ORIGINAL UNITED STATES DISTRICT CO NORTHERN DISTRICT...

ORIGINAL UNITED STATES DISTRICT CONORTHERN DISTRICT OF TE)

DALLAS DIVISION

HARRY COOPER, DAVE GRIFFITHS,CLARENCE ELIASON, ELLIS JOHNSON,JAMES OWENS, JOHNS NIXON,CLAUDIA LEAL, DONALD SWENSON,DENNIS GARRISON, SABYASACHIBOSE, DEVON J . COLVIN, ROBERT J .MILLER, JULIE ELLIOT-JENSEN andTAMMY NEWMAN, individually and onbehalf of all others similarly situated,

x

CT COURT. ._ T RICTOFTEXAS

FILED

OCT 1 0 Z)OO

CLERK,U.S. DISTRICT COURTBY

Deputy (d

Case No . 3 :98-CV-2804-M

Plaintiffs,v.

PAUL E . KANA, KEVIN L. FIGGE,JAMES K. HOOFARD, JR . ,G. DEAN BOOTH, JR., SIDNEY H .CORDIER, BRIAN R. WILSON,CRUTTENDON ROTH INC ., JOSEPTHALCO., INC. and GRANT THORNTON, LLP ,

Defendants .x

SECOND CONSOLIDATED AND AMENDEDCLASS ACTION COMPLAINT

Lead Plaintiffs, by and through their undersigned counsel, based on the investigation of

Plaintiffs' counsel and their experts, which included the review and analysis of : all documents

and exhibits thereto filed with the Securities and Exchange Commission (SEC) by or on behalf

of CPS Systems, Inc . ("CPS" or the "Company") ; all public statements made by, or on behalf

of, and/or concerning CPS; analyst reports and publications concerning CPS, its industry,

products, competitors and securities ; documents from the files of other past and pending

litigation between CPS and its prior customers concerning the inoperability of certain CPS

software products ; CPS contracts and related documents used to transact sales of CPS products

and services and to book and recognize revenues ; controlling accounting and auditing

standards ; pertinent SEC interpretive releases concerning relevant accounting issues ; and

interviews concerning facts material to the claims set forth herein, allege for their complaint

against each of the defendants, as follows :

c~a_

JURISDICTION AND VENUE

1 . The claims asserted herein arise under and pursuant to Sections 11, 12(a)2 and

15 of the Securities Act of 1933, as amended (the "Securities Act") (15 U .S .C. §§ 77k,

771(a)(2) and 77o], and pursuant to Sections 10(b) and 20(a) of the Securities Exchange Act of

1934 (the "Exchange Act") [15 U .S .C. §§ 78j(b) and 78t (a)] and Rule lOb-5 promulgated

under Section 10(b) by the SEC [17 C .F.R. 240 . 10b-5] .

2 . This Court has jurisdiction of this action pursuant to Section 22 of the Securities

Act [15 U.S .C . § 77v] and pursuant to Section 27 of the Exchange Act, as amended [1 5

U.S .C . § 78aa] .

3 . Venue is properly laid in this judicial district pursuant to Section 22 of the

Securities Act and pursuant to Section 27 of the Exchange Act and 28 U .S .C . § 139 1 (b) and

(c). The acts and conduct complained of, including the preparation, issuance and

dissemination of materially false and misleading information to the investing public, occurred

in substantial part in this judicial district .

PARTIES

Lead Plaintiffs

4 . Each of the following Lead Plaintiffs purchased his or her shares of commo n

stock of CPS in its initial public offering that commenced on March 25, 1998 (the "Offering"),

pursuant to the Registration Statement that became effective and the Prospectus that was filed

on or about that date with the SEC in connection therewith (the "Registration Statement" and

the "Prospectus," respectively), and/or purchased CPS shares traceable to the Offering and/or

in the open market from March 25, 1998 through November 4, 1998 (the "Class Period") :

a. Plaintiff Harry Cooper purchased 500 shares of CPS common stock on

March 25, 1998, pursuant to the Prospectus at a price of $4 .00 per share, purchased 1000 CPS

shares in the open market on July 24, 1998 at a price of $5 .62 per share, and suffered damage s

as a result thereof.

CPS-2\AMD-CMP 2

b . Plaintiff Dave Griffiths purchased 300 shares of CPS common stock on

March 25, 1998, pursuant to the Prospectus at a price of $4 .00 per share, purchased 200 CP S

shares in the open market on May 27, 1998, at a price of $6 .125 per share, and suffere d

damages as a result thereof.

c. Plaintiff Clarence Eliason purchased 1000 shares of CPS common stoc k

on March 25, 1998, pursuant to the Prospectus at a price of $4 .00 per share, purchased 1000

CPS shares in the open market on May 29, 1998 at a price of $5 .875, and suffered damages as

a result thereof .

d. Plaintiff Ellis Johnson purchased 3500 shares of CPS common stock at a

price of $3 .1215 per share and purchased 500 shares of CPS common stock at a price of $2 . 8

75 per share in the open market on October 15, 1998, and suffered damages as a result thereof .

e. Plaintiff James Owens purchased 6000 shares of CPS common stock in

the open market as follows : 1000 shares on July 13, 1998, at a price of $6 .93 ; 1000 shares on

August 31, 1998, at a price of $3 .25 ; 1000 shares on September 1, 1998, at a price of $3 .50 ;

2000 shares on September 25, 1998, at a price of $3 .00 per share ; 1000 shares on November

4, 1998, at a price of $1 .75 per share, and suffered damages as a result thereof .

f. Plaintiff John Nixon purchased 2000 shares of CPS common stock in the

open market on May 8, 1998, at a price of $7 .125 per share, and suffered damages as a resul t

thereof.

g . Plaintiff Claudia Leal purchased 215 shares of CPS com Mon stock i n

the open market on May 5, 1998, at a price of $6 .875 per share, and suffered damages as a

result thereof .

h. Plaintiff Donald Swenson purchased 8000 shares of CPS common stock

in the open market at various prices during the relevant period, and suffered damages as a

result thereof.

CPS-2\AMD-CMP 3

i . Plaintiff Dennis Garrison purchased 580 shares of CPS common stock i n

the open market on April 21, 1998, at a price of $6 .125 per share, purchased 3500 shares o f

CPS common stock in the open market on April 22, 1998, at a price of $6 .125 per share, and

suffered damages as a result thereof .

j . Plaintiff Sabyasachi Bose purchased 500 shares of CPS common stock i n

the open market on April 15, 1998, at a price of $5 .50 per share, purchased 1000 shares of

CPS common stock in the open market on April 15, 1998, at a price of $5 .25, per share, and

suffered damages as a result thereof .

k. Plaintiff Devon J . Colvin purchased 500 shares of CPS common stock in

the open market on April 3, 1998, at a price of $5 .25 per share, and suffered damages as a

result thereof.

1 . Plaintiff Robert J . Miller purchased 3000 shares of CPS common stock

on March 25, 1998, pursuant to the Prospectus at a price of $4 .00 per share, and suffered

damages as a result thereof.

M. Plaintiff Julie Elliott-Jensen purchased 100 shares of CPS common stoc k

in the open market on April 16, 1998, at a price of $6.4375 per share , and suffered damages a s

a result thereof.

n. Plaintiff Tammy Newman purchased 3000 shares of CPS common stock

on March 25, 1998, pursuant to the Prospectus at a price of $4.00 per share, and suffere d

damages as a result thereof .

Non-Party CPS

5 . During the Class Period, CPS was a developer and seller of various ta x

remittance software and hardware . CPS was organized under the laws of the State of Texas

and maintained its corporate headquarters at 3400 Carlisle, Suite 500, Dallas, Texas 75204 .

The Offering of 2,185,000 common shares of CPS at the initial public offering price of $4 .00

per share commenced on March 25, 1998, and was completed on March 30, 1998 . Thereafter ,

CPS-2IAMD-CMP 4

during the Class Period, CPS common stock publicly traded on the American Stock Exchange,

an efficient, open and developed market, under the trading symbol "SYS" . CPS would be

named herein as a defendant except for the fact that it filed for bankruptcy protection (U .S .

Bankruptcy Court, N .D. Texas, Case No. 30405) on or about January 19, 2000, subsequent to

the revelation of much of the material, adverse information concerning its business, products,

revenues and earnings complained of herein .

Defendants

6 . Defendant Paul E . Kana ("Kana") was at all relevant times Chief Executive

Officer and Chairman of the Board of the Company . Kana was also a member of the Audit

Committee of the Board of Directors of the Company together with defendants Booth and

Wilson. Kana owned 1,139,402 shares of CPS stock representing 23 .6% of its outstanding

shares prior to the Offering (and 16 .9% thereafter) . Kana signed the Registration Statement

and CPS's Forms 10-Q during the Class Period for the quarterly periods ended March 31 and

June 30, 1998 .

7. Defendant James K. Hoofard ("Hoofard") was at all relevant times a Director ,

and the President and Chief Operating Officer of the Company . Hoofard owned 182,449

shares of CPS stock representing 3 .8% of its outstanding shares prior to the offering (and

2.7% thereafter) . Hoofard issued earnings announcements through public press releases for

CPS's first and second quarter 1998 financial results during the Class Period as discussed

further below .

8. Defendant Kevin L. Figge ("Figge") was at all relevant times Chief Financial

Officer of the Company . Figge signed the Registration Statement and CPS ' s Forms 10-Q

during the Class Period for the quarterly periods ended March 31 and June 30, 1998 .

9 . Defendant G. Dean Booth, Jr . ("Booth") was at all relevant times a director of

the Company and the Secretary of the Company's Board of Directors . In addition, defendant

Booth was a member of the Audit Committee of the Board of Directors along with defendant s

CPS-2\AMD-CMP 5

Kana and Wilson. Booth is also a partner of the firm of Schreeder, Wheeler & Flint, LLP,

which was the Company's principal outside counsel, and which received substantial

remuneration of approximately $120,000 in connection with the Offering in March 1998, and

fees of approximately $289,000 in 1997 for legal services . Booth owned 243,265 shares of

CPS stock representing 5 % of its outstanding shares prior to the Offering . In the Offering,

Defendant Booth sold 18,288 shares of the Company's common stock, reaping proceeds of

approximately $73,000, and retaining 234,977 shares (or 3 .3 % of outstanding shares)

thereafter .

10. Defendants Sidney H . Cordier ("Cordier") and Brian R. Wilson ("Wilson" )

were at all relevant times members of the Company's Board of Directors . Wilson was also a

member of the Audit Committee of the CPS Board of Directors, with defendants Kana and

Booth. Each of Cordier and Wilson owned 1,139,402 shares of CPS common stock

representing 23 .6 % (47 .2 % collectively) of its outstanding shares prior to the Offering . Each

of Cordier and Wilson sold 85,660 shares of CPS common stock in the Offering, reaping

proceeds in the amount of $342,640 . to each of them, and retaining 1,053,742 (15 .7% or

31 .4%, collectively) thereafter .

11 . Defendants Kana, Hoofard, Figge, Booth, Cordier and Wilson are sometime s

referred to collectively herein as the "Individual Defendants ." Each of the Individual

Defendants is liable under § 11 of the Securities Act and under § 10(b) of the Exchange Act

(and as controlling persons of CPS) in connection with the material misrepresentations and

omissions in the Registration Statement and Prospectus for the Offering, as set forth below . In

addition, Defendants Kana, Hoofard and Figge are also liable under § 10(b) of the Exchange

Act (and as controlling persons of CPS) in connection with material misrepresentations and

omissions in public statements that they made after the Offering concerning CPS in press

releases and in CPS's Forms 10-Q, as further detailed below .

CPS-2\AMD-CMP 6

12 . As set forth above, the Individual Defendants together owned 79 .5 % of CPS's

outstanding stock prior to (and 57 .1 % after) the Offering . On or about December 30, 1994, a

private investor group led by Kana, Booth, Cordier and Wilson (who thereafter collectively

owned 75 .8% of CPS's stock) acquired CPS in a leveraged buy-out transaction' for

approximately $4 .6 million, financed with approximately $1 million equity funding by the

Individual Defendants, a $1 .5 million loan from FINOVA Capital ("FINOVA") due

December, 1998, and a $2 .1 million note from Hanifen Inhoff Mezzanine Fund, L .P .

("Hanifen") due in two equal installments in December 1999 and 2000, respectively . The

FINOVA and Hanifen debt was collateralized by a security interest in all of the Company's

assets and outstanding stock. Upon consummation of their leveraged buy-out, Kana, Booth,

Cordier and Wilson designated Hoofard, who had been with the Company since 1982, as

Director, President and Chief Operating Officer of CPS with full responsibility for its day-to-

day operations. Since that time, virtually all CPS Vice Presidents reported to Hoofard .

Hoofard also directed all of CPS's software conversion projects, sales and marketing activities,

software installation and customer support functions . In addition, following the leveraged buy-

out of CPS, Kana, Booth, Cordier and Wilson also designated Figge, who had been Controller

of the Company since 1992, as an officer of CPS with full responsibility for its Accounting,

Finance, Personnel and Corporate Services departments . Since that time, Figge directed all

aspects of CPS's accounting and financial reporting functions . In October, 1997, Figge was

named Chief Financial Officer of CPS .

13 . Each of the Individual Defendants named herein is charged with violations of

§ 11 of the Securities Act as a signatory of a false registration statement, and is also charged

with violations of § 10(b) of the Exchange Act arising out of their respective roles in the

perpetration of a fraud on the market for CPS common stock in the Offering . Defendants

1 For several years immediately prior to 1994, Kana, Cordier and Wilson also were theprincipal executive officers of another data processing company, MR Data Management, Inc .

CPS-2\AMD-CMP 7

Hoofard, Kana and Figge are also so charged for their respective roles in the perpetration of

said fraud continuing throughout the Class Period . As set forth below, strong circumstantial

evidence exists of conscious misbehavior or recklessness by Kana, Hoofard, Figge, Booth,

Cordier and Wilson during the Class Period . Each of them possessed knowledge of facts or

access to material information about CPS's products, publicly reported revenues, revenue

recognition methods, actual earnings and prospective earnings (as discussed hereinbelow) that

contradicted their public disclosures and statements . Also, due to their long pre-Offering

histories with CPS ; their aforementioned knowledge of all aspects of CPS material to this case ;

their control of CPS's public reporting and disclosures ; and their control of CPS's auditing and

accounting methods ; each of them possessed the knowledge and opportunity to perpetrate the

fraud complained of herein . In addition, in light of their substantial stock holdings, and their

urgent need to complete the Offering in order to, inter alia, raise emergency funds to finance

the conversion of CPS's products in order to make them function in the personal computer

operating environments in which they already were being sold in transactions that were being

reported as revenues by CPS ; improve the prospects of timely paying off the FINOVA and

Hanifen loans, thereby unencumbering and preserving their stock holdings that were otherwise

pledged as collateral and subject to security interests held by those entities ; and create a public

market in which to sell their CPS shares at artificially inflated prices ; each of the Individual

Defendants also possessed the motive to perpetrate the fraud complained of herein.

14. Each of the Individual Defendants named herein is also charged with violation s

of §20 of the Exchange Act and §15 of the Securities Act arising out of their respective roles a s

"controlling persons" of non-party CPS that controlled the business, operations, financia l

reporting and public disclosures of CPS throughout the Class Period .

15 . Defendants Cruttendon Roth Inc . and Josephthal & Co., Inc. (collectively, the

"Underwriter Defendants") substantially participated in the commission of the wrongs alleged

herein through their involvement in the Offering of CPS common stock . The Underwriter

CPS-2\AMD-CMP 8

Defendants were at all times entities engaged in the business of investment banking,

underwriting and selling securities to the public . The Underwriter Defendants were co-lead

underwriters of the Offering, for which they received substantial fees . Prior to the Offering,

the Underwriter Defendants each were under a common obligation to conduct a thorough

investigation into the business, operations, prospects, financial condition and management of

CPS, known as a "due diligence investigation ." In the course of such investigation, the

Underwriter Defendants should have obtained knowledge of the facts alleged herein if they had

acted with reasonable care, but each of them failed to do so . During the Offering, the

Underwriter Defendants each had a duty to promptly disseminate truthful and accurate

information with respect to CPS, and were negligent in misrepresenting and omitting material

adverse facts about CPS in the Prospectus . Each of the Underwriter Defendants is charged

with violations of § § 11 and 12(2) of the Securities Act arising out of their negligent

misrepresentations and omissions in the Prospectus in connection with the offer and sale of

CPS common stock in the Offering .

16 . Defendant Grant Thornton LLP ("GT") is a limited liability partnership o f

cert ified public accountants doing business throughout the United States , including this district .

GT is expressly identified as an "expert" in the Prospectus and Registration Statement for the

Offering , and consented to the inclusion of its unqualified opinions on CPS 's financial

statements for fiscal years 1996 and 1997 in the Registration Statement and Prospectus, which

stated :

EXPERTS

The Company's financial statements as of December 31, 1997,and for each of the two years in the period ended December 31,1997 included in the Prospectus have been so included in relianceon the report of Grant Thornton LLP, independent accountants,given the authority of said firm as experts in auditing andaccounting .

17 . Prior to the Offering, GT had a duty to (a) conduct its audits of CPS i n

conformity with generally accepted accounting standards, (b) examine evidence supporting the

CPS-2\AMD-CMP 9

amounts and disclosures in CPS' financial statements and footnotes included therein, (c) assess

the propriety of accounting principles used and significant estimates made by CPS

management, and (d) report CPS' financial statements in conformity with generally accepted

accounting principles . Defendant GT failed to do so, and is charged with violating § 11 of the

Securities Act arising out of its negligently false statements and omissions of material facts in

the Prospectus and Registration Statement for the Offering, specifically with respect to CPS's

financial statements at pages F-1 to F-14 therein, including the footnotes included therein,2

prepared and/or certified, and which GT consented to be included in the Prospectus and

Registration Statement . '

PLAINTIFFS' CLASS ACTION ALLEGATION S

18. Plaintiffs bring this action as a class action pursuant to Fed. R. Civ. P . 23, on

behalf of themselves and on behalf of all persons who purchased CPS common stock (the

"Class") from March 25, 1998 through November 4, 1998 (the "Class Period") . Excluded

from the Class are defendants herein, members of the immediate family of each of the

defendants, any person, firm, trust, corporation, officer, director or other individual or entity

in which any defendant has a controlling interest or which is related to or affiliated with any of

the defendants, and the legal representatives, agents, affiliates, heirs, successors-in-interest or

assigns of any such excluded party .

19 . The members of the Class are so numerous that joinder of all members is

impracticable . CPS and certain selling shareholders sold 2,185,000 shares of CPS stock to

members of the investing public commencing on or about March 25, 1998, at a price of $4 .00

per share, and, throughout the Class Period, CPS common stock was actively traded on th e

2 The footnotes are part of the financial statements . 17 C.F.R. §210 .1-01(b) .

3 Section 11 (a) of the Securities Act holds responsible "every accountant . . . who has withhis consent been named as having prepared of certified any pa rt of the registrationstatement . . . with respect to the statement in such registration statement . . . which purports tohave been prepared or certified by him ." 15 U .S.C. §77k(a)(4) .

CPS-2\AMD-CMP 10

American Stock Exchange . The precise number of class members is unknown to plaintiffs a t

this time but class members are believed to number in the thousands . In addition, the name s

and addresses of the class members can be ascertained from the books and records of CPS o r

its agents .

20 . Plaintiffs will fairly and adequately represent and protect the interests of th e

members of the Class . Plaintiffs have retained competent counsel experienced in class action

litigation under the securities laws to further ensure such protection and intend to prosecut e

this action vigorously .

21 . Plaintiffs' claims are typical of the claims of the other members of the Class

because plaintiffs' and all the class members' damages arise from and were caused by the same

false and misleading representations and omissions made by or chargeable to defendants .

Plaintiffs do not have interests antagonistic to, or in conflict with, the Class .

22. 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 make it virtually impossible

for the class members to seek redress for the wrongful conduct alleged . Plaintiffs know of no

difficulty which will be encountered in the management of this litigation which would preclude

its maintenance as a class action .

23 . 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 § 10(b) of the Exchange Act was violated by each of the

Individual Defendants' acts throughout the Class Period as alleged herein ;

b . Whether §§11 and 12(2) of the Securities Act were violated by each o f

the Underwriter Defendants' negligent acts in connection with the Offering as alleged herein ;

CPS-2\AMD-CMP 11

c. Whether § 11 of the Securities Act was violated by Defendant GT' s

negligent acts in connection with the Offering as alleged herein ;

d. Whether Individual Defendants were "controlling persons" of CPS

within the meaning of the federal securities laws ;

e. Whether the Individual Defendants acted with scienter with respect t o

claims against them arising under § 10(b) of the Exchange Act ;

f. Whether the Prospectus omitted and /or misrepresented material facts ;

g. Whether the post-Offering public statements issued by the Individual

Defendants were materially false and misleading ; and

h. The extent of damages sustained by members of the Class and the

appropriate measure thereof.

24 . The names and addresses of the members of the Class are available from CPS's

transfer agent, the underwriters to the Offering, and other securities brokerage firms . Notice

can be provided to the Class by a combination of published notice and first-class mail using

techniques and a form of notice commonly used in class actions arising under the federal

securities laws .

FACTUAL ALLEGATIONS

Pertinent Pre-Offering Facts Concerning CPS

25 . During at least as early as the summer of 1997, through a combination o f

feedback from sales personnel ( including Vice President of Sales John Thomas and Sales

Manager Olivia Holland ) and demands of current and prospective new clients for CPS's

property tax, appraisal and administrative software product (known as Computer Assisted

Mass Appraisal or "CAMA") including large county government entities from Florida and

California , it became widely known within CPS that major software development and

conversion projects were urgently required in order to get CAMA and other related CPS core

software products to operate and function on personal computers on Windows-based and other

CPS-2IAMD-CMP 12

personal computer operating platforms .4 CPS software products historically operated on older

mainframe computers using COBOL platforms that were becoming increasingly obsolete as

public sector organizations modernized to "distributive processing" or "client-server" systems

that require integrated software systems that could link large numbers of personal computers

through a larger centralized computer .

26. As CPS attempted to confront these critical needs, however, CAMA and othe r

CPS core products had not been developed and/or converted to operate and function property

yet on Windows-based or other personal computer-based platforms . CPS also lacked sufficient

funds to complete the monumental software conversion projects required to meet these needs in

time to sell such fully functional versions of CAMA and other core products during the fall of

1997 and its then-upcoming fiscal year 1998 .

27 . Undeterred, as early as September 1997, under the direction of Hoofard and

Kana, CPS began to market, promote and sell non-existent Windows-based versions of CAMA

and related products that became known within CPS as "vaporware . " For example, on or

about October 9, 1997, CPS (pursuant to a sales agreement signed by Hoofard) sold a

purported Windows-based version of CAMA to the Office of the Okaloosa County Florida

Property Appraiser ("Okaloosa County") for a price of approximately $151,986, together with

related hardware of $77,777 . In connection with that sale, CPS also billed Okaloosa County

an additional $16,000, for various programming services that purportedly would make CAMA

operational and fully functional on Okaloosa County's Windows-based platform . At that time,

however, CPS had (a) no CAMA product that operated on such a platform, (b) no conversion

program to effectively permit CAMA to operate on Okaloosa County's platform, (c) no funds

to finance the development of such a conversion program, and (d) insufficient time to develop

such a conversion program to meet Okaloosa County's needs, expectations or timetable .

4 A "platform" refers to the hardware architecture of a particular computer and/or itssystem software, such as its operating system .

CPS-2\AMD-CMP 13

Nonetheless, CPS booked the Okaloosa County sale and reported it as revenue on its income

statement during 1997 .

28 . CPS, in anticipation of funds to be raised in the Offering, in January 1998 ,

contracted the services of a group of outside project engineers to begin a massive programming

project in an attempt to convert CAMA and related products to genuinely operate and fully

function to client specifications on Windows-based platforms . CPS, through Hoofard and

Kana, mandated that this project be completed no later than June, 1998 . By February 1998,

however, those project engineers informed CPS management, including "Loofard and Kana,

that the June 1998 deadline was impossible to meet, and that the project would realistically

require at least a full year . For these reasons, the engineers terminated their contract with

CPS . Kana and Hoofard relayed that disastrous information to Booth, Wilson, Cordier and

others .

29 . On or about October 27, 1997 , sho rt ly after the consummation of the Okaloosa

transaction, the American Institute of Certified Public Accountants ("AICP") issued Statement

of Position 97-2 ("SOP 97-2") governing the application of generally accepted accounting

principles ("GAAP") in recognizing revenue on software transactions, effective for

transactions entered into in fiscal years beginning after December 15, 1997 .

30 . SOP 97-2 acted to supersede its predecessor SOP 91-1, provided furthe r

clarification concerning the issues of if and when revenue can be properly recognized on sale s

of software products, and set forth substantially more conservative and stringent criteria to b e

met in order to recognize software revenues .

31 . Specifically, under SOP 97-2, revenue cannot be recognized unless and until al l

of the following criteria are met :

a. persuasive evidence of an arrangement exists ;

b. delivery has occurred ;

c . the vendor's fee is fixed and determinable ; and

CPS-2\AMD-CMP 14

d. collectability is probable .

32 . Pursuant to SOP 97-2, the "delivery" criterion is not met , and therefore ,

revenue cannot be recognized, in the event that any elements that are essential to the

functionality of the subject software product sold are not yet provided or available, because the

customer would not otherwise have the product's full use . Similarly, if uncertainty exists

about customer acceptance of the software, license revenue cannot be recognized until such

acceptance occurs .

33 . Defendants Kana, Hoofard, Booth and Figge were aware of SOP 97-2 from its

inception, and discussed its application to CPS's sales of non-existent Windows-based versions

of CAMA during the fourth quarter of 1997 and first quarter of 1998, prior to the Offering .

Specifically, they each knew that absent the successful completion of the above-referenced

software conversion project (which had been abandoned and was still unfunded and not

resumed), sales of Windows-based versions of CAMA could not possibly meet the criteria of

SOP 97-2 because those software products could not otherwise function, and there could not be

certainty of customer acceptance or probability of collectability . Nonetheless, they continued

to book substantial revenues on such phantom sales in direct contravention of SOP 97-2 .

34. Each of the Individual Defendants was aware that substantial portions of CPS' s

purported software licensing revenues being booked during the first quarter of 1998 both

before and after the Offering were attributable to sales of such illusory products, and that those

sales failed to meet any of the four criteria under SOP 97-2 governing software revenue

recognition . First, evidence of a genuine sales agreement was lacking because the purchaser

thought it was buying a fully functioning system at the time of sale . In fact, defendant Hoofard

directed CPS sales managers to merely procure written Notices of Installations ("NOIs" )

signed by customers at or near the point of sale, which would serve as the source document

from which Defendant Figge would then book and authorize the recognition and reporting of

revenues . Members of the Audit Committee of CPS's Board of Directors i .e., defendants

CPS-2\AMD-CMP 15

Kana, Booth and Wilson) were aware of these procedures, and failed to implement or follow

procedures to provide for adherence to SOP 97-2 and GAAP . Second, delivery had not

occurred because, under SOP 97-2, delivery is not deemed complete if any essential element of

the product necessary for it to fully function is not yet provided to the customer and/or

uncertainly remains about customer acceptance . Third, fees were not fixed or determinable

because returns of the products in whole or in part could not be reasonably estimated . Fourth,

under these circumstances, collectability was doubtful at best .

35 . Proceeds from the Offering thus were urgently required to develop, convert an d

de-bug these products for CPS's clients that had already purchased or committed to purchas e

otherwise completely inoperable versions of CAMA and related CPS products .

36 . As set forth below, the Prospectus fails to disclose this damaging information .

In fact, as stated above, even in the face of CPS booking major portions of revenues that fail to

meet any of the criteria mandated by SOP 97-2, the Prospectus inexplicably stated that the

adoption of SOP 97-2 was not expected to have a material impact on CPS's results of

operations or financial condition .

37 . Each of the Individual Defendants knew of the unlawful scheme and course o f

conduct set forth above . All CPS management, Vice Presidents and technical staff reported to

Kana and/or Hoofard . Kana and Hoofard spoke daily with key CPS employees prior to,

during and after the Offering, who gave them updates concerning (a) how far behind schedule

the Company was in having viable, functional Windows-based software products to sell, (b)

the urgent need for funds to pay for the development, conversion, de-bugging and testing of

such products, and (c) the sale of such products prior to their viability . These employees

included but were not limited to, John Thomas (Vice President - Sales), Olivia Holland (Sales

Manager), Michael Brown (Vice President - Conversions), Randy Sellers (Vice President -

Implementation) and Bobby Dow (Vice-President - Product Development) . Figge often

expressed to Kana and Hoofard that the source documentation provided to him from which t o

CPS-2\AMD-CMP 16

recognize revenues on sales of these products reflected that CPS was not complying with SOP

97-2 with respect to Windows-based CAMA sales, because, among other things, the products

sold required a conversion program (that did not exist) in order to operate . Nonetheless, Figge

continued to publicly report false revenues and earnings for CPS resulting from suc h

infractions throughout the Class Period . Kana, Booth and Wilson also discussed these matters

regularly as members of the Audit Committee of the Board of Directors . Cordier also

discussed these issues regularly primarily with Kana and Wilson with whom he has maintained

longstanding business relationships .

38 . The primary motive of the Individual Defendants was to raise emergency funds

in the Offering as the means to fund the enormous programming efforts necessary for the

development and conversion of the Windows and personal computer-based versions of CAMA

and other CPS core products, which the Company was already selling in transactions that were

being recorded and recognized as revenues . In this way, CPS could further its efforts to

attempt to achieve product functionality and customer acceptance through these massive

development and conversion projects by the end of fiscal 1998 so that (a) their inoperability

would not otherwise be revealed, (b) the unlawfully booked revenues would ultimately appear

to have effectively met SOP 97-2 revenue recognition standards by year-end reporting time, (c)

prior misstatements would not need to be publicly disclosed or restated, and (d) artificially

inflated prices for CPS stock could be maintained in the absence of public disclosure .

The Offering and The Prospectus

39 . On or about October 31, 1997, the Individual Defendants filed with the SEC a

Form SB-2 Registration Statement (the "Registration Statement") for the Offering of the shares

of CPS common stock, and thereafter, filed several amendments to the Registration Statement .

40. On or about March 25, 1998, the Prospectus with respect to the Offering, which

forms part of the Registration Statement, became effective, and, commencing on that date, CPS

and certain selling shareholders (including Defendants Booth, Cordier and Wilson), throug h

CPS-2\AMD-CMP 17

the Underwriter Defendants, sold 2,185,000 CPS common shares in the Offering at a price o f

$4.00 per share . The Underwriter Defendants substantially participated in and exercise d

substantial control over all aspects of the Offering .

41 . The Prospectus included financial results for fiscal years 1996 and 1997 . Among

other things, the Company reported that in the fiscal year ended December 31, 1997, it ha d

gross revenue of $10 ,477,562, and a net loss of $246,531, or approximately $0 .06 per share .

With respect to revenue recognition for those fiscal years, the prospectus disclosed as follows :

The Company licenses its software products . Revenue fromsoftware license fees is recognized when an agreement has beenexecuted, software has been delivered and installed, all significantcontractual obligations have been met and collection of the relatedreceivable is probable . Post contract customer support revenue,consisting of continuing maintenance and service fees, includingthat bundled with initial license fees, is deferred and recognizedratably over the contractual periods of the services are provided .Product sales, consisting primarily of computer hardware, arerecognized upon delivery of the product .

42. The Prospectus failed to disclose the failure of CPS's CAMA and relate d

software products to operate on non-mainframe platforms, and misrepresented that CPS' s

products actually possessed such capabilities, which purportedly provided competitiv e

advantages and growth prospects . Specifically, the Prospectus stated :

* CPS "intends to leverage the interoperability of theCompany's core products to manage information flowbetween departments as organizations shift frommainframe computers to client/server systems" (at pp. 2and 24)(emphasis added) ;

* "The Company's tiered software architecture enables CPSto utilize multiple platforms and effectively integrate newtechnologies with existing software" (p . 4) (emphasisadded) ;

* "Delivery of Client/Server Technology .

Multi-Platform Tiered Software Architecture . The Company'stiered software architecture separates the application logic fromthe GUI and database . This feature enables the Company toutilize multiple platforms and effectively integrate newtechnologies with existing software . The tiered architecture also

CPS-2\AMD-CMP 18

allows customers to protect their investments in informationsystems while positioning them to adopt new object-basedsolutions , high performance servers and database managementsystems with no loss of functionality ." (pp . 26-27) (emphasisadded) ;

* "The Company's technological strategy is to continue tooffer applications that run across the most popularoperating systems . Currently, supported systems includeUNIX, AIX and Microsoft NT . The Company's productsare supported on databases including Oracle, Informix,Microsoft SOL Server and C-ISAM . (p. 29) (emphasisadded) ;

"CPS believes it can differentiate its own products andservices from these current and future competitors,focusing on the Company's functionality, productflexibility, ease of implementation and adaptability tocustomer needs without custom programming , enterpriseproduct breadth, individual product features, servicereputation and price . The Company believes that many ofits competitors lack these essential qualities because theydo not focus exclusively on the public sector market oroffer fully integrated software applications ." (p . 34)

43 . Each of the above statements was untrue, incomplete and/or misleading becaus e

CAMA and related core products of CPS could not function in "client/server" environments ,

could not function on "multiple platforms", did not function on the various platforms listed

above, and did in fact, require substantial "custom programming" .

44. The Prospectus disclosed the existence of a recent accounting pronouncemen t

concerning the recognition of revenue on software sales as follows :

Additionally, the AICPA Accounting Standards ExecutiveCommittee has issued Statement of Position (SOP) 97-2, SoftwareRevenue Recognition, which is effective for fiscal years beginningafter December 15, 1997 . SOP 97-2 modifies the criteria fordetermining recognition of revenue and allocation of the contractfee for contracts containing multiple elements, such as softwareproducts, rights to upgrades and other services .

45 . The Prospectus stated (at pages 23 in Management's Discussion and Analysis o f

Financial Condition And Results Of Operations, and at page F-14 in Note J to the Company' s

Consolidated Financial Statements) as follows :

CPS-2IAMD-CMP 19

Management does not expect the adoption of the Statements ofFinancial Accounting Standards and SOP 97-2, referred to above,to have a material impact on the Company's results of operationsor financial condition . (emphasis added) .

46 . Prior to the Offering, each of the defendants was familiar with SOP 97-2, and

was aware of the fact that the provisions of SOP 97-2 set forth the standard that had bee n

mandated by the AICPA as to if and when revenues should be recognized for CPS' s software

sales for its fiscal years beginning January 1, 1998 .

47 . As stated above, beginning at least as early as October 1997 and continuing afte r

the commencement of CPS's fiscal year beginning January 1, 1998, CPS sold non-existent

Windows and other personal computer platform-based versions of CAMA and other core

software products in transactions that failed to meet any of the criteria mandated by SOP 97-2

for revenue recognition, but nonetheless booked and reported revenues for such transactions at

the time of sale, in contravention of SOP 97-2. By the time of the Offering, such improperly

recognized revenues comprised approximately 80% of the CPS's first quarter 1998 software

license revenues .

48 . The Individual Defendants each knew, and the Underwriter Defendants and GT

were negligent in failing to exercise due care in their respective roles as underwriters and

experts in the Offering that would otherwise have provided them with the knowledge, that

beginning at least as early as October 1997 and continuing through the March 25, 1998

issuance of the Prospectus and commencement of the Offering, CPS was employing a contrary

policy of recognizing a substantial portion of its software license revenues before meeting any

of the criteria of SOP 97-2. Accordingly, each of them knew or should have known that the

above statements in the Prospectus concerning the impact of SOP 97-2 were materially untrue

and incomplete ; that the adoption of SOP 97-2 in fact already had a material adverse impact on

CPS's results of operations at the time of the Offering ; that beginning with its fiscal years

commencing on January 1, 1998, CPS's financial statements were not prepared or publicly

reported in compliance with SOP 97-2 or GAAP ; and that CPS's software license fees, absen t

CPS-2\AMD-CMP 20

application of SOP 97-2 were materially overstated on CPS's books at the time of the Offering .

Moreover, the misrepresentation and the failure to disclose the impact of SOP 97-2 in the

Registration Statement and Prospectus violated the provisions of SEC Staff Accounting Bulletin

No. 74, Disclosure of the Impact that Recently Issued Accounting Standards will have on the

Financial Statements of the Registrant when Adopted in a Future Period (requiring full

disclosure of the effects of registrant's adoption of recently issued accounting standards in

registration statements and other reports filed with the SEC) .

49 . The Prospectus did not include any financial statements for CPS on a pro forma

basis utilizing SOP 97-2 . The Individual Defendants each knew that the inclusion of the

Company's historical results of operations (including those recited above), which were not

subject to SOP 97-2, were not representative of then-current i .e ., 1998) results, vastly

overstated the Company's financial prospects on a going-forward basis, and did not offer a

comparable or accurate analytical statement of the Company's financial condition and results

absent concurrent disclosure of pro forma financial statements under SOP 97-2 .

50. Further confirming the consideration given by all defendants to the impact an d

significance of SOP 97-2, on or about December 5, 1997, the SEC provided comments to CP S

on its draft Registration Statement and Prospectus . Among other things, the SEC comment s

stated :

Revise MD&A [Management's Discussion and Analysis offinancial results] and the notes to the financial statements toaddress the expected impact of SOP 97-2 .

51 . In response to these comments, the Company, by its counsel, Schreeder ,

Wheeler & Flint , LLP, of which defendant Booth was and is a partner , stated pertinently in a

letter to the SEC dated January 13, 1998 :

The Amendment (at page 1-5) and the notes to the financialstatements (Note I) have been revised to address the expectedimpact of SOP 97-2 .

CPS-2\AMD-CMP 21

52 . Each of the defendants had a duty to disclose accurate and timely information in

the Prospectus, and had a duty to correct or revise statements previously submitted to the SEC

for inclusion in the Prospectus if such statements were no longer true, accurate, complete or

timely. As set forth above, known to the Individual Defendants and available to the

Underwriter Defendants and GT had they exercised due care prior to the commencement of the

Offering i .e., March 25, 1998),5 however, were adverse material facts demonstrating that

CPS: (a) was continuing to employ obsolete revenue recognition methods after January 1, 1998

in contravention of SOP 97-2 ; (b) was materially overstating its first quarter 1998 revenues

with respect to sales of inoperable Windows-based and other personal computer-based versions

of CAMA and other core products by not complying with SOP 97-2 ; and (c) was improperly

booking and recognizing approximately 80% of its software license revenues prior to any of

the four criteria mandated by SOP 97-2 being met for the sales transactions underlying such

revenues . Nonetheless, no such corrective disclosures were made to the Prospectus prior to

the Offering.

CPS Announces Inflated First Quarter Earning s

53 . On April 15, 1998, CPS announced its financial results for the first quarter of

fiscal 1998, the three month period ended March 31, 1998 . For the three months ended March

31, the Company reported that total revenues grew 80%, to a reported $3 .217 million, from

$1 .792 million in 1997 . Net earnings reportedly totalled $133,000., or $0 .03 per share, in the

first three months of 1998 compared with a reported loss of $279,000 or ($0.07) per share, in

the comparable period in 1997 . For the three months ended March 31, 1998, Software License

Fee Revenue reportedly grew 540 .5% to $1 .217 million from $190,000 in 1997 . In

announcing these results, defendant Hoofard stated :

We are very pleased to report positive earnings from first quarteroperations . Our clients and potential customers within the publicsector market have responded positively to the technolog y

5 Six days prior to the end of the first quarter of CPS's 1998 fiscal year .

CPS-2\AMD-CMP 22

commitment and level of service that CPS Systems, Inc . isdelivering .

Hoofard's above-referenced statements were knowingly false and misleading when made

because Hoofard was aware that both the software license revenue growth and positive

earnings reported by CPS were fictitious, and were attributable to the fraudulent revenue

recognition methods and the fraudulent sales of inoperable versions of CPS software products

described above .

54. Thereafter, on or about May 7, 1998, CPS filed a Report on Form 10-Q for th e

first quarter of fiscal 1998, the period ended March 31, 1998 (the "March 10-Q"), signed by

defendants Kana and Figge, which recited the financial performance results described above .

In addition, the March 10-Q stated that the 79 .5 % increase in total revenue growth was

"primarily due to an increase in property tax billing and collection systems (Collection)

installations, " and that 540.5 % increase in software license revenues "was primarily due to an

increase in new customer ('Collection') installations . " The statements therein are attributable

to Kana and Figge and were false and misleading when made because Kana and Figge were

aware that both the software license revenue growth and positive earnings reported by CPS

were fictitious, and were attributable to the fraudulent revenue recognition methods and

fraudulent sales of inoperable versions of CPS software products described above .

55 . In the March 10-Q, Kana and Figge also reported that the financial statements i n

the Report and the financial statements "reflect all adjustments which are, in the opinion of

management, necessary to present fairly the consolidated financial position as of March 31,

1998, and the consolidated results of operation and cash flows for the three months ended

March 31, 1998 and 1997. . . . The Company believes that the disclosures are adequate to make

the information presented not misleading ." These statements were similarly false because

Kana and Figge knew that CPS's revenues were artificially inflated, not recognized in

compliance with SOP 97-2, and not reported consistent with GAAP . Kana and Figge failed to

disclose that material downward adjustments to reported software license revenues were

CPS-2\AMD-CMP 23

necessary under SOP 97-2 to "present fairly" CPS's financial results and position and to "mak e

the information presented not misleading . "

56 . The financial statements set forth in the March 10-Q and discussed in the Apri l

15 press release were materially false and misleading because they were based on the booking

of sham sales and on unlawful revenue recognition practices which violated GAAP and did not

conform to SOP 97-2 . The Company's reported license fees of $1,217,000 were overstated by

$1,019,000, as actual recognizable license revenues were $198,000 in that period . Likewise,

the Company's reported total revenues of $3,217,000 were overstated by $1,019,000, as actual

recognizable revenues in the quarter were $2,198,000 . The Company's reported gross profit of

$2,567,000 was overstated by the same amount, $1,019,000 . As a result of these

overstatements, the Company's reported earnings from operations of $503,000 was overstated

and illusory, as the Company actually lost $489,000 in the quarter, an overstatement of

$992,000. Similarly, the Company's reported net earnings of $133,000 were overstated, as the

Company actually had a net loss of $474,000 . Reported net earnings per share of $0 .03 were

also overstated, as the Company actually lost more than $0 .11 per share (with subsequent per

share data based on an increased number of shares outstanding) .

57 . On or about July 1, 1998, defendant Kana sold 63,325 shares of CPS, at price s

exceeding the Offering price, reaping profits from such sales of $278,437 .00 .

CPS Announces Inflated Second Quarter Earnings

58 . On July 16, 1998, CPS issued a press release announcing its financial results for

the second quarter of fiscal 1998, the period ended June 30, 1998. For the three months ended

June 30, the Company reported that license fee revenue grew 67% to $1 .96 million from $1 .18

million in the year-earlier period . In addition, for the three months ended June 30, 1998, the

Company reported total revenue of $4 .04 million, compared to $3.61 million in the year

earlier period . For the six months ended June 30, 1998, the Company reported that total

revenues grew from $5 .41 million in 1997 to $7 .26 million in 1998 . The statements in this

CPS-2\AMD-CMP 24

press release are attributable to defendant Hoofard and were knowingly false and misleading

when made because Hoofard knew that both the increase in license fee revenue and positive

earnings reported by CPS were fictitious, and were attributable to the fraudulent revenue

recognition methods and the fraudulent sales of inoperable versions of CPS Software products

described above .

59. Thereafter, on August 13, 1998, CPS filed a Report on Form 10-Q for th e

second quarter of fiscal 1998 , the period ended June 30 , 1998 (the "June 10-Q"), signed by

defendants Kana and Figge , which recited the financial performance results described above.

In addition , the June 10-Q stated that the Company ' s 11 .8 % qua rterly total revenue growth

"was primarily due to an increase in license fee sales for property appraisal and assessment

systems (CAMA) and remittance processing (RPS) hardware and software sales," that the

66 .7% quarterly software license fee revenue growth "was primarily due to an increase in new

customer CAMA installations," and that six month total revenue growth (of 34 . 2 %) and

software license fee revenue growth (of 132 .7%) were both "primarily due to an increase in

new customer Collection and CAMA installations ." The statements made therein are

attributable to Kana and Figge and were false and misleading when made because Kana and

Figge were aware that both the software license revenue growth and positive earnings reported

by CPS were fictitious , and were attributable to the fraudulent revenue recognition methods

and fraudulent sales of inoperable versions of CPS software products described above .

60 . In the June 10-Q, Kana and Figge also falsely reported again that the financia l

statements in the Report and the financial statements "reflect all adjustments which are, in the

opinion of management, necessary to present fairly the consolidated financial position as of

June 30, 1998, and the consolidated results of operation and cash flows for the three months

ended June 30, 1998 and 1997" and "The Company believes that the disclosures are adequate

to make the information presented not misleading ." Kana and Figge failed to disclose tha t

CPS-2\AMD-CMP 25

material downward adjustments to software license revenues were necessary under SOP 97- 2

to "present fairly" CPS's financial results and position and to "make the information presente d

not misleading . "

61 . The financial statements set forth in the June 10-Q and discussed in the July 1 6

press release were materially false and misleading because they were based on the booking of

sham sales and on unlawful revenue recognition practices which violated GAAP and did not

conform to SOP 97-2, as stated above . The Company's reported license fees of $1,959,000

were overstated by $1,557,000, as actual recognizable license revenues were $402,000 in that

period . Likewise, the Company's reported total revenues of $4,039,000 were overstated by

$1,557,000, as actual recognizable revenues in the quarter were $2,482,000 . The Company's

reported gross profit of $3,174,000 was overstated by the same amount, $1,557,000 . As a

result of these overstatements, the Company's reported earnings from operations of $994,000

was overstated and illusory, as the Company actually lost $481,000 in the quarter, an

overstatement of $1,475,000 . Similarly, the Company's reported net earnings of $517,000

were overstated, as the Company actually had a net loss of $377,000 . Reported net earnings

per share of $0.08 were also overstated, as the Company actually lost more than $0 .06 per

share .

CPS's Inflated Revenues And Earnings Are Finally Disclosed

62 . On November 4, 1998, the Company issued a press release ultimately revealin g

that its previously released financial results were in fact being materially affected by the

adoption of SOP 97-2, and that its application to the Company's financial statements would

require the Company to downwardly restate (to reflect losses previously stated as profits as set

forth above) its previously reported financial results for the entirety of fiscal year 1998 then-to

date. The press release stated in pertinent part :

CPS Systems, Inc . (SYS) said it changed its revenue recognitionpolicy to conform with AICPA Statement of Position 97-2,Software Revenue Recognition, which became effective for fiscalyears beginning after December 15, 1997 .

CPS-2\AMD-CMP 26

The company said its decision will result in a restatement of itsrevenues and earnings for the first two quarters of 1998 .

CPS said revenue previously recognized in the first two quartersof 1998 will now be recognized upon the delivery of the systemspursuant to existing contracts, which it expects will occur by theend of the second quarter of 1999 .

Specifically, CPS said that as a result of the change in therevenue recognition policy, it will restate its total revenues for thefirst quarter of 1998 to $2 .2 million from $3 .2 million, and itsearnings for that period to a net loss of $476,000, or 11 cents ashare, from net earnings of $133,000, or 3 cents a share .

The company also said it will restate its total revenues for thesecond quarter of 1998 to $2 .5 million from $4 million , and itsearnings for that period to a net loss of $377 ,000, or 6 cents ashare, from net earnings of $517 ,000, or 8 cents a share .

63 . The November 1998 disclosure revealed matters relating to CPS's revenues ,

earnings , financial condition and prospects which by their nature were ongoing and material .

Importantly , it was revealed publicly for the first time that CPS was improperly booking (and

overstating) 80% of its software license revenues comprising over 30% of its total corporate

revenues at and before the time of the Offering including its first quarter ended March 31,

1998 (all but one day of which was completed prior to the close of the Offering), and

continuing after the Offering as set fo rth above . Under GAAP, such earnings restatements are

only permitted for material accounting irregularities that existed at the time the financial

statements were prepared .

64. As a result of the November 4, 1998 revelation, the price of CPS's shares whic h

had been sold in the Offering at $4 .00 per share and rose to approximately $7 .00 per share

thereafter, sharply declined to below $1 .50 per share, and are now worthless .

COUNT I

Violation of §11 of the Securities Act Against Grant Thornton

65 . Plaintiffs repeat and reallege each and every allegation contained above .

66 . Section 11(a) of the Securities Act provides a cause of action for any perso n

who acquired a security pursuant to a registration statement and prospectus that "contained a n

CPS-2\AMD-CMP 27

untrue statement of a material fact or omitted to state a material fact . . . necessary to make the

statements therein not misleading," as against, among others :

"(4) every accountant . . . who has with his consent been named ashaving prepared or certified any part of the registration statement,or as having prepared or certified any report or valuation which isused in conjunction with the registration statement, with respectto the statement in such registration statement, report, orvaluation, which purports to have been prepared or certified byhim.

15 U.S .C . §77k(a)(4) .

67. Defendant GT made untrue and incomplete statements of material facts in CPS' s

financial statements which GT prepared and/or certified, and which were included in and use d

in conjunction with the Registration Statement and Prospectus with GT' s consent .

68 . At page F-2 of the Prospectus, Defendant GT's opinion letter dated Februar y

19, 1998, issued in connection with CPS's audited financial statements, was set forth as

follows :

We have audited the accompanying consolidated balance sheet ofCPS Systems, Inc . and Subsidiary as of December 31, 1997, andthe related consolidated statements of operations, shareholders'equity, and cash flows for each of the two years in the periodended December 31, 1997. These financial statements are theresponsibility of the Company's management . Our responsibilityis to express an opinion on these financial statements based onour audits .

We conducted our audits in accordance with generally acceptedauditing standards. Those standards require that we plan andperform the audit to obtain reasonable assurance about whetherthe financial statements are free of material misstatement . Anaudit includes examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements . An auditalso includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluatingthe overall financial statement presentation . We believe ouraudits provide a reasonable basis for our opinion .

In our opinion, the financial statements referred to above presentfairly, in all material respects, the consolidated financial positionof CPS Systems, Inc . and Subsidiary as of December 31, 1997,and the consolidated results of its operations and its cash flowsfor each of the two years in the period ended December 31, 1997 ,

CPS-2\AMD-CMP 28

in conformity with generally accepted accounting principles .(emphasis added) .

69 . At page F-13 of the Prospectus , Note J to CPS 's Consolidated Financial

Statements, entitled "New Accounting Pronouncements," stated, among other things, the

following thereunder concerning CPS's recognition of revenue on software sales :

Additionally, the AICPA Accounting Standards ExecutiveCommittee has issued Statement of Position (SOP) 97-2, SoftwareRevenue Recognition, which is effective for fiscal years beginningafter December 15, 1997 . SOP 97-2 modifies the criteria fordetermining recognition of revenue and allocation of the contractfee for contracts containing multiple elements, such as softwareproducts, rights to upgrades and other services .

Management does not expect the adoption of the Statements ofFinancial Accounting Standards and SOP 97-2, referred to above,to have a material impact on the Company's results of operationsor financial condition . (emphasis added) .

70 . The unqualified audit opinion issued by GT on CPS's 1997 financial statements ,

which was included in the Registration Statement and Prospectus, was materially false and

misleading because it misrepresented that GT conducted its audits of those financial statements

in accordance with generally accepted auditing statements and that the Company's financial

statements were prepared in conformity with generally accepted accounting principles .

71 . Generally accepted auditing standards, or "GAAS," as approved by th e

American Institute of Certified Public Accountants, define the conduct of auditors in

performing and reporting on audit engagements . GAAS expressly prohibit the issuance of an

unqualified opinion on financial statements that are not prepared in conformity with generally

accepted accounting principles .

72 . GAAP are those principles recognized by the accounting profession as th e

conventions, rules and procedures necessary to define accepted accounting practice at a

particular time. SEC Regulation S-X (17 C .F .R. §10.4-01(a)(1)) states that financial

statements filed with the SEC that are not prepared in compliance with GAAP are presumed to

be misleading and inaccurate .

CPS-2\AMD-CMP 29

73 . The financial statements audited by GT failed to make required disclosures, and

thereby violated at least the following provisions of GAAP :

a . The principle that financial reporting should provide information that i s

useful to present and potential investors and creditors and other uses in making rationa l

investment, credit and similar decisions (FASB Statement of Concepts, No . 1, Paragraph 34) .

b. The principle that financial reporting should be reliable and that i t

represents what it purports to represent . That information should be reliable as well as

relevant is a notion that is central to accounting (FASB Statement of Concepts No. 2 ,

Paragraph 58) .

c. The principle that conservatism be used as a prudent reaction t o

uncertainty to try to ensure that uncertainties and risks inherent in business situations are

adequately considered . The best way to avoid injury to investors is to try to ensure that what

is reported represents what it purports to represent (FASB Statement of Concepts No . 2,

Paragraphs 95, 97) .

74. In addition to issuing an unqualified opinion on financial statements that wer e

not prepared in conformity with GAAP, GT also violated several other related GAA S

requirements, including but not limited to:

a . The requirement that an inability to obtain sufficient competent evidentia l

matter constitutes a restriction on the scope of the audit which requires an auditor to qualify o r

disclaim an opinion (FASB Auditing Standards §508 .17.)

b . The requirement that the auditor must perform procedures to obtain a

sufficient understanding of three elements of an entity's internal control structure : the contro l

environment, the accounting system, and control procedures . (FASB Auditing Standards

§319 .02.)

CPS-2\AMD-CMP 30

c . The requirement that the auditor obtain a knowledge of the entity' s

business, organization and operating characteristics so that the auditor can identify areas tha t

need special attention. (FASB Auditing Standards §§311 .06-311 .07 . )

d. The requirement that the auditor must design the audit to provid e

reasonable assurance of detecting errors and irregularities that are material to the financia l

statements . (FASB Auditing Standard 316.05 . )

75 . In addition , GT's affirmative statements concerning the purported immateria l

impact of adopting SOP 97-2's revenue recognition policies contained in Note J to CPS's

audited financial statements were materially untrue and incomplete in that, pursuant to SOP 97-

2, a substantial portion of CPS's software license revenue at the time of the Offering failed to

satisfy any of the criteria of SOP 97-2 .

76 . In giving its consent to the use of its audit opinions and good name in

connection with the Offering, GT was under a duty to update, confirm and re-confirm the

accuracy and validity of its audit reports . GT also had a duty to exercise due care in

analyzing, testing and disclosing the true impact of SOP 97-2 on CPS under FASB Auditing

Interpretation AU §410 .

77 . In addition, GT was under a duty to exercise due care to analyze, test an d

disclose in the Prospectus the impact of recently issued accounting standards such as SOP 97-2

pursuant to SEC Staff Accounting Bulletin No . 74, Disclosure of the Impact that Recently

Issued Accounting Standards will have on the Financial Statements of the Registrant when

Adopted in a Future Period (holding auditors responsible for assessing the adequacy of

disclosures concerning the impact of impending changes in controlling accounting principles on

registrants) .

78 . Defendant GT is liable to plaintiffs and all Class members who purchased CP S

shares on or traceable to the Offering that were issued pursuant to the Registration Statemen t

and Prospectus .

CPS-2\AMD-CMP 31

79. GT failed to conduct a reasonable investigation and failed to possess an adequate

basis in fact that the information that it provided to the Registration Statement and Prospectus

was true, accurate, timely and without material omissions .

80 . Plaintiffs and other Class members have sustained substantial damages as a

result of GT's violations of the Securities Act . CPS stock is now worthless .

81 . At all times they purchased CPS shares, plaintiffs and the other members of th e

Class were without knowledge of the facts concerning the wrongful conduct alleged herein and

could not have reasonably discovered those facts prior to the Offering . Less than one year

elapsed from the time that plaintiffs discovered or reasonably could have discovered the facts

upon which this Court is based to the time that plaintiffs filed their initial Complaint for the

claims asserted in this Court . Less than three years have elapsed since the time of the Offering

to the time plaintiffs filed this action .

COUNT II

Violation of §11 of the Securities Act Against Underwriter Defendant s


83 . The Registration Statement for the Offering contained untrue statements o f

material facts and omitted to state other facts necessary to make the statements made not untrue

or misleading , and failed adequately to disclose material facts as described above .

84 . The Underwriter Defendants are liable under § 11(a)(5) of the Securities Act a s

the lead underwriters of the CPS shares sold in the Offering . Each of the Underwriter

Defendants were responsible for the contents and dissemination of the Registration Statemen t

and the Prospectus .

85 . As underwriters of the Offering, each of the Underwriter Defendants owed t o

the purchasers of the shares of CPS, including plaintiffs and the other members of the Class ,

the duty to make a reasonable and diligent investigation of the statements contained in the

Prospectus at the time it became effective, to ensure that said statements were true and tha t

CPS-2\AMD-CMP 32

there was no omission to state a material fact required to be stated in order to make the

statements contained therein not untrue, inaccurate or misleading . Had the Underwriter

Defendants exercised reasonable care, they would have known the material misstatements and

omissions contained in the Prospectus as set forth above . As such, each of the Underwriter

Defendants is liable to plaintiffs and the other members of the Class .

86 . The Underwriter Defendants named herein failed to exercise due care and failed

to conduct a reasonable investigation in order to possess reasonable grounds that the statement s

contained in the Registration Statement and the Prospectus were true and without omissions o f

any material facts .

87 . The Underwriter Defendants issued , caused to be issued , and participated in the

issuance of the Prospectus, which contained materially untrue statements and failed to disclose ,

inter alia, the adverse facts set forth above . By reasons of the conduct herein alleged, each o f

the Underwriter Defendants violated Section 11 of the Securities Act .

88 . Plaintiffs and the other members of the Class who acquired CPS shares on o r

traceable to the Offering and issued pursuant to the Registration Statement and Prospectus ,

have sustained damages . CPS stock is now wo rthless .

89 . At the times they purchased CPS shares, plaintiffs and the other members of th e


could not have reasonably discovered those facts prior to the Offering . Less than one year has


upon which this Count is based to the time that plaintiffs filed their initial Complaint for claims

asserted in this Count. Less than three years have elapsed from the time of the Offering to the

time plaintiffs filed this action .

COUNT III

Violations of §11 of the Securities Act Against the Individual Defendant s


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91 . Section 11 (a) of the Securities Act provides a cause of action for any perso n

who acquired a security pursuant to a registration statement and prospectus that "contained a n

untrue statement of a material fact or omitted to state a material fact . . . necessary to make the

statements therein not misleading," as against, among others :

"(1) every person who signed the registration statement . "

15 U.S .C . §77k(a)(1) .

92. Each of the Individual Defendants i .e., Kana, Figge, Hoofard, Booth, Cordier

and Wilson) signed the Registration Statement for CPS's Offering .

93 . The Registration and Prospectus contained untrue and incomplete statements o f

material facts, and omitted to state material facts that were otherwise necessary to make sai d

statements true, complete or not misleading , with respect to CPS's business , products ,

revenues, earnings and prospects, as set forth above .

94 . Each of the Individual Defendants is liable to plaintiffs and all Class members

who purchased CPS shares on or traceable to the Offering that were issued pursuant to th e

Registration Statement and Prospectus .

95. Plaintiffs and the other members of the Class have sustained substantial damage s

as a result of the Individual Defendants' respective violations of the Securities Act . CPS stock

is now worthless .

96 . At the times they purchased CPS shares , plaintiffs and the other members of the




upon which this Count is based to the time that plaintiffs filed their initial Complaint for claims

asserted in this Count. Less than three years have elapsed since the time of the Offering to the

time plaintiffs filed this action .

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COUNT IV

Violations Of § 12(a)(2) Of The Securities Act Against The Underwriter Defendant s


98 . This Count is brought by plaintiffs Cooper, Griffiths, Eliason, Miller and

Newman pursuant to Section 12(a)(2) of the Securities Act on behalf of all Class members wh o

purchased CPS shares in the Offering .

99. The Underwriter Defendants were sellers and/or solicitors of sales of the share s

offered pursuant to the Prospectus .

100. The Prospectus contained untrue statements of material facts . omitted to state

other facts necessary to make the statements made not misleading, and failed to disclose the

material facts set forth above . The Underwriter Defendants ' actions of solicitation included

participating in the preparation of the Prospectus .

101 . The Underwriter Defendants owed to the purchasers of CPS common stock,

including plaintiffs and the other members of the Class of purchasers of CPS shares, the duty

to make a reasonable and diligent investigation of the statements contained in the Offering

materials, including the Prospectus contained therein, to insure that such statements were true

and that there was no omission to state a material fact required to be stated in order to make

the statements contained therein not misleading . Had the Underwriter Defendants exercised

reasonable care, they would have known the misstatements and omissions contained in the

Offering materials as set forth above .

102 . Plaintiffs and other members of the Class, who purchased or otherwise acquire d

CPS shares in the Offering pursuant to the Prospectus, did not know of, or in the exercise o f

reasonable diligence could not have known of, the untruths and omissions contained in th e

Prospectus .

103 . Plaintiffs, individually and representatively, hereby offer to tender to defendant s

those securities which plaintiffs and the other members of the Class purchased in the Offerin g

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and continue to own, on behalf of all members of the Class who continue to own suc h

securities, in return for the consideration paid for those securities together with interes t

thereon .

104 . By reason of the conduct alleged herein, The Underwriter Defendants violated §

12(2) of the Securities Act . Accordingly, plaintiffs and the other members of the Class who

hold CPS shares purchased in the Offering have the right to rescind and recover the

consideration paid for their CPS shares and, hereby elect to rescind and tender their CPS

shares to the defendants sued herein . Plaintiffs and the other members of the Class who

purchased CPS shares in the Offering and have sold their CPS shares are entitled to rescissory

damages .

105 . At the times they purchased CPS shares, plaintiffs and the other members of th e




upon which this Complaint is based to the time that plaintiffs filed their initial Complaint for

the claims asserted in this County . Less than three years have elapsed from the time that the

securities upon which this Count is brought were bona fide offered to the public to the time

plaintiffs filed this Action .

COUNT V

Violations of Section 15 of the Securities Act Against The Individual Defendant s

106. Plaintiffs repeat and reallege each and every allegation contained above .

107. This Count is brought by plaintiffs pursuant to Section 15 of the Securities Ac t

against the Individual Defendants .

108 . As set forth above, each of the Individual Defendants was a controlling perso n

of CPS and was a culpable participant in the violations of Sections 11 and 12(a)(2) of th e

Securities Act by CPS, which would be strictly liable as the issuer of the subject securitie s

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thereunder, but for its bankruptcy . The Individual Defendants remain liable as controlling

persons of CPS although it is no longer a party to this action . Each of the Individual

Defendants signed the Registration Statement and otherwise substantially participated in the

process which allowed the Offering to be successfully completed .

109. As a result of the foregoing, plaintiffs and the other members of the Clas s

suffered damages .

COUNT VI

Violation Of § 10(b) Of The Exchange Act Against the Individual Defendant s

110. Plaintiffs repeat and reallege each and every allegation contained above .

111 . This claim is brought against each of the Individual Defendants for violations o f

§ 10(b) of the Exchange Act and Rule lOb-5 promulgated thereunder for perpetrating a fraud

on the market for CPS stock . As set forth above, each of the Individual Defendants are liable

under these anti-fraud provisions of the federal securities laws for the materia l

misrepresentations and omissions in the Registration Statement and Prospectus for the

Offering . In addition, defendants Hoofard, Kana and Figge are also liable for certain post-

Offering public statements that they made in press releases and Forms 10-Q for CPS, as further

detailed above .

112. The defendants named in this count, 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 fraudulent conduct to artificially raise and maintain the artificially inflated

market price of the CPS stock during the Class Period . These defendants employed devices,

schemes and artifices to defraud and engaged in acts, practices, and a course of conduct as

alleged herein, which operated as a fraud and deceit upon the purchasers of CPS stock during

the Class Period .

113 . At the time of the course of conduct alleged above , plaintiffs and the other

members of the Class were ignorant of the facts alleged herein . Plaintiffs and the clas s

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members could not in the exercise of reasonable diligence have known the actual facts . In

reliance on the integrity of the market price of these securities, plaintiffs and other members of

the Class were induced to and did purchase CPS stock at artificially inflated prices . Had

plaintiffs and other members of the Class known the truth, they would not have taken such

action .

114. As set forth above, the Individual Defendants, with knowledge or in reckles s

disregard of the fraudulent nature of the conduct complained of herein, caused and permitte d

the actions which are alleged to have occurred .

115. By virtue of the foregoing, the Individual Defendants have violated Sectio n

10(b) of the Exchange Act, and Rule 10-5 promulgated thereunder .

116 . Plaintiffs and other members of the Class have been damaged by these

defendants' violations as described in this Count and seek recovery for the damages cause d

thereby .

COUNT VI I

Violations of § 20(a) of the Exchange Act Against The Individual Defendant s

117 . Plaintiffs repeat and reallege the allegations set forth above as if set forth fully

herein . This claim is asserted against the Individual Defendants .

118 . As set forth above , the Individual Defendants were controlling persons of CP S

within the meaning of Section 20(a) of the Exchange Act as alleged herein, and had the power

to influence and control and/or did influence and control, directly or indirectly, the

decision-making of CPS, including the practices and efforts undertaken with respect to CPS

which plaintiffs contend are deceitful .

119 . As set forth above, CPS, by and through the Individual Defendants, violated

Section 10(b) and Rule l0b-5 as alleged in this Complaint . By virtue of their positions as

controlling persons, these defendants are liable pursuant to Section 20(a) of the Exchange Act .

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As a direct and proximate result of the wrongful conduct of these defendants, plaintiffs an d

other members of the Class suffered damages in connection with their purchases of th e

Company's securities during the Class Period .

PRAYER FOR RELIEF

WHEREFORE, plaintiffs, on behalf of themselves and the other members of the Class ,

pray for judgment as follows:

A . Declaring this action to be properly maintained as a plaintiff class action

pursuant to Rule 23 of the Federal Rules of Civil Procedure ;

B . Awarding plaintiffs and the other members of the Class compensatory damages

together with prejudgment interest thereon ;

C. Awarding plaintiffs and the other members of the Class rescission on Count IV

to the extent they still hold CPS shares, or if sold, awarding rescissory damages in accordance

with Section 12(a)(2) of the Securities Act ;

D . Awarding plaintiffs and the other members of the Class their costs and expense s

of this litigation, including reasonable attorneys' fees, accountants' fees and experts' fees an d

other costs and disbursements ; and

E. Awarding plaintiffs and the other members of the Class such other and furthe r

relief as may be just and proper under the circumstances .

JURY TRIAL DEMANDE D

Plaintiffs hereby demand a trial by jury .

Dated : October IV, 2000

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Respectfully submitted,

Roger . axtonState Bar #04329000Robert J . Hil lState Bar #09652100CLAXTON & HILL, PLLC700 McKinney Plac e3131 McKinney Ave., LB-103Dallas , TX 75204-247 1(214) 969-9099

Liaison Counsel for Plaintiffs

David PastorPeter LagorioEdward L. ManchurGILMAN AND PASTOR, LLPStonehill Corporate Cente r999 Broadway, Suite 500Saugus, Massachusetts 01906(781) 231-7850

Lee S . ShalovRalph M . StoneJames P . BonnerSHALOV STONE & BONNER276 Fifth Avenue, Suite 704New York, New York 10001(212) 686-8004

Lead Counsel for Plaintiffs

Thomas G . ShapiroSHAPIRO HABER & URMY, LLP75 State StreetBoston, MA 02109

Andrew M. SchatzSCHATZ & NOBEL, P.C .216 Main Stree tHartford, CT 06106-1817

Larry R. VeselkaSMYSER KAPLAN & VESELKA, LLPNationsbank Center700 Louisiana , Suite 2300Houston , TX 77002

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Thomas E . BilekHOEFFNER, BILEK & EIDMAN, LLP440 Louisiana , Suite 720Houston , TX 77002

Jeff KodroffSPECTOR & ROSEMAN200 Market St .12th Fl .Philadelphia, PA 1910 3

Marc S . GardyABBEY, GARDY & SQUITIRI, LLP212 East 39th Stree tNew York, New York 1001 6

Counsel for Plaintiffs

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CERTIFICATE OF SERVICE

This will certify that on the 30`' day of October, 2000, the foregoing document wasserved by U.S . Mail, First Class, on the following counsel of record :

Robert W . ColemanBrown McCarroll & Oaks Hartline , L .L .P .2001 Ross Avenue , Suite 2000Dallas , Texas 75201-299 7

Phillip A . DavisSheppard, Mullin , Richter & Hampton . L .L.P.333 South Hope Street , 48`h FloorLos Angeles, California 90071-144 8

Alexander J . Simmons, Jr .Schreeder, Wheeler & Flint, LLP1600 Candler Buildin g127 Peachtree Street, N .E .Atlanta, GA 30303-1845

John R. RiddleStrasburger & Pric e901 Main Street, Suite 4300Dallas , TX 75202

X.~'-~-"' - r-- LZ-'/ZRoger-F. Claxton

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ORIGINAL UNITED STATES DISTRICT CO NORTHERN DISTRICT...

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