UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA WESTERN DIVISION ) AND ON BEHALF OF ALL OTHERS ) CASE No.: SIMILARLY SITUATED, ) 7 ) 8 Plaintiff, ) CLASS ACTION vs. ) COMPLAINT 9 ) FOR VIOLATIONS OF ARTIFICIAL LIFE, INC., AND ) THE FEDERAL EBERHARD SCHONEBURG, ) SECURITIES LAWS ) ) ) JURY TRIAL Defendants. ) DEMANDED ) )
Plaintiff.. similarly situated, by his undersigned attorneys, for his complaint against Defendants, alleges the following based upon personal knowledge as to himself and his own acts, and information and belief as to all other matters, based upon, inter alia, the investigation conducted by and through his attorneys, which included, among other things, a review of the Defendants' public documents, conference calls 7 and announcements made by Defendants, United States Securities and Exchange 8 Commission ("SEC") filings, wire and press releases published by and regarding 9 Artificial Life, Inc., ("Artificial Life", or the "Company"), securities analysts' 0 reports and advisories about the Company, and information readily obtainable on the Internet. Plaintiff believes that substantial evidentiary support will exist for the allegations set forth herein after a reasonable opportunity for discovery. NATURE OF THE ACTION. This is a federal securities class action on behalf of a class consisting of all persons other than Defendants who: () purchased common stock of Artificial 7 8 9 Life during the period between May, 0 and April, (inclusive); () are seeking to recover damages caused by Defendants' violations of federal securities laws; and () wish to pursue remedies under the Securities Exchange Act of 9 (the "Exchange Act"). JURISDICTION AND VENUE. The claims asserted herein arise under and pursuant to Sections 0(b) and (a) of the Exchange Act, ( U.S.C. 78j (b) and 78t (a)), and Rule 0b- promulgated thereunder (7 C.F.R..0b-).. This Court has jurisdiction over the subject matter of this action pursuant to of the Exchange Act ( U.S.C. 78aa) and U. S.C... Venue is proper in this Judicial District pursuant to of the Exchange Act, U.S.C. 78aa and U. S.C. 9(b).
. In connection with the acts, conduct and other wrongs alleged in this Complaint, Defendants, directly or indirectly, used the means and instrumentalities of interstate commerce, including but not limited to, the United States mails, interstate telephone communications and the facilities of the national securities 7 exchange 8 9 PARTIES 0. Plaintiff incorporated by reference herein, purchased Artificial Life securities at artificially inflated prices during the Class Period and has been damaged thereby. 7. Defendant Artificial Life, Inc. is a Delaware Corporation with its principal executive offices located at Broadway Suite 0, Santa Monica, CA, 900. Artificial Life develops and sells software applications for wireless telecommunications devices and mobile phones. 8. Defendant Eberhard Schoneburg was at all relevant times Artificial 7 Life's Chief Executive Officer and Chairman of its Board of Directors. 8 9. During the Class Period, Defendant Schoneburg was privy to non- 9 public information concerning the Company's business, finances, products, markets, and present and future business prospects. Because of his possession of such information, he knew or recklessly disregarded the fact that the adverse facts specified herein had not been disclosed to, and were being concealed from, the investing public. 0. Because of his positions with the Company, Defendant Schoneburg had access to the adverse undisclosed information about the Company's business, operations, operational trends, financial statements, markets and present and future business.
. As CEO and Chairman of Artificial Life, Defendant Schoneburg had a duty to disseminate accurate and truthful information promptly with respect to the Company's financial condition and performance, growth, operations, financial statements, business, markets, management, earnings and present and future business prospects, and to correct any previously-issued statements that had become materially misleading or untrue, so that the market price of the Company's 7 publicly-traded securities would be based upon truthful and accurate information. 8 Defendant Schoneburg breached this duty. 9. Defendant Schoneburg was responsible for the accuracy of the public 0 reports and press releases detailed herein.. Defendant Schoneburg acted with scienter in that he knew, or recklessly disregarded, that the public documents and statements issued or disseminated in the name of the Company were materially false and misleading or omitted to state facts necessary to prevent them from being materially false and is misleading under the circumstances. He knew that such statements or documents would be issued or disseminated to the investing public, and knowingly and 7 substantially participated or acquiesced in the making, issuance or dissemination of 8 9 such statements or documents as a primary violation of the federal securities laws. SUBSTANTIVE ALLEGATIONS. The Class Period begins on May, 0. On that day, Defendant filed its quarterly report on Form 0-Q.. Under the heading "Accounts Receivable" under "Assets", the Company listed $0,9,.. This amount was materially overstated, as it made insufficient allowance for doubtful accounts. 7. The same report recognized revenues of $8,8,7.
8. This amount was also materially overstated, as it made recognized revenue where collectability was not reasonably certain, in violation of SEC Staff Accounting Bulletin 0. 9. The May 0-Q was therefore made false and misleading statements.. On August and November, the Company filed its quarterly reports on Form 0-Q for the second and third quarters of 0, respectively. 7. For the same reasons, the August and November 0-Qs also made 8 false and misleading statements. 9. On April,, after close of trading, the Company issued a current 0 report on Form 8-K. The Report explained that the Company had dismissed its accountant, KPMG. KPMG was responsible for the independent audit of the Company's 0 financials on Form 0-K, which was due on March,.. The Company explained that it had dismissed KPMG because there were disagreements between the Company and KPMG which would have prevented KPMG from issuing an unqualified opinion. 7. In particular, KPMG found issue with the Company's revenue recognition and its reserves for account receivables. 8. These issues remained unresolved at the end of KPMG's engagement. 9. Artificial Life's closed on April,, at a price of $0. per share. It closed on April, (three trading days later) at a price of $0. per share. On each trading day from April 7 to April, the Company's stock traded on very heavy volume.. The stock drop damaged investors. PLAINTIFF'S CLASS ACTION ALLEGATIONS. Plaintiff brings this action as a class action pursuant to Federal Rules of Civil Procedure (a) and (b)() on behalf of a Class, consisting of all persons who purchased common stock of Artificial Life during the Class Period and who
were damaged thereby. Excluded from the Class are Defendants, the officers and directors of the Company at all relevant times, members of their immediate families and their legal representatives, heirs, successors or assigns and any entity in which Defendants have or had a controlling interest. 9. The members of the Class are so numerous that joinder of all members is impracticable. Throughout the Class Period, the Company's securities were 7 actively traded on the OTC.BB. While the exact number of Class members is 8 unknown to Plaintiff at this time, and can only be ascertained through appropriate 9 discovery, Plaintiff believes that there are at least hundreds of members in the 0 proposed Class. Members of the Class may be identified from records maintained by Artificial Life or its transfer agent, and may be notified of the pendency of this action by mail using a form of notice customarily used in securities class actions. 0. Plaintiffs claims are typical of the claims of the members of the Class, as all members of the Class are similarly affected by Defendants' wrongful conduct in violation of federal law that is complained of herein.. Plaintiff will fairly and adequately protect the interests of the members 7 9 of the Class and has retained counsel competent and experienced in class and securities litigation. 8. Common questions of law and fact exist as to all members of the Class and predominate over any questions solely affecting individual members of the Class. Among the questions of law and fact common to the Class are: (a) whether the federal securities laws were violated by Defendants' acts as alleged herein; (b) whether statements made by Defendants to the investing public during the Class Period misrepresented material facts about the business, operations, and management of Artificial Life; and (c) to what extent the members of the Class have sustained damages, and the proper measure of damages.
. A class action is superior to all other available methods for the fair and efficient adjudication of this controversy since joinder of all members is impracticable. Furthermore, as the damages suffered by individual Class members may be relatively small, the expense and burden of individual litigation make it impossible for members of the Class to redress individually the wrongs done to them. There will be no difficulty in the management of 7 this action as a class action. 8 9 Applicability of Presumption of Reliance: Fraud-on-the-Market Doctrine 0. At all relevant times, the market for Artificial Life common stock was an efficient market for the following reasons, among others: (a) The Company's stock met the requirements for listing, and was listed and actively traded on either the OTC Bulletin, a highly efficient and automated market; (b) During the class period, on average, over several hundreds of thousands if not millions of shares of Artificial Life stock were traded on a weekly basis, 7 demonstrating a very active and broad market for the Company's stock and permitting a 8 very strong presumption of an efficient market; 9 (c) Artificial Life 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; (d) Artificial Life was followed by several securities analysts employed by major brokerage firms who wrote reports that were distributed to the sales force and certain customers of their respective brokerage firms during the Class Period. Each of these reports was publicly available and entered the public marketplace;
(e) Numerous NASD member firms were active market-makers in Artificial Life stock at all times during the Class Period; and (0 Unexpected material news about Artificial Life was rapidly reflected and incorporated into the Company's stock price during the Class Period.. As a result of the foregoing, the market for the Company's common stock promptly digested current information regarding Artificial Life from all 7 publicly available sources and reflected such information in Artificial Life's stock 8 price. Under these circumstances, all purchasers of the Company's common stock 9 during the Class Period suffered similar injury through their purchase of Artificial 0 Life's common stock at artificially inflated prices, and a presumption of reliance applies. NO SAFE HARBOR. 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. Many or all of the specific statements pleaded herein 7 were not identified as "forward-looking statements" when made. To the extent 8 9 there were any forward-looking statements, there were no meaningful cautionary statements identifying important factors 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 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, and/or the forward-looking statement was authorized and/or approved by an executive officer of the Company who knew that those statements were false when made. FIRST CLAIM 7
Violation of Section 0(b) of The Exchange Act and Rule 0b- Promulgated Thereunder Against All Defendants 7. Plaintiff repeats and realleges each and every allegation contained above as if fully set forth herein. 8. During the Class Period, Defendants carried out a plan, scheme and course of conduct which was intended to and, throughout the Class Period, did: () 7 deceive the investing public, including Plaintiff and other Class members, as 8 alleged herein; and () cause Plaintiff and other members of the Class to purchase 9 Artificial Life's securities at artificially inflated prices. In furtherance of this 0 unlawful scheme, plan and course of conduct, Defendants, and each of them, took the actions set forth herein. 9. Defendants (a) employed devices, schemes, and artifices to defraud; (b) made untrue statements of material fact and/or omitted to state material facts necessary to make the statements not misleading; and (c) engaged in acts, practices, and a course of business that operated as a fraud and deceit upon the purchasers of the Company's securities in an effort to maintain artificially high market prices for 7 Artificial Life's securities in violation of Section 0(b) of the Exchange Act and 8 9 Rule 0b- thereunder. All Defendants are sued either as primary participants in the wrongful and illegal conduct charged herein or as controlling persons as alleged below. 0. Defendants, individually and in concert, directly and indirectly, by the use, means or 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 business, operations and future prospects of Artificial Life as specified herein.. These Defendants 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 as alleged herein in an effort to assure 8
investors of Artificial Life's value and performance and continued substantial growth, which included the making of, or participation in the making of, untrue statements of material facts and omitting to state material facts necessary in order to make the statements made about Artificial Life and its business operations and future prospects in the light of the circumstances under which they were made, not misleading, as set forth more particularly herein, and engaged in transactions, 7 practices and a course of business that operated as a fraud and deceit upon the 8 purchasers of Artificial Life's securities during the Class Period. 9. Each of the Individual Defendants' primary liability, and controlling 0 person liability, arises from the following facts: () the Individual Defendants were high-level executives, directors, and/or agents at the Company during the Class Period and members of the Company's management team or had control thereof; () each of these Defendants, by virtue of his responsibilities and activities as a senior officer and/or director of the Company, was privy to and participated in the creation, development and reporting of the Company's financial condition; () each 7 8 9 of these Defendants enjoyed significant personal contact and familiarity with the other Defendants and was advised of and had access to other members of the Company's management team, internal reports and other data and information about the Company's finances, operations, and sales at all relevant times; and () each of these Defendants was aware of the Company's dissemination of information to the investing public which they knew or recklessly disregarded was materially false and misleading. Defendants had actual knowledge of the misrepresentations and omissions of material facts set forth herein, or acted with reckless disregard for the truth in that they failed to ascertain and to disclose such facts, even though such facts were available to them. Such Defendants' material misrepresentations and/or omissions were done knowingly or recklessly and for the purpose and effect of concealing Artificial Life's operating condition and future business prospects from 9
the investing public and supporting the artificially inflated price of its securities. As demonstrated by Defendants overstatements and misstatements in regards to the Company's signature product throughout the Class Period, Defendants, if they did not have actual knowledge of the misrepresentations and omissions alleged, were reckless in failing to obtain such knowledge by deliberately refraining from taking those steps necessary to discover whether those statements were false or 7 misleading 8. As a result of the dissemination of the materially false and misleading 9 information and failure to disclose material facts, as set forth above, the market 0 price of Artificial Life's securities was artificially inflated during the Class Period. In ignorance of the fact that market prices of Artificial Life's publicly-traded securities were artificially inflated, and relying directly or indirectly on the false and misleading statements made by Defendants, or upon the integrity of the market in which the common stock trades, and/or on the absence of material adverse is information that was known to or recklessly disregarded by Defendants, but not 7 8 9 disclosed in public statements by Defendants during the Class Period, Plaintiff and the other members of the Class acquired Artificial Life common stock during the Class Period at artificially high prices, and were, or will be, damaged thereby.. At the time of said misrepresentations and omissions, Plaintiff and other members of the Class were ignorant of their falsity, and believed them to be true. Had Plaintiff and the other members of the Class and the marketplace known the truth regarding Artificial Life's financial condition, which was not disclosed by Defendants, Plaintiff and other members of the Class would not have purchased or otherwise acquired their Artificial Life securities, or, if they had acquired such securities during the Class Period, they would not have done so at the artificially inflated prices that they paid.. By virtue of the foregoing, Defendants have violated Section 0(b) of the Exchange Act, and Rule 0b- promulgated thereunder. 0
7. As a direct and proximate result of Defendants' wrongful conduct, Plaintiff and the other members of the Class suffered damages in connection with their respective purchases and sales of the Company's securities during the Class Period. 8. This action was filed within two years of discovery of the fraud and within five years of each plaintiffs purchases of securities giving rise to the cause 7 of action. 8 9 SECOND CLAIM Violation of Section (a) of 0 The Exchange Act Against the Individual Defendants 9. Plaintiff repeats and realleges each and every allegation contained above as if fully set forth herein. 0. The Individual Defendants acted as controlling persons of Artificial Life within the meaning of Section (a) of the Exchange Act as alleged herein. By virtue of their high-level positions, agency, ownership and contractual rights, and participation in and/or awareness of the Company's operations and/or intimate 7 knowledge of the false financial statements filed by the Company with the SEC and 8 disseminated to the investing public, the Individual Defendants had the power to influence and control, and did influence and control, directly or indirectly, the decision-making of the Company, including the content and dissemination of the various statements that plaintiff contends are false and misleading. The Individual Defendants were provided with or had unlimited access to copies of the Company's reports, press releases, public filings and other statements alleged by Plaintiff to have been misleading prior to and/or shortly after these statements were issued and had the ability to prevent the issuance of the statements or to cause the statements to be corrected.. In particular, 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.. As set forth above, Artificial Life and the Individual Defendants each violated Section 0(b) and Rule 0b- by their acts and omissions as alleged in this Complaint.. By virtue of their positions as controlling persons, the Individual 7 Defendants are liable pursuant to Section (a) of the Exchange Act. As a direct 8 and proximate result of Defendants' wrongful conduct, Plaintiff and other members 9 of the Class suffered damages in connection with their purchases of the Company's 0 securities during the Class Period.. This action was filed within two years of discovery of the fraud and within five years of each Plaintiffs purchases of securities giving rise to the cause of action. WHEREFORE, Plaintiff prays for relief and judgment, as follows: (a) Determining that this action is a proper class action, designating 7 Plaintiff as Lead Plaintiff and certifying Plaintiff as a class representative under Rule of the Federal Rules of Civil Procedure and Plaintiffs counsel as Lead 8 Counsel; 9 (b) Awarding compensatory damages in favor of Plaintiff and the other Class members against all Defendants, jointly and severally, for all damages sustained as a result of Defendants' wrongdoing, in an amount to be proven at trial, including interest thereon; (c) Awarding plaintiff and the Class their reasonable costs and expenses incurred in this action, including counsel fees and expert fees; and proper. (d) Such other and further relief as the Court may deem just and JURY TRIAL DEMANDED Plaintiff hereby demands a trial by jury.