SAXENA WHITE P.A. Joseph E. White, IIIsecurities.stanford.edu/.../201464_f01c_13CV00580.pdfCase...

Case 3:13-cv-00580-BEN-RBB Document 56 Filed 06/04/14 of 157

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SAXENA WHITE P.A. Maya Saxena Joseph E. White, III Lester R. Hooker (Bar No. 241590) Brandon T. Grzandziel Dianne M. Anderson (Bar No. 286199) 2424 N. Federal Highway, Suite 257 Boca Raton, FL 33431 Tel: (561) 394-3399 Fax: (561) 394-3382

Lead Counsel for Lead Plaintiff

BERNSTEIN LITOWITZ BERGER & GROSSMANN LLP

Blair A. Nicholas (Bar No. 178428) Benjamin Galdston (Bar No. 211114) 12481 High Bluff Drive, Suite 300 San Diego, CA 92130 Tel: (858) 793-0070 Fax: (858) 793-0323

Liaison Counsel for Lead Plaintiff

Additional Counsel on Signature Page

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF CALIFORNIA

IN RE MAXWELL TECHNOLOGIES ) Case No.: 3:13-cv-00580-BEN-RBB

INC., SECURITIES LITIGATION ) ) CLASS ACTION

AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS

DEMAND FOR JURY TRIAL

AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Case No. 3:13-cv-00580-BEN-RBB


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TABLE OF CONTENTS

I. INTRODUCTION ........................................................................................... 1

II. NATURE OF THE ACTION .......................................................................... 9

III. JURISDICTION AND VENUE....................................................................10

IV . PARTIES ....................................................................................................... 10

A

LEAD PLAINTIFF ................................................................................... 10

B

DEFENDANTS........................................................................................ 11

Maxwell Technologies, Inc. ...................................................... 11

2. The Individual Defendants ........................................................ 11

V. BACKGROUND AND NATURE OF THE FRAUD AT MAXWELL ...... 16

A. MAXWELL ’ S BUSINESS MODEL AND REVENUE RECOGNITION ............. 16

ON THE EVE OF THE CLASS PERIOD , MAXWELL COMMITS TO REVAMPING ITS INTERNAL CONTROLS TO RESOLVE DOJ AND SEC BRIBERY ACTIONS ........................................................................18

PRELUDE TO A FRAUD—MAXWELL ’ S DECLINING FINANCIAL FORTUNES SPUR DEFENDANTS TO ACCELERATE REVENUES ................23

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Leading Up To The Class Period, Maxwell Faced Increased Competition Amidst Lackluster Financial Results ....................................................................................... 23

Defendants Were Aware Of An Impending Downturn In Maxwell’s Chinese Operations ................................................. 24

Defendants Were Personally Incentivized To Pad Maxwell’s Financial Results .....................................................28

Defendants Schramm And Royal Conspire With Andrews To Falsify Maxwell’s Financial Results ................................... 35

DEFENDANTS SECRETLY INFLATE THE COMPANY ’ S FINANCIAL RESULTS...............................................................................................37

1. Defendants StuffMaxwell’s Distribution Channel At Quarters-End And Extend Payment Terms To Placate Distributors ............................................................................... 37

2. The Mechanics OfMaxwell’s Accounting Fraud: “A Scramble” To “Get The Product Out” Before Quarters-End............................................................................ 41

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3. “Make Up The Delta”: The Confidential Witnesses Confirm That The Individual Defendants “Spearheaded” Maxwell’s Accounting Manipulations ...................................... 51

VI. THE TRUTH EMERGES ............................................................................. 61

A. THE MAXWELL FRAUD IS SLOWLY REVEALED .....................................61

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The First Partial Disclosure OfDefendants’ Fraud ................ 61

The Full Extent Of Defendants’ Fraud Is Revealed In A Series Of Disclosures At The End Of The Class Period ...........65

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MARKET REACTION TO THE REVELATION OF DEFENDANTS ’ FRAUD.................................................................................................. 68

C. THE SEC AND DOJ LAUNCH FORMAL INVESTIGATIONS ...................... 73

VII. DEFENDANTS’ FALSE AND MISLEADING STATEMENTS ................ 73

A. FALSE STATEMENTS REGARDING MAXWELL ’ S FINANCIAL RESULTS AND OPERATIONS .................................................................. 74

B. FALSE STATEMENTS REGARDING MAXWELL ’ S ACCOUNTING PRACTICES............................................................................................99

C. FALSE STATEMENTS REGARDING MAXWELL ’ S INTERNAL CONTROLS ..........................................................................................103

VIII. RELEVANT GAAP AND ACCOUNTING PROVISIONS ...................... 108

A. OVERVIEW AND BACKGROUND OF GAAP..........................................108

B. DEFENDANTS ’ IMPROPER RECOGNITION OF REVENUE ........................109

C. DEFENDANTS ’ IMPROPER ACCOUNTING OF ACCOUNTS RECEIVABLE.......................................................................................112

D. DEFENDANTS FAILED TO DISCLOSE KNOWN TRENDS OR UNCERTAINTIES IN VIOLATION OF SEC REGULATIONS ...................... 115

E. DEFENDANTS ’ ACCOUNTING IMPROPRIETIES WERE MATERIAL TO MAXWELL ’ S FINANCIAL STATEMENTS AS EVIDENCED BY THE RESTATEMENT ITSELF ........................................................................ 117

F. DEFENDANTS KNEW OF , OR RECKLESSLY DISREGARDED , MAXWELL ’ S DEFICIENT INTERNAL ACCOUNTING CONTROLS ............ 119

IX. MAXWELL’S RESTATEMENT DEMONSTRATES DEFENDANTS’ INTENTIONAL OR DELIBERATELY RECKLESS CONDUCT.............................................................................120

X. ADDITIONAL FACTS SUPPORTING DEFENDANTS’ SCIENTER ..... 123

A. DEFENDANT SCHRAMM ’ S SCIENTER ...................................................124

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B. DEFENDANT ROYAL ’ S SCIENTER ........................................................127 1

C. DEFENDANT ANDREWS ’ SCIENTER .....................................................129 2

D. MAXWELL ’ S CORPORATE SCIENTER ...................................................131 3

XI. LOSS CAUSATION ................................................................................... 139 4

XII. APPLICABILITY OF THE PRESUMPTION OF RELIANCE: THE

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FRAUD-ON-THE-MARKET DOCTRINE ................................................ 141

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XIII. INAPPLICABILITY OF THE STATUTORY SAFE HARBOR ............... 143

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XIV. CLASS ACTION ALLEGATIONS............................................................143

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XV. CLAIMS BROUGHT PURSUANT TO THE EXCHANGE ACT ............ 145

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FIRST CLAIM FOR RELIEF ............................................................................. 145

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SECOND CLAIM FOR RELIEF ......................................................................... 148

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THIRD CLAIM FOR RELIEF ............................................................................ 150

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XVI. PRAYER FOR RELIEF .............................................................................. 152

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XVII. JURY DEMAND .........................................................................................153

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AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Case No. 3:13-cv-00580-BEN-RBB—Page iv

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Lead Plaintiff The Employees’ Pension Plan of the City of Clearwater

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(“Clearwater” or “Lead Plaintiff”), on behalf of itself and all persons or entities

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that purchased or otherwise acquired the common stock of Maxwell Technologies,

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Inc. (“Maxwell” or the “Company”) between April 29, 2011 and March 19, 2013,

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inclusive (the “Class Period”) and were damaged thereby (the “Class”), alleges the

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following upon personal knowledge as to itself and its acts, and upon information

7 and belief as to all other matters, based upon the investigation of counsel. Lead

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Counsel’s investigation included, among other things: (i) a review of public filings

9 and press releases by Maxwell with the United States Securities and Exchange

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Commission (“SEC”); (ii) media and analyst reports about the Company;

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(iii) publicly available data relating to Maxwell common stock; and (iv) interviews

12 with former employees of the Company. Many of the facts related to the claims

13 and defenses in this action are known only by the Defendants, or are exclusively

14 within their custody or control. Lead Plaintiff believes that substantial additional

15 evidentiary support for its allegations will be developed after a reasonable

16 opportunity for discovery.

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I. INTRODUCTION

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1. This securities class action arises from an admitted deliberate

19 accounting fraud at Maxwell that improperly recognized millions of dollars of

20 revenue from future quarters and artificially inflated the Company’s reported

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financial results to meet or exceed Wall Street expectations. That Defendants

22 made numerous false statements to investors during the Class Period is undisputed.

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Indeed, the Company has admitted that it repeatedly issued misstated financial

24 results during the Class Period, requiring a restatement of nearly two years of the

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Company’s SEC filings. Similarly, that Defendants’ misstatements were material

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is also established. Defendants’ accounting manipulations overstated Maxwell’s

27 reported revenues by at least $19 million and, under Generally Accepted

AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Case No. 3:13-cv-00580-BEN-RBB—Page 1

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Accounting Principles (“GAAP”), financial statements can only be restated to

I correct material errors.

2. Defendants’ scienter is beyond reasonable dispute. The accounting

scheme involved intentional deviations from Maxwell’s standard payment terms

and conditions that were specifically directed and authorized by Defendants David

J. Schramm (“Schramm”), Maxwell’s former Chief Executive Officer (“CEO”);

Kevin S. Royal (“Royal”), Maxwell’s Chief Financial Officer (“CFO”); and Van

M. Andrews (“Andrews”), Maxwell’s former Senior Vice President of Sales and

an SEC-reporting Officer of the Company. 1 The timing and the manner of the

undisclosed arrangements also demonstrates that the Individual Defendants

understood—and indeed intended—that the manipulations artificially inflate

Maxwell’s reported financial results. Specifically, the Individual Defendants

authorized and directed the modified payment terms during the final days of

reporting periods solely so that Maxwell could persuade customers to accept

product they did not need or want. These modifications enabled Maxwell to book

sales and record a profit for the first time in years while beating analyst estimates.

In addition, the Company’s inflated financial results enabled the Individual

Defendants to meet bonus incentive targets and coincided with a well-timed equity

offering, allowing Maxwell to sell stock at artificially-inflated prices just two

months prior to the first partial disclosure of Defendants’ fraud.

3. Defendants’ accounting fraud came to an end when an internal

whistleblower—the Company’s (now former) Director of SEC Compliance and

Reporting, Daniel Reineck, who reported directly to Royal—delivered a multi-

page letter detailing the accounting misconduct at Maxwell, including that

Schramm and Royal were well-aware of the improper accounting manipulations.

Nevertheless, the Company attempted to avoid liability for itself, Schramm and

1 Schramm, Royal and Andrews are referred to throughout this Complaint as the “Individual Defendants” or, together with Maxwell, the “Defendants.”

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Royal by blaming—and summarily firing—certain sales employees who were just

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following orders from their superiors, the Individual Defendants, while allowing

3 co-conspirator Andrews to “resign” rather than face termination.

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4. Maxwell’s Audit Committee investigation claimed that the

5 arrangements with certain distributor customers, which included extended payment

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terms, waived credit holds, rights of return and “profit margin protection” (i.e.,

7 side-payments), “had not been communicated to our finance and accounting

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department, or to our CEO.” This claim is patently false. Former Maxwell

9 employees (“Confidential Witnesses” or “CW__”), including several high-ranking

10 sales executives who each had regular contact with the Individual Defendants and

11 carried out their instructions to modify the sales terms, confirm that the scheme

12 was authorized and directed by all three co-conspirators: Royal, Schramm and

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Andrews. Indeed, only Schramm and Royal were authorized to modify Maxwell’s

14 standard sales terms and conditions. Maxwell’s former Senior Director of Sales

15 confirms that Royal—an experienced CFO and certified CPA with over ten years

16 of public accountancy experience at Ernst & Young LLP and twelve years of

17 experience in corporate finance—authorized the payment term modifications;

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typically, via email distributed to the Maxwell’s finance and accounting

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department and others. These modified payment terms were also recorded on

20 revised purchase orders that were transmitted to Maxwell’s finance and accounting

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department.

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5. According to these Confidential Witnesses, the Individual Defendants

23 routinely instructed employees at quarters-end to “find revenue ” to “make up the

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delta ” between the Company’s actual revenue performance and its external

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targets—all in an effort to maintain Maxwell’s portrayal as “a growth stock”

26 company. In fact, it became an inside joke at Maxwell that the Senior Director of

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Sales “was running back and forth” to Royal’s office so frequently at quarters-end

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to get Royal’s authorization to modify payment terms that she “was wearing a hole



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in the carpeting.” The Confidential Witnesses further confirm that the Individual

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Defendants not only authorized and directed the payment term modifications but

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fully understood the accounting consequences of such arrangements. The modified

4 payment terms were only granted during the last days of each quarter in a

5 calculated effort by Royal, Schramm and Andrews to back into revenue and

6 earnings targets, which they closely monitored. As Maxwell’s former Senior

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Director of Sales stated, the Individual Defendants “knew everything” and had

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been “guiding” Maxwell’s revenue recognition misconduct from start to finish.

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6. The Company has further admitted that it lacked effective internal

10 controls at all times during the Class Period despite the Individual Defendants’

11 repeated affirmations in sworn statements pursuant to the Sarbanes-Oxley Act of

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2002 (“SOX”) that they personally designed and evaluated the effectiveness of

13 such internal controls. Defendants’ knowledge of Maxwell’s control deficiencies

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is further confirmed because, just three months prior to the start of the Class

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Period , Maxwell announced that it had reached settlements with the SEC and the

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U.S. Department of Justice (“DOJ”) to resolve charges of the Foreign Corrupt

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Practices Act (“FCPA”) and other securities law violations arising from internal

18 control weaknesses. The Company agreed to pay fines totaling $14.35 million and

19 entered into a three-year deferred prosecution agreement.

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7. Notably, in connection with the SEC and DOJ actions, Maxwell

21 promised to address internal control deficiencies, including a pledge to adopt

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internal controls sufficient to ensure that financial statements are prepared in

23 conformity with GAAP . The accounting fraud whistleblower at Maxwell, Daniel

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Reineck (Maxwell’s former Director of SEC Compliance and Reporting),

25 uncovered the Company’s FCPA violations and was assigned to oversee the SEC

26 and DOJ settlement, which included internal controls remediation. Maxwell’s

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FCPA issues also spawned a shareholder derivative action, which the Company

28 resolved later on during the Class Period in a settlement that included further



1 purported corporate governance reforms aimed at enhancing the internal controls

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that Defendants once again violated through the conduct leading to the restatement.

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8. The intentional nature of the scheme is bolstered by the terminations

4 and “resignations” of high-level Maxwell executives, including Andrews, who was

5 personally recruited by Schramm and Royal to carry out the revenue recognition

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fraud and who served as an Officer of the Company throughout his tenure. On

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October 24, 2013, Maxwell announced that Schramm was “retiring” from the

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Company effective December 31, 2013, subject to an agreement providing for the

9 mutual release of all claims related to Schramm’s employment at Maxwell. The

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transition agreement between Schramm and Maxwell allowed Schramm to receive

11 millions of dollars in payments and benefits during a 24-month period ending on

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December 31, 2015.

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9. The Individual Defendants were personally motivated to pad

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Maxwell’s financial results since a portion of their individual compensation was

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tied to the Company’s financial performance. Indeed, the criteria used to

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determine the Individual Defendants’ compensation was often manipulated in

17 order to ensure payouts given the financial results that the Company posted in a

18 given year. In fact, had Maxwell reported financial results during the Class period

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that were not artificially inflated by Defendants’ revenue recognition fraud, little to

20 no bonuses would have likely been paid out to the Individual Defendants.

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10. Confirming the Individual Defendants’ knowledge of and

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involvement in the accounting misconduct, Maxwell’s longtime auditor,

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McGladrey LLP (“McGladrey”), abruptly resigned because it could no longer rely

24 on management’s representations , citing continuing material weaknesses in

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Maxwell’s internal controls over revenue recognition and more broadly in the

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Company’s overall control environment. In addition, the DOJ and the SEC have

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both launched fresh investigations into Defendants’ accounting fraud which remain


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1 pending, thus raising the possibility of additional civil and criminal enforcement

2 actions arising as a result of Defendants’ intentional misconduct.

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11. For a time during the Class Period, Defendants’ fraudulent accounting

4 scheme succeeded, materially bolstering Maxwell’s financial results as compared

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to the period immediately preceding the Class Period, enhancing the Company’s

6 optics from a financial point of view and increasing the desirability of its securities

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to the investing public. Specifically, the Company increased its financial results to

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improve what had been nearly a $23 million loss in 2009 to an $8.5 million profit

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in 2012, while improving its profit margins in that period by nearly 70%. In turn,

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Defendants’ fraud had the effect of artificially inflating Maxwell’s common stock

11 price, reaching a Class Period-high of $21.20 per share on November 4, 2011.

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Defendants capitalized on Maxwell’s artificially-inflated financial results by

13 effectuating an at-the-market equity offering of up to $30 million in February 2012

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(the “Offering”), which was announced mere minutes after the Company issued a

15 press release on February 16, 2012 touting its overstated financial results.

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12. A few months later, however, Defendants’ scheme started to slowly

17 crumble. On April 26, 2012, Maxwell issued a press release announcing

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disappointing financial results for the Company’s first quarter of 2012, as a marked

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buildup in excess inventory due to Defendants’ illicit payment plan extensions and

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distribution channel abuses weighed down the Company’s financial results. As a

21 result of this partial disclosure of Defendants’ fraud, Maxwell’s stock price

22 plummeted 40% on enormous trading volume of nearly 7.3 million shares.

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13. Defendants’ misconduct was further revealed on March 7, 2013, when

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the Company was forced to admit to the falsity of its previously-issued financial

25 statements and to disclose that it had improperly recognized revenues during the

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Class Period. As a result, Maxwell was required to restate results for the year

27 ended December 31, 2011, and the first three quarters of 2012, delay its annual

28 report, disclose material weaknesses in its internal controls and default on the



1 covenants governing its credit agreement. The Company also announced the

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terminations and resignations of several executives that were purportedly solely

3 responsible for the misconduct, including Defendant Andrews. Maxwell

4 represented that the restatement would decrease previously reported revenues for

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fiscal year 2011 by approximately $6.5 million and decrease revenues in the first

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three quarters of 2012 by approximately $5.5 million in the aggregate—amounts

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that swelled to over $19 million once the restatement was completed. On this

8 news, the Company’s shares declined $1.01 per share on March 8, 2013, to close at

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$8.10 per share—a one-day decline of 11% on heavy trading volume.

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14. However, the Company’s common stock remained inflated as the full

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truth of Defendants’ false and misleading statements concerning the magnitude of

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the restatement and overall effects on the Company’s business had yet to be

13 revealed. Indeed, in announcing the restatement, Defendants downplayed its

14 significance, stressing that the prematurely-recognized revenues were due to a

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timing issue and that the effects of the restatement were marginal. Defendants’

16 minimization of their misconduct is belied, however, by the material nature of

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Maxwell’s restatement and the outsized effect it had on the appearance of the

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Company’s business as a whole, converting slim operating profits into significant

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losses for fiscal year 2011 and slashing net income in 2012 by nearly 50% from

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1 Nine Months Ended 9/30/12 Year Ended 2011

__ As Reported - As Restated

15. The magnitude of Maxwell’s deficiencies was further revealed on

March 19, 2013, when the Company announced the sudden resignation of its

independent auditor. Maxwell’s auditor resigned because it no longer trusted the

Company’s executives —a unique and telling indictment of management’s integrity

and competence. Following this announcement, the Company’s stock price

plummeted again, falling an additional $1.53, or nearly 21%, to close at $5.91 on

March 20, 2013, on unusually heavy trading volume.

16. On April 30, 2013, Maxwell disclosed that both the DOJ and the SEC

are investigating the Company concerning its illicit revenue recognition practices

disclosed the month prior. Notably, a formal SEC investigation is typically

launched when the SEC staff concludes after an informal inquiry that a securities

law violation has occurred. Accordingly, the full extent of the fallout from

Defendants’ fraud is unclear as the DOJ and SEC investigations remain pending as

of the time of this filing. What is clear is that Maxwell’s shareholders have borne

the brunt of the damage inflicted by Defendants’ knowing misconduct, suffering

millions of dollars in losses as a result of their purchases of the Company’s stock

during the Class Period.

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($2,000)

($4000)



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I II. NATURE OF THE ACTION

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17. This is a federal securities class action against Defendants Maxwell,

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Schramm, Royal and Andrews for violations of the federal securities laws. Lead

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Plaintiff brings this action on behalf of all persons or entities that purchased shares

5 of Maxwell between April 29, 2011 and March 19, 2013, inclusive (the “Class

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Period”), seeking to pursue remedies under the Securities Exchange Act of 1934

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(the “Exchange Act”).

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18. Lead Plaintiff alleges that, throughout the Class Period, Defendants

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issued materially false and misleading statements regarding the Company’s

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business, operational and accounting practices, and failed to disclose material

11 adverse information, including among other things: (i) that senior executives of the

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Company, including certain of the Individual Defendants, were making

13 undisclosed arrangements with certain distributors regarding the payment terms for

14 sales to such distributors; (ii) that, despite these arrangements, Maxwell

15 nevertheless was recognizing revenue on these shipments to distributors; (iii) that a

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fixed or determinable sales price did not exist at the time of shipment to these

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distributors; (iv) that collection was not reasonably assured at the time revenue had

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been recognized for certain transactions; (v) that, as a result, the Company was

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improperly recognizing revenue related to sales transactions to distributors;

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(vi) that, as such, the Company’s financial statements were not prepared in

21 accordance with GAAP; (vii) that the Company lacked adequate internal and

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financial controls; and (viii) that, as a result of the foregoing, the Company’s

23 statements during the Class Period were materially false and misleading at all

24 relevant times.

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19. Defendants’ wrongful acts and false and misleading statements and

26 omissions have caused a precipitous decline in the market value of the Company’s

27 stock. As a result of Defendants’ fraud, Lead Plaintiff and other Class members

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have suffered significant damages.



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III. JURISDICTION AND VENUE

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20. The claims asserted herein arise under Sections 10(b) and 20(a) of the

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Exchange Act (15 U.S.C. §§ 78j(b), 78t(a), 78t-1) and the rules and regulations

4 promulgated thereunder, including Rule 10b-5 (17 C.F.R. § 240.10b-5).

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21. This Court has jurisdiction over the subject matter of this action

6 pursuant to 28 U.S.C. § 1331 and Section 27 of the Exchange Act (15 U.S.C.

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§ 78aa).

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22. Venue is proper in this Judicial District pursuant to 28 U.S.C.

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§ 1391(b) and Section 27 of the Exchange Act. Maxwell maintains its corporate

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headquarters in this District, and many of the acts charged herein, including the

11 preparation and dissemination of materially false and misleading information,

12 occurred in substantial part in this District.

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23. In connection with the acts and omissions alleged in this Amended

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Consolidated Complaint for Violations of the Federal Securities Laws

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(“Complaint”), Defendants, directly or indirectly, used the means and

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instrumentalities of interstate commerce, including, but not limited to, the mails,

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interstate telephone communications, and the facilities of the national securities

18 markets.

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IV. PARTIES

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A. LEAD PLAINTIFF

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24. Lead Plaintiff Clearwater purchased the publicly traded Maxwell

22 securities at artificially inflated prices during the Class Period and has been

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damaged thereby. Clearwater is a single-employer defined benefit retirement plan,

24 providing retirement, disability and death benefits to employees and retirees of the

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City of Clearwater, Florida. Evidence of Lead Plaintiff’s transactions in the

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Company’s securities during the Class Period was previously filed with the Court

27 and are incorporated herein by reference. See ECF No. 33-2, Ex. 2 (Certification

28 and Authorization of Lead Plaintiff).



B. DEFENDANTS

1. Maxwell Technologies, Inc.

25. Defendant Maxwell develops, manufactures and markets energy

storage and power delivery products, and microelectronic products worldwide.

Maxwell’s principal executive offices are located at 3888 Calle Fortunada,

San Diego, CA 92123.

2. The Individual Defendants

26. Defendant Schramm served as the CEO, President and a Director of

Maxwell starting in July 2007. Pursuant to a transition agreement announced on

October 23, 2013, Schramm resigned from his position as President, CEO and

Director effective December 31, 2013. Whereas Schramm’s employment

agreement with Maxwell previously denied him any significant benefits in the

event of a resignation, the transition agreement will maintain Schramm as an

advisor to Maxwell for a two-year period following his retirement, during which

period he is to receive millions of dollars in cash payments and benefits. For

compensation purposes, his service as a senior advisor will be treated as continuing

his employment for purposes of his existing stock options, restricted stock awards

and performance stock awards. Schramm signed and certified the Company’s false

and misleading Form 10-K filed with the SEC on February 26, 20122 and Forms

10-Q filed with the SEC on May 5, 2011, 3 August 8, 2011 4, November 7, 2011 5 ,

April 26, 20126, August 2, 2012 7 and October 30, 20128. Schramm falsely

2 The Company’s annual filing on Form 10-K filed with the SEC on February 26, 2012, for the period ending December 31, 2011 (“2011 Form 10-K”). 3 The Company’s quarterly filing on Form 10-Q filed with the SEC on May 5, 2011, for the period ending March 31, 2011 (“1Q2011 Form 10-Q”). 4 The Company’s quarterly filing on Form 10-Q filed with the SEC on August 8, 2011, for the period ending June 30, 2011 (“2Q2011 Form 10-Q”). 5 The Company’s quarterly filing on Form 10-Q filed with the SEC on November 7, 2011, for the period ending September 30, 2011 (“3Q2011 Form 10-Q”). 6 The Company’s quarterly filing on Form 10-Q filed with the SEC on April 26, 2012, for the period ending March 31, 2012 (“1Q2012 Form 10-Q”).

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certified that the Company’s Class Period false and misleading filings fairly

presented Maxwell’s financial conditions and results of operations, and he falsely

certified that the Company’s internal controls were effective and compliant with

Rule 13a-15(f) or 15d-15(f) promulgated under the Exchange Act. Schramm also

made false and misleading statements during the earnings calls on April 28, 2011,

July 28, 2011, November 3, 2011, February 16, 2012, April 26, 2012, August 2,

2012, and October 25, 2012, and the Needham Growth Conference on January 12,

2012.

27. Defendant Royal has served as Senior Vice President, CFO, Treasurer

and Secretary of Maxwell since April 2009. According to the Company, from May

2005 until he joined Maxwell, Royal was senior vice president and chief financial

officer of a Nasdaq-listed developer and provider of application delivery network

technology. From December 1996 until May 2005, Royal held a series of senior

finance positions, culminating with his appointment as vice president and chief

financial officer of an S&P 500 company that manufactures, markets and services

semiconductor capital equipment. Prior to that, Royal spent 10 years with Ernst &

Young LLP, where he became a certified public accountant. Royal signed and

certified the Company’s false and misleading 2011 Form 10-K, as well as the false

and misleading Forms 10-Q filed with the SEC on May 5, 2011, August 8, 2011,

November 7, 2011, April 26, 2012, August 2, 2012, and October 30, 2012. Royal

falsely certified that the Company’s Class Period false and misleading filings fairly

presented Maxwell’s financial conditions and results of operations, and he falsely

certified that the Company’s internal controls were effective and compliant with

Rule 13a-15(f) or 15d-15(f) promulgated under the Exchange Act. Royal also

made false and misleading statements during the earnings calls on April 28, 2011,

7 The Company’s quarterly filing on Form“ 10-Q filed with the SEC on August 2,

2012, for the period ending June 30, 2012 (2Q2012 Form 10-Q”). 8 The Company’s quarterly filing on Form 10-Q filed with the SEC on October 30, 2012, for the period ending September 30, 2012 (“3Q2012 Form 10-Q”).



July 28, 2011, November 3, 2011, February 16, 2012, April 26, 2012, August 2,

2012, and October 25, 2012, and the Cowen & Co. Technology Media and

Telecom Conference on May 31, 2012.

28. Defendant Andrews joined Maxwell in February 2010 as Vice

President of Sales and Marketing, as announced in a February 9, 2010 Maxwell

press release entitled “Maxwell Technologies Announces Senior Management

Appointment.”9 Andrews was later promoted to Senior Vice President, Sales and

Marketing in October 2010. Maxwell filed a Form 3, Initial Statement of

Beneficial Ownership of Securities, with the SEC on October 22, 2010, describing

Andrews’ new position and stock options that were awarded to him. On July 13,

2012, Maxwell filed a Form 8-K detailing Andrews’ employment agreement with

the Company, which provided a base annual salary of $277,200 and “an annual

bonus of up to 50% of his then salary,” provided Andrews met certain performance

targets. The bonus would be awarded based on objective or subjective criteria

established by CEO Schramm . The July 13, 2012 Form 8-K included Andrews’

employment agreement, which stated that his “title [would] be Senior Vice

President of Sales & Marketing of the Company and [he] [would] report directly to

David Schramm , President and Chief Executive Officer (“CEO”).” At all times

during the Class Period, Andrews was a controlling Officer of Maxwell. Finally,

as stated in a March 7, 2013 Form 8-K filed by Maxwell, Andrews abruptly

resigned from his position on March 1, 2013, effective immediately, in connection

with the investigation related to the restatement and false revenue recognition.

29. Defendants Schramm, Royal and Andrews are referred to herein as

the “Individual Defendants.” Because of the Individual Defendants’ positions,

they had access to the adverse undisclosed information about Maxwell’s financial

9 See Maxwell Technologies Inc., Maxwell Technologies Announces Senior Management Appointments (Feb. 9, 2010) available at http://investors.maxwell.com/phoenix.zhtml?c=94560&p=irol-newsArticle&ID=1385394&highlight=.

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1 results, business, operations and practices, via access to internal corporate

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documents, conversations and contact with other corporate officers and employees,

3 attendance at meetings and via reports and other information provided to them.

4

Each of the Individual Defendants, by virtue of his high-level position, was

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directly involved in the day-to-day operations of Maxwell at the highest levels and

6 was privy to confidential information concerning the Company and its business,

7 operations and practices, including the accounting misstatements alleged herein.

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Their positions of control and authority as officers or directors enabled the

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Individual Defendants to control the content of the SEC filings, press releases, and

10 other public statements of Maxwell during the Class Period. Accordingly, each of

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the Individual Defendants bears responsibility for the accuracy of the public

12 reports and press releases detailed herein and is therefore primarily liable for the

13 misrepresentations and omissions contained therein. Moreover, each of the

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Individual Defendants had continuous and systematic contacts with the United

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States and California through Maxwell’s conduct of its business and its San Diego

16 corporate headquarters. During the Class Period, each of the Individual

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Defendants substantially participated in the preparation of Maxwell’s false

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financial records or engaged in conduct that made it necessary or inevitable that

19 material misrepresentations would be made to investors on the basis of that

20 conduct.

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30. The Individual Defendants were obligated to refrain from falsifying

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Maxwell’s books, records, and accounts and were prohibited from using the

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instrumentalities of interstate commerce or the mails to (a) employ any device,

24 scheme, or artifice to defraud; (b) make any untrue statement of a material fact or

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to omit to state a material fact necessary in order to make the statements made, in

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light of the circumstances under which they were made, not misleading; or (c)

27 engage in any act, practice, or course of business which operates or would operate

28 as a fraud upon any person. The Individual Defendants’ conduct violated the



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Exchange Act and SEC regulations promulgated thereunder in connection with the

2 purchase or sale of Maxwell securities.

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31. Each of the Individual Defendants is liable as a participant in a

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fraudulent scheme and course of business whose primary purpose and effect was to

5 operate as a fraud and deceit on purchasers of Maxwell securities by disseminating

6 materially false and misleading statements and/or concealing material adverse facts

7 about Maxwell’s operations and financial condition.

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32. Defendants’ scheme deceived the investing public regarding

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Maxwell’s operations, finances and financial statements, and the intrinsic value of

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Maxwell’s securities, enabled the Company to register for sale and sell millions of

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dollars in Maxwell securities in the February 2012 Offering, and caused Lead

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Plaintiff and other members of the Class to be damaged as a result of their

13 purchases of Maxwell securities at artificially inflated prices.

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33. The Company’s press releases and SEC filings were group-published

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documents, representing the collective actions of Company management. The

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Individual Defendants, by virtue of their high-level positions with the Company,

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directly participated in the management of the Company, were directly involved in

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the day-to-day operations of the Company at the highest levels, and were privy to

19 confidential proprietary information concerning the Company and its business,

20 operations, products, growth, financial statements and financial condition, as

21 alleged herein. The Individual Defendants were involved in drafting, producing,

22 reviewing and/or disseminating the false and misleading statements and

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information alleged herein, were aware, or deliberately disregarded, that the false

24 and misleading statements were being issued regarding the Company, and

25 approved or ratified these statements, in violation of the federal securities laws.

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34. The Individual Defendants, because of their positions of control and

27 authority as officers and/or directors of the Company, were able to and did control

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the content of the various SEC filings, press releases and other public statements



1 pertaining to the Company during the Class Period. Each Individual Defendant

2 was provided with copies of the documents alleged herein to be misleading prior to

3 or shortly after their issuance and/or had the ability and/or opportunity to prevent

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their issuance or cause them to be corrected. Accordingly, each Individual

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Defendant is responsible for the accuracy of the public reports and releases

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detailed herein, and is therefore primarily liable for the representations contained

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therein.

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V. BACKGROUND AND NATURE OF THE FRAUD AT MAXWELL

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A. MAXWELL ’ S BUSINESS MODEL AND REVENUE RECOGNITION

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35. According to the Company, Maxwell is an energy storage device

11 maker that develops, manufactures and markets cost-effective energy storage and

12 power delivery products for transportation, industrial, information technology and

13 other applications, and microelectronic products for space and satellite

14 applications. The bulk of Maxwell’s revenue is related to supercapacitor sales to

15 clients worldwide.

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36. The Company focuses on three lines of products: Ultracapacitors,

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High-Voltage Capacitors and Radiation-Mitigated Microelectronic Products.

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Maxwell’s ultracapacitor products provide energy storage and power delivery

19 solutions for applications in multiple industries, including transportation,

20 automotive, information technology, renewable energy and industrial electronics.

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The Company’s CONDIS high-voltage capacitors are designed and manufactured

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to perform reliably for decades in all climates. Maxwell’s radiation-hardened

23 microelectronic products for satellites and spacecraft include single board

24 computers and components, such as high-density memory and power modules.

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Maxwell was founded in 1965 and is headquartered in San Diego, California.

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37. According to the Company’s Forms 10-K filed during the Class

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Period, sales revenue is derived from the sale of products directly to customers or


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through distributors, with the Company representing its revenue recognition policy

in the following manner:

Assumptions and Approach Used . Product revenue is recognized when all of the following criteria are met: (1) persuasive evidence of an arrangement exists (upon contract signing or receipt of an authorized purchase order from a customer); (2) title passes to the customer at either shipment from our facilities or receipt at the customer facility, depending on shipping terms; (3) price is deemed fixed or determinable and free of contingencies or significant uncertainties; and (4) collectability is reasonably assured. Customer purchase orders and/or contracts are generally used to determine the existence of an arrangement. Shipping documents are used to verify product delivery. We assess whether a price is fixed or determinable based upon the payment terms associated with the transaction. If a volume discount is offered, revenue is recognized at the lowest price offered to the customer. We assess the collectability of accounts receivable based primarily upon creditworthiness of the customer as determined by credit checks and analysis, as well as the customer’s payment history.

38. Pursuant to this revenue recognition policy, Maxwell could not

recognize a sale as revenue until it was reasonably assured that it would receive

payment for the shipment of goods. This revenue recognition was fairly

straightforward when the Company shipped goods directly to an end-user who paid

Maxwell directly for the shipment. The process varied, however, when the

Company used a distributor intermediary between Maxwell and the end-user. In

this instance, Maxwell would send a shipment to this distributor who would then

send the shipment to the end-user. The end-user would pay the distributor for the

shipment, and the distributor would in turn pay Maxwell. According to Maxwell’s

revenue recognition policy and GAAP, and as Defendants were well aware, the

Company could not recognize revenue for the shipment until collectability was

reasonably assured from the end-user, not merely when the shipment left

Maxwell’s facilities or was received by the distributor.

39. During the Class Period, Maxwell operated under an executive-

centric, top-down organizational structure where all major changes to client

contracts and/or payment arrangements had to be approved by the senior

executives of the Company, including the Individual Defendants. Specifically, any

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material changes to the payment terms for sales to clients had to be approved by

Royal and/or Schramm since a change to payment terms would necessarily result

in a modification to the accounting and revenue recognition for such sales.

Notably, these material changes—including extended payment terms and

allowances—were required to be disclosed to the investing public. See § VII(D).

40. As discussed in detail below, however, the Individual Defendants

caused Maxwell to recognize revenue in a manner that was in direct violation of its

stated policies and GAAP, which resulted in significant inflation of the Company’s

financial results, thereby falsifying the Company’s reported financial results and

presenting a misleading picture of the Company’s current business condition and

future prospects. Defendants embarked on this illicit course of conduct in order to

meet the Company’s aggressive growth estimates and business strategy in the face

of mounting competition that in recent years had been slowly eating away at

Maxwell’s market share.

B. ON THE EVE OF THE CLASS PERIOD, MAXWELL COMMITS TO REVAMPING ITS INTERNAL CONTROLS TO RESOLVE DOJ AND SEC BRIBERY ACTIONS

41. Maxwell’s business practices—and in particular the Company’s

deficient internal controls—have been the subject of repeated scrutiny by law

enforcement agencies. For instance, the DOJ and the SEC both investigated and

filed enforcement actions against the Company in relation to anti-bribery, books

and records and internal control violations of the FCPA. From 2002 to May 2009,

Maxwell and its subsidiaries paid over $2.5 million in illicit kickbacks to foreign

officials in order to improperly secure and retain contracts to supply high voltage

capacitors. 10 The improper payments generated nearly $15.4 million in sales

10 See United States v. Maxwell Techs., Inc ., Case No. 3:11-cr-00329-JM (S.D. Cal. Jan. 31, 2011), “Information Title 15, United States Code, Section 78dd-1 – Foreign Corrupt Practices Act Title 15, United States Code, Sections 78m )(2)(A), 78m(b)(5), and 78ff2– Books and Records” (ECF No.. 1).

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contracts—contracts included in Maxwell revenues during the relevant period and

from which Maxwell realized profits of over $5.6 million. 11

42. Specifically, the DOJ filed a criminal information charging the

Company with violating the FCPA’s anti-bribery provisions and violating the

books and records provisions. According to the DOJ’s criminal information,

Maxwell and certain of its executive officers “ willfully and corruptly acted ” in

violation of the FCPA and the Company “ knowingly falsified and caused to be

falsified books, records, and accounts.” 12 Further, Maxwell’s internal controls

failed since, according to the DOJ’s criminal information, following discovery of

the payments by Maxwell senior executives in the U.S., the payments at issue

actually increased from approximately $165,000 in 2002 to nearly $1.1 million in

2008 .

43. The SEC charged that Maxwell violated Section 13(a) of the

Exchange Act and Rules 12b-20, 13a-l, and 13a-13 by failing to disclose in its

annual and periodic filings that the material revenues and profits associated with its

long-standing bribery scheme enabled Maxwell to better financially position itself

until new products could be commercially developed and sold. The SEC’s

complaint alleged that “[t]he illicit payments were made with the knowledge and

tacit approval of certain former Maxwell officers ” and “Maxwell failed to

accurately record these payments on its books and records, and failed to

implement or maintain a system of effective internal accounting controls to

detect or prevent the payments.” 13

11 See Securities and Exchange Commission v. Maxwell Techs., Inc ., Case No. 1:11-cv-00258-BAH (D.D.C. Jan. 31, 2011), Complaint (ECF No. 1). 12 See United States v. Maxwell Techs., Inc ., Case No. 3:11-cr-00329-JM (S.D. Cal. Jan. 31, 2011), “Information Title 15, United States Code, Section 78dd-1 – Foreign Corrupt Practices Act; Title 15, United States Code, Sections 78m(b)(2)(A), 78m(b)(5), and 78ff – Books and Records” (ECF No. 1) (emphasis added). 13 See Securities and Exchange Commission v. Maxwell Techs., Inc ., Case No. 1:11-cv-00258-BAH (D.D.C. Jan. 31, 2011), Complaint (ECF No. 1) (emphasis added).

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44. The SEC specifically charged Maxwell with violating Section 13(b)

of the Exchange Act by failing to maintain adequate internal controls sufficient to

provide reasonable assurances that, among other things, transactions are recorded

to permit preparation of financial statements in conformity with generally

accepted accounting principles .

45. In a press release issued on January 31, 2011 entitled “SEC Charges

Maxwell Technologies for Long-Running Bribery Scheme in China,” Cheryl J.

Scarboro, Chief of the SEC’s Foreign Corrupt Practices Act Unit, declared that

“Maxwell’s bribery allowed the company to obtain revenue and better financially

position itself.” 14 The SEC’s charges were noteworthy as they included

“disclosure violations not often seen in FCPA enforcement actions, based on

allegation that Maxwell’s bribe payments allowed the company to offset losses

and fund product expansions that are now a source of revenue for the

company .” 15 Moreover, the SEC’s Litigation Release No. 21832 noted that

“Maxwell failed to devise and maintain an effective system of internal controls and

improperly recorded the bribes on its books.” 16

46. Less than three months prior to the start of the Class Period, on

January 31, 2011, the Company settled FCPA charges with the DOJ and SEC in

connection with Maxwell’s violations in China. Maxwell, through Defendant

Royal, who was authorized, empowered and directed to act on the Company’s

behalf, entered into a deferred prosecution agreement (“DPA”) with the DOJ and

14 See Securities and Exchange Commission, SEC Charges Maxwell Technologies for Long-Running Bribery Scheme in China (Jan. 31, 2011) available at http://www.sec.gov/news/press/2011/2011-31.htm. 15 See Koehler, Mike, Maxwell Technologies is the First Corporate Enforcement Action of 2011 (Feb. 2, 2011) available at http://www.fcpaprofessor.com/maxwell-technologies-is-the-first-corporate-enforcement-action-of-2011. 16 See Securities and Exchange Commission, SEC Charges Maxwell Technologies Inc. for Bribery Scheme in China—Maxwell to Pay over $6.3 Million in Disgorgement and Interest (Jan. 31, 2011) available at http://www.sec.gov/litigation/litreleases/2011/lr21832.htm.



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agreed to pay an $8 million criminal penalty. In connection therewith, Maxwell

“admit[ted], accept[ed] and acknowledge[d] that it [was] responsible for the acts of

its officers, employees, subsidiaries, and agents as charged in the Information.” 17

According to his LinkedIn profile, Maxwell’s (now former) Director of SEC

Compliance and Reporting, Daniel Reineck “uncovered” and investigated

Maxwell’s FCPA violations and was put in charge of overseeing implementation

of Maxwell’s settlements with the SEC and DOJ, which included internal controls

reforms. During his tenure at Maxwell, Mr. Reineck also was responsible for

managing Mawell’s external auditors, McGladrey, and preparing responses to SEC

comment letters, among other things. According to Confidential Witnesses, Mr.

Reineck also “blew the whistle” on Defendants’ accounting fraud in a multi-page

letter to the Company, which included information confirming that Defendants

Royal and Schramm were well-aware of the accounting misconduct and its

consequences. Reineck served as Maxwell's Director of SEC Reporting and

Compliance from January 2006 to June 2013 and reported directly to Defendant

Royal. Notably, Mr. Reineck left Maxwell in June 2013 - just two months after the

end of the Class Period. Lead Counsel was informed that Mr. Reineck is currently

represented by Maxwell.

47. Under the DPA, Maxwell agreed to the following, among others:

a. Maxwell shall continue to cooperate fully with the Department in any and all matters relating to corrupt payments and related false books and records and internal controls .

b. Maxwell will adopt new or modify existing internal controls, policies, and procedures in order to ensure that Maxwell maintains : (a) a system of internal accounting controls designed to ensure the making and keeping of fair and accurate books, records, and accounts ...

c. Maxwell shall implement procedures to ensure that where misconduct is discovered, reasonable steps are taken to remedy the harm resulting from such misconduct, and to ensure that

17 See United States v. Maxwell Techs., Inc ., Case No. 3:11-cr-00329-JM (S.D. Cal. Jan. 31, 2011), Deferred Prosecution Agreement (ECF No. 2).



appropriate steps are taken to prevent further similar misconduct, including assessing internal controls, ethics, and compliance program and making modifications necessary to ensure the program is effective .

48. Under the terms of the February 8, 2011 Final Judgment as to

Maxwell Technologies, Inc. (the “Final Judgment”), 18 Maxwell was ordered to pay

$5,654,576 in disgorgement and $696,314 in prejudgment interest, for a total of

$6,350,890. Given the nature of Maxwell’s corporate culture that allowed the

misconduct to occur, the Company also agreed to implement enhancements to its

compliance program and internal controls , to report periodically to the agencies

regarding its compliance efforts and to cooperate with the agencies’ ongoing

investigations. Specifically, the Final Judgment mandated that Maxwell and its

officers and employees were “permanently restrained and enjoined from violating,

directly or indirectly, Section 13(b)(2)(B) of the Exchange Act, 15 U.S.C. §

78m(b)(2)(B), by failing to devise and maintain a system of internal accounting

controls sufficient to provide reasonable assurances that: ”

(i) transactions are executed in accordance with management’s general or specific authorization;

(ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles or any other criteria applicable to such statements, and to maintain accountability for assets;

(iii) access to assets is permitted only in accordance with management’s general or specific authorization ; and

(iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences.

49. In addition to Maxwell’s significant internal control deficiencies

implicated in the FCPA charges and the resulting settlements, Maxwell was also

involved in a derivative action that was settled during the Class Period.

18 See Securities and Exchange Commission v. Maxwell Techs., Inc ., Case No. 1:11-cv-00258-BAH (D.D.C. Feb. 8, 2011), “Final Judgment as to Defendant Maxwell Technologies, Inc.” (ECF No. 3).

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Specifically, on February 16, 2012, Maxwell disclosed that in the fourth quarter of

2011, the Company and its Board of Directors had agreed to settle a shareholder

derivative action alleging breaches of fiduciary duty and other violations. In the

settlement, the defendants agreed to pay $3 million to the plaintiffs’ counsel—$2.7

million of which was paid by Maxwell’s insurer and $290,000 was paid by the

Company itself—and Maxwell agreed to adopt “ significant corporate governance

reforms designed to enhance and improve its internal controls and systems.” 19

50. Accordingly, Maxwell has an established history of significant legal

offenses and internal control failures occurring both immediately prior to and

during the Class Period. Indeed, these failures were often aimed at increasing the

Company’s revenue and overall financial results—conduct that continued

unabated, although in a different form, throughout the Class Period through

Defendants’ revenue recognition fraud. For the Company to continue experiencing

internal control deficiencies despite this repeated pattern of transgressions is highly

indicative of intentional misbehavior or, at the very least, deliberate recklessness

on the part of Defendant Maxwell and the Individual Defendants.

C. PRELUDE TO A FRAUD—MAXWELL ’ S DECLINING FINANCIAL FORTUNES SPUR DEFENDANTS TO ACCELERATE REVENUES

1. Leading Up To The Class Period, Maxwell Faced Increased Competition Amidst Lackluster Financial Results

51. In the years leading up to the Class Period, Maxwell faced a growing

number of competitors that significantly eroded the Company’s market share.

According to an IDTechEx article published on April 15, 2013, in the aftermath of

the revelation of Maxwell’s accounting fraud, the number of developers and

manufactures of supercapacitors had “doubled from 40 to 80 in the last few years,”

and since “all [of these competitors] are taking some business,” Maxwell was

19 See Louis Loizides v. Schramm et al ., Case No. 37-2010-00097953-CU-BT-CTL (Cal. Super. Ct. Feb. 14, 2012).



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“losing market share” and the “largest orders for supercapacitors [were] no longer

being landed by Maxwell.” The article provided in pertinent part as follows:

Maxwell Technologies, which has been the leader in supercapacitors worldwide, has been overstating its results by improperly recording certain sales through distributors.

* * *

The number of developers and manufacturers of supercapacitors, also called ultracapacitors, is rising very rapidly, having doubled from 40 to 80 in the last few years. All are taking some business, so Maxwell is losing market share . . . Many of those in these various technologies are likely to gain market share because they have improved safety and often improved performance in certain aspects as well .

* * * The largest orders for supercapacitors are no longer being landed by Maxwell Technologies . For example, there has never been anything like the Meidensha/Sojitz $318 million (¥25bn) contract to supply two 2 MW Meidensha CapapostTM regenerated energy storage units for Hong Kong’s South Island Line metro project . . . Compare that with Maxwell Technologies’ faltering gross sales value in supercapacitors of the order of $100 million .

52. Accordingly, leading up to the start of the Class Period, Maxwell was

losing market share position due to mounting pressure from its competitors and

lackluster financial performance. For instance, between 2007 and 2009, the

Company reported significant net losses of over $15 million, $14 million and $22

million, respectively, and Maxwell’s profit margin was mired in the range between

25% and 35%. Defendants were thus faced with a challenging operational climate

within which to stave off increased external competition. To that end, Defendants

resorted to accelerating revenue recognition in violation of GAAP and Maxwell’s

own accounting policy in order to bolster Maxwell’s financial results and maintain

an upwards trajectory for the Company’s business prospects.

2. Defendants Were Aware Of An Impending Downturn In Maxwell’s Chinese Operations

53. Near the beginning of the Class Period in 2011, Maxwell engaged a

consulting firm to assess business conditions and the direction of government



policy in China, which represented a significant market for the Company’s

operations. Over the course of the first half of the Class Period up until the first

partial disclosure of Defendants’ fraud in April 2012, the Individual Defendants

downplayed any concerns that they or the market had regarding the Chinese

market. For instance, during an earnings conference call held on April 28, 2011, to

discuss Maxwell’s first quarter 2011 financial results—and after touting the

Company’s revenue growth, profits and the resolution of the FCPA charges—

Defendant Schramm provided the following regarding the outlook for the

Company’s Chinese sales:

A significant portion of wind-related sales continue to go into China, some directly to Chinese wind turbine OEMs and some through European pitch system integrators serving the customers in China. China’s voracious appetite for electrical energy and concerns about urban air quality and green house gas emissions from coal fired power plants have been driving rapid expansion of wind generation capacity there and the recently released five-year plan indicates that growth will continue.

Although we’ve heard of concerns about a global slowdown in deployment of wind energy systems , we’ve added new customers during the past couple of years and that increased market share has driven significant sales gains for Maxwell ultracaps.

54. During the question and answer session of the conference call, a Stifel

Nicholas analyst asked Defendant Schramm specifically about the outlook for the

China market, with Schramm representing that Maxwell had not seen any

I weaknesses in the wind market:

<Q - Dilip Warrier>: Okay. And then one last question just related to the Chinese wind market. So if I heard it right, the slowdown in Chinese wind is already kind of baked into your guidance here , given it sounds like you’ve made enough of sort of customer acquisition for penetrating new customers that you can offset any relative weakness in China?

<A - David J. Schramm>: We haven’t seen any weakness in the Chinese wind market. Again, we have picked up several new customers, so our total volume for wind, we see that growing, not slowing down at all this year.

55. Similarly, during a conference call held on July 28, 2011 to discuss

Maxwell’s financial results for the second quarter of 2011, Defendant Schramm

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again spoke positively regarding the outlook for the wind market in China despite

hearing “rumblings of slower growth”:

A significant portion of Maxwell sales into wind energy over the past couple of years have gone into China, where renewable energy has been a focus of government policy and funding, although we continue to hear rumblings of slower growth. There, as the government adjusts its wind energy subsidy programs, we’ve been able to keep growing by attracting new customers to gain more market share.

To augment what we’re hearing from customers, we’ve engaged a consultant on the ground in China to analyze wind and other market opportunities and to assess the direction of government policies. On the basis of that intelligence, we believe that China’s ever-growing appetite for electrical energy and concerns about urban air pollution and greenhouse gas emissions from coal-fired power plants bodes well for further expansion of wind energy capacity there.

56. During Maxwell’s November 3, 2011 earnings conference call to

discuss the Company’s financial results for the third quarter of 2011, Defendant

Schramm stated that, despite seeing slower sales in the region, Maxwell’s

consultant reinforced the Company’s belief that there will be significant expansion

in the market:

A significant portion of Maxwell’s wind energy-related sales over the past couple of years have gone into China, where renewable energy has been a focus of government policy and funding.

While we are seeing slower sales there, due in part to government’s implementation of a more orderly permitting and citing process, wind order flow continues. Many of you have asked about Maxwell’s exposure to China’s economy. Well to better understand the situation there, we engaged a major global consulting firm with a significant presence in China to analyze the wind, the bus and several other market opportunities and assess the direction of government policies. The consultant’s report based on dozens of interviews with industry and government sources reinforces our belief that China’s ever growing appetite for electrical energy along with concerns about urban air pollution and greenhouse gas emissions from coal-fired power plants will drive significant expansion of wind energy capacity there.

Our contacts with wind customers at the recent wind energy trade show in Beijing indicate that wind projects likely will return to a more normal growth pace by mid-2012.

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57. During Maxwell’s February 16, 2012 earnings conference call to

discuss the Company’s positive financial results for the fourth quarter and full year

2011, as well as the Company’s Offering, Defendant Schramm stated for the first

time that the consulting firm Maxwell had engaged in China the previous year had

actually predicted a lull in sales. However, Schramm downplayed any prolonged

deterioration in the Company’s financial results, and emphasized Defendants’

expectations that the geographical operational activity would return to normal:

Looking ahead, we have received intelligence from various sources in China, including indications from several of our customers that wind farm installations, both on and offshore, can be expected to return to a more normal level within the next couple of quarters.

The current lull was predicted last year by the consulting firm we engaged to assess business conditions and the direction of government policy in China, particularly as they relate to the wind and the bus markets . What we are hearing now is that issues relating to wind farm siting and permitting abuses have been addressed . And technical fixes mandated to solve low-voltage ride-through problems have been implemented, clearing the way for a return to more normal activity.

58. Notably, despite being afforded with this information for several

quarters, Defendants chose not to downwardly adjust the Company’s guidance and

instead reassured investors that the downturn would have a minimal impact on

Maxwell’s business. Defendant Schramm’s assurances in this regard are telling

since just 30 minutes after Maxwell issued its fourth quarter and full year 2011

earnings press release on February 16, 2012, the Company issued a separate press

release announcing that it had entered into the sales agreement for the Offering

pursuant to which Maxwell could sell up to $30 million of its common stock. The

Company stated that it intended to use proceeds from the Offering to satisfy

working capital needs and fund the ongoing growth of the Company. Given that

Maxwell intended to sell shares in the very near future, the Individual Defendants

were incentivized to maintain a positive portrayal of the Company as it was

important for the Company to keep its stock price as high as possible, to show it

was profitable for the full year and to beat analyst estimates. These results were



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also important as it was the final quarter of results that would be used to determine

if management met certain incentive bonus targets, as discussed below.

59. Accordingly, the consulting firm had predicted to Defendants near the

start of the Class Period that the Company’s business in China, particularly in the

wind and bus markets, would experience a significant lull. In preparation for the

likely impending downturn in this important market, Defendants were incentivized

to compensate for this downturn by artificially bolstering Maxwell’s financials

through ulterior means, thus maintaining their portrayal of the Company as a

“growth stock” and enabling the Individual Defendants to tout Maxwell’s

purported streak of profitability that was artificially inflated by bogus financial

results.

60. Indeed, the need to do so was particularly acute given that, as

discussed above, the DOJ and SEC investigations and subsequent settlement of

Maxwell’s FCPA violations ostensibly foreclosed the Company’s prior illicit

tactics for obtaining business in China. Given this changing landscape in

Maxwell’s operational base, as well as the pressure placed on Defendants to

maintain the Company’s growth trajectory, the Individual Defendants thus had

motive to resort to the accounting misconduct that led to the restatement.

3. Defendants Were Personally Incentivized To Pad Maxwell’s Financial Results

61. For the Individual Defendants, an additional incentive existed for

them to cut corners in order to improve Maxwell’s financial results. Specifically,

the Individual Defendants were incentivized to bolster Maxwell’s sales and

revenue figures since their compensation was performance-based and varied

significantly depending on the metrics that the Company achieved. For this

reason, the Individual Defendants’ yearly performance-based compensation criteria

rarely remained constant and was often manipulated in order to ensure the

attainability of hefty payouts. Tellingly, despite years of significant losses and



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financial shortcomings, the Individual Defendants were able to consistently meet

the ever-changing criteria that rarely aligned with the Company’s actual stock price

performance.

62. Prior to the Class Period, Maxwell’s 2008 annual incentive bonus

program was based on undisclosed financial and operating targets which could be

adjusted as the Compensation Committee deemed appropriate. For 2008, the

Company purportedly achieved its operating plan by simply reducing its loss from

operations by almost $5 million over the prior year from a $16.1 million operating

loss in 2007 to a $12.2 million operating loss in 2008. For this “achievement,” the

Compensation Committee approved a bonus pool of approximately $1.1 million.

63. For 2009, Maxwell’s incentive bonus program consisted of three

components: (1) 50% related to positive income operations; 20 (2) 30% related to

the achievement of $1 million of cash flow from operating activities from April 1,

2009 through December 31, 2009; and (3) 20% related to expected operating

results. Maxwell did not have positive income from operations, but the cash flow

and expected operating result targets were achieved and therefore 50% of the 2009

incentive bonus program was approved.

64. For 2010, one of the components determining executive bonuses

changed, the percentages for these components were altered slightly, and financial

targets were more clearly defined. The incentive bonus program consisted of: (1)

50% related to the achievement of operating income of $2.3 million; (2) 25%

related to the achievement of cash flows from operations of $8.3 million; and (3)

25% related to the achievement of earnings before interest, taxes, depreciation and

amortization (“EBITDA”) of $8.6 million. Tellingly, in determining whether

metrics were satisfied, the Compensation Committee excluded certain “unusual

20 This metric excluded stock based compensation, legal and professional services related to the Company’s investigation of FCPA violations and executive severance.



and non-cash items from actual results.” After applying the aforementioned

“adjustments,” the Compensation Committee determined that operating income

was $3.1 million, cash flow from operations was $8.7 million and EBITDA was

$9.7 million, resulting in the apparent overachievement of each target component

and bonuses corresponding to these figures. As to actual results prior to

adjustments, operating income (50% of the bonus pool metric) was actually a loss

of $6.5 million in 2010.

65. For 2011, Maxwell’s executive compensation formula was

manipulated once again to ensure that the Individual Defendants received

additional payments. In fact, had the Company’s 2010 financial targets simply

been maintained, Maxwell would have missed on all but one of these metrics

accounting for only 25% of stated goals. For instance, prior to the restatement,

Maxwell reported operating income of $1.8 million for 2011, over 20% below the

prior year’s target of $2.3 million. Cash flows from operations were a negative

$5.1 million, well below the prior year’s target of $8.3 million.

66. Accordingly, at the start of the Class Period 21 during fiscal year 2011,

the target metrics for performance-based compensation were dramatically

revamped, with net income still notably lacking as a component since the

Company had not actually made money in years. The three brand new metrics

were: (1) 50% related to the achievement of revenue of $157.6 million; (2) 25%

related to the achievement of “non-GAAP gross profit” of $64.9 million; and (3)

25% related to the achievement of “non-GAAP operating income” of $12.1

million. Adding yet another executive-friendly change in performance criteria,

Maxwell decided to use non-GAAP measures for two of these metrics. The

21 Notably, only two months prior to the start of the Class Period, the Individual Defendants received raises to their salary. Defendant Schramm’s salary increased from $485,000 to $495,000 for a change of 2.1%. Schramm’s salary is above the 50th percentile of his peer group. Defendant Royal’s salary increased 3.7%, from $300,000 to $311,100. Additionally, Defendant Andrews’ salary also increased 5%, from $240,000 to $252,000.

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Company defined the non-GAAP measures as excluding stock-based

compensation expense, the impact of significant legal settlements and the impact

of significant legal expenses related to legal matters that were not present or known

when the targets were set. Furthermore, the performance-based compensation was

determined according to a sliding scale, from 0 to 150% of target if the actual

results achieved were higher or lower than the target.

67. Based on this revamped criteria, Maxwell executives were able to

obtain performance-based payouts in 2011. The Company reported $157.3 million

in revenue (still slightly below the actual target of $157.6 million) and, after

adjustments, non-GAAP gross profit of $62.0 million (still below the target of

$64.9 million) and non-GAAP operating income of $9.7 million (well below the

target of $12.1 million). Notably, without the extra $10.1 million in revenue and

$5.0 million in gross profit inappropriately recorded in 2011 (and ultimately

restated), Maxwell earned $147.2 million in revenue and $57 million in gross

profit, both well below the Company’s performance targets:

N Non-GAAP on-GAAP 2011 Bonus Targets Revenue Operating Gross Profit

Income Target Weighting 50% 25% 25% As Reported $157.3 mm $62.0 mm $9.7 mm Target $157.6 mm $64.9 mm $12.1 mm As Restated $147.2 mm $57.1 mm n/a Percentage attributed: 100% 70% 0%

68. Despite the slight revenue miss, 100% of the revenue bonus was paid

as a result of the sliding scale and 70% of the non-GAAP gross profit bonus was

paid. For 2011 performance-based compensation, Defendant Schramm received

$336,600, Royal received $105,800 and Andrews received $85,700. For 2011 cash

bonuses and awards of restricted shares, Schramm received $63,400 and 34,265

shares; Royal received $30,000 and 14,233 shares; and Andrews received $30,000

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and 10,121 shares. Had Maxwell reported financial results that were not

artificially inflated by Defendants’ revenue recognition fraud, little to no bonus

would have likely been paid out to the Individual Defendants.

69. The Individual Defendants’ greed did not stop there. Despite failing

to meet performance targets on inflated numbers and nevertheless awarding

bonuses based on a self-serving sliding scale, the Individual Defendants were

shockingly awarded additional discretionary bonuses “to recognize their

outstanding individual contributions to the Company’s 2011 operational and

strategic process”—contributions that were, again, based on illegally-recognized

revenue and misstated financials, and which were not returned despite the fact that

the restatement stripped away the majority of the financial results upon which this

compensation was based.

70. In addition to the Individual Defendants’ personal benefits derived

from Maxwell’s accounting misconduct, these Defendants also were motivated to

inflate financials in order to effectuate the Offering during the Class Period.

Specifically, in February 2012, the Company entered into an At-the-Market Equity

Offering Sales Agreement with Citadel Securities LLC (“Citadel”) pursuant to

which the Company may sell, at its option, up to an aggregate of $30.0 million in

shares of common stock through Citadel, as sales agent. 22 Tellingly, and as

discussed above, Maxwell announced this Offering on the same afternoon as it

reported inflated financial results for the fourth quarter and full year 2011—results

that, but for Defendants’ accounting manipulations, would have missed the

Company’s earnings guidance and consensus estimates for the reporting period.

71. In fact, Maxwell’s originally-reported amounts allowed the Company

to meet and/or beat its earnings estimates. Specifically, for the fourth quarter fiscal

22 During the quarter ended March 31, 2012, the Company sold 572,510 shares of common stock under this Offering Sales Agreement for net proceeds to the Company of $10.3 million.

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2011, the accounting manipulations allowed Maxwell to report a profit of $0.06,

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beating analyst estimates of $0.04. The Company also reported full year earnings

3 of $0.03, beating consensus estimates for full year GAAP earnings per share

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(“EPS”) of $0.012 and showing a profit after years of hefty losses.

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72. The Company’s inflated financial results were praised by analysts.

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For instance, Wedbush issued an analyst report on February 17, 2012 stating

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“Strong 4Q11 EPS,” . . . “Maxwell reported 4Q11 EPS above expectations” . . .

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“4Q11 was $0.06, well above our and the consensus $0.04 estimate.” Similarly,

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Stephens also issued an analyst report on February 17, 2012, stating “4Q11 Results

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In-Line” . . . “Maxwell reported 4Q11 sales/EPS of $42.5 mil./$0.06, in line with

11 our/consensus estimates of $42 mil./$0.03 and $43 mil./$0.04, respectively.”

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Stephens increased its full year 2012 GAAP EPS estimate to $0.53 from $0.51,

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“incorporating management guidance” and raised its price target on Maxwell to

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$24 from $23.

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73. As investors later learned, however, Maxwell’s fourth quarter 2011

16 earnings were materially inflated by Defendants’ fraudulent accounting

17 manipulations. Specifically, the Company’s fourth quarter 2011 earnings were

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inflated and were ultimately restated lower by $0.04; full-year 2011 earnings were

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likewise inflated and were eventually restated lower by $0.08 cents. Without these

20 purposefully manipulated numbers, Maxwell would have reported fourth quarter

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2011 earnings of $0.02 missing consensus analyst estimates of $0.04 and would

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have reported a loss of $0.05 for the full year 2011 instead of a profit of $0.03, as

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depicted in the table and chart below:

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4Q11

2011 Year

Reported

$0.06

$0.03

Estimate

$0.04

$0.01

Restated

$0.02

($0.05)

4Q11

2011 Year $0.08

$000

$0.04

$0.02

$0.00

($002)

($004)

($006)

As Reported - As Restated - Analysts Estimate

74. Accordingly, the Company sold shares in the Offering at market

prices that were artificially inflated by Defendants’ revenue recognition fraud.

Defendants’ fraud included improper accounting for transactions that admittedly

took place right at the very end of the fourth quarter 2011 and at fiscal year-end,

providing in the last days of those critical periods revenues which allowed the

Company to meet analyst expectations and also allowed management to meet

incentive bonus thresholds. Moreover, the timing of the Company’s sales was

even more fortuitous since, as discussed below, on April 26, 2012—a only two

months after effectuating these sales—Maxwell reported disappointing earnings

that caused its stock price to plummet approximately 40%. Notably, the Company

did not sell any shares under this program in subsequent periods during the Class

Period.



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75. In this manner, the Individual Defendants demonstrated a willingness

to manipulate Maxwell’s operations to benefit themselves and the Company

financially—a desire that manifested itself again in the revenue recognition fraud

that led directly to the Company’s restatement.

4. Defendants Schramm And Royal Conspire With Andrews To Falsify Maxwell’s Financial Results

76. Against this backdrop of increasing competition and declining

financial results, Schramm recruited Andrews to the Company in early 2010, and

eventually promoted him to the position of Senior Vice President of Sales and

Marketing by October 2010. As Senior Vice President of Sales and Marketing,

Andrews was third in line at Maxwell, reported directly to Schramm and Royal,

and was an Officer of the Company. As several former Maxwell employees stated,

once Andrews’ tenure began, Maxwell’s culture shifted dramatically, becoming

more secretive and isolationist.

77. For instance, CW 1,23 who was a former Maxwell Vice President of

Business Development and had been one of the senior executives in charge of sales

and marketing prior to Andrews’ tenure at Maxwell, reported that “things

definitely changed” once Andrews was on the scene at the Company. CW 1 stated

that during Andrews’ tenure, she 24 was “taken completely out of the loop” on many

of the matters at issue in the restatement.

23 CW 1 served as Maxwell’s Vice President of Business Development from January 2006 through March 2013. At the beginning of CW 1’s tenure at Maxwell, CW 1 was responsible for sales and marketing at the Company and reported directly to Defendant Schramm. In 2010, after Schramm brought in Andrews as Senior Vice President, Sales and Marketing, CW 1 reported directly to Andrews and Schramm. CW 1 was one of the employees terminated for purportedly having a role in the events giving rise to Maxwell’s restatement. 24 In order to maintain the confidentiality of the witnesses quoted herein, all of the confidential witnesses are referenced in the feminine.



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78. Similarly, CW 2, a former Maxwell Sales Operations Manager, 25

confirms this change in the Company’s corporate dynamic upon the

commencement of Andrews’ tenure. CW 2 stated that she was “not surprised” by

the Company’s need to restate based on improper revenue recognition since, upon

Andrews taking over, Maxwell’s environment changed to a much more secretive

and restricted environment that differed from the more open and participatory

climate that existed beforehand. In fact, CW 2 characterized the sales operations

of the Company as going “downhill” upon Andrews’ arrival. CW 2 stated that she

had not trusted Andrews and had considered him “a typical sales” person as, in her

experience, sales people always “pushed to get stuff done” at the end of quarters.

In that regard, she reiterated that there “was a lot of secrecy” in upper management

and she remarked that a profound gap existed between the Company’s executives

and subordinate personnel.

79. Not coincidentally, following Andrews’ hiring, Maxwell’s fortunes

nearly immediately changed for the better. Beginning in 2010, the Company

substantially increased its financial results, reducing its loss significantly to post

net income of $8.5 million in the first nine months of 2012 while improving its

profit margins all the way to 42%—a far cry from Maxwell’s dismal financial

performance leading up to the Andrews hire:

25 CW 2 served as Maxwell’s Sales Operations Manager between February 2008 and May 2011. During CW 2’s tenure at the Company, CW 2 was responsible for sales reporting and managing client contracts. These responsibilities included the preparation of sales reports that were primarily used for weekly sales meetings at which CW 2 directly participated. These reports included information such as outstanding sales, received orders, unfulfilled sales and invoiced orders. The data was further broken down into various categories and locations. CW 2 provided these reports directly to Andrews.



Total revenue

Net income (loss)

Net income (loss) per share

Gross Profit Margin

Select Financial Data Pre-Restatement

9 MONTHS YEARS ENDED DECEMBER 31,

2012 2011 2010 2009 2008

(! n thousands, except per share data)

$123,993 $157311 $121,882 $101,315 $80439

$8,565 $849 $6,056) $(22,912) $(14,808)

$0.30 $0.03 $(0.23) $(094) $(O.71)

42% 39% 38% 35% 31%

2007

$56,708

5,733)

$(O.86)

25%

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80. The reason for this dramatic improvement in Maxwell’s financial

results? As the Company has now revealed, during the Class Period, Defendants

secretly inflated Maxwell’s financial results by extending altered payment terms to

certain of the Company’s distributors, shipping product at the end of quarterly

reporting periods that were not ordered, and reporting revenue on these “sales” in

violation of GAAP and Maxwell’s accounting policy. The Individual Defendants

personally authorized and directed the modified payment terms and caused

Maxwell to recognize these “sales” as revenue even though there was no

reasonable assurance of collectability.

D. DEFENDANTS SECRETLY INFLATE THE COMPANY ’ S FINANCIAL RESULTS

1. Defendants Stuff Maxwell’s Distribution Channel At Quarters-End And Extend Payment Terms To Placate Distributors

81. Given Maxwell’s difficult financial environment leading up to the

start of the Class Period, the Individual Defendants were becoming increasingly

desperate to meet financial expectations, fostering a culture within the Company

that placed an unhealthy emphasis on meeting quarterly numbers over reporting

honest and accurate financial results. This desperation was so profound that it led

the Individual Defendants to authorize clandestine payment term modifications in

order to persuade distributors to accept Maxwell product that they did not want or



1 need but which allowed Maxwell to recognize revenue sufficient to meet Wall

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Street expectations, thereby materially inflating Maxwell’s financial results.

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82. Indeed, the impetus behind Defendants’ fraud was straightforward: in

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light of burgeoning competition that was squeezing Maxwell’s profit margin and

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decreasing the Company’s earnings and growth estimates, Maxwell needed to hit

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its financial targets no matter what. To that end, towards the end of the quarterly

7 reporting periods during the Class Period, Maxwell would recognize revenue

8 sufficient to meet these targets by sending shipments to clients that either were not

9 ordered or were only accepted due to extended payment plan inducements. In turn,

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the Individual Defendants recognized revenue on these shipments even though

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doing so was patently in violation of Company policy and GAAP.

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83. These violations were well-known to the Individual Defendants

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because one of their methods of ensuring that Maxwell met its estimates was to

14 secretly modify certain Maxwell’s standard payment terms, extending the time for

15 payment beyond the mandatory 30 days to 60, 90, 120 or more days, as well as

16 providing for undisclosed rights of return and “profit margin protection.” With

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these modified terms, Maxwell was not allowed to recognize this revenue under

18

GAAP because there was no reasonable assurance of collectability on these sales at

19

the time of the revenue recognition.

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84. In order to effectuate their fraudulent revenue recognition scheme, the

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Individual Defendants would also inflate Maxwell’s sales figures by forcing sales

22 and shipments through its distribution channels that were not ordered by the end-

23 user client. In this regard, the Company used a distributor as an intermediary

24 where Maxwell sends a shipment to the distributor and informs the distributor that

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it does not need to pay until the end-user accepts and pays for the item. In

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Maxwell’s case, however, the Individual Defendants knew that the shipment was

27 not going to be accepted by the end-user and Maxwell was not going to receive

28 payment for the sale. Nevertheless, Defendants caused the Company to book the



transaction as revenue, particularly during quarter-end periods when the Individual

Defendants were well aware of the financial result requirements necessary to meet

estimates. As the Class Period progressed, this quarter-end chicanery caused a

marked build-up in accounts receivables that was repeatedly questioned by

analysts and downplayed by the Individual Defendants.

85. For instance, on April 28, 2011, when Maxwell reported financial

results for the first quarter of 2011, Royal noted that the “ significant increase in

accounts receivable is due to the shipment linearity in the first quarter of 2011,”

which meant accounts receivable increased dramatically because shipments

occurred at the very end of the quarter. Indeed, after the Company announced the

restatement, Maxwell admitted that “there were a number of quarter end revenue

cut-off errors wherein revenue was recorded prior to the transfer of title to the

customer and the satisfaction of our obligation to deliver the products.” 26

86. Similarly, on July 28, 2011, in connection with Maxwell’s reporting

of financial results for the second quarter of 2011, the Company reported that its

accounts receivable had increased substantially yet again. Maxwell reported

accounts receivable of $35.8 million for the second quarter of 2011, an increase of

$8.7 million or 32% from the same quarter a year earlier. While discussing the

financial results, Royal stated that: “[T]he increase in accounts receivable is due to

sales growth and shipment linearity in the second quarter of 2011 with 57% of

shipments falling in the final month of the quarter .”

87. During the question and answer session of the earnings conference

call on this same date, a Stephens analyst questioned Defendants Schramm and

Royal regarding the disconcerting increase in accounts receivables that was the

result of sending out shipments right at quarter-end:

<Q - Zach Larkin MBA>: Wonderful. And then just one final question, if I may. It looks like last quarter we saw a tick up in

26 See 2012 Form 10-K at p. 31 (filed August 1, 2013).

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accounts receivable due to shipments that came through right at the end of the quarter. We’ve seen that again this quarter. Is that just normal – just kind of normal quarterly seasonality, if I can use that phrase that we should expect to kind of see a lot of orders come back-end loaded toward the end or is that something maybe unique in these last two quarters?

<A - Kevin S. Royal> : Well, if you look back over the last six quarters, what you would see is that these last two quarters have been significantly more back-end loaded than the previous quarters. I would be cautiously optimistic that where we’ll see this quarter is a slight improvement and into Q4 as well. But we’re not planning on a significant improvement in the linearity. And if you take a look at the receivables, in large part the growth that we had in Q2 is directly related to the growth in revenue. So we didn’t have deterioration of DSOs. We just had about the same level of back-end loaded shipments during the quarter. And then the increase in the revenue is throughout the receivable balances within the Q2.

88. Forbes contributor, Tom Konrad (“Konrad”), specifically recalled Jan

Schalkwijk, manager of a green stock focused hedge fund along with Konrad,

noting the “rapid growth of Maxwell’s account receivable.” Between Q3 2011 and

Q3 2012, Maxwell’s net accounts receivable grew by $21 million to $53 million.

The accounts receivable caused hesitation on their part for possible inclusion in

their fund. As such, upon learning of the rapid accounts receivable growth,

Konrad emailed Defendant Schramm inquiring as to the cause:

When Jan brought this to my attention, I asked Maxwell’s CEO, David Schramm about it by email. He replied:

I would say there are two factors for the increase in accounts receivable. First, our sales have been increasing and that naturally drives the receivables balances higher. The second reason is that a number of customers have been paying slowly. While it is not unusual to have one customer pay slowly, it is not normal for us to have more than one customer pay late. In our current case, there are three customers who are paying slower than normal. We have evaluated these customers and their ability to pay and believe the accounts are fully collectible.”

89. The Individual Defendants were thus well aware from the start of the

Class Period that, beginning with the first quarter of 2011 (the very first quarter of

the restatement period), Maxwell was booking a large amount of its revenue right

before the end of the quarter; that as a result, the Company’s accounts receivable

was also dramatically increasing; and that this increase in back-ended revenue



bookings was admittedly unusual in that it was out of line with how revenue was

recognized in previous quarters and had nearly tripled over three years, as shown

in the chart below:

Maxwell's Accounts Receivable $60000 $50,000 $40000 $30,000 $20,000 $10,000

$3 1009 2009 3009 4009 1010 2010 3010 4010 1011 2011 3011 4011 1012 2012 3012

- Accounts Receivable

90. The Individual Defendants would go to great lengths to ensure their

ability to continue using distributors to inflate their sales figures and meet

estimates. After stuffing the Company’s distribution channels, these distributors

would invariably fall behind on their payments for these purportedly legitimate

orders. Customers would be placed on credit hold for failing to timely pay what

they owed to Maxwell and no further shipments could be sent to these customers

unless they paid the amounts outstanding or the holds were lifted by the Company.

The only employees with the authority to lift the credit holds at Maxwell were

Schramm and Royal themselves. In this manner, the Individual Defendants

orchestrated a wide-ranging fraud to pad Maxwell’s financial results and to cover

their tracks to ensure that the fraudulent misconduct could continue.

2. The Mechanics OfMaxwell’s Accounting Fraud: “A Scramble” To “Get The Product Out” Before Quarters-End

91. Former high-ranking Maxwell executives—many of whom were

eyewitnesses to the Individual Defendants’ misconduct—confirm that the

Individual Defendants authorized and directed the fraudulent accounting scheme.

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For instance, CW 1, Maxwell’s former Vice President of Business Development,

2 stated that she was directly involved in a transaction involving a shipment of the

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Company’s product that was not going to be accepted by the end-user. However,

4 according to CW 1, Defendant Andrews ordered her to speak with Maxwell’s

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German distributor, Alfatec, and to instead have the shipment delivered to Alfatec.

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In recalling these events, CW 1 stated that the position of the distributor was

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“clear”: Alfatec knew that Maxwell wanted it to take the product and store it at

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Alfatec’s facility, but that Alfatec would not pay for the product at that time. CW

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1 stated that she recalled the value of this particular transaction was in the

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hundreds of thousands of dollars.

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92. CW 1 confirmed that this secret change in shipment terms for the

12

transaction was ordered at the direction of Andrews and Schramm. In fact,

13 according to CW 1, she directly questioned Andrews whether it was appropriate to

14 change the terms of the shipment in this manner, and Andrews told CW 1 that the

15 change would be “OK’d by David [Schramm] and don’t worry about it.” CW 1

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further stated that the deal was “countersigned” by Andrews. CW 1 clarified that a

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few months after this particular incident, the Alfatec issues “suddenly” became the

18 subject of the Company’s internal investigation. CW 1 stated that the result of the

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investigation was that she and other individuals were terminated for their

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involvement in the Alfatec transactions, with CW 1 coming to the office and being

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“walked out the door.”

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93. CW 2, Maxwell’s former Sales Operations Manager, provided a

23 similar account. CW 2 stated that she prepared sales reports that were used in

24 weekly sales meetings in which she participated prior to Defendant Andrews’

25 arrival at the Company. When Andrews joined the Company, however, he

26 excluded CW 2 from the meetings, but CW 2 was still required to send these sales

27 reports to Andrews for his use in the meetings. CW 2 stated that she was “sure at

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the time” of her tenure that there were orders that were being reported as “booked”



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when this might not have been the case. CW 2 stated that these incidents occurred

particularly at the end of quarters. CW 2 further stated that any issues or

discrepancies regarding the terms of a transaction were addressed by Andrews, and

that lower level employees were often frustrated by discrepancies that needed

approval from the sales side.

94. Other former Maxwell employees corroborate the accounts of CWs 1

and 2 and confirm that the Individual Defendants were directly responsible for the

fraud at Maxwell. For instance, CW 3,27 a former Maxwell Senior Sales

Operations Administrator, recalled that Alfatec was a problem distributor account.

CW 3 stated that it was “always a scramble” at the very end of quarters to process

Alfatec orders and to put the products “on a boat” so that those orders could be

counted before a reporting period ended. In fact, CW 3 recalled instances

involving orders for distributors in other regions, including Asia and the Americas,

in which these sales would frequently be processed at the very end of a quarter so

that the shipments could “get off the dock” so that the sales could be counted in the

current quarter, regardless of whether payment was reasonably likely to occur.

CW 3 understood that this was being done so that these orders could be booked as

revenue in the quarter about to end, and that, based on her experience at other

companies, this practice was definitely “not within the norms.” CW 3 recalled that

this occurred in several quarters during her tenure.

95. This focus on meeting numbers permeated Maxwell’s operations. For

instance, CW 3 stated that the Individual Defendants received periodic “flash

27 CW 3 served as Maxwell’s Senior Sales Operations Administrator from September 2011 through June 2012. During her tenure, CW 3 was responsible for entering and processing orders in Maxwell’s internal order management system called “IFS,” which she characterized as “terrible” and “very archaic.” CW 3 was also responsible for overseeing the implementation of a customer relationship management system. CW 3 participated in weekly Accounts Receivable meetings where various members of finance and accounting were present, including Tara Whiteside (“Whiteside”). CW 3 reported directly to Whiteside, Maxwell’s Business Planning & Sales Operations Manager, as well as Andrews during her tenure.



1 reports” that set forth the sales that were expected to be achieved in a given period.

2

According to CW 3, these flash reports were “always inflated” because of the

3 overall sales quota that was expected to be fulfilled and reflected more orders than

4 were actually in the pipeline for that period. By inflating the orders in the flash

5 reports, CW 3 stated that there was always a mad dash to actually “make the

6 numbers” for the quarter, leading CW 3 to state that “the integrity of the orders

7 came into question.”

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96. In addition to Alfatec, CW 3 recalled a similar situation involving

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Pana-Pacific, a Maxwell distributor that was the Company’s largest North

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American customer and the only distributor in North America to buy in bulk from

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Maxwell, primarily Engine Start Motors. In fact, according to CW 3, Pana-Pacific

12 was responsible for the majority of revenue the Company derived from the North

13

American region. CW 3 stated that she had entered the original terms for orders

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from Pana-Pacific into Maxwell’s internal system, but that the these original terms

15 were not the same as the terms that were later verbally extended by Andrews to

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Pana-Pacific. Specifically, CW 3 stated that Pana-Pacific’s accounts receivable

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had become past-due and that she raised the issue of these delinquencies in weekly

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Accounts Receivable meetings, which included Andrews and on occasion

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Defendant Royal. CW 3 stated that the past due receivables had been derived from

20 a number of different orders and occurred over different periods. CW 3 recalled

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that, after raising the issue with her direct superior Whiteside, Whiteside informed

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CW 3 that Defendant Andrews had made a verbal agreement with Pana-Pacific to

23 extend Pana-Pacific’s payment terms on a 90-day basis. CW 3 confirmed that

24 extending 90-day payment terms to a customer required the approval of the CFO,

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Defendant Royal. CW 3 stated that since the Pana-Pacific accounts receivables

26 were repeatedly showing up as past due in the reports discussed during these

27 meetings, the CFO should have been involved.


28


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97. In fact, CW 3 stated that if customers were past due in paying what

2

they owed to Maxwell, such customers were placed on credit hold, meaning that

3 additional orders would not be fulfilled while the hold was in place. CW 3 stated

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that Pana-Pacific and several other clients were placed on credit hold.

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Accordingly, if these customers placed any additional orders, the only way the

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hold could be released without payment, the orders fulfilled and the purported

7 corresponding revenue recognized, was if either Schramm or Royal released the

8

hold. CW 3 stated that Pana-Pacific had been on credit hold because of unpaid

9 receivables, but those holds had been lifted so that other orders could be processed.

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CW 3 reiterated that even Controller Jim DeWitt (“DeWitt”) stated to her that he

11 could not lift credit holds—the release would have to be authorized by Defendant

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Royal.

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98. CW 3 further stated that Whiteside instructed CW 3 to refrain from

14 calling Pana-Pacific to try to collect on the past-due receivables because Defendant

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Andrews was “handling it.” Notably, Whiteside instructed CW 3 that she was not

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to talk to Andrews about the Pana-Pacific orders. In fact, CW 3 expressed her

17 concerns and questions to Whiteside on many occasions, but neither Whiteside nor

18 anyone above her, including Defendant Andrews, ever did anything about them.

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CW 3 stated that any questioning of this treatment would likely “go nowhere.”

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99. CW 3 stated that virtually all of Maxwell’s operations were “a cluster

21 mess.” She stated that Defendant Andrews’ verbal payment term extensions and

22 variations were not legitimate and that it was “very weird” to be directed to remain

23 silent about the situation. CW 3 further stated that she was familiar with federal

24 audits from prior employment and that she felt it was “very misleading” for

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transactions to be booked with verbally extended terms that were not reflected in

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the originally-entered transaction statements. According to CW 3, Maxwell’s

27 problems were further compounded by the fact that, when the external auditors

28 requested a random sample of invoices for their evaluations, the Pana-Pacific



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invoices were never included in the sample, thus raising concerns over the

adequacy of these evaluations.

100. CW 4,28 Maxwell’s former Senior Director of Global Sales and

Marketing, corroborates the accounts of CW 1, CW 2 and CW 3. In fact, CW 4

stated that the Company’s portrayal of the issues as involving only European

distributors was false. In reality, according to CW 4, these issues were not

confined to European or North American distributors—although German-based

Alfatec was “the biggest” single distributor and had a hub in China—but rather

occurred with Maxwell’s clients “all over the world.” In fact, CW 4 stated that the

Company’s illicit business practices, including extended payment terms, occurring

in other parts of the world represented bigger contributions of revenue than Alfatec

did.

101. CW 4 further verified the variety of methods that the Defendants used

to meet numbers. Specifically, CW 4 stated that it was always such a “scramble”

to get enough orders to meet revenue goals before the end of a quarter that CW 4

“dreaded that week” because she would have to get on the phone with customers

and ask if she could get an order from them to make up the quarter-end “delta”

between actual sales and sales needed to make Wall Street earnings projections.

CW 4 stated that in order to achieve the end-of-quarter sales necessary to make the

quarterly revenue goals, it was clear “where to go” for those orders since Maxwell

28 CW 4 served as Maxwell’s Director of Sales and Marketing for the Americas from February 2008 through July 2010, and was directly recruited back to Maxwell by Defendants Schramm and Andrews in 2012 to serve as Senior Director of Global Sales and Marketing, a position which she held from August 2012 through May 1, 2013. Upon returning to Maxwell, CW 4 was responsible for managing and developing a global sales and field application engineering team with offices in North America, Europe and Asia. CW 4 was tasked with realigning sales strategy and customer relationship management. CW 4 reported directly to Defendants Schramm, Royal and Andrews and was one of the employees terminated for purportedly having a role in the events giving rise to Maxwell’s restatement of earnings.



1 simply did not have many customers that ordered in high volume. CW 4 noted that

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for Maxwell, an order of $1 million was considered big.

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102. CW 4 provided the example of a high-volume customer being one that

4 orders several million dollars of product in a given quarter. She stated that it “was

5 a big deal” to have to go to that same customer and solicit another $1 million order

6 at the end of a quarter. She said getting such end-of-quarter deals required

7 concessions of some kind by Maxwell, such as extended payment terms, since the

8 customers had to pay to store the products and might have to pay value-added-tax.

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Notably, CW 4 recalled that the practice of getting end-of-quarter orders to meet

10 quarterly revenue goals occurred during CW 4’s second stint of employment at the

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Company, and that the practice had been preceding her return for several quarters.

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In fact, CW 4 specifically recalled going to customers at the end of a quarter and

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being told that “every quarter you guys come to us ” wanting end of quarter sales

14 and “it’s getting old.”

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103. CW 4 stated that the typical response from clients on these last-minute

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deals was “what can you give me?” CW 4 explained that the customers would ask

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her why they should take early deliver of a product that they did not need or could

18 not sell to an end customer, and still have to pay for it within 30 days. To that end,

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CW 4 stated that payment terms were often extended for significantly longer than

20

45 days—recalling instances where a preferred client was up to 150 days late and

21 was still receiving shipments. Indeed, CW 4 confirmed that payment terms to

22 some customers were extended in order to “get product out” and that with these

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transactions it was sometimes necessary to “go to the CFO for 90 to 120 day

24 extended terms.”

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104. CW 4 also stated that customers were placed on credit hold for failing

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to timely pay what they purportedly owed to Maxwell and that, pursuant to these

27

holds, no further shipments were allowed to leave to such customers. CW 4

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further corroborated the accounts of other former Maxwell executives that these



1

terms were being extended on the last days of quarters and that revenue was

2 nevertheless being booked on these transactions. CW 4 also “100%” confirmed

3

that only Defendants Schramm and Royal could approve extended payment terms

4 and that only Schramm and Royal had authority to release these credit holds.

5

CW 4 further stated that the decision to recognize revenue was up to Royal, and

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that these practices of engaging in end-of-quarter deals had been necessary to get

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Maxwell “over the hump” and meet the expectations of being a publicly-traded

8 company.

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105. CW 4 further confirmed that Schramm and Royal were informed

10 about the Company’s performance relative to revenue and earnings targets and

11 were directly involved in authorizing and directing the modification of payment

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terms to ensure that sales could be booked at quarters-end. For instance, CW 4

13 said that members of the sales team participated in bi-weekly “revenue calls.”

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According to CW 4, during the revenue calls, the percentage by which the

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Company still needed to achieve its revenue goals— i.e ., the “delta”—would be

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discussed. CW 4 said that the revenue goals began with an annual revenue goal,

17 which had been given to Wall Street as guidance. CW 4 said that this annual

18 revenue goal was then broken into quarterly goals. Her point was that

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“everybody” at a certain level within the sales organization and Maxwell’s senior

20 management in particular “knew where we were in terms of revenue.” By

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“everybody” CW 4 stated that she meant upper management (including,

22 specifically, Schramm and Royal), Andrews, and various members of the sales

23 organization.

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106. CW 4 also confirmed that sales and revenue information was also

25 communicated in the weekly flash reports, which were distributed every Monday

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to “all senior managers,” including Defendants Schramm, Royal and Andrews.

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CW 4 said that the flash reports were approximately three pages, and that the first

28 page gave the “30,000-foot view” of the sales the Company had achieved,



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including by region and customer, in the preceding week, with the other two pages

providing more details. CW 4 said that the flash reports showed past sales

numbers, what was forecasted to be shipped, and the “weighted revenue” of

shipments for the quarter at issue. CW 4 stated that, at Maxwell, “we only cared

about topline revenue.”

107. CW 5,29 a former Maxwell Director of Sales and Marketing, similarly

stated that one of the primary sources of the revenue that the Company had to

restate likely came from Alfatec. CW 5 further commented that the ultimate end-

user of the products that the Company shipped to Alfatec was Peugeot Automotive.

However, Alfatec would usually sell those products first to Continental AG, a

“tier-one” automotive supplier to Peugeot. CW 5 stated that at one point

Continental had been “a direct customer” of Maxwell, but that Alfatec had been

brought in “as a buffer” to “hold inventory” intended for Continental/Peugeot.

108. CW 5 further relayed that once a contract was established between

Maxwell and a customer, subsequent deals and purchase orders usually matched

the terms and conditions established in the contract. According to CW 5, however,

the original purchase orders for the problematic Alfatec transactions and the other

transactions at issue in the restatement would not have included the additional

terms and concessions that had been secretly extended to these distributors. CW 5

stated that Maxwell’s restatement was “not a surprise” to her given the clients’

failure to send payment for inventory they had received. CW 5 further noted that if

the customers received illicit extended payment terms, the transactions at issue

should not have been accounted for as revenue. CW 5 confirmed the other

29 CW 5 served as Maxwell’s Director of Sales and Marketing from June 2010 through October 2012. During her tenure, CW 5 was responsible for both “direct” sales to end-user customers as well as sales to distributors in the Americas. In addition, during the last several months of her tenure, CW 5 participated in weekly Days Sales Outstanding meetings with Royal and other executives where outstanding accounts receivables were discussed. CW 5 reported and interacted directly with Defendants Schramm and Royal.



witnesses’ accounts of Defendant Schramm and Royal’s emphasis on meeting

Wall Street expectations as she recalled her suspicions during her tenure at

Maxwell that the Company was improperly accounting for revenue. CW 5 stated

that at one point—she recalled possibly around May 2012—an analyst had asked

Defendant Schramm why Maxwell’s accounts receivable had been growing three- 3 fold whereas sales had only been growing by a factor of 1.2 . 0 CW 5 stated that

the analyst had not been satisfied with Schramm’s answer, that the analyst

published that Schramm’s explanations did not make sense and that the analyst had

been “dogged” about getting to the bottom of the “days sales outstanding” issue.

109. CW 5 recounted that the analyst’s inquiry had the direct result of the

Individual Defendants initiating a weekly meeting commencing around May 2012.

The purpose of these weekly meetings was to analyze customer accounts that had

lengthy days sales outstanding “DSO” 31 issues—in other words, accounts that were

past due on payments. These accounts would include sales where the Individual

Defendants had verbally provided extended payment terms. CW 5 participated in

these weekly meetings along with Defendant Royal, who “directed” the meetings,

and Defendant Andrews, as well as Maxwell’s Controller, DeWitt, CW 1 and a

couple of other executives. CW 5 reiterated that the catalyst for these meetings

was the analyst inquiries into Maxwell’s DSO, and she stated that it was apparent

that the primary distributor accounts with significant DSO included Alfatec.

110. The accounts of these former Maxwell executives thus confirm that

I the Individual Defendants authorized and directed the Maxwell revenue

recognition fraud. Above and beyond the details of the Maxwell fraud, however, a

30 discussed herein, Konrad, a Forbes contributor and a hedge fund co-manager, As contacted Defendant Schramm in regards to rapid growth in accounts receivable from Q3 2011 to Q3 2012. See ¶88. 31 Days sales outstanding is a measure of the average number of days that it takes a company to collect revenue after a sale has been made. http://www.investopedia.com/terms/d/dso.asp.

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truth becomes increasingly clear: the Individual Defendants were the driving force

every step of the way.

3. “Make Up The Delta”: The Confidential Witnesses Confirm That The Individual Defendants “Spearheaded” Maxwell’s Accounting Manipulations

111. When the Maxwell fraud was publicly revealed, several executives

either resigned or were terminated, including Andrews and CWs 1 and 4. The

implication was evident: Schramm and Royal, the two highest-ranking executives

at the Company, presumably were innocent of wrongdoing since they were

allowed to keep their positions at Maxwell. The reality stands in stark contrast to

this fabricated blame-shifting: Defendants Schramm and Royal orchestrated the

Company’s revenue recognition fraud starting with the recruitment of Defendant

Andrews to run Maxwell’s sales operations. Moreover, the scienter of Andrews—

as an Officer of the Company and the third-in-command—is effectively imputed to

Maxwell and confirms the Company’s violations of the Exchange Act. See §X(D).

Indeed, CW 5 stated that while “a certain segment of the company” blamed lower

executives for what happened, other people at Maxwell knew this was not the case,

and that the role of these lower executives, including CW 1, was “circumspect at

best.” CW 5 also stated that Defendants needed these executives to “make

numbers” for a company whose story was that it was “a growth stock.”

112. CW 5 and the former Maxwell executives quoted herein also

remarked on the close relationship that each of the Individual Defendants shared.

CW 5 stated that it was well-known amongst the Company’s employees that

Defendants Schramm and Andrews lived in the same Orange County community,

were members of the same country club, 32 and often carpooled together for an hour

and a half from their Orange County homes to Maxwell’s San Diego offices.

32 Defendants Schramm and Andrews both served on the Board of Directors of the Mission Viejo Country Club as President and 2nd Vice President, respectively. See http://www.docstoc.com/docs/102709359/MISSION-VIEJO-COUNTRY-CLUB (last accessed June 2, 2014).



1

Indeed, CW 4 accompanied these Individual Defendants in these carpools on

2 numerous occasions and provides confirmation of the Individual Defendants’

3

knowing complicity in the Maxwell accounting fraud.

4

113. CW 1, Maxwell’s former Vice President of Business Development,

5 confirmed that Defendant Schramm and Andrews used to sit together “in cars for

6

hours every day,” and that their relationship was so close that, when it was

7 apparent that Andrews was going to be terminated, Schramm gave Andrews some

8

kind of forewarning that allowed Andrews to resign so that he could benefit from

9

“legal privilege”—the ability to collect additional compensation.

10

114. CW 4, Maxwell’s former Senior Director of Global Sales and

11

Marketing, stated that she often joined Schramm and Andrews during their

12 carpools to Maxwell’s offices—approximately three days per week with Andrews

13 and at least three to four times per month with Schramm and Andrews together,

14 although her trips with Schramm became more frequent after Andrews resigned.

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Altogether, carpooling meant that the occupants were in each other’s presence for

16

three to four hours and, as a result, CW 4 was intimately familiar with the “off the

17 record” conversations between Schramm and Andrews. CW 4 recalled that during

18

these conversations Schramm directed both Andrews and CW 4 to take certain

19 actions necessary to “make the numbers.” Thus, as a result of her position at

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Maxwell and her access to the Individual Defendants, CW 4 stated that she had “a

21

lot of information” regarding the events that took place and could put “a nail in the

22 coffin” of the Individual Defendants.

23

115. CW 4 further reiterated that, although the Company publicly blamed

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Andrews and other executives, including CW 4, for the issues leading to the

25 restatement, Schramm and Royal—the key people who were actually

26

“spearheading” the fraudulent transactions and responsible for the matters that

27 were restated—were either still employed at Maxwell or were allowed to retire


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with two years of severance. 33 In fact, CW 4 emphasized that Schramm and Royal

“knew everything” and had been “guiding it”— i.e ., the transactions that ultimately

had to be restated. Furthermore, CW 4 stated that she had been “told what to do by

[Schramm and Royal],” and that all of their directions were focused on one end

result: to “make numbers.” CW 4 also recounted that Royal would order extended

payment terms for customers on the last days of quarters in order to ship more

product and that Schramm and Royal “[knew] what’s going on.”

116. When asked to clarify Schramm and Royal’s participation in the

Maxwell accounting scheme, CW 4 stated that the amount of revenue that Maxwell

needed to meet quarterly goals and the Company’s guidance to Wall Street was

always Schramm and Royals’ primary concern. Therefore, according to CW 4, not

only “did you go into a quarter knowing the guidance” that had been given to Wall

Street, but “obviously, you don’t miss” that guidance. In that regard, CW 4 stated

that she and the Individual Defendants “knew at all times” what the quarterly

revenue goals were and how far off Maxwell was at any time toward achieving

those goals.

117. In fact, CW 4 affirmed that it was a typical and common occurrence at

Maxwell that the Individual Defendants asked her to try and “find revenue” on

“the very last day of a quarter” in order to meet quarterly revenue goals . CW 4

stated that many of the conversations during her carpools with Defendants

Schramm and Andrews that occurred near the end of quarterly earnings period

33 As noted above, Defendant Schramm retired from his position as CEO effective December 31, 2013. Schramm will remain a consultant for Maxwell for a two-year period following his retirement. Schramm negotiated a Transition and Consulting Agreement (the “Transition Agreement”) dated October 23, 2013, whereby Schramm was granted his current base salary and a health stipend in the aggregate amount of $45,177.39 per month, a 2013 bonus of $371,000, and treatment as though he is continuing his employment for purposes of his existing stock options, restricted stock awards and performance stock awards. See Maxwell’s Form 10-K filed October 24, 2013; 2014 Proxy Statement, at p. 24. Had Schramm not executed the Transition Agreement, he would have only received a vacation payout of $147,800. See Maxwell’s 2013 Proxy Statement, at p. 43.



1 were focused on ways to “find revenue” in order to meet these goals. CW 4

2 confirmed that these conversations were focused on how the numbers were going

3

to be made and “where we’re going to get it,” and that oftentimes they referenced

4 open orders from which revenue could be pulled. CW 4 stated that up until the

5

fourth quarter of 2012 it was “always a scramble to find a couple million every

6 quarter” to meet the revenue goals.

7

118. CW 4 reiterated that her “job was to get revenue,” but that it was not

8

her decision whether an order could or could not be shipped. Rather, CW 4 stated

9

that the decision of what could be shipped and whether revenue could be

10 recognized would be decided by Defendants Schramm and Royal, with Royal

11

being the primary decision-maker in most instances. CW 4 stated that the typical

12 scenario was that she would invariably be in Defendant Royal’s office on the last

13

day of a quarter because she needed Royal’s approval to extend any payment terms

14

that were not Maxwell’s standard payment policy, which was usually 30 days, or to

15

lift a credit hold or obtain some kind of modified terms for customers. In fact, CW

16

4 said that it became a joke that at the ends of quarters CW 4 was running back and

17

forth from her office to Royal’s to the point that CW 4 “was wearing a hole in the

18 carpeting.” CW 4 stated that Royal would indicate his approval of lifting a credit

19

hold or extending payment terms by sending an e-mail to that effect and/or signing

20 a revised purchase order. The recipients of the e-mails included DeWitt and other

21 members of the finance and accounting team.

22

119. CW 4 stated that Royal would always approve these requests—Royal

23

did not ever “answer no”—which, according to CW 4, thereby allowed the

24 products associated with the order to be shipped before the quarter ended and

25 allowed revenue to be recognized for that quarter. CW 4 reiterated that “the

26

decision to recognize revenue was up to Royal,” and that “Royal is a CPA.” CW 4

27

further explained that Schramm “is a very smart guy” who has “run many

28 companies besides Maxwell,” and that the “only reason that they would ship



1 product was to recognize the revenue.” Indeed, CW 4 stated that not only was it

2 very clear which “orders are there,” but she stated that Royal in particular “clearly

3

knew” if and when revenue was being recognized on certain orders.

4

120. CW 4 was asked whether Schramm and Royal understood that these

5 modifications—including extending payment terms beyond Maxwell’s standard

6

30-day requirement, lifting credit holds, or granting rights of return—would have

7 an impact on revenue recognition. CW 4 replied affirmatively that the impact of

8 modifying the terms “was on revenue itself.” CW 4 further affirmed that, no

9 matter what, an order would not be shipped unless the terms and conditions were

10 reviewed and approved, and that only Schramm or Royal could authorize those

11 changes.

12

121. CW 4 recounted several instances involving improper transactions

13

that were ultimately involved in the restatement. In the first incident, CW 4 stated

14

that on the last day of a quarter, Maxwell found itself short of its quarterly revenue

15 goals. CW 4 recalled that the scenario in question involved an Alfatec shipment of

16

between $500,000 and $1,000,000 that clearly was going to be among the end of

17 quarter orders that would enable the Company to achieve its quarterly revenue

18 goals. However, CW 4 stated that Alfatec “owed us money” and was significantly

19 past due in paying what they owed and therefore was on credit hold. In this

20 particular situation, CW 4 recalled that Alfatec was past due by approximately 120

21 or 150 days.

22

122. CW 4 stated that Defendant Royal sent an e-mail whose recipients

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included Defendant Andrews, CW 4, Wolfram Krueger (one of the executives fired

24

in connection with the restatement), Whiteside and possibly Controller DeWitt. In

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the e-mail, CW 4 recalled that Royal stated words to the effect that he would let the

26 shipment go to the customer, but that Royal queried whether the shipments could

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be appropriately be reported as revenue. In CW 4’s opinion, she thought Royal

28 was trying to “cover his ass” with the e-mail, to which no one responded,



1 particularly given the timing and size of the shipment and the fact that Royal, as

2

Maxwell’s CFO and an experienced CPA, had overall responsibility for revenue

3 recognition decisions. Nevertheless, CW 4 stated that she knew the revenue was in

4

fact recognized by Maxwell on this shipment, that she “knew all the revenue that

5 would be reported” and that, as a sales executive, she was privy to revenue reports

6 every two weeks. CW 4 stated that this transaction was particularly important for

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the Company because booking the shipment as revenue would allow Maxwell “to

8 make up the delta” for the revenue that needed to be achieved for the quarter, and

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that revenue was in fact recognized on this shipment.

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123. CW 4 recalled another instance where Schramm lifted a credit hold.

11

CW 4 stated that Royal was not in the office at the time, so Schramm directed

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Maxwell’s “accounting people” to lift the credit hold on an order to Alfatec. CW 4

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knew this because she was in Schramm’s office early in the morning when

14

Schramm issued this directive, and she recalled that Schramm stated “just lift it” to

15

the accounting department. According to CW 4, the credit hold was immediately

16

lifted, and the shipment was sent to Alfatec. When asked about Schramm’s

17

justification to lift the credit hold, CW 4 stated that there was none, other than the

18

fact that it was the very last day of the quarter and this shipment was needed in

19 order to meet revenue goals.

20

124. CW 4 also recalled an Alfatec deal in which, a few months prior to the

21 start of her second stint at Maxwell, the Company had shipped to Alfatec 2,200

22

48-volt modules intended for use in Chinese hybrid buses. While Alfatec was a

23

European distributor, Alfatec also had a hub operation in China. However, Alfatec

24

had no Chinese customers and had never previously ordered any 48-volt modules.

25

Altogether, CW 4 estimated that the value of the 2,200 modules was around $2.2

26 million (i.e., 2,200 x $1,000 per piece), although this was apparently a higher price

27

than what Maxwell charged other customers for these products. CW 4 stated that

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the problem with this particular transaction was that Alfatec did not actually need



1

this shipment—Alfatec had never ordered the product before, had not requested it

2 and did not need it. Alfatec did not have an end-client to purchase the product and

3

it was not going to pay for the products if they could not find an end-user

4 customer. According to CW 4, the question that had to be asked was why Maxwell

5

had sold and shipped these 48-volt products to Alfatec—including at a price higher

6

than what they charged for these products to other customers—to a client that had

7 never ordered them before. According to CW 4, the answer was that the shipment

8 was made to meet revenue goals for that particular quarter.

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125. CW 4 stated that, in essence, Maxwell approached Alfatec to try to

10 persuade Alfatec to place the large, unusual order for which there was no identified

11 end-user and Maxwell made the business case that Alfatec would benefit by having

12 stock on hand in Asia in case demand arose. However, there was no immediate

13

demand for the product and Alfatec was looking to return it. CW 4 stated that she

14 was tasked with “straightening out” the mess.

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126. CW 4 stated that she met with Bjoern Koehler, the son of the Alfatec

16

founder who had been primarily in charge of Alfatec for the last several years, in

17

Germany in November 2012 and was basically told that Alfatec needed to “get rid

18 of this stuff”— i.e ., find a customer for it—or else Alfatec would have to return it

19

back to Maxwell. Following her discussion with Koehler, CW 4 then had

20

discussions with Defendants Schramm and Andrews about the situation. Their

21 position was firmly that “we’re not taking it [the products] back” from Alfatec, to

22 which CW 4 replied that Maxwell was not going to get paid unless the Company

23

did something for Alfatec. CW 4 stated that it fell on her to try and find a

24 customer that would purchase these products from Alfatec, otherwise Alfatec was

25 going to return the products back to Maxwell. CW 4 stated that this represented

26 significant work and stress for her since she spent the next two weeks trying to find

27 a resolution to the situation. CW 4 was ultimately able to help Alfatec move the

28 product “through the channel” so that Maxwell would not have to absorb a return.



1

Significantly, CW 4 recalled the product had been shipped in the second quarter of

2

2012 and had been subject to extended payment terms.

3

127. CW 4 also recounted another instance of improper revenue

4 recognition that was implicated in the restatement, this time involving a Korean

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distributor of products whose final customer was Samsung. CW 4 stated that the

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distributor would ship the products to Samsung, but it would only be at that point

7

that Maxwell would actually be paid, not on the basis of shipping the products to

8

the distributor. CW 4 felt that this instance was a situation that required either

9

Defendant Schramm or Royal’s intervention to be effectuated since it involved

10

Maxwell “shipping something that the customer didn’t need for three or four

11 months .” In CW 4’s view, this transaction was typical of successive quarters at

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Maxwell in which the Company was “ chasing the revenue ” by pulling in orders

13

that were to be shipped in future periods and shipping them in a quarter about to

14 end. As she explained, Maxwell had “open” or “blanket purchase orders” from

15 some of its customers that provided future shipping dates for orders. CW 4 stated

16

that the Company’s practice was routinely to “ steal from Peter to pay Paul ” by

17 pulling in orders that were expected to be shipped in a future period and instead

18 shipping them in the current quarter to meet estimates or guidance.

19

128. CW 4 also recalled a conversation during a carpool with Schramm

20 near the end of her tenure at Maxwell. In this situation, CW 4 recalled that

21

Maxwell had enough orders in the current quarter that it was decided to hold back

22

recognizing revenue on some of these orders until the ensuing quarter . CW 4

23 stated that Maxwell’s numbers were literally “too good” and that Schramm had

24 said that these results could not be reported and certain orders should not be

25 counted until the ensuing quarter. CW 4 stated that she personally found this to be

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“a little alarming after all that had happened” in preceding quarters when it had

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been necessary to “find revenue” in the final days of a quarter.


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129. CW 4 further noted that during her carpools Schramm boasted that he

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had “a clean bill of health” regarding his participation in these practices. When

3 asked to clarify this statement, CW 4 stated that she understood this to mean that

4

Schramm had been interviewed as part of the Company’s internal investigation and

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that the conclusion of the inquiry was that it could not be established that Schramm

6 was “privy to any of it.”

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130. Notably, when asked whether CW 4 herself was ever interviewed as

8 part of the Company’s internal investigation, CW 4 stated that she only spoke with

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the investigators on one occasion when they asked her to explain the relationship

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between Maxwell and a distributor called Richardson Electronics to, as she put it,

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know “how [the relationship] worked.” According to CW 4, she was never asked

12 about Alfatec or other distributors, and she was never asked whether she withheld

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information from Maxwell management regarding the extension of payment terms

14 or lifting credit holds.

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131. Nevertheless, in the weeks after Defendant Andrews had resigned and

16 other employees, including CW 1, had been fired, CW 4 stated that she felt as

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though Schramm would ask questions in a manner that made her feel as though “he

18 wanted to know exactly what [she] knew.” CW 4 noted that because Defendants

19

Schramm and Royal were not held accountable for the improper accounting, it was

20

the sales leaders such as herself, Defendant Andrews, Wolfram Krueger and others

21 who were penalized. CW 4 stated that it was notable that no one from finance or

22 accounting was fired over the restatement. CW 4 was directly asked if there was

23 any chance that the extended payment terms and directives to lift credit holds were

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not communicated to the accounting department, as the Audit Committee’s

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investigation concluded. CW 4 stated that there was “ no chance” because any

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deviations from Maxwell’s standard terms had to be authorized in writing by

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Schramm or Royal, usually in an e-mail or a revised purchase order.


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1

132. When asked to clarify the details concerning her departure, CW 4

2 noted that she was terminated on May 1, 2013, when she was summoned to a

3 meeting with Schramm and Royal at 3:00 p.m. During the meeting, CW 4 stated

4

that she was informed of her termination due to a sales issue that had taken place in

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2009 where CW 4 had purportedly approved a right of return for a small order in

6 an e-mail to a client. CW 4 stated that while she was never shown the e-mail, and

7 even though the customer had actually paid for the order, she was terminated for

8 cause at that point. CW 4 stated that her termination came at a time when she had

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been travelling to Asia and Europe virtually every week to the point that she was

10 almost a stranger to her family. She said she was “absolutely shell-shocked” by

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her termination and she said to Schramm and Royal “you are f****** kidding me,

12

I gave you my life.” CW 4 characterized herself as “another sacrificial lamb”

13 alongside Defendant Andrews, CW 1 and Wolfram Krueger.

14

133. CW 4 also provided notable information regarding the whistleblower

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that CW 4 stated tipped off the SEC regarding the Maxwell accounting

16 manipulations. CW 4 stated that the whistleblower, who CW 4 identified as Dan

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Reineck (“Reineck”), had been in charge of SOX compliance at the Company

18

during CW 4’s first stint with the Company. CW 4 stated that Reineck had then

19 gone over to handle matters involving a Swiss company that Maxwell had

20 acquired. Just before CW 4 returned to Maxwell, CW 4 stated that Reineck was

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brought back to the U.S. Although CW 4 never saw Reineck’s whistleblower letter

22

first-hand, in speaking with other individuals who did see it, including Defendant

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Andrews, CW 4 stated that Reineck’s letter was “multiple pages” and detailed

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“wrongdoings,” including that Schramm and Royal were aware of these issues.

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While CW 4 believes that Reineck was “trying to get Kevin [Royal],” CW 4 stated

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that Reineck’s efforts actually backfired and “the sh** rolled up and down, but off

27 of Royal” since he is still employed at Maxwell.


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1

134. Accordingly, as described above, the former executives quoted herein

2 confirm that the Individual Defendants knew of Maxwell’s fraudulent revenue

3 recognition issues every step of the way, from their initial recruitment of

4

Defendant Andrews to carry out their scheme, to their participation in periodic

5 meetings where these issues were discussed, their consistent emphasis on meeting

6

Wall Street expectations, their access to weekly and periodic flash reports, and

7

their repeated directives to make shipments and recognize revenue in order to meet

8 sales quotas. Defendants Schramm and Royal, along with Defendant Andrews,

9 were thus the central figures in Maxwell’s accounting fraud.

10

VI. THE TRUTH EMERGES

11

A. THE MAXWELL FRAUD IS SLOWLY REVEALED

12

1. The First Partial Disclosure OfDefendants’ Fraud

13

135. The first partial disclosure of Defendants’ fraudulent revenue

14 recognition scheme occurred on April 26, 2012—only weeks after selling over $10

15 million worth of shares pursuant to the Offering. On this date, Maxwell issued a

16 press release announcing financial results for the Company’s first quarter of 2012.

17

In the press release, as a result of Defendants’ illicit payment plan extensions and

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distribution channel abuses—causing a marked buildup in excess inventory—

19

Maxwell posted disappointing financial results, including net income of $504,000

20 and revenue of $39.2 million for the first quarter ended March 31, 2012—up 11%

21

from $35.3 million in the same quarter the prior year, but trailing the Zacks

22

Consensus Estimate of $41.0 million. In reality though, revenue was overstated by

23

$3.4 million and should have been reported as $35.8 million, which would have

24 shown a mere 1.6% increase over the $35.3 million in revenue reported for the first

25 quarter of 2011, well short of revenue growth estimates. Moreover, because of the

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Individual Defendants’ previous push to boost sales and accelerate revenue

27 recognition, the Company was forced to reduce its financial guidance.


28


136. As a result of the partial disclosure of Defendants’ fraud, Maxwell’s

stock price plummeted $6.20, declining from a closing price of $15.80 on April 26,

2012 to a closing price of $9.60 on April 27, 2012—a stunning 40% drop on

enormous trading volume of nearly 7.3 million shares that was exponentially

greater than normal volumes.

137. After these announcements, analysts were forced to drastically reduce

their own estimates based on the Company’s surprising announcement that

business was much weaker than previously disclosed. ThinkEquity Partners LLC

(“ThinkEquity”) issued a research report on April 27, 2012, and stated:

We take our 2Q:12 revenue estimate to $41M, from $46M. Our 2Q:12 EPS estimate goes to $0.01, from $0.07. Our FY:12 EPS estimate goes to $0.20, from $0.35.

138. Ardour Capital Investments, LLC issued its own report on April 27,

2012, entitled “MXWL faces head winds from Chinese wind market—maintain

ACCUMULATE and lower price target.” The analyst report noted the slump in

the Chinese wind market and also noted that as a result of working capital

concerns, Maxwell needed to raise capital through a stock offering:

In 1Q12, MXWL faced ongoing challenges to meet our revenue estimates. The weakness was attributable to the 3 week Chinese New Year celebrations affecting Chinese sales, a slump in Chinese wind market and overall global slowdown affecting hybrid automobile sales. Ultracapacitor revenue was sequentially lower than 4Q11 due to historical seasonality. We base the target price on a 10-year DCF model with a 20% discount rate and 9x terminal EBITDA multiple.

* * *

MXWL addresses working capital concerns. In FY2011 MXWL faced an increasing demand for ultracapacitors. To meet growing global

Q- ft customer demand the Company is setting up a new 123,000 s ultra capacitor facility in Arizona to expand production capacity. However working capital was a concern. To address this issue MXWL raised capital through a stock offering of $30m. Proceeds will be utilized by MXWL to facilitate ongoing growth.

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139. Also on April 26, 2012, Maxwell held a conference call led by

Defendants Schramm and Royal to discuss the first quarter 2012 results. During

the call, Schramm stated:

As noted in our press release, ultracapacitor sales were lower sequentially compared with the fourth quarter. This was mainly due to normal seasonal factors including the Chinese New Year observance, which effectively shuts down business across much of Asia for two to three weeks every year.

Looking at key ultracapacitor markets, wind turbine deployments in China and elsewhere continued to be well below levels seen in previous years . So wind related ultracapacitor sales were lower than a year ago.

* * *

Looking ahead, an increase in recent order activity and intelligence from various sources in China including forecasts from several of our customers indicate that wind farm installations both on and offshore can be expected to move toward a more normal level over the next few quarters.

The current lull was predicted last year by the consulting firm that we engaged last year to assess business conditions and the direction of government policy in China, particularly as they related to the wind and the bus markets .

140. Accordingly, Schramm effectively admits that Defendants were aware

of the slowdown in the China markets the previous year because of information

obtained from the consulting firm that the Company had engaged. However,

despite being informed of this predicted lull, Defendants failed to properly adjust

estimates until after the Company effectuated the Offering only two months prior

to this announcement. Indeed, based on Maxwell’s trading from February 27,

2012 through March 31, 2012 (the time period that Maxwell sold shares pursuant

to the Offering), Maxwell was able to sell at prices well above $18 per share, while

the Company’s stock price plummeted to $9.60 after the partial disclosure.

141. In addition, also during the first quarter 2012 conference call,

Maxwell management was again questioned regarding its ever increasing accounts

receivables and payment terms. Addressing this topic, Defendant Royal

demonstrated full knowledge concerning this accounting treatment, stating that



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accounts receivable and inventories increased $9.8 million and that “the increase in

accounts receivable was primarily due to an increase in day’s sales outstanding and

the increase in inventory that’s associated with anticipated future product demand.”

142. However, unbeknownst to investors, and as revealed at the end of the

Class Period, the truth was that Maxwell’s accounts receivable was increasing

because Maxwell was inappropriately booking sales at quarter and year-ends and

that those sales were either illusory with no chance of collection during the given

reporting period or were only agreed upon in the respective period if Maxwell gave

unusually lax credit terms. The Individual Defendants were well aware of these

illicit arrangements, and given the rudimentary nature of the accounting principles

in question—as well as Maxwell’s straightforward policy on revenue

recognition—the Individual Defendants were aware of the Company’s

corresponding fraudulent accounting treatment for this premature revenue.

143. Further, during the earnings call, a ThinkEquity Partners LLC analyst

questioned Maxwell management about accounts receivable and credit terms:

<Q - Colin W. Rusch>: Hi, can you just give us a better sense of the composition of both the receivables and the inventories and let us know if you’ve changed your terms with anyone in China on those receivables?

<A - Kevin S. Royal>: So, I guess, it would be related to the question on China receivables. It will depend on change our terms in relation to what period. But typically what we do in China is, we require either a payment in advance or a letter of credit. There are customers that have shown that they pay on time and pay consistently that we do grant terms.

And so, with respect to customers that receive terms that’s been fairly consistent over the last couple of two, three quarters. With respect to the increase in receivables, some of that is related to linearity. We also have $2.7 million receivable recorded related to the derivative lawsuit, that’s a receivable from the insurance company and that was paid in the second quarter so that will not show up in the receivables.

<Q - Colin W. Rusch>: All right, perfect.


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144. Accordingly, the Individual Defendants were well aware of shifting

payment terms and the clients to which Maxwell provided these alternate

arrangements. Defendants Schramm and Royal directly participated in the

decision-making process and, as several former executives have stated, Schramm

and Royal were responsible for signing off on extended payment and credit terms

I to customers.

145. Despite the partial disclosure of Defendants’ fraud and the resulting

decline in Maxwell’s stock price, Defendants failed to disclose the full truth

concerning their revenue recognition scheme, continuing to mislead the investing

public and conceal their fraudulent misconduct. As a result, Maxwell’s stock price

continued to trade at levels that were artificially inflated by Defendants’ fraud, and

would continue to do so until the full extent of Defendants’ fraud was publicly

revealed nearly a year later.

2. The Full Extent OfDefendants’ Fraud Is Revealed In A Series Of Disclosures At The End Of The Class Period

146. On March 7, 2013, Maxwell shocked the investing public when the

Company issued a press release disclosing that its previously issued financial

statements contained in its annual report on Form 10-K for the year ended

December 31, 2011, as well as the report of its independent registered public

accounting firm, McGladrey, and all unaudited quarterly reports on Forms 10-Q in

2011 and 2012, should no longer be relied upon because of errors in those financial

statements. According to the Company, the errors related to the timing of

recognition of revenue from sales to certain distributors and would decrease

previously reported revenues for fiscal year 2011 by approximately $6.5 million

and decrease revenues in the first three quarters of 2012 by approximately $5.5

million in the aggregate.

147. The Company further stated that, after an internal investigation, it had

discovered arrangements with certain distributors regarding the payment terms for

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1

I sales to such distributors that were not communicated to Maxwell’s finance and

2 accounting department and which were not considered when recording revenue on

3 shipments to these distributors. The Company also disclosed that “as a result of

4 our investigation, certain employees were terminated and our Sr. Vice President of

5

Sales and Marketing resigned.” Contrary to Defendants’ previous assurances

6 regarding the reliability of the Company’s internal control over financial reporting,

7

the Company was forced to acknowledge that it had identified a “material

8 weakness” in the procedures resulting in the overstatement of revenues by millions

9 of dollars. Accordingly, the Company announced that it would be required to

10 restate its reported revenues for 2011 and the first three quarters of 2012.

11

148. On this news, the Company’s shares declined $1.01 per share on

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March 8, 2013, to close at $8.10 per share, a one-day decline of 11% on heavy

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trading volume. However, the Company’s common stock remained inflated as the

14

full truth of Defendants’ false and misleading statements concerning the magnitude

15 of the restatement and overall effects on the Company’s business had yet to be

16 revealed.

17

149. The precarious financial situation and the lack of transparency at

18

Maxwell were only further exposed on March 19, 2013, when the Company filed a

19

Form 8-K announcing that it received a letter of resignation from McGladrey

20 stating that it had resigned as the Company’s independent registered public

21 accounting firm. Notably, according to this press release, which was signed by

22

Defendant Royal, McGladrey’s letter of resignation took the unique step of

23

informing the Company that the resignation was based on: (i) information that had

24 come to McGladrey’s attention leading it to conclude that it could no longer rely

25 on management’s representations ; (ii) material weaknesses in Maxwell’s

26

internal control over revenue recognition and potentially, more broadly, in the


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Company’s overall control environment; and (iii) an inability to rely on

information obtained directly from certain third parties. 34

150. Thus, McGladrey did not merely resign as Maxwell’s auditor, but it

did so because it could no longer trust the representations of the Individual

Defendants themselves. McGladrey’s “noisy” resignation as Maxwell’s auditor

speaks volumes as it effectively states that the auditor does not trust the

Company’s executives—a stunning indictment on management’s forthrightness

and integrity. Indeed, instances where an auditor resigns because of an inability to

rely on management “are perhaps the biggest red flags found among auditor-

change disclosures because the outgoing auditors are basically saying that they

could not trust management,” 35 and are suggestive of management’s intentional

misconduct:

When an auditor is unable to rely on information provided by management, doubt is cast on the integrity of the financial statements, as well as on management. It also raises a serious question about possible lack of oversight by the audit committee. When an auditor is unable to rely on management, it means that something has occurred to cause suspicion about the integrity of management or of the board of directors. Auditors may have learned that they had been provided with false or misleading information, or found that information had been withheld. In some cases, auditors might refuse to rely on management because of actions not taken, such as the proper investigation of improprieties. 36

34 Given Maxwell’s announcement of the restatement and the termination of employees, McGladrey was under no further reporting obligation: “Section 10A imposes no reporting duty to the SEC unless management and directors fail to take timely and appropriate remedial action. In practice, proper response includes: investigation; measurement of the effect of the illegal act on financial statement amounts; assessment of possible misconduct by officers, management or employees; identification of any weaknesses in, or violations of, controls and procedures in respect of the illegal act; and remedial accounting and reporting, control, and personnel actions – if warranted.” Daniel V. Dooley, CPA, Section 10A Audit Requirements Under The Securities Exchange Act of 1934: A Play In Five Acts , available at http://www.law.yale.edu/documents/pdf/SEA-Section_ 10A_Audit_ Requirements-A_Play_in_Five_Acts.pdf. 35 See Mark Grothe and Thomas R. Weirich, Analyzing Auditor Changes: Lack of Disclosure Hinders Accountability to Investors , The CPA Journal (Dec. 2007), available at http://www.nysscpa.org/cpajournal/2007/1207/infocus/p14.htm. 36 See Lynn E. Turner, Jason P. Williams and Thomas R. Weirich, An Insider Look at Auditor Changes , The CPA Journal (Nov. 2005), available at

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151. McGladrey’s stunning resignation—and the reasons behind its exit—

shocked investors anew. Following this announcement, Maxwell’s stock

plummeted again, falling nearly 21% from $7.44 per share on March 19, 2013 to

$5.91 on March 20, 2013, on unusually heavy trading volume. All told, as a result

of Defendants’ revenue recognition fraud, the Company’s stock price collapsed

over 70% from its Class Period high of $21.20 per share on November 4, 2011, as

demonstrated in the following chart of Maxwell’s stock price during and

immediately following the Class Period:

Maxwell Stock Price Chart April 29, 2011 through April 15, 2013

8/29111 12/29/11 04/29/12 08/29/12 12/29/12 04115113

B. MARKET REACTION TO THE REVELATION OF DEFENDANTS ’ FRAUD

152. Immediately after Defendants’ announcements and the resulting stock

price declines, reaction from the investing community was decidedly negative. For

instance, a March 12, 2013 Forbes article entitled “Maxwell’s Misreported

Revenue: AR Says There Could be More to Come,” commented on Maxwell’s

push to hit too-aggressive growth targets and the overall culture of the Company

that led to the restatement, including the fact that the author had previously

http://www.nysscpa.org/printversions/cpaj/2005/1105/special_issue/essentials/p12 . htm.

$20.00

$15.00

$10.00

5.00

$0.00 4/29/11



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inquired of Defendant Schramm regarding Maxwell’s growing accounts

receivable. The article provided in pertinent part as follows:

On March 7th, Maxwell Technologies (NASD:MXWL) announced problems with revenue timing. . .

Too-early revenue recognition is one of the most common accounting problems, and often results when managers push employees to help them hit too-aggressive growth targets. This makes sense given Maxwell’s recent series of earnings disappointments and reduced growth estimates.

* * *

Although there can be many other causes, improperly recognized revenue usually shows up in growth of accounts receivable (AR). AR is supposed to be money owed to the company by its customers. If product has been shipped to a distributor, but payment need not be made until it is sold, then that product should still be considered inventory, not booked as revenue and moved to AR. Yet this is what seems to have happened at Maxwell.

Between Q3 2011 and Q3 2012, Maxwell’s net accounts receivable grew by $21 million to $53 million. When Jan brought this to my attention, I asked Maxwell’s CEO, David Schramm about it by email. He replied:

“I would say there are two factors for the increase in accounts receivable. First, our sales have been increasing and that naturally drives the receivables balances higher. The second reason is that a number of customers have been paying slowly. While it is not unusual to have one customer pay slowly, it is not normal for us to have more than one customer pay late. In our current case, there are three customers who are paying slower than normal. We have evaluated these customers and their ability to pay and believe the accounts are fully collectible.”

Jan and I were not entirely comfortable that this completely accounted for rapid growth of AR (revenues only grew 10% over the same period.) . . .

In hindsight, I suspect the “slow

been part of how the employees revenue recognition .

payment” by customers may have responsible were hiding the early

We now know the accounts receivable growth was a red flag . The 10% increase in revenue would most likely be matched by a 10% increase in AR, so revenue growth accounts for only $2 to $3 million of the $21 million increase in AR. Another $12 million is the misreported revenue that was announced on Thursday. That leaves a gap of $6 million or so to be accounted for by customers who have recently begun paying more slowly.



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* * *

If AR had been growing only in proportion with revenue, days to pay should have remained roughly constant.

As you can see, it took 57 days to collect payment from the average customer in Q3 2008, but it took 110 days in Q3 2012. Even after we account for the misreported revenue announced on March 7th, adjusted Q3 2012 days to pay remained at 89. If the adjusted numbers are to believed, Maxwell’s average customer was taking between 70 to 80 days to pay in the four years to 2011, but was taking almost 90 days to pay in 2012.

It seems quite possible to me that behind theW growing Accounts

Receivable lies yet more mis-reported revenue . e know that some customers had payment terms which “had not been communicated to Maxwell’s finance and accounting department and, therefore, had not been considered when recording revenue on shipments to these distributors.” Is it unreasonable to assume that there are other customers who seem to be paying slowly also have lenient payment terms of which Maxwell’s accounting department is not yet aware?

If we were to assume that all the misreported revenue had already been found, we would have to come up with some other explanation as to why Maxwell’s customers have been paying more slowly in 2012 than they have in the past. Sometimes the simplest explanation is the right one.

Conclusion

While we will only know the truth when Maxwell files its results, it seems likely to me that the company developed a culture which pushed hitting the numbers even if they had to be fudged.

After accounting for the fudging revealed so far, the recent growth in Accounts Receivable cannot be explained solely by revenue growth over the same period and by the misreported revenue already announced. While it is possible that Maxwell’s customers have been paying more slowly in 2012 than in previous years for their own reasons, it is also possible that there is more aggressive accounting yet to be revealed.

153. Similarly, a March 22, 2013 The Street article entitled “5 Dumbest

Things on Wall Street This Week,” published after the Company’s announcement

of the resignation of its public accountant, provided the following commentary

regarding the Maxwell revenue recognition scandal:

Bang! Bang! Maxwell Technologies (MXWL) is once again dropping the hammer on shareholders.

The energy storage device maker announced the resignation of its public accounting firm McGladrey LLP in an SEC filing Tuesday. In



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its farewell letter to Maxwell’s audit committee, McGladrey confirmed “it could no longer rely on management’s representations,” nor the “information obtained directly from certain third parties.” Maxwell added it will be forced to delay the reporting of its 2012 financials while it looks for an accountant to replace McGladrey. Shares of the company sank 14% to $6.40 on the news.

No, all is not well at Maxwell, so much so that its accountant is throwing in the towel. Not that McGladrey had a clue as to what was going on at the company anyway. To tell the truth (which nobody did

G l at the company), Mcadrey was probably plenty glad to get out of there. Furthermore, we doubt they will be the last to go since they are following a host of other Maxwell employees, including the company’s senior vice president of sales and marketing, out the door.

Of course, McGladrey or no McGladrey, nobody expected the company to release its 2012 numbers for a long, long time anyway. In case you forgot, the company said earlier this month that it needs to restate its 2010 and 2011 financial results due

’ to revenue recognition

errors, so even the thought of closing last years books was ridiculous. Maxwell said at the time that it expects the restatement will decrease its fiscal 2011 top-line by $6.5 million and revenue during the first three quarters of 2012 by $5.5 million by comparison to its previously stated results.

Then again, nobody knows how the numbers will add up once the next auditor digs into Maxwell’s accounting mess.

154. An April 15, 2013 IDTechEx article entitled “Change of Leadership of

the Global Market Value of Supercapacitors?,” provided commentary regarding

the motives behind Defendants’ misconduct, stating in pertinent part:

Maxwell Technologies, which has been the leader in supercapacitors worldwide, has been overstating its results by improperly recording certain sales through distributors.

* * * There is one other lesson from this story. Small companies like Maxwell Technologies are attracted to take a listing because it gets them funding and prestige and an exit for early investors but there is a price to pay. The intense attention to half year and even quarterly results is not conducive to long term objectives and it diverts the attention of management. When reporting errors arise, as in this case, all hell is let loose. Perhaps they should have stayed private.

155. On August 1, 2013, Maxwell issued a press release announcing that

Maxwell would need to nearly double the aggregate overstated revenue figures.

While the Company’s initial press release represented that overstated revenues

were an aggregate $11 million, the Company disclosed that revenue for the fiscal


Nine Months Ended 9/30/12 Year Ended 2011

- As Reported - As Restated


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year 2011 was decreased by $10.1 million and revenue for the first three quarters

of 2012 was decreased by $9.2 million, for an aggregate total of approximately

$19.3 million. Maxwell’s restatement resulted in dramatic declines in the

Company’s key financial metrics, converting profits in operating income, net

income and net income per share into losses for 2011:

$12000 $10,000

$8,000 $&000 $4000 $2,000

$o 2,OOO)

S4000)

Net Income Per Share $0.35

$0.25 $0.20 $0.15 $0.10 $0.05 $0.00

($0.05) $0. 10)

As Reported — As Restated

156. In total, the restatement of Maxwell’s SEC statements caused by

Defendants’ revenue recognition fraud had a profound effect on the Company’s

financial results during the Class Period.


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C. THE SEC AND DOJ LAUNCH FORMAL INVESTIGATIONS

157. On April 30, 2013, buried in one sentence of the Company’s press

release announcing financial highlights for the most recent quarter, Maxwell

disclosed that both the DOJ and the SEC are investigating the Company

concerning its announcement that Maxwell would restate its financial results for

2011 and 2012 due to illicit revenue recognition.

158. With regards to the SEC investigation, the first stage of an SEC action

is typically an informal investigation . At this stage, the Commission staff has no

formal subpoena power, and hence must rely on the cooperation of the relevant

individuals and entities to gather information. At the conclusion of an informal

investigation, SEC staff may recommend that the Commission undertake an

enforcement action seeking sanctions, seek a formal order of investigation from

the Commission, or conclude the investigation without recommending an

enforcement action. When the SEC staff request and receive a formal order, the

next stage is a formal investigation . The Commission typically approves requests

for formal orders when it finds that it is likely that a securities law violation has

occurred . The formal order grants designated SEC staff the ability to issue

subpoenas and to administer oaths. 37

159. As of the date of this Complaint, the full extent of the repercussions

stemming from the Maxwell accounting fraud remain unknown as the SEC and

DOJ investigations remain ongoing.

VII. DEFENDANTS’ FALSE AND MISLEADING STATEMENTS

160. Throughout the Class Period, Defendants made false and misleading

statements, as well as failed to disclose material adverse facts, concerning

Maxwell’s business, operations and prospects. Specifically, Defendants made

false and misleading statements and/or failed to disclose that: (1) Maxwell was

37 See SEC Enforcement Manual, available at http://www.sec.gov/divisions/ enforce/enforcementmanual.pdf.

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improperly recognizing revenue from certain distributors by providing sales

concessions to induce them to receive quantities of product exceeding their

inventory needs and current demands; (2) that as a result of the Company’s

improper revenue recognition practices, the Company’s reported financial

conditions and results were materially false and misleading and were not in

compliance with GAAP; and (3) that the Company’s disclosure controls and

procedures over financial reporting were ineffective. As a result, Defendants

projections about future revenue, gross profit and earnings lacked a reasonable

basis since they were premised on the Company’s improper revenue recognition

practices.

A. FALSE STATEMENTS REGARDING MAXWELL ’ S FINANCIAL RESULTS AND OPERATIONS

161. In each quarterly and annual SEC filing during the Class Period,

Maxwell reported false and misleading financial results, including inflated

revenues, income metrics and accounts receivable. The Company’s materially

false and misleading financial results reported in its SEC filings issued during the

Class Period are summarized in the following chart: 38

38 Defendants Schramm and Royal signed the 1Q2011 Form 10-Q at p. 23 (filed May 5, 2011); the 2Q2011 Form 10-Q at p. 26 (filed August 8, 2011); the 3Q2011 Form 10-Q at p. 28 (filed November 7, 2011); the 1Q2012 Form 10-Q at p. 26 (filed April 26, 2012); the 2Q2012 Form 10-Q at p. 27 (filed August 2, 2012); and the 3Q2012 Form 10-Q at p. 29 (filed October 30, 2012).

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Cost Period Revenue of Revenue

1011 $35,259 $21,375

2Q11 $38,463 $22,987

3Q11 $41,096 $24,547

4011 $42,493 $23,345

FY2011 $157,311 $92,254

2012 Proxy $157311 $92,254

1Q12 $39,230 $23,093

2Q12 $40,856 $23,876

3Q12 $43,907 $25,534

Notes:

a April 28, 2O Press Release; 102011 Form 10-0 at pp. 4-5 (filed M ay 5, 2011).

b July 28, 2011 Press Release; 202017 Form 1O-0 at pp. 4-5 (filed August 8, 201 7).

c November 3, 2011 Press Release; 30201 Form 10-0 at pp. 4-5 (filed November 7, 201 1).

d February 16, 2012 Press Release; 2011 Form W-K at p. 85 (flied Febru a ry 26, 2012,

Gross Op. Income Net Income Net Income per Accounts

Profit (Loss) (Loss) Diluted Share (Loss) Receivable Notes

$13,884 ($73) $196 $0.01 $32,301 a

$15476 ($1,619) ($1,217) ($0.04) $35,791 b

$16549 $1247 $298 $0.01 $31,838 c

$16,148 $2228 $1,572 $006 $36,131 d

$62,057 $1783 $849 $003 $36,131 e

$62,057 $1783 $849 $003 $36,131

$16,137 $1255 $504 $0.02 $43,147 g

$16980 $3448 $2658 $0.09 $48,514 H

$18,373 $5945 $5,403 $0.19 $52,988 I

February 16, 2012 Press Release; 2011 Form 10-l( at pp. 51-52 (filed February 26, 2012)

March 30, 202 Fo rm 14-A. On p. 38, M axwe ll specifically "incorporate[d] by reference the

consolidated firancial statements a nd the notes re'ated thereto contained n the Company's 2071 Annual Report on Form 10-K, a copy ctwhich is being hjrnished., with this Proxy Statement."

g April 26, 2012 Press Rel ea se; 1 02012 Form 10-0

at pp. 4-5 (filed Apri' 26, 2012.

h August 2, 2012 Press Re lease ; 2020?2 Form W-Q a tpp. 4-5 fed August 2, 202).

I October 25, 2012 Press Release; 302012 Form W-Q a t pp. 4-5 fed October 25, 2012).

162. These financial results were false and misleading because, in the

Company’s March 7, 2013 press release announcing the restatement, Maxwell

publicly admitted to the falsity of these figures, stating that its audit committee:

tiC]oncluded that the previously issued financial statements contained in its annual report on Form 10-K for the year ended December 31, 2011, and all unaudited quarterly reports on Form 10 -Q in 2011 and 2012 . . . as well its selected financial data for the related periods, should no longer be relied upon because of errors in those financial statements. The errors relate to the timing of recognition of revenue from sales to certain distributors.

163. On August 1, 2013, Maxwell filed its long-delayed 2012 Form 10-K,

which included final figures for the Company’s restatement that had swelled to

approximately $19 million in overstated revenue. The finally tally put the

Company’s admittedly false financial results into stark perspective, which are

summarized in the following charts demonstrating the startling effects of the

restatement on both a quarterly basis and yearly basis:

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1 Nine Months Ended Septem be r 30, 2012

As Rpotd Restated

$23,993 $114755

$51,490 $47,823

$10,648 $6,336

$8,565 $4,307

$0.30 $0.15

Three Months Ended December 30, 2011

Rpord Red

$42,493 $37,376

$16,148 $15,010

$2228 $1,171

$1,572 $515

$0.06 $0.02

Three Months Ended Three Months Ended Three Months Ended

September 30 2012 June 30 2012 March 31, 2012

APro4 Rportth Red 4 FreeoyRepoted As Prim pMed Restated

$43,907 $42,713 $40,856 $36,238 $39,230 $35,804

$18,373 $18,142 $16980 $14,524 $16,137 $15,157

$5945 $5,716 $3448 821 $1,255 $(201)

$5403 $5,228 $2458 $31 $504 $(952)

$0.19 $0.18 $009 $- $002 $(0.03)

Three Months Ended Three Months Ended Three Months Ended

September 30, 2011 June 30,2011 March 31, 2011

4 Rpr d Poy A PrJoJy pid Rtfd

$41,096 $42,030 $38,463 $38,546 $35,259 $29,224

$16,549 $16,830 $15,476 $13,901 $13,884 $11,329

$1,247 $1,518 $(1619) $(602) $(73) $(2591)

$298 $569 $(1217) $200) $196 $(2,322)

$0.01 $0.02 S0.04) $tOOl) $0.01 $(0.09)

(Iii thoug a nds, except per share date)

Revenue

Gross proft

Income (loss) from operations

Net income (loss)

Diluted net income (loss) per share

(In thousands, except per share data)

Revenue

Gross profit

Income (loss) from operations

Net income (loss)

Diluted net income (loss) per share

Condensed Consolidated Statement of Operations

Revenues

Cost of Revenue

Gross profit

Operating Expense

Operating income (loss)

Net income

Net income per share

Nine Moth Ended September 30, 2012

As Reported Restatement Adjusted As Restated

$123,993 $(9,238) $114755

72,503 $(5,571) $66,932

51,490 $(3,667) $47,823

40,842 $645 $41,487

$0648 $(4,312) $6,336

$8,565 $(4258) $4,307

$030 $(0.15) $0.15

For the Year Ended December 31, 2011

As Reported Restatement Adjusted As Resta ted

$157311 $(10,135) $147176

$95254 $5148) $90,106

$62057 $(4987) $57070

$60274 $(2700) $57,574

$1183 $(2,281) $(504)

$849 $(2,287) $(1,438)

$003 $(0.08) $0.05)

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164. In the Management’s Discussion and Analysis (“MD&A”) section of

Maxwell’s quarterly and annual filings, the Company repeated its false financial

results and then went on to make the following false and misleading statements

with respect to the sources of, and impacts on, the Company’s revenue:

a. In the first quarter of 2011, revenue increased 32% to $35.3 million , compared with $26.6 million in the same quarter one year ago. The increase in revenue was influenced primarily



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by higher volume in our ultracapacitor product line influenced by continuing strong demand for energy storage and power delivery systems for wind energy, hybrid energy and electric transit vehicles, and micro hybrid automotive systems . 39

b. In the second quarter of 2011, revenue increased 30% to $38.5 million , compared with $29.6 million in the same quarter one year ago. The increase in revenue was influenced primarily by higher volume in our ultracapacitor product line associated with continuing strong demand for energy storage and power delivery systems for wind energy, hybrid energy and electric transit vehicles, and micro hybrid automotive systems . 40

c. In the third quarter of 2011, revenue increased 31% to $41.1 million , compared with $31.5 million in the same quarter one year ago. The increase in revenue was influenced primarily by higher volume in our ultracapacitor product line associated with continuing strong demand for energy storage and power delivery systems for hybrid energy and electric transit vehicles and micro hybrid automotive systems, as well as backup power applications for enterprise computing systems . 41

d. Revenue in 2011 increased 29% to $157.3 million , compared with $121.9 million in 2010. Ultracapacitor product revenue increased by 42% to $97.0 million in 2011, compared with $68.5 million in the prior year. Sales of high voltage capacitor products totaled $42.3 million for 2011, up 18% from the $35.7 million recorded in 2010. Revenue from our microelectronic products was relatively flat year-over-year. The increase in revenue was influenced primarily by higher volume in our ultracapacitor product line associated with continuing strong demand for energy storage and power delivery systems for hybrid energy and electric transit vehicles and micro hybrid automotive systems, as well as backup power applications for enterprise computing systems, and the sale of our proprietary electrode material . 42

e. In the first quarter of 2012, revenue increased 11% to $39.2 million , compared with $35.3 million in the same quarter one year ago. The increase in revenue was influenced primarily by higher volume in our high voltage and microelectronics product lines. We continued to experience growth in our ultracapacitor product line, although at a more modest rate than recent periods, influenced by continuing strong demand for energy storage and power delivery systems for hybrid

39 1Q2011 Form 10-Q at p. 18 (filed May 5, 2011). 40 2Q2011 Form 10-Q at p. 19 (filed August 8, 2011). 41 3Q2011 Form 10-Q at p. 20 (filed November 7, 2011). 42 2011 Form 10-K at p. 34 (filed February 26, 2012).



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energy and electric transit vehicles and micro hybrid automotive systems . 43

f. In the second quarter of 2012, revenue increased 6% to $40.9 million , compared with $38.5 million in the same quarter one year ago. The increase in revenue was influenced primarily by higher revenues for our high voltage capacitor product line. Revenues for our high voltage product line increased 20% during the three months ended June 30, 2012 compared with the prior year, primarily due to changes in our pricing policy concerning sales denominated in foreign currencies. Revenues for our ultracapacitor product line decreased by 1% during the three months ended June 30, 2012 compared with the prior year, influenced by a decline in sales for wind energy applications, offset by continuing strong demand for energy storage and power delivery systems for hybrid energy and electric transit vehicles and micro hybrid automotive systems. 44

g. In the third quarter of 2012, revenue increased 7% to $43.9 million , compared with $41.1 million in the same quarter one year ago. The increase in revenue was influenced primarily by higher revenues for our ultracapacitor product line which increased by 15% compared with the same period in the prior year, influenced primarily by sales growth in the hybrid transit bus and wind energy markets, offset by lower sales for certain backup power applications. 45

165. In the MD&A section of Maxwell’s quarterly and annual filings, the

Company repeated its false financial results and then went on to make the

following false and misleading statements with respect to the Company’s net

I income and net losses:

a. Net income reported for the three months ended March 31, 2011 was $196,000, or $0.01 per diluted share , compared with net income of $1.2 million, or $0.05 per diluted share, in the same quarter one year ago. The decrease in net income was primarily driven by a decrease in the gain on embedded derivative and warrants of $2.2 million, offset by an increase in revenue combined with improvements in gross profit and operating margins . 46

b. Net loss reported for the three months ended June 30, 2011 was $1.2 million, or $0.04 per diluted share , compared with a net loss of $2.6 million, or $0.10 per diluted share, in the same

43 1Q2012 Form 10-Q at p. 20 (filed April 26, 2012). 44 2Q2012 Form 10-Q at p. 19 (filed August 2, 2012). 45 3Q2012 Form 10-Q at p. 20 (filed October 30, 2012). 46 1Q2011 Form 10-Q at p. 18 (filed May 5, 2011).


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quarter one year ago. During the three months ended June 30, 2011 and 2010, we recorded accruals for settlements of legal matters of $2.6 million and $3.4 million, respectively. Further, during the three months ended June 30, 2010, we recorded a gain on embedded derivatives and warrants of $1.2 million. During the current period, we continued to achieve improved operating results due to revenue growth combined with a reduction in operating expenses as a percent of revenue . 47

c. Net income reported for the three months ended September 30, 2011 was $298,000, or $0.01 per diluted share , compared with a net loss of $2.4 million, or $0.09 per share, in the same quarter one year ago. During the three months ended 2010, we recorded an accrual for settlement of a legal matter of $1.7 million. Further, during the three months ended September 30, 2010, we recorded a loss on embedded derivatives and warrants of $814,000. During the current period, we continued to achieve improved operating results due to revenue growth combined with improvements in gross profit and operating margin . 48

d. Net income reported for 2011 was $849,000, or $0.03 per share , while net loss was $6.1 million, or $0.23 per share, in 2010. During 2011, we continued to achieve improved operating results due to revenue growth combined with improvements in gross profit and operating margins . In 2011, we achieved positive income from operations of $1.8 million, compared with an operating loss of $6.5 million in 2010. Revenue grew by 29% in 2011 compared with 2010, while both cost of revenue and operating expenses declined as a percentage of revenue . 49

e. Net income reported for the three months ended March 31, 2012 was $504,000, or $0.02 per diluted share , compared with net income of $196,000, or $0.01 per diluted share, in the same quarter one year ago. The increase in net income was primarily driven by revenue growth combined with improvement in gross profit and operating margins , offset by a decrease associated with a $1.1 million gain on embedded derivatives recorded during the three months ended March 31, 2011. 50

f. Net income reported for the three months ended June 30, 2012 was $2.7 million, or $0.09 per diluted share , compared with a net loss of $1.2 million, or $0.04 per share, in the same quarter one year ago. During the three months ended June 30, 2011, we recorded an expense for the settlement of a legal matter of $2.6 million, which negatively impacted our operating results. During the current period, we continued to achieve

47 2Q2011 Form 10-Q at p. 19 (filed August 8, 2011). 48 3Q2011 Form 10-Q at p. 20 (filed November 7, 2011). 49 2011 Form 10-K at p. 34 (filed February 26, 2012). 50 1Q2012 Form 10-Q at p. 19 (filed April 26, 2012).



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improved operating results due to revenue growth, improved gross margin and a reduction in operating expenses . 51

g. Net income reported for the three months ended September 30, 2012 was $5.4 million, or $0.19 per diluted share , compared with $298,000, or $0.01 per diluted share, in the same quarter one year ago. While revenue growth for the three months ended September 30, 2012 compared with the same period of the prior year was more moderate than in recent annual periods at 7%, we were able to achieve an improved gross profit rate of 42%, compared with 40% in the same quarter of the prior year, and also reduced operating expenses, which were 28% of revenue in the current quarter, down from 37% in the same quarter of the prior year. 52



following false and misleading statements with respect to the Company’s accounts

I receivable and inventories:

a. Net cash used in operating activities was $12.7 million for the first quarter of 2011. Although the Company generated net income, net of non-cash items, of $1.7 million, the usage of cash was driven by an increase in accounts receivable of $5.1 million, an increase of inventories of $3.5 million , and a decrease in other long-term liabilities of $5.6 million. The increase in accounts receivable was due to significant sales in the last two weeks of the quarter. The increase in inventories was related to anticipated product demand and planned larger quantities shipped by sea versus air to reduce freight costs. . . . Net cash provided by operating activities was $2.4 million for the first quarter of 2010, which related primarily to an increase in accounts payable and accrued liabilities during the period. 53

b. Net cash used in operating activities was $13.0 million for the six months ended June 30, 2011. Although we generated $3.2 million from net loss excluding non-cash items, the usage of cash was driven primarily by an increase in accounts receivable of $7.6 million and an increase in inventories of $7.1 million. The increase in accounts receivable was due to revenue growth as well as significant sales in the last month of the quarter. The increase in inventories was related to anticipated product demand. . . . [C]ash flows were positively impacted by a $4.9 million increase in accounts payable and accrued liabilities, which correlates to the increase in inventory. Net cash provided by operating activities was $2.9 million for the six months ended June 30, 2010, which related primarily to

51 2Q2012 Form 10-Q at p. 18 (filed August 2, 2012). 52 3Q2012 Form 10-Q at p. 20 (filed October 30, 2012). 53 1Q2011 Form 10-Q at p. 20 (filed May 5, 2011).



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an increase in accounts payable and accrued liabilities, offset by an increase in accounts receivable. 54

c. Net cash used in operating activities was $7.1 million for the nine months ended September 30, 2011. This usage of cash related primarily to increased inventory levels of $8.6 million and an increase in accounts receivable balances of $4.4 million. The increase in accounts receivable was due to revenue growth as well as significant sales in the last month of the quarter. The increase in inventories was related to anticipated product demand. . . . [C]ash flows were positively impacted by a $5.8 million increase in accounts payable and accrued liabilities, which correlates to the increase in inventory. In addition, included in net cash used in operating activities are net non-cash charges of $6.4 million which negatively impact the statement of operations but do not impact cash. Net cash provided by operating activities was $8.5 million for the nine months ended September 30, 2010, which related primarily to an increase in accounts payable and accrued liabilities, offset by an increase in accounts receivable. 55

d. Net cash used in operating activities was $5.1 million in 2011. This usage of cash related primarily to increased inventory levels of $8.1 million and an increase in accounts receivable balances of $9.1 million. The increase in accounts receivable is due to revenue growth as well as significant sales in the last month of 2011. The increase in inventories relates to anticipated sales growth, as well as a change in our inventory management strategy to ensure that we are able to meet our customers’ delivery requirements. . . . [T]here was a $9.6 million increase in accounts payable and accrued liabilities and other long-term liabilities primarily correlating to the increase in inventory, which positively impacted cash flows. In addition, included in 2011 net income of $849,000 are net non-cash charges of $9.2 million which negatively impact the statement of operations but do not impact cash. Net cash provided by operating activities was $8.7 million in 2010 and net cash used in operating activities was $1.0 million in 2009. Although we achieved positive net income in 2011 of $849,000 compared with a net loss of $6.1 million in 2010, which contributed to an improvement in our operating cash flows, this improvement in cash flows was offset by settlement payments in 2011 to the SEC and DOJ of $6.7 million, as well as a significant consumption of cash related to increased accounts receivable and inventory balances, as compared with 2010 . 56

e. Net cash used in operating activities was $11.8 million for the first quarter of 2012. Although the Company generated net income, net of non-cash items, of $3.6 million, the usage of cash was driven by an increase in accounts receivable of $6.6

54 2Q2011 Form 10-Q at p. 23 (filed August 8, 2011). 55 3Q2011 Form 10-Q at p. 24 (filed November 7, 2011). 56 2011 Form 10-K at p. 39 (filed February 26, 2012).

Case No. 3:13-cv-00580-BEN-RBB—Page 81 AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS


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million, an increase in inventories of $3.2 million , and a decrease in accounts payable and accrued liabilities and other long-term liabilities of $5.5 million. The increase in accounts receivable was primarily due to an increase in days sales outstanding, while the increase in inventories was related primarily to anticipated future product demand. . . . Net cash used in operating activities was $12.7 million for the first quarter of 2011, which related primarily to an increase in accounts receivable of $5.1 million due to significant sales in the last two weeks of the quarter, an increase in inventories of $3.5 million associated with anticipated product demand and planned larger quantities shipped by sea versus air to reduce freight costs , and settlement payments to the SEC and DOJ of $6.7 million, offset by net income, net of non-cash charges, of $1.7 million.57

f. Net cash used in operating activities was $14.0 million for the six months ended June 30, 2012. This usage of cash related primarily to an increase in accounts receivable of $12.2 million and a decrease in accounts payable and accrued liabilities and other long-term liabilities of $6.9 million. The increase in accounts receivable was due to significant sales in the last month of the quarter. . . . Net cash used in operating activities was $12.8 million for the six months ended June 30, 2011, which related primarily to increases in accounts receivable and inventories associated with growth in our business , offset by settlement payments of $6.7 million related to the Foreign Corrupt Practices Act matter. 58

g. Net cash used in operating activities was $11.6 million for the nine months ended September 30, 2012. This usage of cash related primarily to an increase in accounts receivable of $16.7 million and a decrease in accounts payable and accrued liabilities and other long-term liabilities of $6.0 million. The increase in accounts receivable was due to significant sales in the last month of the quarter , as well as slow payment from several customers. . . Net cash used in operating activities was $6.8 million for the nine months ended September 30, 2011, which related primarily to increases in accounts receivable and inventories associated with growth in our business , and settlement payments of $6.7 million related to the Foreign Corrupt Practices Act matter, offset by an increase in accounts payable and accrued liabilities primarily associated with the increase in inventories. 59



57 1Q2012 Form 10-Q at p. 21 (filed April 26, 2012). 58 2Q2012 Form 10-Q at p. 22 (filed August 2, 2012). 59 3Q2012 Form 10-Q at p. 24 (filed October 30, 2012).



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following false and misleading statements with respect to the Company’s gross

profit:

a. In the first quarter of 2011, gross profit increased $3.7 million or 36% compared with the same quarter one year ago. As a percentage of revenue, gross profit increased to 39% compared with 38% in the same period one year ago. Of the increase in gross profit in absolute dollars, $3.3 million related to an increase in the volume of sales , and $566,000 was due to net reductions of product costs. . . . Product cost reductions were driven primarily by advancements in our manufacturing process and product design. The product design advancements allowed us to reduce product cost of our large cell ultracapacitor product line. 60

b. In the second quarter of 2011, gross profit increased $3.6 million or 31% compared with the same quarter one year ago. As a percentage of revenue, gross profit was 40%, consistent with the same period one year ago. Of the increase in gross profit in absolute dollars, $3.6 million related to an increase in the volume of sales , and $268,000 was due to net reductions in product costs. 61

c. In the third quarter of 2011, gross profit increased $4.2 million or 34% compared with the third quarter of 2010. As a percentage of revenue, gross profit increased to 40% compared with 39% in the same quarter one year ago. Of the increase in gross profit in absolute dollars, $3.8 million related to an increase in the volume of sales , and $1.3 million was due to net reductions in product costs. 62

d. Gross profit in 2011 increased $15.2 million, or 32%, to $62.1 million compared with 2010. As a percentage of revenue, gross profit increased to 39% in 2011 compared with 38% in 2010 . Of the increase in gross profit in absolute dollars, $13.6 million related to an increase in the volume of sales and $2.7 million was due to net reductions of product costs. . . . Product cost reductions related primarily to our high-voltage capacitors product line, and were due to price increases, material cost reductions, and a shift in sales mix to higher margin products. In addition, product design advancements allowed us to continue to reduce the product costs of our large cell ultracapacitor product line. 63

e. In the first quarter of 2012, gross profit increased $2.3 million or 16% compared with the same quarter one year ago. As a percentage of revenue, gross profit increased to 41% compared

60 1Q2011 Form 10-Q at pp. 18-19 (filed May 5, 2011). 61 2Q2011 Form 10-Q pp. 19-20 (filed August 8, 2011). 62 3Q2011 Form 10-Q at p. 21 (filed November 7, 2011). 63 2011 Form 10-K at p. 35 (filed February 26, 2012).



with 39% in the same period one year ago. Of the increase in gross profit in absolute dollars, $1.3 million related to an increase in the volume of sales , $228,000 related to favorable effects from foreign exchange rate fluctuations, and $690,000 was due to net reductions of product costs. The reduction in our net product costs was driven primarily by a shift in product mix toward higher margin products. 64

f. In the second quarter of 2012, gross profit increased $1.5 million or 10% compared with the second quarter of 2011. As a percentage of revenue, gross profit margin increased to 42% compared with 40% in the same quarter one year ago. Of the increase in gross profit in absolute dollars, $1.6 million related to an increase in the volume of sales , and $540,000 was due to net reductions in product costs. 65

g. In the third quarter of 2012, gross profit increased $1.8 million or 11% compared with the third quarter of 2011. As a percentage of revenue, gross profit margin increased to 42% compared with 40% in the same quarter one year ago. Of the increase in gross profit in absolute dollars, $1.9 million related to an increase in the volume of sales , and $693,000 was due to net reductions in product costs for both our ultracapacitor and high voltage product lines. 66

168. After releasing the Company’s quarterly results, the Individual

Defendants would conduct investor conference calls to discuss those quarterly

results. The Individual Defendants repeated the false and misleading statements

about Maxwell’s financial results on these calls. The Individual Defendants also

made additional false and misleading statements in their prepared remarks and in

response to analysts’ questions.

169. On the quarterly investor conference calls, Schramm and Royal

falsely stated the following with respect to Maxwell’s revenue in their prepared

remarks:

a. Schramm: We’re pleased to report that Maxwell recorded total revenue of $35.3 million for the first quarter ended March 31, 2011 . That’s up 32% from the $26.6 million reported in the same period a year ago. That growth was driven mainly by strong ultracapacitor sales of $21.4 million, which is up 55% from the $13.8 million recorded in Q1 of 2010. Sales of microelectronics and high voltage capacitor products came in at

64 1Q2012 Form 10-Q at p. 20 (filed April 26, 2012). 65 2Q2012 Form 10-Q at p. 19 (filed August 2, 2012). 66 3Q2012 Form 10-Q at p. 20 (filed October 30, 2012).

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$13.9 million for the quarter, up 8% from last year’s first quarter. And both of these legacy product lines continued to make important contributions to the Maxwell bottom line . 67

b. Royal: Our revenues were $35.3 million for the first quarter 2011 , up 3% from Q4 2010. The higher revenues in the first quarter were driven by a 6% increase in ultracapacitor product sales , which generated $21.4 million in revenues for the quarter. Revenues from our Microelectronics business were down slightly this quarter, while our high voltage product revenues were essentially flat compared to Q4 2010. 68

c. Schramm: We’re pleased to report that Maxwell recorded total revenue of $38.5 million for the second quarter ended June 30, 2011 . That’s up 30% from the $29.6 million reported in the same period a year ago. That growth was driven mainly by strong ultracapacitor sales of $24.4 million. That’s up 54% from the $15.9 million recorded in Q1 of 2010. Sales of microelectronics and high-voltage capacitor products came in at $14 million for the quarter, up 2% from last year’s first quarter, and both of these mature product lines continue 9to make significant contributions to the Maxwell bottom line . 6

d. Royal: Our revenues were $38.5 million for the second quarter of 2011 , up 9% from Q1 2011. The higher revenues in the second quarter were driven by a 14% sequential increase in ultracapacitor product sales , which generated $24.4 million in revenues for the quarter. Revenues from our microelectronics products were down slightly this quarter, while our high voltage product revenues were up slightly compared with Q1 2011. 70

e. Schramm: We’re pleased to report that Maxwell recorded total revenue of $41.1 million for the third quarter ending September 30th, 2011 . Now that’s up 31% from the same period a year ago. That growth was mainly driven by strong ultracapacitor sales of $24.9 million. Now that’s up 34% from Q3 of 2010. Sales of the microelectronics and the high-voltage capacitor products came in at $16.2 million for the quarter, up 26% from last year’s first quarter. That’s higher than usual for these mature product lines which both continue to deliver solid contributions to our bottom line . 71

f. Royal: Our revenues were $41.1 million , up 7% from Q2, 2011. This quarter, higher revenues were primarily driven by growth in our high voltage business, related to an increase in shipments and favorable currency exchange rates. Sales of our

67 1Q2011 Investor Conference Call (held April 28, 2011). 68 1Q2011 Investor Conference Call (held April 28, 2011). 69 2Q2011 Investor Conference Call (held July 28, 2011). 70 2Q2011 Investor Conference Call (held July 28, 2011). 71 3Q2011 Investor Conference Call (held November 3, 2011).


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ultracapacitor products were up slightly quarter-over-quarter as we continued to achieve substantial growth in the bus and automotive markets , while sales in the wind sector were down primarily associated with a slowdown of the wind market in China. 72

g. Schramm: We’re really pleased to report that Maxwell reported total revenue of $42.5 million for the fourth quarter ended December 31, 2011 . Now that’s up 24% from the same period a year ago. That growth was driven mainly by strong ultracapacitor sales of $26.2 million . That’s up 30% from Q4 of 2010. Sales of our microelectronics and the high-voltage capacitor products came in at $16.3 million for the quarter, up 16% from last year’s fourth quarter. That’s higher than usual for these mature product lines, which both continued to deliver solid contributions to the Maxwell bottom line. 73

h. Royal: Our revenues are $42.5 million for the fourth quarter 2011 , up 3% from Q3 2011. The higher revenues in the fourth quarter were driven by a 5% increase in ultracapacitor product sales , which generated $26.2 million in revenues for the quarter. Despite what we believe to be a temporary slowdown in the wind market due to regulatory changes in China, we continue to grow our sales in the bus, auto, and uninterrupted power supply market . Revenues from our microelectronics and high-voltage business were relatively flat compared to Q3 2011. 74

i. Schramm: Maxwell reported total revenue of $39.2 million for the first quarter ended March 31, 2012 now that’s up 11% from the same period a year ago. That growth was driven not only by ultracapacitor sales of $22 million, which is up 3% from Q1, 2011, but also by unusually strong sales of microelectronics and high voltage capacitor products , which came in at $17.2 million, which is up 24% from last year’s first quarter. 75

Royal: Our revenues are $39.2 million for the first quarter of 2012 down 8% from Q4, 2011. Our ultracapacitor product line sales declined by 16% compared with Q4, 2011. The Chinese New Year holiday and overall historical seasonal softness typically impact our top line results in the first quarter of each year. In addition, we experienced some minor selling in Europe during the quarter and we have received feedback from European customers that the slowing may continue for the foreseeable future. As a result we have modified our

72 3Q2011 Investor Conference Call (held November 3, 2011). 73 4Q2011 Investor Conference Call (held February 16, 2012). 74 4Q2011 Investor Conference Call (held February 16, 2012). 75 1Q2012 Investor Conference Call (held April 26, 2012).


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revenue expectations for the full year to a range of 15% to 20% overall revenue growth for 2012. 76

k. Schramm: We’re pleased to report that Maxwell recorded total revenue of $40.9 million for the second quarter into June 30, 2012. Now, that’s up 12% sequentially from the first quarter and up 6% from the same quarter a year ago. Ultracapacitor sales totaled $24.2 million, up 10% sequentially from the first quarter, but down slightly from the second quarter of 2011 due mainly to continuing soft demand in Europe. Second quarter sales of microelectronics and high voltage capacitor products came in at $16.7 million, down a bit from the unusually high sales posted in the first quarter, but up 19% from last year’s second quarter. 77

Royal: Our revenues were $40.9 million for the second quarter of 2012 , up 4% from Q1 2012. The higher revenues in the second quarter were driven by a 10% sequential increase in ultracapacitor product sales which generated $24.2 million in revenues for the quarter. Continued strong demand for ultracapacitor products for hybrid electric vehicles, in wind turbine blade FIT systems were the main drivers of this quarter’s growth . 78

m. Schramm: We’re pleased to report that Maxwell recorded total revenue of $43.9 million for the third quarter ended September 30, 2012 . Now that’s up 7% both sequentially from the second quarter in year-to-year from the same quarter last year. Ultracapacitor sales totaled $28.8 million, up 19% sequentially from the second quarter, and up 15% from the second quarter of 2011. Third quarter sales of microelectronics and high-voltage capacitor products came in at $15.1 million, down 9% from the strong sales posted in the second quarter and down 7% from last year’s third quarter. 79

n. Royal: Our revenues were $43.9 million for the third quarter 2012, up 7% from Q2 2012. The higher revenues in the third quarter were driven by a 19% sequential increase in ultracapacitor product sales, which generated $28.8 million in revenues for the quarter. Higher demand in the third quarter for ultracapacitor products for hybrid public transit vehicles in Asia was the driver of this quarter’s growth . 80

76 1Q2012 Investor Conference Call (held April 26, 2012). 77 2Q2012 Investor Conference Call (held August 2, 2012). 78 2Q2012 Investor Conference Call (held August 2, 2012). 79 3Q2012 Investor Conference Call (held October 25, 2012). 80 3Q2012 Investor Conference Call (held October 25, 2012).


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170. On the quarterly investor conference calls, Schramm and Royal

falsely stated the following with respect to Maxwell’s net income and net losses in

their prepared remarks:

a. Royal: We reported non-GAAP net income of $161,000 or $0.01 per diluted share for the first quarter compared with non-GAAP net income of $1.1 million or $0.04 per diluted share for the fourth quarter 2010. 81

b. Royal: We reported non-GAAP net income of $1.7 million or $0.06 per diluted share for the second quarter compared with non-GAAP net income of $161,000 or $0.01 per diluted share for the first quarter of 2011. 82

c. Royal: Non-GAAP income from operations was up slightly quarter-over-quarter at $2.1 million for Q3 2011 , compared to $1.9 million for Q2 2011. However, we incurred a higher tax expense in Q3 2011, compared to Q2 due to higher profits from our Swiss subsidiary. Therefore, non-GAAP net income was down quarter-over-quarter at $1.2 million or $0.04 per diluted share for the third quarter compared with non-GAAP net income of $1.7 million or $0.06 per diluted share for the second quarter of 2011. Non-GAAP income from operations and non-GAAP net income excludes stock-based compensation expense, amortization of intangible assets and the Q2 2011 expense for the anticipated legal settlement. 83

d. Royal: We reported non-GAAP net income of $1.9 million or $0.07 per diluted share for the fourth quarter, compared with non-GAAP net income of $1.2 million or $0.04 per diluted share for the third quarter of 2011. For the full year, non-GAAP net income was $4.9 million or $0.17 per diluted share for 2011 , compared with $1.3 million or $0.05 per diluted share for 2010. 84

e. Royal: Non-GAAP net income was $1.8 million or $0.07 per diluted share for the first quarter compared with non-GAAP net income $1.9 million or $0.07 per diluted share for the fourth quarter of 2011. 85

f. Schramm: .A particular note is that despite the challenging global economic environment, a favorable revenue mix and

81 1Q2011 Investor Conference Call (held April 28, 2011). 82 2Q2011 Investor Conference Call (held July 28, 2011). 83 3Q2011 Investor Conference Call (held November 3, 2011). 84 4Q2011 Investor Conference Call (held February 16, 2012). 85 1Q2012 Investor Conference Call (held April 26, 2012).


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careful expense controls enable the company to post net income of $2.7 million or $0.09 per share for the quarter . 86

g. Royal: Non-GAAP net income was $3.5 million or $0.12 per diluted share for the second quarter compared with non-GAAP net income of $1.9 million or $0.07 per diluted share for the first quarter of 2012. 87

h. Schramm: In the face of the current challenging global economic environment, improving the efficiency and effective expense controls enabled the company to post net income of $5.4 million or $0.19 per share for the third quarter that compares with net income of $298,000 or $0.01 per share in the same period last year. On a non-GAAP basis, third quarter net income was $6 million or $0.21 per share compared to $1.2 million or $0.04 per share in Q3 of last year . 88

Royal: Our cost control measures during Q3, as well as other reductions in expense, proved for significant growth to our bottom line results compared to the second quarter, non-GAAP net income was $6 million or $0.21 per diluted share for the third quarter compared with non-GAAP net income of $3.5 million or $0.12 per diluted share for the second quarter of 2012. 89

171. On the quarterly investor conference calls, Royal falsely stated the

following with respect to Maxwell’s accounts receivable in his prepared remarks:

a. The significant components of our cash activity for the quarter include $6.7 million of the initial settlement payment to the SEC and DOJ, an increase in accounts receivable of $5.1 million and capital spending of $2.9 million. The significant increase in accounts receivable is due to the shipment linearity in the first quarter of 2011. 90

b. Cash used in operations in Q2 was approximately $238,000 and the increase in accounts payable was offset by consumption of cash related to inventory growth and increased accounts receivable balances. The increase in accounts receivable is due to sales growth and shipment linearity in the second quarter of 2011 with 57% of shipments falling in the final month of the quarter. While our cash balances are lower at the end of Q2, this is driven by investment in capital equipment and

86 2Q2012 Investor Conference Call (held August 2, 2012). 87 2Q2012 Investor Conference Call (held August 2, 2012). 88 3Q2012 Investor Conference Call (held October 25, 2012). 89 3Q2012 Investor Conference Call (held October 25, 2012). 90 1Q2011 Investor Conference Call (held April 28, 2011).


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facilities as well as an increase in inventory to support Q3 sales. 91

c. This quarter, we generated $5.9 million in cash from operations, while we invested $3.7 million in capital spending. Cash generated from operations in Q3 related primarily to our net income of $298,000, which included net non-cash charges of $2.2 million and a decrease in accounts receivable balances of $3.2 million as we achieve strong collections during the third quarter . 92

d. Cash generated from operations was lower in the current quarter compared to the prior quarter primarily due to normal patterns associated with the collection of accounts receivable, as a few of our large customers extend their payments due to us at year-end . 93

e. The significant components of our cash activity for the quarter include $10.3 million raised under our shelf registration statement, $5 million in net borrowings, $5.5 million in settlement payments made to the SEC and DOJ. Capital spending of $4.1 million and a combined increase in accounts receivable and inventories of $9.8 million. The increase in accounts receivable was primarily due to an increase in day’s sales outstanding and the increase in inventory that’s associated with anticipated future product demand . 94

f. The significant components of our cash activity for the quarter include an increase in accounts receivable, a $5.6 million in capital spending of $4.2 million. The increase in accounts receivable is primarily attributable to shipment linearity, where a significant portion of the quarter sales were shipped in the third month of the quarter and also to a few significant customer accounts that are past due but which we expect to collect . 95

g. Operating cash flows for the quarter reflected net income of $5.4 million, which includes non-cash charges of $2.5 million. This source of cash was offset by an increase in accounts receivable of $4.5 million as well as capital spending of $4.8 million. The increase in accounts receivable is primarily attributable to the increase in sales as well as shipment linearity, whereas significant portion of the quarter sales were shipped in the third month of the quarte r. 96

91 2Q2011 Investor Conference Call (held July 28, 2011). 92 3Q2011 Investor Conference Call (held November 3, 2011). 93 4Q2011 Investor Conference Call (held February 16, 2012). 94 1Q2012 Investor Conference Call (held April 26, 2012). 95 2Q2012 Investor Conference Call (held August 2, 2012). 96 3Q2012 Investor Conference Call (held October 25, 2012).


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172. On the quarterly investor conference calls, Royal falsely stated the

following with respect to Maxwell’s gross profit in his prepared remarks:

a. Non-GAAP gross profit was $14.1 million or 40% of revenues for the first quarter of 2011 compared to non-GAAP gross profit of $13.1 million or 38% of revenues for the fourth quarter of 2010. In the current quarter, non-GAAP gross profit was positively impacted by improvement in our gross profit as a percentage of sales on microelectronics and high voltage products, but was negatively impacted by unfavorable product mix and higher outbound freight costs for ultracapacitor products . 97

b. Non-GAAP gross profit was $15.7 million or 41% of revenues for the second quarter of 2011 compared to non-GAAP gross profit of $14.1 million or 40% of revenues for the first quarter of 2011. In the current quarter, non-GAAP gross profit reflected improvement in our gross profit as a percentage of sales on ultracapacitor products due to ongoing product cost reduction programs and higher volume . 98

c. Non-GAAP gross profit was $16.7 million for the third quarter of 2011 compared to non-GAAP gross profit of $15.7 million for the second quarter of 2011. For both the second and third quarters, we achieved a non-GAAP gross profit margin of 41% as we continue to focus on cost reduction and gross profit improvement . 99

d. Non-GAAP gross profit was $16.3 million in both the first quarter and Q4, 2011 . As a percentage of revenue non-GAAP gross profit was 41% of revenues for the first quarter of 2012 compared to 38% of revenues for the fourth quarter of 2011. In the current quarter non-GAAP gross profit was positively impacted by favorable product mix associated with increased contribution from our high-voltage and microelectronics products . 100

e. Non-GAAP gross profit was $17.3 million in the second quarter of 2012 compared to $16.4 million in Q1 of 2012. As a percentage of revenue, non-GAAP gross profit was 42% of revenues for the second quarter of 2012 compared to 41% of revenues for the first quarter of 2012. The increase in gross margin is due primarily to product mix as well as continuing cost reductions for our ultracapacitor products . 101

97 1Q2011 Investor Conference Call (held April 28, 2011). 98 2Q2011 Investor Conference Call (held July 28, 2011). 99 3Q2011 Investor Conference Call (held November 3, 2011). 100 1Q2012 Investor Conference Call (held April 26, 2012). 101 2Q2012 Investor Conference Call (held August 2, 2012).


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f. Non-GAAP gross profit was $18.6 million in the third quarter of 2012 compared to $17.3 million in Q2 of 2012. As a percentage of revenue, non-GAAP gross profit was 42% of revenues for both the second and third quarters of 2012. Over time, we’ve been able to exceed our target level of gross profit margin of 40% through continuing cost efficiencies for our ultracapacitor and high voltage products . 102

173. In addition to restating the Company’s financial results, Maxwell

flatly admitted in its 2012 Form 10-K that, as a result of the audit committee’s

investigation and management’s subsequent review, “investors should no longer

rely upon . . . any earnings releases or other communications relating to these

periods.” 103 Defendants failed to inform investors that Maxwell’s increasing

revenue was the result of improper revenue recognition in violation of GAAP, thus

omitting material adverse information from their Class Period representations. For

example:

a. As reported by CW 1, Maxwell used Alfatec whereby it would

ship products to Alfatec despite knowing in fact that the Company would not

receive timely payment for its products. ¶91. CW 5 confirmed that Alfatec was

used “as a buffer” to “hold inventory” for end-users, in particular Continental.

¶107.

b. Indeed, as CW 3 reported, there was “always a scramble” to

process Alfatec orders and to put the products “on a boat” so that those orders

could be counted before a reporting period ended. According to CW 3, this

“scramble” occurred not only at Alfatec, but at multiple other distributors in Asia

and the Americas throughout her tenure. ¶94. CW 4 confirmed that the

Company’s illicit business practices were not confined to dealings with European

of North American distributors. ¶100.

c. The various CW accounts confirm that the “scramble” to get

products to distributors prior to the end of reporting periods, and the resulting

102 3Q2012 Investor Conference Call (held October 25, 2012). 103 2012 Form 10-K at p. 32 (filed August 1, 2013).

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improperly recognized revenue, was one of the primary reasons that Maxwell was

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forced to restate its financial results. ¶¶94, 101, 117.

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d. As CW 3 and CW 4 confirm, Schramm and Royal expected

4 quarterly sales to match “flash reports” to which only they were privy. These flash

5 reports were “always inflated” because of the overall sales quota that was expected

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to be fulfilled and reflected more orders than were actually in the pipeline for that

7 period. ¶¶95, 106.

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e. CW 3 reported, and CW 4 confirmed, that only Schramm and

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Royal could verbally order that the credit holds placed on delinquent distributors

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be lifted so that other orders from the distributors could be processed. ¶¶97, 104,

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120, 131.

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f. CW 4 stated that the decision of what could be shipped and

13 whether revenue could be recognized would be decided by Defendants Schramm

14 and Royal, with Royal being the primary decision maker in most instances. ¶118.

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In fact, according to CW 4, Defendants Schramm and Royal always had to directly

16 authorize the modifications from the original contract. ¶120.

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g. CW 4 confirmed and recalled several instances of revenue

18 recognized on transactions involving extended payment modifications, including

19 an Alfatec shipment valued at between $500,000 to $1,000,000 that was necessary

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for Maxwell to meet quarterly revenue targets, regardless of the fact that Alfatec

21 was significantly past due by 120 or 150 days and on credit hold. ¶¶121, 122. CW

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4 also recalled an Alfatec deal where the Company had shipped to Alfatec 2,200

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48-volt modules, worth $2.2 million, intended for use in Chinese hybrid buses, all

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the while knowing that there was no identified end-user. ¶¶124, 125. CW 4

25 personally met with Bjoern Koehler, the son of Alfatec’s founder discussing

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Alfatec’s need to “get rid of this stuff”— i.e. , find a customer for the additional

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h. As reported by CW 4, Maxwell had “open” or “blanket

2 purchase orders” from some of its customers that provided future shipping dates

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for orders; however Maxwell would pull in orders that were expected to be shipped

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in a future period and instead shipping them in the current quarter to meet

5 estimates or guidance. CW 4 recounted an improper revenue recognition that was

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implicated in the restatement, involving a Korean distributor of products whose

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final customer was Samsung where Maxwell was “shipping something that the

8 customer didn’t need for three or four months.” ¶127.

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i. CW 4 also described the “scramble” to meet revenue goals

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before the end of a quarter and the variety of methods used to meet numbers,

11 which included contacting customers to seek orders from them to make up the

12 quarter end “delta” between actual sales and sales needed to make Wall Street

13 earnings projections. CW 4 stated that those end-of-quarter deals often required

14 concessions, as the same high-volume multi-million dollar customers were often

15 contacted and involved discounts that deviated from the original contracts

16 associated with the transactions. ¶¶101-104.

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j. CW 4 reported conversations where Schramm directed

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Andrews and herself to “make the numbers,” affirming that the Individual

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Defendants asked her to try and “find revenue” on the very last days of quarter in

20 order to meet quarterly revenue goals. ¶¶114, 117. Further showing revenue

21 manipulation, during one carpool conversation involving a quarter were Maxwell’s

22 numbers were literally “too good”, Schramm said that the results could not be

23 reported and certain orders should not be counted until the ensuing quarter. ¶128.

24

k. Maxwell itself confirmed the CW’s accounts when it

25 announced on March 7, 2013 that its internal investigation, “discovered

26 arrangements with certain distributors regarding the payment terms for sales to

27 such distributors with respect to certain transactions. These arrangements had not

28

been communicated to Maxwell’s finance and accounting department and,



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therefore, had not been considered when recording revenue on shipments to these

distributors.” ¶¶146, 147, 152.

174. The Individual Defendants also made several false and misleading

statements in their answers to various analysts’ questions. For instance, on the

2Q2011 investor conference call, an analyst asked for an explanation regarding

anomalous activity with respect to Maxwell’s accounts receivable. Royal falsely

stated in response:

<Q - Zach Larkin>: It looks like last quarter we saw a tick up in accounts receivable due to shipments that came through right at the end of the quarter. We’ve seen that again this quarter. Is that just normal – just kind of normal quarterly seasonality, if I can use that phrase that we should expect to kind of see a lot of orders come back-end loaded toward the end or is that something maybe unique in these last two quarters?

<A - Kevin S. Royal>: Well, if you look back over the last six quarters, what you would see is that these last two quarters have been significantly more back-end loaded than the previous quarters. I would be cautiously optimistic that where we’ll see this quarter is a slight improvement and into Q4 as well. But we’re not planning on a significant improvement in the linearity. And if you take a look at the receivables, in large part the growth that we had in Q2 is directly related to the growth in revenue. So we didn’t have deterioration of DSOs. We just had about the same level of back-end loaded shipments during the quarter. And then the increase in the revenue is throughout the receivable balances within the Q2 . 104

175. On January 12, 2012, Schramm presented at the Needham Growth

Conference. In response to a question, he falsely stated:

The foreign currency, everything we sell into China, we build it the good old American way. It’s in dollars. We request – we don’t request – we expect a line of credit or cash before shipment out of China. We don’t give terms. The only exposure we have comes out of Switzerland because we build the product there in Swiss francs, so we sell most of it in Swiss francs or euros. So, that’s the only exposure we have. Most of its dollars.

176. On May 31, 2012, Royal presented at the Cowen & Co. Technology

Media and Telecom Conference. In response to a question, Royal falsely stated:

<Q>: How fast do you think business can bounce back? You know, higher expectations, you lowered them; maybe going to lower them

104 2Q2011 Investor Conference Call (held July 28, 2011).


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again. I don’t know. But is it gradual or is there some big step function where people get back online?

<A - Kevin S. Royal>: So the revised guidance is for revenue growth for the year of 15% to 20% and we took very careful consideration in formulating that guidance. So we would expect, as we stand here today, that that would be an achievable range for revenue growth for 2012.

177. On the 1Q2012 investor conference call, an analyst inquired into the

composition of the Company’s receivables and inventory. Royal falsely stated in

response:

<Q - Colin W. Rusch>: Hi, can you just give us a better sense of the composition of both the receivables and the inventories and let us know if you’ve changed your terms with anyone in China on those receivables?

<A - Kevin S. Royal>: So, I guess, it would be related to the question on China receivables. It will depend on change our terms in relation to what period. But typically what we do in China is, we require either a payment in advance or a letter of credit. There are customers that have shown that they pay on time and pay consistently that we do grant terms.

And so, with respect to customers that receive terms that’s been fairly consistent over the last couple of two, three quarters. With respect to the increase in receivables, some of that is related to linearity . We also have $2.7 million receivable recorded related to the derivative lawsuit, that’s a receivable from the insurance company and that was paid in the second quarter so that will not show up in the receivables. 105

178. As Maxwell has now publicly confessed, its financial results for these

reporting periods were false. As a result, “investors should no longer rely upon our

previously released financial statements for any quarterly or annual periods after

and including March 31, 2011, and any earnings releases or other communications

relating to these periods.” 106 Defendants failed to inform investors that Maxwell’s

revenue, cost of revenue, operating income, net income, net income per share,

accounts receivable, and gross profit figures were the result of improper revenue

recognition in violation of GAAP, thus omitting material adverse information from

their Class Period representations. For example:

105 1Q2012 Investor Conference Call (held April 26, 2012). 106 2012 Form 10-K at p. 32 (filed August 1, 2013).


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1

a. As reported by CW 1, Maxwell used Alfatec whereby it would

2 ship products to Alfatec despite knowing in fact that the Company would not

3 receive timely payment for its products. ¶91. CW 5 confirmed that Alfatec was

4 used “as a buffer” to “hold inventory” for end-users, in particular Continental.

5

¶107.

6

b. Indeed, as CW 3 reported, there was “always a scramble” to

7 process Alfatec orders and to put the products “on a boat” so that those orders

8 could be counted before a reporting period ended. According to CW 3, this

9

“scramble” occurred not only at Alfatec, but at multiple other distributors in Asia

10 and the Americas throughout her tenure. ¶94. CW 4 confirmed that the

11

Company’s illicit business practices were not confined to dealings with European

12 of North American distributors. ¶100.

13 c. The various CW accounts confirm that the “scramble” to get

14 products to distributors prior to the end of reporting periods, and the resulting

15

improperly recognized revenue, was one of the primary reasons that Maxwell was

16

forced to restate its financial results. ¶¶94, 101, 117.

17

d. As CW 3 and CW 4 confirm, Schramm and Royal expected

18 quarterly sales to match “flash reports” to which only they were privy. These flash

19 reports were “always inflated” because of the overall sales quota that was expected

20

to be fulfilled and reflected more orders than were actually in the pipeline for that

21 period. ¶¶95, 106.

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e. CW 3 reported, and CW 4 confirmed, that only Schramm and

23

Royal could verbally order that the credit holds placed on delinquent distributors

24

be lifted so that other orders from the distributors could be processed. ¶¶97, 104,

25

120, 131.

26

f. CW 4 confirmed and recalled several instances of revenue

27 recognized on transactions involving extended payment modifications, including

28 an Alfatec shipment valued at between $500,000 to $1,000,000 that was necessary



1

for Maxwell to meet quarterly revenue targets, regardless of the fact that Alfatec

2 was significantly past due by 120 or 150 days and on credit hold. ¶¶121, 122. CW

3

4 also recalled an Alfatec deal where the Company had shipped to Alfatec 2,200

4

48-volt modules, worth $2.2 million, intended for use in Chinese hybrid buses, all

5

the while knowing that there was no identified end-user. ¶¶124, 125. CW 4

6 personally met with Bjoern Koehler, the son of Alfatec’s founder discussing

7

Alfatec’s need to “get rid of this stuff” –i.e., find a customer for the additional

8 products. ¶126.

9

g. As reported by CW 4, Maxwell had “open” or “blanket

10 purchase orders” from some of its customers that provided future shipping dates

11

for orders; however Maxwell would pull in orders that were expected to be shipped

12

in a future period and instead shipping them in the current quarter to meet

13 estimates or guidance. CW 4 recounted an improper revenue recognition that was

14

implicated in the restatement, involving a Korean distributor of products whose

15

final customer was Samsung where Maxwell was “shipping something that the

16 customer didn’t need for three or four months.” ¶127.

17

h. CW 4 also described the “scramble” to meet revenue goals

18

before the end of a quarter and the variety of methods used to meet numbers,

19 which included contacting customers to seek orders from them to make up the

20 quarter end “delta” between actual sales and sales needed to make Wall Street

21 earnings projections. CW 4 stated that those end-of-quarter deals often required

22 concessions, as the same high-volume multi-million dollar customers were often

23 contacted and involved discounts that deviated from the original contracts

24 associated with the transactions. ¶¶101-104.

25

i. CW 4 reported conversations where Schramm directed

26

Andrews and herself to “make the numbers,” affirming that the Individual

27

Defendants asked her to try and “find revenue” on the very last days of quarter in

28 order to meet quarterly revenue goals. ¶¶114, 117. Further showing revenue



manipulation, during one carpool conversation involving a quarter were Maxwell’s

numbers were literally “too good”, Schramm said that the results could not be

reported and certain orders should not be counted until the ensuing quarter. ¶128.

j. CW 4 stated that the decision of what could be shipped and

whether revenue could be recognized would be decided by Defendants Schramm

and Royal, with Royal being the primary decision maker in most instances. ¶118.

In fact, according to CW 4, Defendants Schramm and Royal always had to directly

authorize the modifications from the original contract. ¶120.

k. Maxwell itself confirmed the CW’s accounts when it

announced on March 7, 2013 that its internal investigation, “discovered

arrangements with certain distributors regarding the payment terms for sales to

such distributors with respect to certain transactions. These arrangements had not

been communicated to Maxwell’s finance and accounting department and,

therefore, had not been considered when recording revenue on shipments to these

distributors.” ¶¶146, 147, 152.

B. FALSE STATEMENTS REGARDING MAXWELL ’ S ACCOUNTING PRACTICES

179. In each of Maxwell’s quarterly filings, the Company stated in

substantially identical language the following with respect to the presentation of its

financial results:

Financial Statement Presentation

The accompanying condensed consolidated financial statements include the accounts of Maxwell Technologies, Inc. and its subsidiaries. All significant intercompany transactions and account balances have been eliminated in consolidation. The Company has prepared the accompanying unaudited interim condensed consolidated financial statements in accordance with the instructions to Form 10-Q and the standards of accounting measurement set forth in the Interim Reporting Topic of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) . Consequently, the Company has not necessarily included in this Form 10-Q all information and footnotes required for audited financial statements. In the opinion of the Company’s management, the accompanying unaudited

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condensed consolidated financial statements in this Form 10-Q contain all adjustments (consisting only of normal recurring adjustments, except as otherwise indicated) necessary to present fairly the financial position, results of operations, and cash flows of Maxwell Technologies, Inc. for all periods presented . The results reported in these condensed consolidated financial statements should not be regarded as necessarily indicative of results that may be expected for any subsequent period or for the entire year. These unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto included in the Company’s latest Annual Report on Form 10-K. Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) have been condensed or omitted in the accompanying interim consolidated financial statements. 107

180. In each of Maxwell’s quarterly filings, the Company falsely stated in

substantially identical language the following with respect to its accounting

practices and policies:

Critical Accounting Policies and Estimates

We describe our significant accounting policies in Note 1, Description of Business and Summary of Significant Accounting Policies, of the notes to consolidated financial statements included in our Annual Report on Form 10-K. . . We discuss our critical accountW

inancial stimates

in Item 7, Management’s Discussion and Analysis Condition and Results of Operations, in our Annual Report on Form 10-K . . . . There have been no significant changes in our significant accounting policies or critical accounting estimates . . . 108

181. In Maxwell’s 2011 Form 10-K, the Company falsely reported its

revenue recognition policy to investors:

Revenue Recognition

Revenue is derived primarily from the sale of manufactured products directly to customers. Product revenue is recognized, according to the guidelines of the Securities and Exchange Commission (“SEC”)

107 1Q2011 Form 10-Q at p. 7 (filed May 5, 2011); 2Q2011 Form 10-Q p. 7 (filed August 8, 2011); 3Q2011 Form 10-Q at p. 7 (filed November 7, 2011); 1Q2012 Form 10-Q at p. 8 (filed April 26, 2012); 2Q2012 Form 10-Q at p. 8 (filed August 2, 2012); and 3Q2012 Form 10-Q at p. 8 (filed October 30, 2012). 108 1Q2011 Form 10-Q at p. 21 (filed May 5, 2011); 2Q2011 Form 10-Q at p. 24 (filed August 8, 2011); 3Q2011 Form 10-Q at p. 25 (filed November 7, 2011); 1Q2012 Form 10-Q at p. 23 (filed April 26, 2012); 2Q2012 Form 10-Q at p. 24 (filed August 2, 2012); and 3Q2012 Form 10-Q at p. 26 (filed October 30, 2012).



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Staff Accounting Bulletin (“SAB”) Numbers 101, Revenue Recognition in Financial Statements, and 104, Revenue Recognition, when all of the following criteria are met: (1) persuasive evidence of an arrangement exists (upon contract signing or receipt of an authorized purchase order from a customer); (2 ,) title passes to the customer at either shipment from the Company s facilities or receipt at the customer facility, depending on shipping terms; (3) customer payment is deemed fixed or determinable and free of contingencies or significant uncertainties; and

f (4)

collectability is reasonably assured . If a volume discount is ofered, revenue is recognized at the lowest price to the customer. This method has been consistently applied from period to period and there is no right of return. 109

182. In the same Form 10-K, Maxwell falsely reported its policies

governing the Company’s accounts receivable and allowance for doubtful

I accounts:

Accounts Receivable and Allowance for Doubtful Accounts

Trade receivables are stated at gross invoiced amount less an allowance for uncollectible accounts. The allowance for doubtful accounts reflects management’s best estimate of probable losses inherent in the accounts receivable balance. Management determines the allowance for doubtful accounts based on known troubled accounts, historical experience and other currently available evidence. 110

183. The preceding emphasized statements were false and misleading

because the Company recognized revenue in complete violation of GAAP:

a. Price protection was offered as a concession to Maxwell’s

distributors, sometimes to guarantee that the distributor would earn a minimum

profit upon resale of a product, and other times to guarantee that the distributor

would not lose money upon resale. Maxwell recognized revenue from sales

subject to price protection when it should not have under GAAP. GAAP precludes

revenue recognition from a sale of goods until it is realized or realizable and

earned. See Statement of Financial Accounting Concepts No. 5 (“CON 5”); see

also SEC Staff Accounting Bulletin No. 101 (“SAB 101”). Under GAAP, if a

company can reasonably and reliably estimate the amount of price protection

109 2011 Form 10-K at p. 56 (filed February 26, 2012). 110 2011 Form 10-K at p. 57 (filed February 26, 2012).


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exposure at the time of the sale, the sale (net of an allowance for the price

protection credit expected to be paid) can be recognized as revenue. Maxwell,

however, could not reasonably estimate its exposure and thus recognition of

revenue was improper.

b. Another form of sales concession involved expanded return

rights. Under ASC 605-15-25-1, the revenue from a sale with a right of return

cannot be recognized if, among other things, the buyer has not paid the seller and

has no obligation to pay until the product is resold. Because Defendant granted

return rights to distributors who had not paid for the products and had no

obligation to pay until they sold the products, Maxwell’s upfront recognition of

revenue was improper.

c. In contravention of Maxwell’s credit policy, which required

payment within 45 days (or, alternatively, a letter of credit for the full amount

owed), Defendants granted “flexible” payment terms, where the distributor was

expected to pay Maxwell only after the distributor sold the product to an end

customer – whenever that occurred. Sales made contingent upon the resale of the

product to an end-user do not support recognition of revenue under GAAP. See

ASC 605-15-25-1; CON 5. In addition, SAB 101 requires reasonable assurance of

collectability before revenue can be recognized from a sale. By recognizing

revenue from orders that included extended and “flexible” payment terms, where

the ultimate payment for the product was uncertain, Maxwell did not comply with

GAAP.

184. Indeed, Maxwell itself confirmed that its accounting practices during

the Class Period did not conform with what it had falsely told the public:

a. On March 7, 2013, Maxwell announced that its internal investigation, “discovered arrangements with certain distributors regarding the payment terms for sales to such distributors with respect to certain transactions. These arrangements had not been communicated to Maxwell’s finance and accounting department and therefore had not been considered when recording revenue on shipments to these



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distributors. . . . As a result of the arrangements discovered during the investigation, Maxwell does not believe that a fixed or determinable sales price existed at the time of shipment to these distributors, nor was collection reasonably assured, at least with respect to certain transactions. Therefore, the revenue from such sales should not have been recognized at the time of shipment to these distributors.

b. In Maxwell’s 2012 Form 10-K, Maxwell confessed that “we determined that certain of our employees had engaged in conduct which resulted in revenue being recorded in periods prior to the criteria for revenue recognition und 1U.S. generally accepted accounting principles being satisfied.”

c. In Maxwell’s 2012 Form 10-K, the Company additionally admitted that during a subsequent internal review, “we noted that there were a number of quarter end revenue cut-off errors wherein revenue was recorded prior to the transfer of title to the customer and the satisfaction of our obligation to deliver the products.” 112

C. FALSE STATEMENTS REGARDING MAXWELL ’ S INTERNAL CONTROLS

185. In each of Maxwell’s quarterly and annual SEC filings, the Company

falsely stated in substantially identical language the following regarding its internal

controls and procedures:

We are committed to maintaining disclosure controls and procedures designed to ensure that information required to be disclosed in our periodic reports filed under the Securities and Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure .

Under the supervision and with the participation of our management, including our Principal Executive Officer and Principal Financial Officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of [the reporting period’s end], as such term is defined under Rule 13a-15(e) promulgated under the Exchange Act. Based on this evaluation, our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this . . . Report . . . . 113

111 2012 Form 10-K at p. 30 (filed August 1, 2013). 112 2012 Form 10-K at p. 31 (filed August 1, 2013). 113 This statement was repeated in substantially identical form in: 1Q2011 Form 10-Q at p. 21 (filed May 5, 2011); 2Q2011 Form 10-Q pp. 24-25 (filed August 8, 2011); 3Q2011 Form 10-Q at p. 26 (filed November 7, 2011); 2011 Form 10-K at



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186. In each of Maxwell’s quarterly and annual SEC filings, Defendants

Schramm and Royal certified to the effectiveness of the Company’s internal

controls on financial reporting, stating in substantially identical language that:

1. I have reviewed this . . . report . . . of Maxwell Technologies. . .

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report .

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report .

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others

p. 87 (filed February 26, 2012); 1Q2012 Form 10-Q at p. 24 (filed April 26, 2012); 2Q2012 Form 10-Q at p. 25 (filed August 2, 2012); 3Q2012 Form 10-Q at p. 27 (filed October 30, 2012). The false statement in Maxwell’s 1Q2012 is phrased slightly differently. It reads:

Our management evaluated, under the supervision and with the participation of our principal executive officer and our principal financial officer, the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of the end of the last fiscal quarter. Based upon their evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of [quarter end] to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange êommission ’s rules and forms, and to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosures .



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within those entities , particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles ;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures , as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

5. The registrant’s other certifying officer(s) and I have disclosed , based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information ; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting . 114

187. In each of Maxwell’s quarterly SEC filings, Schramm and Royal

certified the following with respect to Maxwell:

Solely for the purpose of complying with 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, we, the undersigned Chief Executive Officer and Chief Financial Officer of Maxwell Technologies, Inc. (the “Company”), hereby

114 This statement was repeated in substantially identical form in: 1Q2011 Form 10-Q at Ex. 31.1 & 31.2 (filed May 5, 2011); 2Q2011 Form 10-Q at Ex. 31.1 & 31.2 (filed August 8, 2011); 3Q2011 Form 10-Q at Ex. 31.1 & 31.2 (filed November 7, 2011); the 2011 Form 10-K at Ex. 31.1 & 31.2 (filed February 26, 2012); 1Q2012 Form 10-Q at Ex. 31.1 & 31.2 (filed April 26, 2012); 2Q2012 Form 10-Q at Ex. 31.1 & 31.2 (filed August 2, 2012); and 3Q2012 Form 10-Q at Ex. 31.1 & 31.2 (filed October 30, 2012).



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certify that, based on our knowledge, the . . . Report . . . fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company . 115

188. In Maxwell’s 2011 Form 10-K, Schramm and Royal certified the

following with respect to Maxwell:

In connection with the accompanying Annual Report on Form 10-K of Maxwell Technologies, Inc. for the year ended December 31, 2011, I, David J. Schramm, Chief Executive Officer of Maxwell Technologies, Inc., hereby certify pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

(1) such Annual Report on Form 10-K of Maxwell Technologies, Inc. for the year ended December 31, 2011, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) the information contained in such Annual Report on Form 10-K of Maxwell Technologies, Inc. for the year ended December 31, 2011, fairly presents, in all material respects, the financial condition and results of operations of Maxwell Technologies, Inc. at the dates indicated . 116

189. The preceding emphasized statements were each materially false and

misleading, and failed to disclose material adverse information concerning

Defendants revenue recognition fraud, because:

a. On March 7, 2013, Maxwell announced that it suffered from

deficiencies in its internal controls over financial reporting due to the revenue

recognition issues discussed herein, and therefore concluded such controls were

I not effective.

b. The reports of former Maxwell employees also show that the

Company suffered from substantially compromised internal controls that allowed

the Individual Defendants to alter payment terms and nevertheless recognize

115 This statement was repeated in substantially identical form in: 1Q2011 Form 10-Q at Ex 32 (filed May 5, 2011); 2Q2011 Form 10-Q at Ex. 32 (filed August 8, 2011); 3Q2011 Form 10-Q at Ex. 32 (filed November 7, 2011); 1Q2012 Form 10- Q at Ex. 32 (filed April 26, 2012); 2Q2012 Form 10-Q at Ex. 32 (filed August 2, 2012); and 3Q2012 Form 10-Q at Ex. 32 (filed October 30, 2012). 116 2011 Form 10-K at Ex. 32.1 & 32.2 (filed February 26, 2012).



1 revenue on an improper shipment despite the fact that doing so was a clear

2 violation of GAAP and Company policy.

3 c. Maxwell’s internal controls deficiencies were well known by

4

Defendants since Defendants Schramm and Royal approved of the remedial

5 measures consented to in the DPA that Maxwell entered into with the DOJ filed

6

January 31, 2011 and Maxwell’s Final Judgment with the SEC filed February 8,

7

2011. Defendants thus knew or were deliberately reckless in disregarding that the

8

Company’s internal controls were not adequate for ensuring that financial

9 statements were prepared in conformity with GAAP. ¶¶6-7, 46-48

10

d. The February 16, 2012 derivative action settlement further

11

highlights Maxwell’s internal control deficiencies, as the Company agreed to adopt

12 significant corporate governance reforms designed to enhance and improve its

13

internal controls and systems as part of the settlement. ¶49.

14

e. The disclosure controls were deficient because Defendants

15

failed to disclose and record that payment terms to distributors such as Alfatec and

16

Pana-Pacific were being altered. Indeed, CW 3 confirmed that she was instructed

17 not to raise issues regarding altered payment terms, and CW 4 confirmed that the

18

Individual Defendants directed, approved and were thus well aware of the payment

19 modifications and credit hold lifts, yet nevertheless approved of the improper

20 revenue recognition—all of which was allowed to occur as a result of the

21

Company’s deficient internal controls. ¶¶96, 98, 105, 120.

22

190. As a result of Defendants’ false statements, Maxwell stock traded at

23 artificially inflated levels during the Class Period. However, after the truth was

24 revealed, the Company’s share price took a catastrophic dive, plummeting nearly

25

62% from its Class Period high.

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VIII. RELEVANT GAAP AND ACCOUNTING PROVISIONS

A. OVERVIEW AND BACKGROUND OF GAAP

191. During the Class Period, Defendants represented that Maxwell’s

financial statements were prepared in conformity with GAAP. GAAP are

recognized by the accounting profession and the SEC as the uniform rules,

conventions and procedures necessary to define accepted accounting practices at a

particular time. Maxwell’s materially false and misleading financial statements

resulted from a series of deliberate senior executive decisions designed to conceal

the truth regarding Maxwell’s actual financial position and operating results.

Defendants caused the Company to violate GAAP and SEC rules by, among other

things, improperly recognizing the Company’s revenues and other related financial

metrics.

192. As set forth in Financial Accounting Standards Board (“FASB”)

Statements of Concepts (“Concepts Statement”) No. 1, one of the fundamental

objectives of financial reporting is to provide accurate and reliable information

concerning an entity’s financial performance during the period being presented.

Concepts Statement No. 1, paragraph 42, states:

Financial reporting should provide information about an enterprise’s financial performance during a period. Investors and creditors often use information about the past to help in assessing the prospects of an enterprise. Thus, although investment and credit decisions reflect investors’ and creditors’ expectations about future enterprise performance, those expectations are commonly based at least partly on evaluations of past enterprise performance.

193. Regulation S-X (17 C.F.R. § 210.4-01(a)(1)) states that financial

statements filed with the SEC which are not prepared in compliance with GAAP

are presumed to be misleading and inaccurate, despite footnote or other disclosure.

SEC Rule 4-01(a) of SEC Regulation S-X provides that: “Financial statements

filed with the [SEC] which are not prepared in accordance with [GAAP] will be

presumed to be misleading or inaccurate.” 17 C.F.R. § 210.4-01(a)(1).

Management is responsible for preparing financial statements that conform to

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GAAP. As stated in the professional standards adopted by the American Institute

of Certified Public Accountants (“AICPA”):

[F]inancial statements are management’s responsibility . . . . [M]anagement is responsible for adopting sound accounting policies and for establishing and maintaining internal control that will, among other things, record, process, summarize, and report transactions (as well as events and conditions) consistent with management’s assertions embodied in the financial statements. The entity’s transactions and the related assets, liabilities and equity are within the direct knowledge and control of management . . . . Thus, the fair presentation of financial statements in conformity with Generally Accepted Accounting Principles is an implicit and integral part of management’s responsibility.

194. In order to meet revenue projections, Defendants granted sales

concessions to Maxwell’s distributors to induce them to purchase quantities of

product exceeding their inventory needs and current demands. The concessions

took various forms: price protection, expanded return rights and extended payment

terms. Defendants caused the Company to violate GAAP and SEC rules by,

among other things, (i) improperly overstating the Company’s revenues and gross

profit, and (ii) improperly overstating the Company’s accounts receivables.

B. DEFENDANTS ’ IMPROPER RECOGNITION OF REVENUE

195. GAAP permits the recognition of revenue only if the following

criteria are met: (i) persuasive evidence of an arrangement exists; (ii) delivery has

occurred; (iii) the vendor’s fee is fixed or determinable; and (iv) collectability is

probable. SEC Staff Accounting Bulletin (“SAB”) No. 104. Moreover, in order

for revenue to be recognized, it must be earned and realized or realizable.

Concepts Statement of Financial Accounting No. 5, Recognition and Measurement

in Financial Statements of Business Enterprises (“CON 5”), ¶83, ASC § 605-10-

25-1(a). 117

117 With the issuance of FASB Statement No. 168, The FASB Accounting Standards CodificationTM and the Hierarchy of Generally Accepted Accounting Principles, the FASB approved the Codification (“ASC”) as the source of authoritative US GAAP for non-governmental entities for interim and annual periods ending after September 15, 2009. The FASB Accounting Standards Codification , hereinafter cited as “ASC __.”



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196. Revenues are earned when the reporting entity has substantially

accomplished what it must do to be entitled to the benefits represented by the

revenues. Id. Revenues are realizable when related assets received or held are

readily convertible to known amounts of cash or claims to cash. Id. If

collectability is not reasonably assured, revenues should be recognized on the basis

of cash received. CON 5, ¶84g; see also Accounting Research Bulletin No. 43

(“ARB 43”), Ch. 1A, ¶1 (June 1943); ASC § 605-10-25-1; Accounting Principles

Board Opinion No. 10 (“APB 10”) Omnibus Opinion-1966 ¶12 (Dec. 1966). If

payment is subject to a significant contingency, revenue recognition is improper.

ASC § 450-30-25-1.

197. Defendants represented that the Company’s accounting for revenue

recognition was consistent with GAAP. For example, in the Company’s 2011

Form 10-K, Defendants represented the following:

Revenue Recognition

Revenue is derived primarily from the sale of manufactured products directly to customers. Product revenue is recognized, according to the guidelines of the Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) Numbers 101, Revenue Recognition in Financial Statements, and 104, Revenue Recognition, when all of the following criteria are met: (1) persuasive evidence of an arrangement exists (upon contract signing or receipt of an authorized purchase order from a customer); (2 ,) title passes to the customer at either shipment from the Company s facilities or receipt at the customer facility, depending on shipping terms; (3) customer payment is deemed fixed or determinable and free of contingencies or significant uncertainties; and (4) collectability is reasonably assured. If a volume discount is offered, revenue is recognized at the lowest price to the customer. This method has been consistently applied from period to period and there is no right of return.

198. Despite the foregoing GAAP requirements and Maxwell’s illusory

adhesion to them, Defendants violated GAAP as follows:


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a. The CWs offered multiple first-hand accounts, and in its 2012

2

Form 10-K Maxwell admitted to, offering extended payment terms as a sales

3 concession. Pursuant to Maxwell’s credit policy, payment was required within 45

4

days, or, alternatively, a letter of credit for the full amount owed was required.

5

Defendants, however, made exceptions to this policy, granting at times 90-120 day,

6 even up to 150-day, payment terms. At other times, Defendants granted “flexible”

7 payment terms, where the distributor was expected to pay Maxwell only after the

8

distributor sold the product to an end customer—whenever that occurred. Sales

9 made contingent upon the resale of the product to an end-user clearly do not

10 support recognition of revenue under GAAP. See ASC 605-15-25-1; CON 5. In

11 addition, SEC Staff Accounting Bulletin No. 101 (“SAB 101”) requires reasonable

12 assurance of collectability before revenue can be recognized from a sale. By

13 recognizing revenue from orders that included extended and “flexible” payment

14

terms, where the ultimate payment for the product was uncertain, Maxwell did not

15 comply with GAAP.

16

b. Maxwell admitted in its 2012 Form 10-K that one distributor

17 was offered price protection as a concession, in order to guarantee that the

18

distributor would earn a minimum profit upon resale of a product, and other times

19

to guarantee that the distributor would not lose money upon resale. Maxwell

20 recognized revenue from sales subject to price protection when it should not have

21 under GAAP. GAAP precludes revenue recognition from a sale of goods until it is

22 realized or realizable and earned. See CON 5; see also SAB 101. Under GAAP, if

23 a company can reasonably and reliably estimate the amount of price protection

24 exposure at the time of the sale, the sale (net of an allowance for the price

25 protection credit expected to be paid) can be recognized as revenue. Maxwell,

26

however, could not reasonably estimate its exposure and thus recognition of

27 revenue was improper.


28


1 c. Maxwell admitted in its 2012 Form 10-K that other customers

2 were offered expanded return rights. Under ASC 605-15-25-1, the revenue from a

3 sale with a right of return cannot be recognized if, among other things, the buyer

4

has not paid the seller and has no obligation to pay until the product is resold.

5

Because Defendant granted return rights to distributors who had not paid for the

6 products and had no obligation to pay until they sold the products, Maxwell’s

7 upfront recognition of revenue was improper.

8

d. In addition, revenue related to certain shipments to the one non-

9

distributor customer was recorded before the actual transfer of title and the

10 satisfaction of the Company’s obligation to deliver the products. Revenue should

11 not be recognized until the seller has substantially accomplished what it must do

12 pursuant to the terms of the arrangement. CON 5, ¶84(a), (b), and (d). Therefore,

13 revenue from these sales should not have been recognized at the time of shipment.

14

C. DEFENDANTS ’ IMPROPER ACCOUNTING OF ACCOUNTS RECEIVABLE

15

199. Maxwell’s reported financial results during the Class Period were

16 materially false and misleading because the Company overstated its accounts

17 receivables due to transactions with extended payment terms for certain sales to

18

distributors; undisclosed return rights and profit margin protection; and improper

19

lifting of customer credit holds for failing to timely pay what these distributors

20 purportedly owed to Maxwell. Accordingly, the collectability of resulting

21 receivables from these distributors was not reasonably assured.

22

200. Accounting Research Bulletin (“ARB”) No. 43, Chapter 3, Section 9

23 provides that the objective of providing for reserves against receivables is to assure

24

that, “[a]ccounts receivable net of allowances for uncollectible accounts . . . are

25 effectively stated as the amount of cash estimated as realizable.”

26

201. Defendants represented that they complied with GAAP in reporting

27

the Company’s accounts receivable. For example, in the Company’s 2011 Form

28

10-K, Defendants represented in pertinent part, the following:



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Accounts Receivable and Allowance for Doubtful Accounts

Trade receivables are stated at gross invoiced amount less an allowance for uncollectible accounts. The allowance for doubtful accounts reflects management’s best estimate of probable losses inherent in the accounts receivable balance. Management determines the allowance for doubtful accounts based on known troubled accounts , 1 18historical experience and other currently available evidence.

202. Defendants, however, failed to disclose that the Company offered

extended payment terms to distributors which, according to Maxwell’s Form 10-Q

filed with the SEC on October 24, 2013, “allowed these distributors to pay

[Maxwell] after they received payment from their customer, with respect to certain

sales transactions.” Additionally, Maxwell disclosed in the Form 10-Q that, “for

one other distributor of the Company’s products, the Company offered return

rights and profit margin protection with respect to certain sales transactions.”

Accordingly, these were not legitimate receivables, as there was no prospect of

collectability at the time they were recorded.

203. Throughout the Class Period, Defendants represented that the increase

to accounts receivable was due to timing issues. For example, in Maxwell’s 1Q

2011 Form 10-Q, Defendants stated that “[t]he increase in accounts receivable was

due to significant sales in the last two weeks of the quarter.” In the 2Q 2011 Form

10-Q, Defendants stated that “[t]he increase in accounts receivable was due to

revenue growth as well as significant sales in the last month of the quarter.”

Contrary to Defendants’ representations, the “increase in accounts receivable [was

not] due to revenue growth” or timing issues but the improper recording of revenue

from certain of its distributors from extended payment terms, return rights and

profit margin protection. As a result, Maxwell accumulated millions of dollars of

illegitimate receivables on its balance sheet:

118 2011 Form 10-K at p. 57 (filed February 26, 2012).


28

Maxwell's Net Accounts Receivable

Dec. 31, 2011 Mar. 31, 2012 Jun. 30, 2012 Sept. 30, 2012

Illegitimate Receivables __ As Restated


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$60,000

4 $50000

5 $40,000

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$30000

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$20,000

9 $10,000

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204. On August 1, 2013, Defendants admitted that the Company’s accounts

15 receivable were materially overstated during the Class Period. In this regard, the

16

Company’s 10-Q filed on August 1, 2012, disclosed that “[s]everal adjustments

17 were made to the Company’s previously filed consolidated financial statements as

18 a result of the restatement in order to reflect revenue recognition in the appropriate

19 . . . . [F]or the subject sales transactions, revenue and accounts receivable balances

20 were reduced by an equivalent amount in the period that the sale was originally

21 recorded as revenue, and revenue was increased in the subsequent period in which

22

the criteria for revenue recognition were met.” The table below reflects dollar and

23 percentage accounts receivable overstatements:

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[]IZ!II1

JUN. 30, 2012

SEPT. 30, 2012

(In thousands)

As Originally Reported

$36131

$43147

$48,514

As Restated

27,973

32,523

34,334

$ Overstatement

(8,158)

(10,624)

(14,180)

% Overstatement -22.6% -24.6% -29.2%

205. The Company’s failure to properly account for and disclose

Maxwell’s accounts receivables was materially misleading to investors.

Accordingly, in order to falsely and materially inflate earnings, assets and

stockholders’ equity during the Class Period, Defendants violated GAAP and SEC

rules by overstating Maxwell’s accounts receivables in its financial statements.

D. DEFENDANTS FAILED TO DISCLOSE KNOWN TRENDS OR UNCERTAINTIES IN VIOLATION OF SEC REGULATIONS

206. Defendants violated Item 303 of Regulation S-K, 17 C.F.R.

§ 229.303, by providing incomplete and materially misleading disclosures in its

2011 Form 10-K concerning Maxwell’s gross margins.

207. The instructions to Item 303(a) state the following:

The discussion and analysis shall focus specifically on material events and uncertainties known to management that would cause reported financial information not to be necessarily indicative of future operating results or of future financial condition. This would include descriptions and amounts of (A) matters that would have an impact on future operations and have not had an impact in the past, and (B) matters that have had an impact on reported operations and are not expected to have an impact upon future operations.

208. The Company did not make adequate disclosures in its public filings.

As noted in SAB 101, the SEC Staff requires that the following items be disclosed

and discussed by all registrants, in accordance with the SEC’s Financial Reporting

Release No. 36:

$52,988

38,816

(14,172)

-26.7%


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a. Shipments of product at the end of a reporting period that significantly reduce customer backlog and that reasonably might be expected to result in lower shipments and revenue in the next period;

b. Granting of extended payment terms that will result in a longer collection period for accounts receivable; and

c. Changing trends in shipments into, and sales from, a sales channel or separate class of customer that could be expected to have a significant effect on future sales or sales returns.

209. Additionally, Item 303 of Regulation S-K requires MD&A sections to

disclose “known trends or uncertainties that have had or that the registrant

reasonably expects will have a material favorable or unfavorable impact on net

sales or revenues or income from continuing operations,” as well as “events that

will cause a material change in the relationship between costs and revenues.” Item

303 of Regulation S-K, 17 C.F.R. § 229.303(a)(3)(ii); Exchange Act Release No.

34-26831 (“Interpretative Release”), 43 SEC Docket 1577 (May 18, 1989)

(“Required disclosure is based on currently known trends, events, and uncertainties

that are reasonably expected to have material effects.”).

210. During the Class Period, Defendants made the following

representations:

Revenue in 2010 increased 20% to $121.9 million, compared with $101.3 million in 2009. Ultracapacitor revenue increased by 56% to $68.5 million in 2010, compared with $43.8 million in the prior year. Sales of high voltage capacitor products totaled $35.7 million for 2010, down 10% from the $39.8 million recorded in 2009. Revenue from our microelectronic products was flat year-over-year. The increase in revenue from our ultracapacitor product line was influenced primarily by continuing strong demand for energy storage and power delivery systems for wind energy, hybrid and electric transit vehicles, micro hybrid automotive systems, backup power and wireless communications. The decline in our high voltage capacitor product revenues was a result of a shift in the mix of high voltage product sales to lower priced products.

211. The disclosure was materially false and misleading because it omitted

any reference to Maxwell’s improper revenue recognition in contravention of the

Company’s signed contracts and stated accounting policies—a scheme that forced

Maxwell to restate nearly two years’ worth of financial data.



1

212. Nonetheless, Maxwell’s Class Period Form 10-K and Forms 10-Q

2

failed to disclose that the Company’s revenue growth was, in part, achieved at the

3 expense of future results. Indeed, Maxwell had offered discounts, extended

4 payment terms and other inducements to customers to sell product immediately

5

that otherwise would have been sold in later periods or not at all, each of which

6 were all reasonably likely to have a material adverse effect on Maxwell’s operating

7 results and which was necessary for a proper understanding and evaluation of the

8

Company’s operating performance and an informed investment decision. By

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failing to report the facts concerning its sales practices, the Company’s Class

10

Period financial statements failed to provide investors with the most basic

11

information necessary to understand Maxwell’s financial results, mischaracterized

12

the Company’s sales and operations and omitted material information. In addition,

13

Defendants failed to disclose the existence of known trends, events or uncertainties

14

that they reasonably expected would have a material unfavorable impact on

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Maxwell’s operating results in violation of Item 303 of Regulation S-K under the

16

federal securities laws (17 C.F.R. § 229.303). These failures rendered the

17

Company’s Class Period financial statements and Forms 10-K and 10-Q materially

18

false and misleading.

19

E. DEFENDANTS ’ ACCOUNTING IMPROPRIETIES WERE MATERIAL TO MAXWELL ’ S FINANCIAL

20

STATEMENTS AS EVIDENCED BY THE RESTATEMENT ITSELF

21

213. Defendants’ fraudulent revenue recognition scheme had a material

22

impact on Maxwell’s financial statements. According to GAAP, a retroactive

23 restatement of financial statements is reserved for material accounting errors

24

“resulting from mathematical mistakes, mistakes in the application of GAAP, or

25 oversight or misuse of facts that existed at the time the financial statements were

26 prepared.” SFAS No. 154, Accounting Changes and Error Corrections, ¶2h (May

27

2005); ASC § 250. Since GAAP allows only for correction of errors that are

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“material,” resulting from “mistakes in the application of GAAP . . . that existed at



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the time,” by restating the Company’s financial statements, Defendants have

admitted the materiality of the errors in the Company’s previously-issued financial

I statements.

214. In this regard, the Company disclosed in a March 7, 2013 press

release that “the audit committee of its board of directors concluded that the

previously issued financial statements contained in its annual report on Form 10 ‐K

for the year ended December 31, 2011, and all unaudited quarterly reports on Form

10 -Q in 2011 and 2012 (collectively, the “Prior Periods”), as well its selected

financial data for the related periods, should no longer be relied upon because of

errors in those financial statements. The errors relate to the timing of recognition

of revenue from sales to certain distributors.”

215. Several months later, in the Company’s long-delayed 2012 Form 10-

K, Maxwell informed investors that:

The effect of the restatement was to decrease revenue for the fiscal year 2011 by $10.1 million. Of the amount subject to restatement for the fiscal year 2011, $2.6 million is a reclassification of a settlement charge from G&A expense to contra revenue, bringing the restatement amount for 2011, net of the reclassification to $7.5 million. Further, the restatement decreased revenue in the first three quarters of 2012 by $9.2 million, for a total reduction in revenue, net of the reclassification of $2.6 million in 2011, of $16.7 million related to the year ended December 31, 2011 and the three quarters ended September 30, 2012, all of which has been collected as of June 30, 2013. Of this $16.7 million, $7.2 million has been recognized as revenue and $9.5 million has yet to be recognized as revenue as of June 30, 2013. In addition to this amount, another $5.9 million of shipments subsequent to September 30, 2012 have yet to be recognized as revenue as of June 30, 2013.

216. The adjustments materially reduced the Company’s previously

reported financial results. The restatement materially reduced the Company’s net

revenues during five of the seven quarters during the Class Period—reducing

revenue by $10.1 million in 2011 and $9.2 million for the first nine months of

2012. The restatement also materially reduced gross profit during six of the seven

quarters during the Class Period—reducing gross profit by $5.0 million in 2011

and $3.7 million for the first nine months of 2012. Additionally, the restatement



adversely impacted net income during five of the seven quarters during the Class

Period—reducing net income by approximately $2.3 million in 2011 and

approximately $4.3 million for the first nine months of 2012.

F. DEFENDANTS KNEW OF, OR RECKLESSLY DISREGARDED , MAXWELL ’ S DEFICIENT INTERNAL ACCOUNTING CONTROLS

217. Section 13(b)(2) of the Exchange Act states, in pertinent part, that

every reporting company must: “(A) make and keep books, records and accounts

which, in reasonable detail, accurately and fairly reflect the transactions and

dispositions of the assets of the issuer and (B) devise and maintain a system of

internal accounting controls sufficient to provide reasonable assurances that . . .

transactions are recorded as necessary . . . to permit the preparation of financial

statements in conformity with [GAAP].” 15 U.S.C. § 78m. These provisions

require an issuer to employ and supervise reliable personnel, to maintain

reasonable assurances that transactions are executed as authorized, to properly

record transactions on an issuer’s books and, at reasonable intervals, to compare

accounting records with physical assets.

218. In addition to the allegations above and the indicators of scienter

herein, Defendants knew or were, at the very least, deliberately reckless in not

knowing that Maxwell’s system of internal accounting controls governing its

revenue recognition practices during the Class Period were inadequate. In fact, in

Maxwell’s press release announcing the restatement, the Company stated that

management “concluded that it has material weaknesses in its internal controls

over financial reporting related to the identification and evaluation of revenue

transactions which deviate from contractually established payment terms,” and

therefore that the Company’s “internal controls over financial reporting and

disclosure are not effective.”

219. Maxwell violated § 13(b)(2)(A) of the Exchange Act by failing to

maintain accurate records concerning its revenues, costs, accounts receivables and

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1 net income as reported during the Class Period. The Company improperly

2 recognized revenue from illegitimate sales to certain distributors, thereby

3 overstating revenue, accounts receivable, gross profit and earnings. Maxwell’s

4

inaccurate and false records were not isolated or unique instances because they

5 were improperly maintained for multiple reporting periods, for at least fiscal year

6

2011 and the first three quarters of 2012. Accordingly, Maxwell violated §

7

13(b)(2)(A) of the Exchange Act.

8

220. In addition, the Company violated § 13(b)(2)(B) of the Exchange Act

9

by failing to implement procedures reasonably designed to prevent accounting

10

irregularities. Maxwell failed to ensure that proper review and checks were in

11 place to ensure that it was recording and reporting revenue and accounting for

12

distributor sales properly. The Company failed to ensure that transactions were

13 reported during the Class Period in accordance with its own policies and with

14

GAAP. Maxwell’s failure to strengthen its known inadequate internal controls

15 rendered the Company’s Class Period financial reporting inherently unreliable and

16 contributed to the Company’s inability to prepare financial statements that

17 complied with GAAP.

18

IX. MAXWELL’S RESTATEMENT DEMONSTRATES DEFENDANTS’ INTENTIONAL OR DELIBERATELY RECKLESS CONDUCT

19

20

221. Maxwell’s GAAP violations and other misstatements further establish

21 scienter based on the results and accounts affected and their specific significance to

22

Maxwell’s business. The restatement is an admission that: (i) the Company’s

23

Class Period financial statements and the public statements by Maxwell, Schramm

24 and Royal regarding those results were materially false and misleading; and (ii) the

25

financial statements reported during the Class Period were incorrect based on

26

information available to the defendants at the time the results were originally

27 reported. Maxwell’s restatement contains at least the following indicators of

28

defendants’ scienter.



1

222. As set forth below, the restatement is an admission by the Company

2

that (i) the Company’s Class Period financial statements and the Individual

3

Defendants’ public statements regarding those results were materially false and

4 misleading; and (ii) the financial statements reported during the Class Period were

5

incorrect based on information available to Defendants at the time the results

6 were originally reported . Maxwell’s restatement contains at least the following

7

indicators of Defendants’ scienter:

8

a. The type of restatement —The restated items at issue did not

9 occur as a result of a good-faith mathematical error, an honest misapplication of a

10 complex accounting standard, or a faulty implementation of internal policies aimed

11 at addressing newly-imposed accounting regulation. Rather, as set forth above at

12

§V(D), the restatement resulted from intentional manipulations enacted at the end

13 of financial reporting periods, including secret payment arrangements with

14

distributors and extended payment plans to certain clients, thus improperly

15

inflating gross margins, operating income, net income and earnings per share.

16

b. The duration over which the improper accounting was

17 perpetrated—As detailed herein, the restatement does not hinge on an honest

18 mistake or oversight during a single quarter or even a single year that was later

19 corrected on a good faith basis. Rather, Maxwell was forced to restate its financial

20 statements covering fiscal 2011, each quarterly period during 2011, and the first

21

three quarters of 2012 to correct its accounting improprieties that could no longer

22

be concealed.

23 c. The types of accounting gimmicks employed —As detailed

24

herein, the improper accounting corrected by the restatement did not occur as a

25 result of good faith differences in accounting judgments, or interpretations of

26 complicated, vague or arcane accounting rules, and the Company does not claim

27 otherwise. Rather, Maxwell’s accounting improprieties violated clear and well-

28 established basic revenue recognition standards and the Company’s own



1 accounting policies—provisions which would only reasonably be violated at the

2

behest of the Individual Defendants themselves.

3

d. The income statement effect of the misstatements —The

4 accounting violations in question had the effect of improving, not worsening,

5 operating results, including but not limited to operating income, net income and net

6

income per share, and notably bolstered the desirability of the Company’s Offering

7 effectuated only two months prior to the first partial disclosure of Defendants’

8

fraud.

9

e. The timing of the accounting manipulations —As detailed

10

herein, Maxwell’s accounting manipulations often occurred at the end of periodic

11 reporting periods, including the very last days of a fiscal quarter or year, and are

12

thus indicative of intentional misconduct on the part of the Individual Defendants

13 and represent classic fact patterns of accounting fraud.

14

f. The Company’s own admissions —In addition, Maxwell’s own

15 admissions at the end of the Class Period regarding the restatement confirm the

16

intentional nature of the misconduct. Indeed, Maxwell admitted that the

17 accounting manipulations were the result of intentional decisions to prematurely

18 and improperly recognize revenue, the nature of which, as set forth above, support

19 a finding of scienter on the part of both the Individual Defendants and the

20

Company.

21

223. Accordingly, that Maxwell disseminated materially false and

22 misleading statements during the Class Period cannot be credibly questioned.

23

Moreover, the scienter of the Individual Defendants is imputed to the Company,

24

thus establishing Maxwell’s liability under the Exchange Act. Indeed, the

25

Individual Defendants, as the three highest-ranking officers of the Company, were

26

intimately involved in all aspects of the operations which led to the restatement and

27 were directly involved in the recognition of revenue derived from these operations.

28

Schramm and Royal, as the CEO and CFO of the Company, respectively,



1 personally signed off on the materially false and misleading financial results that

2 were ultimately restated, and personally disseminated other false and misleading

3 statements with knowledge or deliberate recklessness of such statements’ falsity.

4

224. In addition to the Individual Defendants’ knowledge of the

5

Company’s violations of basic accounting principles based on their accounting

6

backgrounds, defendants’ SOX Certifications attached to Maxwell’s Forms 10-Q

7 and Forms 10-K also establish scienter. As set forth in ¶¶186-188, Schramm and

8

Royal certified that they had personally reviewed Maxwell’s financial statements,

9

designed and evaluated Maxwell’s disclosure controls and evaluated Maxwell’s

10

internal controls over financial reporting. Such reviews and evaluations, if

11 performed as represented, would have alerted the Individual Defendants to

12

Maxwell’s glaring accounting misstatements and material weaknesses in internal

13 and disclosure controls that were subsequently admitted.

14

225. These Defendants either knew of the material misstatements in the

15

financial statements, the ineffectiveness of the disclosure controls, and the material

16 weaknesses in internal controls, or defendants knowingly failed to perform the

17 required review of the financial statements, evaluation of internal controls and

18 evaluation of disclosure controls and falsely represented that they had. In either

19 case, Defendants knew or recklessly disregarded that the SOX Certifications that

20

Schramm and Royal signed were false and misleading.

21

X. ADDITIONAL FACTS SUPPORTING DEFENDANTS’ SCIENTER

22

226. In addition to the circumstances involved in the restatement, various

23 other indicia of scienter are present here, including, among others: (i) the

24

Company’s FCPA-related settlements with the DOJ and SEC, which, as Schramm

25 and Royal were well-aware, included a pledge by the Company to adopt internal

26 controls sufficient to ensure that financial statements are prepared in conformity

27 with GAAP; (ii) Maxwell’s settlement of a derivative action related to its FCPA

28 violations, in which the Company also agreed to adopt “significant corporate



1 governance reforms designed to enhance and improve its internal controls and

2 systems”; (iii) McGladrey’s resignation, which included the auditor’s telling

3 rationale that it resigned because it could no longer rely on the representations of

4

Maxwell’s management; and (iv) the new SEC and DOJ investigations of the

5

Company pertaining to Defendants’ revenue recognition scheme, which remain

6 pending as of the filing of this Complaint.

7

227. Moreover, the Individual Defendants scienter, as well as Maxwell’s

8 corporate scienter, is established, as discussed below.

9

A. DEFENDANT SCHRAMM ’ S SCIENTER

10

228. In addition to the facts summarized at ¶¶221-227 above, additional

11

facts establishing that Schramm knew or recklessly disregarded that the statements

12 about the Company financial results and internal controls were materially false and

13 misleading when made include the following:

14

a. At the end of reporting periods, Schramm directed employees

15

to “make numbers,” “find revenue” and to “make up the delta” between actual

16 revenue figures and the Company’s external targets. ¶¶5, 115, 117.

17

b. Schramm (along with Royal and Andrews) was cognizant of the

18 urgent need to actually “make the numbers” for the quarter, as he received weekly

19

“flash reports” throughout the Class Period, which were “always inflated” because

20

the overall sales quota that was expected to be fulfilled was high and reflected

21 more orders than were actually in the pipeline for that period, according to CW 3

22 and CW 4. ¶¶95, 106, 134.

23 c. Schramm was informed of Maxwell’s internal controls

24

deficiencies since he approved of the remedial measures consented to in the DPA

25

that Maxwell entered into with the DOJ filed January 31, 2011, and Maxwell’s

26

Final Judgment with the SEC filed February 8, 2011. Schramm thus knew or was

27

deliberately reckless in disregarding that the Company’s internal controls were not


28


1 adequate for ensuring that financial statements were prepared in conformity with

2

GAAP. ¶¶6-7, 46-48.

3

d. Schramm (along with Royal) falsely certified that he personally

4

designed and evaluated the effectiveness of Maxwell’s internal controls pursuant to

5

SOX and attested to the adequacy of such controls despite knowing or recklessly

6

disregarding that the Company’s internal controls were materially deficient.

7

¶¶186-188.

8

e. Schramm further knew about the Company’s internal controls

9

deficiencies through the February 16, 2012 derivative action settlement, where the

10

Company agreed to adopt significant corporate governance reforms designed to

11 enhance and improve its internal controls and systems, as he was a defendant in the

12 matter. ¶¶7, 49.

13

f. Schramm was responsible (along with Royal) for approving any

14 material changes to the payment terms for sales to clients—with orders not being

15 shipped unless approved by Schramm or Royal—and thus knew or was

16

deliberately reckless in disregarding that modifications to accounting terms would

17

have a profound effect on the Company’s ability to recognize revenue on such

18 shipments. ¶¶39, 104-105, 120.

19

g. Schramm (along with Andrews) ordered CW 1—over which he

20

had direct oversight—to implement a transaction to ship product to Alfatec that

21 would not be accepted by the end-user in order to inappropriately account for

22

hundreds of thousands of dollars. ¶¶77 n.23, 91-92. Schramm “ok’d” the secret

23 change in the terms of the order to effectuate the shipment. ¶92.

24

h. Schramm, as stated in Maxwell’s July 13, 2012 Form 8-K,

25

directly supervised Defendant Andrews whose direct participation in the revenue

26 recognition scheme is set forth in this Complaint. ¶28.

27

i. Schramm (along with Royal) knew and approved of releasing

28 credit holds for past-due customers, as only he or Royal could lift the holds; and



1

thus knew or recklessly disregarded that Maxwell was continuing to book

2 receivables that would be unpaid, according to CWs 3 and 4. ¶¶97, 104.

3

j. Schramm was aware of the discrepancy between accounts

4 receivables’ growth and sales growth as he was directly confronted by an analyst in

5 regards to accounts receivable growing three-fold and sales growing by a factor of

6

1.2, according to CW 5, who reported directly to Schramm. ¶¶88, 107 n.29, 108.

7

k. Schramm was aware of the Company’s internal dealings, as he

8

knew that Andrews was going to be terminated, and gave Andrews a forewarning

9

that allowed him to resign rather than be terminated for cause, according to CW 1.

10

¶113.

11

l. Schramm ordered Andrews and CW 4 to “find revenue” on the

12 very last day of quarters in order to meet quarterly revenue goals, as he was an

13 active participant in the scheme, engaging in conversations with Defendant

14

Andrews, focusing on taking actions necessary to “make the numbers” and

15

discussing open orders from which revenue could be pulled and recognized,

16 according to CW 4, who reported directly to Defendant Schramm. ¶¶100 n.28,

17

114-115, 117.

18 m. Schramm was responsible for lifting credit holds in order to

19 recognize revenue on shipments and meet revenue goals, as he himself directed

20

Maxwell’s “accounting people” to lift a credit hold on an Alfatec order without

21 proper justification, other than meeting goals on the last day of the quarter. ¶123.

22 n. Schramm (along with Andrews) knew of customers receiving

23 product that would not reach an end-user, as CW 4, after a November 2012

24 meeting with Bjoern Koehler, the son of Alfatec’s founder, told Schramm that

25

Alfatec would have to return product from an improper shipment earlier in 2012

26 and Maxwell would not get paid unless the product was purchased from Alfatec.

27

¶126.


28


1

o. Schramm (along with Royal and Andrews) benefitted from

2

Maxwell’s consistently-changing criteria for executive bonuses and compensation.

3

¶¶2, 9, 61-69.

4

p. Schramm and Andrews were members of the same country club

5 and would carpool together, along with CW 4, to Maxwell’s headquarters, during

6 which the trio would have conversations directly touching on the Company’s

7 revenue recognition scheme that led to the restatement. ¶¶112, 114, 117, 128.

8

B. DEFENDANT ROYAL ’ S SCIENTER

9


10

facts establishing that Royal knew or recklessly disregarded that the statements



13

a. Royal was directly informed of Maxwell’s internal controls

14

deficiencies, as he, on behalf of the Company, approved of the remedial measures

15 consented to in the DPA that Maxwell entered into with the DOJ filed January 31,

16

2011 and Maxwell’s Final Judgment with the SEC filed February 8, 2011; and thus

17

knew or was deliberately reckless in disregarding that the Company’s internal

18 controls were not adequate for ensuring that financial statements were prepared in

19 conformity with GAAP. ¶¶6-7, 46-48.

20

b. Royal also was aware of the internal controls deficiencies

21

through the February 16, 2012 derivative action settlement, where the Company

22 agreed to adopt significant corporate governance reforms designed to enhance and

23

improve its internal controls and systems. ¶¶7, 49.

24 c. Royal (along with Schramm) falsely certified that he personally

25

designed and evaluated the effectiveness of Maxwell’s internal controls pursuant to

26

SOX and attested to the adequacy of such controls despite knowing or recklessly

27

disregarding that the Company’s internal controls were materially deficient.

28

¶¶186-188.



1

d. Royal was responsible (along with Schramm) for approving any

2 material changes to the payment terms for sales to clients—with orders not being

3 shipped unless approved by Schramm or Royal—and thus knew or was

4

deliberately reckless in disregarding that modifications to accounting terms would

5

have a profound effect on the Company’s ability to recognize revenue on such

6 shipments. ¶¶39, 104-105, 120.

7

e. Royal, according to CW 4, was the primary decision maker

8 regarding revenue recognition, and Royal did not ever “answer no” to lifting a

9 credit hold or extending payment terms and would express his consent by sending

10 an e-mail to that effect and/or signing a revised purchase order. ¶¶118, 119.

11

f. Royal was aware that Maxwell unusually booked a large

12 amount of its revenue right before the end of the quarter, with the Company’s

13 accounts receivable also dramatically increasing, as he addressed back-loading in

14 various public statements. ¶¶84-87. Royal was also aware of engaging in end-of-

15 quarter deals as he was responsible for deciding whether to recognize revenue,

16 according to CW 4. ¶¶104, 119.

17

g. Royal (along with Schramm and Andrews) was cognizant of the


19


20



22 and CW 4. ¶¶95, 106, 134.

23

h. Royal attended weekly Accounts Receivable meetings, which

24

had repeatedly identified: (i) Pana-Pacific’s accounts receivable becoming past

25

due; and (ii) the issue of these delinquencies, according to CW 3. ¶96.

26

i. CW 3 confirmed that she needed Royal’s approval for any

27 extended payment terms for clients. ¶96.


28


1

j. Royal (along with Schramm) knew and approved of releasing

2 credit holds for past-due customers, as only he or Schramm could lift the holds;

3 and thus knew or was deliberately reckless in disregarding that Maxwell was

4 continuing to book receivables that were not reasonably assured of collectability,

5 according to CWs 3 and 4. ¶¶97, 104, 118.

6

k. Royal “directed” weekly meetings, commencing approximately

7

in May 2012, where the attendees discussed customer accounts that had lengthy

8

“DSO” issues, and which rendered the improper use of verbal extension of

9 payment terms identifiable, according to CW 5, who reported and interacted

10

directly with Royal. ¶¶107 n.29, 109.

11

l. Royal knew about accounting insufficiencies and material

12 weaknesses in Maxwell’s internal control over revenue recognition, as he signed

13

McGladrey’s letter of resignation. ¶149.

14 m. Royal (along with Schramm and Andrews) benefitted from

15


16

¶¶2, 9, 61-69.

17

C. DEFENDANT ANDREWS ’ SCIENTER

18


19

facts establishing that Andrews knew or recklessly disregarded that the statements



22

a. Andrews was the executive that Maxwell implicitly identified

23 as culpable for the accounting scheme, as he was forced to abruptly resign from

24

Maxwell on March 1, 2013, taking heed to Defendant Schramm’s forewarning that

25

termination loomed, as Maxwell was investigating the Company’s restatement and

26

false revenue recognition scheme—a mere six days before Maxwell disclosed the

27 restatement and the accounting scheme. ¶¶3, 8, 13, 28, 111, 113, 147.


28


1

b. Andrews (along with Defendant Schramm) ordered CW 1 -

2 over which he had direct oversight - to implement a transaction to ship product to

3

Alfatec that would not be accepted by the end-user in order to inappropriately

4 account for hundreds of thousands of dollars in revenue. ¶¶91, 92. Andrews

5

“countersigned” the secret change in the terms of the order to effectuate the

6 shipment. ¶92.

7 c. Andrews received weekly sales reports, prepared by CW 2, for

8

Andrews’ use in sales meetings, and which identified outstanding sales, received

9 orders, unfulfilled sales and invoiced orders. ¶¶78 n.25, 93.

10

d. Andrews attended weekly Accounts Receivable meetings,

11 which had repeatedly identified: (i) Pana-Pacific’s accounts receivable becoming

12 past due; and (ii) the issue of these delinquencies, according to CW 3, who

13 reported directly to Andrews. ¶¶94 n.27, 96.

14

e. Andrews was responsible for any issues or discrepancies

15 regarding the terms of a transaction, as he knew and personally approved of

16

illegitimate verbal payment term extensions and variations not reported in

17 originally-entered transaction statements, according to CW 2 and CW 3. ¶¶93, 96,

18

98, 99.

19

f. Andrews attended weekly meetings, commencing

20 approximately May 2012, where the attendees discussed customer accounts that

21

had lengthy “DSO” issues, and which rendered the improper use of verbal

22 extension of payment terms identifiable, according to CW 5. ¶109.

23

g. Andrews directly participated and was culpable for the scheme

24

to try to “find revenue” on the very last day of quarters in order to meet quarterly

25 revenue goals, as he was an active participant in the scheme, engaging in

26 conversations with Defendant Schramm and CW 4 focusing on where numbers

27 were going to be made and discussing open orders from which revenue could be


28


1 pulled, according to CW 4, who reported directly to Defendant Andrews. ¶¶114,

2

117.

3

h. Andrews (along with Schramm and Royal) was cognizant of the


5


6



8 and CW 4. ¶¶95, 106, 134.

9

i. Andrews (along with Schramm) knew of customers receiving

10 product that would not reach an end-user, as CW 4, after a November 2012

11 meeting with Bjoern Koehler, the son of Alfatec’s founder, told Schramm that

12

Alfatec would have to return product from an improper shipment earlier in 2012

13 and Maxwell would not get paid unless the product was purchased from Alfatec.

14

¶126.

15

j. Andrews (along with Schramm and Royal) benefitted from

16


17

¶¶2, 9, 61-69.

18

k. Andrews was directly recruited by Defendants Schramm and

19

Royal to carry out the Individual Defendants’ revenue recognition scheme. ¶¶8,

20

76, 111, 134.

21

l. Andrews and Schramm were members of the same country club

22 and would carpool together, along with CW 4, to Maxwell’s headquarters, during

23 which the trio would have conversations directly touching on the Company’s

24 revenue recognition scheme that led to the restatement. ¶¶112, 114, 117, 128.

25

D. MAXWELL ’ S CORPORATE SCIENTER

26

231. The corporate scienter of Maxwell is established by the scienter of the

27

Individual Defendants, Maxwell’s officers, directors, and other high-level

28 employees. A corporate defendants’ scienter is necessarily derived from its



1 employees and is not limited to the scienter of the speaking defendants. Courts

2 routinely impute to the corporation the intent of officers, directors and executive

3 employees acting within the scope of their authority.

4

232. Andrews’ scienter as a controlling officer of Maxwell is directly

5 attributable to the Company. At all times during the Class Period, Andrews was

6

the Company’s Senior Vice President of Sales and an SEC-reporting Officer of the

7

Company. In fact, Maxwell has admitted that Andrews resigned in connection

8 with the accounting misconduct. Specifically, in a Form 8-K filed with the SEC on

9

March 7, 2013, Maxwell announced the restatement and, under Item 5.02,

10

“Departure of Directors or Certain Officers,” the Company announced that

11

Andrews resigned on March 1, 2013, effective immediately, in connection with the

12 ongoing Audit Committee investigation. Andrews’ involvement in the Company’s

13

improper revenue recognition scheme is therefore apparent.

14

233. Furthermore, the detailed accounts of highly-placed former Maxwell

15 employees—each of which corroborates the others—confirms that Andrews, Royal

16 and Schramm engaged in a scheme to enter into “arrangements” with distributors

17 and others to extend payment terms, among other things, which necessarily

18 precluded the Company from recognizing revenue on those sales but, nevertheless,

19

these Defendants directed the Company to accelerate revenue recognition in

20 violation of GAAP and Maxwell’s accounting policy.

21

234. Moreover, Andrews was a high-level executive of the Company who

22 publicly represented Maxwell on several occasions both prior to and during the

23

Class Period and spoke on the Company’s behalf. For instance, on May 12, 2010,

24

Maxwell and Rutronik Elektronische Bauelemente GmbH issued a joint press

25 release announcing an agreement through which Rutronik (“Rutronik”) would

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distribute Maxwell’s BOOSTCAP(R) ultracapacitor products throughout

Europe. 119 In the press release, Defendant Andrews stated the following:

“Rutronik’s comprehensive coverage of the entire European continent and their commitment to providing a complete range of value-added support services brings a significant additional dimension to our channel partner network,” said Van Andrews, Maxwell’s vice president of ultracapacitor sales and marketing. “This new partnership will be instrumental in educating and better serving the European energy storage marketplace and accelerating BOOSTCAP products’ penetration of this large and dynamic market.”

235. In a February 1, 2011 press release, the Company announced that it

was introducing a new ultracapacitor module for installations such as data centers,

hospitals, factories and telecommunication facilities. 120 Defendant Andrews

described the Company’s purported opportunities by stating the following:

“The energy storage segment of the global UPS market is valued at nearly $1 billion a year, so it represents an attractive opportunity for our products ,” said Van Andrews, Maxwell’s senior vice president, sales and marketing.

“The vast majority of power disturbances last a second or less, so ultracapacitors provide an excellent technical solution for the application, and their projected 14-year life in a typical UPS installation makes for a very compelling value proposition.”

236. On March 15, 2011, Richardson RFPD, Inc., and Maxwell announced

the expansion of their mutual business agreement to include distributing

ultracapacitors in the European markets. 121 In their joint press release, Defendant

Andrews stated the following on behalf of Maxwell:

119 See Maxwell Technologies, Inc. and Rutronik Elektronische Bauelemente GmbH, Rutronik to Distribute Maxwell’s Ultracapacitors Throughout Europe (May 12, 2010), available at http://investors.maxwell.com/phoenix.zhtml ?c=94560&p=irol-newsArticle&ID=1425731&highlight= (emphasis added). 120 See Maxwell Technologies, Inc., Maxwell Technologies Introduces Ultracapacitor-Based Backup Power Module for Uninterruptible Power Supply Systems (Feb. 1, 2011), available at http://investors.maxwell.com/phoenix.zhtml ?c=94560&p=irol-newsArticle&ID=1522204&highlight= (emphasis added). 121 See Maxwell Technologies, Inc. and Richardson RFPD, Inc., Richardson RFPD and Maxwell Technologies Expand Agreement- Ultracapacitors will now be distributed by Richardson RFPD in Europe (Mar. 15, 2011), available at http://www.businesswire.com/news/home/20110315006819/en/Richardson-RFPD-Maxwell-Technologies-Expand-Agreement#.U4vPWSjijYc (emphasis added).



“We recognize Richardson RFPD’s unique ability to close the technical sale using its extensive worldwide sales and support organization. We have witnessed it for the past three years in both North America and China, and believe it is time to leverage those resources and capabilities in Europe. Richardson RFPD has been a truly formidable alliance partner as evidenced by their investments in Maxwell inventory to ensure product availability and in personnel to help drive the sales of our products to unprecedented levels .”

237. In a May 17, 2011 Form 8-K filed by the Company with the SEC,

Andrews is quoted in Exhibit 14.1 entitled “Code of Business Conduct and Ethics

of Maxwell Technologies, Inc.” as stating the following in regards to ethical

interactions and external parties: “High ethical standards and compliance with

laws and regulation are essential elements of all business dealings, including

those with customers, suppliers, government officials and private parties.”

238. On June 15, 2011, the Company announced introduction of a new

product, a 12-volt ultracapacitor module for commercial trucks and other heavy

vehicles. 122 Defendant Andrews stated the following on the Company’s behalf: 123

“Clearly the trucking industry is ripe for a more reliable and cost-effective starting solution ,” said Van Andrews, Maxwell’s senior vice president, sales and marketing.

“This ultracapacitor-based engine start module in a compact, lightweight, industry-standard form factor provides an ‘onboard jump-start’ capability that will virtually eliminate starting failures in low temperature conditions or when hotel loads drain a truck’s batteries.

“Fleet operators and other truck owners will see an immediate return on their investment in this engine start module in terms of improved performance and reliability, reduced weight versus batteries, longer battery life and less frequent battery replacement, and elimination of road service and downtime expense,” Andrews added.

122 See Maxwell Technologies, Inc., Maxwell Technologies Introduces Ultracapacitor-Based Engine Start Module for Commercial Trucks and Other Heavy Vehicles (June 15, 2011), available at http://investors.maxwell.com /phoenix.zhtml?c=94560&p=irol-newsArticle&ID=1573952&highlight=. 123 Defendant Andrews’ comments were again used in a December 6, 2011 press release by the Company announcing Maxwell’s new marketing campaign. See Maxwell Technologies, Inc., Maxwell Technologies Announces Ice Road Trucker Will Promote Engine Start Module With New Technology that Provides Reliable Cold Weather Starting for Trucking Industry (Dec. 6, 2011), available at http://www.prweb.com/releases/technology/trucking/prweb8997253.htm (emphasis added).

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“By significantly reducing the cost of ownership over the life of a truck, this novel product provides a compelling value proposition that is opening up a large and previously untapped market for Maxwell's ultracapacitor technology .”

239. Defendant Andrews also described the Company’s one-year

agreement with Pana-Pacific, where Pana-Pacific was announced to distribute a

Maxwell ultracapacitor-based engine start module in the U.S., Canada and Mexico.

Defendant Andrews stated the following in a January 24, 2012 press release: 124

“Pana-Pacific has a long history and great reputation as an integrator in the commercial vehicle market and we’re very pleased to be working with them to make our new Engine Start Module widely available to owner operators and fleets,” said Van Andrews, Maxwell’s senior vice president, sales and marketing.

“Through the agreement, buyers are now able to walk into any heavy-duty truck dealership in the U.S., Canada or Mexico and get the Engine Start Module right off the shelf or order it.”

240. On May 10, 2012, Digi-Key Corporation and Maxwell signed a global

distribution agreement. 125 In the joint press release, Defendant Andrews, as

Maxwell’s representative, stated the following:

“We are excited to partner with Digi-Key,” said Van Andrews, Maxwell’s senior vice president of sales and marketing. “Their dynamic, Internet-based business model and superior customer service will help to make our products and technical information on their use more readily available to the worldwide electronic design community.”

241. Defendant Andrews also described Maxwell’s ultracapacitor-based

Engine Start Module (ESM) a June 21, 2012126 news release, stating the following:

124 See Maxwell Technologies, Inc., Maxwell Technologies Inks Agreement with Pana-Pacific to Distribute Its New Ultracapacitor-Based Engine Start Module for Trucks (Jan. 24, 2012) available at http://investors.maxwell.com/phoenix.zhtml? c=94560&p=irol-newsArticle&ID=1651654&highlight=. 125 See Digi-Key Corporation and Maxwell Technologies, Inc., Digi-Key Corporation and Maxwell Technologies Sign Global Distribution Agreement (May 10, 2012), available at http://investors.maxwell.com/phoenix.zhtml?c=94560& p=irol-newsArticle&ID=1694308&highlight=. 126 See Maxwell Technologies, Inc., Maxwell Technologies’ Ultracapacitor-Based Engine Start Module For Medium And Heavy Duty Trucks Wins Innovation Award From R&D Magazine (June. 21, 2012) available at http://investors.maxwell.com /phoenix.zhtml?c=94560&p=irol-newsArticle&ID= 1707221&highlight=

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“Numerous trucking industry sources confirm the need for a more reliable and cost-effective starting solution, said Van Andrews, Maxwell’s senior vice president, sales and marketing.

“The ESM provides an “onboard jump start” capability that virtually eliminates starting failures due to extreme temperatures or depletion of batteries’ cranking power by repetitive starting for deliveries or the use of battery power for heating, air conditioning, entertainment systems and other ‘hotel loads’ in states where engine idling is limited by law.”

242. In addition, Andrews is listed as an officer in the following documents

that Maxwell filed with the SEC during the Class Period:

a. Form 4 filed May 12, 2011 : Andrews is listed as “SVP, Sales &

Marketing.”

b. Form 8-K filed May 17, 2011 : Andrews is listed as Senior Vice

President of Sale and Marketing and is quoted describing ethical standards and

legal compliance as essential elements of business dealings.

c. Form 4 filed February 9, 2012: Andrews is listed as “SVP,

Sales & Marketing.”

d. Form 4 filed February 17, 2012: Andrews is listed as “SVP,

Sales & Marketing” and disposed 5,000 shares.

e. Form 8-K filed February 13, 2012: On February 7, 2012, the

Compensation Committee took certain actions regarding compensation

arrangements with the Company’s named executive officers. Andrews, in addition

to Schramm, Defendant and George Kreigler, is listed as a Maxwell executive

officer. Defendant Andrews’ base salary increase of $252,000 to $277,200; 2011

incentive bonus of $115,680; long-term incentive award of 12,188 shares; and

2012 target bonus of $138,600 are all listed in the Form 8-K.

f. Form DEF 14A filed March 30, 2012 : Andrews is listed as a

named executive officer. His compensation is detailed in the proxy, as

shareholders were asked to vote, on an advisory basis, on the compensation of the

named executive officers.

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g. Form 8-K filed July 13, 2012 : Maxwell entered into an

2 employment agreement with Andrews. The terms of the agreement were detailed

3

therein and the agreement was signed on Maxwell’s behalf by Schramm. As stated

4 above, Andrews, as Senior Vice President of Sales & Marketing of the Company,

5 was to report directly to Schramm and Andrews’ bonus would be based on criteria

6 established by Schramm.

7

h. Form 4 filed February 11, 2013: Andrews is listed as “SVP,

8


9

i. Form 4 filed February 15, 2013: Andrews is listed as “SVP,

10


11

j. Form 8-K filed February 19, 2013 : On February 13, 2013, the

12

Compensation Committee took certain actions regarding compensation

13 arrangements of the Company’s named executive officers. Andrews, in addition to

14

Schramm and Royal, is listed as a Maxwell executive officer. Defendant

15

Andrews’ base salary increase of $277,200 to $287,064; long-term incentive award

16 of 11,790 shares; and 2013 target bonus of $143,532 are all listed in the Form 8-K.

17

k. Form 8-K filed March 7, 2013 : Defendant Andrews’

18 resignation was the only officer departure detailed in the Form 8-K.

19

243. Accordingly, Andrews was an officer of Maxwell and, alongside

20

Schramm and Royal, was responsible for the day-to-day management of the

21

Company’s operations that ultimately led to the restatement. Andrews’ scienter is

22 rightfully imputed to Defendant Maxwell.

23

244. Similarly, Maxwell’s scienter is derived from Schramm’s and Royal’s

24 scienter, which is established herein. See ¶¶228-229. Apart from the Individual

25

Defendants’ scienter, and in addition to the facts summarized above, Maxwell’s

26 executive officers, including Schramm, Royal and Andrews, were directly

27 responsible for the core day-to-day operations of the Company.


28


1

245. Maxwell’s corporate scienter is thus established because the Company

2 was directly responsible for the dissemination of many of the false and misleading

3 statements identified above at § VII and included in SEC filings made during the

4

Class Period in the Company’s Forms 10-Q for the first, second and third quarters

5 of fiscal 2011, the Company’s Form 10-K for the fiscal year 2011, and the

6

Company’s Forms 10-Q for the first, second and third quarters of fiscal 2012. In

7

these false and misleading filing, Maxwell materially misrepresented: (i) revenue

8

(¶164); (ii) net income and net losses (¶165); (iii) accounts receivable and

9

inventories (¶166); (iv) gross profit (¶167); (v) accounting practices and policies

10

(¶180); (vii) revenue recognition policy (¶181); (viii) policies governing the

11

Company’s accounts receivable and allowance for doubtful accounts (¶182); and

12

(ix) internal controls and procedures (¶185). Moreover, the subject-matter of the

13

false and misleading statements identified above concern, by their very nature, the

14

type of information and transactions which implicate the active participation of the

15

Individual Defendants.

16

246. Maxwell’s GAAP violations, misrepresentations of financial results

17 and other misstatements further establish scienter based on the financial results and

18 accounts affected and their specific significance to Maxwell’s business. See §VII

19

(materially false and misleading statements contained in Maxwell’s Class Period

20

SEC filings and press releases). These misrepresentations were disseminated by

21

Schramm and Royal acting on behalf of the Company during the Company’s

22 quarterly filings and annual filing during the Class Period, earnings calls on April

23

28, 2011, July 28, 2011, November 3, 2011, February 16, 2012, April 26, 2012,

24

August 2, 2012 and October 25, 2012, and conferences on January 12, 2012 and

25

May 31, 2012, discussing: (i) revenue (¶¶169, 176); (ii) net income and net losses

26

(¶170); (iii) accounts receivable (¶¶171, 174, 177); (iv) gross profit (¶172); (v)

27 accounting practices (¶175); and (vii) internal controls on financial reporting

28

(¶¶186-188).



1

247. Accordingly, Maxwell disseminated materially false and misleading

2 statements during the Class Period. Moreover, not only is the scienter of the

3

Individual Defendants imputed to the Company, but the nature of the

4

transgressions themselves implicate the active participation of the Individual

5

I Defendants. Accordingly, Maxwell’s liability under the Exchange Act is

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I established.

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XI. LOSS CAUSATION

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248. Defendants’ wrongful conduct, as alleged herein, directly and

9 proximately caused the economic loss suffered by Lead Plaintiff and the Class.

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Throughout the Class Period, Maxwell’s stock price was artificially inflated by

11 materially false and misleading statements and omissions that created a false

12

impression of the Company’s financial results and business prospects. As a result,

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the market price of Maxwell common stock was inflated by the materially false

14 and misleading statements and omissions made by Maxwell and the Individual

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Defendants, as identified above, and Lead Plaintiff and the Class purchased

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Maxwell common stock at artificially inflated prices during the Class Period.

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249. The Company’s ensuing disclosures on these topics, as described at

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Section V(A), revealed to the market on a piecemeal basis the fraudulent nature of

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these statements and the extent of the misrepresentations contained in Maxwell’s

20

financial statements that form the primary basis of this action. When the truth

21 about Maxwell was revealed to the market, the price of the Company’s common

22 stock declined in response, as the artificial inflation caused by Maxwell’s and the

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Individual Defendants’ material omissions and false and misleading statements

24 was removed from the price of Maxwell common stock, thereby causing

25 substantial damage to Lead Plaintiff and other members of the Class.

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250. Indeed, during the Class Period, Maxwell’s common stock traded as

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high as $21.20 per share on November 4, 2011, and plummeted $6.20, or a

28 stunning 40%, on April 27, 2012, on enormous trading volume of nearly 7.3



1 million shares that was exponentially greater than normal volumes, to close at

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$9.60 from a prior-day close of $15.80 after Defendants’ first partial disclosure of

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Maxwell’s illegal revenue recognition scheme. The Company’s stock price

4 remained inflated, however, due to Defendants’ continued false and misleading

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I statements and omissions of material information.

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251. Thereafter, Maxwell’s stock price declined $1.01 per share for a drop

7 of 11.09% on March 7, 2013, from $9.11 per share on March 6, 2013 to $8.10 per

8 share on March 8, 2013, on unusually heavy trading volume, immediately after the

9

Company disclosed its true financial condition, its unlawful revenue recognition

10 practices and the need for a restatement of its past financial results and SEC filings.

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The market thus immediately reacted to Defendants’ disclosures and Maxwell’s

12 stock price corrected itself as it was significantly driven downward.

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252. However, the Individual Defendants mitigated the impact of these

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disclosures and prevented the full truth about the Company from being revealed by

15 making contemporaneous false and misleading statements that minimized and

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denied the facts being revealed to the market. After the market finally learned the

17 magnitude of the restatement and the Company’s improper revenue recognition

18 practices with the resignation of Maxwell’s auditor, Maxwell’s stock price

19 plummeted again, dropping $1.53 per share or 20.56% on March 20, 2013, from

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$7.44 per share on March 19, 2013 to $5.91 per share on March 20, 2013, on

21 unusually heavy trading volume.

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253. It was entirely foreseeable to the Individual Defendants that

23 concealing Maxwell’s illicit revenue recognition practices and deficient internal

24 controls, and, in turn, overstating the Company’s revenue and financial metrics,

25 would artificially inflate the price of Maxwell common stock. It was similarly

26

foreseeable to the Individual Defendants that the revelation of that misconduct and

27

the Company’s true financial condition would cause the price of Maxwell’s

28 common stock to drop significantly as the inflation caused by their misstatements



1 and omissions was corrected. Accordingly, the conduct of the Company and the

2

Individual Defendants, as alleged herein, proximately caused foreseeable damages

3

I to Lead Plaintiff and members of the Class.

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254. Thus, the stock price declines detailed herein were directly related to

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disclosure of the previously issued materially false and misleading statements and

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I omissions.

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XII. APPLICABILITY OF THE PRESUMPTION OF RELIANCE: THE FRAUD-ON-THE-MARKET DOCTRINE

8

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255. At all relevant times, the market for Maxwell was an open, efficient

10 and well-developed market for the following reasons, among others:

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a. Maxwell’s stock met the requirements for listing and was listed

12 and actively traded on the Nasdaq under the symbol “MXWL” and the Nasdaq is a

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highly efficient and automated market;

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b. As a public company, Maxwell filed periodic public reports

15 with the SEC;

16 c. The average daily trading volume for Maxwell common stock

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during the Class Period was 292,649 shares, thus providing an average weekly

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trading volume of 5.05% that is above the threshold indicative of an efficient

19 market;

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d. Maxwell regularly communicated with public investors via

21 established market communication mechanisms, including through regular

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disseminations of press releases on the national circuits of major newswire services

23 and through other wide-ranging public disclosures, such as communications with

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the financial press and other similar reporting services;

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e. Maxwell was followed by securities analysts employed by

26 major brokerage firms, including Piper Jaffray, Wedbush and Roth Capital

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Partners. Each of these reports was publicly-available and entered the public

28 marketplace;



f. Institutional investors reported owning a majority of all

Maxwell common stock during the Class Period. Indeed, as of March 17, 2013,

institutional holdings of Maxwell common stock amounted to 84.82% of

outstanding shares and 87.37% of the public float according to Bloomberg .

Currently, 71% of total shares and 76% of the public float are held by institutional

owners, according to Yahoo Finance. This high level of institutional ownership of

Maxwell common stock during the Class Period indicates that the market price was

reflective of active trading by extremely sophisticated and knowledgeable

investors; and

g. As a result of the foregoing, the market for Maxwell common

stock promptly digested current information regarding the Company from all

publicly-available sources and reflected such information in Maxwell’s common

stock price. Under these circumstances, all purchasers of the Company’s common

stock during the Class Period suffered similar injury through their purchase of

Maxwell securities at artificially inflated prices and a presumption of reliance

applies.

256. A Class-wide presumption of reliance is also appropriate in this action

under the Supreme Court’s holding in Affiliated Ute Citizens of Utah v. United

States , 406 U.S. 128 (1972), because Lead Plaintiff’s fraud claims are grounded in

Defendants’ material omissions. As this action involves Defendants’ failure to

disclose material adverse information regarding Maxwell’s financial results and

condition and internal controls—information that Defendants were obligated to

disclose during the Class Period but did not—positive proof of reliance is not a

prerequisite to recovery. All that is necessary is that the facts withheld be material

in the sense that a reasonable investor might have considered such information

important in the making of investment decisions.

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XIII. INAPPLICABILITY OF THE STATUTORY SAFE HARBOR

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257. The statutory safe harbor provided for forward-looking statements

3 under certain circumstances does not apply to any of the allegedly false or

4 misleading statements pleaded in this Complaint. The statements alleged to be

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false or misleading herein all relate to then-existing facts and conditions. In

6 addition, to the extent certain of the statements alleged to be false or misleading

7 may be characterized as forward-looking, they were not adequately identified as

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forward-looking statements when made, and there were no meaningful cautionary

9 statements identifying important facts that could cause actual results to differ

10 materially from those in the purportedly forward-looking statements.

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258. To the extent that the statutory safe harbor is intended to apply to any

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forward-looking statements pleaded herein, Maxwell and the Individual

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Defendants are liable for those false forward-looking statements because at the

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time each of those forward-looking statements was made, each of these Defendants

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had actual knowledge that the particular forward-looking statement was materially

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false or misleading. Defendants are liable for the statements pleaded because, at

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the time each of those statements was made, Defendants knew the statement was

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false and the statement was authorized and/or approved by an executive officer of

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Maxwell who knew that such statement was false when made.

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XIV. CLASS ACTION ALLEGATIONS

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259. Lead Plaintiff brings this action as a class action pursuant to Rule 23

22 of the Federal Rules of Civil Procedure on behalf of all persons who purchased or

23 otherwise acquired Maxwell’s common stock during the Class Period and were

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damaged thereby (the “Class”). Excluded from the Class are (i) Defendants; (ii)

25 members of the immediate family of each Individual Defendant; (iii) any person

26 who was an officer or director of Maxwell during the Class Period; (iv) any firm,

27

trust, corporation, officer, or other entity in which any Defendant has or had a

28 controlling interest; (v) any person who participated in the wrongdoing alleged



1

herein; and (vi) the legal representatives, agents, affiliates, heirs, beneficiaries,

2 successors-in-interest, or assigns of any such excluded party.

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

4 members is impracticable. The disposition of their claims in a class action will

5 provide substantial benefits to the parties and the Court. Throughout the Class

6

Period, Maxwell’s common stock was actively traded on the NASDAQ, an

7 efficient market. As of October 19, 2012, the Company had more than 29 million

8 shares of common stock outstanding. While the exact number of Class members is

9 unknown to Lead Plaintiff at this time, and can only be ascertained through

10 appropriate discovery, Lead Plaintiff believes that there are at least hundreds of

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thousands of members in the Class.

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261. There is a well-defined community of interest in the questions of law

13 and fact involved in this case. Questions of law and fact common to the members

14 of the Class predominate over questions that may affect individual Class members,

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including:

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a. Whether Defendants violated the federal securities laws;

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b. Whether Defendants misrepresented material facts concerning

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Maxwell;

19 c. Whether Defendants’ statements omitted material facts

20 necessary to make the statements not misleading in light of the

21 circumstances under which they were made;

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d. Whether Defendants knew or recklessly disregarded that their

23 statements were false and misleading;

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e. Whether Defendants engaged in perpetrating a manipulative

25 and deceptive device and/or scheme and/or otherwise engaged

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in a fraudulent course of conduct;

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f. Whether the Maxwell SEC filings issued during the Class

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Period, which contained financial information ( i.e., its Forms



10-K, 10-Q, 8-K, and S-3) contained untrue or materially

misleading statements;

g. Whether the prices of the Company’s common stock were

artificially inflated; and

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

appropriate measure of damages.

262. The claims of Lead Plaintiff are typical of those of the Class.

263. Lead Plaintiff will adequately protect the interests of the Class and has

retained counsel experienced in class action securities litigation. Lead Plaintiff has

I no interests that conflict with those of the Class.

264. A class action is superior to other available methods for the fair and

efficient adjudication of this controversy.

XV. CLAIMS BROUGHT PURSUANT TO THE EXCHANGE ACT

FIRST CLAIM FOR RELIEF

For Violations Of Section 10(b) Of The Exchange Act And Rule 10b-5(b) (Against Defendant Maxwell And Individual Defendants Schramm And

Royal)

265. Lead Plaintiff repeats and re-alleges each and every allegation

contained above as if fully set forth herein.

266. During the Class Period, Defendants Maxwell and the Individual

Defendants disseminated or approved the false statements specified herein, which

they knew or recklessly disregarded were misleading in that they failed to disclose

material facts necessary in order to make the statements made, in light of the

circumstances under which they were made, not misleading, and they contained

material misrepresentations.

267. These Defendants violated Section 10(b) of the Exchange Act and

Rule 10b-5 thereunder in that they: (i) employed devices, schemes, and artifices to

defraud; (ii) made untrue statements of material facts or omitted to state material

facts necessary in order to make the statements made, in light of the circumstances

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1 under which they were made, not misleading; and/or (iii) engaged in acts,

2 practices, and a course of business that operated as a fraud or deceit upon Lead

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Plaintiff and others similarly situated in connection with their purchases of

4

Maxwell common stock during the Class Period. As detailed herein, the

5 misrepresentations contained in, or the material facts omitted from, these

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Defendants’ public statements, concerned, among other things, the Company’s

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improper accounting, revenue recognition and deficient internal controls.

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268. These Defendants, individually and in concert, directly and indirectly,

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by the use of means or instrumentalities of interstate commerce and/or of the mails,

10 engaged and participated in a continuous course of conduct that operated as a fraud

11 and deceit upon Lead Plaintiff and the Class; made various false and/or misleading

12 statements of material facts and omitted to state material facts necessary in order to

13 make the statements made, in light of the circumstances under which they were

14 made, not misleading; made the above statements with a reckless disregard for the

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truth; and employed devices and artifices to defraud in connection with the

16 purchase and sale of securities, which were intended to, and did: (i) deceive the

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investing public, including Lead Plaintiff and the Class, regarding, among other

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things, Maxwell’s financial and operational results, including but not limited to,

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the Company’s improper revenue recognition and deficient internal controls;

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(ii) artificially inflate and maintain the market price of Maxwell stock; and

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(iii) cause members of the Class to purchase the Company’s securities at

22 artificially inflated prices.

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269. Defendant Maxwell is liable for all materially false and misleading

24 statements made during the Class Period, as alleged above.

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270. Maxwell is further liable for the false and misleading statements made

26

by the Company’s officers in press releases and during conference calls and at

27 conferences with investors and analysts, as alleged above, as the makers of such

28 statements and under the principle of respondeat superior.



1

271. The Individual Defendants, as top executive officers of the Company,

2 are liable as direct participants in the wrongs complained of herein. Through their

3 positions of control and authority as officers of the Company, each of these

4

Defendants was able to and did control the content of the public statements

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disseminated by Maxwell. These Defendants had direct involvement in the daily

6

business of the Company and participated in the preparation and dissemination of

7

the false and misleading statements, as set forth above.

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272. In addition, the Individual Defendants are liable for, among other

9 material omissions and false and misleading statements, the false and misleading

10 statements they made and/or signed as follows:

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a. Defendant Schramm signed and certified the Company’s Forms

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10-Q filed with the SEC on May 5, 2011, August 8, 2011, November 7, 2011,

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April 26, 2012, August 2, 2012 and October 30, 2012, and the Company’s Form

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10-K filed with the SEC on February 26, 2012. Schramm falsely certified that the

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Company’s Class Period false and misleading filings fairly presented Maxwell’s

16

financial conditions and results of operations, and he falsely certified that the

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Company’s internal controls were effective and compliant with Rules 13a-15(f) or

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15d-15(f) promulgated under the Exchange Act. Schramm also made false and

19 misleading statements during the earnings calls on April 28, 2011, July 28, 2011,

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November 3, 2011, February 16, 2012, April 26, 2012, August 2, 2012 and

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October 25, 2012, and Needham Growth Conference on January 12, 2012.

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b. Defendant Royal signed and certified the Company’s Forms 10-

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Q filed with the SEC on May 5, 2011, August 8, 2011, November 7, 2011, April

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26, 2012, August 2, 2012 and October 30, 2012, and the Company’s Form 10-K

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filed with the SEC on February 26, 2012. Royal falsely certified that the

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Company’s Class Period false and misleading filings fairly presented Maxwell’s

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financial conditions and results of operations, and he falsely certified that the

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Company’s internal controls were effective and compliant with Rules 13a-15(f) or



15d-15(f) promulgated under the Exchange Act. Royal also made false and

misleading statements during the earnings calls on April 28, 2011, July 28, 2011,

November 3, 2011, February 16, 2012, April 26, 2012, August 2, 2012 and

October 25, 2012, and the Cowen & Co. Technology Media and Telecom

Conference on May 31, 2012.

273. As described above, these Defendants acted with scienter throughout

the Class Period in that they either had actual knowledge of the misrepresentations

and omissions of material facts set forth herein, or acted with reckless disregard for

the truth in that they failed to ascertain and to disclose the true facts, even though

such facts were available to them.

274. Lead Plaintiff and the Class have suffered damages in that they paid

artificially inflated prices for Maxwell common stock. Lead Plaintiff and the Class

would not have purchased Maxwell common stock at the prices they paid, or at all,

if they had been aware that the market price had been artificially and falsely

inflated by Defendants’ misleading statements.

275. As a direct and proximate result of these Defendants’ wrongful

conduct, Lead Plaintiff and the Class suffered damages in connection with their

purchases of Maxwell stock during the Class Period.

SECOND CLAIM FOR RELIEF

For Violations Of Section 10(b) Of The Exchange Act And Rule 10b-5(a) and (c) (Against Defendant Maxwell And The Individual Defendants)



277. During the Class Period, Maxwell and the Individual Defendants

participated in the preparation of and/or disseminated or approved the false

statements specified above, which they knew or deliberately disregarded were

misleading in that they contained misrepresentations and failed to disclose material

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facts necessary in order to make the statements made, in light of the circumstances

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278. Maxwell and the Individual Defendants violated § 10(b) of the

4

Exchange Act and Rule 10b-5(a) & (c) in that they employed devices, schemes and

5 artifices to defraud and engaged in acts, practices and a course of business that

6 operated as a fraud or deceit upon Lead Plaintiff and others similarly situated in

7 connection with their purchases of publicly traded Maxwell securities during the

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Class Period.

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279. Maxwell and the Individual Defendants, individually and together,

10

directly and indirectly, by the use, means or instrumentalities of interstate

11 commerce and/or the mails, engaged and participated in a continuous course of

12 conduct to conceal the truth and/or adverse material information about the financial

13 condition, business, operations and future prospects of Maxwell as specified

14

herein.

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280. Maxwell and the Individual Defendants employed devices, schemes

16 and artifices to defraud, while in possession of material, adverse, non-public

17

information and engaged in acts, practices, and a course of business which

18 operated as a fraud and deceit upon the purchasers of publicly traded Maxwell

19 securities during the Class Period.

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281. Maxwell and the Individual Defendants had actual knowledge of the

21 misrepresentations and omissions of material fact set forth herein, or recklessly

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disregarded the true facts that were available to them. Defendants’ misconduct

23 was engaged in knowingly or with reckless disregard for the truth, and for the

24 purpose and effect of concealing Maxwell’s true financial condition from the

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investing public and supporting the artificially inflated price of Maxwell’s

26 securities.

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282. Lead Plaintiff and the Class have suffered damages in that, in reliance

28 on the integrity of the market, they paid artificially inflated prices for Maxwell



publicly traded securities. Lead Plaintiff and the Class would not have purchased

Maxwell publicly traded securities at the prices they paid, or at all, had they been

aware that the market prices for Maxwell’s securities had been artificially inflated

by Maxwell and the Individual Defendants’ materially false and misleading

statements.

THIRD CLAIM FOR RELIEF

For Violations Of Section 20(a) Of The Exchange Act (Against The Individual Defendants)



284. This Count is asserted against the Individual Defendants for violations

of Section 20(a) of the Exchange Act, 15 U.S.C. § 78t(a), on behalf of all members

of the Class.

285. As alleged in detail above, Maxwell committed a primary violation of

the federal securities laws through its knowing and/or reckless dissemination of

materially false and misleading statements and omissions throughout the Class

Period.

286. During their tenures as officers and/or directors of Maxwell, each of

these Individual Defendants was a controlling person of the Company within the

meaning of Section 20(a) of the Exchange Act. By reason of their positions of

control and authority as officers and/or directors of the Company, these Individual

Defendants had the power and authority to cause Maxwell to engage in the

wrongful conduct complained of herein. As set forth in detail above, Defendants

named in this Count were able to and did control, directly and indirectly, and exert

control over Maxwell, including the content of the public statements made by the

Company during the Class Period, thereby causing the dissemination of the false

and misleading statements and omissions of material facts as alleged herein.

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287. In their capacities as senior corporate officers of the Company, and as

2 more fully described above, the Individual Defendants had direct involvement in

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the day-to-day operations of Maxwell and in the Company’s financial reporting

4 and accounting functions. Each of these Individual Defendants was also directly

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involved in providing false information and certifying and/or approving the false

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financial statements disseminated by Maxwell during the Class Period. Further, as

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detailed above, the Individual Defendants had direct involvement in the

8 presentation and/or manipulation of false financial reports included within the

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Company’s press releases and filings with the SEC.

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288. The Individual Defendants all received various written and oral

11 reports from different divisions of the Company, and attended in-person and

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telephonic meetings, on a routine basis. The Individual Defendants’ knowledge of

13 and participation in the Company’s affairs through the various reports they

14 received and/or had access to, and the meetings they attended, are described above.

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289. By reason of their positions as officers of Maxwell, and more

16 specifically as controlling officers—as can be seen by their corresponding ability

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to influence and control the Company—each of these Individual Defendants is a

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“controlling person” within the meaning of Section 20(a) of the Exchange Act and

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had the power and influence to direct the management and activities of the

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Company and its employees, and to cause the Company to engage in the unlawful

21 conduct complained of herein. Because of their positions, these Individual

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Defendants had access to adverse nonpublic financial information about Maxwell

23 and acted to conceal the same, or knowingly or recklessly authorized and approved

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the concealment of the same. Moreover, each of the Individual Defendants was

25 also involved in providing false information and certifying and/or approving the

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false financial statements disseminated by the Company during the Class Period.

27 Each of these Individual Defendants was provided with or had access to copies of

28 the Company’s reports, press releases, public filings and other statements alleged



1

by Lead Plaintiff to be misleading prior to and/or shortly after these statements

2 were issued and had the ability to prevent the issuance of the statements or cause

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I the statements to be corrected.

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290. As set forth above, Maxwell violated Section 10(b) of the Exchange

5

Act by its acts and omissions alleged in this Complaint. By virtue of their

6 positions as controlling persons of the Company and as a result of their own

7 aforementioned conduct, the Individual Defendants named in this Count are liable

8 pursuant to Section 20(a) of the Exchange Act, jointly and severally with, and to

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the same extent as the Company is liable under Section 10(b) of the Exchange Act

10 and Rule 10b-5 promulgated thereunder, to Lead Plaintiff and the other members

11 of the Class who purchased or otherwise acquired Maxwell securities.

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291. As a direct and proximate result of these Individual Defendants’

13 conduct, Lead Plaintiff and the Class suffered damages in connection with their

14 purchase or acquisition of Maxwell stock.

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XVI. PRAYER FOR RELIEF

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292. WHEREFORE, Lead Plaintiff prays for judgment individually and on

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behalf of the Class, as follows:

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a. Declaring this action to be a proper class action pursuant to

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Rule 23 of the Federal Rules of Civil Procedure;

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b. Awarding Lead Plaintiff and the Class members damages,

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including interest;

22 c. Awarding Lead Plaintiff reasonable costs, including attorneys’

23 and experts’ fees; and

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d. Awarding such equitable/injunctive or other relief for the

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benefit of the Class as the Court may deem just and proper.

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XVII. JURY DEMAND

293. Lead Plaintiff demands a trial by jury for all issues so triable.

Dated: June 4, 2014

Respectfully submitted,

By: /s/ Benjamin Galdston Benjamin Galdston

BERNSTEIN LITOWITZ BERGER & GROSSMANN LLP

Blair A. Nicholas (Bar No. 178428) [email protected] Benjamin Galdston (Bar No. 211114) [email protected] 12481 High Bluff Drive, Suite 300 San Diego, CA 92130 Tel: (858) 793-0070 Fax: (858) 793-0323

Liaison Counsel for Lead Plaintiff

SAXENA WHITE P.A.

Maya Saxena Joseph E. White, III Lester R. Hooker (Bar No. 241590) Brandon T. Grzandziel Dianne M. Anderson (Bar No. 286199) 2424 North Federal Highway, Suite 257 Boca Raton, FL 33431 Tel: (561) 394-3399 Fax: (561) 394-3382

Lead Counsel for Lead Plaintiff

Klausner, Kaufman, Jensen and Levinson Robert Klausner Stuart A. Kaufman 10059 NW 1st Court Plantation, FL 33324 Tel: (954) 916-1202 Fax: (954) 916-1232

Attorneys for Lead Plaintiff


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