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ATI Technologies Inc., a Canadian manufacturer of computer graphics chips, has agreed to pay $8 million to settle a federal class action securities suit that accuses company executives of misleading investors with falsely optimistic sales projections in early 2000 in order to inflate stock prices prior to a major acquisition. If the settlement wins the approval of U.S. District Judge Stewart Dalzell, the team of plaintiffs’ lawyers will be asking for a fee award equal to one-third of the settlement fund, or $2.6 million. In an order handed down late Wednesday, Dalzell, of the Eastern District of Pennsylvania, said he would hold a fairness hearing on April 25 to consider any objections. According to the suit, In re: ATI Technologies Inc. Securities Litigation, ATI in 1999 was an undisputed leader in the market for 3-D graphics computer chips, enjoying command of about one-third of the market. But by early 2000, the suit alleges, the market had changed considerably, and ATI executives began hiding the truth about the company’s sagging sales. The suit says ATI’s position in the market was “increasingly diminished by intense competition and the flood of cheaper products from rivals such as S3 Inc. and nVidia.” To cure the problem, the suit says, ATI set out to acquire ArtX Inc., a privately held company worth an estimated $500 million that “possessed the technologies that ATI hoped would catapult it into the e-appliance market as a major player.” Closing the ArtX deal was “necessary for ATI’s survival,” the suit says. But since ATI was intent on using only a public offering of ATI stock to fund the acquisition, the suit alleges, ATI executives “embarked on a scheme to inflate the price.” In mid-January 2000, the suit says, ATI President and CEO Kwok Yuen Ho issued statements to investors and analysts that said ATI expected its sales to increase 25 percent in 2000 and its market share also to rise. When asked about competitors, Ho insisted that “we are taking market share from all of them,” the suit alleges. But in reality, the suit alleges, Ho was already well aware that ATI’s market share was going down, not up. Sales of computer chips are dependent on decisions by the major computer manufacturers who place orders six to 12 months in advance, the suit says. As a result, the suit says, ATI knew that it had lost several major contracts to its competitors, including Apple Computers and Hewlett-Packard. According to court papers, ATI employees have testified that the first few months of 2000 were “desperate” times and that workers began selling their own stock and exercising options because they knew that ATI was losing market share. In February 2000, Ho gave an interview to Reuters in which he was quoted as having said: “Everything is under control.” The suit directly disputed Ho’s claim, alleging, “In fact, it seemed everything was spiraling out of control.” Ho told analysts that the $212 million in inventory on the company’s books was the result of having “works in progress” and significant “raw materials” on hand, the suit says. But in reality, the suit says, the inventory was a sign of serious problems because ATI had thousands of unusable, worthless chips in its warehouses as a result of technical glitches that had plagued the chip designers. The suit says the truth about ATI’s financial picture began to emerge in May 2000 when the company announced lower-than-expected revenues for the second quarter of its fiscal year and took a $56 million inventory write-down. ATI also projected that its third-quarter sales would not go up 25 percent, as it had previously predicted, but would decrease about 20 percent, the suit says. On the news, ATI’s stock prices plummeted from $16.75 to less than $8.50 in just two days. When the actual third-quarter numbers were released later that year, the suit says, ATI declared a record loss of $128 million. In August 2000, ATI Vice President and CFO James Chwartacky resigned. The suit accuses ATI of violating securities laws by making false and misleading statements to the investing public. Dalzell certified the suit as open to anyone who purchased ATI stock from Jan. 13, 2000, through May 24, 2000. Dalzell later referred the case to U.S. Magistrate Judge Jacob P. Hart, who conducted a mediation that resulted in a settlement after just one day of talks. The plaintiffs’ team was led by attorneys George A. Bauer III and Regina LaPolla of Milberg Weiss Bershad Hynes & Lerach in New York and included attorney Deborah R. Gross of the Law Offices of Bernard M. Gross in Philadelphia; Richard Schiffrin, Katharine M. Ryan, David Kessler and Marc A. Topaz of Schiffrin & Barroway in New York; and Barbara Podell of Savett Frutkin Podell & Ryan in Philadelphia. Also on the plaintiffs’ team were attorneys Paul J. Geller of Cauley Geller Bowman & Coates in Boca Raton, Fla.; Evan Smith of Brodsky & Smith in Bala Cynwyd, Pa.; and solo practitioners Brian M. Felgoise and Marc S. Henzel, both of Philadelphia. ATI was represented by attorneys Daniel Segal and John S. Summers of Hangley Aronchick Segal & Pudlin in Philadelphia and Stuart J. Baskin and Brian H. Polovoy of Shearman & Sterling in New York.

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