johnson, et al. v. us auto parts network, inc., et al. 07...
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Elaine Byszewski (SBN 222304)HAGENS BERMAN SOBOL SHAPIRO, LLP700 South Flower Street , Suite 2940Los Angeles , CA 90017Tel: (213) 330-7149Fax: (213) 330-7152Email : [email protected]
Liaison Counsel for Lead Plaintiffand the Class
Kim E. Miller (SBN 178370)KAHN GAUTHIER SWICK, LLC12 E. 41s' St., Ste. 1200New York, New York 10017Tel: (212) 696-3730Fax: (504) 455-1498E-mail: [email protected]
Lead Counsel for Lead Plaintiffand the Class
CDT
OCT 4 2001 I
Di5 rRiCT
DFPIJ \'
Lewis S. KahnKAHN GAUTHIER SWICK, LLC650 Poydras St., Suite 2150New Orleans, LA 70130Tel: (504) 455-1400Fax: (504) 455-1498E-mail: [email protected]
Lead Counsel for Lead Plaintiffand the Class
UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
WESTERN DIVISION
re U.S. AUTO PARTS NETWORK,C. SECURITIES LITIGATION
Master File No.: CV 07-2030-GW (JC;';n)
CLASS ACTION
AMENDED CONSOLIDATED CLASSACTION COMPLAINTFOR VIOLATIONS OFFEDERAL SECURITIES LAWS
a,
2001,
014
JURY TRIAL DEMANDED
JUDGE: George H. WuCTRM: 10
ORIGINAL
1 NATURE OF THE ACTION
2 1. This is a class action brought on behalf of the purchasers of U.S. Auto Parts
3 Network, Inc. ("U.S. Auto Parts" or the "Company") common stock pursuant to its
4 February 9, 2007 Initial Public Offering ("IPO" or the "Offering") of 10 million shares of
5 common stock. In connection with this Offering - during which 8 million shares were sold
6 by the Company and 2 million shares were sold by insiders - the Defendants raised gross
7 proceeds of at least $100 million, not including another $15 million in Company stock
8 sold in connection with the IPO pursuant to the Underwriters' oversubscription agreement.
9 2. U. S. Auto Parts, its Board of Directors, its Chief Financial Officer, and Other
10 Controlling Defendant described herein, and the Underwriters involved in the Offering
11 (including Thomas Weisel Partners, LLC, Piper Jaffray & Co., JMP Securities, LLC, and
12 RBC Capital Markets Corp.) are each charged with including or allowing the inclusion of
13 untrue statements of material fact and omitting to state material facts required to make the
14 statements not misleading in the Registration Statement and Prospectus issued in
15 connection with the IPO in direct violation of the Securities Act of 1933. Specifically, the
16 Defendants each failed to conduct an adequate due diligence investigation into the
17 Company prior to the IPO, and they also each failed to reveal, at the time of the IPO, that
18 the integration of All OEM Parts, Inc., ThePartsBin.com, Inc., and their affiliated
19 companies (collectively, "Partsbin"), its recently acquired subsidiaries, was not proceeding
20 according to plan and that U.S. Auto Parts' sales already had been, and foreseeably would
21 continue to be, adversely affected as a result thereof Defendants also failed to disclose
22 material information about the Company's inventory, customer cancellations, revenue
23 recognition, and return policies necessary to make the statements in the Prospectus and
24 Registration Statement not misleading. Defendants further failed to disclose the lack of
25 adequate internal controls and failures to comply with Generally Accepted Accounting
26 Principles ("GAAP").
27 3. During the IPO, Defendants and Company insiders liquidated over 3.5
28 million shares - allowing them to profit by $35 million dollars. The sales of personally-
2
I held shares by Defendants and company insiders resulted in millions in earnings as
2 follows:
3 Name Earnings from IPOEarnings fromOver-Allotment Option
4 Defendant Khazani $9,641,340 $7,231,0.005
Defendant Nia $5 , 139,030 --6
Defendant Pile $681,300 $170,3307
Ben Elyashar $3,402 , 830 $2,552,1208
Todd Daugherty $681,300 $510,9809
Lowell Mann $227,100 --10
Brian Tinari $227,100 $170,33011
TOTAL $20,000 ,000 $15 ,000,00012
4. It was only on March 20, 2007, after the close of trading - and after the13
Defendants and other Company insiders liquidated over $35 million of their personally-14
held shares in or in connection with the IPO - that U.S. Auto Parts revealed the truth15
about the Company, including that the problems which already existed at the time of the16
IPO (i.e., the failure to integrate Partsbin or operate the Company's dual order fulfillment17
system effectively) would result in extremely disappointing results for the fourth quarter18
19of 2006 , including loss caused by large , undisclosed costs and expenses.
5. The following trading day, on the publication of this news, U.S. Auto Parts'20
stock price collapsed . As evidence of this, shares of U.S . Auto Parts fell over 50% in a21
single trading day, plummeting from $ 11.07 per share to close at $6.49 per share on March22
21, 2007. On that day, U.S. Auto Parts also experienced exceptionally heavy trading23
24volume with over 18 million shares traded, hundreds of times the Company's recent
average daily trading volume.25
6. The Securities Exchange Commission ("SEC") has since commenced an26
inquiry into the events leading up to U.S . Auto Parts' financial results announced for27
284Q:06 and year-end December 31, 2006 , the same results which caused U.S. Auto Parts'
3
I stock price to plummet.
2 JURISDICTION AND VENUE
3 7. The claims asserted herein arise under § § 11, 12, and 15 of the Securities Act
4 of 1933 (the "Securities Act"). Jurisdiction is conferred by §22 of the Securities Act.
5 Venue is proper pursuant to §22 of the Securities Act, as Defendant U.S. Auto Parts
6 and/or the Individual Defendants, Other Controlling Defendants, and Underwriter
7 Defendants - Thomas Weisel, Piper Jaffray, JMP Securities and RBC Capital - conduct
8 business in, and the wrongful conduct took place in, this District.
9 THE PARTIES
10 Lead Plaintiff
11 8. Lead Plaintiff SASCO INVESTMENTS, LP purchased shares ofU.S. Auto
12 Parts common stock pursuant and/or traceable to the Company's materially untrue and
13 misleading Registration Statement and Prospectus issued by Defendants in connection
14 with the February 2007 IPO, as set forth in the Certification submitted with Lead
15 Plaintiff's motion for appointment as Lead Plaintiff, incorporated herein by reference, and
16 was damaged thereby.
17 Issuer Defendant
18 9. Defendant U.S. AUTO PARTS is a Delaware Corporation founded in 1995
19 and headquartered in Carson, California. U.S. Auto Parts operates as an Internet retailer of
20 aftermarket auto parts and accessories primarily in the United States. The Company
21 purports to sell its products principally to individual consumers through a network ofWeb
22 sites and online marketplaces. The Company's flagship websites, PartsTrain.com and
23 AutoPartsWarehouse.com, provide a selection of approximately 550,000 products,
24 including auto body parts, engine parts, performance parts, and accessories. The Company
25 also has operations in the Philippines.
26 Individual Defendants
27 10. The individuals identified as Defendants in subparagraphs (a) - (g) below are
28- referred to collectively herein as the "Individual Defendants." The Individual Defendants
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I each signed the Registration Statement. The Individual Defendants are each liable for the
2 untrue statements of material fact and omissions of facts necessary to make the statements
3 made not misleading contained in the Registration Statement and Prospectus, as alleged
4 herein, as those statements were "group-published" information. The Individual
5 Defendants include the following:
6 (a) Defendant SOL KHAZANI ("Khazani") is and at all relevant times
7 was Chairman of the Board of Directors and co-founder of U.S. Auto Parts. Defendant
8 Khazani signed the Registration Statement containing materially untrue statements and
9 omissions of material facts and filed with the SEC the Prospectus containing materially
10 untrue statements and omissions issued in connection with the February 2007 IPO. Also in
11 connection with the IPO, Defendant Khazani sold over $1.687 million of his personally-
12 held U.S. Auto Parts shares.
13 (b) Defendant MEHRAN NIA ("Nia") is and at all relevant times was
14 President, Chief Executive Officer, a Director of U.S. Auto Parts, and a member of the
15 Board of Directors of the Company. Defendant Nia signed the Registration Statement
16 containing materially untrue statements and omissions of material facts filed with the SEC
17 and the Prospectus containing materially untrue statements and omissions issued in
18 connection with the February 2007 IPO. Also in connection with the IPO Defendant Nia
19 sold over $8.993 million of his personally-held Company shares.
20 (c) Defendant RICHARD PINE ("Pine") has been the Vice President of
21 Strategic Planning at U.S. Auto Parts since January 2007 and a director since June 2006.
22 Defendant Pine signed the Registration Statement containing materially untrue statements
23 and omissions of material facts and filed with the SEC the Prospectus containing
24 materially untrue statements and omissions issued in connection with the February 2007
25 IPO. Also in connection with the IPO Defendant Pine sold over $1.192 million of his
26 personally-held U.S. Auto Parts shares.
27 (d) Defendant FREDRIC W. HARMAN ("Harman") is and at all
28 relevant times was a member of the Board of Directors of U.S. Auto Parts. Defendant
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Harman signed the Registration Statement containing materially untrue statements and
omissions of material facts and filed with the SEC the Prospectus containing materially
untrue statements and omissions issued in connection with the February 2007 IPO.
Defendant Harman also owns and controls Defendant Oak Investment Partners'
subsidiaries that owned over 30% of the Company's shares immediately prior to the IPO.
Oak Investment Partners owns and controls over 6.633 million Series A Preferred shares
convertible into ordinary shares of the Company, pursuant to which it also has the right to
appoint at least two directors to the Company Board.
(e) Defendant ROBERT J. MAJTELES ("Majteles") is and at all
relevant times was a member of the Board of Directors of U.S. Auto Parts. Defendant
Majteles signed the Registration Statement containing materially untrue statements and
omissions of material facts and filed with the SEC the Prospectus containing materially
untrue statements and omissions issued in connection with the February 2007 IPO.
Defendant Majteles also is, and at all relevant times was, a member of the Audit
Committee, the Compensation Committee, and the Nominating and Corporate Governance
Committee of the Board of Directors of the Company.
(f) Defendant ELLEN F. SIMINOFF ("Siminoff') is and at all relevant
times was a member of the Board of Directors of U.S. Auto Parts. Defendant Siminoff
signed the Registration Statement containing materially untrue statements and omissions
of material facts and filed with the SEC the Prospectus containing materially untrue
statements and omissions issued in connection with the February 2007 IPO. Defendant
Siminoff is a member ofthe Audit Committee, Compensation Committee, and Nominating
and the Corporate Governance Committee of the Board of Directors of the Company.
(g) Defendant MICHAEL J. McCLANE ("McClane") is and at all
relevant times was Chief Financial Officer, Executive Vice President of Finance, and
Treasurer of the Company. Defendant McClane signed the Registration Statement
containing materially untrue statements and omissions of material facts and filed with the
SEC the Prospectus containing materially untrue statements and omissions issued in
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connection with the February 2007 IPO.
Other Controlling Defendant
11. Defendant OAK INVESTMENT PARTNERS XI, LP ("Oak Investment
Partners") was, prior to the February 2007 IPO, the owner ofover 30% ofthe Company's
shares and, following the IPO, continued to own approximately 22% of its stock. In
addition to exercising control over the Company as a result of its large equity interest and
ability to appoint at least two directors to the Company Board-due to its ownership of
over 6.633 million Series A Preferred stock, convertible into ordinary shares of the
Company-Defendant Oak Investment Partners is and at all relevant times was owned and
controlled by Defendant Harman.
IPO Underwriter Defendants
12. In connection with the February 2007 IPO, Defendants RBC CAPITAL
MARKETS CORPORATION, THOMAS WEISEL PARTNERS LLC, PIPER
JAFFRAY & CO., and JMP SECURITIES LLC (collectively the "Underwriter
Defendants") acted as "Lead Underwriters" of the Offering - distributing 10 million
shares of U.S. Auto Parts stock to investors and initiating the first public market for U.S.
Auto Parts shares, and distributing an additional 1.5 million shares upon exercise of the
Underwriters' over-subscription allotment option. Excluding the oversubscription
allotment of an additional 1.5 million shares, the distribution ofthe U. S. Auto Parts shares
awarded to Underwriters in the IPO occurred, as follows:Name Number of Shares
RBC Capital Markets Corporation 4,400,000
Thomas Weisel Partners LLC 2,600,000
Piper 3affray & Co. 2,000,000
JMP Securities LLC 1,000,000
Total 10 1000,000
13. In connection with the February 2007 IPO, the Underwriter Defendants were
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paid over $8.0 million in gross fees - which were paid indirectly by purchasers of the
Company's shares . The Underwriter Defendants were paid at least $0.70 per share in
connection with the sale of the 11.5 million shares, including shares sold pursuant to the
exercise of the Underwriter's over-subscription option, as follows:
TotalPer Share No Exercise Full Exercise
Public offering price $ 10.00 $100;000,000 $115,000,000
Underwriting discounts and
commissions payable by us 0.70 5,600,000 5,600,000
Underwriting discounts andcommissions payable by the
selling stockholders 0.70 1,400,000 2,450,000
14. Shareholders paid over $8.0 million in combined fees to compensate the
Underwriter Defendants for conducting a purported significant "due diligence"
investigation into U.S. Auto Parts in connection with the IPO. The Underwriter
Defendants' due diligence investigation was a critical component of the IPO, and was
supposed to provide investors with important safeguards and protections.
15. The due diligence investigation that was required of the Underwriter
Defendants included a detailed investigation into U.S. Auto Parts ' sales , accounting,
controls, and procedures, and it also required Defendants to test the assumptions and
verify the projections adopted or ratified by Defendants, to the extent a reasonable investor
with access to such confidential corporate infornlation would. A reasonable due diligence
investigation would have extended well beyond a mere casual view of U.S. Auto Parts
books and records, and its accounting, financial report and operational and financial
controls. The failure of the Underwriter Defendants to conduct an adequate due diligence
investigation was a substantial contributing factor leading to the harm complained of
herein.
16. In addition, because of the Issuer's, Underwriter Defendants', Individual
Defendants', and Other Controlling Defendant's positions with the Company and/or roles
8
in preparing the Registration Statement and/or Prospectus, they each had access to the
I adverse undisclosed information about U.S. Auto Parts' business, operations, products,
operational trends, financial statements, markets, and present and future business
I prospects via access to internal corporate documents (including the Company's operating
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plans, budgets and forecasts and reports of actual operations compared thereto),
conversations and connections with other corporate officers and employees, attendance at
management and Board ofDirectors meetings and committees thereof, and via reports and
other information provided to them in connection therewith.
17. In addition to the Underwriter Defendants, it is also appropriate to treat the
Individual Defendants as a group for pleading purposes and to presume that the false,
misleading, and incomplete information conveyed in the Company's public filings, press
releases, and other publications as alleged herein are the collective actions of the
narrowly-defined group of Individual Defendants identified above. Each of the Individual
Defendants, by virtue of their high-level positions with the Company, directly participated
in the management of the Company, was directly involved in the day-to-day operations of
the Company at the highest levels and was privy to confidential proprietary information
concerning the Company and its business, operations, products, growth, financial
statements, and financial condition, as alleged herein. Accordingly, the Individual
Defendants were also involved in drafting, producing, reviewing and/or disseminating the
false and misleading statements and information alleged herein, and approved or ratified
these statements, in violation of the federal securities laws.
18. As officers, directors, and/or controlling persons of a publicly-held company
whose common stock was, and is , registered with the SEC pursuant to the Exchange Act,
and was traded on the Nasdaq stock market exchange ("NASDAQ"), and governed by the
provisions of the federal securities laws, the Individual Defendants each had a duty to
promptly disseminate accurate and truthful information with respect to the Company's
financial condition and performance, growth, operations , financial statements, business,
products , markets, management, earnings and present and future business prospects, and
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to correct any previously-issued statements that had become materially misleading or
untrue, so that the market price of the Company's publicly-traded common stock would be
based upon truthful and accurate information. The Individual Defendants' untrue
statements and omissions made in connection with the issuance of common stock in
February 2007 violated these specific requirements and obligations.
19. The Individual Defendants and Other Controlling Defendant, because oftheir
positions of control and authority as officers and/or directors of the Company, or in the
case of Oak Investment Partners, as a result of its large equity interest and ability to
appoint multiple directors to the board of directors, were able to and did control the
content of the various SEC filings, press releases and other public statements pertaining to
the Company during the Class Period. Each Individual Defendant and Other Controlling
Defendant was provided with or had access to copies of the documents alleged herein to
be misleading prior to or shortly after their issuance and/or had the ability and/or
opportunity to prevent their issuance or cause them to be corrected. Accordingly, each of
the Individual Defendants and Other Controlling Defendant is responsible for the accuracy
of the public reports and releases detailed herein and are therefore primarily liable for the
representations contained therein.
Relevant Non-Parties
20. Ben Elyashar served as the Chief Operating Officer ofU.S. Auto Parts from
February 2006 to October 2006, and was Vice President ofOperations as ofDecember 31,
2006. Elyashar liquidated nearly $6 million in U.S. Auto Parts stock in the IPO and the
Underwriters' over-allotment option.
21. Todd Daugherty Joined the Company upon the acquisition of Partsbin and
currently serves as U.S. Auto Parts' Vice President of Vendor Relations. Daugherty
liquidated over $1 million in U.S. Auto Parts stock in the IPO and the Underwriters' over-
allotment option.
22. Lowell Mann acquired his shares of the Company in connection with U.S.
Auto Parts' acquisition of Partsbin. Mann liquidated over $200,000 in U.S. Auto Parts
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I stock in connection with the IPO.
2 23. Brian Tinari joined U.S. Auto Parts in connection with the acquisition of
3 Partsbin and currently serves as U.S. Auto Parts' Vice President of Marketing. Tinari
4 liquidated nearly $400,000 in U.S. Auto Parts stock between the IPO and Underwriters'
5 over-allotment option.
6 24. Alexander Adegan ("Adegan") has been the Chief Information Officer of
7 U.S. Auto Parts since May 2006. He was CIO at the time of the IPO and had the ability to
8 control the Company by virtue of his role as an officer.
9 25. Warren Riley was a Director of the Company beginning March 2006 and
10 signed the Registration Statement containing materially untrue statements and omissions
11 of material facts and filed with the SEC the Prospectus containing materially untrue
12 statements and omissions issued in connection with the February 2007 IPO. Riley resigned
13 from the Company after the filing of the initial Registration Statement.
14 26. Massoud Entekhabi ("Entekhabi") was a Director of the Company
15 beginning June 2006 and a member of its audit committee and signed the Registration
16 Statement containing materially untrue statements and omissions of material facts and
17 filed with the SEC the Prospectus containing materially untrue statements and omissions
18 issued in connection with the February 2007 IPO. Entekhabi resigned in January 2007, the
19 month prior to the IPO.
20 BACKGROUND TO THE IPO
21 27. In May 2006, U.S. Auto Parts completed the acquisition of Partsbin. As a
22 result of this acquisition, the Company was reportedly able to expand its product offering
23 and product catalog significantly to include performance parts and accessories and
24 additional engine parts. In addition, the Partsbin acquisition also expanded the Company's
25 international operations by adding two outsourced call centers in the Philippines and in
26 India, as well as a Canadian subsidiary to facilitate sales in Canada. Importantly, the
27 Partsbin acquisition was also reported to have augmented U.S. Auto Parts' technology
28 platform and expanded its management team.
11
1 28. This acquisition was also reported to substantially enhance revenues and
2 increase the Company's ability to reach more customers. It also added what was described
3 as a "complementary" Drop-Ship Order Fulfillment System that was purported to provide
4 the Company additional benefits, operational efficiencies, and other synergies. As
5 evidence of the importance of the Partsbin acquisition to the Company, at year-end 2005,
6 revenues for U.S. Auto Parts alone were approximately $59.698 million, and revenues for
7 Partsbin were $38.295 million.
8 29. The total purchase price for Partsbin was $50.6 million and consisted of
9 $25.0 million in cash, promissory notes in the aggregate principal amount of $5.0 million
10 payable to the former stockholders of Partsbin, and 1.983 million shares of U.S. Auto
11 Parts common stock. The acquisition of Partsbin did not result in a new operating segment
12 for financial reporting purposes. The Company funded the acquisition ofPartsbin through
13 the notes payable to its former shareholders in addition to a $22.0 million bank loan.
14 30. Thus, as indicated, the May 2006 acquisition ofPartsbin was very important
15 to the Company because it increased revenues by over 65% and it added a purportedly
16 important second fulfillment method, the "Drop-Ship Order Fulfillment System," to
17 augment the Company's pre-existing "Stock-and-Ship Fulfillment" System.
18 31. Under a stock-and-ship system, a company takes physical delivery of a part
19 and stores it in one of its distribution centers until it is shipped to a customer, filling orders
20 from its own inventory. Under a drop-ship order distribution system, parts are shipped
21 directly to the customer from the supplier. Under this system, a company will outsource its
22 distribution and fulfillment operations to third parties. While a drop-ship system is less
23 capital intensive than a traditional stock-and-ship system, it provides a company with less
24 control over its operations as it is highly dependent upon third parties to properly maintain
25 their inventory levels and to timely and accurately fill customer orders.
26 32. In addition to expanding its breadth and scope of services, the addition ofthis
27 drop-ship fulfillment system was also important to U.S. Auto Parts because it was
28 projected to allow the Company to reduce costs and increase profits.
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33. On February 8, 2007, Defendants published a release announcing that U.S.
Auto Parts had priced the Initial Public Offering ("IPO") of its common stock at $10.00
per share. This release stated, in part, the following:
U.S. Auto Parts Network, Inc. Prices Initial Public Offering of CommonStock
CARSON, Calif., Feb. 8 /PRNewswire-FirstCall/ - U.S. Auto PartsNetwork, Inc. (Nasdaq: PRTS - News) announced today the pricing of itsinitial public offering of 10,000,000 shares of its common stock at a price tothe public of $ 10.00 per share. There are 8,000,000 shares being offered byU.S. Auto Parts Network, Inc. (the "Company") and 2,000,000 shares beingoffered by selling stockholders. The net proceeds to the Company from thisoffering are intended to reduce the Company's outstanding indebtedness andfor working capital and other general corporate purposes. The sellingstockholders have granted the underwriters a 30-day option to purchase up toan additional 1,500,000 shares at the initial public offering price to coverover-allotments, if any.
The shares will trade on the Nasdaq Global Select Market under the symbol"PRTS."
The offering is being made through an underwriting syndicate led by RBCCapital Markets and Thomas Weisel Partners LLC as joint book-runners forthe offering. Piper Jaffray & Co. and JMP Securities LLC are acting as co-managers.
34. The following day, February 9, 2007, U.S. Auto Parts executed the IPO and
sold 10 million shares at $10.00 per share. According to media reports, after opening
trading at $11.00 per share, the first day shares ofU.S. Auto Parts closed at a trading price
of $11.90, up over 19% over the IPO price. At the time of the IPO, the Company had
recently reported net income of $6.8 million in 2005 and $3.6 million for the first nine
months of 2006, and revenues of $59.7 million in calendar year 2005 and $83.5 million
for nine months through Sept. 30, 2006.
35. On March 20, 2007, after Defendants announced results for the fourth quarter
and full year 2007 that were well below plan, over 18.33 million shares ofU.S. Auto Parts
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I traded - more than 1.8 times the number of shares sold in the IPO - and the stock
2 plummeted, falling over 50%. At that time, Defendants revealed that, for the fourth quarter
3 of 2006 - the period that ended on December 31, 2006, only six weeks prior to the IPO -
4 the Company would report a loss of $0.01 per share compared to a profit of $0.16 per
5 share, or $2.1 million, reported for the same period the prior year. According to the
6 Company, profits were decimated by a huge sudden increase in amortization of intangibles
7 to $2.1 million from $4,000, and a big increase in interest expense to $560,000 from
8 $37,000.
9 THE UNDISCLOSED, MATERIAL TRUE FACTS
10 36. The true but undisclosed negative conditions that existed at the time of the
11 February 2007 IPO, and that continued to adversely impact the Company after that time
12 include, but are not limited to, the following:
13 The Company's Failure to Integrate Partsbin
14
1537. The Company acquired Partsbin, its largest competitor, in May 2006. Prior to
16that time, U.S. Auto Parts had had difficulty marketing itself and sought to buy out and
17thereby eliminate its competition. In fact, U.S. Auto Parts was close to going out of
18business and in a hurry to close the deal. The first discussions between U.S. Auto (Mehran
19Nia, Michael McClane, Ben Elyashar, Sheryl Hendershot) and Partsbin (Richard Pine,
20 Todd Daughtery, Brian Tinari, Lowell Mann) were held in April 2006. It took no more
21 than four weeks to close the deal through which U.S. Auto Parts acquired Partsbin and
22 little due diligence was performed.
23 38. Only nine months after the near bankruptcy and rushed acquisition, U.S.
24 Auto Parts went public. At the time of the IPO, however, Partsbin had not been integrated
25 and there were material problems preventing integration. For instance, Defendants could
26 not assimilate the drop-ship fulfillment order system or Partsbin's diverse business culture
27 and operations into the Company, nor could they address the myriad problems at Partsbin
28 stemming from its salvage and tiered-credit programs, as discussed below.
14
1 39. US Auto Parts stocked inventory in physical warehouses while Partsbin had
2 no inventory. Partsbin had no sales personnel to process orders. U.S. Auto Parts used live
3 sales personnel to process orders.
4 40. At the time of the IPO, Partsbin was not integrated at all. Moveover,
5 Defendants had no plan to integrate Partsbin. Ideas for possible future integration
6 included moving to a manager system, but there was no facility to handle purchasing. An
7 alternate plan called for upgrading the POS (point of sale) system. Yet another plan called
8 for relocating to Great Plains.
9 41. U.S. Auto Parts and Partsbin, through the date of this pleading, continue to
10 use two very different non-integrated systems to conduct business. The competing systems
11 negatively impacted each other prior to the IPO, and problems relating to the different
12 systems are continuing to occur through the date of this filing.
13 42. For example, the Partsbin and U.S. Auto systems were not cross-connected
14 and orders had to be manually integrated. U.S. Auto Parts was on a server while Partsbin
15 was web-based. Thus, when the internet went down, the Company was unable to conduct
16 either aspect of its business. The Company also failed to invest in sufficient servers,
17 further exacerbating its technology difficulties.
18 The Company ' s Inability and/or Failure to Fill Customer Orders: Incomplete
19 Orders, Incorrect Orders, Unfilled Orders , Imitation Products
2043. At the time of the IPO, the Company failed to disclose that under its drop-
21ship order fulfillment system- the "complementary" system that was purported to
22 provide the Company additional benefits, operational efficiencies, and other synergies-
23 was in fact unable to and/or failed to fill customer orders.
2444. At the same time, the Company was unable and/or failed to keep online
25 catalog information current or to retain key employees from Partsbin's catalog department
26 that were crucial to successfully integrating the two companies and ensuring that the dual
27 fulfillment methods were working properly and had oversight by trained personnel.
28 Integration failed and the dual fulfillment methods suffered from severe problems.
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1 45. Examples of material problems that arose prior to the IPO, in the fall of2006,
2 include that inventory was often not available, or was priced differently than advertised.
3 As a result, in the fall of 2006, the Company's non-integrated Partsbin acquisition was
4 unable to get orders promptly filled through its third-party distributors, finding that many
5 orders were for parts that were out of stock at all of the potential distributors used by it. As
6 a result, customers routinely attempted to cancel orders and demanded credits for out-of-
7 stock products that the Company had previously recorded as sales.
8 46. To delay or prevent the issuance of credits, employees in the non-integrated
9 Partsbin sent customers incomplete or incorrect orders or imitation products, or failed to
10 fill orders at all. The non-integrated Partsbin (hereinafter, "Partsbin") employees notified
11 customers that products had shipped, when products were actually out of stock. These
12 employees were also instructed to and then did make it difficult or impossible for
13 customers to return the incorrect products and/or refused returns altogether. Customer
14 refunds for returns that Partsbin actually eventually accepted or for those products that
15 were never sent were often delayed by months, if a refund was ever provided at all.
16 47. Moreover, revenues were inflated as result of these cancellations. Customers
17 frequently cancelled orders because parts were not shipped. There were no adequate
18 controls or procedures to monitor the size of cancelled orders. Defendants were not
19 sending out the products ordered, but nevertheless were still recording sales - therefore
20 inflating revenues.
21 Material Credit and Inventory Risks
22Associated With Drop-Ship Fulfillment
23 48. At the time of the IPO, the Company also failed to adequately disclose the
24 credit and inventory risks associated with its failing drop-ship order fulfillment system.
25 Though third-party vendors shipped the orders directly to the customer, the Company was
26 responsible for paying the vendor. The Company was fully liable to the vendor for
27 payment regardless of whether the customer payment came through, therefore creating a
28 credit risk for the Company.
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49. Second, the Company faced substantial inventory risks because customer
returns of Partsbin products were sent to Partsbin, not the third-party vendors from which
the product originated. As a result, by using the drop-ship order fulfillment system, which
is not structured to hold inventory, Partsbin, and therefore the Company, faced the risk of
receiving thousands of dollars of returned merchandise each day, with no adequate control
or ability to predict inventory return levels.
Inflated Gross Profits From The "Salvage Program" and"Tiered Credit Program"
50. Two days prior to the IPO, Defendants discovered that the acquired but non-
integrated Partsbin had programs designed to inflate revenues which were known
internally as the "Salvage Program" system and the "Tiered Credit Program," which
allowed it to inflate gross revenues with unfilled customer orders for which Partsbin had
already received payment. Although Partsbin represented to customers that it had
inventory warehouses, it did not actually have any such inventory warehouses. Instead,
Partsbin merely had a series of vendors that would fill its customer orders. If none of the
vendors had the part a customer ordered, the order would enter the "Salvage Program."
51. Under the "Salvage Program":
• If a different product was available, a Partsbin employee was instructed to
attempt to contact the customer by phone; if no one answered right away, the
order would be moved to "Salvage Two."
• In "Salvage Two," a Partsbin employee was again directed to attempt to
contact the customer by phone; if no one answered, the order would be
moved to "Old Salvage."
• The order would remain in "Old Salvage"- even though the customer's
money had been accepted and the Company was unable to fulfill its order -
until the customer complained. After the customer's initial complaint to
Partsbin, the order was sent to a separate system of "tiered credit."
Under the "tiered credit" system:
17
i • A customer's initial complaint was placed on a spreadsheet as "low priority
2 credit." The customer's money would not be refunded nor would the order
3 be shipped.
4 • If the customer placed a second call to Partsbin to complain, the customer
5 would be moved to "medium priority credit." Again, Partsbin held the
6 customer's money without filling the order.
7 • Only those customers who actually placed a third call to Partsbin to complain
8 were moved to "high priority credit" where their legitimate requests for
9 refunds were actually considered for the first time.
10 52. At the time of the IPO, Partsbin dramatically limited the quantity of credits
11 to be refunded to customers. Sheryl Hendershot, a Partsbin employee who was the
12 daughter of Richard Pines and wife of Buster Hendershot, was in charge of customer
13 service and credit. Each day, Sheryl Hendershot would credit only "high priority credit"
14 customers- e.g., those that had contacted Partsbin at least three times. Despite the fact
15 that approximately $125,000 in credits were requested from Partsbin each day, Partsbin
16 executives who had stayed on post-acquisition with the Company placed Sheryl
17 Hendershot on a limit of crediting only $25,000 per day - less than a fifth of the actual
18 daily returns. The salvage program was used to delay or discourage credits to allow
19 Partsbin, and therefore the Company, to show an inflated gross profit.
20 53. The Partsbin database divided orders in the salvage program into various
21 categories including "pending" and "complete." The "pending" category was used for
22 those customers who had never been contacted about the unavailability of their order.
23 When this category got "too full," however, some of its orders would simply be moved to
24 other categories, such as "complete." "Complete" was another salvage order category that
25 had little meaning and resulted in an appearance that credits were properly made when
26 they had not been.
27 54. The Salvage Program was used, in large part, to make Partsbin's gross profit
28 more attractive as an acquisition target of U.S. Auto. Counsel for Partsbin approved the
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legality of the program, which was the brainchild of Richard Pines.
55. Two days prior to the IPO, senior management of U.S. Auto, including Alex
Adegan, CIO, was informed of the "salvage program" and "tiered credit program."
Nevertheless, the IPO went forward as scheduled.
56. After the IPO, in or around early April 2007, prior to the anticipated arrival
of U.S. Auto attorneys who planned to interview Partsbin customer service employees,
hard drives of certain of these Partsbin employees involved were deemed by Partsbin's
management to have "viruses" and were removed. Sheryl Hendershot and Buster
Hendershot, among others, received new hard drives after their old ones were taken away.
57. Approximately ten attorneys arrived in early April 2007 and interviewed
persons involved with Partsbin customer service, including: Buster Hendershot, Sheryl
Hendershot, Carl Standhope, Quina Kelsey, Kyle Singleton, William Tannowsik, Anthony
Doughlas, Patricia McDaniel, and Elizabeth Miller. The attorneys had also planned to
interview Partsbin owners (pre-acquisition) Richard Pine and Todd Daugherty, but one
hour before the attorneys arrived, Pine and Daughtery left with their personal computers.
58. Thereafter, on April 2, 2007, Buster Hendershot noted in tears that the New
Jersey location of Partsbin would be shut down because of the Salvage Program.
The Company's Materially Decreased Profit Margins and Revenues Used in anAttempt to Boost Revenues Prior to the IPO
59. Defendants failed to reveal in the Prospectus and Registration Statement that
at the time of the IPO profit margins had materially eroded from prior quarters (and
foreseeably would continue to erode). To boost revenues prior to the IPO, the Company
offered substantial discounts on products to stimulate demand, in some cases selling
products for below-market prices Indeed, after the IPO it was revealed that the Company's
gross margin dropped from 42% for the fiscal year ended December 31, 2005 to 35% for
the fiscal year ended December 31, 2006;
60. At the time of the IPO, the Company had already experienced a disastrous
fourth quarter that would result in disappointing 2006 results.
19
IDefendants Failed to Disclose Material Control Deficiencies and Failed to
Conduct Adequate Due Diligence in Order to Rush the Acquisition and IPO
2 61. At the time of the IPO, U. S. Auto Parts' control deficiencies were materially
3 worse than revealed in the Prospectus and Registration Statement. Indeed, the Company
4 did not even maintain the minimum standards of good corporate governance or controls
5 and procedures, as required by the SEC and the Company's own internal guidelines and
6 standards of business conduct.
7 62. At the time of the IPO, Defendants had not conducted an adequate due
8 diligence investigation into U.S. Auto Parts, including the recently-acquired, disastrous
9 non-integrated Partsbin, that would have revealed many of the material issues and that10 would most likely have prevented the sale of this Company to shareholders through the11 public equity markets at that time, or at the inflated price at which these shares were12
originally sold.
13 63. As further evidence that Defendants did not conduct adequate due diligence,14
the original but ineffective Registration Statement filed with the SEC stated:15 This prospectus contains market data and industry forecasts and
16projections, which we have obtained from third party marketresearch, publicly available information and industry publications.
17 These sources generally state that the information they provide has
18 been obtained from sources believed to be reliable, but that theaccuracy and completeness of the information are not guaranteed.
19 The forecasts and projections are based on industry surveys and
20 the preparers' experience in the industry, and we cannot assure youthat any of the projected amounts will be achieved. Similarly, we
21 believe that the surveys and market research others have performed
22 are reliable, but we have not independently verified the
23information . [Emphasis added]
The SEC, via comment letters, notified the Company on two separate occasions that it had24
full responsibility for all information included in the prospectus, and that such limiting25
26language could not be included. In response, the Company simply deleted the specific
disclosures from the Prospectus and Registration Statement that some information was27
based on third parties altogether.28
Failure To Hire and/or Maintain Adequate Staff20
1 To Address Customer and Other Complaints
2 64. Prior to the IPO, Defendants refused to maintain adequate staff to address
3 customer complaints and problems not only to save costs but to inflate revenues
4 temporarily. In fact, the company hid letters from the Better Business Bureau, complaints
5 from attorneys, and complaints from Attorneys General of various States.
6 65. ' For example one and only one employee, Eric Bailey, was the customer
7 service employee responsible for handling all written complaints mailed or emailed to
8 Partsbin prior to and through the time of the IPO until layoffs ofPartsbin customer service
9 representatives occurred in or around April 2007.
1066. In addition to these duties, Bailey was the back up customer service
11representative and had to help other staff members when there was high call volume.
12Bailey reported directly to Buster Hendershot but was supervised by Sheryl Hendershot.
13Pine personally directed Bailey to handle the avalanche of complaints that were received
14by Partsbin daily.
1567. The workload for Bailey was more than one person could handle. His desk
16was covered with unopened mail from the Better Business Bureau, attorneys, and even
17Attorneys' General. Bailey indicated that all of the complaints were in the form of:
18"Where is my credit?"
1968. After Bailey was laid off, at least 250 letters from the Better Business
20Bureau, 14 complaints from attorneys, and 11 complaints from Attorneys General of
21various States were unaddressed and not answered.
2269. The extremely high volume ofPartsbin customer complaints involving failure
23of Partsbin to issue credits for returned or cancelled or wrong merchandise and the lack of
24an adequate procedure or control mechanism at Partsbin to deal with and adequately
25address the issues arising therefrom or any adequate control, were omitted from the
26Prospectus and Registration Statement. Defendants' Violations ofGAAP and Financial Reporting
27Standards
2870. As discussed below in detail, under SFAS No. 48, if a company sells its
21
I product but gives the buyer the right to return the product, revenue from the sales
2 transaction shall be recognized at time of sale only if the Company meets certain criteria.
3 One such criterion is that the amount of future returns can be reasonably estimated. SFAS
4 48, ¶6. Contrary to Defendants' assertions, U.S. Auto Parts was unable to reasonably
5 estimate its returns and therefore should not have recognized revenue upon shipment.
6 Defendants violated SFAS No. 48. As a result, U.S. Auto Part reserves were understated.
7 71. In addition, despite Defendants' representations ofGAAP compliance, due to
8 inflated profits, inaccurate inventory levels, failures to properly credit customer returns,
9 and failure to fill orders but nevertheless recording sales , Defendants violated GAAP.
10 MATERIALLY UNTRUE STATEMENTS AND OMISSIONS
11 IN THE REGISTRATION STATEMENT AND PROSPECTUS
12 Untrue Statements and Omissions Concerning
13 Business Plan, Growth Strategy, Integration of Partsbin
14 72. On February 9, 2007, Defendants filed with the SEC the Company's
15 Prospectus pursuant to Form 424(b)(4). The Prospectus issued in connection with the U.S.
16 Auto Parts IPO, which forms part of the Registration Statement, contained untrue
17 statements of material fact and omitted to state facts necessary to make the statements
18 made not misleading. Rather than disclose material problems that existed within the
19 Company, the Prospectus described U.S. Auto Parts as a growth company that was
20 executing according to plan and that was capitalizing on the integration of Partsbin and
21 upon its proprietary assets. As evidence of this, the Prospectus stated, in part, the
22 following:
23 Our Business
24 Overview
25We are a leading online provider of aftermarket auto parts, including body
26 parts, engine parts, performance parts and accessories. Our network of
27websites provides individual consumers with a comprehensive selectionof approximately 550,000 products , identified as stock keeping units or
28 SKUs....
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Our online sales channel and relationships with suppliers enable us to
eliminate several intermediaries in the traditional auto parts supply
chain, allowing us to acquire many of our products directly from
manufacturers and sell them to our customers . Additionally, as an online
retailer, we do not incur many of the costs associated with operating brick
and mortar stores. We believe that our ability to disintermediate the auto
parts supply chain, combined with our efficient e-commerce platform,
enables us to sell products at competitive prices while achieving higher
operating margins and return on invested capital than many traditional
automotive parts retailers....
....The number of orders placed through our e-commerce websiteshas also increased to approximately 288,000 and 505,000 for the year endedDecember 31, 2005 and the nine months ended September 30, 2006,respectively, from approximately 201,000 and 207,000 for the year endedDecember 31, 2004 and the nine months ended September 30, 2005,respectively . The average order value of purchases on our websites forthe nine months ended September 30, 2006 was approximately $120.
Recent Acquisition. In May 2006, we completed the acquisition ofPartsbin . As a result of this acquisition, we expanded our productoffering and product catalog to include performance parts andaccessories and additional engine parts, enhanced our ability to reachmore customers and added a complementary, drop-ship order
fulfillment method.
[Emphasis added]
73. These statements were materially untrue when made, inter alia, because the
network of websites did not in fact "provide[] individual consumers with a comprehensive
selection of .... Products." To the contrary, consumers routinely ordered and paid for
products that were out of stock and requests for cancellations and returns were not
honored. Further, the Company did not "sell products at competitive prices" while
achieving "higher margins." In truth, products were often booked as sales improperly
despite orders not being filled or shipped to customers. Simultaneously, margins had
rapidly deteriorated and the Company resorted to dropping sales prices, in some instances
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below-market prices, to stimulate demand. Defendants' representations about the "number
of orders" was also untrue as many orders were never filled and returns and cancellations
were not honored. Further, various systems were used, as described in the "Undisclosed,
Material, True Facts" Section above, that resulted in untrue numbers concerning orders,
credits, cancellations, and returns, in violation of GAAP and Financial Reporting. Finally,
the representations concerning "enhanced ability to reach more customers" and the "drop-
ship order fulfillment system" are untrue because they fail to disclose that the acquisition
of Partsbin, and its drop ship fulfillment method, had failed at the time of the IPO. The
acquisition had not been integrated and the drop ship fulfillment method resulted largely
in customers being charged while orders went unfilled. These statements were also
materially untrue for the reasons set forth in paragraphs 37-71 above.
74. In addition to the foregoing, the Prospectus also described the Company's
purported "Growth Strategy," in part, as follows:
Our Growth Strategy
Increase Repeat Customers. We intend to enhance and improve theoverall customer shopping experience while offering a broad selection ofproducts at competitive prices , which we believe is a key to increasingrepeat customers . We plan to continue to invest in the training anddevelopment of our customer service personnel, focus on rapid andaccurate fulfillment of orders and further enhance the features andfunctionality of our websites....[Emphasis added]
75. The above statements were materially untrue because they omitted to disclose
that "the overall customer shopping experience" would not be and had not been
"improved" nor would there be "rapid and accurate fulfillment of orders." Instead, the
Company's order fulfillment system was in chaos and had utterly failed. Customers
routinely placed orders that they were charged for but that never shipped out, credits were
ignored or refused, wrong products were shipped, or products were shipped untimely.
These statements were also materially untrue for the reasons set forth in paragraphs 37-71
above.24
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Untrue Statements and Omissions ConcerningFulfillment Methods and "Benefit To Customers"
76. Defendants described the Company's business model and operations
I "Solution" and the resulting "Benefit to Customers," stating, in part, as follows:
Our Solution
We believe our solution addresses the problems faced in the traditional autoparts market and provides additional benefits for our customers. The keycomponents of our solution include:
• disintermediation of the traditional auto parts supply chain, whichenables us to eliminate several intermediaries, allowing us to offerauto parts at competitive prices while maintaining higher profitmargins...;
• flexible fulfillment methods that allow us to offer a broad selection ofproducts, while effectively managing our inventory and enhancingour overall profitability...;
• long-standing , strong supplier relationships with manufacturers anddistributors located in Asia and the United States.
Long-Standing Supplier Relationships
.... Many of our aftermarket products are available from more than onesupplier, and we secure secondary sources for most of our top sellingproducts . We continually research and analyze our market to understand howour suppliers are changing their product mix, part availability and pricing.Our supplier relationships and our understanding of the market enableus to set competitive pricing for our products and ensure productavailability.
Benefit to Customers
We believe our solution provides multiple benefits to our customers,including:
• Broad Product Selection and Availability. Our proprietary product
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catalog provides our customers with the ability to select fromapproximately 550,000 SKUs that correlate to over 4.3 million productapplications, based on vehicle makes, models and years . A majority ofour products are readily available and in stock, either in ourdistribution center or from our suppliers , providing convenient one-stop shopping for the customer.
• Competitive Pricing. We are able to offer our customers lower prices
relative to OEM parts retailers and traditional aftermarket retailers
by eliminating several intermediaries in the aftermarket auto parts
supply chain , leveraging our long-term supplier relationships and
establishing an efficient online cost structure that capitalizes onrelatively inexpensive labor.
• Prompt Order Fulfillment. Our proprietary order fulfillment systemallows as to efficiently process and ship items from our distributioncenters or from our suppliers, ensuring timely delivery of products toour customers....
[Emphasis added]
77. These statements were materially untrue because the Company did not "offer
auto parts at competitive prices" while maintaining "higher profit margins." To the
contrary, many customer orders were unfilled, or filled with the wrong product, and
requests for returns and cancellations were not honored. As to "higher profit margins," in
truth the Company's margins were eroding and dropped from 42% to 35% from fiscal
year end 2005 to fiscal year end 2006. The statements that "a majority of our products are
readily available and in stock" are also untrue, as the majority ofproducts were neither in
stock in the Company's inventory, nor readily available from potential suppliers. As to
statements regarding "Prompt Order Fulfillment," again, the reality was that more often
than not, orders were not promptly filled but rather often not filled at all, resulting in
cancellations and requests for credit that were not honored. These statements were also
materially untrue for the reasons set forth in paragraphs 37- 71 above.
78. This strategy was also dependent upon the Company's successful integration
of Partsbin, and the Company's ability to integrate the Drop-Ship fulfillment operations to
augment the Company's existing Stock-and-Ship operations. The critical importance of
26
Fulfillment Operations to the Company's Growth Strategy was evidenced, in part, as
2 follows:
3Our Solution
4
5 We believe our solution addresses the problems faced in the traditionalauto parts market and provides additional benefits for our customers.
6 The key components of our solution include:
7Disintermediation ofthe Auto Parts Supply Chain
8
9 .... We disintermediate the traditional auto parts supply chain by eitherobtaining products directly from manufacturers or sourcing products
10 directly from wholesalers to fulfill customer orders. Disintermediating
11 the traditional supply chain allows us to offer auto parts to ourcustomers at competitive prices and allows us to more efficiently deliver
12 products to our customers while generating higher profit margins.
13
14 . , .. We believe that our ability to disintermediate the auto parts supply
15 chain , combined with our efficient e-commerce platform , enables us to
16sell products at competitive prices while achieving higher operatingmargins and return on invested capital than many traditional
17 automotive parts retailers.
18 Flexible Fulfillment Methods19
20We fulfill customer orders using two primary methods: (i) stock-and-ship , where we take physical delivery of a part and store it in one of our
21 distribution centers until it is shipped to a customer, and (ii) drop-ship,
22where the part is shipped directly to the customer from the supplier. Webelieve that the flexibility of fulfilling orders via two different fulfillment
23 methods allows us to offer a broader selection of products, optimize
24product inventory, determine optimal pricing and enhance overallbusiness profitability.
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28 Our Fulfillment Operations
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The selection of fulfillment methodology occurs at the time of ordersubmission. When a customer submits an order, an invoice with an ordernumber is created. Our fulfillment system then performs a check on theordered item to determine if it is in stock at any of our distributioncenters. Fulfillment teams in our distribution centers then processorders for in-stock products . Orders for non-stocked products are sentto our suppliers and processed via drop -ship. Our proprietary orderprocessing technology allows us to monitor customer orders at eachstage of the fulfillment process, from the time the customer places anorder until the product is delivered, and provides us with real-timevisibility into our inventory, logistics , procurement processes and salesactivity.
Stock-and-Ship Fulfillment
Our stock-and-ship products are sourced primarily from supplierslocated in Asia and the U.S. and are stored in one of our distributioncenters in Carson, California or Nashville, Tennessee. All productsreceived into our distribution centers are entered into our proprietaryinventory tracking system, allowing us to closely monitor inventorystatus on a real-time basis.
We consider a number of factors in determining which items to stock inour distribution centers, including which products can be purchased ata meaningful discount to domestic prices for similar items, whichproducts have historically sold in high volumes, and which productsmay be out of stock when we attempt to fulfill via drop-ship.
Drop-Ship Fulfillment
We have developed relationships with several U.S.-based automobileparts distributors that operate their own distribution centers and willdeliver products directly to our customers . We have internally developeda proprietary distributor selection system, Auto-Vend, which combinesproduct and pricing information provided by each of our drop-shipdistributors to create an aggregated view of in-stock items and pricing at ourdistributors' fulfillment facilities.
Using the drop-ship method, a customer order for an item that is not instock in our distribution center is automatically transmitted to the Auto-Vend system, which will seek to fill the order from our selection ofdistributors. The Auto-Vend system selects the distributor to fill the
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order based on predetermined set of factors, including price of the item,discounts provided and shipping costs. [Emphasis added]
79. The above statements were materially untrue because they omitted to disclose
that, at the time of the IPO, rather than actually "fulfill[ing] customer orders using two
primary methods," the order fulfillment systems had failed and were in chaos. Instead of
"develop[ing] relationships with... distributors that. . .will deliver products directly to our
customers" instead, the Company was unable to and/or failed to fill customer orders under
its drop-ship order fulfillment system and was repeatedly requested to issue credits to its
customers for out-of-stock products that it had previously recorded as sales. The Company
was sending customers incomplete or incorrect orders, imitation products, or not filling the
orders at all. Defendants notified customers that products had shipped, when products
were actually out of stock. Defendants had also been making it difficult or impossible for
customers to return the incorrect products and/or refused returns altogether. Customer
refunds for returns that U.S. Auto Parts actually eventually accepted or for those products
that were never sent were often delayed by months, if a refund was ever provided at all.
These statements were also materially untrue for the reasons set forth in paragraphs 37-71
above.
Untrue Statements and Omissions ConcerningAvailable Inventory, Reserve for Returns, Processing of Orders
80. The Prospectus made materially untrue statements and omissions about the
Company's available inventory, the adequacy of its reserve for returns, and the speed of
processing and shipping orders. In this regard, the Prospectus stated, in part, as follows:
Critical Accounting Policies and Estimates
Inventory.... We believe that our products are generally available frommore than one supplier , and we maintain multiple sources for many ofour products , both internationally and domestically . We offer a broadline of auto parts for automobiles from model years 1965 to 2006. Because
of the continued demand for our products , we primarily purchase products
in bulk quantities to take advantage of quantity discounts and to ensure
29
}
1 inventory availability . Inventory is reported net of inventory reserves forslow moving, obsolete or scrap product, which are established based on
2 specific identification of slow moving items and the evaluation of overstock3 considering anticipated sales levels. If actual market conditions are less
favorable than those anticipated by management, additional reserves may be4 required . Historically , our recorded reserve for returns has been5 adequate to provide for actual returns. [Emphasis added]
6To understand revenue generation through our network of e-commerce
7 websites, we monitor several key business metrics, including the following:8
9 • Total Number of Orders. We closely monitor the total number
10of orders as an indicator of revenue trends. We recognizerevenue associated with an order when the products have been
11 shipped, consistent with our revenue recognition policy
12discussed in "Critical Accounting Policies" below . Orders aretypically processed and shipped within one business day after
13 a customer places an order . [Emphasis added]
14 81. The above statements were materially untrue because parts were rarely, if
15 ever, available from "more than one supplier." In fact, "inventory availability" was not
16 "ensure[d]" at all. The Company's reserve for returns were unreasonably low in light of
17 the salvage and tiered-credit systems discussed herein. Further, orders were rarely if ever
18 "processed and shipped within one business day after the customer places an order."
19 Revenue was not recognized when products were shipped but rather when orders were
20 placed but went unfilled or were filled with imitation or wrong products. These statements
21 were also materially untrue for the reasons set forth in paragraphs 37-71 above.
22 Untrue Statements and Omissions Concerning
23the Company's Technology and Management Systems
2482. Although the Company was unable to integrate Partsbin and its marketing
25systems and technology, had problems with Company servers, and was unable to properly
26fill many customers' orders resulting in an avalanche of cancellation requests and returns,
27the majority ofwhich were not honored, Defendants made the following untrue statements
28and omissions in the Prospectus about U.S. Auto Parts' technology and management
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systems:
Technology
Over the past ten years, we have developed the technologicalcompetencies to procure, receive, inventory, market and sell autoparts on the Internet....We have implemented and maintainproprietary application programming interfaces ("APIs") with all ofour significant drop-ship vendors. These APIs provide us withvisibility into inventory availability, pricing, shipping andpurchasing information from these vendors.
.... Our system provides us with a reliable and robust back-end thatmaintains an audit trail of all transactions and changes to financialdata and provides our management with real-time insight into ourdaily operations . The majority of our technology is developed in-house, which provides for rapid development and better response tothe specific requirements of our business and customers . ... Ourinterfaces are a powerful management tool that can be accessed fromanywhere in the world through the Internet.[Emphasis added].
83. The above statements were materially untrue because they omitted to disclose
for the reasons stated in paragraphs 37-71 above, including that the technology in the
Company's system was not "reliable," nor did it "provide. . .real time insight into our daily
operations." Instead, U.S. Auto Parts and Partsbin, through the date of this pleading,
continue to use two very different non-integrated systems to conduct business, resulting in
chronic technology problems. The competing technology systems negatively impacted
each other, causing even greater problems with order backups and return and credit issues
that were already inherent as a result of the use of the salvage and tiered-credit systems.
Server problems affected the systems of both companies. The Partsbin and U.S. Auto
systems were not cross connected and orders had to be manually integrated. U.S. Auto
Parts was on a server while Partsbin was web-based; if a problem occurred with either
system, the entire Company would be impacted. Also undisclosed, the Company had
failed to invest in enough servers, resulting in server overloads. These statements were
also materially untrue for the reasons set forth in paragraphs 37-71 above.
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Materially Untrue Statements and Omissions Regarding Compliancewith Financial Accounting and Reporting Standards and GAAP
Relevant GAAP and Financial Reporting Requirements
84. At the time of the IPO, Defendants represented that U.S. Auto Parts'
financial statements were prepared in conformity with GAAP, which are recognized by
the accounting profession and the SEC as the uniform rules, conventions and procedures
necessary to define accepted accounting practice at a particular time. However, in order to
artificially inflate the price of U.S. Auto Parts' stock, Defendants used improper
accounting practices in violation of GAAP and SEC reporting requirements to inflate the
Company's balance sheets and statements of income in the Prospectus and Registration
Statement.
85. 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 financialperformance during a period. Investors and creditors often use information aboutthe past to help in assessing the prospects of an enterprise. Thus, althoughinvestment and credit decisions reflect investors' and creditors' expectationsabout future enterprise performance, those expectations are commonly based atleast partly on evaluations of past enterprise performance.
86. 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 GAAP. As stated in the
professional standards adopted by the AICPA:financial statements are management's responsibility . . . . [M]anagement isresponsible for adopting sound accounting policies and for establishing andmaintaining internal control that will, among other things, record, process,summarize, and report transactions (as well as events and conditions) consistentwith management's assertions embodied in the financial statements. The entity'stransactions and the related assets, liabilities and equity are within the direct
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knowledge and control of management .... Thus, the fair presentation of financialstatements in conformity with Generally Accepted Accounting Principles is animplicit and integral part of management's responsibility.
87. GAAP generally provides that revenue should not be recognized until it is
realized or realizable and earned. FASB Concepts Statement No. 5, ¶ 83. The conditions
for revenue recognition ordinarily are met when persuasive evidence of an arrangement
exists, delivery has occurred or services have been rendered, the seller's price is fixed or
determinable, collectability of the sales price is reasonably assured and when the entity has
substantially performed the obligations which entitle it to the benefits represented by the
revenue. Revenue should not be recognized until an exchange has occurred and the
earnings process is complete. A transfer of risk has to occur in order to affect an
"exchange" for the purposes of revenue recognition. SEC Staff Accounting Bulletin
("SAB") No. 101; FASB Concept Statement Nos. 2 and 5; FASB Statement of Financial
Accounting Standards ("SFAS") No. 48; Accounting Research Bulletin ("ARB") No. 43;
and Accounting Principles Board ("APB") Opinion No. 10. The SEC's SAB No. 101
provides specific guidance concerning the recognition of revenue.
88. Pursuant to SAB No. 101, the following criteria must be met before revenue
on software can be recognized: (1) persuasive evidence of an agreement to purchase
software exists; (2) delivery of the software has occurred; (3) the vendor's fee is fixed and
determinable; and (4) the collectability of the sales price is probable.
89. The U.S. Auto Parts' Prospectus disclosed the following with respect to the
Company's policy of accounting for revenue recognition:Product sales and shipping revenues, net of promotional discounts and. returnallowances, are recorded when the products are shipped and title passes tocustomers. Retail items sold to customers are made pursuant to terms andconditions that provide for transfer of both title and risk of loss upon our delivery tothe carrier. Return allowances, which reduce product revenue by our best estimateof expected product returns, are estimated using historical experience.
Contrary to Defendants' assertions, U.S. Auto Parts was unable to reasonably estimate its
returns and therefore should not have recognized revenue upon shipment.
90. Under SFAS No. 48, if a company sells its product but gives the buyer the
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right to return the product, revenue from the sales transaction shall be recognized at time
of sale only if the Company meets certain criteria. One such criterion is that the amount of
future returns can be reasonably estimated. SFAS 48, ¶ 6.
91. If the requirements of SFAS No. 48 are met, sales revenue and cost of sales
reported in the income statement must be reduced to reflect estimated returns. Although
"[t]he ability to make a reasonable estimate of the amount of future returns depends on
many factors and circumstances that will vary from one case to the next, [the] absence of
historical experience with similar types of products, or inability to apply such experience
because of change circumstances, for example, changes in the selling enterprise's
marketing policies or relationships with its customers" may impair the ability to make a
reasonable estimate. SFAS No. 48, ¶ 8.
92. U.S. Auto Parts' financial statements within the Registration Statement and
Prospectus contained untrue statements of material fact because the Company reported
inflated accounts receivable, revenue and earnings.
93. Indeed, the acquisition of Partsbin caused the Company to employ an entirely
new second type of fulfillment system, including its marketing policies and relationships
with customers. Because Defendants failed to perform adequate due diligence into
Partsbin's operations prior to the IPO, -the Company was unable to reasonably estimate its
returns and therefore should not have recognized revenue upon shipment.
94. Further, at the time of the IPO, under Partsbin's "Salvage Program" and
"Tiered Credit Systems," the Company was not completing the correct number of returns.
Because of these practices, the Company's amount of future returns could not be
reasonably estimated based on past returns, as the amount of past returns was
underreported.
95. If sales revenue is recognized because the conditions of SFAS No. 48 are
met, any costs or losses that may be expected in connection with any returns shall be
accrued in accordance with SFAS No. 5, Accountingfor Contingencies. SFAS No. 48 ¶¶
6,7. In addition, GAAP requires that "[s]ales revenue and cost of sales reported in the
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1 income statement shall be reduced to reflect estimated returns." Id. ¶ 7.
2 96. In this regard, because of the salvage/tiered systems and limits on daily
3 credits, the reduction of sales revenue and cost of sales reported in the Consolidated
4 Statement of Income stated, as required by SFAS No. 48, was insufficient to adequately
5 reflect the amount of credits the Company was expecting. Therefore, the Company's
6 reported accounts receivables, revenues and reported earnings in the Prospectus and
7 Registration Statement contained materially untrue statements and omissions.
8 97. The Prospectus and Registration Statement also stated the Company's
9 Critical Accounting Policies were in compliance with GAAP, in part, as follows:
10Critical Accounting Policies and Estimates
11
12Our consolidated financial statements have been prepared inaccordance with accounting principles generally accepted in the United
13 States. ... We base our estimates on historical experience and on various
14 other assumptions that we believe to be reasonable under thecircumstances , the results of which form the basis for making judgments
15 about carrying values of our assets and liabilities that are not readily apparent
16 from other sources....
17 98. To the contrary, however, for the reasons set forth in this section, and also
18 immediately below ("Additional GAAP Violations"), these statements were materially
19 untrue because Defendants' critical accounting policies and estimates were not reasonable
20 and did not comply with GAAP.
21 Additional GAAP Violations
22 99. As a result of the foregoing, Defendants caused U.S. Auto Parts' reported
23 financial results within the Registration Statement and Prospectus, which contained
24 materially untrue statements and omissions, to violate, among other things, the following
25 provisions of GAAP for which each Defendant is necessarily responsible:
26a) The principle that interim financial reporting should be based upon
27 the same accounting principles and practices used to prepare annual28 financial statements (APB No. 28, Interim Financial Reporting ¶
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10 (May 1973));
b) The principle that financial reporting should provide informationthat is useful to present and potential investors and creditors andother users in making rational investment, credit and similardecisions (FASB Concepts Statement No. 1, ¶ 34);
c) The principle that financial reporting should provide informationabout the economic resources of an enterprise, the claims to thoseresources, and effects of transactions, events and circumstances thatchange resources and claims to those resources (FASB ConceptsStatement No. 1, ¶ 40);
d) The principle that financial reporting should provide informationabout how management of an enterprise has discharged itsstewardship responsibility to owners (stockholders) for the use ofenterprise resources entrusted to it. To the extent that managementoffers securities of the enterprise to the public, it voluntarily acceptswider responsibilities for accountability to prospective investorsand to the public in general (FASB Concepts Statement No. 1, ¶50);
f) The principle that financial reporting should be reliable in that itrepresents what it purports to represent . That information should bereliable as well as relevant is a notion that is central to accounting(FASB Concepts Statement No. 2, Qualitative Characteristics ofAccounting Information ¶¶ 58-59 (May 1980));
g) The principle of completeness, which means that nothing is left outof the information that may be necessary to insure that it validlyrepresents underlying events and conditions (FASB ConceptsStatement No. 2, ¶ 79); and
h) The principle that conservatism be used as a prudent reaction touncertainty to try to ensure that uncertainties and risks inherent inbusiness situations are adequately considered. The best way toavoid injury to investors is to try to ensure that what is reportedrepresents what it purports to represent (FASB Concepts StatementNo. 2, ¶¶ 95, 97).
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Additional SEC Violations
100. U.S. Auto Parts' Prospectus and Registration contained materially untrue
statements and omissions because they failed to comply with the disclosure obligations
under the SEC's rules and regulations, including the rules and regulations concerning
Management's Discussion and Analysis of Financial Condition and Results of Operations
("MD&A"). See 17 C.F.R. §229.303. Throughout the process of the Company's
registration of its securities, the SEC asked that the Company provide more information in
its Registration Statement about some of the same undisclosed distribution, return, and
accounting practices discussed above. Defendants continually concealed information from
the SEC and the Registration Statement and Prospectus, and therefore from the public.
101. In this regard , U.S. Auto Parts' Registration Statement and Prospectus
contained materially untrue statements and omissions because: (i) Defendants failed to
disclose U.S. Auto Parts' inability to integrate Partsbin or conduct adequate due diligence
into the practices of the Company's newly acquired drop-ship fulfillment division; (ii)
Defendants failed to adequately disclose U.S. Auto Parts' revenue recognition policies;
(iii) Defendants failed to disclose the Company's true "return policy" that included its
salvage and tiered credit programs; and (iv) Defendants failed to disclose that the
Company was often unable to obtain inventory to fill customer orders at all, and certainly
could not select its supplier.
102. For example, the SEC asked the Company to "revise [its risk factors] to
discuss any past difficulties that [the Company has] had integrating prior acquisitions."
Despite knowledge that U.S. Auto Parts had failed to integrate Partsbin or conduct
adequate due diligence into the practices of the Company's newly-acquired drop-ship
fulfillment division, and that two days before the IPO the Company discovered the internal
"Salvage Program" and "Tiered Credit Program" used to inflate revenues, Defendants
merely added to the Registration Statement's risk section that the "recent acquisition of
Partsbin has resulted in significant costs and a number of challenges, including integrating
the diverse technologies and differing e-commerce platforms and accounting systems used
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by each company" - an inadequate disclosure . The Company omitted substantial
information necessary to make this statement not misleading.
103. The SEC also asked the Company to explain its revenue recognition
practices, and why it is appropriate to recognize revenue upon shipment rather than upon
customer acceptance. The Company responded that it complied with SFAS No. 48 and
stated that "the Company is able to estimate future returns based on historical experience."
Both of these statements are untrue and contained in the Registration Statement and
Prospectus.
104. The SEC also asked the Company to explain its return policy. Defendants
merely responded: "The Company's return policy, as stated under its terms and conditions
on its websites, allows customers to return parts within a limited period oftime following
the original date the order was shipped to the customer." This statement to the SEC was
blatantly untrue. Ultimately, Defendants failed to disclose in its Registration Statement
and Prospectus the Company's true "return policy" that included its "Salvage" and "Tiered
I Credit" programs.
105. Defendants further represented to the SEC that: "The company has discretion
in supplier selection. The company generally has multiple suppliers for many parts and is
able to select the supplier based on its developed criteria." Similar language was ultimately
included in the Prospectus and Registration Statement, i.e., "We believe that our products
are generally available from more than one supplier, and we maintain multiple sources for
many of our products, both internationally and domestically."
106. As is now apparent to investors, the Company was often unable to obtain
inventory to fill customer orders at all, and certainly could not select its supplier. Further,
the Company employed no criteria for selecting suppliers, as evidenced by the fact that
vendors were the ones to access the Company's orders to see if they had the ability to fill
them.
107. Item 303 of Regulation S-K requires public companies to:
Describe any known trends or uncertainties that have had or that theregistrant reasonably expects will have a material favorable or
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Iunfavorable impact on net sales or revenues or income from continuingoperations. If the registrant knows of events that will cause a material
2 change in the relationship between costs and revenues (such as known3 future increases in costs of labor or materials or price increases or
inventory adjustments), the change in the relationship shall be disclosed.4
5 Item 303 of Regulation S-K, 17 C.F.R. § 229.303(a)(3)(ii).
6 108. It is precisely because such "qualitative" information is important to investors
7 that the SEC requires corporations to discuss their businesses and interpret their results.
8 As the Securities Act Release No. 6711 states:
The Commission has long recognized the need for a narrative explanation9 of the financial statements, because a numerical presentation and brief
10 accompanying footnotes alone may be insufficient for an investor tojudge the quality of earnings and the likelihood that past performance is
11 indicative of future performance. MD&A [Management Discussion and
12 Analysis] is intended to give the investor an opportunity to look at thecompany through the eyes of management by providing both a short and
13 long-term analysis of the business of the company...
14 109. In addition, the SEC, in its May 18, 1989 Interpretive Release No. 34-26831,
15 has indicated that registrants should employ the following two-step analysis in
16 determining when a known trend or uncertainty is required to be included in the MD&A
17 disclosure pursuant to Item 303 of Regulation S-K:
18 A disclosure duty exists where a trend, demand, commitment, event oruncertainty is both presently known to management and is reasonably
19 likely to have a material effect on the registrant's financial condition or
20 results of operations.
21110. According to Securities Act Release No. 6349:
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23[i]t is the responsibility of management to identify and address those keyvariables and other qualitative and quantitative factors which are peculiar
24 to and necessary for an understanding and evaluation of the individual
25company.
26 Accordingly, U.S. Auto Parts' Prospectus and Registration contained materially untrue
27statements and omissions because Defendants failed to comply with the disclosure
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obligations under the SEC's rules and regulations as described above.
Untrue Statements and OmissionsConcerning Adequacy of Internal Controls
111. The Prospectus and Registration Statement represented that the Company
maintained significant controls and procedures so as to assure strict compliance with its
internal guidelines for accounting, financial reporting and forecasting - including its use
of estimates. Defendants' assessment and control over financial reporting and forecasting
was especially important because, prior to the IPO, certain control deficiencies in the
Company's system of internal controls had been identified. Thus, at the time of the
Offering, the statements in the Prospectus and Registration Statement that the Company
was working to correct previously-identified deficiencies was critical to investors. In this
regard, the Prospectus and Registration Statement stated, in relevant part:
Internal Controls Over Financial Reporting...Our auditors have identified certain significant deficiencies in oursystem of internal control over financial reporting that are primarilyrelated to our need to hire additional financial and accounting employees,as well as our need to upgrade our accounting systems and improve thedocumentation of our key assumptions, estimates, accounting policies andprocedures. We are actively working to correct these deficienciesthrough hiring additional finance personnel and increasing focus ondocumentation, and we have upgraded our accounting system sinceDecember 31, 2005 when the deficiencies were identified.
[Emphasis added].
112. Because of these statements, investors reasonably believed that the Company
had taken steps to "correct these deficiencies," "hired additional finance personnel," and
"upgraded" its documentation and accounting systems including the integration of the
Partsbin systems, and that a proper due diligence investigation into the Company had
already been conducted and that U.S. Auto Parts maintained at least the minimum controls
and procedures necessary to operate the Company in a safe and efficient manner.
113. In addition to the foregoing, and in light of the status of the Company's
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controls and procedures at the time of the Offering, the duties and responsibilities of U.S.
Auto Parts' Board Committee members that served to augment these controls formed a
very important part of the Prospectus and Registration Statement. The additional oversight
duties and responsibilities of the Board Committee members included, in part, the
following:
• meeting with our management periodically to consider the adequacyof our internal controls and the objectivity of our financialreporting;
• reviewing our financial statements and periodic reports anddiscussing the statements and reports with our management andindependent auditors , including any significant adjustments,management judgments and estimates, new accounting policies anddisagreements with management;
• establishing procedures for the receipt, retention and treatment ofcomplaints received by us regarding accounting, internal accountingcontrols and auditing matters;
[Emphasis added].
114. The above statements were materially false and misleading because they
omitted to disclose that:
• At the time of the IPO, U.S. Auto Parts' did not even maintain the mostminimum standards of good corporate governance or controls andprocedures, as is required by the SEC and the Company 's own internalguidelines and standards of business conduct.
• At the time of the IPO, Defendants had not conducted an adequate duediligence investigation into U.S. Auto Parts that would have revealedmany of the material issues and that would most likely have prevented thesale of this Company to shareholders through the public equity markets atthat time, or at the inflated price at which these shares were originallysold.
• The Company reported inflated revenue and violates Standards of
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Financial Accounting and Reporting and lacked internal controls toaddress these serious violations, including violations of GAAP.
2 These statements were also materially untrue for the reasons set forth in paragraphs 37-71
3 above.
4 THE TRUE FINANCIAL AND OPERATIONAL CONDITION OF5 U.S. AUTO PARTS IS BELATEDLY DISCLOSED
6115. On March 20, 2007, after Defendants announced results for the fourth quarter
7and full year 2007 that were well below plan, over 18.33 million shares ofU.S. Auto Parts
8traded - more than 1.8 times the number of shares sold in the IPO - and the stock
9plummeted, falling over 50%. At that time, Defendants revealed that, for the fourth
10quarter of 2006 - the period that ended on December 31, 2006, six weeks prior to the IPO
11 -the Company would report a loss of $0.01 per share compared to a profit of $0.16, or
12$2.1 million, reported for the same period the prior year. According to the Company,
13profits were decimated by a huge sudden increase in amortization ofintangibles to $2.1
14million, from $4,000, and a big increase in interest expense to $560,000 from $37,000.
15116. Upon the publication of these shocking and belated adverse admissions, the
16true but undisclosed negative conditions that existed at the time ofthe February 2007 IPO,
17and that continued to adversely impact the Company after that time came to light, as set
18forth in detail in the section entitled "The Undisclosed, Material True Facts" above.
19117. As an immediate reaction to the publication of these belated disclosures, U.S.
20Auto Parts' share price declined 50% on March 21, 2007. As over 18 million shares traded
21that day, U.S. Auto Parts stock collapsed from $11.07 per share on March 20, 2007 to
22close at $6.49 per share on March 21, 2007.
23Post-Class Period SEC Inquiry
24118. On August 13, 2007, the SEC notified U.S. Auto Parts that it had commenced
25an informal inquiry into the events leading up to the Company's March 20, 2007
26announcement of its financial results for the fourth quarter and year ended December 31,
272006.
28CAUSATION AND ECONOMIC LOSS
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119. In connection with the February 2007 U.S. Auto Parts IPO, Defendants
signed a Registration Statement containing materially untrue statements and omissions and
filed with the SEC and made available to shareholders a Prospectus containing materially
untrue statements and omissions. These filings were essential in allowing Defendants to
complete the Initial Public Offering of 11.5 million U.S. Auto Parts shares and raise over
$115 million , and to create a public market for trading in Company stock immediately
thereafter.
120. On March 20, 2007, when Defendants' prior materially untrue statements and
omissions came to be revealed to investors , shares of U.S . Auto Parts declined
precipitously - evidence that the prior artificial inflation in the price of Company shares
was eradicated. As a result of their purchases of U.S. Auto Parts stock in connection with
the IPO, Plaintiff and other members of the Class, including those who purchased shares
traceable to the Offering in the public markets immediately thereafter, suffered economic
losses, i.e. damages under the federal securities laws.
121. By improperly characterizing the Company's financial results and
misrepresenting its prospects, the Defendants presented a misleading image of U.S. Auto
Parts' business and future growth prospects. Within the IPO Prospectus and Registration
Statement, Defendants repeatedly emphasized the ability of the Company to integrate its
Partsbin acquisition and to adopt a dual method fulfillment system, and consistently
reported expenses and gross profit margins within expectations sponsored and/or endorsed
by Defendants. These claims caused and maintained the artificial inflation in U.S. Auto
Parts' stock at the time of the February IPO, and thereafter until the truth about the
Company was ultimately revealed to investors.
122. Defendants' materially untrue statements and omissions caused U.S. Auto
Parts shares to trade at artificially-inflated levels from the time of the IPO, when they were
offered at $10.00 per share, until such shares reached an all-time record trading high of
over $12.60 per share on February 20, 2007.
123. On March 20, 2007, however , as investors learned the truth about the
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I Company and learned that Defendants could not operate the Company according to plan
2 and could not integrate Partsbin efficiently or operate its dual order fulfillment system
3 effectively such that fourth quarter 2006 results were already adversely impacted prior to
4 the Offering, shares of the Company collapsed. Defendants' belated disclosures had an
5 immediate, adverse impact on the price of U.S. Auto Parts shares.
6 124. These belated revelations also evidenced Defendants' prior misrepresentation
7 of U. S. Auto Parts' business prospects. As investors and the market ultimately learned, the
8 Company's prior business prospects had been overstated as were the Company's results of
9 operations. As this adverse information became known to investors, the artificial inflation
10 was immediately eliminated from U.S. Auto Parts' share price, and shareholders were
11 damaged as a result of this related share price decline.
12 125. As a direct result of investors learning the truth about the Company, on
13 March 21, 2007, U.S. Auto Parts' stock price collapsed to below $6.50 per share, from
14 above $11.00 per share - a decline of over 50%. The trading volume was over 18 million
15 shares - almost twice the number of shares issued in the February 2007 IPO. This
16 dramatic share price decline eradicated much of the artificial inflation from U.S. Auto
17 Parts' share price, causing real economic loss to investors who purchased this stock in, or
18 in connection with, the U.S. Auto Parts IPO.
19 126. In sum, as the truth about Defendants' materially untrue statements and
20 omissions in the Prospectus and Registration Statement became known to investors, and as
21 the artificial inflation in the price of U.S. Auto Parts shares was eliminated, Plaintiff and
22 the other members of the Class were damaged, suffering an economic loss.
23 127. The decline in U.S. Auto Parts' stock price following the belated disclosures
24 on March 20, 2007 was a direct result of the nature and extent of Defendants' materially
25 untrue statements and omissions contained in the IPO Prospectus becoming known to
26 investors, and to the market. The timing and magnitude of U.S. Auto Parts' stock price
27 decline the following day, when trading resumed, negates any inference that the losses
28 suffered by Plaintiff and the other members of the Class were caused by changed market
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conditions, macroeconomic or industry factors or even Company-specific facts unrelated
to Defendants' conduct. During the same period in which U.S. Auto Parts' share price fell
over 50% as a result of Defendants' misrepresentations and omissions being revealed, the
I Standard & Poor's 500 securities index was relatively unchanged.
128. The economic loss, i.e. damages, suffered by Plaintiff and other members of
the Class, was a direct result of Defendants' materially untrue statements and omissions
being revealed to investors.
CLASS ACTION ALLEGATIONS
129. This is a class action on behalf of all persons who purchased U.S. Auto Parts
shares, or traceable stock, pursuant to the February 2007 Registration Statement and
Prospectus (the "Class"), excluding Defendants. Class members are so numerous that
joinder of them all is impracticable.
130. Common questions of law and fact predominate and include whether
Defendants: (i) violated the Securities Act; (ii) whether the U.S. Auto Parts IPO
Registration Statement and Prospectus contained untrue statements of material facts and
omissions of material facts; and (iii) the extent of and appropriate measure of damages.
131. Plaintiffs claims are typical of those of the Class. Prosecution of individual
actions would create a risk of inconsistent adjudications. Plaintiff will adequately protect
the interests of the Class. A class action is superior to other available methods for the fair
and efficient adjudication of this controversy.
NO SAFE HARBOR
132. The statutory safe harbor provided for forward-looking statements under
certain circumstances does not apply to any of the untrue statements of material fact or
material omissions pleaded in this complaint. The vast majority of the specific statements
pleaded herein were not identified as "forward-looking statements" in the Prospectus
and/or Registration Statement.
133. To the extent there were any forward-looking statements, there were no
meaningful cautionary statements identifying important factors that could cause actual
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I results to differ materially from those in the purportedly forward-looking statements.
2 Alternatively, to the extent that the statutory safe harbor does apply to any forward-
3 looking statements pleaded herein, Defendants are liable for those untrue forward-looking
4 statements because at the time each of those statements was made, the forward-looking
5 statement was authorized and/or approved by an executive officer of the Company who
6 knew that those statements were false.
7 CLAIMS FOR RELIEF8 COUNTI
For Violations of §11 of the Securities Act Against9 U.S. Auto Parts, the Individual Defendants , and the Underwriter Defendants
10 134. Plaintiff incorporates each and every allegation above as if stated herein.
11 135. On or about February 9, 2007, the Defendants named in this Claim for Relief
12 completed an IPO of 11.5 million shares of U.S. Auto Parts stock - including the 1.5
13 million shares allotted to Underwriters in an oversubscription option - at $10 per share,
14 for total proceeds of at least $115,000,000.
15 136. U.S. Auto Parts' February 2007 Registration Statement contained untrue
16 statements of material fact or omitted to state material facts required to be stated therein or
17 necessary to make the statements therein not misleading, as alleged above.
18 137. The Individual Defendants each signed U.S. Auto Parts' IPO Registration
19 Statement and/or filed that Prospectus with the SEC and distributed it to investors.
20 138. The Underwriter Defendants each permitted their names to be included on the
21 cover of the Prospectus as the Underwriters.
22 139. All Defendants named in this Claim for Relief, with the exception of U.S.
23 Auto Parts, the issuer (whose liability for the misstatements is absolute), owed to the
24 purchasers of the stock, including Plaintiff and the Class, the duty to make a reasonable
25 and diligent investigation of the statements contained in the Registration Statement and
26 Prospectus at the time it became effective, to assure that those statements were true and
27 that there was no omission to state material facts required to be stated in order to make the
28 statements contained therein not misleading.
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1 140. The officers and directors of U.S. Auto Parts who were signatories to the
2 Registration Statement were responsible for the preparation of the Prospectus and the
3 Registration Statement. By virtue of the material misrepresentations contained in the
4 Registration Statement and Prospectus, Plaintiff and the Class have been damaged.
5 141. The Underwriter Defendants owed to the purchasers of the stock, including
6 Plaintiff and the Class, the duty to make a reasonable and diligent investigation of the
7 statements contained in the Registration Statement and Prospectus at the time it became
8 effective, to assure that those statements were true and that there was no omission to state
9 material facts required to be stated in order to make the statements contained therein not
10 misleading.
11 142. The Underwriter Defendants were responsible for the preparation of the
12 Prospectus and the Registration Statement. By virtue of the materially untrue statements
13 and omissions contained in the Registration Statement and Prospectus, Plaintiff and the
14 Class have been damaged.
15 143. By reason of the conduct herein alleged, the Corporate, Underwriter, and
16 Individual Defendants named in this Claim for Relief violated § 11 of the Securities Act.
17 144. Less than three years elapsed from the time that the securities upon which
18 this Count is brought were sold to the public to the time of the filing of this action. Less
19 than one year elapsed from the time when Plaintiff discovered or reasonably could have
20 discovered the facts upon which this Count is based to the time of the filing of this action.
21COUNT II
Violation of Section 12(a)(2) of the Securities Act Against U.S. Auto Parts, the22 Individual Defendants, and the Underwriter Defendants
23 145. Plaintiff repeats and re-alleges each and every allegation contained above.
24 146. This Count is brought by Plaintiff pursuant to Section 12(a)(2) of the
25 Securities Act [15 U.S.C. §771(a)(2)] on behalf of all purchasers ofU.S. Auto Parts shares
26 in connection with and traceable to the February 2007 IPO. This cause of action is brought
27 against U.S. Auto Parts, the Individual Defendants, and the Underwriter Defendants.
28 147. The Company, the Individual Defendants, and Underwriter Defendants were
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sellers, offerors, and/or solicitors of sales of the U.S. Auto Parts shares offered pursuant to
the February 2007 Registration Statement and Prospectus.
148. U.S. Auto Parts, as the issuer, successfully solicited and actually transferred
title of the securities; the Underwriter Defendants successfully solicited the purchase of
the securities; and each of the Individual Defendants is a solicitor seller because he/she
signed those documents that solicit the sale of securities - the Prospectus and/or
Registration Statement.
149. The U. S. Auto Parts Registration Statement and Prospectus contained untrue
statements of material facts or omitted to state material facts necessary to make the
statements, in light of the circumstances under which they were made, not misleading.
Defendants' actions of solicitation included participating in the preparation of the
Prospectus and Registration Statement which contained materially untrue statements and
omissions.
150. Defendants owed to the purchasers of U.S. Auto Parts shares, which were
sold in the IPO, the duty to make a reasonable and diligent investigation of the statements
contained in the Prospectus and Registration Statement, to ensure that such statements
were true and that there was no omission to state a material fact required to be stated in
order to make the statements contained therein not misleading. These Defendants knew of,
or in the exercise of reasonable care should have known of, the misstatements and
omissions contained in the Offering materials as set forth above.
151. Plaintiff and other members of the Class purchased U.S. Auto Parts shares
pursuant to and traceable to the defective Registration Statement and Prospectus. Plaintiff
did not know, or in the exercise of reasonable diligence could not have known, of the
untruths and omissions contained therein.
152. Plaintiff, individually and representatively, hereby offers to tender to
Defendants those securities which Plaintiff and other Class members continue to own, on
behalf of all members of the Class who continue to own such securities, in return for the
consideration paid for those securities together with interest thereon.
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153. By reason of the conduct alleged herein, these Defendants violated § 12(a)(2)
of the Securities Act. Accordingly, Plaintiff and members. of the Class who hold U.S. Auto
Parts shares purchased in the IPO have the right to rescind and recover the consideration
paid for their U.S. Auto Parts shares and, hereby elect to rescind and tender their U.S.
Auto Parts shares to the Defendants sued herein. Plaintiff and Class members who have
sold their U.S. Auto Parts shares are entitled to recissory damages.
154. Less than three years elapsed from the time that the securities upon which
this Count is brought were sold to the public to the time of the filing of this action. Less
than one year elapsed from the time when Plaintiff discovered or reasonably could have
discovered the facts upon which this Count is based to the time of the filing of this action.
COUNT IIIFor Violations of Section 15 of the 1933 Act Against the Individual Defendants
and Other Controlling Defendants
155. Plaintiff repeats and re-alleges each and every allegation contained above.
156. This Count is brought pursuant to § 15 of the 1933 Act against the Individual
Defendants and Other Controlling Defendants
157. Each of the Individual Defendants and Other Controlling Defendants was a
control person of U.S. Auto Parts by virtue of his or her position as a director and/or
senior officer of U.S. Auto Parts or, in the case of Oak Investment Partners, as a result of
its large equity interest and ability to appoint multiple directors to the board of directors.
The Individual and Controlling Defendants each had a series of direct and/or indirect
business and/or personal relationships with other directors, officers, and/or major
shareholders of U.S. Auto Parts.
158. Each of the Individual and Controlling Defendants was a culpable participant
in the violations of § 11 and § 12(a)(2) of the 1933 Act alleged in the Count above, based
on their ability to control U.S. Auto Parts. This ability stems from their management
positions and/or ability to control those persons in management positions, access to
information regarding U.S. Auto Parts' operations and/or financial condition, ability to
cause and direct the dissemination of that information, and/or the ability to prevent the
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issuance of, correct, or cause to be corrected, the misleading statements in the Registration
Statement and Prospectus.
159. The Individual Defendants and Other Controlling Defendants, by reason of
their stock ownership and/or positions with U.S. Auto Parts, were controlling persons of
U.S. Auto Parts and are liable under § 15 of the Securities Act.
PRAYER FOR RELIEF
WHEREFORE, Plaintiff prays forjudgment as follows: declaring this action to be a
proper class action; awarding damages, including interest; and such other relief as the
Court may deem proper.
JURY TRIAL DEMANDED
Plaintiff hereby demands a trial by jury.
Dated: October 4, 2007
Elaine T. ByszewskiHAGENS BERMAN SOBOL SHAPIRO,LLP700 South Flower St., Suite 2940Los Angeles, CA 90017Tel: (213) 330-7149Fax: (213) [email protected]
- and -
Reed KathreinHAGENS BERMAN SOBOL SHAPIRO,LLP715 Hearst Ave., Suite 202Berkeley, CA 94710Tel: (415) [email protected]
Liaison Counsel for Plaintiffs & theClassKim E. MillerKAHN GAUTHIER SWICK, LLC12 East 41st Street - 12 FloorNew York, NY 10017Tel: (212) [email protected]
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Lewis S. KahnKAHN GAUTHIER SWICK LLC650 Poydras Street - Suite 2156New Orleans, LA 70130Tel: (504) 455-1400Fax: (504) [email protected]
Lead Counsel for Lead Plaintiff andthe Class
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DECLARATION OF SERVICE
I, the undersigned, declare:
That declarant is and was, at all times herein mentioned, a citizen of the
United States and a resident of the County of Los Angeles, over the age of 18 years,
and not a party to or interested in the within action; that declarant's business address
is 700 South Flower Street, Suite 2940, Los Angeles, California 90017-4101.
On October 4, 2007, I served the foregoing document(s) described as:
AMENDED CONSOLDIATED CLASS ACTION COMPLAINT FOR
VIOLATIONS OF FEDERAL SECURITIES LAWS; JURY TRIAL
DEMANDED
on all interested parties in this action.
IN BY MAIL
By placing a true copy thereof enclosed in seal envelopes address as follows:See Attached Service List. That there is a regular communication by mailbetween the place of mailing and the places so addressed. I am readily familiarwith the firm's practice for collection and processing correspondence for mailing.Under that practice, this document will be deposited with the U.S. Postal Serviceon this date with postage thereon fully prepaid at Los Angeles, California in theordinary course of business.
IN BY EMAIL
I caused the above listed documents to be served by E-MAIL from Kevin G.Acosta to the email addresses set forth on the attached service list.
I declare under penalty of perjury under the laws of the United States of
America that the foregoing is true and correct. j
Executed this 4h day of September , 2007, at Los Ang,^
.ACOSTA
001973- 1 1 176298 v - 1 -
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SERVICE LIST
The Honorable George H. WuUnited States District CourtCentral District of California312 No. Spring St., Courtroom 10Los Angeles, CA 90012Via Hand Delivery
Evan J. SmithBRODSKY AND SMITH9595 Wilshire Boulevard, Suite 900Beverly Hills, CA 90212Telephone : [email protected] U. S. Mail and E-Mail
Paul J . GellerPAUL J. GELLER LAW OFFICES120 East Palmetto Park Road, Suite 500Boca Raton, FL 33432Telephone : (561) 750-3000Via U.S.Mail
Luke LissWILSON SONSINI GOODRICH ANDROSATI650 Page Mill RoadPalo Alto, CA 94304Telephone : (650) [email protected] U. S. Mail and E-Mail
Steven S. WangBRODSKY AND SMITH9595 Wilshire Boulevard, Suite 900Beverly Hills, CA 90212Telephone: (310) 300-8425Via U.S.Mail
Jonathan M. SteinJONATHAN M. STEIN LAW OFFICES120 East Palmetto Park Road, Suite 500Boca Raton, FL 33432Telephone: (561) 750-3000Via US. Mail
Darren J. RobbinsCatherine J. KowalewskiDavid C . WaltonLERACH COUGHLIN STOIA GELLERRUDMAN AND ROBBINS655 West Broadway, Suite 1900San Diego , CA 92101Telephone : (619) [email protected] U.S.MailVia U. S. Mail and E-Mail to DarrenRobbins
Robert A. SacksSULLIVAN & CROMWELL1888 Century Park ESte 2100Los Angeles , CA 90067Telephone : (310) [email protected] U. S. Mail and E-Mail
Steve W. Berman
ELAINE T. BYSZEWSKI (SBN 222304)
HAGENS BERMAN SOBOL SHAPIRO LLP
700 S. Flower Street, Suite 2940rum rALos Angeles, CA 90017
Telephone: (213) 330-7150 e I s
Facsimile: (213 ) 330-7152 '
`UNITEDSTATES DISTRICT COURTCENTRAL DISTRICT OF CALIFORNIA
PARTICIA JOHNSON, et al.
PLAINTIFF(S)
V.
OAK INVESTMENT PARTNERS XI, LP
CV -7-02030 GW-(JCx)
SUMMONSDEFENDANT(S).
TO: THE ABOVE- Fb S
YOU ARE HEREBY SUMMONED and required to file with this court and serve upon plaintiff ' s attorneyElaine T. Byszewski and Steve W. Berman , whose address is:
HAGENS BERMAN SOBOL SHAPIRO LLP
700 S. Flower Street, Suite 2940
Los Angeles, CA 90017
Telephone: (213) 330-7150
Facsimile: (213) 330-7152
an answer to the q complaint ® Consolidated amended complaint q counterclaim q cross-claim
which is herewith served upon you within 20 days after service of this Summons upon you, exclusive
of the day of service. If you fail to do so, judgement by default will be taken against you for the relief
demanded in the complaint.
Clei
Dated: 16 r'5 y^y.' y
^kvSA M'^t ^^
uPula
CASE NUMBER
(Seal of the Court)
CV-01A (01/01) SUMMONS
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Elaine T. ByszewskiHAGENS BERMAN SOBOL SHAPIROLLP700 South Flower St., Suite 2940Los Angeles, CA 90017Telephone: (213) [email protected] E-Mail
Kim E . MillerKAHN GAUTHEIR SWICK, LLC12 E. 41st St ., Suite 1200New York, NY 10017Telephone : (212) 696-3730Facsimile : (212) [email protected] E-Mail
HAGENS BERMAN SOBOL SHAPIROLLP1301 Fifth Ave., Suite 2900Seattle , WA 98101Telephone : (206) 623-7292Facsimile : (206) [email protected] E-Mail
Lewis S. KahnKAHN GAUTHE[R SWICK, LLC650 Poydras St., Suite 2150New Orleans , LA 70130Telephone : (504) 455-1400Facsiinilie : (504) 455-1498Lewis.kalin @kgscounsel.comVia E-Mail
001973-11 176298 V 1 -2-