4 Second Consolidated Amended Class Action Complaint 01/25/2002

62 Pages·2002·0.18 MB·English

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UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF MISSOURI
SOUTHERN DIVISION

IN RE DT INDUSTRIES, INC. Civil Action No. 00-CV-3369-S-4-ECF
SECURITIES LITIGATION
JURY TRIAL DEMANDED

SECOND CONSOLIDATED AMENDED CLASS ACTION COMPLAINT

Plaintiffs, individually and on behalf of all other persons similarly situated, by their
undersigned attorneys, allege upon personal knowledge as to themselves and their own acts, and upon
information and belief as to all other matters, based upon, inter alia, the investigation, as detailed in
paragraph 16 below, made by and through their attorneys, the following:
I.
NATURE OF THE ACTION

1. Plaintiffs bring this action as a class action on behalf of all persons who purchased the
common stock of DT Industries (“DT” or the “Company”) on the open market during the period
September 29, 1997 through and including August 23, 2000 (the “Class Period”), to recover damages
caused by the Defendants’ violations of the federal securities laws.
2. During the Class Period, Defendants engaged in a common course of conduct that
operated as a fraud on the integrity of the market for DT common stock by intentionally and/or
recklessly issuing quarterly and yearly financial statements which materially overstated the Company’s
assets and revenue and caused its reported earnings to be artificially inflated. This fraud was achieved
by materially overstating inventory at two of its wholly-owned subsidiaries Kalish, Inc. (“Kalish”) and
Sencorp Systems, Inc. (“Sencorp”) and by prematurely or improperly recognizing revenue at
Sencorp. The Company’s fraudulent accounting practices, particularly with respect to inventory and
revenue recognition, violated Generally Accepted Accounting Principles (“GAAP”), as well as the
Company’s own stated accounting policies.
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3. In particular, according to a former Controller and a former Administrative
Director/Marketing Manager for Sencorp, the CEO of DT controlled and manipulated revenue and
earnings at Sencorp by directing corporate management at Sencorp to: (i) take Sencorp shipments
that were scheduled for the first quarter of 1999 and book them as revenue in 1998 as if they had
been shipped that year; and (ii) consider machines that were only partially completed, to be completed
to a larger extent, thereby allowing recognition of a greater amount of revenue under the percentage
of completion method.
4. Moreover, according to a former sales engineer/extrusion manger at Sencorp and a
former manager of information technology at Sencorp, inappropriate revenue recognition took place
at Sencorp because Sencorp did not keep reserves for troubleshooting and correction of problems
that surfaced when a new system was installed in a customers’ plant. Instead, Sencorp would simply
give the customer a discount when it failed to meet specifications or when it provided defective
products.
5. In addition, according to a former executive administrative assistant at Sencorp, the
President of Sencorp would knowingly and fraudulently adjust upward the actual financial numbers
on the Monthly Operating reports and then send these reports to the defendants at DT headquarters.
The President would reprimand and threaten any employee who questioned the fraudulent numbers he
was submitting.
6. The reason for defendants intentional and/or reckless acts was simple. Because of the
tremendous pressure on companies to meet Wall Street expectations, an environment was created at
DT where the top priority was to meet Wall Street’s consensus estimates at any and all costs.
7. Through this inventory and revenue manipulation highlighted above and detailed
herein, Defendants were able to sufficiently “manage” the Company’s earnings, albeit through larger

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and larger fabrications as the Class Period wore on. In this regard, Defendants were able to
consistently satisfy Wall Street expectations before the Company’s independent auditors,
PricewaterhouseCoopers (“PWC”), pulled the plug on the scheme.
8. On August 23, 2000, DT shocked the market by revealing that PWC had requested
additional time in order to continue its investigation into an overstatement of certain asset accounts at
one of its subsidiaries and the impact of the discrepancies on DT’s financial results. The Company
further announced that the “discrepancies” could materially impact DT’s previously reported earnings
for fiscal years ended 1997, 1998 and 1999, and for each of the fiscal quarters during those years as
well as the first three quarters of fiscal year 2000.
9. As a result, the Company announced that (i) its previously-reported fiscal 1997, 1998
and 1999 financial statements should not be relied upon; (ii) the senior financial officer of Kalish, had
been placed on administrative leave; and (iii) Defendant Bruce P. Erdel, the Senior Vice President of
Finance and Administration of DT had resigned.
10. On August 23, 2000, NASDAQ immediately halted trading of DT until the Company
provided NASDAQ with additional information. At the time of the suspension, DT stock last traded
at $9.875 per share.
11. Ultimately, the Company admitted the falsity of its previously issued financials by
restating its financial results for almost a full four-year period. As reflected in this restatement, the
Company had materially overstated certain of its assets, including most significantly, inventory, as
well as materially overstating its net income and earnings per share throughout the Class Period.
12. DT issued restated financial results for fiscal years ended 1997, 1998 and 1999, and
the first, second and third quarters of fiscal year 2000. It is apparent that what started out as a
simple, but nonetheless fraudulent, “massaging” of results, turned into a massive fraud as evidenced

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by the increasing size of the restatement over the Class Period. In this regard, Defendants overstated
earnings per share by 6.3% in fiscal 1997, 12.5% in fiscal 1998, 200% in fiscal 1999 and by 159.4%
for the first nine months of 2000.
13. Rather than meeting or exceeding analyst expectations throughout the Class Period,
and thus, appearing to be a consistent performer, without the fraudulent and/or reckless accounting
practices which violated both GAAP and the Company’s publicly stated accounting policies, DT
would have missed Wall Street’s expectations by a material amount in almost every reporting
period during the Class Period.
14. Upon the resumption of trading three months later on November 22, 2000, DT’s
common stock opened at $3.50 per share, a $6.37 per share difference from the Company’s common
stock price when its trading was halted, representing a drop of almost 65%. The Company’s common
stock price has remained below $4.00 per share since November 2000.
15. Plaintiffs and the other members of the Class have suffered tremendous damages as a
result of defendants’ conduct.
II.
PLAINTIFFS’ INVESTIGATION

16. The allegations set forth herein are based on a thorough investigation conducted by
and through Plaintiffs’ attorneys of all reasonable available sources of information, including, without
limitation, the following:
a. DT’s filings with the Securities and Exchange Committee (“SEC”), including,
but not limited to, the Company’s Annual Reports on Form 10-K for fiscal years 1997, 1998, 1999;
the Company’s Quarterly Reports on Form 10-Q filed during 1997, 1998, 1999; and the first, second
and third quarters of 2000, and any amendments thereto;

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b. Press releases and other publicly disseminated statements made by the
Company and/or the Individual Defendants;
c. Reports, articles, and discussions concerning the Company and the subject
matter of this Complaint contained in the print and electronic media and computer data bases;
d. Reports of securities analysts and investors’ advisory services concerning DT
and its subsidiaries and divisions; and
e. Information provided during interviews and consultations with numerous
confidential witnesses, including former employees of DT, Sencorp and/or Kalish, who are
knowledgeable about the Company’s business practices and reporting structure, and about the
industry and markets in which the Company operated during the Class Period.
17. Except as alleged in this Complaint, the underlying information relating to Defendants’
misconduct and the exact particulars thereof, are not available to Plaintiffs and the public as they lie
exclusively within the possession and control of Defendants and insiders of DT, Sencorp and Kalish,
thereby preventing Plaintiffs from further detailing Defendants’ misconduct at this time.

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III.
JURISDICTION AND VENUE

18. The claims alleged herein arise under Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934 (the “Exchange Act”), 15 U.S.C. §§ 78j(b) and 78t(a), and Rule 10b-5, 17
C.F.R. § 240.10b-5 promulgated thereunder by the SEC.
19. This Court has jurisdiction over the subject matter of this action pursuant to Section
27 of the Exchange Act, 15 U.S.C. § 78aa and 28 U.S.C. § 1331.
20. Venue is proper in this Judicial District pursuant to Section 27 of the Exchange Act
and 28 U.S.C. §1391(b). Many of the acts and transactions constituting the violations of law alleged
herein, including the preparation and dissemination to the investing public of false and misleading
information, occurred in substantial part in this Judicial District. DT’s corporate headquarters is
located in this District.
21. In connection with the acts, transactions and conduct alleged herein, Defendants,
directly and indirectly, used the means and instrumentalities of interstate commerce, including the
United States mails, interstate telephone communications and the facilities of the national securities
exchanges.
IV.
THE PARTIES

22. Lead Plaintiff Watson Investment Partners purchased shares of DT common stock as
set forth in the previously filed Exhibit A to the Affidavit of Stuart L. Berman In Support of Motion
of Watson Investment Partners To Consolidate Actions, To Be Appointed Lead Plaintiff And For
Approval Of The Lead Plaintiff’s Selection of Lead Counsel And Liaison Counsel. By order of the

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Court, dated January 16, 2001, Plaintiff Watson Investment Partners (“Watson”) was appointed Lead
Plaintiff in this action.
23. Numerous additional plaintiffs, including Richard C. Bergman, Bill Bishop, and Mary
C. Gilles purchased DT common stock in the open market during the Class Period and were damaged
thereby. These plaintiffs have either filed their own complaint against certain defendants named
herein, have joined as movants in Watson’s Lead Plaintiff Motion, and/or are joining in the filing of
the instant complaint. In each such instance, these plaintiffs have each signed appropriate
certifications under the Private Securities Litigation Reform Act of 1995, which state their
willingness, if needed, to serve as Class representatives in this Action. The certifications of these
additional plaintiffs have been previously filed of record with the Court or are being attached hereto
as Exhibit A.
24. Defendant DT Industries is incorporated in the state of Delaware and maintains its
principal place of business at 1949 East Sunshine, Suite 2-300, in Springfield, Missouri. As of April
28, 2000, DT had approximately 10,107,274 shares of common stock outstanding. DT’s common
stock was actively traded on the NASDAQ National Market System under the ticker symbol “DTI”
during the Class Period. According to its SEC filings, the Company is a leading designer,
manufacturer and integrator of automated production equipment and systems used to manufacture,
assemble, test or package industrial and consumer products. During the Class Period, DT operated
under a fiscal year-end accounting period ending in the last week of June.
25. Defendant Kalish Inc. (“Kalish”) is a wholly-owned subsidiary of DT, incorporated in
Quebec, Canada, and based in Montreal, Canada. According to DT’s SEC filings, Kalish
manufactures unscrambling, cottoning, capping and labeling equipment, and acts as an agent for sales

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of electronic tablet-filling, liquid-filling, and tube-filling equipment, primarily serving the
pharmaceutical, cosmetics and food industries. DT acquired Kalish on or about August 29, 1995.
26. Defendant Sencorp Systems, Inc. (“Sencorp) is also a wholly-owned subsidiary of DT,
incorporated in Delaware, and based in Hyannis, Massachusetts. According to DT’s SEC filings,
Sencorp designs and manufactures plastic processing and packaging equipment, systems and related
parts, including roll-fed thermoformers, blister-packaging equipment and extruders for foam. DT
acquired Sencorp in August 1993.
27. Defendant Stephen J. Gore (“Gore”) was at all relevant times DT’s President and
Chief Executive Officer, as well as a member of its Board of Directors. Gore resigned as President
and Chief Executive Officer of DT on November 3, 2000. As alleged herein, Gore signed each of the
Company’s materially false and misleading annual reports filed on Forms 10-K for fiscal years 1997,
1998 and 1999.
28. Defendant Bruce P. Erdel (“Erdel”) was at all relevant times DT’s Senior Vice
President of Finance and Administration, until resigning from his position on or about August 23,
2000. As alleged herein, Erdel signed each of the Company’s materially false and misleading annual
reports filed on Form 10-K for fiscal years 1997, 1998 and 1999, as well as the materially false and
misleading quarterly reports filed on Forms 10-Q during those fiscal years and the first three quarterly
reports of fiscal year 2000.
29. Defendant Graham L. Lewis (“Lewis”) was at all relevant times the President of DT’s
Packaging Machinery Group and a Director of DT until August 25, 2000, when DT placed Lewis on
administrative leave. DT terminated Lewis’s employment with the Company on October 5, 2000 and
sought his immediate resignation from the Board. Prior to the acquisition of Kalish by DT, Lewis
was Kalish’s president and controlling shareholder. As alleged herein, Lewis signed the Company’s

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materially false and misleading annual reports filed on Forms 10-K for fiscal years ended 1997, 1998
and 1999.
30. Defendant Louis Pallay (“Pallay”) was at all relevant times the President of Kalish,
until August 25, 2000, when the Company placed Pallay on administrative leave. DT subsequently
terminated Pallay’s employment on October 5, 2000.
31. Defendant Sam Patrai (“Patrai”) was President of Sencorp during the Class Period and
was directly involved in the fraudulent reporting of Sencorp’s revenues and inventory.
32. Defendants Gore, Erdel, Lewis, Pallay and Patrai are sometimes collectively referred
to herein as the “Individual Defendants.”
33. In addition to specific allegations of actual knowledge or reckless disregard further
detailed herein, by reason of their positions with the Company, the Individual Defendants had access
to internal documents of the Company and its subsidiaries, reports and other information, including
the adverse non-public information concerning the Company’s true financial condition and future
prospects, and attended management and/or board of directors meetings. As a result of the
foregoing, they were responsible for the truthfulness and accuracy of the Company’s public reports
and releases described herein.
34. The Individual Defendants, as officers and directors of a publicly-held company or its
subsidiaries, had a duty to promptly disseminate truthful and accurate information with respect to DT,
including its subsidiaries or divisions, and DT’s business, and to promptly correct any public
statements issued by or on behalf of the Company which had become false or misleading.
35. Each of the defendants knew or recklessly disregarded that the misleading statements
and omissions complained of herein would adversely affect the integrity of the market for the
Company's common stock and would cause the price of the Company’s common stock to become

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artificially inflated. Each of the defendants acted knowingly or in such a reckless manner as to
constitute a fraud and deceit upon plaintiffs and the other members of the Class.
36. Defendants are each liable as a direct participant in the wrongs complained of herein.
V.
BACKGROUND

Business Description

37. DT is an engineering-driven designer, manufacturer and integrator of automated
production equipment and systems used to manufacture, test or package a variety of industrial and
consumer products. The Company is the largest manufacturer of integrated assembly and test
systems for discrete parts, as well as integrated tablet processing packaging systems in North
America.
38. The Company operates in two business segments, Special Machines and Components.
The Special Machines segment consists of two core business groups: DT Automation and DT
Packaging, where the fraud alleged herein took place during the Class Period.
39. As is stated in the Company’s 1997 Form 10-K filed on September 29, 1997 (the
“1997 10-K”):
The DT Packaging group designs and builds proprietary machines and integrated
systems which are marketed under individual brand names and manufactured for
specific industrial applications using designs owned or licensed by the Company.
Although these machines are generally cataloged as specific models, they are usually
modified for specific customer requirements and often combined with other machines
into integrated systems. Many customers also requests additional accessories and
features which typically generate higher revenues and enhanced profit opportunities.

40. As a result, the business of the DT Packing Group, which includes Kalish and Sencorp,
largely involves the manufacturing and sale of customized machines, which have limited application
for anyone other than the customer. Thus, any cancellation of orders or production of excess
customized machines, would necessarily result in inventory which would be obsolete if it is not sold.

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