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Two months before Scientific-Atlanta’s stock plummeted 34 percent, the company’s chief executive officer sold 815,000 shares. Now some shareholders claim he engaged in insider trading and are suing the company in the U.S. District Court for the Northern District of Georgia. CEO James F. McDonald sold those shares in April as the company’s stock surged with news of record sales and earnings. In one week, McDonald sold stock valued at $42.8 million, according to the suits. That same week, the company’s chief financial officer, Wallace Haislip Sr., sold 53,000 stock shares for $3.2 million. The stock sales — at prices ranging from $55 to nearly $60 a share — “were unusual in both timing and amount,” the three complaints allege. On July 19, Scientific-Atlanta announced that sales had declined dramatically, and that it was cutting its earnings forecasts drastically for the first quarter of 2002. The complaint says “a chorus of Wall Street analysts” then downgraded the stock. In one day the stock lost 34 percent of its value, plunging from $35.08 to $22.80. The stock’s high for the past 52 weeks is $94. The stock closed Monday at $26.66. Now, three Scientific-Atlanta stockholders are suing the firm, McDonald and Haislip, claiming that the executives approved misleading news releases that were intended to inflate the stock price. Those releases gave corporate insiders with advance knowledge of the company’s true financial condition the opportunity to sell their own stock shares at artificially high prices, the suits claim. Fadem v. Scientific-Atlanta, No. 1:01-cv-1966 (N.D. Ga. July 25, 2001); Pond Equities v. Scientific-Atlanta, No. 1:01-cv-1967 (N.D. Ga. July 25, 2001); Phillips v. Scientific-Atlanta, No. 1:01-cv-1950 (N.D. Ga. July 24, 2001). The cases have been assigned to federal Senior Judge Robert L. Vining Jr. McDonald of the Northern District and the company’s corporate counsel could not be reached for comment. But a July 25 statement by the company on its Web site says it is “in full compliance” with federal securities laws relating to its SEC reports and public announcements, and it “intends to defend the action vigorously.” Scientific-Atlanta spokesman Paul Sims says he “can’t go any further” than the news release in discussing the litigation. The company’s top executives, he says, are limited to selling or trading their corporate stock to a 10-day window every quarter that begins three days after the quarterly earnings report is made public. “Routinely, top executives do sell stock and exercise options as part of their estate planning,” he says. The suits seek class action status for an undetermined number of Scientific-Atlanta stockholders who lost money on stock purchased between April 19 and July 19. That period falls between Scientific-Atlanta’s press release trumpeting record sales and profits and the release that slashed its fiscal 2002 earnings forecasts. Headquartered in Lawrenceville, Ga., Scientific-Atlanta is a technology firm that, by its own description, is “a leading supplier” of transmission networks for cable companies and television “set-top” boxes that enhance video and high-speed Internet access for cable subscribers. Two of the suits were filed by attorney Martin D. Chitwood of Chitwood & Harley. The third suit was filed by Corey D. Holzer of Holzer & Holzer. Chitwood has teamed up with two New York firms — Fructer & Twersky and Bernstein Liebhard and Lifshitz — and Boca Raton, Fla., firm Milberg, Weiss, Bershad, Hynes & Lerach. Holzer has joined with Pennsylvania firm Shifferin & Barroway and Denver, Colo., firm Dyer & Shuman. Chitwood represents Rochelle Phillips, who bought 35 shares last May at $40-$42 a share. Chitwood also represents Pond Equities, an investment firm that bought 2,000 shares of Scientific-Atlanta on April 26 at prices from $56-$58 a share. Since last year, Pond Equities has sued seven other companies in California, Florida, Massachusetts and New York — most of them technology firms — alleging securities fraud and seeking class action status and designation as a class representative. Chitwood was lead attorney in a recent class action settlement with the Atlanta Real Estate Investment Trust, JDN Realty. JDN has agreed to pay stockholders more than $20 million in cash and give them 1,680,000 stock shares to resolve allegations of securities fraud. Chitwood’s firm currently represents stockholders who have sued Coca-Cola Co. alleging securities fraud. It also represents a chain of convenience stores that claim five national tobacco companies have fixed cigarette prices in violation of antitrust laws. INSIDE ACCESS ALLEGED The suits allege that McDonald and Haislip had access to internal corporate information that warned them sales would drop dramatically in fiscal 2002. The complaints allege that the April 19 press release was intentionally deceptive — allowing company insiders, and perhaps their friends and families, to sell Scientific-Atlanta stock at “artificially inflated prices while privy to material, adverse knowledge regarding the company’s soon to be reported financial status.” In that press release, McDonald predicted “growth in the quarters ahead.” On May 11, a week after Haislip and McDonald sold a total of 865,000 stock shares for a combined $46 million, Haislip filed a quarterly report with the SEC reiterating the information released to the media. Missing from the news release and from the SEC report was information that “demand for SFA’s [Scientific-Atlanta's] products had already declined dramatically,” according to one complaint. “Defendants knew or recklessly disregarded that there was no need for increased capacity, as customer orders … had already declined.” On July 19, Scientific-Atlanta announced fourth-quarter earnings that had grown from $59.1 million to $80.5 million. But it also announced that subscriber service orders were off by $132.3 million, or 21 percent. It also reported that cable and Internet transmission orders had fallen 45 percent. The suits say the substantial reduction in orders doesn’t square with the announcement two months earlier predicting that the company expected continued growth in both sales and orders. According to the complaints, the July 19 release suggests not only that the April 19 release was intentionally overstated but that it could not have been made public “without the knowledge and complicity of the personnel at the highest level of the company” who wished to “sell millions of dollars worth of SFA [Scientific-Atlanta] stock before the truth was revealed.”

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