In Re: Citrix Systems, Inc. Securities Litigation 00-CV...
Transcript of In Re: Citrix Systems, Inc. Securities Litigation 00-CV...
cv-06796-WPD Document 24 Entered on FLSD Docket 12/01/2000
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF FLORIDA
FORT LAUDERDALE DIVISION
Case No . 00-6796 -CIV-DIMITROULEAS -JOHNSONION r BQxit ^
> w 5 ^ ^oooIN RE CITRIX SYSTEMS. INC. )SECURITIES LITIGATION ) LERK USDC / SDFDoFTL
PLAINTIFFS' CONSOLIDATED AMENDED CLASS ACTION COMPLAINT
Lead plaintiffs, Richard Petitti, Erik Petitti, Jenny Hu Chang, Pell Rudman & Company,
and Eleanor Perry (" Lead Plaintiffs "), by and through their attorneys, allege the following upon
personal knowledge as to those allegations conceming themselves and, as to all other matters.
upon the investigation of counsel, which included : ( a) review and analysis of public filings made
by Citrix Systems. Inc. ("Citrix," or the "Company"). with the Securities and Exchange
Commission (the "SEC"); ( b) review and analysis of securities analysts' reports concerning
Citrix; ( c) review and analysis of Citrix press releases, publicly available information, other
public statements made by or on behalf of Citrix and/or any of the defendants; (d) contact with
factual sources : ( e) online research including the review of Citrix' s website ; ( f) reference to
authoritative accounting literature ; and (g ) consultation with forensic accounting experts.
NATURE OF THE OF ACTION
common stock of Citrix from October 18, 1999 through June 9, 2000 (the "Class Period").
Plaintiffs' claims arise under Section 10(b) of the Securities Exchange Act of 1934 (the
"Exchange Act") and SEC Rule I Ob-5 promulgated thereunder and pursuant to Section 20(a) of
the Exchange Act.
This action is brought as a class action on behalf of all persons who purchased the
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2. Citrix, a software developer and licensor, creates software that allows desktop and
mobile computers to be run from central server computers. The Company describes itself as a
"global leader in application server software and services that offer the ability to run any
application over any comsection. wireless to Web."
3. Throughout the Class Period, defendants engaged in a fraudulent scheme which
was intended to and did artificially inflate the market price of Citrix's stock. Defendants issued a
series of public statements touting the Company's supposed "record" financial results, results
that, as defendants knew or recklessly disregarded. were improperly inflated through accounting
manipulations in violation of generally accepted accounting principals ("GAAP"). Among other
things, defendants disseminated artificially high statements of income and earnings. Defendants
also mischaracterized Citrix's relationships with its distributors. While making these
misrepresentations, defendants knew that the Company's business and financial condition were
experiencing severe and unusual adverse pressures as a result of a transition in how the Company
transacted business. These adverse circumstances. which were never disclosed to the public,
were having and continued to have a material adverse affect on the Company's business and
financial condition and prospects.
4. As a result of defendants' numerous misrepresentations the market price of Citrix
stock soared to over $181 per share on February 10, 2000, and traded at well over $l00 a share in
March. 2000, after a two-for-one stock split on February 17, 2000.
5. Defendants Templeton and lacobucci capitalized on the artificially inflated price
of Citrix's stock by selling a total of 267.738 shares of stock between them for proceeds of
approximately $40,405.31 1 during the Class Period. Other corporate officer and director insiders
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sold over 327,297 shares for proceeds of $41,114,692. The total proceeds from stock sales by
corporate insiders during the Class Period was over $81 million.
6. On June 12, 2000. Citrix made an announcement that disclosed the true financial
condition of the Company to the marketplace. For the quarter. Citrix announced that its second
quarter 2000 financial results would show total revenue in the range of $ t 05 million to $110
million. and earnings of $.09 - $.11 per share. The $.09 - $.I 1 EPS estimate was a dramatic
contrast to market analysts' consensus estimates of $021 EPS for the second quarter of 2000, a
consensus based on information that defendants had disseminated to the market and directly to
professional market analysts. As a result of the June 12, 2000 announcement, Citrix stock
plummeted 46% to a closing price of $22.25 per share from its closing price of $41.18 per share
the prior trading day on unusually high trading volume of 94.598,300 shares compared to Citrix's
average daily trading volume of4.521,818 shares. The drop in Citrix's stock on June 12, 2000
translated into a total market loss of over $3.5 billion.
7. Not only the investing public, but also professional market analysts were shocked
by the news. Analyst Paul Dravis of Banc of America Securities, reported in a June 12, 2000
article published on TheSireer.coin, called the Company's communications with investors
"atrocious" and told Company executives their credibility was lost.
8. Within two weeks of the close of the Class Period, on June 23, 2000, defendant
lacobucci stepped down as Chairman of the Board and defendant Templeton resigned as Chief
Executive Officer.
JURISDICTION AND VENUE
9. This Court has jurisdiction over the subject matter of this action pursuant to
Section 27 of the Exchange Act, 15 U.S.C. §78aa and pursuant to 28 U.S.C. §§] 331 and 1337.
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The claims asserted herein arise under and pursuant to Sections 10(b) and 20(a) of the Exchange
Act and present federal questions.
10. Venue is proper in this judicial district pursuant to Section 27 of the Exchange
Act and pursuant to 28 U.S.C. § 1391( b). At all times relevant to the complaint , the Company
maintained its principal executive offices at 6400 Northwest Sixth Way, Ft. Lauderdale, Florida.
33309, in this judicial district . In addition , a substantial number of the false and misleading
statements complained of were prepared and disseminated to the investing public from offices
within this district.
11. In connection with the violations of law alleged herein, the defendants used the
means and instrumentalities of interstate commerce including the United States mail, interstate
wire and telephone facilities, the facilities of the national securities markets and the Internet to
distribute the false and misleading statements complained of herein.
THE PARTIES
12. Lead Plaintiffs. Richard Petitti, Erik Petitti, Jenny Hu Chang, Pell Rudman &
Company, and Eleanor Perry. appointed by the Court in its Order of October 5, 2000, purchased
shares of Citrix at artificially inflated prices during the Class Period, and have been damaged
thereby.
13. Defendant Citrix is an application server software and services provider. The
Company markets its software solutions through value-added resellers ("VAR"), system
integrators as well as issuing software licenses.
14. Defendant Mark B. Templeton ("Templeton") has, at all times material hereto,
been the Company's Chief Executive Officer and President. Defendant Templeton personally
prepared and disseminated many of the false and misleading statements complained of herein,
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and directed the Company's campaign of false and misleading statements regarding its business
and operations, as more fully alleged herein. Throughout the Class Period Templeton sold
67.738 shares of Citrix common stock at artificially inflated prices for proceeds of $7,505.311.
On June 23, 2000, Templeton resigned from his position as Chief Executive Officer of Citrix.
15. Defendant John P. Cunningham ("Cunningham") has been the Company's Chief
Financial Officer since November, 1999. Defendant Cunningham is responsible for signing
many of the Company's false and misleading statements filed with the SEC during the Class
Period.
16. Defendant Edward E. lacobucci ("lacobucci") is the co-founder of the Company
and has served as Chairman of the Board since 1991. Throughout the Class Period, lacobucci
sold 200,000 shares of Citrix common stock at artificially inflated prices for proceeds of
$32,900,000. Defendant lacobucci resigned as Chairman of the Board of Citrix on June 23,
2000.
CLASS ACTION ALLEGATIONS
17. Plaintiffs bring this action as a class action pursuant to Rule 23(a) and (b)(3) of
the Federal Rules of Civil Procedure on behalf of all persons who purchased the common stock
of Citrix from October 18. 1999 through and including June 9, 2000 (the "Class Period").
Excluded from the Class are the defendants, members of the defendants' immediate families,
their legal representatives, heirs, successors and assigns and any person acting in concert with or
under the control of any defendant.
18. Members of the Class are so numerous that joinder of all members is
impracticable. While the exact number of Class Members is unknown to plaintiffs at the present
time, plaintiffs reasonably believe that there are hundreds, if not thousands, of members of the
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Class throughout the United States. As of May 12. 2000, there were approximately 185 million
shares outstanding of Citrix common stock. The members of the Class are geographically
dispersed throughout the United States and can be determined by the records maintained by the
transfer agent for Citrix.
19. Plaintiffs' claims are typical of the claims of other Class Members because the
damage suffered by plaintiffs and all members of the Class arise from the same conduct.
Specifically, plaintiffs' claims and the claims of members of the Class arise out of the
misrepresentations and omissions made by the defendants regarding the Company's operations
and financial growth, as more fully alleged herein. Plaintiffs have no claims which are
antagonistic to, or in conflict with, the members of the Class.
20. 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
common questions of fact are:
a) whether the federal securities laws were violated by reason of the
false and misleading statements described herein:
b) whether defendants misrepresented or failed to disclose material
facts regarding the true status of Citrix's business and operations as more fully particularized
herein;
c) whether defendants are "controlling persons" as that term is
defined in Section 20(a) of the Exchange Act;
d) whether the price of Citrix's common stock was artificially inflated
during the Class Period due to the material misrepresentations and omissions complained of
herein: and
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e) whether the members of the Class have been damaged as a result of
the conduct alleged herein and, if so, the proper measure of such damages.
21. Plaintiffs will fairly and adequately protect the interests of other members of the
Class, and plaintiffs have retained counsel competent and experienced in class and securities
litigation to prosecute the claims of the Class. Plaintiffs intend to prosecute the claims asserted
herein vigorously.
22. A class action is superior to the other available methods for the fair and efficient
adjudication of this controversy. The Class is so numerous and geographically dispersed
throughout the United States that it would be impractical for each member of the Class to bring
separate actions or be joined in one individual action. In addition, the individual damages
suffered by members of the Class may be relatively small when measured against the potential
costs of bringing this action, thus, making the expense and burden of litigation appropriate for
class action treatment. Also, the adjudication of this controversy through a class action will
avoid the possibility of inconsistent and possibly conflicting adjudications of the claims asserted
herein.
23. There will be no difficulty in the management of this litigation as a class action.
The names and addresses of record owners of the shares of the Company's common stock may be
determined through the transfer agent, and notice can be provided to such persons through
appropriate means of notice through publication, mailing and notices over business wire services
in a form similar to those customarily used in class action litigation arising under the federal
securities laws.
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SUBSTANTIVE ALLEGATIONS
24. At the beginning of the Class Period, on October 18, 1999, Citrix issued a press
release announcing "record third quarter results." Citrix announced that net revenues for the
third quarter of 1999 were $105.8 million, up 56% from the previous year. Net income,
excluding certain write-offs, was reported as $34.2 million, or $0.35 per share, as compared to
$21.1 million or $0.23 per share, for the third quarter of 1998. Net income for the third quarter
of 1999 was reported to be $29.3 million, or $0.30 per share, compared with net income of $16.9
million, or $0.18 per share, for the third quarter of 1998. For the first nine months of 1999, net
revenues were purportedly $285.2 million, a 65% increase for the comparable nine months of
1998.
25. On November 15, 1999, defendants filed Citrix's Form 10-Q for the period ended
September 30, 1999 with the SEC ("the 1999 third quarter 10-Q"). This document, signed by
defendant Templeton, reflected reported revenue, pre-tax income and net income of
$105,780,000. $45,853,000 and $29,346,000, respectively.
26. The Company's reported financial results as set forth in ¶¶ 24-25 above were
materially false and misleading because defendants improperly recognized revenue upon the
transfer of software inventory to affiliates and materially understated expenses in connection with
Cirix's provision for product returns to further inflate the Company's reported earnings.
Citrix' s "Platinum " Program
27. The Company's products are primarily sold through the "Citrix Solutions
Network" ("CSN"). The success of the CSN is critical to the Company because well over 904/0 of
Citrix's sales were made by the Citrix affiliates in CSN during the Class Period. CSN offers its
members a variety of benefits depending on which particular CSN program the affiliate
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participates in. There were essentially four different CSN marketing programs: the Silver
Solutions Provider, the Gold Solutions Provider, the Platinum Solutions Provider and the
Enterprise Solutions Provider. Citrix touted the Platinum program as by "invitation only."
28. In an October 25. 1999 press release, where the Company announced the
establishment of the "Platinum Solutions Provider Programme," the Company stated that the new
program was one of the "most comprehensive" distribution channel programs in the industry and
entailed "increased levels of support and integration services for Citrix application-server
software."
29. To qualify for the "Platinum Solutions Provider Programme ." the affiliate had to,
among other things, attain a minimum level of Citrix application server software sales and
inventory. The Company's launch of the Platinum program was intended to improve application-
server software sales.' Citrix indicated in the October 25, 1999 press release that "Platinum
Solutions Providers" became eligible for "a host of training and support programmes," including,
among other things: the up-front availability of market development funds from Citrix upon entry
into the program: advanced technical training: on-site training in Citrix application server
software solutions: priority sales lead assignment: and extended sales and marketing support.
'The Company defines "Application Server Computing" as follows:
"An innovative, server based approach to delivering business-critical applications toend-user devices, whereby an application's logic executes on the server and only the
user interface is transmitted across a network to the client."
The Company defines " application logic" as "the computational aspects of an application , including
a list of instructions that tells a software application how to operate."
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Defendants Improperly Recognized Revenue
From Citrix's Purported " Sales" to Platinum Affiliates
30. In Citrix's June 30, 1999 Form 1 O-Q. filed on August 16, 1999 and signed by
defendant Templeton ("the 1999 second quarter l0-Q"), the Company describes its practice of
revenue recognition, in part, as follows:
Product revenues are recognized upon shipment of the software product only if no
significant company obligations remain . The fee is fixed or determinable. and
collection of the resulting receivable is deemed probable .
Revenue from packaged product sales to distributors and resellers is recordedwhen related products are shipped ... [ Emphasis Supplied].
31. The representation in ¶30 above was repeated in the Company ' s 1999 Form I O-K
filed with the SEC on March 23. 2000 (" the 1999 Form 10-K"). that was signed by defendants
Templeton . Cunningham and lacobucci , and each of the other Form I O-Qs filed with the SEC
during the Class Period.
32. Throughout the Class Period, defendants inflated the Company's revenues and
earnings by improperly recognizing millions of dollars of revenue based upon the purported
"sale" of merchandise to its Platinum affiliates, when, as defendants knew or recklessly
disregarded . no actual sales took place.
33. In substance , defendants caused the Company to park millions of dollars of
Company merchandise in its affiliates ' warehouses , and to fraudulently record such parked
merchandise as bona fide sales. Indeed , it was precisely this practice that let to what defendants
described to analysts as a channel " sell in" problem in their June 12. 2000 disclosure that ended
the Class Period.
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34. Financial Accounting Statement Board ("FASB") Statement No. 48 provides that
revenue may be recognized only where the seller does not have significant obligations for future
performance to directly bring about resale of the product by the buyer [Emphasis Supplied]."
With respect to Citrix' newly created category of Platinum affiliates, however, the Company was
obligated to devote substantial resources and to provide significant sales assistance to directly
bring about resale of its products. Accordingly, the Company was not permitted, under GAAP to
recognize revenue on the sale of such products at that time. In addition, as noted in the Citrix
1999 Form 10-K:
Citrix's sales and marketing organization actively supports its distributors andresellers. The Company's marketing department provides training, sales event
support, sales collateral. advertising, direct mail and public relations coverage toits indirect channels to aid in market development and in attracting new
customers.
35. Through the use of improper revenue recognition and a failure to comply with
GAAP, including FASB Statement No. 48, the Company was able to, and did , manipulate its
revenue and eamings so as to report a fictitious trend of impressive growth throughout the Class
Period.
36. GAAP precluded the recognition of revenue based on nothing more than transfers
of inventory because, at that point in time, the earnings process was not complete.
37. By mischaracterizing the nature of its inventory shipments to affiliates as "sales,"
the Company created the illusion of a fast-growing company. In addition, a concomitant result of
this improper revenue recognition practice was the material overstatement of revenues and
earnings attributable to bogus "sales" that were merely transfers of inventory.
38. Defendants not only concealed the Company's practice of improper revenue
recognition from inventory shipments, but also stated that Citrix's financial statements were
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prepared in conformity with GAAP. By recognizing revenue in violation of GAAP ( including
FASB Statement No. 48 ). each of the Company's financial statements during the Class Period as
contained in its public filings with the SEC violated the following GAAP provisions, among
others:
a. Profit is deemed to be realized when a sale in the ordinary
course of business is effected (Chapter I A of Accounting
Research Bulletin No. 43. paragraph 1);
b. Revenue should ordinarily be accounted for at the time a
transaction is completed. (Accounting Principles Board
Opinion No. 10, paragraph 12);
Revenues and gains generally are not recognized until
realized or realizable, and revenues are considered to have
been earned when the entity has substantially accomplished
what it must do to be entitled to the benefits represented by
the revenues. (Statement of Financial Accounting Concepts
No. 5, paragraph 83);
39. In addition, each and every financial statement of the Company which was
disseminated to the investing public during the Class Period was not prepared in accordance with
GAAP because neither the financial statements nor the notes thereto contained disclosure of the
fact that the Company was recognizing revenue upon the transfer of merchandise that was in fact
being shipped to affiliates, to which Citric owed additional substantial obligations with respect to
the ultimate sale of the merchandise to end-users. In fact, the Company was improperly
recognizing revenue upon the shipment of such merchandise.
To Inflate Revenue , Defendants Required Platinum
Affiliates to Purchase Minimal Amounts of Product
40. Defendants issued the following statement in the Company's 1999 third quarter
O-Q, the 1999 Form 10-K and the March 31, 2000 Form 10-Q ("the 1999 first quarter 10-Q"):
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Additionally. our distributors and resellers as well as our other indirect
distribution channels are not obligatedto purchase products from us and may also
represent other lines of products.
41. This statement was materially false and misleading. According to a former
account executive of FutureLink Corp. -- among the largest of Citrix's Platinum affiliates --
Platinum affiliates were required to stockpile a specified level of Citrix inventory in order to
maintain their status as a Platinum affiliate. As a result of this requirement. Platinum affiliates
would order unneeded merchandise inventory from Citrix which was "piled high" in the
affiliates' warehouses. This "piled high" inventory was fraudulently recorded as having been
"sold" by Citrix to its affiliates in violation of GAAP.
42. As of November 30, 2000, there were approximately 41 affiliates which
comprised Citrix's Platinum inner circle. By virtue of its funding of the increased incremental
inventory which was required to be purchased by these numerous affiliates, the Company
boosted its in-channel "sales" by no less than $10 million during the Class Period.
Defendants Also Materially Understated Citrix's Level ofProduct Returns In Order to Increase Reported Revenue
43. The Company's financial statements for the six months ended June 30. 1999
reflected a products return provision of $2.990,000. whereas the Company's financial statements
for the nine months ended September 30, 1999. that as presented in Citrix's 1999 third quarter
I0-Q, reflected a provision for product returns in the sum of $1,400,000. Citrix thus decreased
its provision for product returns by $1,590.000 in the third quarter of 1999. This decrease was
false and misleading because it was intended to and did further mislead the investment
community into believing that the distribution channel was largely cleared of returnable, old or
otherwise non-marketable products.
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44. In effecting this approximately $1.6 million decrease (a material decrease in
excess of 50%), defendants either knew or recklessly disregarded that the Company's provision
for product retums was required to have been materially increased , not decreased , in recognition
of the following facts:
a. The Company had begun to sell to large corporate clients, thus eliminating
sales which would otherwise have been made through affiliates.
b. There was an ongoing consolidation of the Company's distribution
network (as further discussed below) which would likely result in substantial product returns.
c. The Company had begun to introduce a new version of its
MetaFrame(TM) application server software family - MetaFrame 1.8 for Microsoft Windows(R)
2000 Servers - which was virtually assured to result in substantial returns of older versions of the
Company's product.
45. Because the Company's financial statements failed to include an adequate
provision for product returns, Citrix's reported earnings which appeared in the October 18, 1999
press release and in the 1999 third quarter I O-Q were materially false and misleading because the
Company's reported net income for the third quarter of 1999 was overstated by approximately
$10 million. In addition, pre-tax income was overstated by virtue of defendants' overstatement of
revenue, as set forth in ¶¶30-42 above.
46. The 1999 third quarter 10-Q also represented that:
We provide certain of our distributors with product return rights for stock
balancing or limited product evaluation. We also provide certain of our
distributors with price protection rights. To cover these product returns and price
protection rights. we have established reserves based on our evaluation of
historical trends and current circumstances . These reserves may not prove to be
sufficient in the future, in which case our business, operating results and financial
condition could be adversely affected [Emphasis Supplied].
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47. The statement in ¶46 above was materially false and misleading because
defendants concealed their knowledge of the adverse impact of Citrix's business transition from a
focus on sales of shrink wrap software to a focus on electronic licensing to large enterprises and
because defendants did not establish the Company's reserves on the basis of all " current
circumstances ." Instead, they knowingly, or with extremely reckless disregard, understated
Citrix's reserves and made inadequate provisions for product returns, in material amounts, which
overstated the Company's pre-tax income in comparable amounts.
Defendants Misrepresented The Size of Citrix' s International Inventory
48. On October 19, 1999, Gerard Klauer Mattison & Co. also issued an analyst's
report which, based upon information obtained from defendants through a Company conference
call, stated that there had been "a reduction in already low international channel inventory."
49. The defendants' representation that there had been "a reduction in already low
international channel inventory" was materially false and misleading. In fact, as defendants knew
or recklessly disregarded, international inventory was continuing to pile up. as revealed on June
12, 2000 when it was disclosed that Citrix management was forced to adjust "bloated"
international channel inventory by $2-3 million.
Defendants Concealed Their Knowledge of the Adverse
Impact on Citrix of Its Business Transition
50. On October 19. 1999, Credit Suisse First Boston Corporation issued an analyst's
report which stated that: "Citrix introduced on October 1st its enterprise licensing model focused
on 5000+ user seat deployments." The report noted that this new "enterprise" initiative was in
addition to the Company's existing "Corporate licensing" initiative which "focused on deals
under 5000 seats." On this same date. A.G. Edwards issued an analyst's report which stated that
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the Company's third quarter saw an improvement in gross margin due to the Company's
movement "away from shrinkwrap product towards corporate/ enterprise licensing."
51. The Company's transition "away from shrinkwrap product towards
corporate/enterprise licensing" was an integral part of the Company's plan to focus on large
corporate/enterprise "paper licensing" (which delivers programs and upgrades electronically)
sales.
52. Citrix's heavy reliance on its distributors' marketing networks was described in a
January 12, 2000 analyst's report issued by Prudential Volpe Technology that stated that "Citrix
sales are almost 100% indirect." Similarly, in a February 17, 2000 follow-up report, the same
analyst stated that "Citrix still operates a near-100% indirect sales model." On April 14. 2000,
Gerard Klauer Mattison & Co. issued an analyst's report which stated that, "Citrix's sales force is
presently very small and the Company's sales remain mostly indirect, with more than 90% of
revenues generated through the channel."
53. Due to the defendants' desire to focus key affiliates on larger corporate/licensing
transactions as opposed to smaller shrink wrap sales transactions, they caused the Company to
cease providing sales leads for shrink wrap products to certain of its key Platinum affiliates. A
former account executive with FutureLink noticed that Citrix stopped providing FutureLink with
shrink wrap customer sales leads and, therefore, FutureLink's sales of shrink wrap products
slowed.
54. Defendants knew and failed to disclose that its fundamental business transition
would, and did, have a significant adverse impact on the sale of shrink wrap software, and failed
to disclose this material information to the investing public. When defendants finally, on June
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12, 2000, caused the Company to issue a press release disclosing this adverse fact, among others,
the market reacted decisively, repricing Citrix stock dramatically downward.
Defendants Reported False and Misleading 1999 Year End Financial Results
55. For the year ending December 31. 1999. defendants announced net revenues of
$403.3 million, tip 62% from $248.6 million for 1998. Net income for the year ending December
31, 1999 was reported to be $116.9 million, or $1.21 per share, compared to $61.1 million, and
$0.67 per share, for 1998.
56. On January 19, 2000, defendants issued a press release again boasting of supposed
"record" results for fourth quarter and fiscal year 1999. The press release reported that annual
revenues grew 62% for the twelve months ending December 31, 1999, net revenues for the fourth
quarter were $1 18.1 million, up 56% in the comparable period of the prior year. Net income,
excluding write-offs, was reported to be $37.7 million for the fourth quarter, or $0.38 per share,
as compared with $24.7 million or $0.27 per share for the fourth quarter of 1998. Net income for
the fourth quarter of 1999 was reported to be $34.0 million, including the effect of certain write-
offs. or $0.34 per share, as compared with net income of $22.3 million, or $0.24 per share, for
the fourth quarter of 1998.
57. Commenting on the year-end results, defendant Templeton stated:
We believe these results represent an exceptional year for Citrix and one of the
most exciting in the Company's ten year history. Moving forward, our goal
remains the same - -bringing strategic value to the enterprise. In continuing to
enable our customers and partners to effectively address needs, we will focus on
adding new functionality to our current product line and developing winning new
technologies - - from multi-media to Web solutions - -that optimize productivity
and enhance business performance.
58. The Company also announced a two-for-one stock split payable in the form of a
dividend on February 16. 2000, and the "extension" of its product line as well as the growing
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acceptance of licensing to ASP's.' Defendant lacobucci stated:
The growing acceptance of our ASP programme and the customer demand to port
our products across other platforms such as UNIX are both indications that we are
well positioned to actively address the challenges and opportunities associated
with effectively using information in the new millennium.
59. As defendants continued to flood the market with positive announcements
concerning the Company's financial results and growth prospects, defendant Templeton, the
Company's top-ranking officer, sold 67,738 shares between December I, 1999 and March 2,
2000, generating proceeds of over $7 million dollars at artificially inflated prices ranging from
$95.03 to $148.89 per share, prices well above the $22 per share price on June 12, 2000, when
the truth about Citrix's business and financial condition was disclosed. During the same period.
defendant lacobucci sold 200,000 of his Citrix holdings. generating proceeds of $32,900,000.
60. All of these announcements -- including the financial results -- were false and
misleading due to the fact that they were based on defendants' manipulation of GAAP because
(1) defendants improperly recognized revenue for sale of merchandise to affiliates, and (2)
because defendants failed to provide for the building-up of inventory which had become
excessive, obsolete or otherwise non-saleable merchandise being carried by its distributors. Such
announcements were also false and misleading in view of the fact that defendants failed to
disclose the material adverse effect caused by the Company's transition from shrinkwrap to ASP
sales.
An ASP delivers software applications to its customers from a remote data center on a
subscription basis. The ASP operates the data center in which the applications are hosted and
provides software management , security, and disaster recovery , and business fu nctions such as
billing and usage monitoring . The ASP also provides user support and training for the use of the
particular application.
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The Consolidation of Distributorships by Citrix' s Largest Affiliate, FutureLink,Resulted In An Increase In The Company 's Level of Excess Inventory
61. On December 30. 1999. Gerard Klauer Mattison & Co. issued an analysts' report
which stated the following with regard to FutureLink, a key affiliate of the Company:
Since the announcement of its agreement to acquire Micro Visions in early June,
the company has closed four acquisitions of Platinum Citrix resellers and expects
to close its fifth by the end of January. Through these acquisitions it is building
critical mass and a strong management team, in our view. In addition to managers
hired externally, the company has placed personnel from its acquisitions in key
roles and has built strong depth, in our view...The company is establishing
regional service centers through organic growth as well as through acquisitions of
five Platinum Citrix resellers, four in the US and one in the UK. We believe
FutureLink has the largest team of SBC engineers worldwide. This team knows
how Citrix's technology works and has extensive in-house ASP experience, which
we believe will help FutureLink grow its SBC business and convert existing SBC
customers to the ASP model. As a combined entity, the company has installed
over 50,000 SBC seats. It has deployed some of the more marquee Citrix
implementations worldwide. We believe that the company could become a Citrix
service integration partner for large enterprise implementations [Emphasis
Supplied].
62. On February I. 2000, FutureLink issued a press release announcing the
acquisition of VSI Technology Solutions ("VSI"). The press release noted that: "VSI was among
North America's top 5 largest Citrix integrators in 1998 and was one of the top 10 Citrix resellers
in 1997. The following day. Gerard Klauer Mattison & Co. issued an analyst's report noting that
FutureLink had announced that "yesterday, the company announced the closing of its acquisition
of VSI Technology Solutions, a Citrix Platinum Reseller, based in the mid-Atlantic region."
63. On February 2, 2000, Gerard Klauer Mattison & Co. issued an analyst's report
which stated that "this morning" FutureLink announced an agreement to acquire Madison
Technology Group, "a top ten Citrix reseller for the past five years and was the number one
Citrix reseller nationally in the third quarter of 1999."
64. On February 15. 2000, FutureLink issued a press release which quoted defendant
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Templeton as stating that FutureLink was "one of Citrix's most important channel partners..."
In fact after the Class period, on August 22, 2000 FutureLink issued a press release announcing
that:
Citrix...has recognized FutureLink as the number one volume reseller of Citrix
technology in multiple territories for two fiscal quarters . The awards were given
to FutureLink's Great Lakes, Los Angeles/Orange County. and Northern
California territories for the first quarter of 2000 , and again to the Washington DC
Metro. Los Angeles/Orange County, New York Metro, and Southwest territories
for the second quarter of 2000 . The honor is given quarterly to the top national
member of the Citrix Solutions NetworkTM (CSN) in each territory... [Emphasis
Supplied].
65. On March 2, 2000 Gerard Klauer Mattison & Co. issued an analyst's report which
noted that FutureLink had added 35 additional channel partners to its ASP channel, bringing the
total 65 participants. This report also stated that: "Through acquisition it has become a national
Citrix server-based computing (SBC) integrator and arguably the largest. Its SBC effort is
composed of a strong group of Platinum Citrix integrators that have a broad geographic footprint
and strong client relationships."
66. Due to FutureLink's acquisition of the Citrix Platinum level affiliates during the
Class Period, Citrix channel inventory was consolidated such that the overstocked inventory
position of FutureLink was combined with the overstocked inventory of FutureLink's acquirees,
thus resulting in an increasing and ever-growing excess of inventory held by the new
consolidated FutureLink affiliate. Defendants knew or recklessly disregarded that it was only a
matter of time before a substantial amount of this excess inventory would be returned. During
the Class Period, defendants did not disclose these facts, which were required to be disclosed to
make the Company's periodic SEC filings during the Class period not misleading. and in
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addition, issued false and misleading financial statements with inadequate provisions for product
returns and inventory reserves.
Citrix's Introduction Of a New Product -- MetaFrame 1.8 -- Further
Drove Up The Company's Level of Product Returns
67. On September 13, 1999, the Company issued a press release announcing the
showcasing of a Beta version MetaFrame Application-Server Software for Windows 2000. As
stated in the press release:
Citrix Systems , Inc. (Nasdaq : CTXS) will demonstrate a version of its
MetaFrameTM 1.8 application - server software adapted for Microsoft Windows
2000 Server Terminal Services at Microsoft Developer Days 99 on September 15.
This version of MetaFrame 1.8. which is also compatible with Windows NT 4.0
Tenninal Server Edition, extends the reach and enhances the capabilities of
Windows 2000 through additional client and server functionality , including
enterprise management capabilities , heterogeneous computing support and
seamless desktop integration.
Citrix continues to provide value-added solutions that enhance the Windows
server platform," said Tod Nielsen, vice president Developer Marketing,
Microsoft Corp. "By providing a rich toolset for deployment and management of
Windows-based applications, and by extending Windows 2000 to non-Windows
based client devices. Citrix MetaFrame helps enterprise customers maximize their
existing computing environment.
68. The MetaFrame 1.8 appeared to he a success. An October 13. 1999 Company
press release stated:
Citrix Systems has announced that MetaFrame 1.8, its leading application-server
software, has been awarded the Computing Award for Excellence for Network
Software prize at the magazine's annual ceremony. Computing, the UK's leading
weekly information technology title, recognized MetaFrame 1.8 for its role in
advancing application deployment in the enterprise and providing organizations
with "digital independence" - fast. flexible access to applications by anyone,
anywhere.
We are honored to have MetaFrame application-server software recognized by
this prestigious European publication." said Jane Rimmer, Director, Marketing
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Northern Europe. "This accolade attests to the broad applicability of our
server-based solutions in helping customers extend the reach of their business
critical applications. We remain dedicated to providing innovative solutions to
enhance the access, performance, manageability and security of enterprise
applications.
69. On February 15, 2000, defendants caused the Company to issue a press release
announcing the latest version of its MetaFrame(TM) application server software family -
MetaFrame 1.8 for Microsoft Windows(R) 2000 Servers." According to this press release:
By extending the MetaFrame family to support Windows 2000, Citrix adds the
core functionality to this new platform that has made MetaFrame the system
solution of choice for server-based hosting of Windows applications in the
enterprise and Application Service Provider (ASP) markets. MetaFrame for
Windows 2000 also extends the reach of Windows 2000 Servers beyond the
desktop to non-Windows client devices.
Citrix is intensely focused on increasing the value we bring to enterprise
customers and ASPS, and MetaFrame for Windows 2000 demonstrates how we
continue to work with Microsoft to improve our customers' enterprise class
computing environment," said Edward lacobucci. senior vice president of strategy
and technology and chief technical officer for Citrix,. "The beta program for
MetaFrame for Windows 2000 was the largest in Citrix's history, which
underscores the strong industry support for this software . By extending Windows
2000 to non-Windows client devices. MetaFrame continues to help enterprise
customers maximize their existing computing environments as they adapt to the
latest platforms [Emphasis Supplied].
70. While defendants were touting the successful introduction of the Company's new
product , they falsely and misleadingly failed to disclose that the introduction of new products had
resulted in, and would continue to result in, an even further increase in product returns from
Citrix reseller affiliates.
71. The financial data set forth in the 1999 Form 10- K was substantially identical to
the financial data set forth in the January 16. 2000 press release. In addition , the 1999 Form 10-
K noted that the provision for product returns had increased from $1.400,000 for the nine months
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ended September 31, 1999 to $17,996,000 for the year ended December 31, 1999, an increase of
more than $16.5 million.
72. Although the January 16, 2000 press release and the 1999 Form 10-K reported
financial results which reflected a significant increase in the Company's provision for product
returns, this provision was understated by no less than $9.6 million for the following reasons: (1)
the Company had stuffed its channel by forcing Platinum affiliates to stockpile inventory
knowing that its new product MetaFrame 1.8 was about to be released thus rendering this
inventory excess, obsolete or unsaleable: (2) the Company's move towards enterprise licensing
coupled with its decision to stop providing sales leads for shrink wrap products to certain of its
key Platinum affiliates made it more difficult for distributors to sell through their bloated
inventories; (3) Citrix had granted its distributors a right of return: (4) the Company had reduced
its reserves for product returns; (5) defendants knew or recklessly disregarded that consolidation
of its distributors would decrease channel tolerance for excess inventory; and (6) the increased
provision for product returns in the fourth quarter of 1999 did not take factors (I) through (5)
into account. The Company's reported pre-tax income and net income for the fourth quarter and
for the 1999 year. as reflected in the Januay 16. 2000 press release and the 1999 Form 10-K, was
overstated by approximately $9.5 million and $6.0 million respectively. In addition, reported
pre-tax income was overstated by virtue of defendants' overstating revenue as set forth in ¶ )30-
42 above.
73. The 1999 Form 10-K again misrepresented that Citrix's established reserves were
based on defendants' evaluation of "current circumstances," which was again materially false and
misleading because defendants (1) failed to disclose and concealed the build-up of international
inventory, (2) failed to disclose and concealed the impact of Citrix's business transition from
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shrink wrap to ASP sales, (3) failed to disclose and concealed the foreseeable impact that the
consolidation of distributors by FutureLink had on its already ever-growing build-up of
inventory, and (4) failed to disclose and concealed the impact on returns made by Citrix's
introduction of a new product. The egregiousness of this material falsity was compounded by the
fact that the SEC, on December 3, 1999, issued Accounting Bulletin No. 101, Revenue
Recognition in Financial Statements ("SAB 101") which specifically addressed the issues set
forth in 1146-47 above.
74. As stated in SAB 10 I. which as noted by the SEC. was "not intended to change
current guidance in the accounting literature":
The staff believes that the following additional factors, among others. may affect
or preclude the ability to make reasonable and reliable estimates of product
returns: (1) significant increases in or excess levels of inventory in a distribution
channel (sometimes referred to as "channel stuffing"), (2) lack of "visibility" into
or the inability to determine or observe the levels of inventory in a distribution
channel and the current level of sales to end users, (3) expected introductions ofnew products that may result in the technological obsolescence of and larger than
expected returns of current products, (4) the significance of a particular distributor
to the registrant's (or a reporting segment's) business, sales and marketing, (5) thenewness of a product, (6) the introduction of competitors' products with superior
technology or greater expected market acceptance, and other factors that affect
market demand and changing trends in that demand for the registrant's products.
Registrants and their auditors should carefully analyze all factors, including trends
in historical data, that may affect registrants' ability to make reasonable and
reliable estimates of product returns.
75. The representations which appeared in the January 16, 2000 press release and the
1999 Form 10-K were also materially false and misleading because they failed to disclose that,
but for the failure of the Company's financial statements to reflect an adequate provision for
product returns, the Company's reported pre-tax income and net income for the fourth quarter of
1999 and for the year would have decreased by approximately $9.5 million and $6 million
respectively.
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76. Significantly, the 1999 Form 10-K stated that, during 1999, there was "an increase
in product returns of $18.0 million primarily due to product swaps caused by the release of
MetaFrame 1.8 and the overall increase in the Company's revenues."
77. As stated above, Citrix decreased its product returns from $2,990,000 to
$1,400,000 in the Company's 1999 third quarter 10-Q, filed with the SEC on or about November
15. 1999. The magnitude of the approximate $18 million increase in product returns during that
period again confirms that defendants acted with knowledge or reckless disregard for the
dramatic increase in product returns during the Class Period.
Defendants Report False and Misleading Financial Results For Fourth Quarter, 1999
78. On March 31, 2000 Gerard Klauer Mattison & Co. issued an analyst's report
which stated:
Clearly, dealing with large corporate purchasing departments is more difficult
than selling to VARs. The direct deal sizes are expected to be significantly larger
than VAR sales to their customers. Larger deals usually have longer sales cycles
and are more difficult to close early in the quarter. Naturally, the extension of the
sales cycle could result in a temporary sales deceleration, followed by an
acceleration as the transition is completed.
Another result could be a lower percentage of sales in channel inventory. since asmaller percentage of sales is distributed indirectly ...A final issue with the shift to
more direct is VAR moral. We believe many VARs feel betrayed by Citrix, which
is effectively bypassing them when it comes to the best enterprise accounts (even
though Citrix has always told VAR partners that they would sell as much as 10%
direct). This may have an unanticipated negative impact on overall VAR sales
effectiveness.
To the extent these issues are bigger than we anticipate , Citrix could potentially
miss earningsexpectations at some point [ Emphasis Supplied].
79. Although as reflected in the March 31, 2000 Gerard Klauer Mattison & Co.,
analyst's report , the market was showing skepticism towards Citrix' s performance . it was still
fundamentally in the dark as to the true business and financial condition of the Company as a
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result of defendants' continued and ongoing campaign of fraudulently false and misleading
statements. Indeed, shortly after the publication of the report, Citrix issued a press release on
April 19, 2000, again announcing supposed "record results" for its first quarter ending March 31.
2000. This press release stated that:
Net income, excluding the amortization of intangible assets relating to business
combinations, was $43.9 million for the first quarter, or $0.21 per share, as
compared to $28.2 million or $0.15 per share for the first quarter of 1999. Net
income for the first quarter of 2000 was $38.5 million or $0.19 per share, as
compared with net income of $25.8 million or $0.14 per share for the first quarter
of 1999.
80. Significantly, the April 19, 2000 press release noted that during the first quarter of
2000 the Company had released three new products. including MetaFrame for Windows, and
made no mention of the expected increase in channel product returns due to the release of these
products. In this regard, in a section of the press release titled "Business Highlights", defendants
stated:
Three New Products Released - - Citrix launched MetaFrame for Windows 2000
Servers, MetFrame for the Solaris Operating System, and NFUSE. a new Web
application portal, as part of extending these product lines into new markets.
81. On or about May 12, 2000, defendants caused the Company to file its 2000 first
quarter Form l0-Q with the SEC ("the 2000 first quarter lO-Q"), which was signed by defendants
Templeton and Cunningham. The financial data set forth in the 2000 first quarter 10-Q was
substantially identical to the financial data set forth in the April 19. 2000 press release.
Significantly, the Company's financial statements for three months ended March 31, 2000 as
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contained therein, reflected a provision for product returns and a provision for inventory reserves
of $1,813.000 and $97 1,000 respectively.'
82. As stated above, defendants' provision for product returns which appeared in the
April 19, 2000 press release and the 2000 first quarter I0-Q , was materially false and misleading
because ( I) defendants concealed the impact of Citrix' s accelerated transition to electronic
licensing , ( 2) defendants concealed the known impact that the consolidation of distributors by
FutureLink had on its already ever-growing build - up of inventory, and (3) defendants concealed
the known impact which MetaFrame 1.8 would have on its returns of older software which had
become obsolete.
83. Similarly, defendants' provision for inventory reserves which appeared in the
April 19, 2000 press release and the 2000 first quarter 10-Q. was materially false and misleading
because (I) the provision did not provide for the fact that the market value for Citrix's shrink-
wrap inventory had to be adjusted to account for the Company's transition from shrink wrap sales
to ASP sales and (2) because the provision did not provide for the fact that the market value for
Citrix's inventory had to be adjusted due to the introduction of MetaFrame 1.8 which made
former versions excess, obsolete, or otherwise not saleable at its carrying value. These
documents were also materially false and misleading because they failed to disclose that, but for
the failure of the Company's financial statements to reflect an adequate provision for product
returns and inventory reserves, the Company's reported pre-tax income and net income for the
3A charge to income for the provision for product returns reflects the fact that merchandise is
expected to be returned (the sale is effectively negated because of the buyer's return privilege). Acharge to income for the provision for inventory reserves serves to reduce the carrying value ofinventory to the lower of the cost of the goods or the market value therefor. Such an adjustment to
inventory is required when inventory becomes obsolete or otherwise impaired.
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first quarter of 2000 would have decreased by approximately $10 2 million and $6.5 million,
respectively.
84. Additionally, the 2000 first quarter 10-Q contained a representation which was
substantially identical to the one set forth in Citrix's 1999 third quarter 10-Q regarding
defendants' establishment of reserves based on their evaluation of "current circumstances."
Defendants' statement was materially false and misleading for the reasons set forth in ¶84 above.
85. The 2000 first quarter 10-Q also falsely represented, with respect to Citrix
international operations:
International revenues accounted for approximately 39% of net revenues for the
three months ended March 31, 2000 and March 31, 1999. The increase in
international revenues was primarily due to the Company's increased sales andmarketing efforts in Europe and Asia [Emphasis Supplied].
86. The quarterly report went on to state that the Company's gross margins "increased
... due to higher sales volumes and additional user licenses."
87. On May 12, 2000, Citrix stock traded at nearly $53 per share (after the Company's
previously announced two-for-one stock split on February 17, 2000).
The Market Becomes Aware of The Truth About Citrix
88. On June 12, 2000, only one month after defendants' statements in IT 85 and 86
above, touting the Company's expansion into new markets and stellar financial performance,
defendants were forced to publicly disclose in a press release that the Company's tnie financial
condition was not as it had been represented. Defendants attributed Citrix' earnings shortfall to
among other factors, a shift from ' shrink-wrap box" licensing, in which programs are
individually loaded onto computers, to "paper licensing" which delivers programs and upgrades
electronically. Defendant Cunningham also stated in a June 12, 2000 conference call, that Citrix
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would not be able to fully adjust spending to compensate for the delayed revenues. Defendants
were also forced to admit that growth rates for the Company's gross margins were falling,
contrary to the numerous Class Period representations touting the Company's phenomenal
growth, increasing gross margins and entry into new markets. Defendants also admitted that.
contrary to the statements regarding increased sales in Asia detailed in 185 above, the Company's
earnings shortfall was also attributable, in part, to slower expansion in Asia.
89. In the June 12 press release, defendants attributed the earnings shortfall to,
among other things, a shift from "shrink-wrap box" licensing (in which programs are individually
loaded onto computers) to "paper licensing " (which delivers programs and upgrades
electronically). The June 12, 2000, press release stated:
(Nasdaq : CTXS) [Citrix] today announced preliminary expectations for thesecond fiscal quarter ending June 30. 2000. For the quarter , the company expects
to report total revenue in the range of $105 million to $ 110 million , compared to$94.4 million in the second quarter of 1999. The company expects to report
earnings per share , excluding the amortization of intangible assets relating tobusiness combinations , in the range of $0.09 and $0.1 1, compared to $0.16 for thesecond quarter of I999... The expected results announced today are lower than theconsensus estimates of Wall Street analysts for the company's quarterly
performance.
90. In the June 12 press release, defendants attributed the earnings shortfall to,
among other things, a shift from "shrink-wrap box" licensing -- in which programs are
individually loaded onto computers -- to "paper licensing" -- which delivers and upgrades
programs electronically.
91. On the same day -- June 12, 2000 -- an analyst's report was issued by Credit
Suisse First Boston Corporation which stated. in relevant part:
* This morning CTXS announced preliminary expectations for Q2 of
$105-$ 110 MM and $0.09 - 0.11 (excluding amortization), compared with ourestimates of $137 MM and $0.2 1. Primary reason for the shortfall involves i)
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faster than expected transition from predominantly "shrink wrap" to
paper/electronic licensing model happening, ii) slower expansion of core business
within large enterprise accounts, and iii) slower ramp of new products and new
geographies (including Asia).
* These factors are in addition to our previously stated (5/3/00) concerns of:
i) Windows 2000-related slowdown, ii) multi-quarter ramp of non-Windows
product revenue, iii) transition to enterprise sales model, iv) re-alignment of
distribution channels in response to shift in market stratification , and v) latent
revenue contribution from ASP design wins.
*****
* To address the channel " sell in" problem, management expects to adjust
down channel inventory by $8-10 MM in U . S and $2-3 MM internationally t
address the "bloated " nature of CTXS' channel currently [Emphasis Supplied].
92. The dissemination of this news, particularly as it related to the imminent 2000
second quarter charges to income of approximately $10.2 million to provide for product returns
and inventory related reserves, had a profound adverse effect on the price of the Company's
stock.
93. In response to defendants ' announcement , the price of Citrix Systems shares were
cut almost in half. dropping from over $41 per share on June 9, 2000, to slightly over $21 per
share on June 12, 2000.
ADDITIONAL ACCOUNTING FRAUD VIOLATIONS
94. Defendants were required to disclose, in the Company's financial statements, the
existence of the material facts described herein and to appropriately recognize and report
expenses in conformity with GAAP. Defendants failed to cause the Company to make such
disclosures and to account for and report expenses in conformity with GAAP.
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95. Due to the pervasive non-disclosures, deceptive disclosures and violations of
GAAP by defendants, the Forms 10-K and 10-Q -- as well as the financial statements contained
therein -- filed with the SEC during the Class Period, were materially false and misleading.
96. SEC Regulation SX requires that financial statements filed with the SEC conform
with GAAP. Financial statements filed with the SEC which are not prepared in conformity with
GAAP are presumed to be misleading or inaccurate. [17 C.F.R. §210.401 (a)(1)]. The
Company's financial statements which were disseminated to the investing public during the Class
Period, which represented that the Company's financial position and results of operations were in
conformity with GAAP. were false and misleading for the reasons alleged herein and because
they constituted an extreme departure from GAAP. Citrix's financial statements violated the
following GAAP concepts and principles, among others particularized herein:
a. The concept that financial reporting should provide information that is
useful to present and potential investors and creditors and other users in
making rational investment, credit and similar decisions (FASB Statement
of Financial Accounting Concepts No. 1).
b. The concept that financial reporting should provide information about an
enterprise's financial performance during a period (FASB Statement of
Financial Accounting Concepts No. 1).
c. The concept that financial reporting should be reliable in that it represents
what it purports to represent (FASB Statement of Financial Accounting
Concepts No. 2).
d. The concept of completeness, which means that nothing material is left out
of the information that may be necessary to ensure that it validly
represents underlying events and conditions (FASB Statement of Financial
Accounting Concepts No. 2).
e. The concept that conservatism be used as a prudent reaction to uncertainty
to try to ensure that uncertainties and risks inherent in business situations
are adequately considered (FASB Statement of Financial Accounting
Concepts No. 2).
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f. The principle that disclosure of accounting policies should identify and
describe the accounting principles followed by the reporting entity and the
methods of applying those principles that materially affect the financial
statements (APB Opinion No. 22).
g. The principle that losses be accrued for when a loss contingency exists
(Statement of Financial Accounting Standards No. 5).
h. The principle that if no accrual is made for a loss contingency, then
disclosure of the contingency shall be made when there is at least a
reasonable possibility that a loss or an additional loss may have been
incurred (Statement of Financial Accounting Standards No. 5).
i. The principle that contingencies and other uncertainties that affect the
fairness of presentation of financial data at an interim date shall be
disclosed in interim reports in the same manner required for annual reports
(APB Opinion No. 28).
j. The principle that disclosures of contingencies shall be repeated in interim
and annual reports until the contingencies have been removed, resolved, or
have become immaterial (APB Opinion No. 28).
k. The principle that management should provide commentary relating to theeffects of significant events upon the interim financial results (APBOpinion No. 28).
1. The concept that an expense or loss is required to be recognized if it
becomes evident that previously recognized future economic benefits of an
asset have been reduced or eliminated, or that a liability has been incurred
or increased, without associated economic benefits (FASB Statement ofFinancial Accounting Concepts No. 5).
m. The principle that a departure from the cost basis of pricing the inventory
is required when the utility of the goods is no longer as great as the cost;where there is evidence that the utility of goods, in their disposal in the
ordinary course of business, will be less than cost. whether due to physical
deterioration, obsolescence, changes in price levels, or other causes, thedifference should be recognized as a loss of the current period; this is
generally accomplished by stating such goods at a lower level commonlydesignated as market. (ARB 43 Chapter 4, Statement 5)
97. Defendants intentionally or recklessly disregarded facts which indicated that the
Company's September 30. 1999 financial statements, December 31, 1999 financial statements
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and March 31. 2000 financial statements, press releases, public statements and filings with the
SEC which were disseminated to the investing public during the Class Period, were materially
false and misleading when made, for the reasons set forth above.
98. The 1999 third quarter 10-Q and the 2000 first quarter l0-Q each contained a
management representation which stated:
All adjustments which, in the opinion of management, are considered necessary
for a fair presentation of the results of operations for the periods shown are of anormal recurring nature and have been reflected in the unaudited condensed
consolidated financial statements [Emphasis Supplied].
99. The financial statements which were contained within the 1999 third quarter l0-Q
and the 2000 first quarter l0-Q did not reflect "a fair presentation of the results of operations"
due to the violations of GAAP and the SEC cited above and because the financial statements also
violated (AU 411.04) the principle that the:
a. Accounting method applied should be appropriate in the circumstance.
b. Financial statements, including the related notes, should be informative of
matters that affect their use, understanding. and interpretation.
c. Financial statements should reflect the underlying events and transactions
in a manner that present the financial position and the results of operationswithin a range of acceptable limits that were reasonable and practicable to
attain accuracy in financial statements.
100. At all relevant times, the material misrepresentations and omissions particularized
in this Complaint directly or proximately caused or were a substantial contributing cause of the
damages sustained by plaintiffs and other members of the Class. As described herein, during the
Class Period, defendants made or caused to be made a series of materially false or misleading
statements about the Company's business, prospects and operations. These material
misstatements and omissions had the cause and effect of creating in the market an unrealistically
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positive assessment of the Company and its finances, business, prospects and operations, thus
causing the market price of the Company's common stock to be artificially inflated at all relevant
times. Defendants' materially false and misleading statements during the Class Period resulted
in plaintiffs and other members of the Class purchasing the Company's common stock at
artificially inflated prices, thus causing the damages complained of herein.
ADDITIONAL SCIENTER ALLEGATIONS
101. As alleged herein, defendants acted with scienter in that defendants knew that the
public documents and statements, issued or disseminated by or in the name of defendants or the
Company were materially false and misleading; knew or recklessly disregarded that such
statements or documents would be issued or disseminated to the investing public; and knowingly
and substantially participated in the issuance or dissemination of such statements or documents
as primary violators of the federal securities laws. Defendants, by virtue of their receipt of
information reflecting the true facts regarding Citrix. their control over Citrix's allegedly
materially misleading misstatements and/or their control over and close association with the
Company which makes them privy to confidential information concerning all of Citrix's activities
and operations. were active and culpable participants in the fraudulent scheme alleged herein.
Defendants knew and/or recklessly disregarded the falsity and misleading nature of the
information which they caused to be disseminated to the investing public. This case does not
involve allegations of false forward-looking statements or projections but instead involves false
statements concerning Citrix's finances and ongoing activities, all central to the Company's core
business. The ongoing fraudulent scheme described in this Complaint could not have been
perpetrated over a substantial period of time, as has occurred, without the knowledge and
complicity of defendants, who were Citrix's top executives and hands-on managers.
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Defendants Were Motivated To Commit Securities Fraud toArtificially Inflate the Market Price of Their Citrix Holdings
102. The defendants also had motive and opportunity to commit the fraud alleged
herein. Defendants' were motivated to commit securities fraud for the following reasons: (a) to
raise money to fund and protect the continued operations of Citrix. upon which defendants
depended for their substantial compensation and prestige; (b) to personally benefit defendants by
enhancing the value of their personal holdings of Citrix common stock; (c) to allow defendants
to raise additional capital needed to consumate the acquisition of the Innovex Group. Inc. in
February of 2000, and (d) to sell their own shares in Citrix at artificially inflated prices during the
Class Period.
103. While Citrix and the Individual Defendants were issuing materially false
favorable statements about the Company and concealing or obscuring negative information.
insiders lacobucci and Templeton . who had access to confidential information and were aware of
the truth about the Company and its operations . were benefiting from the illegal course of
conduct described above by selling the Company ' s stock at artificially inflated prices without
disclosing the material adverse facts about the Company to which they were privy. The
following table shows the insider selling of defendants lacobucci and Templeton during the Class
Period:
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Edward E. lacobucci - Chairman of the Board
Date Shares Price Value
2/6/00 200.000 $164.50 $32.900,000.00
Total 200,000 $32.900,000.00
Mark Templeton - President, Chief Executive Officer and Director
Date Shares Price Value
3/2/00 30.000 $ 98.79 $2.963,700.00
1/24/00 17.738 $148.89 $2,641,011.00
12/1/99 20.000 $95.03 $1,900,600.00
Total 67.738 $7,505.31 1.00
Grand Total 267,738 $40,405,311.00
104. lacobucci and Templeton' s sales of Citrix stock were unusual both in amount and
timing. Notably, most of the sales by lacobucci and Templeton occurred at practically the height
of the market for Citrix's stock during the class period. Indeed, lacobucci's sale of 200,000
shares of Citrix stock generated proceeds of nearly $33 million in a single day. Perhaps even
more significant is the fact that the sales by lacobucci and Templeton occurred shortly after the
release of the false and misleading statements that are the subject of this Complaint.
105. In addition, as set forth in the table below, other Citrix officers and directors also
reaped enormous proceeds from their sale of Citrix stock during the Class Period at artificially
inflated prices:
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James J. Felcyn, Jr. - Chief Financial Officer
Date Shares Price Value
2/8/00 15.936 $166.19 $2,648,404.00
12/3/99 2,500
2,624
$100.44
$100.31
$251,100.00
$263,213.00
11/30/99 3.957
25,000
$92.88
$89.89
$ 367,526.00
$2,247,250.00
10/22/99 20,000 $64.41 $1,288,200.00
Total 70,017 $7,065,693.00
Robert N. Goldman - Director
Date Shares Price Value
2/2/00 300 $145.63 $ 43,689.00
400 $145.19 S 58,076.00
500 $146.13 $ 73,065.00
900 $146.50 $ 131,850.00
1,750 $145.50 $ 254,625.00
2.752 $145.19 $ 399,563.00
5,200 $145.38 $ 755,976.00
8,600 $146.88 $1 263,168.0014,700 $145.88 $2,144,436.0014.900 $145.07 $2,161,543.00
10/22/99 30,000 $64.50 $1,935,000.00
Total 80,002 $9,220,991.00
Chris Phoenix - Vice President , General Manager of Citrix Business
Date Shares Price Value
2/11/00 35,000 $175.50 $6,142,500.00
Total 35.000 $6,142,500.00
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Tyrone F. Pike - Director
Date Shares Price Value
12/10/99 15,000 $109.94 $1,649,100.00
12/8/99 52,278 $116.97 $6.114.958.00
Total 67,278 $7,764.058.00
Roger W. Roberts - Chief Operating Officer
Date Shares Price Value
1/24/00 20,000
55.000
$148 . 89
$144 .43
$ 2,977 . 800.00
$ 7,943.650.00
Total 75, 000 510 , 921,450.00
Grand Total 327,297 541,114 ,692.00
106. The investing public was not as fortunate. While defendants timed their sales of
Citrix stock to sell near the Company's Class Period highs. investors unaware of the Company's
true financial condition purchased Citrix stock at artificially inflated prices. As a result of the
fraudulent statements, the price of Citrix common stock reached over $181 per share on February
10, 2000 . By the end of the Class Period on June 12 , 2000, Citrix common stock was trading at
less than $22 per share.
Defendants Were Further Motivated to Commit Securities Fraud
to Obtain Shareholder Approval For Amendments to The Certificate of Incorporation
107. Defendants had additional motives to commit the fraud alleged. motives arising
from the need to obtain shareholder approval for amendments to the Company's Certificate of
Incorporation and certain stock option award plans. The proposals before the shareholders
represented pecuniary benefits to the Individual Defendants if approved.
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108. On or about April 7, 2000, Citrix filed with the SEC and distributed to its
shareholders a proxy statement soliciting proxies in favor of four proposals which were to be
voted on at the Company ' s next Annual Meeting of Shareholders ("Annual Meeting ") scheduled
for May 18.2000.
109. Of the four proposals described on the proxy statement , the Board of Directors'
first proposal ("Proposal No. 1") recommended the election of three nominees for three Board
positions. Included in the nominees was Individual Defendant lacobucci. The proxy statement's
second proposal ("Proposal No. 2") recommended approval of an amendment to the Company's
Amended and Restated Certificate of Incorporation to increase the number of authorized shares
of the Company's common stock from 400.000.000 to 1,000,000,000.
110. The Board of Directors' third proposal ("Proposal No. 3") recommended an
amendment and restatement of the Company's 1995 Stock Plan so that the number of shares
available under this plan would be increased by approximately 10 million shares from
69,945,623 to 80.000.000. Under the terms of the 1995 Stock Plan, the Company was authorized
to make stock awards, provide eligible individuals with the opportunity to purchase stock, grant
incentive stock options and grant non-statutory stock options to employees, consultants, directors
and officers ofCitrix. The Individual Defendants, as eligible participants in the 1995 Stock Plan,
would he eligible to receive valuable shares of C'itrix common stock and/or options to acquire
Citrix common stock in connection with their employment and/or association with the Company
if Proposal No. 3 were passed.
I l 1. The Board of Directors' fourth proposal ("Proposal No. 4") recommended
approval of the Company's 2000 Director and Officer Stock Option and Incentive Plan (the
"2000 Plan"). Under the terms of the 2000 Plan, the Company was authorized to make stock
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awards, provide eligible participants with the opportunity to purchase stock, grant incentive stock
options and grant non-statutory stock options to directors and officers of Citrix. The Individual
Defendants, as eligible participants in the 2000 Plan, would be eligible to receive additional
shares of Citrix common stock and/or options to acquire Citrix common stock in connection with
their employment and/or association with the Company if Proposal No. 4 were passed.
112. The 1995 Stock Plan and the 2000 Plan were represented as income: (I) to
provide competitive compensation to attract and retain talented individuals to serve the
Company: (2) to align management's interest with the success of the Company; (3) to align
management's interest with that of the Company's shareholders; and (4) to increase the
Company ' s profitability and, therefore , increase shareholder value.
113. The eligible participants in the 1995 Stock Plan and the 2000 Plan stood to benefit
from the shareholders ' approval of Proposal Nos. 3 and 4 . More specifically, the Individual
Defendants , as officers and directors of Citrix, stood to directly benefit from ratification of both
Plans as they would receive valuable shares of Citrix common stock and /or options to acquire
shares of Citrix common stock.
114. As a result, the Individual Defendants were highly motivated to conceal the true
financial condition of the Company, at least until after the shareholders voted on Proposal Nos. 3
and 4, as any disclosures of adverse financial information would likely have threatened
shareholder ratification of such Proposals.
115. While publicly touting the Company's purportedly stellar financial results for the
first quarter ended March 31, 2000, as alleged herein, defendants actively solicited shareholders
to approve all four proposals contained in the issued proxy statement.
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116. Upon reviewing the proxies received, and discussing the proposals with some of
the larger Citrix shareholders, it became apparent that Proposal No. 3 was not going to pass. As
a result, on or about May 18, 2000. Citrix contacted the Division of Investment of the
Department of Treasury of New Jersey, which owned approximately 2.7 million shares of Citrix
stock, and specifically lobbied it to change its vote from "no" to "yes" on Proposal No. 3.
117. At the Annual Meeting on May 18, 2000. Citrix' shareholders approved Proposal
Nos. 1, 2 and 4. While closing Proposal Nos. 1. 2 and 4, the Company adjourned the Annual
Meeting without closing the polls on Proposal No. 3, which otherwise, would not have passed on
May 18, 2000. The Company did not offer or provide any additional information regarding the
adjourmnent of the Annual Meeting or Proposal No. 3. Instead. defendants continued their
efforts to privately solicit shareholders individually in hope of obtaining the sufficient number of
votes to pass Proposal No. 3.
118. On or about August 11. 2000. the Company filed its Form l0-Q for the quarterly
period ended June 30. 2000 ("the 2000 second quarter I0-Q"). and reported that the Annual
Meeting reconvened on June 2, 2000, during which time the Company's shareholders approved
Proposal No. 3, thereby increasing the number of shares available under the 1995 Stock Plan by
more than 10,000.000 shares. The polls reportedly closed with Proposal No. 3 narrowly passing
by a vote of 64,514,386 (50.53%) in favor and 63.147.895 (49.46%) against. As a result, the
Individual Defendants were able to achieve their goal of getting Proposal Nos. 3 and 4 passed
prior to issuing the negative news concerning the true financial condition of the Company. In
addition, because both compensation Plans expressly permit the repricing of underwater stock
options without first securing shareholder approval, the Individual Defendants were further
motivated to get both Plans passed. Moreover, the Individual Defendants were protected from
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obtaining worthless options once the devastating news caused the common stock price of Citrix
to drop.
119. The material misrepresentations and/or omissions, as alleged herein, were done
knowingly or with such reckless disregard for the truth as to indicate fraudulent intent, and for
the purpose and effect of concealing the true financial results of the Company's operations from
the investing public and supporting the artificially inflated price of its stock. In addition, the
Individual Defendants' positions and their tight control over the materially false and misleading
statements and omissions, coupled with the fact that they directly benefitted from the shareholder
ratification of Proposal No. 3. which likely would not have passed but for the materially false and
misleading statements and omissions regarding the true financial condition of the Company,
present a strong inference that the Individual Defendants acted with scienter.
120. Thus, the Individual Defendants had further motive and opportunity to materially
misrepresent the Company's true financial condition until after the shareholders voted on, and
approved Proposal No. 3. As a result, these defendants caused the Company to directly solicit
and obtain authorization from its shareholders to issue a substantial number of shares (and
options) to eligible participants of the 1995 Stock Plan. As eligible participants of one or both
Plans, the Individual Defendants, collectively, stood to receive valuable shares and/or options
and, therefore, had sufficient motive and opportunity to materially misrepresent and/or conceal
the true financial condition of the Company, as alleged herein.
121. As alleged herein, the Individual Defendants acted with scienter in that each had
actual knowledge that the public documents and statements, issued or disseminated by or in the
name of defendants or the Company were materially false and misleading; acted with reckless
disregard for the truth in that they failed to disclose such facts that would have revealed the
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materially false and misleading nature of the statements and omissions complained of herein,
even though such facts were available to them: or had motive and opportunity to deceive
plaintiffs and other members of the Class by causing the Company's stock price to be artificially
inflated.
NO SAFE HARBOR
122. The statutory safe harbor provided for forward-looking statements under certain
circumstances does not apply to any of the allegedly false statements pleaded in this complaint.
To the extent any of the specific statements pleaded herein were identified as "forward-looking
statements", there were no meaningful cautionary statements identifying important factors that
could cause actual results to differ materially from those in the purportedly forward-looking
statements.
123. Alternatively, to the extent that the statutory safe harbor does apply to any
forward-looking statements pleaded herein, defendants are liable for those false forward-looking
statements because at the time of each of those forward-looking statements were made, the
speaker knew that the particular forward-looking statement was false, and/or the forward looking
statement was authorized and/or approved by an executive officer of Citrix who knew that those
statements were false when made.
APPLICABILITY OF FRAUD-ON-THE-MARKET
PRESUMPTION OF RELIANCE
124. At all relevant times, the market for Citrix common stock was in an efficient
market for the following reasons:
(a) Citrix common stock met the requirements for listing andwas listed on the NASDAQ New Market system:
(b) As the Company registered pursuant to the provisions of the
Exchange Act. Citrix filed periodic public reports with the SEC
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and the NASD and was subject to the requirements for providing
timely and accurate information to the investing public pursuant to
the rules and regulations of the SEC and the NASD;
(c) Citrix regularly communicated with public investors,
analysts and market professionals generally regarding the
release of current information, and generally assured that
information was released over major newswire services on
a current basis;
125. The market price for Citrix common stock reflected the information publicly
available about the Company, its results of operations and its potential products and development
of those products throughout the Class Period. Thus, all purchasers of Citrix common stock
during the Class Period are entitled to rely on the "fraud-on-the-market" doctrine which doctrine
presumes reliance on the fraudulent statements alleged herein because the market price
established in an open, developed and efficient market reflects those false and misleading
statements. Accordingly, reliance on the false and misleading statements alleged herein is
presumed.
FIRST CLAIM FOR RELIEF UNDER SECTION 10(b)
OF THE EXCHANGE ACT AND RULE 10b-5
126. Plaintiffs repeat and reallege each and every allegation above as if set forth in full
herein.
127. Throughout the Class Period, defendants, singly and in concert, directly or
indirectly, engaged in a common plan, scheme and course of conduct described herein, pursuant
to which they knowingly or recklessly engaged in acts, transactions, practices and a course of
business which operated as a fraud upon plaintiffs and other members of the Class; made various
false statements of material facts and omitted to stated materials to make the statements made not
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misleading to plaintiffs and the other members of the Class; and employed manipulative or
deceptive devices and contrivances in connection with the purchase and sale of Citrix stock.
128. The purpose and effect of defendants' plan. scheme, and course of conduct was to
artificially inflate the price of Citrix stock and to artificially maintain the market price of Citrix
securities.
129. Defendants, who include the top officer of the Company. had actual knowledge of
the material omissions and/or the falsity of the material statements set forth above, and intended
to deceive plaintiffs and the other members of the Class, or, in the alternative, acted with reckless
disregard for the truth when they failed to ascertain and disclose the true facts in the statements
made by them or other Citrix personnel to the SEC. securities analysts and members of the
investing public, including plaintiffs and the Class.
130. As a result of the foregoing, the market price of Citrix securities was artificially
inflated during the Class Period. In ignorance of the falsity of the reports and statements, and,
the material misstatements by defendants regarding the financial condition and growth prospects
of Citrix during the Class Period, and the deceptive and manipulative devices and contrivances
employed by defendants, plaintiffs and the other members of the Class relied, to their damage, on
the reports and statements described above and/or the integrity of the market price of Citrix stock
during the Class Period in purchasing Citrix common stock at prices which were artificially
inflated as a result of defendants' false and misleading statements.
131. Had plaintiffs and the other members of the Class known of the material adverse
information which defendants did not disclose, they would not have purchased Citrix common
stock at the artificially inflated prices that they did.
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132. Defendants' concealment of this material information served only to harm and the
other members of the class who purchased Citrix common stock in ignorance of the financial risk
to them as a result of such non-disclosures.
133. As a result of the wrongful conduct alleged herein, plaintiffs and other members
of the Class have suffered damages in an amount to be established at trial.
134. By reason of the foregoing, defendants have violated Section 10(b) of the
Securities Exchange Act and SEC Rule 10b-5 promulgated thereunder and are liable to the
plaintiffs and the other members of the Class for the substantial damages which they suffered in
connection with their purchase of Citrix common stock during the Class Period.
SECOND CLAIM FOR RELIEF FOR VIOLATION
OF SECTION 20(a) OF THE EXCHANGE ACT
135. Plaintiffs repeat and reallege each and every allegation above as though set forth
in full herein.
136. Defendants, by virtue of their office, directorship and specific acts were, at the
time of the wrongs alleged herein, controlling persons of Citrix within the meaning of Section
20(a) of the Exchange Act. Defendants had the power and influence and exercised the same to
cause Citrix to engage in the illegal conduct and practices complained of herein by causing the
Company to disseminate to the public, or through analysts, the materially false and misleading
information referred above.
137. Defendants' positions made them privy to and provided them with actual
knowledge of the material facts concealed from plaintiffs and the Class by Citrix during the Class
Period.
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138. By reason of the conduct alleged in the First Claim for Relief, Defendants are
liable for the aforesaid wrongful conduct and are liable to the plaintiffs and the members of the
Class for the substantial damages which they suffered in connection with their purchases of
Citrix common stock during the Class Period.
WHEREFORE, plaintiffs, on behalf of themselves, and on behalf of the other members
of the Class, pray for judgment as follows:
(1) Declaring this action to be a proper class action, certifying the Lead
Plaintiffs as Class representatives and their counsel as Class Counsel;
(2) Declaring and determining that the defendants violated the federal
securities laws by reason of their conduct as alleged herein;
(3) Awarding money damages against the defendants, jointly and
severally. in favor of the plaintiffs and the other members of the Class for all losses and injuries
suffered as a result of the acts and transactions complained of herein, together with prejudgment
interest on all of the aforesaid damages which the Court shall award from the date of said wrongs
to the date ofjudgment herein at a rate the Court shall fix;
(4) Awarding plaintiffs their costs and expenses incurred in this action,
including reasonable attorneys', accountants' and experts' fees; and
(5) Awarding such other relief as may be just and proper.
JURY TRIAL DEMANDED
Plaintiffs hereby demand a trial by jury.
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STULL STULL & BRODY
Jules Brody
Aaron Brody
6 East 45th Street. Suite 500
New York, NY 10017
Tel: (212) 687-7230
Fax: (212) 490-2022
SCHIFFRIN & BARROWAY LLC
Mark A. Topaz
Three Bala Plaza East , Suite 400
Bala Cynwyd, PA 19004
Tel: (610) 667-7706
Fax: (610) 667-7056
Plaintiffs' Executive Committee
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Dated: November 30, 2000 Respectfully submitted,
MILBERG WEISS BERSHAD
H ERAC LLP
By:
Abrahan appaport
e-mail: ABR(d mwbhlny.com
Fla. Bar No. 0163211
Robert R. Adler
e-mail: RRA(r^mwbhlny.com
Fla. Bar No. 0) 22858
5355 Town Center Road. Suite 900
Boca Raton, Florida 33486
Tel: (561) 361-5000
Fax: (561) 367-8400
BARRACK RODOS & BACINE
M. Richard Komins
Jeffrey Gittleman
3300 Two Commerce Square
2001 Market Street
Philadelphia, PA 19103
Tel: (215) 963-0600
Fax: (215)963-0838
Co-Lead Counsel for Plaintiffs
and the Class
BURT & PUCILLO LLP
Michael J. Pucillo
Wendy H. Zoberman
Northbridge Centre, Suite 1701
515 North Flagler Drive
West Palm Beach, FL 33401
Tel: (561) 835-9400
Fax: (561) 835-0322
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CERTIFICATE OF SERVICE
I HEREBY CERTIFY that a true and correct copy of the foregoing was furnished via
U.S. Mail on November 30. 2000 to the below listed counsel:
BROBECK PHLEGER
& HARRISON LLP
James Kramer
Tanya Herrera
Polley Snyder
Spear Street Tower
One Market Street
San Francisco . CA 95105
Tel: (415) 442-0900
Fax:(415 ) 442-1010
HOLLAND & KNIGHT LLP
Martin J. Alexander
Elizabeth Stone Shavitz
625 North Flagler Drive. Suite 700
West Palm Beach, FL 33401
Tel: (561) 833-2000
Fax: (561) 650-8399
obert R Adler
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