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IN RE NICE SYSTEMS

March 8, 2001

IN RE: NICE SYSTEMS, LTD. SECURITIES LITIGATION


The opinion of the court was delivered by: Lechner, District Judge.

        OPINION

This is an action for securities fraud brought on behalf of purchasers of American Depository Shares ("ADSs")*fn1 of Nice Systems, Ltd. ("NSL"), seeking damages for violations of Section 10(b) and Section 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act"), as amended, 15 U.S.C. § 78j(b) and 78t(a), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5. Damages are sought from NSL, David Arzi ("Arzi"), Benjamin Levin ("Levin") and Mordechai Golan ("Golan") (collectively, the "Defendants"). Jurisdiction is alleged pursuant to 28 U.S.C. § 1331 and 1337 and Section 27 of the Exchange Act, 15 U.S.C. § 78aa.

Currently pending is a motion to dismiss (the "Motion to Dismiss") the second amended complaint (the "Second Amended Complaint") pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. Lead plaintiffs Marvin Frank ("Frank"), Brian Glogower ("Glogower"), Pradeep Jain ("Jain"), Daniel Laser ("Laser") and Jeffrey Rubin ("Rubin") (collectively, the "Lead Plaintiffs") brought suit on behalf of purchasers of NSL ADSs between 4 February 1998 and 24 September 1998 (the "Class Period").*fn2 For the reasons set forth below, the Motion to Dismiss is granted.

Facts*fn3

A. Procedural History

On 24 May 1999, an order was filed consolidating Marvin Frank v. Nice Systems, Ltd., David Arzi, Benjamin Levin and Mordechai Golan, Civil Action No. 99-1307(AJL) and James Bell v. Nice Systems, Ltd., David Arzi, Benjamin Levin and Mordechai Golan, Civil Action No. 99-1693(AJL) (the "24 May 1999 Order of Consolidation"). 24 May 1999 Order of Consolidation. By order, dated 11 June 1999, (the "11 June 1999 Order") Frank, Glogower, Jain, Laser and Rubin were appointed lead plaintiffs. 11 June 1999 Order. The law firm of Milberg Weiss Bershad Hynes & Lerach was appointed lead counsel. Id.

The Lead Plaintiffs filed a consolidated amended complaint (the "First Amended Complaint"). Thereafter, Defendants submitted a motion to dismiss the First Amended Complaint (the "First Motion to Dismiss"). In their brief in opposition to the First Motion to Dismiss, the Plaintiffs included a footnote requesting an opportunity to file yet another amended complaint.

On 24 January 2000, a telephone conference was conducted with counsel (the "24 January 2000 Conference"). During the 24 January 2000 Conference, Plaintiffs were given an opportunity to amend the First Amended Complaint:

COURT: Mr. Pearlman*fn4, do you want an opportunity to amend the complaint?
  PEARLMAN: I suspect yes.
COURT: I'm going to give you the opportunity to amend if you want to.
KADET*fn5: You're giving him his last and best chance to address the points we raised.

COURT: That's right.

PEARLMAN: I understand that, your Honor. I will let you know what our desire is midday. If we do elect to amend the complaint, it will be in by the close of business Wednesday.

24 January 2000 Conference, Tr. at 1:102:23.

Counsel for Lead Plaintiffs subsequently informed the court of their desire to amend the First Amended Complaint. As a result, an order was entered on 28 January 2000 (the "28 January 2000 Order") denying without prejudice the First Motion to Dismiss and granting Lead Plaintiffs leave to file a second amended complaint. 28 January 2000 Order.

On 11 February 2000, Lead Plaintiffs filed the Second Amended Complaint. On 27 April 2000, Defendants filed a motion to dismiss the Second Amended Complaint; that motion was denied without prejudice to re-filing same, by an order, dated 4 May 2000 (the "4 May 2000 Order").*fn6 4 May 2000 Order. Thereafter, the Defendants filed the current Motion to Dismiss. Oral argument was conducted on 20 December 2000.

B. Parties

1. The Defendants

NSL is an Israeli corporation with its principal place of business located in Ra'anana, Israel. Second Amended Complaint at ¶ 12. NSL describes itself as a global provider of computer telephony integrated logging ("CTIL"), quality measurement and workflow solutions for voice, data and facsimile transmissions. Id. NSL maintains headquarters in the United States at 200 Plaza Drive, Secaucus, New Jersey. Id.

Arzi is a founder of NSL and served as Chairman of the Board of Directors from the inception of NSL, through August 1998. Id. at ¶ 13(a). Arzi continues to serve as a director of NSL. Id. Arzi is alleged to have signed the 1997 Form 20-F*fn7 on behalf of NSL. Id.

Levin is a founder of NSL and has been a director of NSL since its inception. Id. at ¶ 13(b). Levin has served as the Chief Executive Officer of NSL since February 1998. Id. Levin was also the President of NSL from its inception until August 1998. Id. In August 1998, Levin succeeded Arzi as the Chairman of the Board of Directors of NSL. Id.

Golan, a founder of NSL, has been a director of NSL since 1988. Id. at ¶ 13(c). Golan has served as the Chief Operating Officer since 1997. Id. From 1988 to 1996, Golan served as Chief Engineer and Vice President of Research and Development of NSL. Id. In August 1998, Golan succeeded Levin as President of NSL. Id.

As a result of their positions of control and authority, Arzi, Levin and Golan (collectively, the "Individual Defendants") are responsible for the content of various press releases, Securities and Exchange Commission ("SEC") filings, and other public statements issued by NSL. Id. at ¶ 19. The Individual Defendants were provided with copies of said press releases, filings and other statements, before or shortly after their issuance. Id. The Individual Defendants, moreover, had the ability and opportunity to prevent the issuance of said press releases, filings and other statements. Id.

The Individual Defendants had access to adverse, non-public information, as a result of (1) their ability to view internal corporate documents, (2) conversations and other communications and contacts with corporate officers and employees, (3) attendance at meetings of the Board of Directors of NSL, as well as various committees thereof, and (4) periodic reports and other information provided to them. Id. at ¶ 20.

The Individual Defendants, by reason of their "positions of control and authority," as well as their "substantial holdings and voting control of NSL shares," were controlling persons within the meaning of Section 20(a) of the Exchange Act. Id. at ¶¶ 18, 19.

2. The Plaintiffs

As mentioned, the Lead Plaintiffs represent a class consisting of all persons who purchased NSL ADSs between 4 February 1998 and 24 September 1998. Id. at ¶ 1.

C. Background

NSL was founded in 1986, and an initial public offering was completed in Israel in 1991. Second Amended Complaint at ¶ 22. NSL completed a $20 million initial public offering in the United States in 1996. Id. at ¶ 23. In 1997, a follow-up offering of $98 million was completed in the United States. Id. NSL shares were traded on the Tel-Aviv Stock Exchange and NSL ADSs were traded on the NASDAQ. Id.

During the Class Period, NSL derived the majority of its reported revenues from the sale of its CTIL products. Id. at ¶ 24. CTIL products are designed to protect businesses and customers against risks posed by lost or misinterpreted voice, facsimile or data transmissions, and in some instances, to monitor, train and enhance call center agent productivity. Id.

In or about September 1997, NSL acquired Dees Communications, Ltd. ("Dees"), a Canadian corporation. Id. at ¶ 27. The acquisition of Dees was important to the CTIL growth plans of NSL. Id. This acquisition provided NSL with automated call center monitoring, quality measurement training and agent productivity enhancement products. Id. NSL began to market the NiceUniverse version 3.0 and, later, the version 3.1 (the "System"), as an upgraded version of a Dees product. Id. at ¶ 28. The System was designed to serve the low-end and mid-range call center market, i.e., centers which have fewer than 200 to 250 operators receiving calls at a given time. Id.

The 1998 Form 20-F of NSL indicated that NSL generated revenues of $91 million, of which approximately $85.8 million were attributed to sales of the CTIL products. Id. at ¶ 24. The 1998 Form 20-F further indicated that NSL markets, distributes and services its CTIL products worldwide, primarily through independent dealers which specialize in the voice logging market, but also through global distribution arrangements with Siemens AG and Lucent Technologies. Id. at ¶ 25.

D. Factual Allegations

The Second Amended Complaint alleges that NSL raced to the market with upgrades to the NiceUniverse product to enhance its position in the call center market. Id. at ¶ 28. The Second Amended Complaint further alleges that the System was promoted as highly innovative and technologically advanced, ready to meet the current needs of call centers, and in compliance with the systems requirements of its various distributors. Id.

Lead Plaintiffs allege NSL materially misstated the abilities and readiness of the System. Id. at ¶ 29. Lead Plaintiffs further allege NSL failed to disclose the System "was plagued with numerous problems and defects" which hindered its commercial utility. Id. In addition, Lead Plaintiffs allege the truth concerning the System was not disclosed until 24 September 1998, when NSL announced its third quarter 1998 results would fall short of the expectations of analysts. Id. at ¶ 63. According to the Lead Plaintiffs, the "`difficulties' associated with the introduction of the [System] were responsible for the shortfall in sales." Id. In a press release, issued 24 September 1998, NSL stated:

We have decided to act swiftly to modify our product offering for the low-end and mid-range market and to base it on our well-received high-end solution, providing a better offering to the market. As a result, we anticipate a six-month delay in revenues for this product. [NSL] is planning to release the new and enhanced quality measurement solution for the low-end to mid-range market at the end of 1998. We anticipate that [NSL] will return to its previous growth rate in the beginning of 1999.

Id. (citing 24 September 1998 NSL Press Release).

1. Alleged Materially False and Misleading Statements Made by Defendants During the Class Period

Lead Plaintiffs allege that NSL issued press releases and made submissions to the SEC which were materially false and misleading. Id. at ¶¶ 30-63. According to Lead Plaintiffs, various analysts' reports indicate the market was deceived by the materially false and misleading statements of Defendants.*fn8 The alleged misleading statements made during the Class Period follow.

a. 4 February 1998 Press Release

On 4 February 1998, NSL issued a press release (the "4 February 1998 Press Release"), published on PR Newswire, in which it announced the introduction of the System at the 1998 Call Center Trade Show. Id. at ¶ 30. According to the 4 February 1998 Press Release, NSL "unveiled the newest release of its call center performance measurement solution, NiceUniverse, version 3.0. . . . The product is integrated with NSL's NiceLog and NiceCLS Systems, and supports the industry's leading switches including Nortel, Lucent and Aspect." Id. (quoting 4 February 1998 Press Release). Further, NSL spokesman Morgan Sturdy ("Sturdy"), head of the North American Sales Division of NSL, stated in part:

The focus of our applications is to address the compliance, performance and risk management issues of the call center. Our goal is to offer clients logging and monitoring systems that are easily integrated with their existing computer network and telecom environments.

Id. (emphasis added).

b. 25 February 1998 Press Release

On 25 February 1998, NSL issued a press release (the "25 February 1998 Press Release"), published on PR Newswire, announcing results for both the fourth quarter and the year ending 31 December 1997. Id. at ¶ 37. NSL announced net income for the fourth quarter of $4.6 million and net income for 1997 of $13 million. Arzi also stated:

We have achieved our goal of becoming a global company providing a suite of products for a range of market sectors. I trust that in 1998 we will enjoy another year of continuous growth. We have established technological leadership and a strong competitive position in a dynamic market.

Id. (quoting 25 February 1998 Press Release).

c. The 3 March 1998 Press Release

On 3 March 1998, NSL issued a press release (the "3 March 1998 Press Release"), published on M2 Presswire, announcing its acquisition of IBS Corporation ("IBS"), a privately held California-based maker of software used by call centers. Id. at ¶ 40. As consideration for the acquisition, NSL issued 35,000 ADSs, valued at $1.6 million, and paid an additional $3.9 million in cash. Id. In connection with the acquisition of IBS, Levin stated:

We believe that the acquisition of IBS, following the acquisition of Canadian based Dees Communications in September 1997, will support our ongoing expansion into the fast growing call center market. With IBS's technology, products and customer base, and Nice's CTIL logging and quality measurement solutions, we now have the broadest range of call center logging and quality solutions in the market.

Id.

d. The 23 April 1998 Press Release

On 23 April 1998, NSL issued a press release (the "23 April 1998 Press Release"), on PR Newswire, concerning the ability of the NiceUniverse System to integrate with the pre-existing systems of its customers. Id. at ¶ 42. The 23 April 1998 Press Release indicated NSL had completed the installation of its NiceUniverse quality measurement system at Advanta Mortgage. Id. The 23 April 1998 Press Release further stated:

This installation showcases [NSL's] newest Computer Telephony Integrated [Logging] (CTIL) quality measurement solution, NiceUniverse 3.0, fully integrated with Aspects Automated Call Distributor (ACD).
Advanta, a provider of mortgage and home equity loans, will use the system to monitor its agents to identify agent training requirements and improve agent performance levels in the call center. Integrated with Advanta's Windows 95 network, NiceUniverse allows multiple reviewers to playback [sic] recorded agent transactions and analyze the call center's performance levels using the system's powerful evaluation tools.
Integration with leading PBX/ACDs is a core component of our business strategy. We are pleased to introduce a truly reliable quality assurance solution tightly integrated with Aspect's ACD.

Id.

e. The 6 May 1998 Press Release

On 6 May 1998, NSL issued a press release (the "6 May 1998 Press Release"), on PR Newswire, in which it announced results for the first quarter of 1998. Id. at ¶ 45. The 6 May 1998 Press Release indicated net income for the first quarter of 1998 of $4.8 million. Id. Commenting upon the performance of NSL in the first quarter of 1998, Levin stated:

The first quarter of 1998 shows that [NSL] continues to benefit from its technological leadership and strong competitive position. In addition to other sectors, we are focusing on the call center market which is expected to grow significantly in the coming years.

Id.

f. The 18 May 1998 Press Release

On 18 May 1998, NSL issued a press release (the "18 May 1998 Press Release"), on PR Newswire, announcing that Electric Insurance Company ("EIC") had implemented the quality measurement system of NSL at its Boston-based call center. Id. at ¶ 48. The 18 May 1998 Press Release further stated:

EIC has fully-implemented NiceUniverse 3.0 and integrated the system with its Microsoft Windows-NY network and Lucent PBX. [EIC], with annual sales of over $250 million, is using the system to monitor the quality of service provided by its approximately 150 agents, who provide direct auto, home and boat insurance and related services over the phone.
NiceUniverse 3.0, integrated with Lucent's Definity G3, will provide EIC simultaneous voice recording and screen capture for quality measurement as well as recording on demand capabilities to verify transactions.
As a partner in Lucent Technologies' BusinessWorks Alliance Program, we are pleased to have [EIC] represent a showcase site for NiceUniverse 3.0 integrated with Lucent's Definity G3. . . . We look forward to long-term customer partnerships, such as the one we have set with [EIC], to provide call center solutions now and in the future.
NiceUniverse is a Windows-compatible CTIL application that automates call center recording and monitoring and assists management in objective evaluation of agent performance. Agent transactions (voice and screen) are digitally stored and easily retrieved using CTIL criteria such as DNIS, ANI and other data. Calls are played back from the workstation of the reviewer who evaluates agents performance using the systems' on-line grading templates and integrated reporting capabilities.

Id.

g. The 26 June 1998 Form 20-F

NiceUniverse, introduced in February 1998, is a quality measurement solution that automates call center agent monitoring and screen capture. The system provides objective evaluation tools and helps identify training requirements for call center agents. NiceUniverse uses a switch-independent CTIL interface that integrates with ACDs and PC networks. This enables NiceUniverse to monitor and record agent sessions (voice and screen) on a user-defined schedule and store them in compressed digital format. Sessions are later retrieved by the reviewers from their network PCs and agent performance is graded using customized on-screen templates. From these templates and other data, NiceUniverse generates detailed reports, statistics and graphs to help identify training requirements and set relevant benchmarks for call center agents.
To date the Company has not experienced any significant product returns or requests for repairs.

Id.

h. The 5 August 1998 Press Release

On 5 August 1998, NSL issued a press release (the "5 August 1998 Press Release"), on PR Newswire, in which it announced results for the second quarter ending 30 June 1998. Id. at ¶ 56. Pursuant to the 5 August 1998 Press Release, the net income of NSL for the second quarter of 1998 was $5.1 million. Id. Commenting upon the results, Levin stated:

Results for the second quarter reflect our improved position in the call center market. Our strategic decision to focus on call centers in 1998, highlighted by the acquisition of Dees Communications last year and the acquisition of the assets of IBS this quarter, is paying off handsomely. Our leading position in the North American call center market is consistent with Nice's dominance in the financial institutions and the air traffic control markets.

Id. (quoting Levin).

i. The 17 August 1998 Press ...


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