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In a significant victory for the plaintiffs in a shareholder suit against Corel Corp., a federal judge has certified the case as a class action open to any investor who bought the company’s stock between Dec. 7, 1999, and March 20, 2000. Lawyers for Corel had argued that the case should be limited to a two-week window ending on Dec. 21, 1999 — the same time limits the plaintiffs themselves had proposed when the case was first filed. But plaintiffs’ lawyers urged U.S. District Judge Anita B. Brody of the Eastern District of Pennsylvania to expand the class, arguing that Corel’s Dec. 20 announcement of fourth-quarter losses was just the tip of the iceberg, and that the company continued to hide the true state of its financial problems for three more months. Now Brody has sided with the plaintiffs and held that the class must be expanded. In doing so, Brody rejected Corel’s argument that the plaintiffs cannot establish “commonality” for class members who purchased stock after Corel’s December 1999 announcement of an expected loss in its fourth quarter results. Defense lawyers argued that the claims of class members who purchased stock after Dec. 22, 1999, presented “fundamentally different questions of law and fact” than the pre-Dec. 22 purchasers because they were aware, or at least put on notice, of Corel’s expected loss before purchasing the stock. Brody disagreed, saying the defense had misconstrued the changes the plaintiffs made in their amended complaint. “Instead of focusing on a single incident of misrepresentation, the plaintiffs now advance the theory that the defendants engaged in a systematic course of conduct of misrepresenting the true financial state of the corporation,” Brody wrote. In the original suit, filed in March 2000, the plaintiffs alleged that Corel violated securities laws by issuing false and misleading statements about the company’s performance in the fourth quarter of 1999 and the prospects for its recently-introduced Linux and Windows products. The suit alleged that the misrepresentations were designed to “hide Corel’s dramatically reduced sales revenues, and to convey the false message that sales of Corel’s Windows products remained strong … [and] that Corel’s Linux market was much more mature and significant to Corel’s operations tha[n] it actually was.” In August 2000, the plaintiffs’ lawyers — Robert P. Frutkin of the Law Offices of Bernard M. Gross; Paul J. Scarlato of Weinstein Kitchenoff Scarlato & Goldman; and sole practitioners John Phillip McCarthy and Charles J. Piven — filed an amended complaint that sought to expand the class definition. The new version of the suit alleged that Corel engaged in a course of conduct, as opposed to a short-lived and focused attempt, to defraud the public concerning the financial condition of Corel and to artificially inflate the company’s stock prices. Corel’s lawyers — P. Kevin Castel, Andrea Butler and George Wailand of Cahill Gordon & Reindel — said they did not oppose certifying a class of investors who purchased stock for a two-week period in December 1999, but that any expansion of the class would be inappropriate since it would no longer satisfy the requirements of commonality and typicality. But Brody found that the plaintiffs properly alleged a “course of conduct” that began in December 1999 and continued into March 2000. Brody’s opinion outlines the public statements made by Corel and its top officers in public filings with the SEC and in television and newspaper interviews. In June 1999, she said, the company was touting a “return to profitability,” and later that year began to extol the virtues of its new products that could be used on the “Linux” operating system, a free software that competes with Windows. In mid-December 1999, Corel announced the resignation of its CFO but insisted that the company was in sound financial shape for both the present and future and expressly denied any connection between the resignation and the impending announcement of fourth quarter losses. Just one week later, however, Corel announced a fourth-quarter loss of more than $8.5 million on declining revenues on $61 million. Despite this bad news, the company put a positive spin on it by noting the profitable year and attributing the losses to Windows-based products and focusing on a bright future with Linux-based products. In late January 2000 Corel was continuing to sing the praises of its Linux business, describing their beginning as “stunning.” By early February 2000, it had announced that it had entered into a “definitive merger agreement” with the U.S. company Inprise/Boland, which would, as combined, allow Corel to operate as a “Linux powerhouse.” Continuing into March, the suit says, Corel was claiming success in both the Linux and Windows markets. But later that month, when the first-quarter results were announced, Corel had losses of more than $12 million. Stock prices plummeted on the news which also predicted similar results in the next two quarters, belying the previous optimism about the strength of Windows sales. Corel had also admitted that Linux sales, rather than experiencing “exponential growth,” actually decreased from $3.2 million in the previous quarter to $2.3 million in the current one. The next month, a former director of Inprise/Borland filed suit in Chancery Court in Delaware against Inprise and Corel, seeking to block their merger and alleging that Corel misrepresented its Linux sales, a primary force behind the merger. Corel announced the termination of the merger agreement with Inprise/Borland on May 16, 2000, and the implementation of a cost reduction program designed to save them $40 million annually. Following the termination of the merger agreement, several analysts noted the dire cash flow situation of Corel and noted that while they might survive short term, their long range prospects were “onerous.”

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