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HULETT HARPER STEWART LLPBLAKE MUIR HARPER, SBN: 115756550 West C Street, Suite 1600San Diego, CA 92101Telephone: (619) 338-1133Facsimile: (619) 338-1139
KLAFTER & OLSEN LLPKURT B. OLSEN2121 K Street NW, Suite 800Washington, DC 20037Telephone: (202) 261-3553Facsimile: (202) 261-3533
Attorneys for Plaintiffs[Additional Counsel on Signature Page]
2.36 A'^1 13 ti:, fl: 59
itIN THE UNITED STATES bISTRICT COURT
ISOUTHERN DISTRICT OF CALIFORNIA
CHARLES RULAND, on Behalf of Himself CASE N96 CV 1 231 BTN WMCand all Others Similarly Situated,
CLASS ACTION
Plaintiff, CO)IPLAINT FOR VIOLATION OF THEFEDERAL SECURITIES LAWS
V.
INFOSONICS CORP., JOSEPH RAM, JOHNJ. ALTHOFF, JEFFREY KLAUSNER,JOSEPH MURGO, and ABRAHAMROSLER,
Defendants.JURY TRIAL DEMANDED
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Plaintiff alleges the following based upon the investigation of Plaintiff's counsel, whic
included a review of United States Securities and Exchange Commission ("SEC") filings b
InfoSonics Corp. ("InfoSonics or the "Company"), as well as regulatory filings and reports, prey
releases and other public statements issued by the Company, and media reports relating to th
Company. Plaintiff believes that additional substantial evidentiary support exists for th
11 allegations set forth herein which will be revealed after a reasonable opportunity for discovery.
NATURE OF THE ACTION
1. This is a federal securities class action on behalf of purchasers of the securities
InfoSonics between May 9, 2006, and June 9 , 2006, inclusive (the "Class Period"), seeking tc
pursue remedies under the Securities Exchange Act of 1934 (the "Exchange Act").
JURISDICTION AND VENUE
2. This action arises under and pursuant Sections 10(b), 20(a), and 20A of the
Exchange Act, 15 U.S.C. §§ 78j(b), 78t(a), 78t-1, and the rules and regulations promulgated
thereunder, including SEC Rule lOb-5, 17 C.F.R. 240. 1Ob-5.
3. This Court has jurisdiction over the subject matter of this action pursuant to 28
U.S.C. § 1331 and Section 27 of the Exchange Act, 15 U.S.C. § 78aa.
4. Venue is proper in this District pursuant to Section 27 of the Exchange Act, 15
U.S.C. § 78aa, and 28 U. S.C. § 1391 (b). Many of the acts and transactions giving rise to the
violations of law complained of herein , including the preparation and dissemination to the
investing public of false and misleading information, occurred in this District and the Company's
principal place of business is in this District.
5. In connection with the acts, conduct and other wrongs complained of herein, the
Defendants used the means and instrumentalities of interstate commerce , including , but not limited
to, the mails, interstate telephone communications and the facilities of the national securities
markets.
PARTIES
6. Plaintiff Charles Ruland purchased the Company's publicly traded securities as
1etailed in the attached Certification and was damaged thereby.
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1 7. Defendant InfoSonics has its corporate headquarters in San Diego, California and
2 is incorporated in the State of Maryland. InfoSonics represents itself as one of the fastest growing
3 distributors of wireless handsets and accessories in the United States and Latin America providing
4 end-to-end handset and wireless terminal solutions for carriers in both the United States and Latin
5 America.
6 8. Defendant Joseph Ram founded InfoSonics and is currently its President, CEO and
7 a Director. During the Class Period, Ram sold 25,000 shares of InfoSonics stock for proceeds of
8 approximately $428,000.
9 9. Defendant John G. Althoff is currently InfoSonics' President of the Company's
10 Latin American operations. During the Class Period, Althoff sold 25,000 shares of InfoSonics
11 stock for proceeds of approximately $465,000.
12 10. Defendant Jeffrey A. Klausner has been InfoSonics' Chief Financial Officer since
13 July 2003. During the Class Period, Klausner sold 26,000 shares of InfoSonics stock for proceeds
14 of approximately $625,000.
15 It. Defendant Joseph C. Murgo has been InfoSonics' Vice President of North
16 American Sales & Marketing since February 2000. During the Class Period, Murgo sold 55,000
17 shares of InfoSonics stock for proceeds of approximately $1.285 million.
18 12. Defendant Abraham Rosier is InfoSonics Executive Vice President and a Director.
19 During the Class Period, Rosler sold 15,000 shares of InfoSonics stock for proceeds of
20 approximately. $307,000.
21 13, Because of the Individual Defendants' positions with the Company, they had
22 access to the adverse undisclosed information about the Company's business, operations, and
23 financial statements, via access to internal corporate documents (including the Company's
24 operating plans, budgets and forecasts and reports of actual operations compared thereto),
25 conversations and connections with other corporate officers and employees, attendance at
26 management and Board of Directors meetings and committees thereof and via reports and other
27 information provided to them in connection therewith.
28 14. It is appropriate to treat the Individual Defendants as a group for pleading purposes
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I and to presume that the false, misleading and incomplete information conveyed in the Company'.
2 public filings, press releases and other publications as alleged herein are the collective actions o1
3 the narrowly defined group of defendants identified above. Each of the above officers of
4 InfoSonics, by virtue of their high-level positions with the Company, directly participated in the
5 management of the Company, was directly involved in the day-to-day operations of the Company
6 at the highest levels and was privy to confidential proprietary information concerning the
7 Company and its business, operations, growth, financial statements, and financial condition, as
8 alleged herein. Said defendants were involved in drafting, producing, reviewing and/or
9 disseminating the false and misleading statements and information alleged herein, were aware, or
10 recklessly disregarded, that the false and misleading statements were being issued regarding the
11 Company, and approved or ratified these statements, in violation of the federal securities laws.
12 CLASS ACTION ALLEGATIONS
13 15. Plaintiff brings this action as a class action pursuant to Rule 23 of the Federal
14 Rules of Civil Procedure on behalf of all persons who purchased the Company's publicly traded
15 securities (the "Class") during the Class Period. Excluded from the Class are the Defendants
16 herein, the directors, officers and employees of the Company, the members of each Individual
17 Defendants' immediate families, any entity in which any defendant has a controlling interest, and
18 the legal affiliates, representatives, heirs, controlling persons, successors and predecessors in
19 interest or assigns of any such excluded party.
20 16. The members of the Class are so numerous that joinder of all members is
21 impracticable. The disposition of their claims in a class action will provide substantial benefits to
22 the parties and the Court. During the Class Period, InfoSonics had outstanding at least 7.7 million
23 shares of common stock.
24 17. Plaintiffs claims are typical of the claims of the members of the Class because
25 Plaintiff and all of the Class members sustained damages arising out of the same wrongful conduct
26 complained of herein.
27 18. Plaintiff will fairly and adequately protect the interests of Class members and has
28 retained counsel who are experienced and competent in class and securities litigation. Plaintiff has
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I no interests that are contrary to or in conflict with the members of the Class Plaintiff seeks to
2 represent.
3 19. A class action is superior to all other available methods for the fair and efficient
4 adjudication of this controversy, since joinder of all members is impracticable. Furthermore, as
5 the damages suffered by individual members of the Class may be relatively small, the expense and
6 burden of individual litigation make it impossible for the members of the Class individually to
7 redress the wrongs done to them. There will be no difficulty in the management of this action as a
8 class action.
9 20. Questions of law and fact common to the members of the Class which predominate
10 over questions which may affect individual Class members include: (a) whether Defendants!
11 violated the federal securities laws; (b) whether Defendants misrepresented material facts;
12 (c) whether Defendants' statements omitted material facts necessary to make the statements made,
13 in light of the circumstances under which they were made, not misleading; (d) whether Defendants
14 knew or acted with deliberate reckless disregard that their statements were false and misleading;
15 (e) whether InfoSonics shares were artificially inflated during the Class Period; and (f) whether the
16 members of the Class have sustained damages proximately caused by the alleged
17 misrepresentations and omissions, and, if so, what is the appropriate measure of damages.
18 SUBSTANTIVE ALLEGATIONS
19 21. On January 30, 2006, the Company issued a press release announcing that it had
20 entered into definitive purchase agreements with several institutional investors with respect to the
21 private placement of 1,100,000 shares of its common stock for $14.4 million at a purchase price o
22 $13.10 per share. SG Cowen & Co., LLC acted as the lead placement agent for this transaction.
23 As part of the private placement, the purchasers also received warrants to purchase an additional
24 330,000 shares of common stock from the Company at a purchase price of $18.38 per share. The
25 placement agent was also granted warrants as a part of the transaction. The press release also
26 stated that:
27 The securities sold in this private placement have not yet been registered under theSecurities Act of 1933, as amended, and may not be offered or sold in the United
28 States in the absence of an effective registration statement or exemption from
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registration requirements. However, as part of the transaction, the Company agreedto file a registration statement on Form S-3 with the Securities and ExchangeCommission within thirty days for purposes of registering the resale of all of thecommon stock issued in the private placement.
22. Accordingly, on February 17, 2006, the Company filed the registration statement
had agreed to file to register the securities issues in the private placement . Specifically, the
registration statement provided for the registration of the 1.1 million shares sold on the private
placement, the 330,000 warrants sold on the private placement, and 28,600 warrants issued to the
placement agent. The registration statement was declared effective by the SEC the same day.
23. On May 8, 2006, after the markets closed, InfoSonics issued a press
announcing its financial results for the first quarter ended March 31, 2006. The Company reported
net income of $1.73$ million or $0.22 per share for the quarter. With respect to the warrants
described above, the press release stated that:
During the first quarter 2006, the Company had incomefrom a non-cash change infair value of derivative liability (for financing related warrants) of $963, 000 andnon-cash expense related to stock-option compensation of$52, 000. To comply withaccounting rules for treatment of derivative liabilities (SFAS 133), the Companywill record a non-cash loss or gain each quarter, based on the calculated change infair value of the wan-ants, which were issued in conjunction with the Company'sfinancing during the first quarter. In addition, the company will recognize non-cashcompensation expense (SFAS 123R) each quarter for outstanding stock options.These non-cash items have the potential to materially affect the Company'searnings per share , both positively and negatively, on a quarterly basis.
(Emphasis added).
24. In a conference call held that day shortly after the press release , Defendant)
Klausner responded to a question about the accounting for the warrants as follows:
Due to the intricacies of FASB 133 those warrants and the fair value related tothose warrants will continue to be on our books at this point until February 17th2007. Those warrants as long as along with the shares that were sold wereregistered and declared effective by the SEC on February 17th of 2006.
So it's the intricacies of FASB 133 that require those warrants, And only thosewarrants to shop up currently as derivative instrument and hang out on our balancesheet as I guess you would call it pseudo debt as opposed to equity.
25. Three days later, on May 11, 2006, as detailed below, the Individual Defendants)
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1 began selling their personal shares of InfoSonics stock.
2 26. On May 15, 2006, the Company filed its Form 10-Q for the quarter ended March
3 31, 2006 which was signed by Defendants Ram and Klausner. In that Form 10-Q, the Company
4 repeated its net income of $1.738 million for the quarter and, with respect to the warrants, stated:
5 Warrants
6 In June 1998, FASB issued SFAS No. 133, Accounting for Derivative Instruments
7 and Hedging Activities. The Statement establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
8 embedded in other contracts, (collectively referred to as derivatives) and for
hedging activities. It requires that an entity recognize all derivatives as either assets
9 or liabilities in the statement of financial position and measure those instruments at
10fair value.
11 In January 2006, the Company sold shares of common stock including warrants topurchase an aggregate of 330,000 shares of the Company's common stock at an
12 exercise price of $18.38 per share during the period beginning six months after thedate of the purchase agreement and ending four years later.... The Company
13 evaluated the warrants in the transaction as derivatives in accordance with SFASNo. 133. The warrants, to the extent that they are to be satisfied with common stock
14 of the Company, would normally be included as equity obligations. However, in the
15 event that the Company does not maintain effectiveness of the registrationstatement shares issued upon exercise of the warrants could be restricted;
16 therefore, the Company is required to record a liability for the fair value of thewarrants determined under the Black-Scholes option pricing formula (included in
17 the liabilities as a "derivative liability'). Subsequent to the initial recording, the
18change in the fair value of the warrants, determined under the Black-Scholes optionpricing formula, at each reporting date, is recorded as an adjustment to the liability.
19 The expense relating to the change in the fair value of the Company's stockreflected in the change in the fair value of the warrants is included as other income
20 (expense). The value of the warrants on January 30 and March 31, 2006 wascalculated using the following weighted-average assumptions: dividend yields of
21 0% and 0%, respectively, expected volatility of 97% and 98%, respectively risk-
22free interest rates of 4.46% and 4.82%, respectively, and expected lives of 4 yearsand 4 years, respectively.
23 (Emphasis added).
24 27. In Exhibits 31.1 - 31.2 to the Form 10-Q, Defendants Ram and Klausner each
25 certified pursuant to Section 302 of the Sarbanes-Oxley Act Of 2002, inter alia, that:
26 Based upon each of their respective knowledge, "this quarterly report does not27 contain any untrue statement of material fact or omit to state a material fact
necessary to make the statements, in light of the circumstances under which such28 statements were made, not misleading with respect to the period covered by this
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• •1 quarterly report."
2 28. However, on Monday, June 12 , 2006, before the markets opened for trading, the
3 Company shocked the market when it disclosed that it would need to restate its reported ne
4 income for its first quarter of $1.738 million to $1,173 million , or a decrease of 32.5%, due to thh
5 fact that InfoSonics had improperly treated the warrants as a derivative liability and accounted fo;
6 those warrants under SFAS 133. The Company stated further that:
7 [U]pon further investigation and an extensive review of the available literature from8 the Financial Accounting Standards Board (FASB), the Emerging Issues Task
Force (EITF) and the U. S. Securities and Exchange Commission (SEC) regarding9 the treatment of these warrants under EITF 00-19 and SFAS 133, the Company
determined the warrants should have been reclassified as equity at February 17,l0 2006, the date upon which the SEC declared effective the Company's registration
statement on Form S-3 registering the shares underlying the warrants. Previously11 the warrants had been marked to market and remained a liability at March 31, 2006
12and would have remained as such on a going forward basis, impacting eachquarter' s results. After an extensive review and consultation with its independent
13 registered public accountants and its audit committee, the Company determined torestate its historical financial statements for the quarter ended March 31, 2006.
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15 (Emphasis added). However, at the same time the Company had been conducting an "extensive
16 review" of the improper accounting for the warrants, the Individual Defendants had been
17 unloading their personal holdings of InfoSonics stock reaping proceeds exceeding $3 million --
18 including sales made on Wednesday, June 7, 2006, less than a week before the June 12 restatement
19 announcement.
20 29. The market ' s response was immediate -- InfoSonics ' stock fell more than 28% on
21 June 12-- from a close of $24 . 22 on Friday, June 9, 2006 to close at $17 . 38 on June 12 on more
22 than four times the average trading volume.
23 30. The Company also filed a Form 8K on June 12, 2006 signed by Defendant
24 Klausner stating , inter alia that
25 On June 5, 2006 , the Company determined that a restatement of its Quarterly
26Report on Form i0-Q for the quarter ended March 31 , 2006, was necessary in lightof the Company's further review of available Financial Accounting Standards
27 Board (FASB), Emerging Issues Task Force (EITF) and Securities & ExchangeCommission (SEC) guidance regarding the classification of the Company's January
28 30, 2006 financing related warrants . The restatement will be reflected in an
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amendment to the Company's Quarterly Report on Form 10-Q/A filed concurrently
with this Form 8-K.
31. Thus, Defendants admitted that they actually knew no later than Monday, June 5,
2006 -- a week before the June 12, 2006 announcement -- that the restatement was absolutely
necessary -- yet Defendants Klausner and Althoff continued to sell nearly $500,000 worth of their
personal holdings between June 5, 2006 and June 7, 2006.
32. 32. The Company also falsely stated in that Form 8K that "[o]n June 9, 2006,
the Company issued a press release announcing a restatement of its financial statements for the
quarter ended March 31, 2006." In fact, that press release was not issued until June 12, 2006,
COUNT I
Violation of Section 10 (b) of the Exchange Act Against and Rule 10b-5 PromulgatedThereunder Against Defendants InfoSonics, Ram and Klausner
33. Plaintiff repeats and realleges each and every allegation set forth above as if
set forth herein.
34. This Claim is brought by Plaintiff pursuant to Section 10(b) of the Exchange Act,
15 U.S.C. § 78j(b), and Rule lOb-5 promulgated thereunder, against defendants; InfoSonics, Ramp
and Klausner.
35. Throughout the Class Period, defendants named in this Count individually and in
concert, directly and indirectly, by the use and means of instrumentalities of interstate commerce
and/or of the mails, engaged and participated in a continuous course of conduct to conceal adverse
material information about the Company, including its true state of operations and financial health,
as specified herein.
36. The defendants named in this Count employed devices, schemes, and artifices to
defraud while in possession of material, adverse non-public information and engaged in acts,
practices, and a course of conduct that included the making of, or participation in the making of,
untrue and/or misleading statements of material facts and/or omitting to state material facts
necessary in order to make the statements made about the Company not misleading; and engaged
in acts, practices and a course of business which operated as a fraud and deceit upon Plaintiff and
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the members of the Class in an effort to maintain artificially high market prices for InfoSonics
shares and personally profit from sales at such prices in violation of Section 10(b) of the Exchange
Act and Rule I Ob-5 promulgated thereunder.
37. The statements referenced above in ¶¶ 23-24 and 26-27 were materially false and
I misleading when issued because they misrepresented and/or failed to disclose, inter alia,
11 following material adverse facts:
a. that the Company materially overstated its financial results by failing
u properly account for the warrants at issue;
b. that the Company had been conducting an "extensive review" of its
accounting for the warrants because there were material concerns that those warrants had not been
accounted for properly;
c. that, as a result of the foregoing, the Company's financial statements
not prepared in accordance with Generally Accepted Accounting Principles ("GAAP")
therefore were materially false and misleading; and
d. that, as a result, the Certifications signed by Defendants Ram and Klai
were materially false and misleading.
38. In addition to the duties of full disclosure imposed on the defendants named in this
Count as a result of their making of affirmative statements and reports, or participation in the
making of affirmative statements and reports to the investing public, the defendants named in this
Count had a duty to promptly disseminate truthful information that would be material to investors
in compliance with the integrated disclosure provisions of the SEC as embodied in Regulation S-
X, S-K, Form S-3 and other SEC regulations, including accurate and truthful information with
respect to the Company's operations and performance so, that the market prices of the Company's
publicly traded securities would be based on truthful, complete and accurate information.
39. Further, the undisclosed adverse information concealed by defendants named in
this Count during the Class Period is the type of information which, because of SEC regulations,
regulations of the national stock exchanges and customary business practice, is expected by
investors and securities analysts to be disclosed and is known by corporate officials and their legal
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and financial advisors to be the type of information which is expected to be and must be disclosed.
40. The defendants named in this Count acted with scienter in that they either had
actual knowledge of the misrepresentations and/or omissions of material facts set forth herein, or
acted with deliberate reckless disregard for the truth in that they failed to ascertain and to disclose
the true pacts, even though such facts were readily available to them.
41. InfoSonics is properly charged with knowledge of the wrongdoing by its officers
and employees as, at all times relevant to this action, InfoSonics' officers were involved in the
accounting treatment for the warrants and were acting within the scope of their employment in
furtherance of their responsibilities to the Company. As such, their scienter is imputable to
InfoSonics.
42. The defendants named in this Count acted with scienter as their responsibilities
included the very matters that were improperly manipulated and concealed - the determination
the proper accounting for the warrants. Indeed, there is a strong inference of scienter in light
the fact that the individual defendants named in this Count as well as the other Individi
Defendants continued to sell their personal holdings of InfoSonics stock while in possession
material information as to the improper accounting treatment for the warrants. Further, defendants
Ram and Klausner, by virtue of their responsibilities, were in possession of, or had access to
information that they deliberately recklessly disregarded, concerning the true financial condition of
InfoSonics.
43. In addition, Defendants Ram and Klausner were motivated to engage in
fraudulent scheme alleged herein in order to enable them to sell their personally-held InfoSo
common stock to the unsuspecting public, as follows:
a. During the Class Period, Defendant Ram sold 25,000 shares of lnfoSoi
common stock for total proceeds of approximately $428,000.
b. During the Class Period, Defendant Klausner sold 26,000 shares
InfoSonics common stock for total proceeds of approximately $625,000.
44. As directors and/or top executive officers of the Company, Defendants Ram and
Klausner are liable as direct participants in the wrongs complained of herein. Through their
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I positions of control and authority as officers and/or directors of the Company, and/or through their
2 extensive stock ownership in InfoSonics, these defendants were able to and did control the conten
3 of the false and misleading public statements disseminated by the Company described herein with
4 which they are charged. With knowledge of the falsity and/or misleading nature of the statement.,
5 contained therein or in reckless disregard of the true facts detailed herein, these defendants caused
6 the heretofore complained of public statements to contain misstatements and omissions of material
7 facts as alleged herein. The false and misleading statements contained in the Company's SEC
8 filings and press releases constituted "group published information," which these Defendants were
9 responsible for creating.
10 45. As a result of these false and misleading statements and/or omissions, the market
11 price of InfoSonics shares was artificially inflated during the Class Period and due to that inflation
12 and the declines in the price of InfoSonics stock due to the revelations of the alleged
13 misrepresentations and omissions detailed herein, Plaintiff and the members of the Class suffered
14 significant damage. Plaintiff and the members of the Class purchased InfoSonics stock in
15 ignorance of the false and misleading nature of the representations and/or omissions described
16 above and the deceptive and manipulative devices alleged herein. Plaintiff and the other members
17 of the Class purchased InfoSonics stock during the Class Period in reliance on either the integrity
18 of the market and/or directly on the alleged false and misleading statements.
19 46. Had Plaintiff and the other members of the Class known of the material adverse
20 information alleged to have been concealed from the investing public, or been aware of the truth
21 behind the alleged material misstatements, they would not have purchased or acquired InfoSonics
22 shares, or, if they had purchased or acquired such shares, they would not have done so at the
23 artificially inflated prices which they paid.
24 47. As a direct and proximate result of the wrongful conduct alleged herein, Plaintiff,
25 and the other members of the Class suffered damages in connection with their purchases o
26 InfoSonics shares during the Class Period.
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APPLICABILITY OF PRESUMPTION OF RELIANCE:FRAUD ON THE MARKET DOCTRINE
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48. At all relevant times, the market for InfoSonics' common stock was an efficient
market for the following reasons, among others:
a. InfoSonics' stock met the requirements for listing, and was listed and
actively traded on the American Stock Exchange ("AMEX"), a highly efficient and automated
market;
b. As a regulated issuer, InfoSonies filed periodic public reports with
regulatory bodies including the SEC;
c. InfoSonics regularly communicated with public investors via established
market communication mechanisms, including through regular disseminations of press releases on
the national circuits of major newswire services and through other wide-ranging public
disclosures, such as communications with the financial press and other similar reporting services;
and
d. InfoSonics was followed by several securities analysts employed by major
brokerage firms who wrote reports which were distributed to the sales force and certain customers
of their respective brokerage firms. Each of these reports was publicly available and entered the
public marketplace.
49. As a result of the foregoing, the market for InfoSonics' common stock promptli.
digested current information regarding InfoSonics from all publicly-available sources and reflectec
such information in InfoSonics' stock. price. Under these circumstances, all purchasers of
InfoSonics' common stock during the Class Period suffered similar injury through their purchase
of InfoSonics' common stock at artificially inflated prices and a presumption of reliance applies.
NO SAFE HARBOR
50. The statutory safe harbor provided for forward-looking statements under certain
circumstances does not apply to any of the allegedly false statements pleaded in this Complaint.
The specific statements alleged to have been materially false and misleading were not, and were
not identified as, "forward-looking statements" when made. To the extent there were any forward-
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looking statements, there were no meaningful cautionary statements identifying important factor
that could cause actual results to differ materially from those in the purportedly forward-looking
statements. Alternatively, to the extent that the statutory safe harbor does apply to any forward-
looking statements pleaded herein, defendants named in this Count are liable for those false
forward-looking statements because at the time each of those forward-looking statements was
made, the particular speaker knew that the particular forward-looking statement was false, an(
the forward-looking statement was authorized and/or approved by an executive officer
InfoSonics who knew that those statements were false when made.
51. By virtue of the foregoing, defendants named in this Count have violated Sect
10(b) of the Exchange Act, and Rule lOb-5 promulgated thereunder.
COUNT II
Violation of Section 20(a) of The Exchanee Act Against the Defendants Ram and Klausner
52. Plaintiff repeats and realleges each and every allegation contained above as if full
set forth herein.
53. This Claim is brought by Plaintiff pursuant to Section 20 of the Exchange Act, 15
U.S.C. § 78t, on behalf of the Class against Defendants Ram and Klausner.
54. Each of the defendants named in this Count was a control persons of InfoSonics
within the meaning of Section 20 of the Exchange Act during the Class Period for the following
reasons:
a, The defendants named in this Count served as CEO or CFO of InfoSonics
In addition, Ram and Klausner were in direct control of the public statements made by InfoSonic!
having signed them, been quoted in them, and/or otherwise approving them.
b. Each of these defendants had direct and supervisory involvement in the
day-to-day operations of the Company and, therefore, is presumed to have had the power to
control or influence the particular transactions giving rise to the securities violations as alleged
herein, and exercised the same.
55. These defendants were therefore each in a position to control or influence the
contents of, or otherwise cause corrective disclosures to have been made in the Company's SEC
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1 filings, along with the Company's other public statements that contained materially false an(
2 misleading statements that were disseminated during the Class Period.
3 56. By reason of the wrongful conduct alleged herein, defendants Ram and Klausnei
4 are liable pursuant to Section 20(a) of the Exchange Act. As a direct and proximate result of their
5 wrongful conduct, Plaintiff and the other members of the Class suffered damages in connection.
6 with their purchases of InfoSonics shares during the Class Period.
COUNT III
8 Violation of Section 20A of The Exchange Act Against theIndividual Defendants Except for Defendant Ram
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10 57. Plaintiff repeats and realleges each and every allegation contained above as if fully
1 l set forth herein. This claim is asserted against Defendants Althoff, Klausner, Murgo, and Rosier.
12 58. Defendants Althoff, Klausner, Murgo, and Rosier, by virtue of their positions as,
13 InfoSonics' officers, had access to, and were in possession of, material non-public information
14 about InfoSonics at the time of their sales of 121,000 shares of their InfoSonics stock for proceeds
15 of approximately $2,682,000 during the Class Period.
16 59. Specifically, in addition to the sales of stock described in ¶J' 9-12 above,
17 Defendant Rosier's sales of 15,000 shares of InfoSonics stock on May 24, 2006, Defendant
18 Murgo's sales of 20,000 shares of InfoSonics stock on June 2, 2006, Defendant Klausner's sales
19 of 13,000 shares of InfoSonics stock on June 5, 2006, and Defendant Althoff s sales of 5,000
20 shares of InfoSonics stock on June 7, 2006 were made "contemporaneously" with Plaintiff Charles
21 Ruland's purchases of 100 shares on June 1, 2006 and 100 shares on June 5, 2006.
22 60. By virtue of their sales of InfoSonics stock while in possession of material non-
23 public information about InfoSonics, Defendants Althoff, Klausner, Murgo, and Rosier violated
24 § 10(b) of the Exchange Act and the applicable rules and regulations thereunder.
25 61. Plaintiff Ruland and all other members of the Class who purchased shares o
26 InfoSonics common stock contemporaneously with sales of InfoSonics' common stock: (a) have
27 suffered substantial damages in that, in reliance on the integrity of the market, they paid artificially
28 inflated prices for InfoSonics stock as a result of the violations of § 10(b) of the Exchange Act
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and Rule 10b-5 as described herein; and (b) would not have purchased InfoSonics stock 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 and concealment of the improper accounting
for the warrants and the prior "extensive investigation" into that improper accounting. At the time
of the purchases by Plaintiff and Class members, the fair and true market value of the InfoSonics
stock was substantially less than the price paid by them.
PRAYER FOR RELIEF
WHEREFORE, Plaintiff, on his own behalf and on behalf of the Class, prays for relief and
judgment, as follows:
A. Declaring this action to be a proper class action pursuant to Rule 23(a) and (b)(3)
of the Federal Rules of Civil Procedure on behalf of the Class defined herein;
B. Awarding Plaintiff and the other members of the Class damages in an amount that
may be proven at trial, together with interest thereon;
C. Awarding Plaintiff and the members of the Class prejudgment and postjudgment
interest, as well as reasonable attorneys' fees, expert witness fees and other costs; and
D. Awarding such other relief as this Court may deem just and proper.
JURY DEMAND
Plaintiff demands a trial by jury.
DATED: June 13, 2006 HULETT HARPER STEWART LLPBLAKE MUIR HARPER
BL MUIR A
550 West C Street, Suite 1600San Diego, CA 92101Telephone: (619) 338-1133Facsimile: (619) 338-1139
15
07/10/2006 14:07 FAX 214 340 9914 LDSSW.COM
1 KLAFTER & OLSEN LLPKURT B. OLSEN22121 K Street NW, Suite 800
3 Washington, DC 20037Telephone: (202) 261-3553
4 Facsimile : (202) 261-3533
5 KLAFTER & OLSEN LLPJEFFREY A. KLAFTER
6 1311 Mamaroneck Avenue, Suite 2207 White Plains, NY 10602
Telephone : (914) 997-56568 Facsimile : (914) 997-2444
9 BERGER & MONTAGUE, P.C.TODD S. COLLINS
10 1622 Locust Street
11Philadelphia, PA 19103Telephone: (215) 875-3000
12 Facsimile : (215) 875-5715
13 Attorneys for Plaintiffs
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