile. CompuMed is controlled
by its Board of Directors which is comprised of seven members. As
described herein, a majority of the members of the Board (Stuckelman,
Funari, Mark and Walker) were involved in and approved the transactions
complained of herein, were responsible for the unlawful and improper
conduct of CompuMed which has damaged the Company, profited from insider
selling during the Relevant Period, and hence are named as defendants
herein. The Director Defendants are not in a position to exercise
independent business judgment with respect to the claims alleged herein due
to their individual and collective approval of, participation in and
responsibility for the unlawful and wrongful conduct. Hence, Director
Defendants are not disinterested and could not exercise independent
business judgment on the issue of whether CompuMed should prosecute this
action. Under the factual circumstances described herein, the directors of
CompuMed are more interested in protecting themselves than they are in
protecting the Company by prosecuting this action. Therefore, demand on
CompuMed and its Board of Directors would be futile and is excused.
41. No demand has been made on the shareholders of CompuMed to cause
CompuMed to bring this action against defendants on behalf of the Company
because such an effort would be futile. The shareholders of CompuMed do
not have the power to collectively act on behalf of the Company. All any
shareholder or group of shareholders could do is, as plaintiff does here,
bring a derivative action, on behalf of CompuMed, pursuant to Rule 23.1 of
the Federal Rules of Civil Procedure.
42. Plaintiff will fairly and adequately protect the interests of
CompuMed and its shareholders in enforcing the rights of CompuMed against
the Defendants. Plaintiff's attorneys are experienced in this type of
litigation and will prosecute this action diligently on behalf of CompuMed
to enforce the rights of the Company against the Defendants. Plaintiff has
no interest adverse to CompuMed.
COUNT I
-------
Breach of Fiduciary Duty Against All Defendants
-----------------------------------------------
43. Plaintiff incorporates by reference the allegations set forth in
paragraphs 1 through 42 above.
44. Each of the defendants, as directors and/or officers of CompuMed,
owed a fiduciary duty to the Company.
45. By engaging in conduct described above, and by their actions or
omissions causing or permitting CompuMed to engage in the unlawful conduct
described above, each of the Defendants breached their fiduciary duties to
the Company. Defendants' violation of his fiduciary duties to CompuMed was
grossly negligent, willful and knowing and made in bad faith.
46. IDB has been damaged by defendants' breach of their fiduciary
duties.
COUNT II
---------
Gross Negligence Against All Defendants
----------------------------------------
47. Plaintiff incorporates by reference the allegations set forth in
paragraphs 1 through 42 above.
48. Each of the Director Defendants, as directors, and in some
instances, as officers of CompuMed, and Pollom and Raynovich, as officers
of CompuMed, owed CompuMed a duty to act with reasonable care.
49. Each of the Defendants, by his conduct and omissions described
herein, breached their duty to act with reasonable care.
50. The breach by Defendants of their duty to act with reasonable
care was grossly negligent and made in bad faith.
51. CompuMed has been damaged by the gross negligence of Defendants.
COUNT III
---------
Violation of California Corporations Code Section 25402
-------------------------------------------------------
against Stuckelman, Pollom, Mark, Funari and Walker
---------------------------------------------------
52. Plaintiff incorporates by reference the allegations set forth in
paragraphs 1 through 42 above.
53. At the time that Stuckelman, Pollom, Mark, Funari and Walker sold
the CompuMed common stock, as set forth above, by reason of their high
executive and/or directorship positions with CompuMed, said defendants had
access to highly material information regarding the Company, including the
information set forth above regarding the true facts of the Company's
contractual arrangements with Merck.
54. At the time of the aforesaid sales, that information was not
generally available to the public or to the securities markets. Had such
information been generally available, it would have significantly reduced
the market price of CompuMed shares.
55. Stuckelman, Pollom, Mark, Funari and Walker had actual knowledge
of this material, adverse, non-public information.
56. The acts of Stuckelman, Pollom, Mark, Funari and Walker were in
violation of California Corporation Code Section 25402. Said defendants
are therefore liable to CompuMed pursuant to Corporation Code Section
25502.5(a) for damages in an amount equal to three (3) times the
difference between the prices at which said defendants sold their
CompuMed shares and the market value which said shares would have had
at the time of said sales if the material non-public information known
to said defendants had been publicly disseminated prior to that time
and a reasonable time had elapsed for the market to absorb the information.
Plaintiff seeks those damages, herein, on behalf of CompuMed with
respect to the sales of CompuMed stock described herein. Pursuant
to California Corporation Code Section 25502.5(a), said defendants
are further liable for plaintiff's reasonable costs and attorneys'
fees incurred.
COUNT IV
---------
Insider Trading Against
-----------------------
Stuckelman, Pollom, Mark, Funari and Walker
-------------------------------------------
57. Plaintiff incorporates by reference the allegations contained in
paragraphs 1 through 42 and 53 through 55 as though fully set forth herein.
58. At the time Stuckelman, Pollom, Mark, Funari and Walker sold
their CompuMed shares they had access to highly material information
regarding the Company, and were aware that the Company's press releases
contained misstatements and omissions, particularly with regard to the
contractual arrangements with Merck.
59. At the time of said sales, the aforesaid information was not
generally available to the public or to the securities markets. Had such
information been generally available, it would have significantly reduced
the market price of CompuMed's shares.
60. Stuckelman, Pollom, Mark, Funari and Walker had actual knowledge
of this material, adverse, non-public information.
61. By reason of the aforesaid insider sales, Stuckelman, Pollom,
Mark, Funari and Walker obtained cash proceeds in substantial amounts.
Said proceeds were realized as a direct result of said defendants' breach
of fiduciary duty to the Company, and they are therefore obligated to
disgorge the same to the Company.
62. The acts of Stuckelman, Pollom, Mark, Funari and Walker
constituted a willful and malicious breach of their fiduciary duties to
CompuMed, and CompuMed is therefore entitled to an award of punitive
damages, in an amount to be determined at trial.
PRAYERS FOR RELIEF
------------------
WHEREFORE, plaintiff, on behalf of CompuMed Inc., demands judgment
against defendants, and each of them, jointly and severally, as follows:
A. Determining that this suit is a proper derivative action,
pursuant to Rule 23.1, Federal Rules of Civil Procedure, and certifying
plaintiff as an appropriate representative of CompuMed, Inc. for said
action;
B. Declaring that each of the Defendants breached his fiduciary duty
to CompuMed, Inc.;
C. Declaring that each of the Defendants breached his duty of care
to CompuMed, Inc. and that the conduct of each of the Defendants
constituted gross negligence;
D. Determining and awarding CompuMed, Inc. the damages sustained by
it as a result of the violations set forth in each count of this complaint
from each of the Defendants named in each count, jointly and severally,
with interest thereon;
E. On Count III, awarding CompuMed damages equal to three (3) times
the difference between the prices at which Stuckelman, Pollom, Mark, Funari
and Walker sold their CompuMed shares and the market value which said
shares would have had at the time of said sales if the material non-public
information known to said defendants had been publicly disseminated prior
to that time and a reasonable time had elapsed for the market to absorb the
information;
F. On Count IV, requiring Stuckelman, Pollom, Mark, Funari and
Walker to disgorge their insider trading profits and to pay the Company
punitive damages in an amount to be determined at trial of this action;
G. Awarding plaintiff the costs and disbursements of this action,
including reasonable fees and costs to plaintiff's attorneys, accountants,
and experts; and
H. Granting such other further relief as the court may deem just and
proper.
Dated: November 2, 1995
ROBERT C. SCHUBERT
JUDEN JUSTICE REED
LAW OFFICES OF ROBERT C. SCHUBERT
One Embarcadero Center, Suite 370
San Francisco, California 94111
By /s/ Robert C. Schulman by msr
------------------------------
Robert C. Schubert
Attorneys for Plaintiff,
Charles Robert Farr,
derivatively on behalf of CompuMed, Inc.
VERIFICATION
------------
I, Robert C. Schubert, hereby declare:
1. I am counsel for derivative plaintiff in the captioned matter.
Derivative plaintiff is absent from the county where this action is pending
and from the county in which I maintain my offices, and for that reason I
am making this verification for and on his behalf.
2. I have read the foregoing Verified Derivative Complaint and know
its contents. I am informed and believe and on that ground allege that the
matters stated therein are true and correct.
Executed this 2nd day of November, 1995 in San Francisco, California.
I declare under penalty of perjury under the laws of the State of
California that the foregoing is true and correct.
/s/ Robert C. Schulman
--------------------------
Robert C. Schubert
