robb ins geller rudman robert r....

Case 8:12-cv-00222-CJC-JPR Document 72 Filed 06/14/13 of 116 Page ID #:1370

1 ROBB INS GELLER RUDMAN & DOWD LLP

DARRENJ. ROBB1NS (168593) ROBERT R. HENSSLE1.JR. (216165) ROBERT K. LU (198607) 655 West Broadway, Suite 1900 San Diego, CA 92101-3301 Telephone: 619/231-1058 619/231-7423 (fax) [email protected] bhensslerrgrdlaw.com [email protected]

Lead Counsel for Plaintiff

UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA

SOUTHERN DIVISION

PAWEL I. KMIEC, Individually and on No. 8: l2-cv-00222-CJC(JPRx) Behalf of All Others Similarly Situated,

CLASS ACTION Plaintiff,

SECOND AMENDED vs. CONSOLIDATED COMPLAINT FOR

VIOLATIONS OF THE FEDERAL POWERWAVE TECHNOLOGIES SECURITIES LAWS INC., et al.,

Defendants.

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TABLE OF CONTENTS

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I. JURISDICTION AND VENUE .....................................................................1

II. INTRODUCTION AND OVERVIEW ....................................... . .................... 1

III. CLAIMS ASSERTED IN THE COMPLAINT .............................................. 3

IV. PLAINTIFFS...................................................................................................4

V. DEFENDANTS...............................................................................................4

VI. STATEMENT OF THE CASE.......................................................................6

VII. SOURCES OF ALLEGATIONS....................................................................8

VIII. FACTUAL BACKGROUND TO DEFENDANTS' SCHEME...................12

A. Nature of Powerwave's Business .......................................................12

B. During the Class Period Powerwave Relied on Bulk Orders that Were Contingent on Resale, Explicitly Waived Payment, and/or Were Defective Product to Inflate Revenues Beyond Legitimate Demand............................................................................................... 14

C. Defendants' Admissions Corroborate and Confirm the Revenue RecognitionScheme ...........................................................................22

1. Powerwave's Revenue Recognition Scheme Is Confirmed by the Fact that Accounts Receivable Attributed to Team Alliance Spiked to 2000% More than Salesin3Qll ............................................................................22

2. Powerwave's Revenue Recognition Scheme Is Corroborated by the 92% Increase in DSO in 3Q11 ................24

3. On October 18, 2011, Buschur Admitted that an Inventory Buildup of a "Couple of Quarters" at North American Customers Was a Cause of the Dramatic Decline in Demand...................................................................27

IX. DEFENDANTS' FALSE AND MISLEADING STATEMENTS AND OMISSIONS ISSUED DURING THE CLASS PERIOD............................29

A. 3Q09 Press Release, and Report on Form 10-Q ................................. 29

B. 4Q10 Press Release and Conference Call, and Report on Form 10-K ..................................................................................................... 32

C. Financial Analysts Contrast Powerwave's Bullish 2011 Guidance with the "Lackluster" Growth Expected for the Industry..............................................................................................37

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D. 1Q11 Press Release, and Conference Call and Report on Form 10-Q ...................................................................................................... 38

E. May 24, 2011 Barclays Capital Global Communications Conference.......................................................................................... 43

X. THE TRUTH BEGINS TO EMERGE ......................................................... 45

A. 2Q11 Press Releases and Conference Call......................................... 45

B. August 9 2011 Canaccord Genuity Global Growth Conference and 2Q11 Report on Form 10-Q ......................................................... 52

C. 3Q11 Press Releases and Conference Calls........................................ 55

XI. DEFENDANTS' MATERIALLY FALSE AND MISLEADING FINANCIAL REPORTING AND GAAP VIOLATIONS DURING THECLASS PERIOD..................................................................................60

A. Powerwave Improperly Recognized Revenue on Contingent Sales with Team Alliance, in Violation of GAAP .............................. 61

Sales of Defective Product ........................... ................................................. 62

Bulk Orders that Included a Right of Return if the Product Could Not be Resold or Explicitly Waived Payment...........................................63

B. Powerwave Recorded Premature and Inflated Revenue in Violation of GAAP and the SEC's Revenue Recognition Requirements....................................................................................64

C. Powerwave's Disclosures Regarding Revenue Recognition Were False and Misleading and in Violation of GAAP and SEC Guidance............................................................................................67

D. Powerwave's Financial Statements Violated Fundamental Accounting Concepts..........................................................................69

XII. DEFENDANTS' KNOWLEDGE OR RECKLESS DISREGARD OF THE TRUTH ABOUT POWERWAVE'S BUSINESS ...............................71

XIII. FRAUDULENT SCHEME AND COURSE OF BUSINESS ......................74

XIV. ADDITIONAL SCIENTER ALLEGATIONS.............................................74

A. Each of Defendants' False Statements and Omissions Involved One of Powerwave's Core Operations................................................74

B. Powerwave's Incentive Compensation Structure Created an Incentive for Fraud and Strongly Supports an Inference of Scienter...........................................................................................75

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C. Defendants' Fraudulent Conduct Allowed Defendants to Preserve Powerwave's Credit and Debt Ratings and Raise $100 Million in the July 20, 2011 Offering Thus Delaying a BankruptcyFiling .............................................................................77

D. Defendants' Misleading Statements About the Reasons for the 3Q11 "Nightmare" Support a Strong Inference of Scienter...............79

B. SOX Certification ...............................................................................80

1. Defendants Signed False Statements Regarding Powerwave's Internal Controls and Procedures.......................80

2. Reasons Why Defendants' Internal Controls and Procedure Statements Were Materially False and Misleading...............................................................................83

F. Expert Opinion Confirms that Defendants Were Aware of the Improper Revenue Recognition..........................................................85

XV. LOSS CAUSATION/ECONOMIC LOSS....................................................87

XVI. ANY PURPORTED RISK WARNING WERE INADEQUATE OR MATERIALLY FALSE AND MISLEADING ............................................ 89:

XVII. NO SAFE HARBOR.....................................................................................89

XVIII. APPLICABILITY OF PRESUMPTION OF RELIANCE: FRAUD-ON-THE MARKET ............................................................. 90

XIX. CLASS ACTION ALLEGATIONS .............................................................91

CLAIMSFOR RELIEF...........................................................................................92

COUNTI .................................................................................................................92

COUNTII ................................................................................................................ 93

PRAYERFOR RELIEF .......................................................................................... 93

JURYDEMAND.....................................................................................................94

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1 III. JURISDICTION AND VENUE

2

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

3 Exchange Act of 1934 ("1934 Act") (15 U.S.C. §78j(b) and 78t(a)) and Rule lOb-5

4 (17 C.F.R. §240.10b-5) promulgated thereunder by the Securities and Exchange

5 Commission ("SEC"). Jurisdiction is conferred by §22 of the Securities Act of 1933

6 ("1933 Act") (15 U.S.C. §77v) and §27 of the 1934 Act (15 U.S.C. §78aa). Venue is

7 proper pursuant to §22 of the 1933 Act and §27 of the 1934 Act. Powerwave

8 Technologies, Inc.'s ("Powerwave" or the "Company") headquarters are located at

9 1801 East St. Andrew Place, Santa Ana, CA 92705 and many of the acts and

10 transactions constituting the violations of the securities laws alleged herein occurred

11 I in this District.

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2. In connection with the acts and conduct alleged herein, defendants,

13 directly and indirectly, used the means and instrumentalities of interstate commerce,

14 including, but not limited to, the United States mails, interstate telephone

15 communications and the facilities of the national securities exchanges and markets.

16 II. INTRODUCTION AND OVERVIEW

17

3. This is a securities class action on behalf of all persons who purchased or

18 otherwise acquired the securities of Powerwave between October 28, 2010 and

19 October 18, 2011, inclusive (the "Class Period"), against certain Powerwave officers

20 and/or directors for violations of the 1934 Act. Powerwave is excluded from the

21 proposed class. These claims are asserted against certain Powerwave officers and/or

22 directors who made materially false and misleading statements during the Class

23 Period in press releases, analyst conference calls and filings with the SEC.

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4. Powerwave engages in the design, manufacture, marketing and sale of

25 wireless solutions for wireless communications networks worldwide. This action

26 concerns defendants' false and misleading statements and omissions regarding: (1)

27 demand; (2) the basis for and reliability of its financial forecasts; (3) risks to its

28 business; and (4) the Company's financial statements. During the Class Period,

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1 defendants caused Powerwave to report artificially inflated financial results in an

2 effort to meet or exceed Powerwave's financial guidance in the face of a market that

3 analysts believed would experience "lackluster" growth through the 2011 fiscal year.

4 Defendants' false explanation for their tremendous feat was that Powerwave's

5 products were technically superior to the competition and that, as a result,

6 Powerwave's growth would exceed that of the market as a whole.

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5. In truth, defendants knew or recklessly disregarded that demand for

8 Powerwave's products was actually steeply declining. According to former

9 employees, to off-set the declining demand, and cloak the Company's deteriorating

10 financial condition, defendants engaged in a revenue recognition scheme to artificially

11 inflate its revenue and earnings by: (1) shipping "bulk orders" of unsold and/or

12 unsellable inventory to resellers on a contingent basis whereby Powerwave would

13 explicitly waive payment, and/or grant rights to return the product if it could not be

14 sold; and (2) knowingly and deliberately shipping product that Powerwave knew did

15 not function with the promise to replace the defective products in a later quarter.

16 According to former employees with knowledge of the bulk orders, the last-minute

17 bulk orders were done to try to meet Powerwave's quarterly and year-end forecasts

18 because actual orders had not been received. In other words, according to former

19 employees, the bulk orders were done to hide the fact that demand was not as strong

20 as defendants claimed.

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6. Defendants' false statements and omissions artificially inflated

22 Powerwave's stock price, allowing defendants and the Company to complete a $100

23 million bond offering and collect millions in performance bonuses and salaries. The

24 $100 million bond offering was completed just before defendants revealed the figures

25 reflecting the Company's true financial condition and delayed a bankruptcy filing -

26 allowing defendants to continue paying themselves for another 15 months. As the

27 truth about defendants' false statements and omissions were revealed, Powerwave

28 shareholders suffered millions of dollars in damages and the Company's common

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stock price plummeted from a Class Period high of $4.69 per share to $.68 per share

on October 19, 2011 - a 85% decline in little over five months, from which

Powerwave' s stock price never recovered. Indeed, on January 28, 2013, the Company

filed for bankruptcy protection and the Company's stock is now virtually worthless.

Powerwave Technologies October 28,2010-October 18, 2011

$25 1 I

$01 1 1 I I I I Ii I I II

0110412010 07/00/2010 01/03/2011 07105/2011 01/03/2012 07/03/2012

04/062510 1010412030 04/04/2011 1010312511 54/03/2012

III. CLAIMS ASSERTED IN THE COMPLAINT

7. Lead Plaintiff the Government of Bermuda Contributory and Public

Service Superannuation Pension Plans (the "Bermuda Pension Plans") asserts claims

arising from allegations of securities fraud in violation of §10(b) of the 1934 Act

against those defendants, certain of the Company's senior executives, who made

materially false and misleading statements that caused the price of Powerwave

securities to be artificially inflated over the course of the Class Period. The Bermuda

Pension Plans also asserts control-person claims under §20(a) of the 1934 Act.

The "Dollars Per Share" reflects the 1-for-5 reverse stock split. See ¶203.

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1 IIV. PLAINTIFFS

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8. On April 26, 2012, the Court appointed the Bermuda Pension Plans as

3 Lead Plaintiff to represent the proposed class of Powerwave shareholders. During the

4 Class Period, the Bermuda Pension Plans purchased and held shares of Powerwave

5 common stock. As a result of the defendants' conduct detailed herein, the Bermuda

6 Pension Plans suffered damages in connection with its purchases of Powerwave

7 securities.

8 V. DEFENDANTS

9

9. Defendant Ronald J. Buschur ("Buschur") served as the Company's

10 President and Chief Executive Officer ("CEO") during the Class Period. During the

11 Class Period, Buschur participated in the issuance of false and misleading statements

12 and failed to disclose the true facts about Powerwave's business. At no time during

13 the Class Period did Buschur or any other defendant assert that they were not aware of

14 material aspects of Powerwave's business or finances. Moreover, Buschur issued

15 statements in press releases and led the Company's conference calls with analysts and

16 investors, representing himself as a primary person with knowledge about the

17 Company's business, outlook, financial reports and business practices. In addition to

18 issuing statements throughout the Class Period, Buschur repeatedly had the

19 opportunity to correct the misstatements and omissions by and on behalf of

20 Powerwave, and failed to do so.

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10. Defendant Kevin Michaels ("Michaels") served as the Company's Chief

22 Financial Officer ("CFO") during the Class Period. During the Class Period, Michaels

23 participated in the issuance of false and misleading statements and failed to disclose

24 the true facts about Powerwave's business. At no time during the Class Period did

25 Michaels or any other defendant assert that they were not aware of material aspects of

26 Powerwave's business or finances. Moreover, Michaels issued statements in press

27 releases and led the Company's conference calls with analysts and investors,

28 representing himself as a primary person with knowledge about the Company's

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1 business, outlook, financial reports and business practices. In addition to issuing

2 statements throughout the Class Period, Michaels repeatedly had the opportunity to

3 correct the misstatements and omissions by and on behalf of Powerwave, and failed to

4 Idoso.

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11. Buschur has been with the Company since 2001 and became CEO of

6 Powerwave and a member of the Board of Directors (the "Board") in February 2005.

7 Michaels has been with the Company since 1996. According to the Company's 2010

8 Form 10-K, which was filed with the SEC on February 17, 2011, the Company was

9 small, consisting of approximately 2,100 employees throughout the entire Class

10 Period. The vast majority of these employees - approximately 1,900 - were on

11 manufacturing, quality, supply chain, sales and research and development.

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12. Defendants Buschur and Michaels (collectively, "defendants"), by virtue

13 of their high-level positions with the Company, had access to adverse, undisclosed

14 information about Powerwave's business, operations, financial statements, markets

15 and present and future business prospects, via internal corporate documents,

16 conversations and connections with other corporate officers and employees,

17 attendance at management and Board meetings and committees thereof, and reports

18 and other information was provided to them as part of their positions.

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13. By virtue of their high level positions with the Company, defendants

20 possessed the power and authority to control the contents of Powerwave's quarterly

21 reports and other public filings, press releases and presentations to securities analysts,

22 money and portfolio managers and institutional investors, i.e., the market. Each of the

23 defendants, by virtue of their high level positions with Powerwave, directly

24 participated in the management of the Company and was directly involved in the day-

25 to-day operations of the Company. The defendants were involved in drafting,

26 producing, reviewing and/or disseminating the false and misleading statements and

27 information alleged herein, and were aware, or recklessly disregarded, that false and

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1 misleading statements regarding Powerwave were being issued, and approved or

2 ratified these statements, in violation of the federal securities laws.

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14. Powerwave had internal systems that allowed senior management - the

4 defendants - to monitor up-to-date quarterly revenues. According to former

5 employees, the Company used a Hyperion system and a salesforce.com system to

6 provide senior management with updated forecasts and revenues.

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15. Powerwave's common stock was listed and traded on the National

8 Association of Securities Dealers Automated Quotations ("NASDAQ") under the

9 symbol PWAV during the Class Period. As officers and controlling persons of a

10 publicly-held company whose common stock was traded on the NASDAQ during the

11 Class Period, and governed by the federal securities laws, each of the defendants had a

12 duty to disseminate promptly accurate and truthful information regarding the

13 Company's financial condition and performance, growth, operations, financial

14 statements, business, markets, management, earnings and present and future business

15 prospects, and to correct any previously-issued statements that had become materially

16 misleading or untrue, so that the market price of Powerwave common stock would be

17 based upon truthful and accurate information. Defendants' misrepresentations and

18 omissions during the Class Period violated these specific requirements and

19 obligations.

20 VI. STATEMENT OF THE CASE

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16. Plaintiffs allege that during the Class Period, Powerwave ran its business

22 in a manner which operated as a fraud or deceit upon investors by using a variety of

23 improper artifices and devices to inflate revenues and conceal declining demand for its

24 products. In particular, defendants: (i) failed to disclose the extent to which

25 Powerwave's business was reliant upon end-of-quarter bulk orders that explicitly

26 waived payment and/or granted the customer a right of return if the product could not

27 be resold, to try to meet forecast expectations for its performance; (ii) issued

28 materially false and misleading financial statements that failed to properly account for

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1 revenues from bulk orders that waived payment and/or granted the customer a right of

2 return if the product could not be resold; (iii) issued financial guidance to investors

3 that failed to disclose the improper bulk orders; and (iv) concealed the extent to which

4 the bulk orders presented a significant risk to demand for the Company's products.

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17. Through extraordinary inducements including waiving payment, granting

the customer a right of return if the product could not be resold, and/or intentionally

7 shipping defective product that would be replaced in a later quarter, Powerwave had

8 been able to coerce its largest customer into purchasing more product than it actually

9 needed. Powerwave's end-of-quarter bulk orders were therefore cannibalizing sales

10 from future periods, and its business practices were unsustainable. While the practice

11 assisted the Company in meeting the quarterly and yearly earnings expectations

12 defendants had set for the market, the sales purportedly generated by the bulk orders

13 created a false picture of demand, and generated artificially inflated earnings.

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18. Defendants used a variety of improper business practices and fraudulent

15 accounting techniques to conceal these circumstances from investors, including by

16 failing to disclose the extent of its bulk orders, improperly booking revenues on bulk

17 orders which Powerwave had agreed to take back if they could not be resold, in

18 violation of Generally Accepted Accounting Principles ("GAAP"), and failing to

19 account for the bulk orders consistent with the Company's stated accounting policies.

20

19. And, the bulk orders were material to Powerwave's business. According

21 to a former employee directly involved, the last-minute bulk orders were at least $15

22 million in 3Q10, 4Q10, and 1Q11 and at least $25 million in 2Q11. And, according to

23 former employees, the undisclosed inducements increased during the Class Period.

24 According to former employees, the 3Q10 and 4Q10 bulk orders granted the customer

25 a right of return if the product could not be resold, the 1Q11 bulk order was made up

26 of defective product that would be replaced in a later quarter, and in 2Q11,

27 Powerwave explicitly waived payment.

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20. These allegations are independently corroborated by at least five former

2 employees and a customer. In addition, the former employees state that the large last-

3 minute bulk orders were approved by defendants Buschur and Michaels. And, Team

4 Alliance was the Company's largest customer during the Class Period and Buschur

5 himself set quarterly sales quotas for Powerwave's head of sales.

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21. The allegations are also confirmed by defendants' admissions. Accounts

7 receivable measures the amount of money owed by a customer. It is a red flag when

8 accounts receivable increases significantly faster than sales. Powerwave's accounts

9 receivable attributed to Team Alliance ballooned to over 2000% greater than sales in

10 3Q11. In fact, despite sales to Team Alliance in 3Q11 of just $2 million, accounts

11 receivable attributed to Team Alliance stood at over $50 million. This admission by

12 the Company confirms what former employees have stated - that Powerwave was not

13 making Team Alliance pay.

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22. Similarly, the Company's Days Sales Outstanding ("DSO") - which

15 measures how long it takes to get paid - grew by 92% during the Class Period to 175

16 days. By comparison, the median DSO for Powerwave's competitors was 69 days

17 during the Class Period - and remained flat while Powerwave's spiked. As the "Big

18 4" auditing firm Ernst & Young has noted, this DSO spike is a red flag: "The higher

19 the number, the greater should be the concern over customers not paying their bills."

20 VII. SOURCES OF ALLEGATIONS

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23. Plaintiffs' allegations are based upon the investigation of plaintiffs'

22 counsel, including information contained in SEC filings by Powerwave, regulatory

23 filings and reports, securities analysts' reports and advisories about the Company,

24 press releases, conference call transcripts and other public statements issued by the

25 Company, as well as media reports and other sources of information about the

26 Company, including information obtained from more than 15 former employees of

27 Powerwave. Information provided by the former employees of Powerwave are

28 reliable and credible because: (a) each of the witnesses worked at Powerwave during

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1 or immediately prior to the Class Period; (b) each witness stated that they had personal

2 knowledge of the information provided; (c) the witnesses' job titles and

3 responsibilities show that they had personal knowledge of the information provided;

4 (d) the witness accounts corroborate one another; and (e) the witness accounts are

5 corroborated by other information alleged herein.

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24. CW1 was a Senior Demand Planner at Powerwave from 2008 until

7 November 2011, when CW1 was laid off. CW1's duties included analyzing the sales

8 forecasts for Powerwave's North and South American network operator customers for

9 all of Powerwave's products. CW1 's network operator customers included AT&T,

10 Verizon, T-Mobile and several others. During 2011, CW1 reported to Materials

11 Manager Alain Ducharrne ("Ducharme"). Ducharme reported to Senior Director of

12 Supply Chain Operations Mike Ryberg ("Ryberg") who reported to Chief Operating

13 Officer ("COO") Mary MaGee ("MaGee"). CW1 was involved in determining how

14 and when Powerwave could realize revenues on product sales to North and South

15 American customers. To that end CW1 participated in weekly Sales Operations

16 meetings held every Monday morning in which CW1 assessed just how confident the

17 sales personnel were that projected orders were going to materialize. After those

18 meetings, on Monday afternoons, CW1 met with Powerwave's corporate planning

19 group as part of the larger objective of determining how many orders had already been

20 invoiced in a given quarter (and thereby revenue already recognized), how many

21 orders were "in backlog" (i.e., orders that had been received, but had yet to be

22 fulfilled), and how many orders were projected to come in during the quarter, as well

23 as how many orders needed to come in to meet projected revenue targets for a given

24 quarter. CW1 prepared a Sales and Operations Planning Report - known internally as

25 an "S&OP Report" - that was discussed in the Monday meetings. CW1 also

26 performed a "risk analysis" so that executives could closely monitor the Company's

27 progress in achieving its projected revenues over a given quarter. As part of the risk

28 analysis, CW1 prepared a "Gap Report" which showed Powerwave's present

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1 forecasted revenue vs. actual revenue. Specifically, the Gap Report showed actual

2 sales that had been recorded already in the quarter (by part number) and compared that

3 sales figure to forecasted sales so that senior executives knew exactly what was

4 needed to make the numbers. CW1 stated that this difference between forecasted

5 sales and actual sales was the genesis for the bulk orders.

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25. CW2 was a Director of Financial Planning at Powerwave from January

7 2007 until November 2011, when CW2 was laid off. As Director of Financial

8 Planning, CW2 was responsible for "developing and executing" a forecasting process

9 that began with a "bottoms-up" sales forecast from the Company's sales force and

10 then forecasting expenses and costs to derive forecasts of margins and profits. This

11 forecasting process was undertaken annually and then updated on a quarterly basis.

12 CW2 reported directly to Michaels, but once Treasurer Tom Spaeth ("Spaeth") was

13 hired, CW2 reported to Spaeth, who reported to Michaels. At the end of quarters,

14 CW2 met with Michaels and Spaeth in Michaels' office to discuss end of quarter

15 margins.

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26. CW3 was a Senior Manager of Strategic Sourcing with Goodman

17 Networks ("Goodman") (an AT&T "Turf Partner" and Powerwave customer), from

18 November 2009 until February 2012 when he was laid off. CW3's role included

19 ordering equipment and products from three primary vendors that Goodman used to

20 build cell-sites on behalf of AT&T. These vendors included Andrews/CommScope,

21 Powerwave, and a German firm - Kathrein. According to CW3, the primary products

22 purchased from Powerwave were antennas, diplexers and TMIs. Goodman's activity

23 on behalf of AT&T covered the entire U.S.

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27. CW4 worked at Powerwave as a Senior Inside Sales Rep on

25 Powerwave's Customer Relationship Management ("CRM") team from 1994 until

26 March 2012 when CW4 was laid off. CW4 was the CRM team member assigned to

27 AT&T. As an Inside Sales Rep, CW4 dealt directly with the Powerwave sales team

28 assigned to AT&T as well as with AT&T personnel. The AT&T personnel CW4 most

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1 often dealt with were members of AT&T's supply chain management group which

2 was located in Seattle. As an Inside Sales Rep CW4 was essentially responsible for

3 receiving AT&T orders and ensuring that the order terms were not only entered into

4 Powerwave's Oracle system, but also that the orders were fulfilled according to

5 AT&T's delivery requirements. This entailed dealing with Powerwave's supply chain

6 organization to ensure that the products necessary to fulfill orders were being

7 I manufactured.

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28. CW5 started at the Company in 2004 and worked as National Sales

9 I Manager for Powerwave's Tier 2 accounts in the U.S. and Canada. These Tier 2

10 accounts included US Cellular, Cricket and MetroPCS. As part of his job, CW5

11 participated in regular sales calls with the various Account Managers, MaGee, and the

12 V.P. of Sales. CW5 left Powerwave of his own volition in June 2011.

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29. CW6 worked at Powerwave from around February 2007 through

14 November 2011 when CW6, and numerous other employees, were laid off. During

15 CW6's time at the Company CW6 had been Global Inventory Manager. Initially,

16 CW6 reported to Ryberg, but at some point, began reporting to Martin Cooper

17 ("Cooper"). Both Ryberg and Cooper reported to current COO MaGee. CW6

18 continued having dealings with Ryberg even after he began reporting to Cooper. As

19 Global Inventory Manager, CW6 had been primarily responsible for monitoring the

20 levels of component/raw material inventory held by Powerwave facilities around the

21 world. CW6 ensured that Powerwave had adequate quantities of such materials to

22 meet production demands and would also facilitate the movement of component

23 inventory from one location to another depending on the respective needs of the

24 locations. Another function of CW6's job was to dispose of Excess and Obsolete

25 component inventory. In addition, as part of CW6's job duties, CW6 had insight to

26 the forecasted demand for Powerwave's products. In this regard, CW6 worked with

27 Powerwave's Planners to determine the component and raw material inventory that

28 would be needed to fulfill expected demand.

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30. CW7 worked at Powerwave from January 2007 until CW7 quit in June

2 2012; CW7 had several positions during that time. CW7 was initially in the

3 Purchasing Department, but from 2008-2010, CW7 worked in a Demand Planning

4 role. Then, from some time in 2010 until CW7's departure, CW7 was involved with

5 Production Planning for new products and also did cost and material analysis. In this

6 latter role, CW7 reported to Gus Gomez, who reported to Cooper, who reported to

7 I MaGee.

8 VIII. FACTUAL BACKGROUND TO DEFENDANTS' SCHEME

9

A. Nature of Powerwave's Business

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31. Powerwave was founded in 1985 and became a public company through

11 an initial public offering ("IPO") in 1996. The Company sells its products through its

12 direct sales force, independent sales representatives, and resellers to wireless original

13 equipment manufacturers ("OEM's") and individual wireless network operators.

14 Powerwave's customers include the OEM's: Alcatel-Lucent, Ericsson, Huawei,

15 Motorola, Nokia Siemens and Samsung. Powerwave's network operator customers

16 include AT&T, Bouygues, Orange, Sprint, T-Mobile, Verizon Wireless and

17 Vodafone. While defendants repeatedly claimed to have technically superior

18 products, there were other companies competing for the same business - including

19 CommScope, Comba Telecom, Fujitsu Limited, Hitachi Kokusai, Japan Radio and

20 Tyco Electronics. In addition, Powerwave also competes with the OEM's - who are

21 also customers - Alcatel-Lucent, Ericsson, Huawei, Motorola, Nokia Siemens and

22 Samsung.

23

32. During the Class Period, Powerwave sold a relatively few products to a

24 handful of customers. In fact, according to the Company, Powerwave's sale of its

25 antennas and base stations represented 90% of Powerwave's business during the Class

26 Period. In addition, according to the Company, sales to North American customers

27 represented over 40% of Powerwave's business during the Class Period.

28

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33. During the Class Period, a substantial portion of Powerwave's sales were

made through resellers or various "Turf Partners." 2 Powerwave's major reseller for

AT&T was Team Alliance. Turf Partners typically purchased Powerwave product

through resellers such as Team Alliance. The Turf Partner would then use the product

as part of building segments or elements of a network building the wireless cell site or

infrastructure for AT&T. Powerwave ' s sales to Team Alliance were as follows:

($000's) 3Q10 1Q11 2Q11 3Q11 4Q11

Net Sales to Team Alliance $ 17,249 $ 19,127 $ 47,779 $ 2,275 $1,930 As a percent of total Powerwave sales 11% 14% 28% 3% 3%

34. The North American wireless carrier AT&T was one of Powerwave's

largest customers during the Class Period. But, as discussed above, Powerwave did

not sell directly to AT&T, but sold to the Turf Partner - through Team Alliance. The

role of AT&T Turf Partners was acknowledged and explained by Michaels in an

August 2, 2010 earnings conference call:

One other thing just to note for you. I think on customers, I'm

sure from an operator basis in North America, our overall largest

relationship there is AT&T. We don't necessarily sell everything

directly there. So, it doesn't count as a 10% customer, but we sell

through their Turf Partners and such. So, I think in this relationship it

would be over a 10% customer. It just doesn't show up that way [sic]

technically.

2 These "Turf Partners" included: Goodman, Black & Veatch, NSORO and Bechtel.

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B. During the Class Period Powerwave Relied on Bulk Orders that Were Contingent on Resale, Explicitly Waived Payment, and/or Were Defective Product to Inflate Revenues Beyond Legitimate Demand

35. Former employees of Powerwave have confirmed that contrary to

defendants' claims of strong demand, demand was actually steeply declining during

the Class Period. According to former employees, to off-set the declining demand,

and cloak the Company's deteriorating financial condition, defendants engaged in an

accounting scheme to artificially inflate its revenue and earnings by: (1) whipping

"bulk orders" of unsold and/or unsellable inventory to resellers on a contingent basis

whereby Powerwave would explicitly waive payment, grant special extended payment

terms, and/or grant rights to return the product if it could not be sold; and (2)

knowingly and deliberately shipping product that Powerwave knew did not function

with the promise to replace the defective products in a later quarter. According to

former employees with knowledge of the bulk orders, the last-minute bulk orders were

done to try to meet Powerwave's quarterly and year-end forecasts because actual

orders had not been received. In other words, according to former employees, the

bulk orders were done to hide the fact that demand was not as strong as defendants

claimed.

36. According to former employees, the bulk orders occurred in 3Q10, 4Q10,

1Q11, and 2Q11. According to CW1, in 3Q10, 4Q10, 1Q11, and 2Q11 Powerwave

needed the last-minute bulk orders (detailed below) to try "to make numbers" because

a gap existed between revenue expectations and actual demand. And, according to

CW1, the last-minute bulk orders in each of these quarters (3Q10, 4Q10, 1Q11, and

2Q11), were made up of inventory that could not be sold because actual orders for the

inventory had not been received.

37. CW1, CW4, CW5, CW6, and CW7 explained that Powerwave's

relationship with AT&T involved third-party "Turf Partners" that actually built

different segments or elements of AT&T's network and a reseller - Team Alliance -

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1 that also processed orders from the Turf Partners for Powerwave products. In essence,

2 according to CW1, CW4, CW5, CW6, and CW7 a Turf Partner would place its order

3 with Team Alliance, which would then issue an order to Powerwave and purchase the

4 products with instructions for Powerwave to drop ship the products directly to the

5 Turf Partner's premises. CW3 confirmed that the Turf Partner Goodman placed its

6 orders for Powerwave products. through Team Alliance.

7

38. But, according to CW1, the Team Alliance arrangement had another,

8 "shady benefit" for Powerwave because beginning in 3Q10 and then continuing every

9 quarter thereafter up until 3Q11, Powerwave was able to ship unneeded product to

10 Team Alliance in order for Powerwave to try to make revenue goals. As a quarter

11 drew to an end, CW1 explained that Powerwave personnel would look around at

12 whatever inventory was unsold and would then obtain "a bulk order" from Team

13 Alliance that permitted Powerwave to ship these items prior to the end of the quarter.

14 According to CW1, if Powerwave had "overbuilt" inventory that could not be sold

15 because actual orders for the inventory had not been received, Powerwave could

16 persuade Team Alliance to issue orders for a portion of the inventory. In other words,

17 according to CWJ, the bulk orders were done to hide the fact that demand was not

18 as strong as defendants claimed.

19

39. According to CW1, Powerwave would purposely ship the inventory to

20 Team Alliance by boat rather than air from China so as to ensure that the products had

21 shipped and were in transit while delaying delivery by three to four weeks. When

22 CW1 first started at Powerwave, the Company had tended to ship almost all of its

23 products from China to customers by air. The delayed delivery was important to

24 Team Alliance because it did not need the product.

25

40. According to CW1, Powerwave granted Team Alliance special extended

26 payment terms and rights of return in order to get Team Alliance to accept delivery of

27 the last-minute quarter-end bulk orders - products Team Alliance did not need -

28 without having to assume the full responsibility of paying for the products.

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1 Specifically, according to CW 1, to encourage Team Alliance to place these large bulk

2 orders, if the products could not be re-sold, Powerwave would take them back and

3 Team Alliance would not have to pay. CW1 stated that this (the fact of the right of

4 return) was relayed to CW1 by CW1 's direct supervisor Ducharme and Ducharme's

5 supervisor Ryberg 3 . In addition, CW1 stated that as part of her job, during 3Q10 -

6 2Q11, CW 1 attended meetings in Ryberg's office and in the conference room that was

7 closest to Ryberg's office (it was called either the Catalina or Capistrano conference

8 room), with Ducharme and Ryberg, when it was discussed that Team Alliance could

9 return the bulk orders if they were unable to sell the product. CW1 also stated that the

10 4Q10 bulk order included "legacy parts" - which were old parts that no one was

11 buying. CW2, CW5, CW6, and CW7 confirmed that Powerwave shipped the bulk

12 orders to Team Alliance at the end-of-quarters during the Class Period.

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41. According to CW1, Powerwave's quarters always ended on a Sunday.

14 CW1 knew that CW1 would be working that weekend because the bulk orders would

15 be arranged on the Saturday - the day before the last day of the quarter. CW1 stated

16 that Ducharme would complain to CW1 about the bulk orders because Ducharme

17 would also be required to work that weekend.

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42. CW5 stated that from CW5 's participation in sales calls, CW5 knew that

19 Powerwave routinely shipped large volumes of inventory to Team Alliance at the ends

20 of quarters. CW5 confirmed that in 3Q10, 4Q10, and 1Q11, Powerwave was "pulling

21 in orders" from future periods into the quarter that was about to end. CW5 left the

22 Company in June 2011 so could not speak to the practices in 2Q11. CW5's

23 impression from what CW5 heard on the sales calls he was on was that Powerwave

24 was typically trying to make a deal by informing Team Alliance of the inventory

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Ryberg reported directly to the Chief Operating Officer, MaGee.

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1 Powerwave had on hand and asking what Team Alliance was willing to order of that

2 inventory.

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43. In addition, CW5 stated that the end-of-quarter orders required the 4 ! extension of discounts and incentives to the customer. It was CW5's understanding

5 that such discounts and incentives had to be approved by Busch ur. CW5 based this

6 perception on what CW5 heard during various sales calls that he was required to

7 attend as part of his job in which the Account Managers working on a particular deal

8 discussed the terms of the transaction. In those calls, MaGee and the VP of Sales

9 (CW5 could not recall this person's name) would make comments to the effect that a

10 proposed discount or incentive needed Buschur's approval and/or that a particular

11 discount or incentive had received Buschur's approval.

12

44. According to CW6, "Team Alliance was our best friend at the end of the

13 quarter" and Powerwave was "dependent on Team Alliance to meet numbers," in

14 1Q11 and 2Q11. In other words, the bulk orders hid the lack of real demand. CW6

15 said it was definitely the case that Powerwave made large shipments to Team Alliance

16 at the ends of 1Q11 and 2Q11. CW6 knew about the large, end-of-quarter shipments

17 to Team Alliance from CW6's regular meetings and discussions with Planning

18 personnel where it would be discussed that Team Alliance would be taking a

19 particular amount of product from Powerwave. CW6 stated that MaGee knew about

20 the bulk orders to Team Alliance, but it was Ryberg who seemed to deal directly with

21 Team Alliance so far as getting the orders. CW7 confirmed that the key individual

22 who was involved with Team Alliance on behalf of Powerwave was Ryberg.

23 According to CW1, Ryberg communicated directly with his boss, MaGee, about the

24 bulk orders.

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45. Once CW6 found out about the Team Alliance shipments at the ends of

26 quarters CW6 began to consider them problematic. CW6 could not recall the exact

27 size of the end-of-quarter shipments to Team Alliance, but believed they were

28 typically worth millions of dollars.

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46. According to CW7, Powerwave shipped a great deal of product to Team

2 Alliance during the Class Period, but if Team Alliance could not sell it, then

3 Powerwave would take the product back. CW7 also confirmed that in early 2012,

4 Team Alliance returned a large amount of product that Powerwave had previously

5 shipped. CW7 gained this knowledge while doing a cost and material analysis for

6 Powerwave's Team Alliance sales personnel in early 2012. In performing the cost

7 and material analysis, at the Powerwave warehouse in Carson, CA, CW7 became

8 aware that the products CW7 was reviewing were parts that had been previously

9 shipped to Team Alliance. The products at issue were called PAS Systems.

10

47. Similarly, CW6 observed on a number of occasions during the Class

11 Period that the finished goods inventory accounts would increase shortly after the fifth

12 or sixth day of the new quarter. In essence, at the end of a quarter CW6would see the

13 finished goods inventory levels go down as goods were shipped and then go back up

14 shortly after the new quarter got underway. Although CW6 did not handle product

15 returns - returns were handled by Cooper and MaGee - CW6 strongly suspected that

16 these increases in finished goods reflected returns from Team Alliance.

17

48. CW3 confirmed that in order to get Goodman to accept Powerwave

18 inventory for which AT&T did not order, Powerwave would extend special

19 concessions that were not reflected in the formal documentation for the transactions

20 (e.g., purchase order and invoice). CW3 stated that concessions, made through verbal

21 side agreements, were extended to Goodman by Powerwave in order to get Goodman

22 to issue Purchase Orders and accept delivery. These sales were often authorized by

23 Powerwave employee Ryberg and Powerwave's District Manager assigned to

24 Goodman, Isaac Bustamante ("Bustamante").

25

49. Thus, these special contingent arrangements with reseller Team Alliance

26 and Turf Partner, Goodman, allowed Powerwave to artificially inflate and manipulate

27 its revenues and hide the fact that demand was declining. According to CW1,

28 Powerwave was well aware of the inventory levels at Team Alliance and how much

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Case 8:12-cv-00222-CJC-JPR Document 72 Filed 06/14/13 of 116 Page ID ii #:1392 '

1 I product was needed to fulfill true customer requirements. CW1 stated that Team

2 Alliance sent their inventory report to Powerwave on an regular basis. According to

3 CW1, Powerwave had to keep track of the inventory being held by Team Alliance

4 because there were times when Powerwave received orders from other customers and

5 Powerwave would use Team Alliance's inventory to fill those other customer orders.

6 In other words, the product was not really sold to Team Alliance, it was essentially

7 just parked with Team Alliance in order for Powerwave to book revenue and try to

8 meet the quarterly revenue expectations.

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50. CW1 knew about the "shady" end-of-quarter "orders" from Team

10 Alliance and the terms of these "orders" through "countless conversations" with

11 CW1 's manager Ducharme - who dealt directly by phone with Team Alliance - in

12 which they would discuss how much unsold inventory was on-hand. CW1 added that

13 Ducharme was clearly following directives from Ducharme's boss, Ryberg. In

14 addition, according to CW1, CW1 received e-mails where the last-minute, end-of-

15 quarter Team Alliance orders were discussed. According to CW1, once the amount of

16 unsold inventory was determined "we'd have Team Alliance cut a Purchase Order"

17 for that amount of product. CW2 also confirmed that large end-of-quarter "orders"

18 were obtained from Team Alliance during the Class Period.

19

51. According to CW1, the "last minute" "orders" that Powerwave got from

20 Team Alliance in 3Q10, 4Q10, 1Q11 and 2Q11 were very big - at least $15 million

21 each quarter and as high as $25 million in a quarter. CW1 confirmed that the 2Q11

22 bulk order was the biggest and at least $25 million. CW1 stated that the last-minute

23 bulk orders to Team Alliance were done to close the gap between forecasted sales

24 and actual sales for the quarter. In other words, the last-minute bulk orders were

25 done because actual demand for these products was not there. CW1 explained that the

26 "Gap Report" - which as noted above was prepared by CW1 for senior executives -

27 measured the difference between realized revenues and forecasted revenues

28 throughout the quarter. CW1 stated that the Gap Report was ultimately used to

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Case 8:12-cv-00222-CJC-JPR Document 72 Filed 06/14/13 of 116 Page ID ii #:1393 )

1 1 determine the amount of the last-minute Team Alliance bulk orders during 3Q10 -

2 1 2Q11.

3

52. CW2 corroborated CW1, explaining that the large end-of-quarter deals

4 made up a large portion of quarterly revenue during this time. CW2 stated that the

5 large end-of-quarter bulk orders during the Class Period were done to make revenue

6 goals in the current quarter. Stated differently, because real demand was down, the

7 bulk orders were used to hide this fact and try to meet revenue goals at the end of a

8 quarter. CW2 added that this practice had the effect of loading up the customer with

9 large volumes of product. CW2 and other personnel often wondered "why we were

10 operating this way" and concluded that "management was not competent."

11

53. According to CW2, the approval for the large end-of-quarter deals

12 came from defendants Buschur and Michaels. CW2 knew that Buschur and

13 Michaels were directly involved in approving the end-of-quarter deals and terms

14 because the internal controls at Powerwave required that deals above a certain

15 threshold - say, several million dollars - and involving discounts and other

16 concessions had to be approved by Buschur and Michaels. And "culturally" CW2

17 said that Powerwave was tightly controlled and managed by Buschur and Michaels.

18 As the last-minute end-of-quarter bulk orders to Team Alliance in 3Q10 - 2Q11 were

19 each between $15 and $25 million, and contained rights of return and extended

20 payment terms, they each would have required approval by Buschur and Michaels.

21

54. One particularly egregious shipment of product to Team Alliance

22 occurred at the very end of 1Q11. At that time, CW 1 said that Powerwave knowingly

23 and deliberately shipped product that it knew did notfunction and which had been

24 "put aside by quality" because it was "bad product." 4 CW7 confirmed that

25 Powerwave knowingly shipped defective products to Team Alliance. According to

26

27 4

All citations are omitted and emphasis is added unless otherwise noted. 28

24

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1 CW 1, Powerwave shipped the products - which were a new type of LTE Antenna—to

2 Team Alliance as part of the end-of-quarter bulk order "with the promise to replace"

3 the defective products once Powerwave had functional products available in a later

4 quarter. CW1 recalled being in a meeting in which Ryberg spoke by phone to the

5 Powerwave factory in China directing them to ship the defective products and in a

6 later meeting hearing Ryberg tell the Chinese factory the specific products that needed

7 to be replaced.

8

55. CW7 confirmed that the defective product involved was a type of

9 antenna. CW7 knows about the shipment of these defective units because CW7 was

10 aware that Powerwave personnel were tasked with having to re-work the antennas.

11

56. CW1 could not recall exactly how many of the defective products went

12 out in the 1Q11 shipment, but estimated that many thousands of the products were

13 shipped; the selling price of the products ranged from $700-$13,000 so the aggregate

14 amount was significant and at least $15 million. Throughout 2011, "we were working

15 on swapping out" the defective products, but the situation had not been resolved as of

16 CW1 's lay-off in November 2011 at which time "we were still trying to get [the

17 products] built correctly" and Powerwave "still owed Team Alliance good"

18 replacements.

19

57. During 3Q11 Team Alliance balked at accepting any more of the

20 Powerwave inventory and, according to CW1, "said 'no more." In essence,

21 according to CW1, Team Alliance "wouldn't allow us" to ship any more product and

22 "drew the line." By 3Q11, Team Alliance was holding very large quantities of

23 Powerwave product for which there was no identified or confirmed end-user demand

24 - CW1 estimated there was as much as $40 million of such inventory (per its "retail

25 value").

26

58. CW2 confirmed that because of the large end-of-quarter bulk orders in

27 1Q11 and 2Q11, Powerwave was unable to duplicate such deals in 3Q11. During the

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Class Period, CW2 heard from co-workers at Powerwave that "we had filled the

channels in 1Q and 2Q" 2011.

59. The last-minute bulk orders from Team Alliance were critical to

Powerwave during the Class Period. As detailed in §XI, the bulk orders allowed the

Company to overstate revenue by at least $70 million - over 10% - during the Class

Period.

C. Defendants' Admissions Corroborate and Confirm the Revenue Recognition Scheme

1. Powerwave's Revenue Recognition Scheme Is Confirmed by the Fact that Accounts Receivable Attributed to Team Alliance Spiked to 2000% More than Sales in 3Q11

60. Accounts receivable measures the amount of money owed by a customer.

I As one commentator has noted: "Accounts receivables should track sales.

Something's amiss when receivables increase significantly faster than sales. It's a red

flag when you detect that happening. Receivables analysis doesn't apply to retail

stores or restaurants because they sell on a cash basis and they don't have significant

receivables."' Similarly, another commentator has explained that it's a "red flag," "if

a company's accounts receivable growth is outpacing sales growth. q16

61. Another commentator has explained that: "When a company sells goods

or services, it often delivers the product with a promise from the customer that he or

she will pay for the item at a future date. This promise creates an account receivable.

If we see accounts receivables growing faster than sales it could indicate that the

See Leo Kurtis, Accounts Receivables and Inventories, Finance Money, Business, Stock Market, Feb. 6, 2007, available at http:/!www.servoo.net7?p=170. 6 See The Motley Fool, Motley Fool: What is channel stuffing? Houston Chronicle Oct. 29, 2007, available at http://www.chron.comlbusiness/article!Motley-Fool-What-is-channel-stuffing-i 837822.php.

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company is extending credit to customers who are not paying or has aggressive

revenue-recognition policies." 7

62. According to The Wall Street Journal: "If a company's accounts

receivables are growing faster than sales, that signals some concerns about the quality

of the sales." 8 And, PricewaterhouseCoopers has explained in a publication titled,

"Protecting Retail & Consumer companies against fraud and misconduct at the

business process level," that auditors should "[r]eview ratio of accounts receivable as

a percentage of sales and total balance sheet between periods," as a "fraud auditing

step" for detecting "Financial statement manipulation."

63. The following chart depicts Powerwave's accounts receivable attributable

to Team Alliance compared to Sales to Team Alliance during the Class Period:

($000's) 3Q10 1Q11 2Q11 3Q11 Net Sales to Team Alliance $17,249 $19,127 $ 47,779 $ 2,276 Accounts receivable attributed to Team Alliance <$15,626 $ 24,399 $57,648 $ 50,293 Sales to Team Alliance as a percent of total sales 11% 14% 28% 3% Accounts receivable attributed to Team Alliance as a percent of total accounts receivable <10% 14% 27% 34%

64. While experts state that accounts receivable should track sales and it is a

red flag when receivables increase significantly faster than sales, the percentage of

See Sean Hannon, 5 Ratios that Help Detect Accounting Scandals, Stock Trading To Go, June 7, 2009, available at http://www.stocktradinctogo.com! 2009/06/1 7/corporate-accounting-scandals-detecting-enron-worldcom-aig/. 8 See Cassell Bryan-Low and Jeff D. Opdyke, Heard on the Street: How to Predict the Next Fiasco In Accounting and Bail Early, Wall. St. J., Jan. 24, 2012.

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Powerwave 's accounts receivable attributable to Team Alliance spiked to more than

2000% higher than sales in 3Q11, compared to 21% and 28% higher in 2Q11 and

1Q11, respectively. Prior to 1Q11, Team Alliance had accounted for less than 10% of

I total accounts receivable. As bulk orders to Team Alliance continued, so did

I receivables and Team Alliance accounted for 14% and 27% of Powerwave's

receivables at the end of 1Q1 1 and 2Q11, respectively. But, despite sales to Team

Alliance dropping to just 3% of total sales in 3Q11, the percentage of receivables

attributable to Team Alliance dramatically increased to 34%. And, tellingly, the

percentage of receivables attributable to Team Alliance remained at 33% through

April 1, 2012 despite a continued sales level below 10%. That Powerwave did just $2

million in sales to Team Alliance in 3Q11 but was owed over $50 million by Team

Alliance at the end of 3Q11 demonstrates that Team Alliance still had notpaid down

the receivables incurred during the Class Period as a result of Powerwave 's

improper revenue recognition.

2. Powerwave's Revenue Recognition Scheme Is Corroborated by the 92% Increase in DSO in 3Q11

65. As detailed herein (see §VI-VIII), as a result of Powerwave's "shady"

practices, the amount owed by Team Alliance and other customers began to grow

rapidly. Accordingly, Powerwave's DSO increased from 91 days at 3Q10 to 175 days

at 3Q11 - a 92% increase. And, tellingly, DSO increased 54% from 2Q11 to 3Q11.

66. DSO is a common financial metric that represents the average number of

days it takes a company to collect its receivables. It is a measure of collectability and

also serves as a useful measure of cash flow efficiency and revenue quality. A DSO

of 50, for example, means that it takes a company 50 days on average to convert a

credit sale (i.e., an account receivable) into cash. An abnormally high DSO, in

comparison to a relevant benchmark, is a sign that receivables are at risk of collection

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NVI


Page ID I' #:1398

and may indicate problems with the collection process at the Company. 9 An

abnormally high DSO is also often a symptom of improper revenue recognition. As

such, DSO is a widely used metric associated with measuring the quality of a

company's revenue and associated accounts receivable portfolio. The significance of

this metric has been made clear by the SEC: "[a] growing DSO figure is often a

telltale sign that a company's receivables are impaired. "10 This is because the older

a receivable gets, the less likely it is to be collected, and there is a much greater

chance that receivables will not be collected when revenue has been recognized

improperly.

67. According to another of the "Big 4" auditing firms, a high DSO figure is

a clear red flag. In section 8.4(b) of "Understanding and Using Financial Data, An

Ernst & Young Guide for Attorneys," Ernst & Young ("E&Y") stated: "The higher

the number, the greater should be the concern over customers not paying their

bills." Similarly, E&Y noted that, "If the days receivable outstanding becomes too

high, it could indicate that the company is not enforcing its credit policies."

68. Industry DSO figures were available to defendants during the Class

Period. Various professional organizations publish DSO information and industry

averages. The median industry DSO at the end of 2010 was 58 days." This was

See David C. Hammer, Performance is reality, how is your revenue cycle holding up?, Healthcare Financial Management Association (July 1, 2005); see also Michael D. Carpenter, A Reliable Framework for Monitoring Accounts Receivable, Financial Management Vol. 8, No. 4 at 37-40 (Winter 1979); Scott Blakely, Esq., The Credit Professional's Duty and Protection with Disclosing Corporate Fraud at the Public Company, The Credit Research Foundation at 2 (November 2002) ("A company's DSO is, at least on Wall Street, an important indicator of the condition of its accounts receivable, and therefore a gauge of asset quality."). '° See SEC v. Korkuc, No. 03-cv-3017, Complaint, ¶28 (E.D.N.Y. June 19,2003); see also SEC AAER No. 1673A (Nov. 25, 2002), available at http :I/www. sec.gov/litigationlhtreleases/ in 78 59a.htm.

Median DSO for the communications equipment industry per CFO/REL's The 2011 Working Capital Scorecard, available at

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calculated by dividing net accounts receivable by net revenue for the year and then

multiplying by 365 days. 12 Similarly, using a comparable formula, the median DSO

for Powerwave's competitors with publicly available quarterly financial statements

was approximately 69 days and the average DSO was 70 days for the December 2010

quarter. 13 Comparatively, Powerwave's DSO was 97 days for 4Q10 and ballooned to

175 days at the end of the Class Period, 3Q11. This was contrary to defendant

Michaels' statement during the 2Q11 conference call when DSO was already 114 days

that "DSOs should decrease. . . as [Powerwave management] anticipate[s] increased

collections throughout the third quarter." The following charts depict Powerwave's

abnormally high and escalating DSO:

3Q10 4Q10 1Q11 2Q11 3Q11

91 97 116 114 175

http://www.cfo.com/mediaJpdf/1107WCcharts.pdf . The median DSO at the end of 2009 was 57 days per The 2010 Working Capital Scorecard. 12 Net accounts receivable is derived by subtracting the allowance for doubtful accounts from gross accounts receivable. 13 Calculated based upon publicly available financial information for the following of Powerwave's competitors 'as disclosed in its 2010 and 2011 Forms 10- K: Fujitsu Limited, Hitachi Kokusai Electric Inc., and Tyco Electronics (now known as TE Connectivity Ltd). Several other foreign competitors were listed, but quarterly financial data was not easily available.

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30


Powerwaves DSO Compared to Competitors

69. The dramatic 92% increase in Powerwave's DSO during the Class

Period confirms that Powerwave was not making its customers pay. And, considering

the astronomical DSO in combination with the Company's accounts receivable

attributed to Team Alliance at the end of the Class Period, it is clear why the DSO-

spiked Powerwave was not making Team Alliance pay.

3. On October 18, 2011 Buschur Admitted that an Inventory Buildup o! a "Couple of Quarters" at North American Customers Was a Cause of the Dramatic Decline in Demand

70. During the October 18, 2011 conference call, financial analysts could not

understand how there could be such a dramatic decline in demand when just six weeks

before the end of 3Q11, on August 9, 2011, defendants had repeatedly answered direct

and specific questions about demand by saying "demand is very healthy." For

example, on August 9, 2011, defendants were asked if the second half of 2011 would

be "better or worse" than the first half and were unequivocal: "our outlook is better."

And, that same day were asked about demand - and the analyst even noted that

"obviously there is a lot of worry about demand." Again defendants were

unequivocal and stated that "North American operators. . . are all committed to

going forward." But, just six weeks later Powerwave missed revenue estimates by

over 50%.

- 27 - 849657_i

1

2

3

4

b

0

WI

8

9

10

11

12

13

14

15

16

17

18

19

20

'4.

22

23

24

25

26

27

28

' 200

160

o 140

120

C,,

60

40

20

-+-- Powerwave

——Tyco

-h- Fujitsu

--- Hitachi

3010 4Q10 1Q11 2Q11 3Q11

31


1

71. On the October 18, 2011, call, an analyst from WBJ Capital specifically

2 asked whether an "inventory buildup" - or customers having too much of

3 Powerwave's product - at North American customers was a possible cause. Buschur

4 admitted that "there is some inventory sitting there being positioned for the next

5 couple of quarters." The context of Buschur's statement is important to note, it was a

6 direct response to an analyst's inquiry about the reason for the dramatic decline in

7 sales and whether an "inventory buildup" at any North American customers was a

8 I cause.

9

Ted Moreau - WBJ Capital Group, Inc. - Analyst

10

Okay. Was there any possibility of an inventory buildup at any

11

other customers in North America?

12

Ron Buschur - Powerwave Technologies, Inc. - President and CEO

13

Well, I certainly would believe based on some of the slowdown,

14

and how abrupt it was after the August announcement, that there

15

probably is some inventory that is sitting there. We have a fairly good

16 understanding of the inventory that we hold, based on the delay, so I

17

would anticipate there is some inventory sitting there being positioned

18

for the next couple of quarters.

19

72. Michaels was also specifically asked where the biggest decline in

20 revenue was and Michaels admitted it was the North American market. "[D]id you

21 give a break out between, which was the bigger decline? Was it North America or

22 EMEA?" Michaels responded: "The North America market was the largest."

23

73. The market understood Buschur's answer to the direct and specific

24 question about an "inventory buildup" at North American customers as an admission

25 that a cause of Powerwave's massive decline in demand was the fact that North

26 American customers were sitting on a "couple of quarters" of inventory. For example,

27 the next day, on October 19, 2011, financial analysts at Jefferies issued an analyst

28 report that highlighted the fact that Buschur admitted to an "inventory buildup" at

-28- 849657_i

32

Case 8:12-cv-00222-CJC-JPR Document 72 Filed 06/14/13 of 116 Page ID ii I #:1402

1 North American customers on the previous days call. In their report that day titled,

2 "Dramatic Pre-Announcement: Inventory Correction atAT&TEven Worse Than

3 Feared," Jefferies specifically focused on the inventory buildup. Based on Buschur's

4 statements the day before, Jefferies stated that "P WA V mgmt believes the AT&T

5 inventory correction will last a couple Qs." In other words, the market understood

6 Buschur's answer to the question about an inventory buildup at North American

7 customers as an admission that there was an "inventory correction" at AT&T (Team

8 Alliance) that "will last a couple" quarters.

9

74. And, on the November 1, 2011, conference call - again discussing 3Q11

10 results - Buschur again confirmed what he had said on the October 18, 2011 call

11 about an inventory buildup at North American customers. Specifically, during the

12 November 1, 2011 conference call, an analyst from Fore Research and Management

13 got Buschur to confirm what he did on the October 18, 2011 call - that a cause of the

14 huge decline in North American demand was the "inventory correction" at North

15 American customers. The analyst asked: "So basically what you're saying is this is

16 more of an inventory correction more so than a revenue that is going to be lost

17 going forward, basically?" Buschur was unequivocal in his response: "Yes."

18 IX. DEFENDANTS' FALSE AND MISLEADING STATEMENTS AND OMISSIONS ISSUED DURING THE CLASS PERIOD

19 A. 3Q09 Press Release, and Report on Form 10-Q

20 75. The Class Period commences on October 28, 2010. On that date

21

22 Powerwave issued a press release announcing its financial results for its third quarter

23 (3Q10), the period ending October 3, 2010. On November 2

'

20 10, Powerwave filed

24 its Report on Form 10-Q. In the 3Q10 press release and Report on Form 10-Q,

25 defendants made false and misleading statements. In particular: defendants: (i) failed

26 to disclose the extent to which Powerwave's business was reliant upon the 3Q10 end-

27 of-quarter bulk orders that granted the customer a right of return if the product could

28 not be resold, to try to meet forecast expectations for its performance; (ii) issued

- 29 - 8496571

33


1 materially false and misleading financial statements that failed to properly account for

2 revenues from the 3Q10 bulk order that granted the customer a right of return if the

3 product could not be resold; (iii) issued financial guidance to investors that failed to

4 disclose the improper bulk order; and (iv) concealed the extent to which the 3Q10

5 bulk order presented a significant risk to demand for the Company's products.

6

76. Defendant Buschur commented on the results, stating, in pertinent part,

7 I as follows:

8

"For the third quarter of 2010, we were able to show growth of 12.8%

9

over the same period last year. . . ." "More importantly, we were able

10

to continue our improvements in our gross margins for this year, with the

11

added benefit of demonstrating strong profitability on both a GAAP and

12

pro forma basis for the third quarter. While we continue to experience

13

longer than normal supply chain lead times and global macro economic

14

issues which continue to impact our business, we see signs of

15

improvement in overall demandfor wireless infrastructure equipment.

16

In particular, we believe that strong North American wireless capital

17

spending patterns should remain throughout the next year."

18

77. Following the issuance of the press release, also on October 28, 2010,

19 Powerwave held a conference call with analysts and investors to discuss the

20 Company's earnings and operations. During the conference call, defendants Michaels

21 and Buschur made positive statements about the Company, current demand, and its

22 operations.

23

78. On November 2, 2010, Powerwave filed its quarterly report on Form 10-

24 Q for the quarterly period ending October 3, 2010. In the 3Q10 Form 10-Q

25 defendants emphasized that Powerwave has "maintained [its] overall market share

26 within the wireless communications infrastructure equipment market," and that its

27 "proprietary design technology is a further differentiator for our products."

34

28

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Case 8:12-cv-00222-CJC-JPR Document 72 Filed 06/14/13 of 116 Page ID 11 / #:1404 1

1

79. By virtue of the facts alleged in § §VI-VIII and XI-XIV, and the other

2 facts set forth herein, it may be strongly inferred that defendants knew or recklessly

3 disregarded that the statements in the October 28, 2010 press releases and conference

4 call, and November 2, 2010 Form 10-Q, would be, and were, misleading to and

5 operated as a fraud upon investors. Considered as a whole, defendants'

6 representations about the Company's revenue and the purported continuing strength of

7 Powerwave's performance along with its prospects for driving further growth,

8 continued to mislead investors by presenting an overly-optimistic picture of

9 Powerwave's results, while failing to disclose, and actively concealing or recklessly

10 ignoring, conditions which created material and significant risks to the Company.

11 Together, these facts and the other allegations herein give rise to a strong inference

12 that defendants knew or recklessly disregarded the actual condition of the Company at

13 the time they delivered their statements. In particular, the foregoing statements were

14 false and recklessly misleading in at least the following respects:

15

(a) Defendants concealed the extent to which the Company's revenues

16 had been achieved through improper and unsustainable sales practices, including the

17 last-minute 3Q10 $15 million bulk order to Team Alliance that included a right of

18 return if Team Alliance could not re-sell the product, were unconnected to actual

19 demand. See §VI-VIII and XI-XIV.

20

(b) Defendants omitted disclosure of the true nature and substance of

21 the 3Q10 end-of-quarter bulk order with Team Alliance in the November 2, 2010

22 Form 10-Q and statements detailed above, or the material risks those practices created

23 to Powerwave's future financial results. See §VI-VIII and XI-XIV.

24

(c) Powerwave's reported financial results were the result of an

25 accounting scheme employing improper accounting practices in violation of GAAP

26 and SEC revenue recognition requirements. See §VI-VIII and XI-XIV.

27

28

35

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Case 8:12-cv-00222-CJC-JPR Document 72 Filed 06/14/13 of 116 Page ID ii #:1405 /

(d) The financial results created a false and misleading appearance of

demand for Powerwave's products because the reported revenues had been artificially

inflated. See § §VI-VIII and XI-XIV.

(e) Powerwave's purported demand was a result of unsustainable

business practices of forcing more products through its sales channels with the 3Q10

end-of-quarter bulk order to Team Alliance than Powerwave's customers could

reasonably expect to absorb, thereby cannibalizing sales from future periods. See

§VI-VIII and XI.

B. 4Q10 Press Release and Conference Call, and Report on Form 10-K

80. On February 1, 2011, Powerwave published its 4Q10 press release and

held a conference call with financial analysts. And, on February 17, 2011,

Powerwave filed its Report on Form 10-K. In the 4Q10 press release and conference

call and full-year 2010 Report on Form 10-K, defendants made false and misleading

statements. In particular defendants: (i) failed to disclose the extent to which

Powerwave's business was reliant upon the 3Q10 and 4Q10 end-of-quarter bulk

orders that granted the customer a right of return if the product could not be resold, to

try to meet forecast expectations for its performance; (ii) issued materially false and

misleading financial statements that failed to properly account for revenues from bulk

orders that granted the customer a right of return if the product could not be resold;

(iii) issued financial guidance to investors that failed to disclose the improper bulk

orders; and (iv) concealed the extent to which the bulk orders presented a significant

risk to demand for the Company's products.

81. On February 1, 2011, the Company issued a press release announcing

financial results for 4Q10, the period ending January 2, 2011, which reported net sales

of $175.6 million, compared to $142.6 million for the same period the prior year.

Defendant Buschur commented on the results, stating, in pertinent part, as follows:

1

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-32- 849657_i

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Case 8:12-cv-00222-CJC-JPR Document 72 Filed 06/14/13 of 116 Page ID ii #:1406 1

1

"For the fourth quarter of 2010, we were able to show growth of 23%

2

over the same period last year and 12% sequentially over the third

3

quarter of this year. . . ." "More importantly, we were able to continue

4

our improvements in our operating income for this year, with the added

5

benefit of demonstrating strong profitability on both a GAAP and pro

6

forma basis for the fourth quarter and year results. We continue to see

7 signs of improvement in overall demand for wireless infrastructure

8

equipment, driven globally by the continued increase in demand for

9

smartphones and the requirements for faster data transmission rates.

10

82. Following the issuance of the press release, also on February 1, 2011,


12 Company's fiscal 2010 earnings and operations. During the conference call,

13 defendants Michaels and Buschur made positive statements about the Company and

14 its current operations. Buschur bragged that for the fiscal year 2010, "we met our

15 annual guidance, "and that 2010 was Powerwave 'S "firstfully profitable year on a

16 GAAP basis since 2005." Michaels stated that Powerwave was establishing a fiscal

17 2011 annual revenue range "of $650 million to $680 million." Michaels added that

18 "[t]he midpoint of this range represents annual growth of 12% which we believe is

19 above the expected growth rates for the industry."

20

83. During the February 1, 2011, conference call, Buschur also made the

21 following statements:

22

The demand in the Wireless data is exploding, as can be seen by the

23 exponential growth in the use of Smart Phones utilizing voice, video and

24

data. This demand is fueling requirements for cost effective

25

infrastructure deployments for both upgrading to existing 2G, 3G, and

26

4G deployment technologies.

27 * * *

28

Charles Johns - Canaccord Genuity - Analyst

37

849657_i

Case 8:12-cv-00222-CJC-JPR Document 72 Filed 06/14/13 of 116 Page ID 11 I #:1407

1

Great. And then Ron, maybe a last one for you. Just wondering,

2

when you look out longer term and think of the LTE and the various

3

carrier deployments that should occur this year, maybe you could just

4

talk about Powerwave's strategic position relative to these LTE builds.

5

Ron Buschur - Powerwave Technologies - President and CEO

6

I think, as you can see from our antenna deployments, as well as

7

our tower mounted amplifiers in some of our base stations subsystems,

8

we have had tremendous growth in the LTE segment of our business,

9

specifically with two large operators here in North America that are

10

building out and one in Europe.

11 * * *

12

We think that we have a technology advantage today in our

13

product offering when you look at the companies that have chosen us

14

and the awards and the percentage of the awards that we've been

15

awarded, when you look at percent of business.

16

84. During the February 1, 2011, conference call, Michaels emphasized that

17 Powerwave was actually being "conservative" in its 2011 guidance:

18

I think to further on what Ron's saying, we obviously think that we're

19

going to grow faster than the market in our segment. But I think the

20

point you're asking, which I would agree with, is that no, we're not

21

looking for huge upsides. We think the market, we think we're

22

positioned well, and it isn't counting on our verticals like the government

23

business to be major contributors in the year. As Ron mentioned, we're

24

still at the early stage there. The actual revenue contribution is quite

25

low. So I think overall we would say that we think we're being

26

reasonably conservative in our guidance and that there is good upside

27

potential.

28

-34- 849657_i


1

85. On February 1, 2011, Deutsche Bank issued a report on Powerwave.

2 Based on defendants' positive statements about demand, Deutsche Bank adjusted their

3 estimates for Powerwave's 2011 revenue as follows: (1) 1Q1 1E was $156m, is

4 $160m; (2) 2Q11E was $158m, is $162m; and (3) 2011E was $639m, is $654m.

5 Deutsche Bank also noted that "[t]he company again said that the second half of the

6 year will provide most of the growth."

7

86. On February 17, 2011, Powerwave filed its annual report on Form 10-K

8 for the fiscal year 2010, ended January 2, 2011. In the 2010 Form 10-K, defendants

9 emphasized that Powerwave has "maintained [its] overall market share within the

10 wireless communications infrastructure equipment market," and that its "proprietary

11 design technology is a further differentiator for our products." In its 2010 Form 10-K,

12 Powerwave also reported revenues of $591.5 million and earnings of $0.03 for the

13 fiscal year.

14

87. By virtue of the facts alleged in §VI-VIII and XI-XIV, and the other


16 disregarded that the statements in the February 1, 2011 press release and conference

17 call, and the financial information discussed therein and in the February 17, 2011

18 Report on Form 10-K, would be, and were, misleading to and operated as a fraud upon

19 investors. Considered as a whole, defendants' representations about the Company's

20 revenue and the purported continuing strength of Powerwave's performance along

21 with its prospects for driving further growth, continued to mislead investors by

22 presenting an overly-optimistic picture of Powerwave 's results, while failing to

23 disclose, and actively concealing or recklessly ignoring, conditions which created

24 material and significant risks to the Company. Together, these facts and the other

25 allegations herein give rise to a strong inference that defendants knew or recklessly

26 disregarded the actual condition of the Company at the time they delivered their

27 statements. In particular, the foregoing statements were false and recklessly

28 misleading in at least the following respects:

-35-

39

849657_i


1



3 last-minute 3Q10 and 4Q10 $15 million bulk orders to Team Alliance that included a

4 right of return if Team Alliance could not re-sell the product, were unconnected to

5 actual demand. See § §VI-VIII and XI-XIV.

6


7 the 3Q10 and 4Q10 end-of-quarter bulk orders with Team Alliance in the February 17,

8 2011 Report on Form 1 0-K and statements detailed above, or the material risks those

9 practices created to Powerwave's future financial results. See § §VI-VIII and XI-XIV.

10




13

(d) At the time the statements were made, internal forecasting data and

14 sales reports that were circulated among the Company's executives and management

15 contradicted the positive outlook the defendants' public statements were intended to

16 create. See § §VI-VIII and XI-XIV.

17

(e) The financial results created a false and misleading appearance of

18 demand for Powerwave's products because the reported revenues had been artificially

19 inflated. See § §VI-VIII and XI-XIV.

20

(f) Powerwave's purported demand was a result of unsustainable

21 business practices of forcing more products through its sales channels with the 3Q10

22 and 4Q10 end-of-quarter bulk order to Team Alliance than Powerwave's customers

23 could reasonably expect to absorb, thereby cannibalizing sales from future periods.

24 See § §VI-VIII and XI-XIV.

25

(g) Powerwave's financial guidance was false and lacked a reasonable

26 basis,, because it failed to disclose the 3Q10 and 4Q10 bulk orders to Team Alliance or

27 the effect those bulk orders could have on fiscal year 2011 sales. See §VI-VIII and

28 XI-xIv.

40

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Case 8:12-cv-00222-CJC-JPR Document 72 Filed 06/14/13 of 116 Page ID if ) #:1410

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C. Financial Analysts Contrast Powerwave's Bullish 2011 Guidance with the "Lackluster" Growth Expected for the Industry

88. On March 17, 2011, Brigantine Advisors issued a report on Powerwave,

"Initiating Coverage with a Buy Rating." The report noted that Powerwave had

exhibited new products to the analyst, Kevin Dede, "behind closed doors at Mobile

World Congress in Barcelona this past February," which led the analyst to make his

recommendation and set a $5 price target. Powerwave was then trading at $3.78.

89. The March 17, 2011, Brigantine Advisors report went on to discuss the

"mobile infrastructure industry" generally and noted that "third party research

providers appear to believe that the mobile infrastructure industry should see

lackluster growth this year." Specifically, the report noted that iSuppli - a

technology market research firm - "projects that the global mobile infrastructure

market should return to modest growth of 3.6% in 2011." And, the Dell'Oro Group -

a networking and telecommunications industries market research firm - "concurs with

iSuppli" and projects "roughly 4%" growth in 2011. The Brigantine Advisors report

contrasts what the market experts were expecting with what Powerwave said it

expected for 2011, "the mid-point" of Powerwave's 2011 guidance, "$655 million

represents 12% annual growth for the current year."

90. On March 24, 2011, after meeting with Powerwave's management on

March 23, 2011, CL King & Associates issued an analyst report on Powerwave,

"[u]pgrading to Buy from Neutral." The report noted that the "overall tenor of the

meeting was highly upbeat." That same day, March 24, 2011, WJB Capital Group

issued an analyst report, noting that they had met with CFO Michaels, "who suggested

that wireless spending trends remain strong, driven by North America."

91. Following the release of these misleading statements, Powerwave's stock

began climbing steadily from $1.91 on October 28, 2010 to $4.69 on May 2, 2011.

-37-

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D. 1Q11 Press Release, and Conference Call and Report on Form 1O-Q

92. On May 5, 2011, Powerwave published its 1Q11 press release and held a

conference call with financial analysts. And, on May 9, 2011, Powerwave filed its

Report on Form 10-Q. In the 1Q11 press release and conference call and Report on

Form 10-Q, defendants made false and misleading statements. In particular:

defendants: (i) failed to disclose the extent to which Powerwave's business was reliant

upon the 3Q10 and 4Q10 end-of-quarter bulk orders that granted the customer a right

of return if the product could not be resold, and the 1Q11 bulk order that was made up

of defective product that would be replaced in a later quarter, to try to meet forecast

expectations for its performance; (ii) issued materially false and misleading financial

statements that failed to properly account for revenues from bulk orders that granted

the customer a right of return if the product could not be resold and were made up of

defective product that would be replaced in a later quarter; (iii) issued financial

guidance to investors that failed to disclose the improper 3Q10, 4Q10, and 1Q11 bulk

orders; and (iv) concealed the extent to which the 3Q10, 4Q10, and 1Q11 bulk orders

presented a significant risk to demand for the Company's products.

93. On May 5, 2011, Powerwave issued a press release announcing its

financial results for its first quarter, the period ending April 3, 2011. For the quarter,

the Company reported net sales of $136.6 million, compared to $114.5 million for the

same period the prior year. Defendant Buschur commented on the results, stating, in

pertinent part, as follows:

The first quarter revenue was impacted by delays we encountered

ramping up one of our new LTE products. .. . "We believe that we

have resolved the production issues that impacted our revenues for the

first quarter. Looking ahead for the remainder of this year, we continue

to believe that we are on track for meeting our annual revenue

42

849657_i


1

guidance. There are signs of improving demand for global wireless

2

infrastructure for the remainder of 2011."

3

94. Following the issuance of the press release, on May 5, 2011, Powerwave

4 held a conference call with analysts and investors to discuss the Company's earnings

5 and operations. During the conference call, defendants Michaels and Buschur made

6 positive statements about the Company and its operations. Michaels stated that 1Q11

7 revenues were impacted by the fact that "the first quarter is usually the slowest quarter

8 of the year." Michaels also explained that 1Q revenues "were impacted by production

9 delays we encountered while ramping up one of our new LTE products." He added

10 that the production delays on the new LTE product "impacted our revenue for the first

11 quarter by approximately $8 million." Michaels emphasized that Powerwave had

12 "resolved this issue going forward to meet our customers' increased demand."

13 Further bolstering his statements about increased demand, Michaels said that

14 Powerwave had "reviewed [its] market forecast and current demand trends and we

15 continue to believe that we will achieve our fiscal 2011 annual revenue range of

16 $650 million to $680 million."

17

95. On the same May 5, 2011, conference call, Buschur explained that the

18 disappointing first-quarter results were due to "unique issues" that "are behind us,"

19 and emphasized that "ftJhe demand for Powerwave 's advanced products are

20 extremely strong." In addition, Buschur added:

21

As Kevin noted, we continue to believe that we will be able to

22

achieve our annual revenue guidance of $650 million to $680 million.

23

As you know, we typically do not give quarterly guidance, but due to

24

the current results and the fact that we have been seeing an increase in

25

demand for our products, we believe the revenue for Q2 will be

26

between $170 million and $180 million. We are confident that the

27

demand should continue to improve throughout this year.

28 * * *

- 39 -

43

849657_i


1

We believe that Powerwave has the product and solutions necessary for

2

these types of cost-effective deployments, as well as we are well

3

positioned to benefit from this demand.

4

96. During the May 5, 2011, conference call, defendants also responded to a

5 number of questions regarding the "surge in demand" that defendants were reporting:

6

Mike Walkley - Canaccord Genuity - Analyst

7

Ron, with the strong sequential guidance it appears you didn't

8

lose any sales to a competitor due to issues with LTE delays. Can you

9

give us a little more color on maybe what caused the delay and also, can

10

you update us on the competitive environment?

11


12

We may have underestimated the ability to ramp that product

13

so quickly with the volume demand that was placed upon us, but we

14

have that behind us, and you're correct, we don't believe that it hurt our

15

market share. In fact, we're seeing demand across the board, not just

16

with the one operator for our LTE products.

17 * * *

18

Ted Moreau - WBJ Capital - Analyst

19

On the guidance for Q2, it's a pretty big snap back and so

20

I'm just wondering if - how comfortable do you feel about your

21 : manufacturing capacity and your ability to handle the surge in demand

22

for Q2?

23


24

Well, I think, Ted, we feel very comfortable that we can achieve

25

that range.

26

Ted Moreau - WBJ Capital - Analyst

27

Okay, great. And then one of the North American carriers spent

28

heavily in Qi, really seems like they're front-end loading their full year.

- 40 - 8496571

44


1

So, do you think once you get through Q2 does 2011 for North America

2

flatten out a little bit, or do you still - would you still see nice growth as

3

the year progresses?

4


5

We - I guess I don't see that same type of rollout, Ted, yet. Isee

6

a pretty healthy growth in North America across most of the operators

7

the remainder of 2011, and then assuming that the merger of the two

8

large operators takes place as scheduled, I think 2012 should be a pretty

9

good year, as well.

10

97. Powerwave's constant assurances of increased revenue from strong

11 demand was adopted by financial analysts. The next day, May 6, 2011, Brigantine

12 Advisors issued a report on Powerwave titled: "Disappointing March Report, but

13 Raising Sales Estimates on Expected Strong June Demand; Reiterate Buy." The

14 report notes that "Powerwave's March quarter report of $136.6M . . . missed our

15 $150.0 and $0.04 estimate and consensus estimates of $151.8M and $0.03 last night."

16

98. That same day, May 6, 2011, WJB Capital Group issued a report on

17 Powerwave titled "Messier Than It Should Have Been." The report noted that

18 Powerwave "missed" analyst expectations. "Despite the Qi miss," given

19 Powerwave's positive statements on May 5, 2011, WJB Capital Group stated that

20 Powerwave "doesn't appear to have lost market share or demand." Merriman Capital

21 also issued a report that day, "remain[ing] positive" on Powerwave given defendants'

22 claims of "broad based demand from operators as well as an alleviation of production

23 issues."

24

99. On May 9, 2011, Powerwave filed its quarterly report on Form 10-Q for

25 the quarterly period ending April 3, 2011. In the 1Q11 Form 10-Q defendants again



28 design technology is a further differentiator for our products."

-41 -

45

849657_i


1

100. By virtue of the facts alleged in § §VI-VIII and XI-XIV, and the other


3 disregarded that the statements in the May 5, 2011, press release and conference call,

4 and the financial information discussed therein and in the May 9, 2011 Report on

Form 10-Q, would be, and were, misleading to and operated as a fraud upon investors.

6 Considered as a whole, defendants' representations about the Company's revenue and

7 the purported continuing strength of Powerwave's performance along with its

8 prospects for driving further growth, continued to mislead investors by presenting an

9 overly-optimistic picture of Powerwave's results, while failing to disclose, and

10 actively concealing or recklessly ignoring, conditions which created material and

11 significant risks to the Company. Together, these facts and the other allegations

12 herein give rise to a strong inference that defendants knew or recklessly disregarded

13 the actual condition of the Company at the time they delivered their statements. In

14 particular, the foregoing statements were false and recklessly misleading in at least the

15 following respects:

16




19 right of return if Team Alliance could not re-sell the product and last minute 1Q11

20 $15 million bulk order to Team Alliance of defective product that would be replaced

21 in a later quarter, were unconnected to actual demand. See § §VI-VIII and XI-XIV.

22


23 the 3Q 10, 4Q10, and 1Q11 end-of-quarter bulk orders with Team Alliance in the May

24 9, 2011 Report on Form 10-Q and statements detailed above, or the material risks

25 those practices created to Powerwave' s future financial results. See § §VI-VIII and XI-

26 XIV.

27

28

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1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


accounting scheme employing improper accounting practices in violation of GAAP

and SEC revenue recognition requirements. See §VI-VIII and XI-XIV.


sales reports that were circulated among the Company's executives and management

contradicted the positive outlook the defendants' public statements were intended to

create. See § §VI-VIII and XI-XIV.


demand for Powerwave's products because the reported revenues had been artificially

inflated. See § §VI-VIII and XI-XIV.


business practices of forcing more products through its sales channels with the 3Q10,

4Q10, and 1Q11 end-of-quarter bulk order to Team Alliance than Powerwave's

customers could reasonably expect to absorb, thereby cannibalizing sales from future

periods. See §VI-VIII and XI-XIV.

(g) Powerwave's financial guidance for both full year 2011 and 2Q11

was false and lacked a reasonable basis, because it failed to disclose the 3Q10, 4Q10,

and 1Q11 bulk orders to Team Alliance or the effect those bulk orders could have on

fiscal year 2011 sales and/or 2Q11 sales. See §VI-VIII and XI-XIV.

E. May 24, 2011 Barclays Capital Global Communications Conference

101. On May 24,201 Ijust five weeks before the end of2Q11, Powerwave

participated in the Barclays Capital Global Communications, Media, and Technology

Conference and reiterated that demand was "improving and strong," and "certainly"

had "improved now" over 1Q11. These statements were false and misleading. 1n

particular: defendants: (i) failed to disclose the extent to which Powerwave's business

was reliant upon the 3Q10 and 4Q10 end-of-quarter bulk orders that granted the

customer a right of return if the product could not be resold, and the 1Q11 bulk order

- 43 -

47

849657_i


1 that was made up of defective product that would be replaced in a later quarter, to try

2 to meet forecast expectations for its performance; and (ii) concealed the extent to

3 which the 3Q10, 4Q10, and 1Q11 bulk orders presented a significant risk to demand

4 for the Company's products.

5

102. Michaels made the following statements:

6

Last quarter, we had some production issues on a new product.

7

We had yield issues on it. We did not get as high yield as we expected.

8

We, since the end of the quarter, have significantly improved our yield.

9

We have caught up with the stuff that we missed in that quarter.

10

At the same time, demand has continued to be improving and

11

strong, so we're feeling fairly confident today in the outlook in the

12

demand side of the market. It is tracking to what we expected, which

13

initially in the first quarter, the very beginning of the first quarter, was a

14

little slower than we expected. It didn't start picking up until toward the

15

end of the first quarter and a little too late for us, but it certainly has

16

improved now. So we're fairly - things are tracking what we expect.

17



19 disregarded that the statements made at the May 24, 2011, Barclays Capital Global

20 Communications, Media, and Technology Conference, would be, and were,

21 misleading to and operated as a fraud upon investors. Considered as a whole,

22 defendants' representations about the Company's revenue and the purported

23 continuing strength of Powerwave's performance along with its prospects for driving

24 further growth, continued to mislead investors by presenting an overly-optimistic

25 picture of Powerwave's results, while failing to disclose, and actively concealing or

26 recklessly ignoring, conditions which created material and significant risks to the

27 Company. Together, these facts and the other allegations herein give rise to a strong

28 inference that defendants knew or recklessly disregarded the actual condition of the

8496571

Case 8:12-cv-00222-CJC-JPR Document 72 Filed 06/14/13 of 116 Page ID ii / #:1418 1

1 Company at the time they delivered their statements. In particular, the foregoing

2 statements were false and recklessly misleading in at least the following respects:

3




6 right of return if Team Alliance could not re-sell the product and last minute 1Q11


8 in a later quarter, were unconnected to actual demand. See § §VI-VIII and XI-XIV.

9


10 the 3Q10, 4Q10, and 1Q11 end-of-quarter bulk orders with Team Alliance in the

11 statements detailed above, or the material risks those practices created to Powerwave's

12 future financial results. See § §VI-VIII and XI-XIV.

13

(c) Powerwave's purported demand was a result of unsustainable

14 business practices of forcing more products through its sales channels with the 3Q10,

15 4Q10, and 1Q11 end-of-quarter bulk order to Team Alliance than Powerwave's

16 customers could reasonably expect to absorb, thereby cannibalizing sales from future

17 periods. See § §VI-VIII and XI-XIV.

18 X. THE TRUTH BEGINS TO EMERGE

19

A. 2Q11 Press Releases and Conference Call

20

104. On July 12, 2011, Powerwave issued a press release to provide a "Second

21 Quarter Update." In the press release, the Company reduced the 2Q11 guidance it

22 had given on May 5, 2011 due to "slowness in several of our markets." The

23 Company also reduced full-year 2011 guidance to the "bottom range" of the previous

24 $650 million - $680 million. The Company reported that for its second fiscal quarter,

25 the period ending July 3, 2011, it "anticipates that revenues for its fiscal second

26 quarter ended July 3, 2011 will be in the range of $168 million to $172 million. This

27 updates Powerwave's previously announced expectations of revenues for the second

28 quarter." The reduced 2Q11 guidance due to declining demand "in several" markets

- 45 - 8496571


1 caught investors off guard given that with five weeks to go in 2Q11, on May 24, 2011,

2 defendants claimed that demand was "improving and strong" and "certainly ha[d]

3 improved now" over 1Q11. Defendant Buschur commented on the announcement,

4 I stating, in pertinent part, as follows:

5

"For the second quarter, in spite of some slowness in several of

6

our markets, we were able to increase revenues by over 24 percent

7

from the first quarter of this year and achieve the anticipated revenue

8

range[.] Looking ahead for the remainder of this year, we continue to

9

believe that we are on track for meeting the bottom range of our 2011

10

annual revenue guidance of $650 million to $680 million. We continue

11

to believe that Powerwave is in an excellent position to build upon and

12

capture the long-term growth opportunities that are in the wireless

13

infrastructure marketplace."

14

105. On July 13, 2011, Merriman Capital issued a report on Powerwave. The

15 report emphasized that Powerwave's reducing its full-year 2011 guidance, "is not

16 AT&T driven as many reports have recently speculated." And added, that based on

17 defendants' assurances, "[w]e believe that AT&T's wireless spending plans remain on

18 track."

19

106. Also, on July 13, 2011, WJB Capital Group issued a report on

20 Powerwave and, given Buschur's positive statements the day before, noted that "we

21 do not believe the updated guidance is the result of changes in market share."

22

107. On July 20, 2011, Powerwave issued a press release announcing that it

23 had entered into a purchase agreement to which it would issue an aggregate of $100

24 million of 2.75% Convertible Senior Subordinated Notes due 2041. According to

25 Powerwave, the offering allowed the Company to repurchase $42.6 million in

26 aggregate principal amount of its outstanding 1.875% Convertible Subordinated Notes

27 due 2024, leaving approximately $15.3 million in principal amount of its 1.875%

28 Notes outstanding. In addition, the Company stated that it was using approximately

- 46 -

50

849657_1


1 1 $25 million from the offering to repurchase 11.2 million shares of its common stock

2 and would use the remaining net proceeds to pay down additional indebtedness and

3 I for working capital purposes.

4

108. On August 4, 2011, Powerwave issued a press release announcing its

5 financial results for its second quarter, the period ending July 3, 2011. For the quarter,

6 the Company reported net sales of $170.6 million, compared to $144.6 million for the

7 same period the prior year. For the first six months of 2011, total revenue was $307.3

8 million compared with $259.1 million for the first six months of fiscal 2010.

9 Defendant Buschur commented on the results, stating, in pertinent part, as follows:

10

For the second quarter, we were able to grow our revenues by 25%

11

sequentially from the first quarter of this year, and by 18% when

12

compared to the same period last year[.] In addition, we were able to

13

show improvement in our gross margins during the quarter while

14

continuing to control our operating expenses, thereby driving strong

15

profitability on both a GAAP and pro forma basis for the second quarter.

16

109. Following the issuance of the press release, on August 4, 2011,


18 Company's earnings and operations. During the conference call, defendants Michaels

19 and Buschur made positive statements about the Company and its operations.

20 Michaels and Buschur both reiterated that defendants "continue to believe that we will

21 achieve our 2011 annual revenue guidance of $650 million to $680 million."

22 Analysts questioned whether the revenue guidance range could be achieved but,

23 Buschur emphasized that "we're pretty confident still that we should be able to

24 achieve the guidance that we had given for the full year." Given thatjust three weeks

25 earlier, on July 12, 2011, defendants had stated that they expected to hit the "bottom"

26 of the range, analysts questioned whether defendants' statements on August 4, 2011,

27 that 2011 would be within the $650 million to $680 million range was a case of

28 defendants being more positive. Buschur agreed that it was, stating: "we're well

51

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1 #:1421

1 positioned, and we're going to continue to focus on taking advantage of the

2 opportunities in North America and in Europe, as well as the APac region."

3

110. During the August 4, 2011, conference call, defendants also commented

4 on present demand:

5

No. What I was saying is the view that we're seeing right now,

6

the questions is, what's the view that we're seeing in the global market?

7

We're seeing a better anticipated view in Western Europe, than what we

8

had anticipated. And Eastern Europe has always been pretty strong and

9

continues to be strong for us.

10

111. Defendants were also specifically asked about North American carrier

11 spending for the second half of the year - and whether any of the "dynamic"

12 macroeconomic factors - including the AT&T/T-Mobile merger - were impacting

13 Powerwave's business. Buschur was unequivocal that this was not impacting

14 demand:

15

Matt Ramsay - Canaccord Genuity - Analyst

16

First I'd like, Ron, to ask for your thoughts on the very dynamic

17

macro environment, I guess that's to say the least. With Clearwire's

18

well-publicized funding issues and their discussion of both LTE and

19

WiMAX network plans, plus Verizon and AT&T giving somewhat

20

different directional back half wireless CapEx guidance, could you

21

discuss your overall views of the carrier spending in North America

22

and effects on your business for the back half?

23

Ron Buschur - Powerwave Technologies Inc - President and CEO

24

Well, Matt, we're pretty confident still that we should be able to

25 achieve the guidance that we had given for the full year. Obviously,

26

the clarity of the market that we see with the uncertainty of Clearwire,

27

some of the uncertainty that exists since AT&T and T-Mobile have

28

combined, has made it little more difficult to predict exact time of some

52

849657_I

Case 8:12-cv-00222-CJC-JPR Document 72 Filed 06/14/13 of 116 Page ID ii / #:1422

1

of the build out and the expenditures, but we do believe that we're going

2

to continue to see some growth in North America and it's going to be

3

strong.

4

112. In the August 4, 2011, press release Powerwave also noted that, "[i]n the

5 second quarter of 2011, Powerwave's largest customer was one of our North

6 American resellers, which accounted for approximately 28 percent of revenue." This

7 huge percentage of revenue to a "North American reseller" did not go unnoticed by

8 financial analysts, but defendants continued to conceal that this huge percentage of

9 revenue was being achieved through end-of-quarter bulk orders to Team Alliance that

10 included rights to return the product if Team Alliance could not re-sell it and explicitly

11 waived payment.

12

Larry Harris - CL King & Associates - Analyst

13 * * *

14

And I noticed you had several distributors or resellers show up as

15

greater than 10% customers this quarter. Do you think this could be, you

16

know, a trend here over the next few quarters, and is there any impact on

17

margins, if you have more sales through distributors?

18

Kevin Michaels - Powerwave Technologies Inc - CFO

19

Larry, this is Kevin.

20

They're not distributors, they're direct resellers. And actually,

21

they've been showing up for a while. You're just seeing more business

22

there in certain markets. I think, as Ron mentioned, really if you look in

23

Europe, it's Eastern Europe where we are really seeing strength in

24

Eastern Europe. Western Europe has been kind of flat, but we deal with

25

a reseller over there, a couple of them, but one of them has been seeing

26

the strength for us there. And in the North American market, some of

27

the large operators want to bring stuff more through some of these

28

resellers that qualify for certain business conditions. So we have seen

53

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1

an increase of that and that's just really driven by the operators

2

decision. So it's not really affecting - they're not distributors in that

3

type of sense, so it's not having a big impact there.

4

So to answer your question overall, yes we expect to continue to

5

see that in certain markets.

6

113. On August 5, 2011, WJB Capital published an analyst report and

7 specifically noted the increase in the Company's accounts receivable. The report

8 highlighted the fact that Powerwave's accounts receivable had "increased by $39

9 million" during 2Q11 to $214 million. According to WJB Capital, "[t]he rise in

10 accounts receivable is related to lengthening payment terms by PWAV customers

11 globally."

12



14 disregarded that the statements in the July 12, 2011, press release and August 4, 2011,

15 press release and conference call, and the financial information discussed therein,

16 would be, and were, misleading to and operated as a fraud upon investors. Considered

17 as a whole, defendants' representations about the Company's revenue and the

18 purported continuing strength of Powerwave's performance along with its prospects

19 for driving further growth, continued to mislead investors by presenting an overly.-

20 optimistic picture of Powerwave's results, while failing to disclose, and actively

21 concealing or recklessly ignoring, conditions which created material and significant

22 risks to the Company. Together, these facts and the other allegations herein give rise

23 to a strong inference that defendants knew or recklessly disregarded the actual

24 condition of the Company at the time they delivered their statements. In particular,

25 the foregoing statements were false and recklessly misleading in at least the following

26 respects:

27



-50-

54

849657_i

Case 8:12-cv-00222-CJC-JPR Document 72 Filed 06/14/13 of 116 Page ID 11 / #:1424


2 right of return if Team Alliance could not re-sell the product, the last minute 1Q11


4 in a later quarter, and the last-minute 2Q11 $25 million bulk order that explicitly

5 waived payment, were unconnected to actual demand. See §VI-VIII and XI-XIV.

6


7 the 3Q10, 4Q10, 1Q11, and 2Q11 end-of-quarter bulk orders with Team Alliance in

8 the July 12, 2011, press release and August 4, 2011, press release and conference call

9 and statements detailed above, or the material risks those practices created to

10 Powerwave's future financial results. See §VI-VIII and XI-XIV.

11




14




17 create. See § § VI-VIII and XI-XIV.

18



20 inflated. See §VI-VIII and XI-XIV.

21

(1) Power-wave's purported demand was a result of unsustainable


23 4Q10, 1Q11, and 2Q11 end-of-quarter bulk orders to Team Alliance than

24 Powerwave's customers could reasonably expect to absorb, thereby cannibalizing

25 sales from future periods. See §VI-VIII and XI-XIV.

26

(g) Powerwave's financial guidance for full year 2011 was false and

27 misleading and lacked a reasonable basis, because it failed to disclose the 3Q10,

28

- 51 -

55

849657_i


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

4Q10, 1Q11, and 2Q11 bulk orders to Team Alliance or the effect those bulk orders

could have on fiscal year 2011 sales. See §VI-VIII and XI-XIV.

B. August 9, 2011 Canaccord Genuity Global Growth Conference and 2Q11 Report on Form 10-Q

115. On August 9, 2011, Powerwave participated in the Canaccord Genuity

Global Growth Conference. Michaels discussed current demand at Powerwave and

emphasized that "fw]ireless demand is very healthy."

116. During the August 9, 2011, Canaccord Genuity Global Growth

Conference, Michaels also took specific questions from financial analysts. Michaels

was asked about Powerwave's outlook for the second half of 2011 - "better or worse

than the first half and do the recent events change anything on that?" Just six weeks

before the end of 3Q11, Michaels again maintained that demand was strong:

I would say our outlook is better. The first quarter was really kind of

slow for us so the second half is a better outlook from the first half

because clearly what our view is and the events of the last week and a

half haven't changed that.

117. Powerwave reported $307.2 million in revenue for the first half of 2011.

In other words, Michaels was telling investors that Powerwave expected revenues

greater than that in the second half of 2011. To meet the low-end of the $650 million

to $680 million revenue guidance, Powerwave would need to record approximately

$350 million in the second half of 2011 - or approximately $175 million in each

quarter.

118. During the August 9, 2011, Canaccord Genuity Global Growth

Conference, Michaels was also specifically asked about current demand: "Maybe you

could walk us through - obviously there is a lot of worry about demand trends out

there. Maybe if you could walk us through what you are seeing on a regional basis in

different parts of the world." Michaels again reiterated that North American demand

was strong: "North American operators we believe from what they said, they are all

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'I #:1426

1 committed to goingforward, don't have any reason to not believe that even with the

2 events we have had this last week."

3

119. On August 10, 2011, Powerwave filed its quarterly report on Form 10-Q

4 for the quarterly period ending July 3, 2011. In the 2Q11 Form 10-Q defendants again



7 design technology is a further differentiator for our products."

8



10 disregarded that the statements in the August 9, 2011, Canaccord Genuity Global

11 Growth Conference and August 10, 2011 Report on Form 10-Q, and the financial

12 information discussed therein, would be, and were, misleading to and operated as a

13 fraud upon investors. Considered as a whole, defendants' representations about the

14 Company's revenue and the purported continuing strength of Powerwave's

15 performance along with its prospects for driving further growth, continued to mislead

16 investors by presenting an overly-optimistic picture of Powerwave's results, while

17 failing to disclose, and actively concealing or recklessly ignoring, conditions which

18 created material and significant risks to the Company. Together, these facts and the

19 other allegations herein give rise to a strong inference that defendants knew or

20 recklessly disregarded the actual condition of the Company at the time they delivered

21 their statements. In particular, the foregoing statements were false and recklessly

22 misleading in at least the following respects:

23




26 right of return if Team Alliance could not re-sell the product, the last minute 1Q11


28

- 53 -

57

849657_i


1 in a later quarter, and the last-minute 2Q11 $25 million bulk order that explicitly

2 waived payment, were unconnected to actual demand. See § §VI-VIII and XI-XIV.

3


4 the 3Q10, 4Q10, 1Q11, and 2Q11 end-of-quarter bulk orders with Team Alliance in

5 the August 10, 2011 Report on Form 10-Q and statements detailed above, or the

6 material risks those practices created to Powerwave's future financial results. See

7 I §VI-VIII and XI.

8




11




14 create. See § §VI-VIII and XI-XIV.

15



17 inflated. §VI-VIII and XI-XIV.

18



20 4Q10, 1Q11, and 2Q11 end-of-quarter bulk orders to Team Alliance than

21 Powerwave's customers could reasonably expect to absorb, thereby cannibalizing

22 sales from future periods. See §VI-VIII and XI-XIV.

23

(g) Powerwave's financial guidance for full year 2011 was false and

24 misleading and lacked a reasonable basis, because it failed to disclose the 3Q10,

25 4Q10, 1Q11, and 2Q11 bulk orders to Team Alliance or the effect those bulk orders

26 could have on fiscal year 2011 sales. See §VI-VIII and XI-XIV.

27

28

-54- 849657_i


1

C. 3Q11 Press Releases and Conference Calls

2

121. On October 18, 2011, Powerwave issued a press release that shocked

3 investors and revealed that contrary to defendants' repeated claims, demand had fallen

4 off a cliff. The Company announced that "it anticipates that revenues for its fiscal

5 third quarter ended October 2, 2011, will be in the range of $75 million to $79

6 I million." Defendant Buschur commented on the announcement, stating, in pertinent

7 part, as follows:

8

Our third quarter revenues were impacted by several factors, which

9

included a significant slowdown in spending by North American

10

network operators, a significant reduction in activity with our original

11

equipment manufacturing customers, coupled with further weakness in

12

several international markets, including Western and Eastern Europe,

13

and the Middle East[.] From a global perspective, we believe that the

14

current economic environment has caused operators to reduce or

15

postpone their spending plans for the near term while they evaluate the

16

macro-economic pressures in each individual market. The Middle East

17 market has been significantly impacted by the political unrest throughout

18

the region. In addition, in the North American market we believe that

19

the uncertainty arising from the government's recent opposition to the

20

proposed merger of AT&T and T-Mobile, has led to delays in spending

21

as these operators re-evaluate their capital spending plans. All of these

22

factors, combined together, have had a significant impact on our third

23

quarter revenues. While near term visibility remains difficult in our

24

markets, we continue to believe that the long-term demand for

25

improvements in wireless infrastructure remain strong, as global demand

26

for data continues and wireless network operators continue to promote

27

their plans to improve existing coverage and add additional capacity, in

28

the form of 4G capabilities, to wireless networks across the globe. We

- 55 - 8496571

59


1

believe that Powerwave remains positioned to build upon and capture the

2

long-term growth opportunities that are in the wireless infrastructure

3

marketplace.

4

122. Following the issuance of the press release, Powerwave held a conference

5 call to discuss the announcement. During the conference call, defendants Michaels

6 and Buschur admitted that the Company was performing poorly and burning through a

7 substantial amount of free cash. Given how positive defendants were just weeks

8 earlier, financial analysts were stunned by the huge decline in demand and actually

9 questioned whether Buschur was fit to run the Company:

10

James Basch - Dialectic Capital Management - Analyst

11

Okay. And then my second question. This is going to be the

12

worst revenue quarter that you guys have had since 2004. And then,

13

Ron, if I look at your tenure as CEO, sales have declined dramatically.

14

The Company really has not been profitable in any way, consistently.

15

And now you are coming up with a quarter like this. And what I've

16 always heard about the Company, is that there is great technology, but

17

it's mismanaged. What should give us confidence at this point, that

18 you should still be managing this business?

19

123. During the same October 18, 2011, conference call several analysts

20 questioned defendants about the huge decline in demand and specifically whether it

21 indicated "market share losses" or customer "inventory buildup." Buschur admitted

22 that "inventory buildup" - or customers having too much of Powerwave's product -

23 was a cause of the huge decline in demand. The inventory buildup was the direct

24 result of Powerwave's prematurely recognizing revenue on the bulk orders to Team

25 Alliance.

26

Umesh Mehta - Tenaya Capital - Analyst

27

Okay. And then if - and then in terms of, you talked about

28

customer loses. So how do we - and sort of a slow down with some of

- 56 - 849657_i

M.


1

the large telcos. How do we - what is - how do we sort of view that

2

versus actual market share losses? I mean, how do you get comfortable

3

that, these are sort of a one-time things, versus more - these are more

4

secular sort of situations?

5 * * *

6

Ted Moreau - WBJ Capital Group, Inc. - Analyst

7

Okay. Was there any possibility of an inventory buildup at any

8

other customers in North America?

9


10

Well, I certainly would believe based on some of the slowdown,

11

and how abrupt it was after the August announcement, that there

12

probably is some inventory that is sitting there. We have a fairly good

13 understanding of the inventory that we hold, based on the delay, so I

14

would anticipate there is some inventory sitting there being positioned

15

for the next couple of quarters.

16

124. Michaels was also specifically asked where the biggest decline in

17 revenue was and Michaels admitted it was the North American market. "[D]id you

18 give a break out between, which was the bigger decline? Was it North America or

19 EMEA?" Michaels responded: "The North America market was the largest."

20

125. The market understood Buschur's answer to the direct and specific

21 question about an "inventory buildup" at North American customers as an admission

22 that a cause of Powerwave's massive decline in demand was the fact that North

23 American customers were sitting on a "couple of quarters" of inventory. For example,

24 the next day, on October 19, 2011, financial analysts at Jefferies issued an analyst

25 report that highlighted the fact that Buschur admitted to an "inventory buildup" on the

26 previous days call. In their report that day titled, "Dramatic Pre-Announcement:

27 Inventory Correction at AT&T Even Worse Than Feared," Jefferies specifically

28 focused on the inventory buildup. Based on Buschur's statements the day before,

-57- 849657_i

61

Case 8:12-cv-00222-CJC-JPR Document 72 Filed 06/14/13 of 116 Page ID ii 7 #:1431

1 Jefferies stated that "PWA Vmgmt believes the AT&T inventory correction will last a

2 couple Qs."

3

126. On October 19,2011, Brigantine Advisors issued areport onPowerwave.

4 In the report, Brigantine Advisors noted that Powerwave's revenue range of $75-59M

5 for 3Q11 "has the makings of a nightmare," given that their previous estimate for the

6 quarter was $162M. The report also noted the Company's cash-crunch:

7

At the end of 2Q11, Powerwave was carrying about $206M in debt and

8

$50M in cash, and through 3Q11, raised a net of $25M, but burned

9

roughly $28M implying a gross margin in the 10% range. In attempting

10

to meet ends going forward, Powerwave sold its Santa Ana, CA

11

headquarters for about $50M in cash.

12

127. That same day, October 19, 2011, J.P. Morgan issued a report on

13 Powerwave. J.P. Morgan noted that Powerwave's preannounced revenue of $75-59M

14 "fell 54% against our prior $168M estimate." The report also stated that Powerwave's

15 "[c]ash burn is troubling."

16

128. Also, on October 19, 2011, WJB Capital Group issued a report on

17 Powerwave and bluntly stated that the "Q3 Pre-Announcement: Fell Off a Cliff." The

18 report noted that consensus estimates for the quarter were $168 million.

19

129. On October 24, 2011, Imperial Capital issued a report on Powerwave

20 bluntly stating that "3Q11 Revenue Shocks Market."

21

130. On October 18, 2011, Powerwave disclosed that because of the

22 Company's precarious financial health it was forced to enter a sale and lease-back

23 transaction involving its corporate headquarters. The Company sold its headquarters

24 including the land and an adjacent vacant 2.87 acre lot for $49.55 million and

25 simultaneously entered into a 15 year lease. The lease payments start at $3.964

26 million/year and increase 2% per year. Under the lease, the Company would also be

27 required to pay insurance, real estate taxes, maintenance and repair expenses.

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131. On October 28, 2011, Powerwave issued a press release announcing that

2 its Board had approved al -for-5 reverse stock split and a reduction in the number of

3 authorized shares of its common stock. The 1-for-5 reverse stock split reduced the

4 number of authorized shares of common stock from 250,000,000 to 100,000,000.

5

132. On November 1, 2011, Powerwave issued apress release announcing its

6 financial results for its third fiscal quarter, the period ending October 2, 2011. The

7 Company reported a net loss of $35.1 million, or a basic loss per share of $1.09.

8 Defendant Buschur commented on the results, stating, in pertinent part, as follows:

9

"As we have previously reported, our third quarter revenues were

10

impacted by several factors, which included significant slowdowns in

11

several of our markets, including North America, Western and Eastern

12

Europe and the Middle East, as well as our original equipment

13 manufacturing customers[.] From a global perspective, we believe that

14

the current economic environment has caused operators to reduce or

15 postpone their spending plans for the near term while they evaluate the

16

macro-economic pressures in each individual market. While near term

17 visibility remains difficult in our markets, we continue to believe that the

18

long-term demand for improvements in wireless infrastructure remain

19

strong, as global demand for data continues and wireless network

20 operators continue to promote their plans to improve existing coverage

21 and add additional capacity, in the form of 4G capabilities, to wireless

22 networks across the globe. We are currently finalizing our restructuring

23

plans in order to take the steps we believe necessary to maintain

24

Powerwave's competitive position and continue to position Powerwave

25

for long-term success."

26

133. That same day, November 1, 2011, defendants also hosted a conference

27 call with financial analysts. During the November 1, 2011, conference call, an analyst

28 from Fore Research and Management got Buschur to confirm what he did on the

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October 18, 2011 call - that a cause of the huge decline in North American demand

was the "inventory correction" at North American customers. Specifically, the analyst

asked: "So basically what you're saying is this is more of an inventory correction

more so than a revenue that is going to be lost goingforward, basically?" Buschur

was unequivocal in his response: "Yes."

XI. DEFENDANTS' MATERIALLY FALSE AND MISLEADING FINANCIAL REPORTING AND GAAP VIOLATIONS DURING THE CLASS PERIOD

134. To disguise the declining demand and attempt to meet its revenue goals,

I Powerwave improperly inflated its publicly reported revenue, gross profit, income

from operations, net income and net income per share. As detailed herein, defendants

and the Company reported false financial results in Powerwave's publicly issued

financial statements and related earnings releases during the Class Period. 14 These

financial results were materially false and misleading and in violation of GAAP' 5 and

SEC guidance by improperly recognizing revenue on purported sales to resellers -

particularly one North American reseller called Team Alliance. During the Class

14 Powerwave's Class Period financial statements and earnings releases issued to the public and filed with the SEC include: SEC Form 10-Ks for full fiscal year ended January 2, 2011 SEC Form 1 0-Qs forperiods ended October 3, 2010, April 3, 2011, July 3, 2011 and October 2,2011; SEC Form 8-Ks issued on February 1, 2011, May 5,2011 and August 4, 2011. 15 GAAP are those principles recognized by the accounting profession as the conventions, rules, and procedures necessary to define accepted accounting practice at a particular time. SEC Regulation S-X (17 C.F.R. §210.4-01(a)(1)) states that financial statements filed with the SEC that are not prepared in compliance with GAAP are presumed to be misleading and inaccurate, despite footnotes and other disclosure. Regulation S-X requires that interim financial statements must also comply with GAAP, with the exception that interim financial statements need not include disclosure that would be duplicative of disclosures accompanying annual disclosures, per 17 C.F.R. §210.10-01(a). On June 30, 2009, the Financial Accounting Standards Board ("FASB') issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles - a rplacement ofFA SB StatementlVo. 162. FASB Accounting Standards Codification ('ASC") became the source of authoritative U.S. accounting and reporting standards for nongovernmental entities, in addition to guidance issued by the SEC, effective for financial statements issued for reporting periods that ended after September 15, 2009. The ASC did not change existing U.S. (jAAP.

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Period, Powerwave engaged in a revenue recognition scheme of improperly reporting

material amounts of revenue in violation of GAAP for consignment sales where:

(a) Powerwave knowingly and deliberately shipped defective product

to Team Alliance in 1Q11 with an agreement to swap these out with functional

products in future periods; and

(b) Powerwave shipped to Team Alliance "bulk orders" of unsold

and/or unsellable inventory with rights to return product if it could not be resold in

3Q10 and 4Q10 and, in 2Q11 explicitly waived payment. See §VI-VIII.

135. Asa result of these improper revenue recognition schemes, Powerwave

materially overstated revenue and earnings in each of its quarterly and annual public

financial statements filed with the SEC during the Class Period. In total, Powerwave

overstated revenue reported during the Class Period by at least $70 million, over 11%

and earnings by at least 46%, as depicted in the following table:

(Dollars in

Total Class thousands) 3Q10

110 1Q11 2Q11 3Q11 Period

Net Sales as Reported $156,813

1,461 $ 136,624 $170,641 $ 77,078 $716,751

Net Sales as Adjusted $141,813

1,461 $ 121,624 $145,641 $ 77,078 $646,751

Overstatement 10%

5% 11% 15% - 10%

Net Income as Reoorted $ 7.934

3.713 $ (6.975) $ 7.021 $ (35.084) $ (20.732

iet income as Adjusted 1 $ 6,525 $ 4,963 $ 894 $ (8,384) $ 4,672 $ (35,084) $ (27,308)

Overstatement 1 18% 22% 76% -20% 20% - -32%

A. Powerwave Improperly Recognized Revenue on Contingent Sales with Team Alliance, in Violation of GAAP

136. Sales to Team Alliance were material throughout the Class Period.

Powerwave disclosed the following amounts of revenue recorded with Team Alliance:

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($000's) 3Q10 1Q11 2Q11 3Q11 4Q11

Net Sales to Team Alliance $ 17,249 $ 19,127 $ 47,779 $ 2,275 $ 1,930 As a percent of total Powerwave sales 11% 14% 28% 3% 3%

Sales of Defective Product

137. According to CW1, in 1Q11, Powerwave knowingly and deliberately

shipped at least $15 million of defective product - mostly LTE antennas - to Team

Alliance in the last few days of the first fiscal quarter of 2011. According to CW1,

this was explicitly done in an effort to meet its quarterly sales forecast because actual

demand was declining. According to CW1, one of the major problems with

Powerwave's antennas during this period was that the computer motherboards

installed in the antennas were defective. Powerwave did not have functional

motherboards and was waiting for new motherboards from its supplier. CW1 clearly

recalled being in a meeting at the end of 1Q11 in which the Senior Director of Supply

Chain Operations, Ryberg, spoke by phone to the Powerwave factory in China,

directing them to ship the defective product to Team Alliance. CW1 also recalls that

in a later meeting in the beginning of April 2011, Ryberg told the Chinese factory the

specific products that needed to be replaced. CW1 explained that at least $15 million

of this bulk order was made up of defective antennas. CW1 further explained that

even though Team Alliance was unaware they would receive a massive shipment of

defective goods, Powerwave deliberately shipped them with the plan to replace them

in later periods. As detailed in § §VI-VIII, CW7 confirmed the shipment of defective

product to Team Alliance. Like other end of quarter bulk orders, CW1 explained that

the defective goods were transported by boat 16 rather than air from China so as to

Transportation costs were paid by Powerwave.

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Case 8:12-cv-00222-CJC-JPR Document 72 Filed 06/14/13 of 116 Page ID ii #:1436 1

ensure that the products had shipped and were in transit, while delaying delivery by

three to four weeks. Powerwpve also granted special payment terms from the usual 30

days to at least 60 days. CW1 explained that as a result of the repeated bulk

shipments beginning in 3Q10, Team Alliance had fallen behind on their payments,

and yet they were never put on credit hold. According to CW1, under no

circumstances could Team Alliance ever be put on credit hold because if they were

then Powerwave would be unable to make additional shipments to Team Alliance.

According to CW1, throughout 2011 and as of November 2011, Powerwave was still

"working on swapping out" the defective products. As described below, recording

revenue on these shipments was improper and violated GAAP and SEC revenue

recognition requirements.

Bulk Orders that Included a Right of Return if the Product Could Not be Resold or Explicitly Waived Payment

138. Beginning in 3Q10 and continuing every quarter thereafter up until 3Q11,

Powerwave began shipping significant amounts of product to Team Alliance with

contingent payment terms. According to CW1, as the quarter drew to an end,

Powerwave would look around at whatever inventory was unsold and then obtain "a

bulk order" from Team Alliance. These bulk orders were done on the very last days

of each quarter during the Class Period and were done so that Powerwave could try to

meet its revenue targets. As detailed in § §VI-VIII, according to former employees,

the bulk orders were done to hide the fact that demand was not as strong as defendants

claimed. According to CW1, these bulk orders consisted of inventory that Powerwave

had overbuilt and customers had not ordered. In order to get Team Alliance to issue a

bulk purchase order and accept delivery of Powerwave's overbuilt inventory, in 3Q10,

4Q10, and 1Q11, Powerwave granted Team Alliance special extended payment terms

and rights to return the product if it could not be resold. See §VIII. Both CW1 and

CW7 confirmed that the inducements to Team Alliance included the right to return the

product if it could not be resold. Id. For these orders, Team Alliance did not accept

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full responsibility for these products and Powerwave, retained the risk of ownership of

the product. Id. Because the payment terms on these deals were such that Team

Alliance did not have to pay for the product until it was resold, the goods were sold on

a consignment basis. These deals, by their very nature, had no assurance of

collectibility. In 2Q11, Powerwave went even further and, according to CW1,

explicitly waived payment. According to numerous former employees (see §VI-

VIII), these bulk orders were done so Powerwave could try meet its revenue goals.

Recording revenue on these contingent sales was improper and violated GAAP.

According to a former employee, in 3Q10, 4Q10, 1Q11 and 2Q11 these orders were at

least $15 million each quarter and $25 million in 2Q11. See §VI and VII.

B. Powerwave Recorded Premature and Inflated Revenue in Violation of GAAP and the SEC's Revenue Recognition Requirements

139. ASC 605-10-25-1 clearly and concisely states that revenue should not be

recognized until it is both realized (or realizable) and earned. The SEC has further

reiterated revenue recognition rules under GAAP, which FASB has codified as ASC

605-10-S25 and ASC 605-10-S99, by requiring that revenue can be recognized only

when all of the following criteria are met:

(a) Persuasive evidence of an arrangement exists;

(b) Delivery has occurred or services have been rendered;

(c) The seller's price to the buyer is fixed or determinable; and

(d) Collectibility is reasonably assured.

140. ASC 605-15-25-1 clearly and concisely states:

If an entity sells its product but gives the buyer the right to return the

product, revenue from the sales transaction shall be recognized at time of

sale only if all of the following conditions are met:

a. The seller's price to the buyer is substantially fixed or

determinable at the date of sale. . .

.4

8496571


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b. The buyer has paid the seller, or the buyer is obligated to pay the

2

seller and the obligation is not contingent on resale of the product...

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C. The buyer's obligation to the seller would not be changed in the

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event of theft or physical destruction or damage of the product.

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d. The buyer acquiring the product for resale has economic substance

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apart from that provided by the seller....

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e. The seller does not have significant obligations for future

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performance to directly bring about resale of the product by the buyer.

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f. The amount of future returns can be reasonably estimated.

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141. ASC 605-10-S99-1 clearly states that if a sales transaction fails to meet

11 all of the conditions of ASC 605-15-25-1, as outlined above, "no revenue may be

12 recognized until those conditions are subsequently met or the return privilege has

13 substantially expired."

14

142. Recognizing revenue from Powerwave's bulk orders, including shipment

15 of defective products to Team Alliance was improper, as the sales did not meet these

16 criteria listed in ASC 605-10-S99-1 and ASC 605-15-25-1.

17

143. Powerwave's end of quarter sales deals were consignment sales.

18 Powerwave had established a business practice whereby sales to Team Alliance were

19 contingent upon resale. According to CW1, Powerwave granted Team Alliance the

20 right to return product if it could not be resold and extended their payment terms

21 beyond the ordinary due dates. According to CW1, Powerwave never put Team

22 Alliance on credit hold despite their lack ofpayment and explicitly waived payment

23 during 2Q11. In 2Q11, Ducharme told CW1 that Powerwave was "not going to ask

24 them [Team Alliance] to pay." Powerwave had deliberately shipped Team Alliance

25 bulk orders and bulk orders of defective product as part of their scheme to inflate

26 revenue. Bulk orders were shipped to Team Alliance even though Powerwave knew

27 there was no end user and that Team Alliance did not need the product based on

28 known bulging inventory levels. Accordingly, revenue could not be recognized

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because collectibility was not reasonably assured (as required by ASC 605-1 0-S99- 1);

the price to the buyer was not fixed or determinable 17 (as required by ASC 605-10-

S99-1); the buyer did not pay the seller at the time of sale and the buyer's obligation

to pay was contractually or implicitly excused until the buyer resells the product (as

required by ASC 605-10-S99-1 and ASC 605-15-25-1(b)). See ASC 605-10-S99-1

("The arrangement may not specify that payment is contingent upon subsequent

resale or consumption. However, if the seller has an established business practice

permitting customers to defer payment beyond the specified due date(s) until the

products are resold or consumed, then... the... right to receive cash representing

the sales price is contingent."). As a result of defendants' improper accounting

practices, Powerwave's financial statements were materially inflated.

144. As further evidence that collectibility was not assured on these sales (as

required by ASC-605-S99-1), Powerwave's accounts receivable grew

disproportionately to its sales. See §VIII.C. 1. More specifically, Team Alliance's

accounts receivable balance disproportionately grew to 34% of the Company's total

accounts receivable by 3Q11 even though Team Alliance made up only 3% of

Powerwave's total sales. Furthermore, Powerwave's DSO ballooned to 175 days at

the end of the Class Period, which was three times the median industry average, two

and a half times that of its competitors, and nearly double the Company's own DSO

heading into 2011.

145. Additionally, ASC 605-1 0-S99-1 precludes revenue recognition when the

"the seller retains the risks and rewards of ownership of the product." According to

former employees (see §VIII), Team Alliance did not accept full responsibility for the

products due to the special terms underlying the sale which made the sale risk free to

Team Alliance. Accordingly, Team Alliance did not assume the risks and rewards of

" ASC 605-10-S99-1 defines a "fixed fee" as a "fee required to 1e paid at a set amount that is not subject to refund or adjustment."

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ownership of the product. Therefore, ASC 605-1 0-S99- 1 criterion requiring that "the

seller retains the risks and rewards of ownership of the product" before revenue can be

I recognized was violated.

146. Powerwave ignored these well established accounting rules, and

improperly recognized revenue on contingent sales to Team Alliance anyway.

C. Powerwave's Disclosures Regarding Revenue Recognition Were False and Misleading and in Violation of GAAP and SEC Guidance

147. Powerwave was required by GAAP and SEC rules, including ASC 605-

10-S99-1 and ASC 235-10, to disclose in detail its significant accounting policies,

including its revenue recognition policy, in the footnotes to its financial statements in

each of its publicly issued Forms 10-K and 10-Q. ASC 605-10-S99-1 clearly and

concisely states this requirement, as follows:

A registrant should disclose its accounting policy for the recognition of

revenue pursuant to APB Opinion No. 22 [Subtopic 235-10]. Paragraph

12 [paragraph 235-10-50-3] thereof states that "the disclosure should

encompass important judgments as to appropriateness of principles

relating to recognition of revenue. . . ."

148. With regard to its revenue recognition policy, Powerwave made the

following disclosures during the Class Period:

Revenue Recognition

The majority of our revenue is derived from the sale of products.

We recognize revenue from product sales at the time of shipment or

delivery and passage of title depending upon the terms of the sale,

provided that persuasive evidence of an arrangement exists, the fee is

fixed or determinable and collectibility is reasonably assured. We offer

certain customers the right to return products within a limited time after

delivery under specified circumstances, generally related to product

defects. We monitor and track product returns and record a provision for

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the estimated amount of future returns based on historical experience and

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any notification we receive of pending returns. While returns have

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historically been within our expectations and the provisions established,

4 we cannot guarantee that we will continue to experience the same return

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rates that we have in the past. Any significant increase in product returns

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could have a material adverse effect on our operating results for the

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period or periods in which these returns materialize. A portion of our

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sales involve contracts that may include the design, customization,

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implementation and installation of wireless coverage applications

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utilizing our coverage solution products. We recognize revenue using

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the percentage-of-completion method for these types of arrangements.

12

We measure progress towards completion by comparing actual costs

13

incurred to total planned project costs. Such sales have not historically

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been a significant amount of our total sales.

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149. These disclosures were materially false and misleading and in violation

16 of the disclosure requirements included in ASC 605-10-S99-1 and ASC 235-10

17 because, as alleged in §VIII.

18

(a) Collection was not reasonably assured on sales to resellers;

19

(b) Persuasive evidence of an arrangement did not in fact exist; and

20

(c) The criteria for revenue recognition under ASC 605-10-S99-1 were

21 not generally met upon shipment of the Company's products.

22

150. In addition to disclosing its revenue recognition accounting policy, ASC

23 605-10-S99-1 requires additional revenue disclosures for the following types of

24 revenue transactions or events:

25

Shipments of product at the end of a reporting period that

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significantly reduce customer backlog and that reasonably might

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be expected to result in lower shipments and revenue in the next

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period.

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Granting of extended payment terms that will result in a longer

PM

collection period for accounts receivable (regardless of whether

3

revenue has been recognized).

4

Changing trends in shipments into, and sales from, a sales channel

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or separate class of customer that could be expected to have a

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significant effect on future sales or sales returns.

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An increasing trend toward sales to a different class of customer,

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such as a reseller distribution channel that has a lower gross profit

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margin than existing sales that are principally made to end users.

10

As described herein, Powerwave was subject to several transactions and events

11 that are covered by the disclosure requirements described above including sales

121 transactions with Team Alliance. Despite these revenue transactions and events,

13 Powerwave failed to make the revenue disclosures required under GAAP.

14

D. Powerwave's Financial Statements Violated Fundamental Accounting Concepts

15

16 151. In addition to the above-referenced departures from GAAP and SEC

17 guidance, as a result of the defendants' accounting improprieties, Powerwave

18 presented its financial results in a manner that violated the following fundamental

19 accounting principles:

20 (a) The principle that "[f]inancial reporting should provide

21 information that is useful to present and potential investors and creditors and other

22 users [of the financial reports] in making rational investment, credit, and similar

23 decisions." (FASB Statement of Concepts No. 1, ¶34);

24 (b) The principle that "[f]inancial reporting should provide

25 information about the economic resources of an enterprise, the claims to those

26 resources, and the effects of transactions, events, and circumstances that change

27 resources and claims to those resources." (Id., ¶40);

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(c) The principle that "[f]inancial reporting should provide

2 information about an enterprise's financial performance during a period. Investors

3 and creditors often us6 information about the past to help in assessing the prospects of

4 an enterprise. Thus, although investment and credit decisions reflect investors' and

5 creditors' expectations about future enterprise performance, those expectations are

6 commonly based at least partly on evaluations of past enterprise performance." (Id.,

7 ¶42);

8

(d) The principle that "[f]inancial reporting should provide

9 information about how management of an enterprise has discharged its stewardship

10 responsibility to owners (stockholders) for the use of enterprise resources entrusted to

11 it.... To the extent that management offers securities of the enterprise to the public,

12 it voluntarily accepts wider responsibilities for accountability to prospective investors

13 and to the public in general." (Id., ¶50);

14

(e) The principle that financial reporting should be reliable in that "it

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

16 as relevant is a notion that is central to accounting. (FASB Statement of Concepts No.

17 2, ¶J58-59);

18

(f) The principle of completeness, which means that "nothing material

19 is left out of the information that may be necessary to insure that it validly represents

20 the underlying events and conditions." (Id., 179);

21

(g) The principle that conservatism be used as a "prudent reaction to

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

23 are adequately considered." (Id., ¶95);

24

(h) The principle that that revenues and gains should not be recognized

25 until they are both earned and realizable (FASB Statement of Concepts No. 5, ¶83);

26

(i) The principle that if "collectibilily of assets received for product,

27 services, or other assets is doubtful, revenues may be recognized on the basis of cash

28 received." (Id., ¶84);

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(j) The principle that financial statements shall contain all data

2 necessary for a fair presentation of financial position and results of operations as set

3 forth in U.S. GAAP, including compliance with the requirements of the SEC's rules

4 and regulations by SEC registrants (ASC 205-10);

5

(k) The principle that interim financial reporting should be based upon

6 the same accounting principles and practices used to prepare annual financial

7 statements (ASC-270-10-45-2); and

8

(1) The principle that interim financial information provide investors

9 and others with timely information as to the progress of the entity (ASC 270-10-45-1).

10 XII. DEFENDANTS' KNOWLEDGE OR RECKLESS DISREGARD OF THE TRUTH ABOUT POWERWAVE'S BUSINESS

11

12 152. As detailed above (see §VI-VIII), throughout the Class Period,

13 defendants knew, or recklessly disregarded, the true facts about Powerwave's

business. Defendants Buschur and Michaels held themselves out to investors and the 14 15 market as the persons most knowledgeable at Powerwave about demand. As detailed

16 in §V-X, each of these defendants communicated with investors and analysts during

17 the Class Period and represented that they were informed of and knowledgeable about

18 demand. At no time during their communications with investors on these matters did

19 any of these defendants assert that they were uninformed about any material aspect of

Powerwave's business. 20

153. The defendants did not merely hold themselves out as knowledgeable 21

about Powerwave's business, but specifically described how they personally 22 23 monitored and kept apprised of sales and demand at Powerwave. For example,

24 according to Powerwave's SEC filings Buschur carefully monitored the Company's

25 sales activity. On May 11, 2011, Powerwave disclosed that the Company had

established a Sales Incentive Program ("SIP") effective January 10, 2011. Under the 26 27 SIP, the Company's Vice President of Worldwide Sales, Basem Anshasi ("Anshasi"),

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1 would receive quarterly cash bonus payments in 2011 based on quarterly sales quotas

2 established by Buschur.

3

154. In addition, defendants implied that they are able to see "booked orders"

4 five to six weeks in advance. On the November 1, 2011, conference call, a financial

5 analyst asked about Powerwave's "visibility" - or how far out defendants can see

6 confirmed orders.

7

Arun Seshadri - Credit Suisse - Analyst

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Got it. Okay. And then, finally, just wanted to get a sense as far

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as your visibility goes, I mean, you answered a few questions about it,

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but generally speaking, is it about five to six weeks normally? And can

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you talk about when you will have some view into what Q could look

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like?

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Well, I think the five to six weeks is generous, as we've always

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talked about, as far as visibility going forward. I don't think anyone in

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this space, at least at our level of supply, has much better visibility than

17

that. So we don't see that improving, even as we go through with the

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total economic slowdown improves tomorrow morning to where we're

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going to have better visibility than that. That's part of the business and

20

the challenges. And that's the reason that we think it's very critical for

21

the long-term of the Company to have diversification in other vertical

22

markets, so we're not so dependent on this market that doesn't seem to

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have that great a visibility, and can't forecast its demands very well.

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Kevin Michaels —Powerwave Technologies, Inc. - CFO and Secretary

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And let me just add onto that. And just to be a little clearer, I

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think when we're discussing visibility, we're talking booked orders.

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And as we've discussed many times, that orders - people are not placing

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long lead-time orders out there.

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155. The market understood defendants to be saying that they could see

2 confirmed orders 5-6 weeks in advance. The next day, November 2,2011, a financial

3 analyst from Brigantine Advisors stated in an analyst report that Powerwave's

4 visibility was "5-6 weeks."

5

156. Aside from defendants' statements on visibility, a former employee and a

6 former customer of Powerwave's have confirmed that visibility was typically at least

7 six weeks. Given CW1 's position, CW1 also has experience with Powerwave's

8 visibility - or how far out it could see confirmed orders - during the Class Period.

9 CW1 said that in CW1 's experience with the customers CW1 dealt with, (North

10 American customers that made up over 40% of Powerwave's revenue), Powerwave

11 typically had at least six weeks of visibility on orders initiated by customers.

12 Similarly, CW3 also stated that typical lead time between when an order was placed

13 with Powerwave and when it was received by Goodman was around six to eight

14 weeks.

15

157. Consistent with their claims of active involvement in and knowledge of

16 Powerwave's business and demand, former employees of Powerwave have confirmed

17 that defendants were directly involved in the operations of the businesses and that they

18 knew or had access to internal information identifying the known, but not timely

19 disclosed, declining demand.

20

158. Concurrent with their claims of personal knowledge and active

21 involvement in monitoring Powerwave's business, the defendants publicly certified

22 with each of the Company's SEC filings that each report "does not contain any untrue

23 statement of a material fact or omit to state a material fact necessary to make the

24 statements made, in light of the circumstances under which such statements were

25 made, not misleading with respect to the period covered by this report." This is

26 discussed more fully below.

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1 1 XIII. FRAUDULENT SCHEME AND COURSE OF BUSINESS

2

159. Defendants are liable for: (i) making false statements; or (ii) failing to

3 disclose adverse facts known to them about Powerwave. Defendants' fraudulent

4 scheme and course of business that operated as a fraud or deceit on purchasers of

5 Powerwave securities was a success, as it: (i) deceived the investing public regarding

6 Powerwave's prospects and business; (ii) artificially inflated the price of Powerwave

7 securities; and (iii) caused plaintiffs and other members of the class to purchase

8 Powerwave securities at inflated prices.

9 XIV. ADDITIONAL SCIENTER ALLEGATIONS

10

160. As alleged herein, defendants acted with scienter in that defendants either

11 knew or recklessly disregarded that the public documents and statements issued or

12 disseminated in the name of the Company were materially false and misleading; that

13 such statements or documents would be issued or disseminated to the investing public;

14 and substantially participated or acquiesced in the issuance or dissemination of such

15 statements or documents as primary violations of the federal securities laws. As set

16 forth elsewhere herein in detail, defendants, by virtue of their receipt of information

17 reflecting the true facts regarding Powerwave, their control over, and/or receipt and/or

18 modification of Powerwave 's allegedly materially misleading misstatements and/or

19 their associations with the Company which made them privy to confidential

20 proprietary information concerning Powerwave, participated in the fraudulent scheme

21 alleged herein.

22

A. Each of Defendants' False Statements and Omissions Involved One of Powerwave's Core Operations

23

24 161. Each of the defendants was a top executive involved in Powerwave's

25 daily operations and with access to all material information regarding the Company's

26 core operations. Therefore, each of the defendants is presumed to have had

27 knowledge of all material facts regarding Powerwave's core operations.

28 162. Each of the false statements alleged herein involved a core operation of

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1 Powerwave.

163. Powerwave sold a relatively few products to a handful of customers.

Powerwave's sale of its products, antennas and base stations, represented 90% of

Powerwave's business during the Class Period. In addition, sales to North American

customers represented over 40% of Powerwave's business during the Class Period.

And, during the Class Period Powerwave's North American sales were highly

concentrated. According to the Company, for the first half of 2011, total sales to

Team Alliance accounted for approximately 22% of sales. In addition, according to

the Company, for the second quarter of 2011, sales to Team Alliance "accounted for

approximately 28% of our total sales." And, according to the Company, sales to

Team Alliance accounted for 14% of total sales in 1Q11 and 11% of total sales in

3Q10. And, according to the Company's SEC filings sales to Team Alliance made up

approximately 37% and 67% of North American sales for 2Q11 and 3Q11.

B. Powerwave's Incentive Compensation Structure Created an Incentive for Fraud and Strongly Supports an Inference of Scienter

164. Defendants were also motivated to engage in the fraud alleged herein due

to the nature of the compensation system in place at Powerwave. Indeed, although

defendants knew, or recklessly disregarded, that the bulk sales strategy resulted in

inflated earnings and was vulnerable to worsening economic conditions, they were

motivated to keep the truth secret so as to avoid losing their jobs and lucrative

performance-based executive compensation.

165. Defendants, as well as other senior Powerwave executives, received

incentive compensation, and such compensation was a significant part of their

compensation packages. The Company states that it intends to tie a "significant

portion of [executive officers] total annual compensation to our financial performance

as measured by certain factors measured during the fiscal year." The Company's

"executive compensation program" includes a "mix of base salary, annual

performance based cash incentives and long-term equity incentive awards."

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166. Under the Company's "Performance Based Cash Incentive Plan,"

Powerwave executives had "incentives. . . in the form of cash payments for achieving

certain objective performance goals based on quarterly [EBITDA]." According to

Powerwave: "For 2010, earned incentives were paid out quarterly with twenty-five

percent (25%) of each executives officer's earned quarterly incentive held back until

the end of the year and is payable following the end of the year. This is done to give

the Compensation Committee the discretion to adjust payouts based on company

performance for the entire fiscal year."

167. Defendants were eligible for - and received massive payouts under the

Company's executive compensation policy. In 2010 Michaels and Buschur each

received incentive compensation that more than quadrupled their total compensation.

In addition, defendants were eligible for and received massive stock awards and

option awards.

168. As detailed in the Company's SEC filings, defendants Michaels and

Buschur received the following nay-outs during 2009 and 2010:

Annual Total Equity Equity and Cash

Defendant Year Salary Bonus Awards Compensation

Buschur 2010 $600,058 $525,000 $2,808,763 $3,958,075

2009 $611,64118 - $204,820 $840,923

Michaels 2010 $450,058 $354,375 $968,133 $1,802,005

2009 $458,767 - $102,410 $593,416

169. The Company's compensation policies created an incentive for fraud. It

18 "The 2009 salaries include an extra week of compensation based on the fact that 2009 was a 53-week fiscal year. 2010 and 2008 were 52-week fiscal years."

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allowed executives to receive massive incentive compensation based on achieving

Company performance targets with no consequence to the executives if the financial

results were later determined to be achieved through fraud. In fact, had defendants

I properly accounted for the 3Q10 and 4Q10 "bulk orders," their performance-based

I compensation would have been substantially reduced. Defendants received incentive

compensation under the "executive compensation program" based on 3Q10 and 4Q10

conduct that plaintiffs allege to be fraudulent. See §VI-VIII, XI. And, the

Company's 25% "hold-back" policy gave them a huge incentive to engage in this

conduct at that time. Furthermore, as a result of the financial results from 2010, "the

Compensation Committee decided to increase the base salary of Mr. Buschur from

$600,000 to $700,000."

170. As detailed above, the incentive compensation at Powerwave played an

unusually large part of the defendants' total compensation. Collectively,

performance-based compensation comprised nearly 75% of the value of the

defendants total compensation for 2010.

171. Thus, the compensation culture at Powerwave, which guaranteed massive

incentive compensation based on fraudulent financial results, provided no mechanism

to recoup such improvidently paid bonuses, provided a strong motivation for fraud

and supports a strong inference of scienter.

C. Defendants' Fraudulent Conduct Allowed Defendants to Preserve Powerwave's Credit and Debt Ratings and Raise $100 Million in the July 20, 2011 Offering Thus Delaying a Bankruptcy Filing

172. The defendants were further motivated to obfuscate the problems with

Powerwave's business, inflate the Company's reported financial results, and keep

Powerwave's stock trading at artificially inflated levels in order to maintain positive

credit and debt ratings.

173. On February 1, 2011, the Company disclosed that it had amended its $50

million credit revolver with Wells Fargo to significantly more favorable terms to

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1 Powerwave. According to the Company: "The Amendment extends the maturity date

2 and the term of the Credit Agreement from August 15, 2011 to August 15, 2014. The

3 Amendment also reduces the interest rate under the Credit Agreement by reducing the

4 Base Rate Margin by 1.50% and the LIBOR Base Rate Margin by 0.75%."

5

174. After the truth was revealed that Powerwave's business was not nearly as

6 strong as it had claimed, Wells Fargo acted to amend the Credit Agreement. On

7 December 29, 2011, the Company announced that the Wells Fargo Credit Agreement

8 was amended and most significantly, Wells Fargo reduced the maximum amount that

9 can be borrowed from $50 million to $30 million.

10

175. Defendants were also motivated to carry out the scheme to raise critically

11 needed capital through the July 20, 2011 offering.

12

176. On July 20, 2011, Powerwave issued a press release announcing that it

13 had entered into a purchase agreement to which it would issue an aggregate of $100

14 million of 2.75% Convertible Senior Subordinated Notes due 2041. According to

15 Powerwave, the offering allowed the Company to repurchase $42.6 million in

16 aggregate principal amount of its outstanding l.875% Convertible Subordinated Notes

17 due 2024, leaving approximately $15.3 million in principal amount of its 1.875%

18 Notes outstanding. In addition, the Company stated that it was using approximately

19 $25 million from the offering to repurchase 11.2 million shares of its common stock

20 and would use the remaining net proceeds - over $30 million— to pay down additional

21 indebtedness and for working capital purposes.

22

177. The July 20, 2011, $100 million bond offering was critical to

23 Powerwave's ability to continue its operations. In fact, without this cash infusion the

24 Company would have wound up in bankruptcy even faster than it did. The timing of

25 this $100 million bond offering is also a red flag as it occurred just after defendants'

26 last minute $25 million 2Q11 bulk order but before the October 18, 2011 disclosure of

27 figures reflecting the Company's true financial condition. And, in selling the bonds,

28

:

849657_i

EM


I defendants failed to disclose any of the bulk orders, including the 1Q11 bulk order of

defective product where Powerwave explicitly waived payment.

178. The July 20, 2011, $100 million bond offering allowed the Company to

avoid bankruptcy until January 2013. Without this critical financing the Company

could not have lasted even the 15 months it did. And this allowed Buschur to gain

another $700,000 during 2012 and Michaels over $450,000 each during 2012.

D. Defendants' Misleading Statements About the Reasons for the 3Q11 "Nightmare" Support a Strong Inference of Scienter

179. When they were forced to disclose the truth defendants acted to off-set

the bad news by claiming that it was caused by an unexpected reduction in capital

expenditures by North American carriers. For example, defendants claimed there had

been "a significant slowdown in spending by North American network operators," and

that "the uncertainty arising from the government's recent opposition to the proposed

merger of AT&T and T-Mobile has led to delays in spending as these operators re-

evaluate their capital spending plans." Given defendants' repeated claims of strong

demand from North American network operators, analysts were bewildered by

defendants' explanation for the massive decline in demand - that AT&T and other

North American carriers were suddenly reducing capital expenditures - first, because

they were not aware of it, and second, because none of Powerwave's competitors

mentioned it when they reported their earnings. Indeed, financial analysts who follow

Powerwave's industry questioned the honesty of the defendants, pointedly challenging

defendants during Powerwave's November 1, 2011, conference call:

Tim Rebinoff - Fore Research and Management - Analyst * * *

And lastly, just kind of thinking about your announcements last

week in terms of AT&T and some of the other telcos slowing down, a

couple of tower companies actually reported today. And the message

that came from them was pretty much the exact opposite. They said

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there was no slowdown whatsoever. So I'm just trying to understand -

how do you think about that? Is there - I mean, what is it that I'm

missing in terms of what's happening with your Company versus some

of the other companies that are basically selling to the same end

customers? Thank you.

180. That defendants misled investors about the reasons for the 3Q11 miss

was further confirmed by financial analysts from Credit Suisse who closely monitor

AT&T's capital expenditures due to the impact it has on so many communications

infrastructure companies like Powerwave. In its October 21, 2011, report, Credit

Suisse bluntly noted that "of those communication equipment suppliers that have

reported or have 'preannounced' calendar third quarter operating results, we believe

that only Powerwave has specifically cited weak capital expenditure by AT&T as

being a significant contributor to its disappointing third-quarter results."

181. The truth was that there was no sudden slowdown but, that Powerwave's

customers - particularly Team Alliance - would not (and could not) take on any more

inventory. See §VI-VIII, X-XI.

E. SOX Certification

1. Defendants Signed False Statements Regarding Powerwave's Internal Controls and Procedures

182. Defendants Buschur and Michaels signed Sarbanes-Oxley ("SOX")

certifications accompanying Powerwave's 2010 Form 10-K, filed on February 17,

2011, Form 10-Q for 1Q11, filed on May 9, 2011, and Form 10-Q for 2Q11 filed on

August 10, 2011. Each certification stated in pertinent part:

2. Based on my knowledge, this report does not contain any

untrue statement of a material fact or omit to state a material fact

necessary to make the statements made, in light of the circumstances

under which such statements were made, not misleading with respect to

the period covered by this report;

Wilm

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3. Based on my knowledge, the financial statements, and other

2

financial information included in this report, fairly present in all material

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respects the financial condition, results of operations and cash flows of

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the Registrant as of, and for, the periods presented in this report;

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4. The Registrant's other certifying officer and I are

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responsible for establishing and maintaining disclosure controls and

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procedures (as defined in Exchange Act Rules 13 a- 15(e) and 15d- 15(e))

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and internal control over financial reporting (as defined in Exchange Act

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Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:

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(a) Designed such disclosure controls and procedures, or

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caused such disclosure controls and procedures to be designed under our

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supervision, to ensure that material information relating to the

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Registrant, including its consolidated subsidiaries, is made known to us

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by others within those entities, particularly during the period in which

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this report is being prepared;

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(b) Designed such internal control over financial reporting, or

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caused such internal control over financial reporting to be designed

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under our supervision, to provide reasonable assurance regarding the

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reliability of financial reporting and the preparation of financial

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statements for external purposes in accordance with generally accepted

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accounting principles; [and]

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(c) Evaluated the effectiveness of the Registrant's disclosure

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controls and procedures and presented in this report our conclusions

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about the effectiveness of the disclosure controls and procedures, as of

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the end of the period covered by this report based on such evaluation[.]

26

183. Defendants Buschur and Michaels also signed the 2010 Form 10-K filed

27 with the SEC on February 17, 2011, that included the additional following assurances

28 concerning Powerwave's controls.

849657_i


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Our management, with the participation of our principal executive

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officer and principal financial officer, evaluated the effectiveness of our

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disclosure controls and procedures (as such term is defined in Rules 13a-

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15(e) and 15d-15(e) under the Exchange Act). . . . We maintain

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disclosure controls and procedures that are designed to provide a

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reasonable assurance level that information required to be disclosed in

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our reports filed or submitted under the Exchange Act is recorded,

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processed, summarized and reported within the time periods specified in

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the SEC's rules and forms and that such information is accumulated and

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communicated to our management, including our principal executive

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officer and principal financial officer, as appropriate, to allow for timely

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decisions regarding required disclosure.... Based upon the evaluation

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of our disclosure controls and procedures . . . our principal executive

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officer and principal financial officer concluded that.. . our disclosure

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controls and procedures were effective at the reasonable assurance level.

16 * * *

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Our management is responsible for establishing and maintaining

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adequate internal control over our financial reporting (as defined in Rule

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13a-15(f) and Rule 15d-15(f) under the Exchange Act). Our

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management assessed the effectiveness of our internal controls over

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financial reporting as of January 2, 2011. In making its assessment of

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the effectiveness of our internal controls over financial reporting, our

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management used the criteria set forth by the Committee of Sponsoring

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Organizations of the Treadway Commission ("COSO") in Internal

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Control—Integrated Framework. Based on these criteria, our

26

management has concluded that, as of January 2, 2011, our internal

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controls over financial reporting are effective.

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Case 8:12-cv-00222-CJC-JPR Document 72 Filed 06/14/13 of 116 Page ID H #:1456

184. Additionally, defendants Buschur and Michaels signed Powerwave's

Form 10-Q for 1Q11, filed on May 5, 2011, and Form l0-Q for 2Qll filed on July 3,

2011. Both filings adopted the previous internal controls assurances set forth in ¶183

by repeating the assurances regarding disclosure controls and by stating there had

been no change to internal controls over financial reporting that occurred during the

reporting period that materially affected, or were reasonably likely to materially

affect, Powerwave's internal controls over financial reporting.

2. Reasons Why Defendants' Internal Controls and Procedure Statements Were Materially False and Misleading

185. Defendants' statements concerning Powerwave' s internal controls and

procedures and SOX certifications were false and misleading. As detailed herein,

Powerwave's management circumvented internal controls and procedures, causing

Powerwave to falsely report its financial results included in publicly issued financial

statements, press releases and conference calls, which improperly inflated the

Company's revenue and earnings.

186. Management of any public company is responsible for establishing and

maintaining adequate internal control over financial reporting as defined in 15 U.S.C.

§78m-o under the 1934 Act. AU 319.06, Internal Control in a Financial Statement

Audit, defines internal control as "a process - effected by an entity's board of

directors, management, and other personnel - designed to provide reasonable

assurance regarding the achievement of objectives in the following categories: (a)

reliability of financial reporting, (b) effectiveness and efficiency of operations, and (c)

compliance with applicable laws and regulations."

187. Section 13(b)(2) of the 1934 Act states, in pertinent part, that every

reporting company must: "(A) make and keep books, records, and accounts, which, in

reasonable detail, accurately and fairly reflect the transactions and dispositions of the

assets of the issuer; [and] (B) devise and maintain a system of internal accounting

controls sufficient to provide reasonable assurances that. . . transactions are recorded

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1 as necessary. . . to permit preparation of financial statements in conformity with

2 [GAAP]." 15 U.S.C. §78m(b)(2)(A)(B). These provisions require an issuer to

3 employ and supervise reliable personnel to maintain reasonable assurances that

4 transactions are executed as authorized, to properly record transactions on an issuer's

5 I books and, at reasonable intervals, to compare accounting records with physical

6 I assets.

7

188. Here, defendants claimed Powerwave' s internal control procedures

8 complied with the standards adopted by the Committee of Sponsoring Organizations

9 of the Treadway Commission ("COSO"). The COSO standards constitute a specific

10 internal control model, and require adopting entities to have: (i) a disciplined and

11 structured control environment; (ii) direct involvement by management in identifying

12 and analyzing internal control risks, rather than reliance on auditors; (iii) formal

13 policies, procedures and practices that ensure control activities are being properly

14 carried out; (iv) accurate and timely communication of control responsibilities to

15 employees; and (v) continual monitoring by management of the controls through

16 formalized procedures or checklists. Had defendants followed these control

17 guidelines as they represented, the falsity of Powerwave's revenue, income and

18 earnings pled herein would have been apparent. Rather, defendants circumvented

19 controls to improperly inflate the Company's revenue and earnings.

20

189. As detailed in § §VI-XI, Powerwave' s financial statements contained

21 untrue statements and omitted material facts as alleged herein. Defendants' attestation

22 to the sufficiency of disclosure controls and procedures and internal controls over

23 financial reporting misled investors into believing that Powerwave's Class Period

24 financials fairly represented the financial condition of the Company when, in fact,

25 they materially overstated Powerwave's revenues and bottom-line.

26

190. Defendants' "review" ofPowerwave's financial statements, "evaluation"

27 of Powerwave's disclosure controls, and "evaluation' ' 'of Powerwave's internal control

28 over financial reporting that defendants certified they had personally performed in the

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above SOX certifications, would clearly have alerted defendants to the presence of the

misstatements described herein and to weaknesses in internal controls.

Therefore, defendants either knew of the misstatements in the financial statements, the

ineffectiveness of the disclosure controls and the weaknesses in internal controls or

defendants knowingly failed to carry out the required review of the financial

statements, evaluation of internal controls, and evaluation of disclosure controls (as

they stated they had done in the certifications). In either case, defendants knew or

recklessly disregarded that the SOX certifications they signed were false.

F. Expert Opinion Confirms that Defendants Were Aware of the Improper Revenue Recognition

191. Greg J. Regan, an expert on accounting fraud - who has previously been

retained by the SEC to "evaluate the conduct of management involving allegations of

improper revenue recognition" - has reviewed the allegations in this case. See Ex. A

to the Declaration of Greg J. Regan (attached hereto) at 1. Having reviewed the

allegations, Mr. Regan was asked to opine on whether the Company violated generally

accepted accounting principles (GAAP) related to revenue and earnings recognition.

192. Mr. Regan concluded that recognizing revenue on the bulk orders was a

violation of GAAP. Moreover, Mr. Regan concluded that "if the allegations in the

[complaint] are true, the CEO and CFO were aware that Powerwave's financial

statements were materially misstated." Ex. A at 3 (emphasis added).

193. In addition, Mr. Regan noted that, assuming it was true that Powerwave

was not demanding payment from Team Alliance, as alleged, "this would require

additional revenue disclosures." Id. at 4. "Specifically, ASC 605-10-S99-1 requires

additional revenue disclosures for certain types of revenue transactions or events

including, 'Granting of extended payment terms that will result in a longer collection

period for accounts receivable (regardless of whether revenue has been recognized).'

FAC ¶150." Id. Thus, "fb]y not demanding payment, Powerwave was effectively

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1 granting exten dedpayment terms, and required to make an appropriate disclosure."

2 lId. (emphasis added).

3

194. Mr. Regan also concluded that the bulk orders to Team Alliance were

4 material. Importantly, as noted by SEC Staff Accounting Bulletin No. 99, among the

5 considerations that render material a misstatement of a financial statement are whether

6 the misstatement: "masks a change in earnings or other trends... [and] whether the

7 misstatement hides a failure to meet analysts' consensus expectations for the

8 enterprise." Id. at 6 (emphasis added).

9

195. Furthermore, Mr. Regan analyzed the accounts receivable attributed to

10 Team Alliance and Powerwave's DSO. As Mr. Regan explained, "CPAs customarily

11 examine analytical relationships such as that between revenue and accounts receivable

12 (e.g., AU 316, Consideration of Fraud in a Financial Statement Audit, ¶29, '[T]he

13 auditor also should perform analytical procedures relating to revenue with the

14 objective of identifying unusual or unexpected relationships involving revenue

15 accounts that may indicate a material misstatement due to fraudulent financial

16 reporting)." Id. at 6. After analyzing the accounts receivable attributed to Team

17 Alliance, Mr. Regan concluded that: "[t]he relationship evident in 3Q2011 indicated 18 : Team Alliance either was unwilling to pay Powerwave on a timely basis, did not have

19 to pay Powerwave on a timely basis, or could not pay Powerwave on a timely basis.

20 In any of these situations, the validity of Powerwave's revenue recognition on the

21 sale of the inventory through the Team Alliance channel is called into question."

22 Id. at 6 (emphasis added). And, after analyzing the 92% DSO spike during the Class

23 Period, Mr. Regan explained that "[t]his increase would also be another red flag

24 associated with fictitious revenue and financial statement manipulation." Id. at 6

25 (citing Fraud Examiners Manual 2011 U.S. Edition, Association of Certified Fraud

26 Examiners, § 1311 ("The following redflags are associated with fictitious revenues

27 unusual growth in the days' sales in receivables ratio.")).

28

8496571

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1 II XV. LOSS CAUSATION/ECONOMIC LOSS

2

196. During the Class Period, as detailed herein, the defendants made false

3 and misleading statements and engaged in a scheme to deceive the market and a

4 course of conduct that artificially inflated the prices of Powerwave securities and

5 operated as a fraud or deceit on Class Period purchasers of Powerwave securities by

6 misrepresenting the Company's business and prospects. Later, when the defendants'

7 prior misrepresentations and fraudulent conduct became apparent to the market, the

8 price of Powerwave securities fell precipitously, as the prior artificial inflation came

9 out of the price over time. As a result of their purchases of Powerwave securities

10 during the Class Period, plaintiffs and other members of the class suffered economic

11 loss, i.e., damages, under the federal securities laws.

12

197. At all relevant times, the material misrepresentations and omissions

13 particularized in this Complaint directly or proximately caused or were a substantial

14 contributing cause of the damages sustained by plaintiffs and other members of the

15 class. As described herein, during the Class Period, defendants made or caused to be

16 made a series of materially false or misleading statements about Powerwave's

17 business, prospects and operations. These material misstatements and omissions had

18 the cause and effect of creating in the market an unrealistically positive assessment of

19 Powerwave and its business, prospects, and operations, thus causing the Company's

20 common stock to be overvalued and artificially inflated at all relevant times.

21 Defendants' materially false and misleading statements during the Class Period

22 resulted in plaintiffs and other members of the class purchasing the Company's

23 common stock at artificially inflated prices, thus causing the damages complained of

24 herein, upon defendants' revelations of the truth and resulting collapse of

25 Powerwave's stock price.

26

198. The inflation in Powerwave stock was dissipated through a series of

27 partial disclosures of the truth that revealed that, contrary to its representations, its

28 statements were false and the Company was not nearly as successful as it had claimed.

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849657_i


1 Asa direct result of disclosures on July 12, 2011 and October 18, 2011, Powerwave's

2 stock price suffered statistically significant declines. The significant stock price

3 declines upon release of information reflecting the Company's true financial condition

4 were due to firm-specific information, and not a result of market or industry. The

5 I following examples are not exhaustive because fact and expert discovery have yet to

6 I commence.

7

199. On July 12,2011, Powerwave disclosed that demand was not as strong as

8 it had claimed, that there was "slowness in several of our markets," that it was

9 reducing 2Q11 guidance, and reducing full-year 2011 guidance. These partial

10 revelations regarding the truth about demand for Powerwave's products caused

11 Powerwave's stock to drop from $2.77 per share on July 11, 2011, to $2.10 per share

12 on July 13, 2011, a decline of nearly 25%, on unusually high volume. But defendants

13 continued to conceal the scope of the problems facing the Company, repeatedly

14 issuing false glowing statements about present demand— and, on August 4,2011, even

15 increased full year 2011 guidance.

16

200. Then, on October 18, 2011, defendants disclosed figures reflecting the

17 Company's true financial condition revealing that 3Q11 revenues would be less than

18 50% of estimates (the worst revenue quarter since 2004), that there was "some

19 inventory sitting there being positioned for the next couple of quarters," at North

20 American customers, and that the biggest decline in demand was at North American

21 customers. As a direct result of defendants' revelations regarding previously

22 concealed risks and the truth about Powerwave's previous representations regarding

23 the demand for Powerwave's products, Powerwave's stock price plummeted from

24 $1.46 per share to a low of $0.68 per share, or over 40%, on extremely heavy trading

25 volume of over four million shares. See also §VIII.C.3. On that day the NASDAQ

26 fell 2%. Individually and collectively, these drops removed the inflation from

27 Powerwave's stock price, causing real economic loss to investors who had purchased

28 the stock during the Class Period.

849657_i


201. In sum, the significant decline in Powerwave's stock price was a direct

result of the nature and extent of defendants' fraud finally being revealed to investors

and the market. The timing and magnitude of Powerwave's stock price decline

negates any inference that the loss suffered by plaintiffs and other class members was

caused by changed market conditions, macroeconomic or industry factors, or

Company-specific facts unrelated to the defendants' fraudulent conduct. The

economic loss, i.e., damages, suffered by plaintiffs and other class members was a

direct result of defendants' fraudulent scheme to artificially inflate Powerwave's stock

price and the subsequent significant decline in the value of Powerwave's stock when

defendants' prior misrepresentations and other fraudulent conduct was revealed.

XVI. ANY PURPORTED RISK WARNING WERE INADEQUATE OR MATERIALLY FALSE AND MISLEADING

202. Even though the Company's earnings press releases, conferences calls

and other Class Period statements may have been accompanied by purported risk

warnings or warnings that certain statements may be forward-looking, they did not

adequately warn investors about the materially false and misleading statements

alleged herein. These risk warning: (i) were false or misleading as a matter of current

or historical fact; and/or (ii) were not meaningful because among other things, they

were vague, boilerplate and did not adequately warn of the true risks of investing in

Powerwave.

XVII. NO SAFE HARBOR

203. Powerwave's verbal "Safe Harbor" warnings accompanying its oral

forward-looking statements ('TLS") issued during the Class Period were ineffective to

shield those statements from liability.

204. The defendants are also liable for any false or misleading FLS pleaded

because, at the time each FLS was made, the speaker knew the FLS was false or

misleading and the FLS was authorized and/or approved by an executive officer of

Powerwave who knew that the FLS was false. None of the historic or present tense

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1 statements made by defendants were assumptions underlying or relating to any plan,

projection, or statement of future economic performance, as they were not stated to be

3 such assumptions underlying or relating to any projection or statement of future

4 economic performance when made, nor were any of the projections or forecasts made

5 by defendants expressly related to or stated to be dependent on those historic or

6 present tense statements when made.

7 XVIII. APPLICABILITY OF PRESUMPTION OF RELIANCE: FRAUD-ON-THE MARKET

8

9 205. Plaintiffs will rely upon the presumption of reliance established by the

10 fraud-on-the-market doctrine in that, among other things:

11 (a) defendants made public misrepresentations or failed to disclose

IPI material facts during the Class Period;

13 (b) the omissions and misrepresentations were material;

14 (c) the Company's stock traded in an efficient market;

15 (d) the misrepresentations alleged would tend to induce a reasonable

16 investor to misjudge the value of the Company's stock; and

17 (e) plaintiffs and other members of the class purchased Powerwave

18 stock between the time defendants misrepresented or failed to disclose material facts

19 and the time the true facts were disclosed, without knowledge of the misrepresented or

omitted facts. 20

21 206. At all relevant times, the market for Powerwave stock was efficient for

22 the following reasons, among others:

23 (a) since well before the Class Period, Powerwave's stock has been

24 listed and actively traded on the NASDAQ National Market, a highly efficient and

automated market; 25

26 (b) as a regulated issuer, Powerwave filed periodic public reports with

27 the SEC; and

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(c) Powerwave regularly communicated with public investors via

established market communication mechanisms, including through regular

disseminations of press releases on the major news wire services and through other

wide-ranging public disclosures, such as communications with the financial press,

securities analysts and other similar reporting services.

XIX. CLASS ACTION ALLEGATIONS

207. Plaintiffs bring this action as a class action pursuant to Rule 23 of the

Federal Rules of Civil Procedure on behalf of all persons who purchased or otherwise

acquired Powerwave securities during the Class Period (the "Class"). Excluded from

the Class are defendants and their families, the officers and directors of the Company,

at all relevant times, members of their immediate families and their legal

representatives, heirs, successors, or assigns and any entity in which defendants have

or had a controlling interest.

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

impracticable. The disposition of their claims in a class action will provide substantial

benefits to the parties and the Court. Powerwave has 100,000,000 shares of stock

outstanding, owned by hundreds of persons. 19

209. There is a well-defined community of interest in the questions of law and

fact involved in this case. Questions of law and fact common to the members of the

Class which predominate over questions which may affect individual Class members

include:

(a) whether the 1934 Act was violated by defendants;

(b) whether defendants omitted and/or misrepresented material facts;

19 As noted, on October 28, 2011, Powerwave announced a 1-for-5 reverse stock split of its outstanding shares of common stock and a reduction in the number of authorized shares of its common stock, each of which were effective as of October 28, 2011. The 1 -for-5 reverse stock split reduced the number of authorized shares of common stock from 250,000,000 to 100,000,000.

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(c) whether defendants' statements omitted material facts necessary to

make the statements made, in light of the circumstances under which they were made,

not misleading;

(d) whether defendants knew or deliberately disregarded that their

statements were false and misleading;

(e) whether the prices of Powerwave securities were artificially

inflated; and

(f) the extent of damage sustained by Class members and the

appropriate measure of damages.

210. Plaintiffs' claims are typical of those of the Class because plaintiffs and

the Class sustained damages from defendants' wrongful conduct.

211. Plaintiffs will adequately protect the interests of the Class and has

retained counsel who are experienced in class action securities litigation. Plaintiffs

have no interests which conflict with those of the Class.

212. A class action is superior to other available methods for the fair and

efficient adjudication of this controversy.

CLAIMS FOR RELIEF

COUNT I

For Violation of §10(b) of the 1934 Act and Rule 10b-5 Against All Defendants

213. Plaintiffs incorporate ¶111-212 by reference.

214. During the Class Period, defendants disseminated or approved the false

statements specified above, which they knew or deliberately disregarded were

misleading in that they contained misrepresentations and failed to disclose material

facts necessary in order to make the statements made, in light of the circumstances

under which they were made, not misleading.

215. Defendants violated §10(b) of the 1934 Act and Rule 1 Ob-5 in that they:

(a) employed devices, schemes and artifices to defraud;

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(b) made untrue statements of material facts or omitted to state

material facts necessary in order to make the statements made, in light of the

circumstances under which they were made, not misleading; or

(c) engaged in acts, practices, and a course of business that operated as

a fraud or deceit upon plaintiffs and others similarly situated in connection with their

I purchases of Powerwave securities during the Class Period.

216. Plaintiffs and the Class have suffered damages in that, in reliance on the

integrity of the market, they paid artificially inflated prices for Powerwave securities.

Plaintiffs and the Class would not have purchased Powerwave securities at the prices

they paid, or at all, if they had been aware that the market prices had been artificially

and falsely inflated by defendants' misleading statements.

COUNT II

For Violation of §20(a) of the 1934 Act Against All Defendants

217. Plaintiffs incorporate ¶111-216 by reference.

218. The defendants acted as controlling persons of Powerwave within the

meaning of §20(a) of the 1934 Act. By reason of their positions with the Company,

and their ownership of Powerwave securities, the defendants had the power and

authority to cause Powerwave to engage in the wrongful conduct complained of

herein. Powerwave controlled the defendants and all of its employees. By reason of

such conduct, defendants are liable pursuant to §20(a) of the 1934 Act.

PRAYER FOR RELIEF

WHEREFORE, plaintiffs pray for judgment as follows:

A. Declaring this action to be a proper class action pursuant to Fed. R. Civ.

P. 23;

B. Awarding plaintiffs and the members of the Class damages, including

interest;

C. Awarding plaintiffs reasonable costs and attorneys' fees; and

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1 D. A warding such equitable' injunctive or other relief as the court may deem

2 just and proper.

3 JURY DEMAND

4 Plaintiffs demand a trial by jury.

5 DATED: June 14, 2013 R(J13Bfl'S GH LI R RUDN1\N .. DOWD LLI

6 1).\RR1N J. R()l3L31N I ROBERT k. FIE NSS1/hRJR.

7 I l' 1 K LU /

__- R c,BLRT R .t IlL N SSLER JR.

10 655 West Broadwa\, ISuite 1900 San Dieo, CA 92101-3301

'I Telephone: 619/23 1-1058 12 619P-31-7423 (fax)

13 Lead Counsel Plaintiff

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EXHIBIT A


ROBBINS GELLER RUDMAN & DOWD LLP

DARREN J. ROBBINS (168593) ROBERT R. HENSSLER JR. (216165) ROBERT K. LU (198607) 655 West Broadway, Suite 1900 San Diego, CA 92101-3301 Telephone: 619/231-1058 619/231-7423 (fax) darrenr@rgrdlaw. corn bhensslerrgrdlaw. corn [email protected]

Lead Counsel for Plaintiff

UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA

SOUTHERN DIVISION

PAWEL I. KMIEC, Individually and on No. 8: 12-cv-00222-CJC(JPRx) Behalf of All Others Similarly Situated,

CLASS ACTION Plaintiff,

DECLARATION OF GREG J. REGAN vs.

POWERWAVE TECHNOLOGIES INC., et al.,

Defendants.

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1

I have been retained by plaintiffs' counsel in the matter of Pawl I. Kmec v.

2 Powerwave Technologies, Inc., I have been asked to review the Corrected First

3 Amended Consolidated Complaint for Violations of the Federal Securities Laws, filed

4 on February 26, 2013 ("FAC"). In particular, I have been asked, assuming the

5 allegations made by former employees of Powerwave Technologies ("Powerwave")

6 regarding the actions of management are true (the Confidential Witnesses or CWs),

7 whether the Company violated generally accepted accounting principles ("GAAP")

8 related to revenue and earnings recognition.

9 I. Qualifications

10

I am a Certified Public Accountant ("CPA"), licensed in California and New

11 York. I hold the Certified in Financial Forensics ("CFF") certification from the

12 American Institute of Certified Public Accountants ("AICPA") and the Certified

13 Fraud Examiner ("CFE") certification.

14

My work in the accounting profession includes experience as an auditor at Ernst

& Young LLP, as the Controller of a publicly traded software company, and as a

16 consultant. Each of these experiences has involved analysis of the accounting for sales

17 to distributors such as those described in the FAC. In particular, in my role as a

18 consultant, I have been engaged by Audit Committees to investigate concerns

19 expressed by the United States Securities and Exchange Commission Division of

20 Enforcement ("SEC") that management of the Company at issue had engaged in

21 improper revenue recognition activities. In these instances, I have interacted directly

22 with the SEC staff related to the procedures I performed and analyses I conducted. I

23 have been also been retained as an expert by the SEC in separate matters to evaluate

24 the conduct of management involving allegations of improper revenue recognition.

25

I am a member of the AICPA, where I currently serve on the Forensic &

26 Litigation Services ("FLS") Committee. The eleven-member FLS committee oversees

27 and provides guidance to the AICPA's members in their practice as it relates to

28 litigation consulting such as misrepresentations regarding financial statements. I am

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I also an Adjunct Professor at Golden Gate University where I teach graduate

accounting courses. My expert qualifications are described in my C.V. attached

hereto as Exhibit 1.

II. The Allegations

Several CWs have explained that Powerwave recorded revenue associated with

"bulk orders" (e.g., FAC ¶35). The bulk orders ranged in amounts from $15 to $25

million each quarter from Q3 2010 through Q2 2011 between Powerwave and Team

Alliance, a significant reseller. FAC ¶53. These bulk orders were (a) significant

dollar-value transactions with resellers, (b) occurring at the end of quarterly

accounting periods, (c) containing abnormal terms and (d) involving unsellable or

defective product. FAC ¶15 , 35.

The abnormal terms are particularly significant to the determination of the

appropriate accounting for the transactions. Specifically, the FAC alleges that

Powerwave: (1) provided Team Alliance a right to return the products if Team

Alliance could not sell the products (FAC ¶40); (2) knowingly shipped defective

products that would need to be replaced in a later quarter (FAC ¶1J54-56); and (3) did

not require Team Alliance to pay for the products. FAC ¶143. In essence,

Powerwave used these devices to relax its normal customer credit policies. In doing

so, the risk associated with the bulk orders was reduced or eliminated to induce Team

Alliance to enter into otherwise unwanted or unnecessary orders (e.g., FAC ¶J57-58).

III. Powerwave's CFO and CEO Certified that the Company's Internal Controls Provide Reasonable Assurance that the Financial Statements Were Prepared in Accordance with GAAP

As a result of the Sarbanes-Oxley Act of 2002 ("SOX"), the responsibilities and

reporting requirements of the Chief Executive Officer ("CEO") and Chief Financial

Officer ("CFO") were heightened in order to reduce the incidents of improper

financial reporting. In accordance with SOX Section 302, in Powerwave's SEC

filings, its President and CEO, Ronald J. Buschur ("Buschur"), and CFO, Kevin

Michaels ("Michaels"), made numerous certifications regarding the reliability of the

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Company's financial statements and internal control over financial reporting. (See,

e.g., Exs. 31.1 and 31.2 to Powerwave 2011 Form 10-K.) Among other certifications,

these included that the financial statements did not contain any untrue statements or

omit to state a material fact that would render the financial statements misleading. Id.

These certifications also stated that the CEO and CFO had designed the Company's

internal control over financial reporting to provide reasonable assurance that the

Company's financial statements were prepared in accordance with GAAP. Id.

But, the FAC alleges that a "gap report" went to senior executives which

showed the total amount of bulk orders needed to bridge the gap between

Powerwave's actual revenue and its desired revenue. FAC ¶51. In addition, the FAC

alleges that the bulk orders were approved by Buschur and Michaels. FAC ¶J43, 53.

Thus, if the allegations in the FAC are true, the CEO and CFO were aware that

Powerwave's financial statements were materially misstated. Moreover, Powerwave's

Control Environment (e.g., its Tone-at-the-Top) was seriously undermined and the

Company's internal control over financial reporting was likely ineffective. As such,

the certifications made by Buschur and Michaels would have been false and

misleading.

IV. Powerwave's Recognition of Revenue on the Bulk Orders Was Not in Accordance with GAAP

GAAP deal with bona fide transactions. If, as the allegations in the FAC

suggest, the bulk orders lacked a legitimate business purpose (e.g., shipping defective

product), Powerwave should not have recognized income at any time from the bulk

orders. This is because Powerwave's commitment to accept the return of the product

negated the earnings process. It is axiomatic in GAAP that accounting should follow

the substance rather than the form of a transaction if these differ. Statement of

Financial Accounting Concepts No. 2 ¶160 ("The quality of reliability and, in

particular, of representational faithfulness leaves no room for accounting

representations that subordinate substance to form.").

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1

Even assuming that the bulk orders were legitimate transactions, if the

2 allegations in the FAC are accurate, Powerwave's recognition of revenue at the time

3 the transactions were executed was improper. This is because, for accounting

4 purposes, the unifying theme of the bulk order enticements is that Powerwave

5 provided Team Alliance with rights to return unwanted products. When the right of

return exists, GAAP set forth specific conditions that must all be met prior to the

7 recognition of revenue for these types of transactions. FAC ¶140 (citing ASC 605-15-

8 25-1 to 4, Revenue Recognition, Products, Sales of Product when Right of Return

9 Exists). With respect to the bulk orders, the most relevant condition is that

10 Powerwave could not have allowed Team Alliance to delay payment for the products

11 until resale occurred. FAC ¶140 ("ASC 605-15-25-1 clearly and concisely states...

12 [t]he buyer has paid the seller, or the buyer is obligated to pay the seller and the

13 obligation is not contingent on resale of the product."). As such, if the allegations in

14 the FAC are accurate (FAC ¶1J40, 54-56, 143), Powerwave's recognition of revenue

15 associated with the bulk orders in each quarter was a violation of GAAP.

16

Additionally, assuming it was true that Powerwave was not demanding payment

17 from Team Alliance, this would require additional revenue disclosures. Specifically,

18 ASC 605-10-S99-1 requires additional revenue disclosures for certain types of

19 revenue transactions or events including, "Granting of extended payment terms that

20 will result in a longer collection period for accounts receivable (regardless of whether

21 revenue has been recognized)." FAC ¶150. By not demanding payment, Powerwave

22 granted extended payment terms, and it was required to make appropriate disclosures.

23

Moreover, even if the bulk orders satisfied all of the conditions set forth in

24 GAAP for revenue recognition, Powerwave still must have been able to reasonably

25 estimate the amount of product that would have ultimately been returned. GAAP

require that the costs or losses associated with estimated returns be recorded at the

27 same time the revenue is recognized. ASC 605-15-25-2. Once again, GAAP set forth

factors that impair an entity's ability to make a reasonable estimate, including 1)

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1 susceptibility, to change in demand, 2) relatively long periods over which the product

2 may be returned, and 3) an absence of large volume of relatively similar transactions.

3 Powerwave was also required to consider whether the sale resulted in "significant

4 increases in or excess levels of inventory in a distribution channel (sometimes referred

5 to as 'channel stuffing')." SEC Staff Accounting Bulletin ("SAB") No. 104 at 66,

6 codified as Topic No. 13(A)(4)(b). All of these factors were present with respect to

7 Powerwave's bulk orders. Thus, even if Powerwave had relevant historical

8 experience from which to estimate the level of returns associated with its routine

9 transactions, that experience was not applicable to the bulk orders with Team

10 Alliance. Ultimately, the same answer is reached: Powerwave's recognition of

11 revenue on the bulk orders failed to comply with GAAP.

12 V. Materiality

13

I have reviewed Powerwave's quarterly financial statements filed with the SEC

14 and noted that quarterly net sales were approximately $156 million in Q3 2010, $136

15 million in Qi 2011, $170 million in Q2 2011. (Powerwave Technologies Inc., 10-Q

16 filed on November 2, 2010, Powerwave Technologies Inc., 10-Q filed on May 9,

17 2011, and Powerwave Technologies Inc., 10-Q filed on August 10, 2011.) In my

18 opinion, a decrease of$ 15 to $25 million dollars in sales each quarter, which would be

19 as high as 15% of total net sales in Q2 2011, would have had a material quantitative

20 effect on Powerwave's sales and its overall financial statements. Additionally, the

21 SEC added explanatory guidance for interpreting materiality under GAAP in Staff

22 Accounting Bulletin No. 99 (SAB 99) that describes not only the quantitative

23 threshold of materiality but also the qualitative considerations. In my opinion, based

24 on the allegations of the confidential witnesses that stated that the impact of the bulk

25 orders, "caused Powerwave to report artificially inflated financial results in an effort

26 to meet or exceed Powerwave's financial guidance" (FAC ¶4), the recognition of

27 revenue related to the bulk orders would have a material effect on the financial

28 statements. SAB 99 ("Among the considerations that may well render material a

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1 quantitatively small misstatement of a financial statement item are. . . whether the

2 misstatement masks a change in earnings or other trends . . . [and] whether the

3 misstatement hides a failure to meet analysts' consensus expectations for the

4 enterprise.").

5 VI. Accounts Receivable

6

The FAC alleges that the growth in the balance of accounts receivable due from

7 Team Alliance outpaced the growth in sales to Team Alliance from Q3 2010 through

8 Q3 2011. FACJ63-64.

9

As an example, in Q3 2011, Powerwave's sales to Team Alliance totaled $2.3

10 million. At the end of this period though, the balance of account receivables attributed

11 to Team Alliance totaled approximately $50.3 million. FAC ¶64. CPAs customarily

12 examine analytical relationships such as that between revenue and accounts receivable

13 (e.g., AU 316, Consideration of Fraud in a Financial Statement Audit, ¶29, "[T]he

14 auditor also should perform analytical procedures relating to revenue with the

15 objective of identifying unusual or unexpected relationships involving revenue

16 accounts that may indicate a material misstatement due to fraudulent financial

17 reporting."). See also PCAOB Release No. 2010-004, ¶47. The relationship evident

18 in Q3 2011 indicated Team Alliance either was unwilling to pay Powerwave on a

19 timely basis, did not have to pay Powerwave on a timely basis, or could not pay

20 Powerwave on a timely basis. In any of these situations, the validity of Powerwave's

21 revenue recognition on the sale of the inventory through the Team Alliance channel is

22 called into question.

23

Furthermore, it is my understanding that Powerwave's days sales outstanding,

24 DSO, which is a financial metric that represents the average number of days required

25 to collect the related receivable, increased from 91 days in 3Q 2010 to 175 days in 3Q

26 2011 - a 92% increase. FAC ¶J 65-66. This increase would also be another red flag

27 associated with fictitious revenue and financial statement manipulation. Fraud

28 Examiners Manual 2011 U.S. Edition, Association of Certified Fraud Examiners,

8502781

Case 8:12-cv-00222-CJC-JPR Document 72 Filed 06/14/13 of 116 Page ID II #:1476 1

1 § 1311 ("The following red flags are associated with fictitious revenues. . . unusual

2 growth in the days' sales in receivables ratio.")

3

I declare under penalty of perjury under the laws of the United States of

4 America that the foregoing is true and correct.

5 Dated: June 14, 2013

6

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8 Greg jan

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EVE

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EXHIBIT 1

WIN

e 109 of 116 Page ID Case 8:12-cv-00222-CJC-JPR

JRLlll

Greg Regan, CPA/CFF, MBA Profile

Greg Regan is a Partner in the Litigation and Forensic Consulting Services Group in the San Francisco office of Hemming Morse, LLP. He serves on the American Institute of CPA's ('AICPA") Forensic and Litigation Services ('FLS") Committee. This 11-member committee provides professional guidance to CPA practitio-ners who perform accounting investigations, economic damage analyses such as lost profits calculations, and a variety of other services. Greg is the current Chair of the AICPA's Damages Task Force. Greg received the AICPA's 2012 Award for the FLS Volunteer of the Year.

Greg has testified in federal and state courts as well as in arbitrations regarding these types of forensic analyses. Greg is also an Adjunct Professor at Golden Gate University, where he teaches forensic account-ing to graduate students. Greg is a Certified Public Accountant (CPA), a Certified Financial Forensic (CFO, and a Certified Fraud Examiner (CFE). Greg serves as an Officer of the California Society of Certified Public Accountants (CaICPA) statewide Forensic Services Committee.

Greg received his B.S. degree in Accounting from Georgetown University, Washington, D.C., and his Masters in Business Administration with an Emphasis in Finance from the University of San Francisco. When he's not working lie enjoys spending time with his wife and coaching the sports teams of his two boys.

San Francisco Office 101 Montgomery Street Suite 1400 San Francisco, CA 94104 Tel: 415.835.4000 Fax: 415.777.2062

San Mateo Office 155 Bovet Road Suite 600 San Mateo, CA 94402 Tel: 415.836.4000 Fax: 415.777.2062

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LL 1479

VHrP

Greg Regan, au:i Employment & Education

2012— Present Hemming Morse, LLP Certified Public Accountants and Forensic Consultants Partner

2003-2011 Hemming Morse, Inc. Certified Public Accountants Litigation and Forensic Consultants Director, 2007-2011 Manager, October 2003-2006

2009 - Present Golden Gate University Adjunct Professor Introduction to Financial Forensic Accounting, Spring 2009-present An In-Depth Analysis of Economic Damages, Fall 2010

1999-2003

1995-1999

2004 - 2007

1995

SupportSoft, Inc. (Nasdaq: SPRT) Controller, February 2001- October 2003 Accounting Manager, April 1999- February 2001

Ernst & Young, LLP SeniorAuditor, October 1997-April 1999 Staff Auditor, October 1995-September 1997

University of San Francisco Masters in Business Administration with emphasis in Finance Beta Gamma Sigma Honor Society

Georgetown University, Washington, D.C. B.S. Accounting, Minor in Theology

San Francisco Office Professional & Service Affiliations

101 Montgomery street Suite 1400 m Certified Public Accountant, State of California, 1998 San Francisco, CA 94104 Tel: 415836.4000 m Certified Public Accountant, State of New York, 2010 Fax: 415.777.2062 m Certified Fraud Examiner

Certified in Financial Forensics, 2008


American Institute of Certified Public Accountants - Forensic & Litigation Services Committee,

201 0-present - Chair, Damages Task Force - National Forensic & Valuation Conference

- Planning Committee, 2011-2013 - CPA Ambassador, January 2006-present - Board of Examiners, Uniform CPA Examination

Contributor

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IF RI L Ii

Greg Regan, CPA/CFF, MBA Professional & Service Affiliations Publications continued

California Society of Certified Public Accountants m "Options for Consumers in Crisis An Economic Analy- - Co-chair, San Francisco Chapter Litigation sis of the Debt Settlement Industry"

Consulting Services Committee, 2006-2011 December 31, 2012

- State Steering Committee, 2007-present m "Discount Rates, Risk, and Uncertainty in Economic Officer, 2012-present Damage Calculations"

- Economic Damages Section A/CPA Practice Aid, 2012 Member, 2004-present

"Causation Scenarios for the Damages Expert" Officer, 2008-2012 Dunn on Damages, Winter 2011

- State Accounting Principles and Auditing Standards Committee, Member, 2005-2010 u "2010 Federal Rules of Civil Procedure Changes"

A/CPA .org, November2010 - CaICPA Leadership Institute, Spring 2006

- Leadership Identification and Development "Selecting the Right Investigative Resource"

Committee, 2007-present (Co-author) Journal olAccountancy, December 2009

• California CPA Education Foundation m "Discount Rates and Lost Profits... Where's The Risk?" —Accounting & Auditing Curriculum Advisory (Co-author) CPA Expert, Summer 2009

Committee, 2007-2010 "Discount Rates and Lost Profits.' A Review of Case • Association of Certified Fraud Examiners Law"

• Georgetown University, Alumni Admissions The Witness Chair Winter 2009

Committee m "CFFs: CPAs Looking Behind Closed Doors" • Advisory Board to Golden Gate University Forensic CaICPA Magazine, September 2008

Accounting Program, August 2008-present "Discount Rates and Lost Profits ... Where's The Risk" • American Bar Association The Witness Chair Summer 2008

- Section of Litigation - Section of International Law "Software Revenue Recognition on the Rise"

- Section of Antitrust Law (Co-author) Journal of Accountancy, December 2007

• Legal Aid of San Mateo County "FAS 123R.'Accounting for Stock Options, Tips for an - Board of Directors, Treasurer Increasingly Complex Task"

• Board of Regents, Junipero Serra High School CaICPA Magazine, March 2007

• Hillsborough Schools Foundation, Board of "Forensic Accounting: lslt Right For you?" Directors CaICPA.org , February 2005

"Talk it Over" CaICPA Magazine, December 2004

San Francisco Office 101 Montgomery Street Suite 1400 San Francisco, CA 94104 Tel: 415.836.4000 Fax: 415.777.2062


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Awards Presentations continued

• AICPA, Forensic & Litigation Services Volunteer of the Year, 2012 a "Accounting for Devices With Embedded Software"

• Georgetown University, Deans Citation, 1995 Revenue Recognition for MedTech Companies June 2009

"Recessionary Implications for CPAs" Ca! Society of CPAs, Economic Damages Section

Presentations May 2009

"Analyzing Earnings Releases" "Attaining Reasonable Certain hj in a Damages Calculation"

San Jose Mercury News, October 2008, January 2010

AICPA National Forensic & Valuation Conference, 2012 m "The Subprime Debacle & Debate About Fair Value Accounting"

"Emerging Financial Forensic Accounting" San Francisco, Barristers Club, August 2008

AICPA National Forensic Accounting Conference September 2011 m "IPOs: Promises and Pitfalls"

"Review of Notable Recent Cases - Economic Guest Lecturer, Golden Gate University Law School

Damages" March 2008, March 2009

AICPA National Forensic Accounting Conference a "The Foreign Corrupt Practices Act: An Independent September 2011 Monitor's Perspective"

• Cal Society of CPAs, San Francisco Chapter Litigation

"Forensic Accounting: Bridging the Gap between Section, January 2008 Theory and Practice" AAA, National Conference, August 2011 m "Options Backdating: What you need to know"

• "Causation Scenarios and the Damages Expert" (Panel member) CaICPA Litigation SocietyOctober 2006

CaICPA Economic Damages and Fraud Committees August 2011 m "I've Sold Software: How and When Do I Recognize

• Revenue?"

"Ethics and the Expert" Hemming Morse Training, November 2005 AAA, Forensic and Investigative Accounting Section Research Conference, March 2011 a "Facts about Fraud"

• Cal Society of CPAs, CPE Extravaganza

"Bridging the Gap The Road to the CFF" June 2005, June 2006 AAA, Forensic and Investigative Accounting Section Research Conference, March 2011 a "Fraud/Corporate Investigations"

• "Educating Legally Aware Accountants" JHI Members Conference, 2004

AAA, Forensic and Investigative Accounting Section Research Conference, March 2011

• "Revenue Recognition" Licensing Executives Society, October 2009

San Francisco Office 101 Montgomery Street Suite 1400 San Francisco, CA 94104 Tel: 415836.4000 Fax: 415.777.2062


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Case 8:12-cv-00222-CJ

R Document 72 Filed 06/14/13 of 116 Page ID

#:1482

IL It {'çt

I;

Greg Began, CPA/CFF, MBA

AICPA CFF Education, Spring 2010-Present

• Fundamentals of the Legal System & Engagement Financial Statement Investigations Administration

• Reporting, Expert Reports, and the Provision of Testimony

Testimony

Trial Deposition

• Richardson Bay Sanitary District v. City of Mill m [Redacted] v. Panoche Energy Center, LLC (2013)* Valley (2013)

Michael Karas v. George S. Karas (2013) California Superior Court, Mann County American Arbitration Association Case No. CIV 1103684 Case No. 74 115 Y 001 44 12 HllB

• Boris Kriman, etal. v. Victor Mayorkis, et al. (2012) Boris Kriman, et al. v. Victor Mayorkis, et al. (2011) Superior Court of the State of California, Superior Court of the State of California, County of San Mateo, Case No. CIV 491312 County of San Mateo, Case No. CIV 491312

• First National v. Federal Realty Investment Trust Underground Solutions, Inc. V. P&F Distributors, (2008) (2009) et al. (2011) U.S. District Court, Northern District of California, Superior Court of the State of California, San J058 Division, Case No. 0-03-02013 RMW County of San Mateo, Case No. CIV 470876

Arbitration n Graco, Inc. v. PMC Global, Inc., etal. (2011) U.S. District Court, District of New Jersey

• [Redacted] v. Panoche Energy Center, LLC (2013)* Case No. 08-CIV-1304 (FLW) (JJH)

• Curriculum Associates, LLC v. Let's Go Learn, Inc. a Paul A. DiMartini and Britt T. Johnson v. Purcell (2011) Tire & Rubber Company, et a! (2010) American Arbitration Association U.S. District Court, State of Nevada No. 74-117-Y-00247-11 Case No. 3:09-cv-00279-HDM (VPC)

in Craig W. Story, Seller Representative of PHSI V. n First National v. Federal Realty Investment Trust U.S. Water LLC (2011) (2008) JAMS Reference No. 1100063613 U.S. District Court, Northern District of California,

San Jose Division, Case No. 0-03-02013 RMW

*parties names and case number have been redacted due to a Stipulated Protective Order Regarding Confidentiality

SEC Enforcement - Investigation Interviews

• Re: Bell MicroProducts, Inc. (March 2009)

• Re: Connectics, Inc. (August 2007)

11 1 IT,

San Francisco Office 101 Montgomery Street Suite 1400 San Francisco, CA 94104 Tel: 415.8364000 Fax: 415.777.2062


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age 114 of 116 Page ID

GregRegan, W AIJ

Selected Experience

im Engaged as the damages expert by the defendant, a financial services company, to analyze and respond to restitution claims of a class of 78,000 plaintiffs.

Engaged as the accounting and damages expert by the plaintiff, to evaluate shareholder oppression claims and valuation of minority share of a multitude of privately owned business.

Lead the restatement of pre-IPO high-tech companies to establish compliance with SOP 97-2 and SAB 104.

Assisted independent monitor in an evaluation of the compliance of a medical device company with the terms of its settlement arrangements with the U.S. Department of Justice and the SEC.

Expert for the defendant. Assessed post-acquisition profitability of the entity to determine implications of EBITDA on Purchase Price and Earn-Out Dispute.

Expert for the plaintiff. Analyzed the pre- and post-acquisition accounting for an entity to assess implications on Post Closing performance commitments.

Consultant for the defendant. Assessed the standalone profitability of a joint venture operated as a division of a parent.

Directed an investigation of revenue recognition and related revenue reserves for the special committee of the board of a NASDAQ-traded pharmaceutical company pursuant to a Securities and Exchange Commission (SEC) subpoena.

Directed an investigation of vendor allowance accounting for the Audit Committee of a publicly traded technology distributor.

Consultant for the SEC. Assisted the accounting expert in assessing whether the financial statements of a high-technology company were prepared in accordance with Generally Accepted Accounting Principles (GMP) and whether related audits were performed in accordance with Generally Accepted Auditing Standards (GMS).

Consultant for the SEC. Evaluated the consistency of the accounting principles applied by a consumer products company with GAAP and assessed the compliance of an audit in accordance GAAS.

Consultant for the SEC. Evaluated the compliance of a consumer products company with SEC regulations and addressed the response of the auditor in accordance with GMS.

Consultant for the SEC. Evaluated the consistency of the accounting principles of a major telecommunications company with GAAP and assessed the compliance of an audit in accordance with GAAS.

Engaged by the Audit Committee of a Nasdaq-traded high-technology company. Investigated possible manipulation of financial statement information by accounting personnel.

Consultant for plaintiff, a leading developer of enterprise application software technologies and products. Assisted the damage expert in determination of damages.

Accounting expert for the defendant. Plaintiff claimed that the defendant, a software company, improperly recognized revenue and presented misleading disclosures. Assisted the expert in the evaluation of revenue recognition and disclosure in compliance with GAAP and SEC regulations.

Consultant for defendant, a telecommunications equipment company. Defendant claimed that plaintiff was responsible for certain lease guarantees subsequent to its divestiture from the plaintiff. Assisted the damage expert in evaluating the divestiture accounting and the plaintiff's lost profits.

San Francisco Office 101 Montgomery Street Suite 1400 San Francisco, CA 94104 Tel: 4158364000 Fax: 415.777.2062


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1 DECLARATION OF SERVICE BY MAIL

2 I, the undersigned, declare:

3 1. That declarant is and was, at all times herein mentioned, a citizen of the

4 United States and a resident of the County of San Diego, over the age of 18 years, and

5 not a party to or interested party in the within action; that deelarant's business address

6 is 655 West Broadway, Suite 1900, San Diego, California 92101.

7 2. That on June 14, 2013, declarant served the SECOND AMENDED

8 CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL

9 SECURITIES LAWS by depositing a true copy thereof in a United States mailbox at

10 San Diego, California in a sealed envelope with postage thereon fully prepaid and

11 addressed to the parties listed on the attached Service List.

12 3. That there is a regular communication by mail between the place of

13 mailing and the places so addressed.

14 I declare under penalty of perjury that the foregoing is true and correct.

15 Executed on June 14, 2013, at San Diego, California.,

16

17 SUSAN L. HAMILTON

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III


POWERWAVE 12 Service List - 6/14/2013 (12-0024)

Page 1 of 1

Counsel for Defendant(s)

Seth A. Aronson Smita Reddy O'Melveny & Myers LLP 400 South Hope Street 10th Floor Los Angeles, CA 90071-2899

213/430-6000 213/430-6407 (Fax)

Counsel for Plaintiff(s)

Jeffrey A. Berens Dyer & Berens LLP 303 East 17th Avenue, Suite 810 Denver, CO 80203

303/861-1764 303/395-0393 (Fax)

Darren J. Robbins Tricia L. McCormick Robert R. Henssler Jr. Robbins Geller Rudman & Dowd LLP 655 West Broadway, Suite 1900 San Diego, CA 92101

619/231-1058 619/231-7423 (Fax)

Michael I. Fistel Jr. Holzer Holzer & Fistel, LLC 200 Ashford Center North, Suite 300 Atlanta, GA 30338

770/392-0090 770/392-0029 (Fax)

robb ins geller rudman robert r....

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