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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.
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.
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?
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.
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.
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.
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.
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.
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.
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,
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
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
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
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.
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
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.
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
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
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
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.
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.
i. The 17 August 1998 Press ...