Summary of Complaint
This is a securities fraud class action on behalf of persons and entities who purchased or acquired the securities of Retek between July 19, 2001 and July 8, 2002 (the "Class Period") and were damaged thereby. The claims asserted herein arise under §§10(b) and 20(a) of the Securities Exchange Act of 1934, ("Exchange Act") 15 U.S.C. §§78j(b) and 78t(a), and Rule 10b-5, 17 C.F.R. §240.10b-5, promulgated thereunder.
Retek sells supply-chain software to companies exclusively in the retail industry. The Class Period starts the day that defendants announced Retek’s results for the second quarter of 2001 ("2Q 01"), which ended June 30, 2001. For that quarter, Retek publicly announced "Continued Dynamic Growth" with total revenue of $43.6 million, an increase of 18% from 1Q 01. In truth, however, Retek’s sales pipeline had failed to yield sufficient revenue for Retek to meet expectations for 2Q 01. To conceal this shortfall, Buchanan, Effertz and Murdy internally manufactured documents to improperly recognize $12 million in connection with Retek’s contract with the Great Atlantic Pacific Tea Company, Inc. ("A&P"), a grocery chain. CW1. By the end of June 2001, Retek had completed just 30% of the work called for by the A&P contract. Violating generally accepted accounting principles ("GAAP"), Effertz instructed Controller Murdy to have his staff create false documents showing 70% completion. Effertz admitted to Retek executives at an internal meeting that Retek’s books were doctored to make the anticipated numbers for the quarter. Thomas exclaimed: "Now we’re involved in fraud!" At other times senior management instructed finance staff members to play with revenue-recognition criteria to make internal results appear better or to "redo it and lie about it," because management "didn’t like the numbers."
In addition to reporting false financial results for 2Q 01, defendants also misled the market about the strength of Retek’s existing business during the Class Period. Throughout the Class Period, defendants refused to disclose Retek’s quarterly bookings. Internally, Retek’s sales pipeline continued to weaken, and quarterly bookings trended downward. Retek’s sales cycle lengthened as retailers delayed procurement and demanded additional concessions before purchasing supply-chain software from Retek. See CW3. Further, defendants knew that Buchanan secretly terminated Retek’s critical alliance with IBM Corporation ("IBM") in October 2001.
While refusing to disclose quarterly sales activity and known adverse trends, defendants were adamant that Retek "continue[d] to see good pipeline growth," and "continue[d] to win the important enterprise opportunities at major retailers around the world." Further, according to defendants, Retek’s important alliance with IBM (which Retek said would result in revenue of more than $1 billion) supposedly remained intact when it did not. See CW1 and CW5. In addition, defendants continued to tout their clear visibility into Retek’s future quarters’ revenue and ability to achieve impressive 40% to 50% year-over-year growth in revenue and earnings for 2002.
The key to Retek’s clear visibility was its revenue recognition model. Unlike Retek’s peers, which recognized all revenue at the time of shipment, Retek structured most of its license contracts to enable Retek to recognize revenue "ratably" over extended periods, usually 18 months (i.e., 6 quarters). Based on this approach, defendants provided specific guidance to the market during the Class Period, representing in press releases, conference calls and various contexts that Retek entered each new quarter with more than 75% of its license objective for that quarter under contract and with more than 65% of that objective under contract for the next 6 months.
On July 8, 2002, Retek abruptly withdrew its guidance – guidance which defendants had reiterated just weeks earlier – and slashed expected revenue for 2002. On this news, Retek stock collapsed from $17.31 on July 8, 2002 to just $6.46 on July 9, 2002 – a single-day decline of more than 62%. Trading volume exceeded 20 times the normal volume. Given Retek’s previous adamant denials of a slowdown and management’s clear visibility into revenues for future quarters, securities analysts openly questioned management’s credibility.
While investors suffered substantial losses, defendants Buchanan, Effertz, Murdy and Thomas, along with John L. Goedert ("Goedert") (Retek’s Chief Operating Officer), reaped millions of dollars through illegal insider trading. Thomas sold 100% of his holdings for more than $2.2 million; Buchanan unloaded 99% of his holdings for more than $8.5 million; and Effertz, Goedert and Murdy likewise sold between 92% and 95% of their holdings.