case3:07-cv-01429-j document58 filed 08/20/2007 page 1 of...
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Case 3:07-cv-01429-J Document 58
ALAN W. SPARER (No. 104921)MARC HABER (No. 192981)JAMES S. NABWANGU (No. 236601)LAW OFFICES OF ALAN W. SPARER100 Pine Street, 33rd FloorSan Francisco, California 94111-5128Telephone: 415/217-7300Facsimile: 415/217-7307asparer(c sparerlaw.commhaber(c sparerlaw.comj nabwangu@ sparer] aw. coin
Attorneys for PlaintiffsMICHAEL B. ESHELMAN, D.D.S.;PETER F. SILCHER, D.D.S.; andLORI I. SILCHER
Filed 08/20/2007 Page 1 of 5
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF CALIFORNIA
SAN FRANCISCO DIVISION
MICHAEL B. ESHELMAN, D.D.S.; PETER No. C 07 1429 JSWF. SILCHER, D.D.S.; AND LORI I.SILCHER Action Filed: March 12, 2007
V.
ORTHOCLEAR HOLDINGS, INC. ABRITISH VIRGIN ISLANDS COMPANY;ORTHOCLEAR, INC., A DELAWARECORPORATION; MUHAMMADZIAULLAH CHISHTI, AN INDIVIDUAL;HUAFENG "CHARLES" WEN, ANINDIVIDUAL; PETER RIEPENHAUSEN,AN INDIVIDUAL; ARTHUR T. TAYLOR,AN INDIVIDUAL; SAIYED ATIQ RAZA,AN INDIVIDUAL; CHRISTOPHERKAWAJA, AN INDIVIDUAL; PATRICIAHUMELL SEIFERT, AN INDIVIDUAL;JOSEPH BREELAND, AN INDIVIDUAL;MUDASSAR RATHORE, ANINDIVIDUAL; PAUL BADAWI, ANINDIVIDUAL; 31 TECHNOLOGYPARTNERS III, LP; AND DOES 1THROUGH 25, INCLUSIVE,
DECLARATION OF MARC HABER INSUPPORT OF MOTION TO SHORTENTIME AND IN SUPPORT OF MOTION TOLIMIT ORTHOCLEAR'S CONTACTS WITHPOTENTIAL CLASS MEMBERS AND FORCORRECTIVE ACTIONS
Date: August 31, 2007Time: 9:00 a.m.Judge: Hon. Jeffrey S. WhiteCourtroom: 2, 17th Floor
Trial Date: None Set
DECL. OF M. HABER ISO MTN TO SHORTEN TIME AND ISO NO. C 07 1429 JSWMTN TO LIMIT DEF'S CONTACT WITH POT CLASS MEMBERS
Case 3:07-cv-01429-J Document 58 Filed 08/20/2007 Page 2 of 5
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I, Marc Haber, declare as follows:
1. I am an attorney with the Law Offices of Alan W. Sparer. I am duly licensed to
practice before the courts of this State, and I am counsel for Plaintiffs Michael B. Eshelman,
D.D.S., Peter F. Silcher, D.D.S., and Lori I. Silcher ("Plaintiffs") in this case. I make this
declaration in support of Plaintiffs' Stipulated Request And [Proposed] Order Shortening Time
and in support of Plaintiffs' Motion To Limit OrthoClear's Contacts With Potential Class
Members And For Corrective Actions. Except as otherwise indicated, the statements made
herein are based on my personal knowledge, and if called upon to do so, I would and could
testify competently thereto.
2. On March 12, 2007, Plaintiffs filed a class action complaint on behalf of Class A,
B and C investors against OrthoClear Inc. and OrthoClear Holdings, Inc., certain directors and
officers personally, and 3i Technology Partners III, LP for, inter alia, fraud, negligent
misrepresentation, breach of fiduciary duty and constructive trust. After the complaint was filed,
the parties agreed to stay the lawsuit in order to avoid litigation expense while we attempted to
settle the claims. Defendants provided us with information subject to a confidentiality agreement
that did not allow us to share this information with unrepresented individual investors. However,
we could share the information with the named class representatives. These individuals were
some of the largest individual investors in OrthoClear. Settlement discussions with 3i soon led
to an impasse and were terminated . 3i's motion to dismiss is scheduled for hearing on October
26, 2007.
3. On August 6, 2007, OrthoClear made a written settlement offer. We shared the
offer with the class representatives and they immediately and unanimously rejected it. On
August 8, we notified OrthoClear of the rejection and informed it that the litigation stay was
being lifted. This required OrthoClear and the director and officer defendants to file a responsive
pleading by September 10. Two days later, OrthoClear mailed checks directly to all the class
members, accompanied by a "Release Of Claims," a cover letter and a copy of the Second
Amended Complaint. A representative copy of OrthoClear's communication is attached hereto
as Exhibit A. OrthoClear represents that the offer is for 28 cents on the dollar invested. The
-1-DECL. OF M. HABER ISO MTN TO SHORTEN TIME AND ISO NO. C 07 1429 JSWMTN TO LIMIT DEF'S CONTACT WITH POT CLASS MEMBERS
Case 3:07-cv-01429-J Document 58 Filed 08/20/2007 Page 3 of 5
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checks ranged in size from around $7,000 to $56,000.
4. Because the class members invested approximately $11 million, OrthoClear's
offer could total as much as $3 million. However, some former OrthoClear employees have
indicated that they used bonus money to purchase shares and otherwise were awarded shares as
performance incentives. Despite the fact that OrthoClear claimed in its cover letter the "check is
for 28 cents per dollar paid to acquire" the shares, the offers that these former employees
received did not account for shares that were obtained in lieu of cash bonuses. Because of this, it
is not clear how much OrthoClear has offered in total or as a percentage of the class action
claims against it.
5. OrthoClear's offer expires on September 10, 2007. Under the terms of the release,
by tendering the check for payment, the investor is releasing all claims that he or she may have
against all defendants "that arise out of the same facts and occurrences as alleged" in the
complaint. The class representatives have received this same offer by mail from OrthoClear
(through counsel) and have rejected it individually.
6. We were not aware that OrthoClear was going to send out these checks and only
learned about it on Saturday, August 11, when this office was contacted by a concerned investor
who had just received the communication. In the week following OrthoClear's mailing, this
office has been in contact with approximately 60 individual investors. Since we believe that
there are between 200 to 300 such investors, this means that we have spoken with around only
20%-30% of the potential class members.
7. From my conversations with these investors, it is possible to make some general
comments about their understanding of this action and OrthoClear's settlement offer. First, the
multi-thousand dollar checks came as a complete surprise to the investors as, for the most part,
this was only the second communication that they have received from OrthoClear since October
2006. Most had not been aware that a class action had been filed before receiving the checks.
No one (other than a handful of investors who had contacted us after the complaint was filed)
was aware of the settlement discussions that had been taking place between the class
representatives and OrthoClear, or that the class representatives had been given access to
-2-DECL. OF M. HABER ISO MTN TO SHORTEN TIME AND ISO NO. C 07 1429 JSWMTN TO LIMIT DEF'S CONTACT WITH POT CLASS MEMBERS
Case 3:07-cv-01429-J Document 58 Filed 08/20/2007 Page 4 of 5
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information that was not available to the potential class members. They did not know that
OrthoClear's settlement offer came on the heels of the rejection by the class representatives of a
settlement offer or that the class representatives also had received checks from OrthoClear but
were refusing to cash them. They did not understand that they were being asked to release their
claims not only against OrthoClear for the loss of the investment, but all claims that the investors
might have against 3i and OrthoClear's officers and directors individually.
8. The potential investors who I spoke with also were unfamiliar with and confused
by the class action process. Most indicated that they thought that they had to "opt in" to the class
action, and many thought that they separately had to retain us as their attorneys to be part of the
class action. They did not understand that the class representatives had an obligation to represent
their interests even before the class was certified. The potential class members did not know that
the Court had to approve any settlement with the class, including any attorneys' fees paid to class
counsel. Many thought that we automatically would receive 40% of any recovery.
9. Most of the investors I spoke with about these issues ultimately expressed an
intention not to cash the check for the time being. I could not answer all of the questions that I
was asked because of the confidentiality of the settlement negotiations.
10. Reasons For The Requested Shortening Of Time: All of the investors who
indicated that for the time being they would not cash OrthoClear's check asked to be provided
updates as more information becomes available. Many have requested that we contact them
again before the September 10 deadline for accepting the settlement offer. Without guidance
from the Court on the propriety of OrthoClear's actions, it is not clear what further information
we can provide them. Also, most investors have not contacted us and we have no way of
contacting them. In the absence of further information, it is likely that many of these people will
cash OrthoClear's checks based on an incomplete understanding or misunderstanding of the facts
of this case, the nature of OrthoClear's settlement offer and the potential class members' rights
and protections as part of the class process.
11. Previous Time Modifications: On April 10, 2007, the parties stipulated that the
deadline for Defendants to respond to the First Amended Complaint be extended 30 days from
-3 -DECL. OF M. HABER ISO MTN TO SHORTEN TIME AND ISO NO. C 07 1429 JSWMTN TO LIMIT DEF'S CONTACT WITH POT CLASS MEMBERS
Case 3:07-cv-01429-J Document 58 Filed 08/20/2007 Page 5 of 5
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the date either party gave notice that current settlement discussions have concluded. On April
20, 2007, the parties stipulated to move the Case Management Conference from June 29, 2007
until after July 8, 2007 in order to accommodate the schedule of Plaintiffs' lead counsel.
Unprompted by the parties, the Court later moved the Case Management Conference to October
26, 2007. There have been no other time modifications requested by the parties.
12. Effect Requested Time Modification Would Have On The Schedule For The
Case: It is not anticipated that this requested time modification would have any effect on the
schedule for this case.
I declare under penalty of perjury that the foregoing is true and correct. Executed on this
20th day of August 2007 in San Francisco, California.
/s/
MARC HABER
-4-DECL. OF M. HABER ISO MTN TO SHORTEN TIME AND ISO NO. C 07 1429 JSWMTN TO LIMIT DEF'S CONTACT WITH POT CLASS MEMBERS
Case 3:07-cv-01429-JSW Document 58-2 Filed 08/20/2007 Page 1 of 57
EXHIBITA
Case 3 : 07-cv-01429 -JSW Document 58-2 Filed 08/20/2007 Page 2 of 57
Ocunlenta Capital Holdings, Inc. (f/k/a OrthoClear Holdings, Inc.)
August 10, 2007
Michael Eshelman REC'D AUG 13 20074850 W. Panther Creek, Ste 108The Woodlands, TX 77381USA
Re: OrthoClear Shareholder Litigation
OrthoClear Holdings, Inc. (now known as Ocumenta Capital Holdings, Inc.), and certain otherentities and individuals were named as defendants in a shareholder class action lawsuit filed inMarch 2007. This lawsuit is pending in the United States District Court for the Northern Districtof California and is described in the enclosed Release of Claims and Exhibit A to the Release ofClaims.
The enclosed Release of Claims and check are an offer by the defendants in the above-referencedlawsuit to settle with you out of court. The enclosed check is for 28 cents per dollar paid toacquire the respective Class A, B, or C preference shares. As explained in the enclosed Releaseof Claims, endorsement by you of the enclosed check and tendering it for payment represents acompromise by you of a claim you may have in connection with the currently-pendingshareholder class action lawsuit. This offer will expire if not accepted by September 10, 2007.
BY ENDORSING THE ENCLOSED CHECK AND TENDERING IT FOR PAYMENT,YOU ARE ACCEPTING THE TERMS OF THE RELEASE OF CLAIMS AND YOUARE GIVING UP ANY CLAIMS OR RIGHTS THAT YOU MAY HAVE INCONNECTION WITH THE CURRENTLY-PENDING SHAREHOLDER CLASSACTION LAWSUIT.
WE RECOMMEND THAT YOU CONSULT AN ATTORNEY IN MAKING ADECISION WHETHER TO ACCEPT THE TERMS SET FORTH IN THE ENCLOSEDRELEASE OF CLAIMS.
The enclosed materials are not an offer to purchase your shares of stock. By endorsing theenclosed check, you are not surrendering your shares.
Sincerely,
Pat W. CostelloGeneral CounselOcumenta Capital Holdings, Inc.
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Case 3:07-cv-01429-JSW Document 58-2
:RELEASE OF .C:L I iJ
Filed.08/20/2007 Page 4 of 57 '
EASE :O ' C _Ax1V1;S
t^s .dcsc'nibetl :t^,claw:, endorsement and toridez 'by S^o^u;of Ghe;check eri,closed with this Releaseof Clahns ("Re'lease") represents a conlpromise by you c t a^eh`rim y.oi may have inconnection with a currently-pending shareholder class action las^^su^it. •Ilyou endorse and.tender the enclosed check, you.are aceeptizrg the terms '.of this Rel.ea^.e and .you .are .g v .ngup any claims or rights that you may hia:v:e in conne .bn wtt*.h the currently-pendingshareholder class action lawsuit described below,
This Release is made between OrthoClear Holdings, Il e..(now known as Ocumenta .Capital'.Holdings, Inc .) .(" OrthoClear"), and you, the person or ertt:`ity endorsin:g.the enclosed check and.the curren t. holder .Q certain Class A, B, or C Preference shares:issued-by OrfhoClear.(t.i e"Releasing Party").
PECITAL'S
A.. OrthoClear its a company incorporated-under the laws of British'VVir-gin Islands,. with -itsregistered office at c/o Walkers BVI, WalkersChainbers; P.:Q. B'ox 92, Road Town, Tortola,British Virgin Islands..
B. OrthoClear and its wholly-owned subsidiary, Ozthho.C ear, Inc. now known as Ocumenta,
Inc.) (collectively referred to herein as the "Ort'ho.1ear-C:ornpctni:es")• have been named :as
defendants in a putative shareholder class action lawsuit;peii ding in-the United State. s• District
Court for the Northern District of California, capC oned ^LIzcl7aeL . Eshelman, D.D.S., et al. v:
OrthoClear Holdings, Inc. et al., No. C .07=0'1429 J'SW (the "Class Action"). Also named as
defendants are former officers and directors-of the.OrthoClear Companies, as well as 3.i
Technology Partners III, LP.
C. The Class Action was filed in March 2007 and Plaintiffs purport to bring the ClassAction on behalf of all persons and entities who purchased or otherwise acquired securitiesissued by.OrthoClear Holdings, Inc. between January 1., 2005 and September 30, 2006, and whowere not an officer or director of the OrthoClear Companies or a family member thereof.
D. Generally, the Class Action alleges that the OrthoClear Companies and the otherdefendants made false and misleading statements to investors and potential investors. Acomplete copy of the-operative complaint in the, Class Action is attached hereto as Exhibit A.
E. The Class Action lawsuit was filed by Plaintiffs' counsel , the Law Offices of Alan W.Sparer, 100 Pine St., 33rd Floor, San Francisco , CA 94111-51.2.8. The firin ' s website iswww.sparerlaw . com and its contact telephone number is (415) 21.7-7300.
F. Plaintiffs' counsel was not involved in preparing this Release and this Release in no way
reflects any agreement by Plaintiffs' counsel to forego prosecution of the Class Action on behalf
of shareholders who do not execute this Release.
Case 3:07-cv-01429-JSW Document 58-2 Filed 08/20/2007 Page 5 of 57
RELEASE CF:CL1:' S
G. The court has not yet certified a class.in the Class Action, but.you:are a'potential memberof the class that Plaintiffs seek to represent in the Class Action Your :endorsement and tend-erin_gof the enclosed check will constitute -a full release of all.claii is aid rights that you may have hadas .a class memberinn the- Class Action. .
H, Endorsing aid tendering the enclose l check foxPayment reflects your acceptance of theterms of this'Re ease:and fill accord and sa isfaoDion for any-.claYrns: ;elated to :the Class Actionlawsuit. or that. ate otherwise related to your investmcain. OrthoClear: The dollar amount setforth on the eenclosed check represents tli'e full conside't,ion that will "be :pa.i:d for your acceptanceof the terms of this Release.
1. The payment ofthe amount on the enclosed check is expressly conditioned on youracceptance of the terms of this Release. By endorsing and tendering the enclosed check, youacknowledge your acceptance to the terms of this Release.
RELEASE:
In consideration for the payment of the enclosed check, you, your predecessors,successors, assigns and each past or present, direct or indirect, partner, subsidiary, division oraffiliated entity, corporation or partnership, and .each past or present employee, agent,representative, attorney, accountant, officer, director, and stockholder hereby completely releaseand forever discharge the OrthoClear Compani s, Muhammad Zinullah Chishti, Huafeng Wen,Peter Riepenhausen, Arthur T. Taylor, Saiyet Atiq Raza, Christopher-Kawaja, Patricia Hume.11Seifert, Joseph Breeland; Mudassar Rathore, Paul Badawi,- and 3i Technology Partners III, LPand their predecessors, successors, assigns and each past OT present, direct or -indirect, partner,subsidiary, division or affiliated entity, . corporation or.partnersliip„ and each past or presentemployee, agent, representative, attorney, .accountant, officer, :director, stockholder (collectively"Released Parties"), and all persons :acting by, through or under the Released Parties, of or fromany and all claims, demands, debts, .duties., obligations, promises., liabilities, damages, attorneyfees, accounts, payments, liens, acts, costs, expenses., sums of money., suits, dues, actions andcauses of action of any kind or nature whether known or unknown, matured, or unmatured,suspected or unsuspected, that are asserted in the Class Action. or that could have been assertedin the Class Action up to the date of your endorsement of the enclosed check; that arise out of thesame facts and occurrences as alleged in the Class Action; that are related to the subject matter ofthe Class Action; or that are otherwise related to your investment in'OrthoClear ("ReleasedClaims").
SECTION 1542 WAIVER:
By endorsing and tendering the enclosed check, you agree that the Released Claimsinclude not only claims presently known, but also include unknown or unanticipated claims,rights, demands, actions, obligations, liabilities, and causes of action of every kind and characterthat would otherwise come within the scope of the Released Claims as described above. Youunderstand that you may hereafter discover facts different from what you now believe to be true,which if knovm, could have materially affected this Release, but you nevertheless waive anyclaims or rights based on different or additional facts. By endorsing and tendering the enclosed
Case 3:07-cv-01.429-JSW Document 58-2 Filed 08/20/2007 Page 6 of.57
RELEASE OF CLAIMS
check, you knowingly Zrd voluntarily wail, e,any. and all..rights or benefit}s-that you-may now-have, or in the fciture moray have, under the terns of Section 1542 of the California ;Civil Code.
By endorsing and tendering the enclosed check, you acknowledge- that you are familiarwith the provisions of Section 1542 of the California Civil Code which states:
A GENERAL RELEASE DOES.NOT EXTEND TO CLAIMSWFIICH THE CREDITOR DOES NOT KNOW OR SUSPECTTO EXIST IN HIS FAVOR AT THE TLIv1E OF EXECUTINGTHE RELEASE, WHICH IF.KNOWN B.Y HTM.MUST HAVEMATER;ZALLY AFFECTEDFZI'S :SET'TL-EMENT WITH TI=TEDEBTOR.
By endorsing: and tendering the enclosed check, it is your intention. to fully, ,finally, andforever settle and release.all possible claims, known and unknown, for.or rel-ati.ng to the subjectmatter of this Release.
ACKNOWLEDGEMENT OF RELINQUISHMENT OF RIGHTS IN CLASS ACTION:
By endorsing and tendering the enclosed check, you acknowledge acceptance of theterms of this Release and you acknowledge that the Release fully extinguishes any claim that youhave for any recovery in the Class Action.
REVIEW BY COUNSEL:
You should consult counsel before accepting the terms of this Release . By endorsingand tendering the enclosed check, you acknowledge that you have had the, opportunity to consultindependent counsel in determining whether to accept the terms of this Release.
NO ADMISSION OF LIABILITY:
The payment of money in connection with this Release is not an admission of liability orwrongdoing by the Released Parties.
ATTORNEYS' FEES:
If you endorse and tender the-enclosed check, should any litigation be commencedbetween you and the Released Parties concerning this Release, its terms, or the rights and dutieschat you may have or that the Released Parties may have concerning the Release, the prevailingparty in such litigation shall, in addition to such other relief as may be granted, be entitled to areasonable sum for such party's attorn.eys' fees and costs in such litigation as determined by thecourt in such litigation.
TIMING OF OFFER:
The enclosed check will be void if not endorsed and tendered forpayrnent on or beforeSeptember 10, 2007.
Case 3:07-cv-01429-JSW Document 58-2 Filed 08/20/2007 Page 7 of 57
RELEASE OF CL.A3
CONSZDE1 . TZQN-"**
By endorsing and tendezing the enclosed oheclG: or-payment, you agree :that this Releaserecites the sole consideration for this. Release; That aio repres:en ad:oh ,or pvomise.,has, been madeby any of the Released Parties, or any other persons 'conc.e ing.the'subj eat matter of thisRelease, except as expressly set forth herein; and thaG•al] agreem.,mits and und.or-saudings betweenthe parties concerning the subject matter of - i:s Release are•:embodied an:d expressed in. thisRelease. This Release. shall supersede all.pri:or- or co±t mporane.ous agree ments between you andany of the Released Parties, whether written or -oral, express or irrmpllied, with re.spect.to theReleased Claims.
AM +NDMENTS:
This Release may not be amended except by an instniment in writing, signed by you andOcumenta Capital Holdings, Inc. No failure to exercise and no delay in exercising any right,remedy or power under this Release shall operate as a waiver thereof, nor shall any single orpartial exercise of any right, remedy, or power under this Release-preclude any other or furtherexercise thereof, or the exercise of any right, r•.emedy, or power provided herein or by law or inequity.
ASSIGNMENT:
By endorsing and tendering the .enclosed check, you-represent and warrant that you have
not transferred, assigned or agreed to transfer or ass •gn.to any.pers:on.or entity any claims, costs
or rights that are released herein and agree to indemnify, defend and hold harmless the ReleasedParties against any and all claims arising out of.any such assignment or.agreement to transfer.
GOVERNING LAW:
This Release and any dispute arising regarding this Release shall be governed by the laws
of the State of California.
EXECUTION:
OrthoClear's execution of and agreement to the Release shall be made below. Yourexecution and agreement to the Release shall be made by endorsing and tendering the enclosedcheck, which reflects a payment of 28 cents per dollar paid to acquire the respective Class A, B,or C Preference Shares currently held by you.
ACKNOWLEDGED AND AGREED TO:
Pat W. CostelloGeneral Counsel ofOcumenta Capital Holdings, Inc.
4
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EXHIBIT A
e 3 : 07-cv-01429 -JSWC Document 58-2 Filed 08/20/2007 Page 9 of 57rCase 3:07-cv-01429-JSW Document 47 Filed 07/24/2007 Page 1 of 48
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1 11 ALAN W. SPARER (No. 104921)MARC HABER (No. 192981)
2.. JAMES S. NABWANGU (No. 236601)LAW OFFICES OF ALAN W. SPARER
3 ` 100 Pine Street, 33'd FloorSan Francisco , California 94111-5128
4 Telephone : 415/217-7300Facsimile : 415/217-7307
5 asparernasparerlaw.cominhaber@sparerlaw. corn
7" Attorneys for Plaintiffs
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF CALIFORNIA
SAN FRANCISCO DIVISION
MICHAEL B. ESHELMAN, D.D.S.; PETER FSILCHER, D.D.S.; and LORI I. SILCHER
Plaintiffs,V.
No. C 07-01429 JSW
Action Filed: March 12, 2007
ORTHOCLEAR HOLDINGS, INC. a BritishVirgin Islands Company; ORTHOCLEAR,INC., a Delaware Corporation; MUHANRYLA-DZIAULLAH,.CHISHTI,, an individual;HUAFENG "CHARLES" WEN, an individual;PETER RIEPENHAUSEN, an individual;ARTHUR. T. TAYLOR, an individual;SAIYED ATIQ RAZA, an individual;CHRISTOPHER KAWAJA, an individual;PATRICIA HUMELL SEIFERT, an individual;JOSEPH BREELAND, an individual;MUDASSAR RATHORE, an individual;PAUL BA]DAWI, an individual ; 3i' TechnologyPartners Ell" LP; and DOES 1 through 25,inclusive,
Defendants.
SECOND AMENDED CLASS ACTIONCOMPLAINT
DEMAND FOR JURY TRIAL
SECOND AMENDED CLASS ACTION COMPLAINT
C e 3:07-cv-01429-JSW Document 58-2 Filed 08/20/2007 Page 10 of 57Case 3:07-cv-01429-JSW Document 47 Filed 07/24/2007,- Paget of 48
1 INTRODUCTION
2 Michael Eshelman, D.D.S., Peter F. Silcher, D.D.S., and Lori I. Silcher ("Plaintiffs"),
3 individually and on behalf of all other persons and entities who purchased or otherwise acquired
4 Class A, B and C preferred shares issued by Defendant OrthoClear Holdings, Inc. ("OrthoClear
5 Holdings") between January 1, 2005 and September 30, 2006 (the "Class" or "Class members"),
6 by their undersigned attorneys, for their Class Action Complaint ("Complaint"), allege the
7 following upon personal knowledge as to themselves and their own acts, and upon information
8 and belief as to all other matters. Plaintiffs' information and belief is based on their investigation
9 (made by and through their attorneys), which investigation included, among other things, a
10 review and analysis of (1) public documents pertaining to Defendants; (2) press releases issued
11 by Defendants OrthoClear, Inc. and OrthoClear Holdings (collectively "OrthoClear");
12 (3) documents sent by OrthoClear to potential investors; (4) court filings of OrthoClear and Align
13 Technology, Inc. ("Align") in the various lawsuits and counter-suits filed by those companies;
14 and (5) filings made by Align and OrthoClear in the International Trade Commission proceeding.
15
16 I.
17 ORTHOCLEAR'S SUMMARY OF THE ACTION
18 1. This action arises out of the false, fraudulent and/or misleading statements made
19 to investors and potential investors by certain of OrthoClear's director and. officers identified
20 more fully below (collectively, the "D&O Defendants"). In order to induce members of the
21 Class to invest in OrthoClear Holdings, OrthoClear and the D&O Defendants falsely
22 characterized as meritless the claims underlying multiple lawsuits and proceedings brought
23 against the Company by Align, Inc. The multiple lawsuits (collectively, the "Align Litigation")
24 alleged, inter alia, theft and misuse of Align's intellectual property by OrthoClear and its
25 founders. OrthoClear and the D&O Defendants also downplayed the risk of losing the Align
26 Litigation and omitted any discussion of the effect that costs of defending the Align Litigation
27 could have on OrthoClear. All these false statements and/or omissions were made knowingly
28 and intentionally, or at the very least in negligent disregard of the truth.
-1-SECOND AMENDED CLASS ACTION COMPLAINT
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2. What made this conduct fraudulent or negligent and not simply imprudent is that
OrthoClear and the D&O Defendants knew or should have known that OrthoClear's entire
business was based upon the wholesale theft of intellectual property by various OrthoClear
officers and directors who had left Align to start OrthoClear. From design and manufacture
through sales and marketing, virtually every aspect of OrthoClear's business derived from
Align's protected intellectual property, including trade secrets, patents, trademarks, and
11 proprietary business information.
3. Although OrthoClear and the D&O'Defendants knew or were on notice that they
had stolen virtually all of the intellectual property used by their company, they falsely assured
investors that Align' s claims were without merit and that OrthoClear would prevail in the
11 litigation. Defendants' fraudulent statements included misrepresentations and omissions made in
12 'Purchase Agreements; press releases and regular oral assurances.- Class Members were told
`13 falsely that "the operation of [OrthoClear's] business as now conducted does not infringe any
14 patent or other proprietary rights of"others respecting any ofthe same." OrthoClear and the D&O
:15 Defendants even used the brazenness of their theft from+Align in order to mislead investors.
16 Noting that OrthoClear's CEO, Defendant Zia Chishti, and it's President, Defendant Charlie
17 Wen, earlier had developed Align's product, OrthoClear claimed that "[i]t is counterintuitive that
18 these same individuals would develop a new company around a product and process that violates
19 the very same patents they composed."
20 4. OrthoClear and the D&O Defendants omitted to inform members of the Class that
21 11 it might be forced to settle the Align Litigation on terms so unfavorable as to constitute a virtual
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surrender of its orthodontic business. Instead, throughout the period in which investments were
solicited, the only caution that OrthoClear gave to investors regarding the Align Litigation was
the boilerplate disclaimer repeated in the investor purchase agreements that "[a]ny outcome that
is adverse to the Company or OrthoClear, Inc. could have a significant adverse impact on the
Company ...." Given Defendants'-reassurances that the litigation was meritless and everything
that Defendants knew about the real merits of the Align Litigation, this minimal disclosure was
inadequate and materially misleading.
SECOND AMENDED CLASS ACTION COMPLAINT
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1 5. Finally, OrthoClear and the D&O Defendants also falsely told members of the
2 Class that OrthoClear Holdings was close to an initial public offering that would raise additional
3 capital for the company. These false representations and promises were repeated often and up
4 until the day that OrthoClear's management announced it was settling the Align lawsuits and
5 abandoning its orthodontic business.
6 6. In August 2006, less than two months before a scheduled trial in the Align
7 Litigation, OrthoClear raised an additional $10 million dollars from the venture capital firm,
8 Defendant 3i Technology Partners III, LP ("3i"). In connection with the investment, Defendant
ii9 Paul Badawi, a Director of 3i, joined OrthoClear's Board of Directors. These funds should have
10 been sufficient to allow OrthoClear to defend the Align Litigation.
11 7. Nonetheless, one month later, on the eve of trial and without warning, OrthoClear
12 abandoned its defense of the Align Lawsuits, announcing that it had entered into a settlement that
13 required it to assign its intellectual property to Align and exit the orthodontic aligner business in
14 return for a payment of only $20 million. OrthoClear admitted for the first time to its investors
15 that it understood that it was likely to lose the litigation with Align, and further acknowledged
16 that the costs of prosecuting and defending the Align Litigation were prohibitive. In other words,
17 OrthoClear tacitly acknowledged that its earlier denials regarding both the merits ofthe Align
18 Litigation and the effect of litigation costs on OrthoClear's business were false. The Class
19 members have not received any payment from the settlement and have suffered damages in
20 excess of $10 million.
21 8. After the settlement, instead of using the $20 million for the benefit of its
22 shareholders, OrthoClear returned all or a significant portion of 3i's $10 million investment.
23 This transaction violated OrthoClear's own Memorandum of Association and constituted a
24 breach of fiduciary duty by OrthoClear's directors, including Defendant Paul Badawi, who
25 placed the interests of 3i ahead of OrthoClear's defrauded shareholders. Accordingly, Plaintiffs
26 also bring this action against the OrthoClear Holdings and its Board of Directors to redress
27 injuries suffered as a direct result of the Board's decision to allow an unlawful distribution of
28 approximately $10 million to 3i..
-3-SECOND AMENDED CLASS ACTION COMPLAINT
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1 II.
2 JURISDICTION AND VENUE.
3 9. This action arises, inter alia under Section 10(b) of the Exchange Act and Rule
4 l Ob-5 promulgated thereunder.
5 10, This Court has jurisdiction over the subject matter of this Action pursuant to 28
6 U.S.C. §1331 and Section 27 of the Exchange Act (15 U.S.C. §78aa). This Court also has
7 supplemental jurisdiction pursuant to 28 U.S.C. §1367(a).
11. Venue is proper in this District-pursuant to Section 27 of the Exchange Act, and
28 U.S.C. §'1391(b) because OrthoClear, Inc. maintained during all times relevant hereto
executive offices in this District and many of the acts and practices complained ofherein
occurred in substantial part in this District. Moreover, Defendants have received substantial
compensation in this District by doing business here and engaging in numerous activities that had
an effect in this District.
12. In connection with the acts alleged in this, Complaint, Defendants, directly or
indirectly,, used the means and instrumentalities of interstate commerce, including, but not
limited to, the mail and interstate telephone communications.
III.
PARTIES.
13. Plaintiff Michael Eshelman, D.D.S. purchased Class B and Class ' C Preferred
Shares of OrthoClear Holdings on or about October 4, 2005 and March 13, 2006 as set forth in
the accompanying certification (incorporated by reference herein).
14. Plaintiff Peter F. Silcher, D.D.S. purchased Class A Preferred Shares of
OrthoClear Holdings on or about April 5, 2005 (with Lori Silcher), April 7, 2005 and June 3,
2005 (with Lori Silcher), as set forth in the accompanying certification (incorporated by
reference herein).
15. Plaintiff Lori I. Silcher purchased Class A Preferred Shares of OrthoClear
Holdings jointly with her husband Peter Silcher, D.D.S. on April 5, 2005 and June 3, 2005.
-4-SECOND AMENDED CLASS ACTION COMPLAINT
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1 16. Defendant OrthoClear, Inc. is a Delaware corporation incorporated on January 4,
2 2005. OrthoClear, Inc.'s principal place of business was at all times relevant hereto located in
3 San Francisco,. California.
4 17. Defendant OrthoClear Holdings is a company organized under the laws of the
5 British Virgin Islands and is the parent of its wholly-owned subsidiary OrthoClear, Inc. Plaintiffs
6 are informed and believe, and on that basis allege, that OrthoClear Holdings utilized the same
7 principal place ofbusiness as OrthoClear, Inc. located in San Francisco, California.
8 18. Defendant Muhammad Ziaullah Chishti ("Chishti") was the founder, and at all
9 relevant times, Chief Executive Officer ("CEO") and a Director of both OrthoClear, Inc. and
10 OrthoClear Holdings. In addition, from 1997 to 2002, Chishti was CEO and Chairman of the
11 Board ofAlign Technology, Inc. Plaintiffs are informed and believe that Chishti is an individual
12 now residing in the District of Columbia.
13 19. At all relevant times herein, Defendant Peter Riepenhausen ("Riepenhausen") was
14 a co-founder of OrthoClear and Chairman ofthe Board of Directors of OrthoClear Holdings.
15 Until March 2002, Riepenhausen served as Chairman of the Board ofAlign Technology, Europe.
16 Plaintiffs are informed and believe that Riepenhausen is an individual residing in Germany.
17 20. At all relevant times herein, Defendant Huafeng "Charles" Wen ("Wen") served
18 as President and Chief Technology Officer of OrthoClear, Inc. and was a Director of OrthoClear
19 Holdings. Before co-founding OrthoClear, Wen was the Chief Technology Officer for Align.
20 Plaintiffs are informed and believe that Wen is an individual residing in the County of San
21 Mateo, California.
22 . 21. At all relevant times herein, Defendant Arthur Taylor,("Taylor") was a member of
23 OrthoClear Holdings' Board of Directors. Plaintiffs are informed and believe that Taylor is an
24 individual residing in Cannel Valley, California.
25 22. At all relevant times herein, Defendant Saiyed Atiq Raza ("Raza") was a member
26 of OrthoClear Holdings' Board of Directors. Plaintiffs are informed and believe that Raza is an
27 individual residing in Palo Alto, California.
28 23. At all relevant times herein, Defendant Christopher Kawaja ("Kawaja") was the
-5-SECOND AMENDED CLASS ACTION COMPLAINT
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Vice President of Finance and Chief Financial Officer for OrthoClear, Inc. and the Chief
Financial Officer of OrthoClear Holdings. Before co-founding OrtboClear, Kawaja was one of
the first hires of Align's finance department, serving in that function through'the date of Align's
initial public offering. Plaintiffs are informed and believe that Kawaja is an individual residing
in the County of San Francisco, California.
24. At all relevant times herein, Defendant Patricia Hummel Seifert ("Seifert") served
as Vice President of Legal Affairs and General Counsel for OrthoClear Holdings and Ortb.oClear,
Inc. Plaintiffs are informed and believe that Hummel Seifert is an,individual residing in Desoto,
Texas.
25. At all relevant times herein, Defendant Mudassar Rathore ("Rathore") served as
the Chief Executive Officer and Country Manager of OrthoClear Pakistan Pvt. Before joining
OrthoClear, Rathore worked for Align Technology Pakistan as Assistant Director of
Manufacturing, from 1999 to 2002. Plaintiffs are informed and believe that Rathore is an
individual residing in Pakistan.
26. At all relevant times herein, Defendant Joseph Breeland ("Breeland") was
OrthoClear, Inc.'s Vice President of Sales and Marketing. Before co-founding OrthoClear,
Breeland was Align's Vice President ofNorth American Sales. Plaintiffs are informed and
18 11 believe that Breeland is an individual residing in Austin, Texas.
19 27. Defendants Chishti, Riepenhausen, Wen, Taylor, Raza, Kawaja, Seifert, Rathore
20 and Breeland are referred to collectively as the "D&O Defendants."
21 28. Plaintiffs are informed and believe that Defendant 3i Technology Partners III, LP,
22 11 is a venture capital fund. Plaintiffs are informed and believe and on that basis allege that 3i's
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principal place ofbusiness is in Menlo Park, California.
29. Plaintiffs are informed and believe that at all times relevant herein, Defendant
Paul Badawi ("Badawi").was a Director of 3i residing in San Francisco, California. In August
2006, Badawi joined the Board of Directors of OrthoClear Holdings, Inc. in connection with a
$10 million purchase of Series D Preferred Shares from OrthoClear Holdings by 3i.
-6-SECOND AMENDED CLASS ACTION COMPLAINT
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IV.
CONTROL PERSON ALLEGATIONS/GROUP PLEADING.
30. By virtue of the D&O Defendants' positions within OrthoClear, they had access to
undisclosed adverse information about its business, trade secrets, intellectual property,
operations, finances and present and future business prospects. Moreover, the D&O Defendants
had undisclosed adverse information regarding the Align Litigation, including the fact that the
allegations underlying Align's claims were true, that OrthoClear was likely to lose these lawsuits,
and that even if OrthoClear did not lose, the costs ofthe litigation were significant enough to
force OrthoClear to settle on highly unfavorable terms that would require it to cease doing
business.
31. The D&O Defendants ascertained or should have ascertained such information
through their former employment with Align, where they had access to Align's proprietary
information, as well as through OrthoClear's internal corporate documents, communications with
other corporate officers and employees, communications with outside legal counsel representing
OrthoClear in the Align Litigation, Board ofDirectors meetings, including Board committee
meetings, and through reports and other information provided to them in connection with their
roles and duties as OrthoClear officers and directors.
32. It is appropriate to treat the D&O Defendants collectively as a group for pleading
purposes and to presume that the materially false, misleading and incomplete information
conveyed in OrthoClear's offering documents, statements and press releases as alleged herein
was the result of the collective actions of the D&O Defendants identified above. The D&O
Defendants, by virtue of their high-level positions within OrthoClear, directly participated in the
management of OrthoClear, were directly involved in the day-to-day operations of the company
at the highest levels, and were privy to confidential proprietary information concerning
OrthoClear and its business, operations, pending litigation, prospects, growth, finances and
financial condition as alleged herein. By virtue of their former high-level positions. with Align,
the D&O Defendants were also in a position directly to compare the operations, trade secrets and
intellectual property of OrthoClear with that of Align, and to evaluate Align's claims of
SECOND AMENDED CLASS ACTION COMPLAINT
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1 wholesale misappropriation.
2 33. The D&O Defendants were involved in drafting, producing, reviewing, approving
3 and/or disseminating the materially false and misleading statements and information as alleged
4 herein, were aware of or recklessly disregarded or negligently failed to discover the fact that
5 materially false and misleading statements were being issued regarding OrthoClear, and
6 approved or ratified these statements in violation of the federal securities laws.
7 34. As officers, directors and/or controlling persons of a privately held company
8 governed by the provisions of federal and state securities laws, the D&O Defendants each had a
9 duty not-to disseminate or allow OrthoClear to disseminate inaccurate and-misleading
10 information with respect to OrthoClear's financial condition and performance, growth,
11 operations, business, markets, management, and present and future business and litigation
12 prospects. The material misrepresentations and omissions and the failure to exercise due., care
13 with respect to such misrepresentations and omissions during and after the Class Period by the
14 D&O Defendants and by OrthoClear violated these requirements and obligations. The Class
15 Period is from January 1, 2005 through September 30, 2006.
16 35. The D&O Defendants, by virtue of their position of control and authority as
17 officers and/or directors of OrthoClear, were able to and did control the content of the various
18 private offerings, press releases and public statements pertaining to the company during the Class
19 Period. The D&O Defendants were provided with copies of the documents alleged herein to be
20 misleading prior to or shortly after their issuance and/or had the ability and/or opportunity to
21 prevent their issuance or cause them to be corrected. Accordingly, they are responsible for the
22 accuracy of the public report, statements and releases detailed herein.
23
24 V.
25 OVERVIEW OF THE FRAUDULENT CONDUCT.
26 A. The Clear Orthodontic Aligner Industry.
27 36. Align Technology, founded in 1997 by Defendant Chishti, manufactures
28 transparent plastic appliances for correcting the malocclusion of teeth. Align's core product,
-8-SECOND AMENDED CLASS ACTION COMPLAINT
e% ^-2 FiF'^e07124T2T2t^ 07Page .o 4gf 57R5 :9?oIVj9^j3qq Q,9gyu r,e
1 Invisalign, which was conceived, invented and patented by Defendants Chishti and Wen, utilizes
2 a series of clear, nearly invisible, removable appliances to correct misaligned teeth. The clear
3 aligners fit over the upper or lower teeth and gradually move them into a new position like
4 traditional braces. The Invisalign System includes three-dimensional computer graphics coded to
5 aid in the design and manufacture of its customized, clear orthodontic appliances. Orthodontic
6 treatment takes the form ofwearing a series of individually tailored aligners, largely eliminating
7 any need for traditional metal "braces." Beginning in 2004, after a falling out with Align, Chishti
8 and Wen started a new company with a product called OrthoClear to compete with Align using
9 misappropriated Align intellectual property, including Align's trade secrets, trademarks and
10 patents.
11 37. In 2004, Align Technology was the dominant company in the market for clear
12 orthodontic aligners, having enjoyed a near monopoly in the industry since its inception. -Align
13 had significant intellectual property protections, including 62 issued United States patents, 24
14 issued foreign patents and 76 published pending United States patent applications. The named
15 inventor on most of these patents was Defendants Chishti and/or Wen, who had assigned all of
16 their rights, title and interests in those inventions to Align before founding OrthoClear, Inc. and
17 OrthoClear Holdings.
18 38. Between 1997 and 2004, Align invested tens ofmillions of dollars in the
19 development of its intellectual property, including manufacturing techniques for the clear plastic
20 aligners,-computer source code and software processes for the programs creating a three-
21 dimensional image of the patients' teeth and designing the series of aligners, and training
22 materials that allow orthodontists to use the Invisalign product.
23 39. Align's computer source code was designed to permit, among other things, the
24 creation of three-dimensional computer models of patients' teeth, and images which show the
25 teeth at different stages of the treatment plan. Align's proprietary computer source incorporated
26 Align's trade secret information, including but not limited to treatment methodologies, tolerances
27 and constraints. The trade secrets included data developed through research, data mining and
28 case studies conducted by Align.
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1 40. . In addition to its treatment planning software, Align had developed proprietary
2 and confidential manufacturing processes, techniques,•and technologies for use, among other
3 things, in the manufacturing process for its aligners. Until 2002, the aligners were manufactured
4 in Pakistan, where Chishti was born. Upon information and belief, confidential Align
5 information regarding its manufacturing processes remained behind in Pakistan after Align
6 closed its facilities there.
7 41. Align also invested millions of dollars over seven years developing confidential
8 internal training materials, protocols, and operating procedures to permit the technicians who
9 manufactured the clear aligners to plan the movement of the teeth and design the sequential
10 aligners as required to "implement an orthodontist's treatment plan. Align's standard operating
11 procedures, training materials, and case status logs contained trade secret information relating to
12 the appropriate treatment methodologies for particular types ofmalocclusion, procedures to
13 assess and avoid tooth collisions during treatment ofmalocclusion, as well as best practices for
14 communicating particular aspects of cases among technician supervisors. These training
15 materials were developed by Align in order to educate technicians in Pakistan so that they could
16 create and implement treatment plans using Align's proprietary software.
17 42. In total, Align estimated that it had spent in excess of $700 million over. 9 years to
18 develop the Invisalign System and support it in the marketplace.
19B. Align's Former Chief Executive Officer And Chief Technology
20 Officer Recruit Other Key Current And Former AlignEmployees To Form OrthoClear Using Misappropriated Align
21 Technology.
22 43. In or about March 2002, Chishti-then the CEO and Chairman of the Board of
23 Align 'departed from the company. Chishti was upset that OrthoClear had decided to shut down
24 its manufacturing facility in Pakistan in the wake of the September 11, 2001 attacks. Align and
25 Chishti entered into a Transition, Consulting and Separation Agreement containing various
26 confidential information, nonsolicitation and proprietary information provisions (the "Consulting
27 Agreement").
28 44. In 2004, Chishti sought to extricate himself from the Consulting Agreement
-10-SECOND AMENDED CLASS ACTION COMPLAINT
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without disclosing that his purpose was to develop a new company with Wen to compete with
Align. Instead, Chishti persuaded Align to release him from the Consulting Agreement so that he
11 could purchase land owned by Align in Pakistan without apparent conflict of interest, and use it
11 in connection with another unrelated business.
45. In reliance on Chishti's representations, Align amended its consulting relationship
with Chishti on or about October 27, 2004 by entering an Amendment to Transition, Consulting
and Separation Agreement (the "Consulting Agreement Amendment"). The Consulting
Agreement Amendment provided for the termination of Chishti's status as a consultant, the
accelerated vesting of Chishti's stock options and the payment of $200,000 by Align to Chishti.
The non-solicitation provision in the Consulting Agreement remained "unmodified and in full
force and effect."
46. Unknown to Align, while Chishti was negotiating his release from the Consulting
Agreement, he and other former and current Align employees were forming OrthoClear using
misappropriated intellectual property from Align. These misappropriated materials incorporated
virtually every aspect of OrthoClear's business, including the computer program for the design of
the sequential clear aligners, and the manufacturing process at the original Pakistan
manufacturing facility. OrthoClear also was recruiting members of Align's sales force, and
incorporating its program for the recruitment of orthodontists to use OrthoClear's products.
47. On or about January 4, 2005, Chishti incorporated OrthoClear Holdings and
OrthoClear, Inc. In February 2005, OrthoClear announced publicly that it would compete
directly with Align, offering a similar but supposedly improved clear orthodontic appliance for
moving and straightening teeth.
48. Plaintiffs are informed and believe that prior to his leaving Align, Chishti and
others had enjoyed full access to and control of Align's proprietary information and materials
located in Pakistan. Copies of Align's proprietary computer source code were located in Align's
Pakistan facility. When Align ordered the facility closed in late 2001 and early 2002, Chishti
was in charge of that process, and as a result, according to Align, copies of its proprietary
computer source code (as well as other Align trade secret materials) remained under Chishti's
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1 dominion and control.
2 49. Chishti's efforts to solicit away Align's key personnel to •OrthoClear apparently
3 started as early as November 2002, during the consultancy period and while Chisliti was still
4 serving as Align's CEO. Among the individuals helping Chishti start OrthoClear were key
5 employees who developed, manufactured, and marketed Invisalign. All of the co-founders of
6 OrthoClear (Defendants Chishti, Wen, Riepenhausen, Kawaja and Breeland) were former key
7 employees of Align who had considerable access to the manufacturingprocesses, intellectual
8 ' property, marketing strategies and trade secrets of Align, and were instrumental in developing the
9 Invisalign System and building Align's'business. Wen, Riepenhausen, and Kawaja previously
10 had signed non-compete agreements with Align, which contained strict non-disclosure
11 provisions. In addition, - OrthoClear hired Mudassar Rathore, who had managed Align's
12 manufacturing facility in Pakistan.
13C. Backgrounds Of Former Align Employees And Key Employees
14 Of OrthoClear.
15 50. Align hired Wen as a Software Engineer in 1998. Wen was promoted to the
16 position of Director of Software Development and the Chief Technical Officer. Wen established
17' the strategic technology plan for Align. Wen recruited and trained a team of engineers to
18 improve and develop the company's product-portfolio. In his role, Wen had extensive
19 knowledge of existing products, as well as new products under development. Wen voluntarily
20 resigned-from Align in November 2003. Prior to his resignation, Wen had validly assigned all of
21 his rights, title, and interests to all of his patented inventions to Align. After his resignation, Wen
22 continued to perform consulting activities for Align related to the drafting ofpatent applications.
23 Wen co-founded OrthoClear in 2004, and contributed substantially to the development of the
24 intellectual property upon which its invisible aligner system was based.
25 51. Align hired Riepenhausen in 2000 as the Chairman of Align Technology, Europe.
26 Riepenhausen was responsible for ekecuting Align's entrance into the European market. He
27 developed Align's customer base and had extensive contact with potential customers throughout
28 Europe. Riepenhausen recruited and trained European sales representatives and developed his
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1 knowledge of the European orthodontic market at Align. Riepenhausen voluntarily resigned
2 from Align in August 2002. Riepenhausen joined Chishti and Wen in co-founding OrthoClear in
3 2004 and became the Chairman ofthe Board of Directors ofboth OrthoClear Holdings and
4 OrthoClear, Inc.
5 52. Align hired Kawaja in 2000 as a Planning and Special Projects Manager. As a
6 member of Align's senior management team, Kawaj a worked closely with both sales and
7 technology employees to develop and manage Align's business plan in the market place. Kawaj a
8 designed and implemented the algorithms for locating potential doctor customers. He also
9 developed pricing models in order to make recommendations regarding product pricing strategy.
10 Kawaja developed extensive knowledge of Align's customer base, as well as its technology and
11 marketing strategies. Kawaja resigned from his position in April 2002 but continued to work as a
12 consultant to Align in connection with litigation brought against Align by a former marketing
13 partner. In 2004, Kawaja co-founded OrthoClear where he performed the same functions as he
14 had at Align.
15 53. Align hired Breeland in 1998 as its National Sales Director. In 1999, Breeland
16 was promoted to the position of Vice President of Sales. Breeland was the first member of
17 Align's sales team, which he grew to an organization employing over 90 sales representatives. In
18 this role, Breeland was responsible for developing and implementing Align's sales strategy,
19 improving sales force productivity, and recruiting and training Aligin's sales representatives. In
20 addition to his extensive contact with Align's existing customer base, Breeland was responsible
21 for identifying and developing contacts with potential customers. Breeland resigned from Align
22 in December 2004 and co-founded OrthoClear, Inc. as its Vice President of Sales and Marketing.
23 54. Align hired Jeff Tunnell in 1998 as its Western Regional Sales Manager. Tunnell
24 recruited and trained the company's high-end sales representatives and had extensive contact
25 with customers in his region. Through his management role, Tunnell was able to develop a
26 thorough understanding of the orthodontic industry and Align's key accounts. Tunnell's
27 employment at Align was terminated in October 2004. He joined OrthoClear in or about late
28 2005 as its Director of Sales.
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55. OrthoClear also hired Align's key manufacturing personnel. Prior to joining
OrthoClear, Rathore was Assistant Director of Manufacturing for Align, with responsibility for
3 Align's manufacturing operations in Pakistan. *OrthoClear Holdings hired Rathore as the Chief
4 Executive Officer and Country Manager of OrthoClear Pakistan Pvt. Ltd., and gave Hui a seat on
5 II its Board of Directors.
6D. OrthoClear 's Plan To Use Misappropriated Intellectual Property
7 b Order To Force Align To Purchase It For Stock.
8 56. During'a December' 17, 2004 OrthoClear meeting to explain OrthoClear's
9 intended business strategy, Chishti confirmed that he had been working on OrthoClear since
10 2002. The strategy consisted primarily of ridingthe coat tails of Invisalign in the United States
11 and Europe and maximizing switchover from Invisalign to OrthoClear by targeting Align's
12 customers, employees and end users. OrthoClear intended to download from Align's website the
13 lists of doctors who are certified providers of Invisaiign and send the doctors.direct mailings,
14 regarding the OrthoClear product and its lower price. OrthoClear also planned to recruit the
15 existing Aligii sales representatives in the United States and Europe to sell OrthoClear directly to
16 doctors known to prescribe Invisalign.
17 57. Plaintiffs are informed and believe, and on that basis allege, that OrthoClear's
18 stated goal was to capture 50% ofAlign's market share within one year of launch to achieve one
19 of several results:
20 (a) Force Align to purchase OrthoClear for 40% or 50% of Align's
21 outstanding stock;
22 (b) Offer OrthoClear technology to a large potential competitor; or
23 (c) Take OrthoClear public and sell a lower-cost product in the market
24 without having to do significant training or consumer advertising because ofAlign's
25 investments in those areas.
26 58. Chishti was very emotional during this meeting and revealed that OrthoClear was
27 notjust about a new start-up, but was a way for him, Riepenhausen, and Wen to regain their
28 positions and/or financial interests in Align. Plaintiffs are informed and believe, and on that
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1 basis allege, that OrthoClearmade several overtures to Align consistent with the plan described
2 by Chishti. Align rejected all overtures made by OrthoClear.
3 59. Defendants never told investors or potential investors that OrthoClear's business
4 plan included attempting to force Align to purchase OrthoClear. Nor did Defendants inform
5 potential investors of the overtures made to Align.
6 60. Wen and Chishti began filing new patent applications on behalf of OrthoClear in
7 November 2004. On February 7, 2005, barely one month after its incorporation, OrthoClear, Inc.
8 issued a press release announcing the upcoming release of its "OrthoClear System, a series of
9 clear plastic aligners designed to straighten teeth." Three months later, on May 16, 2005,
10 OrthoClear, Inc. formally announced the "launch" of its "OrthoClear System."
11 61. OrthoClear hid from investors that its lightning fast entry into the aligner market
12 had been achieved only by piggy-backing on Align's patented methods and stealing Align's trade
13 secrets, including proprietary computer code and training materials, copies ofwhich were
14 available at the former Align production facilities in Pakistan. OrthoClear did not disclose that
15 only by violating contractual obligations using Align's proprietary training materials and illegally
16 borrowing from Align's patents (many of which list Chishti and other OrthoClear executives as
17 inventors, but all of which were assigned to Align), were Defendants able to bypass the normal
18 product design and development cycle, and launch the "OrthoClear System" in a matter of
19 months.
20 62. OrthoClear claimed that within the span of five months, it independently had
21 conceived and developed the software, systems and manufacturing technology required to design
22 and fabricate its aligners in Pakistan and import them into the United States. In other words,
23 OrthoClear is supposed to have done in five months what had taken Align seven years and an
24 investment of several hundred million dollars to do.
25 63. OrthoClear also jumpstarted its business by borrowing Align's doctor certification
26 process. Beginning in 1999, Align had provided training and certification to orthodontists and
27 dentists to become part of Align's network of certified providers. Each year, Align provided
28 numerous clinical education and training programs, which include certification classes,
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conference calls, seminars and workshops. Starting in 1999, Align had certified over ten
thousand orthodontists and dentists during these multi-day, intensive training sessions.
64. OrthoClear adopted Align's certification process as its own, and misrepresented
its efforts, stating that "[s]ince February 2005 the company has certified over a thousand of the
nation's leading orthodontists and- dentists to treat with OrthoClear. 'We are making every
attempt to meet the demand of doctors who would like to be certified to use OrthoClear. In most
markets there is a certification waitlist. `
65. In fact, OrthoClear did not have abona fideprogram for training and certifying
dentists and orthodontists in using the OrthoClear product. ` OrthoClear instead relied on Align's
training, granting an instant OrthoClear "certification" to any Align-trained or certified doctor.
By stating that doctors Were.certified as OrthoClear providers, OrthoClear mislead Class
members into believing that it had a genuine, independently developed program in place to train
and certify new doctors. In fact, the real training and certification had been or was being done by
.Align.
66. °OrthoClear even misappropriated a common law trademark, in use by Align since
at least 2002, "THE CLEAR WAY TO STRAIGHTEN TEETH." Align developed the slogan
THE CLEAR WAY TO STRAIGTHEN TEETH, and delivered it to end users through targeted
television, radio, print, point of sale, and internet advertising, and distributed over 2 million
banners, decals and product bags bearing the tagline.
'VI. .
LITIGATION BETWEEN ALIGN AND ORTHOCLEARBEGINS IN 2005.
67. As a result of OrthoClear' s actions, Align filed four lawsuits and initiated an
administrative proceeding against OrthoClear over an eighteen-month period beginning in
February 2005.
(a) State Action : On February.2, 2005, Align filed a multi-claim lawsuit in
San Francisco Superior Court against defendants OrthoClear, Inc. and OrthoClear Holdings (the
"State Action"). The State Action also named Chishti, Riepenhausen, Breeland, Kawaja, Wen,
SECOND AMENDED CLASS ACTION COMPLAINT
7- v-01429-J ^/ [Document 58-2 Filed 08/20/2007 Paae 26 of 57:0^f-cv- SW ocument 47 Filed 07/24/2007 * Page 8 of 48
1 and others individually. The State Action included tort, contract, statutory and common law
2 causes of action arising from OrthoClear's alleged plan unlawfully to use Align's intellectual
3 property and proprietary information, and to solicit Align's employees unlawfully.
4 (b) Lanham Action . On July 19, 2005, Align filed a multi-claim lawsuit in
5 the United States District Court for the Northern District of California against OrthoClear (the
6 "Lanham Action I") alleging violations of the Lanham Act including unfair competition,
7 trademark infringement and false advertising. The Federal Lanham Action I sought monetary
8 damages and an injunction against OrthoClear's use ofAlign's trademark ("THE CLEAR WAY
9 TO STRENGTHEN TEETH"), and false and misleading statements on OrthoClear's website.
10 Align alleged that OrthoClear used its website to hold out as its own the track record, treatment
11 history, and network of doctors trained and certified by Align. Specifically, Align sought an
12 order requiring OrthoClear to conduct corrective advertising with regard to this alleged
13 misleading advertising.
14 (c) Patent Infringement ITC Complaint . On January 11, 2006, Align filed
15 a formal complaint with the United States International Trade Commission ("ITC") against
16 OrthoClear, seeking to halt the importation into the United States of infringing aligners
17 manufactured by OrthoClear in Pakistan in violation of its patent and other intellectual property
18 rights (the "ITC Complaint"). The ITC Complaint alleged that OrthoClear utilized Aligns trade
19 secrets and infringed 12 of Align's patents. The ITC Complaint requested that the ITC institute
20 an investigation and ultimately issue an exclusionary order and two cease and desist orders
21 specifically preventing OrthoClear from importing and selling its infringing aligners in the
22 United States.
23 The ITC instituted a formal investigation on February 7, 2006. Pursuant to a scheduling
24 order issued by the administrative law judge, the initial hearing on the ITC Complaint was set to
25 take place from November 6-16, 2006 in Washington, D.C. The scheduling order set February
26 15, 2007 as the target date for the initial determination, and May 15, 2007 as the target date for
27 completion of the ITC investigation.
28 (a) Federal Patent Infringement Action . On January 11, 2006, Align also
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1 filed a federal court patent infringement action against OrthoClear in the Western District of
2 Wisconsin (Madison) (the "Federal Patent Infringement Action") containing the same allegations
3 as in the ITC Complaint, including infringement of 12 of Align's patents. The Federal Patent
4 Infringement Action sought monetary damages and an injunction to augment the exclusionary
5 relief available from the ITC. The Federal Action was stayed on March 10, 2006 pending the
6 outcome of the ITC investigation.
7 (b) Lanham Action II . On June 19, 2006, Align filed a multi-claim lawsuit
8 in the United States District Court for the Northern District of California against OrthoClear
9 alleging numerous violations of the Federal Lanham Act and related common law claims
10 ("Lanham Action II"). The alleged violations included unfair competition, false advertising,
11 trade libel and defamation based on OrthoClear's public statements touting the. alleged quality
12 and effectiveness of its products and falsely disparaging those of Align. Specifically.,.Align
13 ' claimed that OrthoClear infringed its common law trademark, "TIE CLEAR WAY TO
14 STRAIGHTEN TEETH," and that OrthoClear made false and misleading advertising claims that
15 its dligners were superior in performance, fit and comfort to those manufactured by Invisalign.
16 The Lanham Action II sought monetary damages and an injunction preventing OrthoClear from
17 further false advertising and unfair competition. A trial date never was set for the matter.
18
19 VII.
20 ORTHOCLEAR ISSUED FALSE AND MISLEADINGSTATEMENTS REGARDING THE LITIGATION AND THE
21 STATUS OF ITS INTELLECTUAL PROPERTY.
22 68. OrthoClear financed both the growth of itsbusiness and its legal defense against
23 Align's lawsuits in substantial part through three private stock offerings to supposedly accredited
24 private investors . Class A Preferred Shares were offered to investors commencing in or about
25 April 2005; Class B Preferred Shares were offered to investors from at least October 3, 2005 to
26 November 27, 2005; Class C Preferred Shares were offered to investors from March 7, 2006 to
27 March 21, 2006. In August 2006, OrthoClear also offered Class D Preferred Shares solely to the
28 venture capital firm, Defendant 3i.
-10-
SECOND AMENDED CLASS ACTION COMPLAINT
se 3'07-cv-014 Jd W ocumer^t4118-2 Filec^l^^lg / ?^OO^age o?^8of57
ase 3:07-cv-01 W Bocumen
1 69. From the outset of the Align Litigation, OrthoClear misled potential private
2 investors regarding the merits ofAlign's claims and the effects of the litigation on OrthoClear's
3 business prospects. In particular, OrthoClear repeatedly and falsely stated that: (1) Align's
4 claims were without merit; (2) OrthoClear legitimately owned the intellectual property that Align
5 claimed had been misappropriated; and (3) OrthoClear would vigorously defend the litigation.
6 At the same time, OrthoClear omitted material information regarding the litigation, including
,7 that: (1) Align's lawsuits had merit; (2) OrthoClear had based its entire business on the
8 wholesale misappropriation of Align's intellectual property; (3) there was at least a strong
9 possibility that OrthoClear either would lose at trial or obtain an unfavorable ruling forcing it to
10 settle on unfavorable terms; and (4) the litigation was so expensive that OrthoClear might have to
11 settle the lawsuits and abandon its business even in the absence of an adverse ruling.. OrthoClear
12 continued to mislead investors about the true risks that it faced up until the point that it
13 announced a global settlement with Align that required it to cease operations and transfer its
14 intellectual property for minimal compensation. Nonetheless, just days before OrthoClear
15 surrendered to Align, it was telling investors that it anticipated a public offering within the next
16 few months.
17 70. On February 7, 2005, just five days after the State Action was filed, OrthoClear
18 issued a press release announcing its public response to the lawsuit:
19 "Large companies frequently try to impede healthy competition bythreatening young companies with legal action. This lawsuit is baseless and
20 without meat and wefully intend to protect Ortho Clear, our employees, andour productsfrom all unfair suits and actions. OrthoClear will not hesitate
21 to exercise our right to seek all remedies available to us under the law."(Press Release, OrthoClear, Inc., OrthoClear, Inc. Announces the Release of
22 the Technologically Advanced OrthoClear System; Issues Response to AlignTechnology Lawsuit (Feb. 7, 2005) (emphasis added)).
23
24 This was a theme regularly repeated in conference calls with Class members during the Class
25 period.
26 71. In May 2005, OrthoClear provided written disclosures relating to the State Action
27 to potential investors in connection with its Class A Preferred Stock offering. However, the
28 Purchase Agreements and related schedules provide, a.false picture regarding the merits of
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1 Align's claims and the risks to OrthoClear from the Align Litigation:
2 "2.10 Litigation . Other than the lawsuit filed against the Company by AlignTechnology, Inc. and described in the Schedule of Exceptions (the `Align
3 Litigation'),lo the Company's knowledge, there is no action, suit,proceeding or investigation pending or currently threatened against the
4 Company that questions the validity, of this Agreement ... or that mightresult, either individually or in the aggregate, in any material adverse change
5 in the assets , business , properties or financial condition of the Company, anyimpairment of the right or ability of the Company to carry on its business as
6 now conducted, or in any material change in the current equity ownership ofthe company, nor is the Company aware that there is any basisfor any of
7 theforegoing.'
8 *
9 "2.13 Patents, Trademarks, Etc. To the Company's knowledge, theCompany owns and possesses or is licensed under all patents, patent
10 applications, licenses, trademarks, trade names,-brand names,-inventions andcopyrights employed in the operation of its business as now conducted, with
11 no known'infringement of or conflict with the rights of others respecting anyofthe same. To the Company's knowledge, the operation of the Company's
12 business as now conducted does not infringe anypatent or other proprietaryrights ofothers respecting any ofthe same." (Class A Preferred Shares
13 Purchase Agreement at. 4-5 (emphases added)) '
14 Ii 72. In the attached-Schedule of-Exceptions,'OrthoClear 's sole description of the risks
15 11 to the investors posed by the Align Litigation was the following boilerplate disclosure:
16 "The outcome of this litigation is unknown. Any outcome or interimdecision of the Court that is adverse to the Company, OrthoClear, Inc. or
17 any of the Company's or OrthoClear, Inc.'s employees or consultants couldhave a significant adverse impact on the Company, including, without
18 limitation, its°ability.to conduct its business, and any investment in theCompany therefore is made with the risk that some or all of such investment
19 may'be'lost in the event of such an adverse ruling or outcome and the" (Schedule of Exceptions to Class Awill flow from itconsequences that
20..
Preferred Shares'Purchase Agreement at 2)
21 73. The attachment is notable for its total failure to convey any genuine warning about
22 the grave risk posed by the'litigation with Align. The omission is especially significant in light
23 : of the reassurances contained in Paragraphs 2.10 and 2.13 of the Purchase Agreement, and in,
24 light ofthe Company's repeated public statements that the lawsuits were meritless. It contains no
25 suggestion that the costs of the litigation alone could force OrthoCleanto abandon its intellectual
26 property and its-business. It contains no suggestion that the continuation of the litigation could
27 force OrthoClear to abandon its business even without an "outcome or interim decision" that is
28 adverse to the company. It entirely fails to explain that a finding that certain of the individual
SECOND AMENDED CLASS ACTION COMPLAINT
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1 defendants breached their agreements with Align or improperly drew on Align technology could
2 force OrthoClear out ofbusiness. Finally, the paragraph buried in a schedule of exceptions talks
3 only ofpossible consequences, and therefore does not contradict or qualify the express
4 statements in the Purchase Agreement that the litigation has "no basis" and that "the operation of
5 the Company's business "does not infringe any patent or other proprietary rights of others."
6 74. Even without statements about the Align litigation, OrthoClear's representations
7 in Paragraph 2.13-that there was no known "conflict" between its intellectual property and the
8 "rights of others" and no known infringement of any patent or property right of others-were
9 false, incomplete and misleading. At the time this representation was made, OrthoClear and the
10 D&O Defendants knew, for example, that there was a substantial question whether or not its
11 patents infringed certain broadly written Align patents. Plaintiffs are informed and believe that
12 as early as the second quarter of2005, OrthoClear had petitioned anonymously for re-
13 examination by the United States Patent Office of certain Align patents, which raised serious
14 infringement issues for OrthoClear. These facts were not disclosed to investors, nor were the
15 results of the re-examination when it was announced in July 2006 that Align's patents had been
16 found to be valid.
17 75. The language quoted above from the Purchase Agreement for the Class A
18 Preferred Shares is repeated verbatim in the Purchase Agreements for the B and C Series
19 Preferred Shares. OrthoClear again explicitly states that there is "no basis" for any lawsuit filed
20 against the Company by Align, or any basis for any suit, action, or proceeding that might result in
21 any material adverse change in the assets, business, properties or financial condition of the
22 Company, or any impairment ofthe right or ability of the Company to carry on its business.
23 Again, OrthoClear stated that it owned, possessed or was licensed under all applicable patents.
24 The only relevant change is the addition to the Schedule of litigation of the later filed lawsuits
25 comprising the Align Litigation. Each lawsuit description is accompanied by the same
26 boilerplate noting that the outcomes-were "unknown" and could have a significant adverse
27 impact on OrthoClear's business. These disclosures were also insufficient given the nature and
28 scope of the litigation, the inconsistent public reassurances, and the theft of intellectual property
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1 that was,alleged and had occurred.
2 76: OrthoClear compounded its deception regarding the merits and risks of the Align
3 Litigation by issuing unjustifiably upbeat and deliberately misleading characterizations of the
4 later progress of the cases. On June 6, 2005, the Court in the State Action denied OrthoClear's
5 demurrer to Align's, core. claims of misappropriation of trade secrets and breach of contract. The
6 Court also granted Align's request for permission to amend its original complaint to consolidate
7 several duplicative causes of action and to add specific evidence not available to Align When the
8 original complaint was filed.
9 77. In an effort to put a positive spin on the ruling, OrthoClear issued a press release
10 on June 14 announcing, "favorable court Orders in litigation with Align'Technology." The
11 relevant portion of the press release states:
12 . "Today, OrthoClear, Inc. also announced that in a suit pending in SanFrancisco County Superior Court, the Court awarded OrthoClear a'victory
13 over. plaintiff Align Technology; Inc. Upon OrthoClear's challenge toAlign's coniplairit, the Court dismissed nine'ofthe sixteen claims brought
14 by Align, including,Align's claims of unfair competition, interference withprospective economic'advanfiage, conversion, as wellas unjust enrichment,
15 and-the Court, specifically ordered Align not to re-file its conspiracy claim.Align has since amended its 'complaint'to attempt-to overcome the court's
16 ruling, but has completely dropped five ofthe dismissed claims." (PressRelease;"OrthoCleat,' d., OrthdClear, Inc. 'Reports SuccessRil Noi-ih`
17 American Launch ofits, OrthoClear System; Announces Favorable CourtOrders in Litigation with Align Technology (June 14, 2005))
18
19 78. On August 23, 2005, the Courtin the State Action overruled in its entirety
20 OrthoClear's demurrer to .Align':s First Amended Complaint. As a result, on September 9, 2005,
21 OrthoClear filed answers to eleven causes of action brought by Align, including unfair
22 competition, misappropriation of trade secrets, breach of contract, intentional and negligent
23 interference with prospective economic advantage and accounting. No announcement was made
24 relating to OrthoClear's failed demurrer or the fact that Align's lawsuit had been allowed to
25 proceed virtually untouched by the pleading process.
26 79. On September 20, 2005, OrthoClear sent a letter to doctors, many of whom are
27 Class members, regarding Align and the status of,the Align. Litigation. The letter states in
28 relevant part:
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se 3:07-cv-01429-J ^/ Document g-2 Fil p / 2007 P e 2 f 57ase 3 : 07-cv-01429 -JlW Document ? Filed eb9/21/0567 - Page o ^F8o
1 "As OrthoClear has prospered and grown, our principal competitor,Align Technology, has been unable to compete on the basis of product
2 quality, performance, and cost. Instead, Align has taken to misstatiri.g thetruth in an attempt to slow our advance."
3"One damaging falsehood that Align is circulating is that OrthoClear is
4 somehow violating its patents and that, as a result, OrthoClear can be `shutdown.' OrthoClear is not violating Align's patents ."
5"Zia Chishti, OrthoClear ' s CEO, was the founder and CEO ofAlign and
6 the principal inventor listed on Align ' s patents. Charlie Wen, OrthoClear'sPresident and ChiefTechnology Officer, was the longstanding Chief
7 Technology Officer ofAlign. Nobody understands the scope of Align'spatents, which are publicly filed, better than Mr. Chishti or Mr. Wen."
8
9"[A]s they have done with Sybron, Align may try to confuse the market by
10 filing unsubstantiated and ultimately unwinable patent lawsuits, Aligncannot stop new competitors from coming into the market for clear aligner
11 therapy. " (Letter from OrthoClear, Inc. to Doctor Customers (Sept. 20,2005))
1280. On September 22, 2005 OrthoClear held an open conference call for investors,
13clinicians , and the general public to discuss its pending litigation with Align. Chishti, Seifert,
14and George Riley of the law firm of O'Melveny & Myers, lead counsel to OrthoClear in the
15Align Litigation, were on the call. Numerous positive statements were made on the call,
16reiterating OrthoClear ' s contention that Align's litigation claims were meritless and baseless.
1781. On November 10, 2005, the court in the State Action issued its ruling on Align's
18demurrer to OrthoClear ' s First Supplemental and Amended Cross-Complaint , granting
19challenges to 18 of 19 causes of action. Six were dismissed without leave to amend.
20OrthoClear ' s announcement regarding the Court ' s ruling again . is significantly misleading.
21
22 "On November 3rd, the California state court presiding over the lawsuit,Align Technology, Inc. et al. vs . OrthoClear, Inc. et al. affirmed the right of
23the OrthoClear parties to pursue their core claims against Align Technology,Inc. Align unsuccessfully sought the dismissal of nearly all counter-claims
24brought by OrthoClear and its founders . The court's most recent rulingallows the OrthoClear parties to pursue their claims against Align for unfair
25 competition , abuse ofprocess , intentional interference with prospectiveeconomic advantage, libel, and slander.
26 "`This order helps us move forward in the litigation. We have
27 maintained from the outset that Alignimproperly initiated this suit in anattempt to impede our business . We are pleased that the court's ruling
28 allows us to proceed with our claims to hold Align accountable ,' said Mr.Riepenhausen." (Press Release , Yahoo Finance, OrthoClear Holdings, Inc.
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2
3
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5
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OrthoClear Reports Record Month - Patient Starts Increase 55% in October(Nov. 10, 2005))
82. OrthoClear's response to Align's International Trade Cormnission Complaint
II added to its chorus of assertions that Align' s claims were baseless and meritless . On January 17,
2006,. OrthoClear announced its preliminaryresponse to Align's filings with the,ITC and the
Federal Patent Infringement Action filed in Wisconsin. The press release contains the following
statements:
12
13
8314 .
".:The--ITC and Wisconsin filings are another in a long line of frivolouslawsuits filed by Align with the intention of curtailing competition ....Each of the 12 patents.that Align alleges were violated°byOrthoClear wereoriginally written or co-written by Zia Chishti, former founder ofAlignTechnology, Inc: and current CEO of OrthoClear, Inc. Our CEO Zia Chishtiand President Charlie Wen were both members of the original AlignTechnology'teain that developed the Invisalign,product. It iscounterintuitive that these same individuals would develop a new companyaround a product andprocess that violates. the very samepatents theycomposed." (Press Release, OrthoClear, inc., OrthoClear Responds toRecent Litigation.by Align Technology (Jan. 17, 2006) (emphasis added))
On January 24, 2006, OrthoClear again wrote to its doctor customers , many of
1$ . whom are Class members, to update them on the pending lawsuits with Align, and again
16 -11 OrthoClear repeated'its position that Align's lawsuits were frivolous:
17 "While OrthoClear has prospered, Align Technology,' our principalcompetitor, has seen their market share diminish and their near monopoly
18 status threatened:... With` a:limited ability to doxitpete in product benefitsand value, Align has become increasingly aggressive in attempting to use the
19legal system to-,obstruct OrthoClear's. efforts in the market place. The resulthas been a series .ofmeritless lawsuits. It has become a predictable pattern:every'few months Align files alawsuit against .OrthoClear ...." (Emphasis
20added)
21
22"In short, Align's lawsuits are designed to confuse you, our customers, into
23 believing that they have the sole right to manufacture and distribute invisiblealigners." (Letter from Joe Breeland, Vice President of Sales and
24Marketing, OrthoClear, Inc.,,to Doctor Customers (Jan. 24, 2006))
25 84. In or about March 2006, Defendants Kawaja and Seifert had a conference call
26 with investors and stated that the Align Litigation was a "non-issue" for the Company. Seifert
27 misleadingly asserted or implied that the Company had only one attorney on staff handling the
28 litigation, and that the actions brought by Align had no merit. These statements carefully omitted
-24-SECOND AMENDED CLASS ACTION COMPLAINT
C ae^07c^01429SS DSocume t 5 -2 Fil^ec^^ 96?^907
Page^^ .o44$f 57cument File
1 to znention that several law firms were employing teams of attorneys to defend the multiple legal
2 claims by Align and related counter-claims, including O'Melveny & Meyers LLP, Pillsbury
3 Winthrop LLP and Jones Day. It also omitted to mention that legal fees to these outside lawyers
4 were running into the millions of dollars, a huge drain on a fledgling company. Kawaja added
5 that the Company was doing so well, he anticipated that it would go public by Thanksgiving
6 2006.
7 85. In March 2006, OrthoClear offered Class C preferred shares to investors. The
8 Class C Share Purchase Agreement disclosures repeat the same litigation disclosures found in the
9 Class A and B purchase agreements simply adding to the number of lawsuits in the addendum.
10 In the Class C Preferred Convertible Shares Circular that OrthoClear distributed to investors in
11 connection with the offering, OrthoClear specifically assured investors that "OrthoClear believes
12 that th[e] patents in suit are not infringed by OrthoClear."
13 86. On March 22, 2006, OrthoClear sent an email to investors and shareholders
14 putting them on notice that the company was planning an underwritten initial public offering of
15 its common shares. In connection with the offering, OrthoClear requested that each investor fill
16 out an NASD questionnaire and execute a lock-up agreement. OrthoClear failed to inform
17 members of the Class that there was no realistic possibility of a public offering until and unless
18 the litigation was resolved in its favor. Throughout the Spring and Summer of 2006, employees
19 of OrthoClear Holdings repeatedly suggested that the Company was going public 'during 2006.
20 Just 3 days before the settlement between Align and OrthoClear, on September 25, 2006)-
21 Ortho Clear sent an email regarding the public offering to an investor in the Class B and C shares,
22 stating"[w]e do not have a certain date yet for the IPO, but we anticipate to go public in the end
23 of this year or early next year."
24VIII.
25ORTHOCLEAR. ANNOUNCES PARTNERSHIP WITH 3i IN
26 AUGUST 2006.
27 87. On July 27, 2006, OrthoClear Holdings announced to its shareholders that it
28 intended to sell $10 million in preferred equity to an institutional investor, which was 3i
-25-
SECOND AMENDED CLASS ACTION COMPLAINT
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1 Technology'Partners III, L.P. In connection with the transaction, OrthoClear Holdings sought
2 shareholder approval authorizing 28 million shares of Class D preferred stock having an original
3 issue price of $0.49. The materials sent to the existing shareholders sought consent to modify the
4 Company's Articles and Memorandum of Association iii variou's' ways that modified the rights of
5 the holders of Class A, B and C preferred shares and common shares. The request for consent
6 was incomplete, inadequate and;misleading and failed to provide material information necessary
7 for the shareholders to make a reasoned and informed judgment whether or not to approve the
"8 proposed investment and changes. The deficiencies included: (a) failure to provide a copy of the
9 purchase agreement with the'riew investor; (b) failure'to clearly set forth 'the terms of the
10 investment; (c) failure to, disclose the nature and terms of the warrant for purchase of nearly 8
11 million addition shares of Class D preferred or common shares in the event of a conversion;
12 (d) failure to provide a copy of the Warrant Agreement; (e) failure to disclose'the current
13 financial circumstances of the Company under which the investment had been sought; (f) failure
14- to disclose the costs of litigation which in part had necessitated additional' investment; (g) failure
15 to explain the nature of the changes made.to the Articles and Memorandum, and their potential
16' impact on the existing Class A, B, and-'C-shareholders; and (h) failure to explain and quantify the
17 dilutive effect of the investment on the existing shares of Orthoclear.
18 88. ' In an August 8, 2006"press release announcing the 3i investment, OrthoClear
19 stated that Paul Badawi, a Director of 3i, had joined OrthoClear'Holdings' Board ofDirectors.
201 Again, there was no discussion or disclosure of thefact that 3i was receiving a substantial
21 premium in the form of a 10-year warrant for the investment it was making,. or that the terms of
22 the investment had' a number ofadverse impacts on existing investors, or:that OrthoClear was
23 facing financial difficulties that would make such a premium necessary to obtain additional
24 capital. Again, OrthoClear did not disclose to its investors that it needed the funds to pay for its
25 mounting litigation costs, nor did OrthoClear disclose that it was on the verge of conceding
26 defeat in the litigation with Align and surrendering its orthodontic aligner business.
27 89. 'The actions of OrthoClear and the D&O Defendants constituted a further fraud
28 11 upon the Class A, B, and C preferred shareholders in that consent was obtained to vary the rights
SECOND AMENDED CLASS ACTION COMPLAINT
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1 of their shares and to authorize Class D shares on the basis of disclosures that these Defendants
2 knew to be materially inaccurate and incomplete. These actions also constituted a continuation
3 of the fraud, misrepresentation, and concealment that had begun as plaintiff class members were
4 first solicited to purchase preferred stock in the Company.
5IX.
6ORTHOCLEAR ABRUPTLY EXITS FROM THE WORLDWIDE
7 ALIGNER BUSINESS IN SEPTEMBER 2006.
8 90. On September 28, 2006, less than a month before the trial of the Lanham Action I
9 was set to begin, and less than two months before the initial hearing on Align's ITC Complaint
10 was scheduled to begin, OrthoClear suddenly and unexpectedly announced that it was ceasing
11 operations, and that it had reached a tentative settlement with Align to end all litigation between
12 the parties.
13 91. By letter dated September 28, Seifert advised preferred shareholders ofthe
14 proposed settlement and requested their consent to it. The letter explained that Align would pay
15 OrthoClear $20 million in exchange for OrthoClear's agreement to cease accepting patients
16 worldwide, and provide an assignment of all its intellectual property with application to the
17 correction of malocclusions to Align. The letter also claimed that $10 million of the $20 million
18 payment was conditioned upon the Company obtaining shareholder approval of the settlement
19 within a certain period of time.
20 92. At or about the time ofthe settlement announcement, Badawi and the other D&O
21 Defendants knew that the information given to the Class A, B and C preferred shareholders, and
22 the representations formerly made to them by the Company and the Board about the. Align
23 litigation and the status of OrthoClear's Intellectual Property, were materially false and/or
24 misleading. Notably absent from this communication, and all others that followed, was any
25 explanation, clarification, or correction of the numerous prior statements made to investors
26 asserting that the Align litigation was frivolous and without merit.
27 93. On September 28, 2006, instead of disclosing the truth to the holders of Class A,
28 B and C preferred shares about the litigation, the true nature of the disputes over the Company's
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3
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Intellectual Property, and the reasons for the unexpected settlement, OrtlaoClear, with the
approval and participation of the D&Q Defendants including Badawi, followed a course of
misdirection designed to prevent shareholder scrutiny of the circumstances which had led to the
abrupt^termination of OrthoClear' s'business.
94. In response to the September 28 letter seeking shareholder approval of the
11 settlement, a number of shareholders asked why OrthoClear had entered into a settlement which
1j"involved abandoning its business . 'Shareholders also asked what would be done with the
remaining assets of OrthoClear, including the $20°-,million' to be paid by Align.
95. The letter response dated October 2, 2006, which was sent to shareholders on
10 information and beliefwith the approval oftheD&O Defendants and Badawi (and in any event
11 also would have been sent to the directors as shareholders) acknowledged for the first time that
12 there was a significant chance OrthoOlear would lose the litigation with Align. In contradiction
13 `^ -to-its prior'assettions, OrthoClear now stated that the timing of the settlement was caused by the
14 rapid approach of the two trials in 2006 and the increasing litigation costs associated with the
15, ' trials and the other pending cases with Align. .
16 96. The October 2 letter also.stated=that itwas necessary to settle because ITC staff
17 attorneys had suggested an interpretation of one patent that increased the risk of an exclusion
18 . "'order prohibiting OrthoClear from importing aligners into the United States. Absent from the
19 October 2 letter was any reference to the prior statements by OrthoClear' s officers and directors
20 that it could work around anylimitations on importation ofproducts which the ITC might
21 impose. Despite its earlier unequivocal statements regarding both the-merits of Align's claims,
22 the ownership of its intellectual property and the potential financial impact of the litigation,
23 OrthoClear now proposed.to abandon its fight with Align and its sole line ofbusiness without
24 any adverse judicial finding.
25 97. . The October 2, 2006 letter also falsely stated that "[t]he settlement terms do not
26
11
require OrthoClear to cease operations or to dissolve... No final decision has been made about
27 the approach to take, but our goal is to maximize investor return." It went'on to reassure
28 11 investors that "the exact amount ofmoney that may be returned to shareholders in each class has
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1 not been determined and cannot be determined unless and until there is an actual liquidation."
2 98. The September 28 and October 2 letters, sent to shareholders with the approval of
3 the D&O Defendants and Badawi to obtain shareholder approval of the Board's decision to settle
4 with Align and related Board actions, contained information that Defendants knew was
5 incomplete, inadequate, misleading and/or false. The omitted and misleading material included
6 the following:
7 (a) The letters failed to provide full and accurate information pertaining to pending
8 litigation, including outstanding bills, and anticipated costs and prospects for full or partial
9 success if the litigation proceeded.
10 (b) The letters failed to set forth the true basis for the sudden decision by the Board to
11 settle.
12 (c) The letters failed to disclose that, given the known assets and liabilities of the
13 Company, approval of the settlement would result in a near total loss of the investment of the
14 A, B, and C preferred shareholders.
15 (d) OrthoClear was prohibited by its Memorandum of Association from entering into
16 the proposed settlement with Align absent approval of 3/ of OrthoClear's Preferred
17 Shareholders. Indeed, the letters affirmatively misrepresented the issue for decision as
18 whether or not to preserve only a small part of the business "that would not have much value
19 in itself."
20 (e) The letters failed disclose that, in the event the settlement was approved there
21 would be no prospect for the Company to do anything other than liquidate, resulting in a
22 payout to employees, officers, directors and other creditors, but a loss ofthe entirety of the
23 investment made by the A, B, and C preferred shareholders.
24 (f The letter failed to disclose that 3i expected immediate repayment of its $10
25 million investment on a priority basis, which would leave OrthoClear unable to continue any
26 business or even meet potential outstanding obligations such as those to orthodontists and
27 patients who had already paid for services and products which had not been delivered.
28 (g) The letter failed to disclose that a principal benefit at the settlement with Align
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1 would be the protection afforded the individual officers and directors of OrthoClear from
2 personal liability amounting to tens ofmillions of dollars in connection with Align's claims
3 against them individually for theft and-infringement of its intellectual property.
4 99. Defendants have continued to this. day to conceal the facts surrounding the
5 settlement, the reasons for it, and other information described above. Had this information been
6 disclosed, Plaintiffs would not have approved the settlement on the terms proposed and/or would
7 have taken immediate steps to hold OrthoClear,'the D&O Defendants and Badawi accountable
,8 for their failure to protect the interests of the Company's shareholders.
9 100. As part ofthe settlement with Align, OrthoClear consented to the entry of an order
10 by the ITC prohibiting importation of OrthoClear aligners into the-United States . In addition,
11 ' OrthoClear, Chishti` and Wen assigned and transferred all intellectual property rights with
12 application to the correction of misaligned teeth to Align. The settlement agreement also
13 required OrthoClear principals Chishti, Wen, Riepenhausen, and Kawaj a to sign 5-year, global
14' non-compete agreements in the field ofremovable aligner therapy products and related software
15.. market. In return, Align made a one-time cash payment of $20 million to OrthoClear Holdings,
16 and released OrthoClear and its principals personally from any further liability for theft of its
17 intellectual property. The complete terms ofthe settlement including benefits, if any, that
18 accrued personally to the directors, officers and founders of OrthoClear were not disclosed.
19 101. During the months following approval of the settlement, 3i and Badawi, using
20 information obtained by Badawi while he was a director of OrthoClear, entered into secret
21 negotiations to recover its $10 million investment ahead of other investors, while the other
22 shareholders waited patiently for further communications from OrthoClear regarding its
23 promised plans for a distribution or liquidation.
24 102. During this time, OrthoClear apparently also paid some debts, paid off employees
25 and gave many ofthem severance packages. However, no information about the Company's
26 business activities, financial condition, plans for additional operations or liquidation, or
27 discussions with 3i was disclosed to the Class A, B and C preferred shareholders.
28 103. During this time, Class A, B and C preferred shareholders made inquiries of the
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1 OrthoClear officers and directors as to whatthe Company was doing, the status of their
2 investment and when the liquidation and distribution would occur. They were told repeatedly by
3 Chishti and other OrthoClear representatives that matters were still under consideration and that
4 no decision had been taken, and that further information would be available by year-end 2006.
5 However, by year-end, OrthoClear's management largely had stopped returning telephone calls,
6 or told investors it still had no information to communicate.
7 104. On or about March 8, 2007, OrthoClear through its CEO Zia Chishti sent a letter
8 to shareholders finally reporting on liquidation efforts of the Company. The letter stated in part
9 that OrthoClear had "successfully negotiated a reduction in the distribution rights of 3i, which
10 held Class D Preference Shares." However, the letter failed to disclose the amounts paid 3i or
11 the terms of its arrangement with 3i, or the nature of.the supposed distribution rights asserted by
12 OrthoClear or 3i. This information remains secret to this day, and OrthoClear and 31i still refuse
13 to disclose the nature of their actions of their settlement to the other preferred shareholders.
14 105. The other Preferred Class A, B and C shares have received nothing from the
15 settlement funds, although OrthoClear apparently has ceased operations. Plaintiffs are informed
16 and believe that there was no material reduction in the distribution rights of 3i and that the
17 arrangement the parties entered into violated the terms of OrthoClear's Articles and
18 Memorandum of Association and the BVI Business Companies Act. The secret arrangement
19 between OrthoClear and 3i also violated applicable law by diverting to 3i funds that should have
20 been available for distribution to the Class A, B and C preferred shareholders. The actions of
21 OrthoClear were taken without shareholder approval as required under the Companies Act and
22 also left OrthoClear unable to meet contractual commitments it had made to orthodontists who
23 had purchased OrthoClear appliances for their patients.
24 106. Although the March 8, 2007 letter stated that a "final distribution to shareholders"
25 was expected "by the end of the second quarter of 2007," in fact OrthoClear subsequently
26 became a defendant in a consumer class action on behalf ofpatients who purchased the
27 OrthoClear product and who did not receive it when OrthoClear abruptly exited the aligner
28 business. The payment to 3i left OrthoClear unable to meet its contractual obligations to
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1 orthodontists who had purchased OrthoClear products and services.
2 107. The payment to 3i also circumvented the orderly public liquidation process that
3 had been promised in the October 2, 2006 letter . ' It was the culmination of a deception
4 perpetrated against the Class A, B and C preferred shareholders, which 'began at or about the time
5 OrthoClear sought shareholder approval of its proposed settlement with Align. The deception
6 included concealment of the circumstances, under which Ortho.Clear was settling and exiting the
7 clear alignment .business and failure to provide available information necessary for shareholders
8 to evaluate the settlement and de facto liquidation. It continued with deception about
9 OrthoClear' s business and liquidation plans before ' atid during the period of secret negotiations
10 between OrthoClear and 3i occurred . The final result ofthis course of conduct consisted of the
11' diversion of substantial funds to 3i from OrthoClear and its Class A, B and C 'preferred
12 shareholders.
13 108. This course of conduct involving Badawi, the OrthoClear Board, 3i and
14 OrthoClea'r constituted a further fraud upon the Class A, B and .C preferred shareholders. At the
15 very least, the conduct of the directors was negligent and a breach of their fiduciary duty and
16 duty to act in the best interest of all the shareholders.17
18 X.
19 ORTHOCLEAR WRONGFULLY FAVORED 3i OVEROTHER PREFERRED SHARE CLASSES BY RETURNING
20 ALL OR PART OF 3i INVESTMENT BEFORE A FORMALWINDING-UP OF THE COMPANY'S AFFAIRS.
21109. Although the March 8, 2007 letter casts the arrangement with 3i as favorable to
22the Class A, B and C preferred shareholders, in fact OrthoClear, its directors and 3i knew this
23was false. Instead, the arrangement with 3i (reached while other shareholders were being misled
24about OrthoClear's intent) was detrimental to the Class A, B and C shareholders:
25
II110. Neither OrthoClear Holdings' Memorandum of Association nor the Articles of
26Association empower the Directors to make distributions which favor one class ofpreferred
27
28shareholders over another without the consent of the remaining shareholders in the absence of a
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1 winding up of the Company's affairs, which has not yet occurred.
2 111. As such, OrthoClear's distribution of millions of dollars from the settlement funds
3 to 3i on authority of the D&O Defendants was also a transfer of assets in violation ofthe
4 Company's Memorandum and Articles and in breach of the Directors' duties to the shareholders.
5XI.
6BY ACCEPTING A RETURN OF 31'S INVESTMENT IN
7 ORTHOCLEAR, DEFENDANT BADAWI BREACHED HISFIDUCIARY DUTIES TO ORTHOCLEAR HOLDINGS'
8 SHAREHOLDERS.
9 112. As a member of OrthoClear Holdings' Board of Directors, Defendant Badawi had
10 a duty to act honestly and in good faith with a view to the best interests of OrthoClear Holdings
11 and its shareholders. Moreover, Badawi had a duty of loyalty to OrthoClear Holdings and its .
12 shareholders that required him not to favor 3i's interests over the interests of other shareholders,
13 despite his employment with 3i. Badawi, acting in concert with the D&O Defendants, breached
14 his fiduciary duties by engaging in a joint course of conduct resulting in the payment to 3i of as
15 much as $10 million from OrthoClear funds in derogation of the interests of other OrthoClear
16 preferred shareholders. As a result, 3i benefited to the detriment of OrthoClear Holdings, the
17 other preferred and common shareholders, creditors and Class members who had been defrauded
18 by OrthoClear.
19XII.
20ADDITIONAL SCIENTER ALLEGATIONS
21
22 113. The conduct of OrthoClear and the D&0 Defendants makes clear that they acted
23 with scienter or were reckless in connection with the materially false and misleading statements
24 issued by OrthoClear about the Align Litigation and intellectual property. OrthoClear and the
25 D&O Defendants knowingly and substantially participated in or acquiesced in the issuance or
26 dissemination of such materially false and misleading statements.
27 114. That OrthoClear and the D&O Defendants knew the claims underlying the Align
28 Litigation had merit is apparent from their actions. It is not credible that these Defendants did
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1 not know that OrthoClear had misappropriated Align's intellectual property given the following
2 facts:
3.
(a) The Breadth And Depth Of OrthoClear's Improper4 Usage Of Align's Protected Intellectual Property.
5 All of the key OrthoClear personnel-from marketing, sales, manufacturing and
6 technology-were former Align employees with access to its proprietary information.
7 Defendant Chishti solicited Align's employees to leave the company while he was still,on
8 Align's Board of Directors. The two main'invento' s of Align's products, Defendants Chishti and
9 Wen, were among the founders of OrthoClear. Indeed, OrthoCl'ear attempted to use. the
10 brazenness of OrthoClear's theft to' defend itself against Align's lawsuits, claiming that""[i]t is
11 counterintuitive that these same individuals would develop a new company around a product and
12- process that violates the very same patents they composed." OrthoClear used Align's former
13 manufacturing facility and personnel, iri Pakistan and.had custody of Align's proprietary source
14 code maintained in that facility. OrthoClear used Align's former sales force to contact its client
15 base and to "certify" doctors to use OrthoClear's process solely based on their training with
16 Align technology. OrthoClear marketed its product using Align's protected trademark, "THE
17 CLEAR WAY TO STRAIGHTEN TEETH." There was no part of OrthoClear's business that
18 did not in some way piggyback on Align's protected intellectual property.
19(b) The Time It Took OrthoClear To Get To Market
20 Compared To Align.
21 Align has stated that it took several years and hundreds of millions of dollars for it to
22 design and manufacturer its clear aligners. OrthoClear claims to have been able to accomplish
23 the same feat in a matter ofmonths, spending hundreds ofmillions of dollars less. It is not
24' credible that the D&O Defendants believed that they had accomplished such a feat without using
25 Align's intellectual property.
26(c) OrthoClear's Anonymous Challenge of Align's Patents.
27
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C ase 370 cv0-u1 JSW Documennt5412 File 671284/200707Page36.of4857
1 It is not credible that OrthoClear's Board Members did not suspect that the Company was
2 infringing on Align's patents, given OrthoClear's anonymous petition in the second quarter of
3 2005 for re-examination by the United States Patent Office of certain Align patents, which raised
4 serious infringement issues for the Company.
5 (d) The Manner In Which OrthoClear Settled The Align Litigation.
6 After proclaiming its innocence for 18 months and vowing to fight Align's supposedly
7 meritless claims, OrthoClear suddenly gave up just as it was supposed to obtain victory. While
8 OrthoClear previously had noted that an adverse ruling could harm its ability to conduct-
9 business, it now voluntarily was abandoning the aligner business in the absence of any ruling by
10 any courtlet alone a final and binding court decision. Such action is not likely to occur simply
11 because one of the ITC staff attorneys "suggested an interpretation of one patent that increased
12 the risk of an exclusion order." It also is not credible that OrthoClear simply would have
13 abandoned its business based on "increasing litigation costs" when it just had raised $10 million
14 dollars in additional capital and was close to a hearing that supposedly would vindicate its
15 claims.
16 115. The ongoing fraudulent scheme described in this Complaint could not have been
17 perpetrated over a substantial period of time, as has occurred, without the knowledge of
18 individuals at the highest levels of OrthoClear, including the D&O Defendants.
19XIII.
20ORTHOCLEAR, INC. AND ORTHOCLEAR HOLDINGS WERE
21 ALTER EGOS.
22 116. Plaintiffs are informed and believe, and on that basis allege, that OrthoClear, Inc.
23 and OrthoClear Holdings routinely disregarded corporate formalities and acted as a single entity.
24 Examples of OrthoClear, Inc.'s and OrthoClear Holdings' failure to observe corporate formalities
25 include but are not limited to the following:
26 (a) Chishti, a Director and CEO of both OrthoClear, Inc. and OrthoClear
27 Holdings stated under oath that, because the Directors of OrthoClear, Inc. take significant
28
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1 direction from OrthoClear Holdings, he had only a "vague" awareness of the "directorship and
2 composition of directorship of OrthoClear, Inc."
'3 (b)' Numerous OrthoClear officers and employees stated under oath that they
4 did not know whether they worked for OrthoClear, Inc. or.OrthoClear Holdings.
5 (c) Numerous OrthoClear officers and employees stated under oath that they
6 did not know whether'stock they own in their company is stock in OrthoClear Holdings or
'7 ` 'OrthoClear, Inc.
8 11'7. Plaintiffs are informed and believe, mid on`that basis allege, that OrthoClear, Inc.
9 and OrthoClear Holdings routinely commingled funds, and that OrthoClear Holdinggs'treated the
10 assets of OrthoClear, Inc. as its own. By way of example, but not limitation, Plaintiffs are
11 informed and believe that:
12 (a) OrthoClear Holdings' Chief Financial. Officer ("CFO"), Defendant
13 : `Kawaja, admitted that the CEO of the two companies and other officers regularly invested money
14 in OrthoClear Holdings by depositing money in OrthoClear, Inc.'s bank•account.
15 . (b) OrtlioClear Holdings' CFO admitted that interest on a bank account owned
16 by OrthoClear, Inc, is paid every month to OrthoClear Holdings.
17' 118. Plaintiffs are informed and believe, and on-that basis allege, that Ortho Clear, Inc.
18 is an inadequately capitalized shell. Examples of OrthoClear, Inc.'s inadequate capitalization
19 include, but are not limited, to the following:
20 (a) OrthoClear, Inc. sent the vast majority of its revenue to OrthoClear
21 Holdings. -OrthoClear, Inc. rarely had enough assets for even two weeks' operations and was
22 completely dependent on weekly infusions of cash from OrthoClear Holdings, Inc. to remain
solvent.
(b) ' OrthoClear'Holdings guaranteed at least one debt for OrthoClear, Inc.
119. Other facts suggesting that OrthoClear, Inc, and OrthoCle'ar Holdings are one
' another's alter egos include, but are-not limited, to the following:
(a) OrthoClear, Inc. and OrthoClear Holdings have essentially identical
officers and directors occupying the same positions in both companies.
-36-SECOND AMENDED CLASS ACTION COMPLAINT
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(b) OrthoClear, Inc. and OrthoClear Holdings have identical equitable
11 ownership.
(c) OrthoClear Holdings routinely used OrthoClear, Inc.'s offices and
11 employees.
120. Plaintiffs also are informed and believe, and on that basis allege , that OrthoClear,
Inc.'s Board of Directors did not meet even once in the eighteen plus months from January 2005
to September 2006 prior to the cessation of its operations. Likewise, Plaintiffs are informed and
believe and on that basis allege that many of the Board members of OrthoClear, Inc. were not
aware they were on its Board.
XN.
CLASS ACTION ALLEGATIONS.
121. Plaintiffs bring this action as a class action pursuant to Federal Rules of Civil
Procedure 23(a) and 23(b)(3) on behalf of a class (the "Class") of all persons who purchased or
otherwise acquired OrthoClear Class A, Class B or Class C preferred convertible shares and
common shares during the Class Period and who were damaged thereby.
122. Excluded from the Class are the Defendants herein, members of the immediate
families' of the D&O Defendants, any parent, subsidiary, affiliate, officer, or director of
OrthoClear, any entity in which any excluded person has a controlling interest, and the legal
representatives, heirs, successors and assigns of any excluded person.
123. The members of the Class are so numerous that joinder of all members is
impracticable. While the exact number of members of the Class is unknown to Plaintiffs at the
present time and can only be ascertained from books and records maintained by OrthoClear
and/or its agent(s), Plaintiffs are informed and believe that there are over one hundred members
of the Class located throughout the United States. As of July 2006, OrthoClear had issued and
outstanding approximately 280 million shares of Class A, Class B, Class C and Common Shares.
124. Plaintiffs fairly and adequately will represent and protect the interests of the
members of the Class. Plaintiffs have retained extremely competent counsel experienced in class
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1 and securities litigation and intend to prosecute this action vigorously. Plaintiffs are a member of
2 the Class'-and do not have interests antagonistic to, or in conflict with, the other members ofthe
3 Class.
4 125. Plaintiffs' claims are:typical of the claims of the members of the Class. Plaintiffs
5 and all members of the Class purchased OrthoClear securities and;have sustained damages
6 arising out of the same wrongful course of conduct.
7 126. -Common questions oflaw and fact exist as to all members of the Class and
8 : predominate over any`questions solelyaffecting individual members. Among the questions of
`9 law and fadt,cominon to the,-Class are:
10 (a) Whether the federal securities laws were violated by the Defendants' acts
11 and omissions as alleged-herein;
12 (b) Whether Defendants' acts and omissions as alleged herein constituted a
13 breach of fiduciary duty owed to shareholders;
14- (c) Whether Defendants participated in-and pursued the common course of
15 conduct and fraudulent scheme complained ofherein;
16 (d) Whether Defendants had"knowledge of or were reckless or negligent with
17 respect to'the improper activities described herein;
18 (e) Whether the statements contained in the offering documents and press
19 releases during the Class Period omitted and/or misrepresented material facts about OrthoClear's
20 true financial condition, trade secrets, business operations and the prospects for a successful
21, resolution-to the Align Litigation;
22 (f) Whether Defendants acted knowingly, recklessly or negligently in
23 : omitting to'state and/or misrepresenting material facts;
24 (g) Whether Defendant Badawi breached his fiduciary duties owed to the
25 shareholders by putting the interests ofhis employers 3i, above the interests of the shareholders
26 of OrthoClear Holdings, on whose Board he sat;
27
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SECOND AMENDED CLASS ACTION COMPLAINT
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1 (h) Whether the other D&0 Defendants breached the fiduciary duties each
2 owed to investors by putting the interests of 3i above the interests of the other shareholders of
3 OrthoClear Holdings; and
4 (i) Whether Plaintiffs and other members of the Class have sustained damages
5 and, if so, the appropriate measure thereof.
6 127. ' A class action is superior to other available methods for the fair and efficient
7 adjudication of this controversy since, among other things, joinder of all members of the Class is
8 impracticable. Furthermore, because the damages suffered by the individual Class members are
9 small relative to the expense and burden of individual litigation, it is virtually impossible for
10 Class members individually to seek redress for the wrongful conduct alleged. Plaintiffs do not
11 foresee any difficulty in the management of this litigation that would preclude its maintenance as
12 a class action.
13 128. The names and addresses of the record owners of the shares of OrthoClear
14 Holdings stock purchased during the Class Period are available from OrthoClear and/or its
15 agents. Notice can be provided to persons who purchased or otherwise acquired OrthoClear
16 Holdings stock by a combination ofpublished notice and first class mail, using techniques and
17 forms of notice similar to those customarily used in other class actions arising under the federal
18 securities laws.
19
20 COUNT I
21 Violation Of Section 10(b) Of The Exchange Act And Rule 10b-5 Promulgated Thereunder (Against OrthoClear And The
22 D&O Defendants)
23 129. Plaintiffs incorporate herein by reference each of the allegations set forth in
24 Paragraphs 1 through 128 above.
25 130. This Count is asserted by Plaintiffs on behalf of themselves and the Class against
26 OrthoClear and the D&O Defendants and is based upon Section 10(b) of the Exchange Act, 15
27 U.S.C. §78j(b), and Rule I Ob-5, promulgated thereunder.
28 131. During the Class Period, Defendants carried out a plan, scheme and course of
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1 " conduct which was intended to and'throughout the Class Period, did: (a) deceive the Class as to
2 the merits of the Align Litigation; (b) deceive the Class as to whether OrthoClear had a valid
3 ownership'interest in the patents and other intellectual property upon which its business was
4 'based; (c) deceive the Class as to whether'ornct°OrthoClear's patents'and business operations
5 infringed Align's patents; (d) deceive the Class as to the effect of the costs of the Align Litigation
6 on OrthoClear's ability to continue in business and conduct a defense of the cases; (e) deceive the
7 'Class as-to whether and when OrthoClear was making an initial public offering of its shares; and
8 (f) cause Plaintiffs and other members of the` Class to purchase or otherwise acquire OrthoClear
9 Holdings securities tliatwere ultimately worthless.`'
10 132. During fhe-Class'Period, Orth6Clear' and the°D&O Defendants sought and
11 obtained approval to `issue shares of Class D preferred stock to 3i and to modify the 'terms of
12 ownership of Class A, B and C preferred shares,' while•failiug adequately to disclose'all the
13 material terms of the transaction, the modifications to the rights and interests' of the Class A, B,
14 and 'C preferred !shares, or the financial circumstances of Company operations under which the
15 Preferred bD shares were being sold.
16 ' 133. During the Class Period, OrthoClear, the D&O Defendants and'Badawi deceived
17 Plaintiffs about the true circumstances of and reasons for the Align settlement, the financial
18 condition of OrthoClear, the fact that the settlement would result in little or no payout to the
19 Class A, B, and C preferred shareholders, and that the individual officers and directors and 3i
20 would be'the principal or exclusive, beneficiaries of the settlement with Align. Defendants also
21 falsely reassured shareholders that remaining Company assets would be used to meet obligations
22 to all shareholders; and no decisions had been taken or were being taken as to specific payments;
23 and amounts due to each class could not be determined until an "actual liquidation." In the
24 II meantime, OrthoClear and 3i secretly entered into an arrangement that unlawfully diverted a
25 1 substantial part ofthe remaining OrthoClear assets to 31.
26134. OrthoClear and the D&O Defendants: (a) employed devices, schemes, and'27
artifices to defraud; (b) made untrue statements of material fact and omitted to state material facts28
SECOND AMENDED CLASS ACTION COMPLAINT
C as '3?0Fc90132^§W File ll'R/Rf 11?PafeawdARf 57
1 necessary to make statements not misleading by use ofmeans or instrumentalities of interstate
2 commerce; and (c) engaged in acts, practices, and a course of business that operated as a fraud
3 and deceit upon the purchasers and acquirers of the Company's securities in an effort to sell
4 OrthoClear Holdings securities in violation of Section 10(b) of the Exchange Act and Rule
5 l Ob-5.
6 135. OrthoClear and the D&O Defendants engaged in the fraudulent activity described
7 above knowingly and intentionally or in such a reckless manner as to constitute willful deceit and
8 fraud upon Plaintiffs and the Class. These defendants knowingly caused their statements to
9 contain misstatements and omissions ofmaterial fact as alleged herein.
10 136. Plaintiffs and the Class have suffered damages in that, in reliance on the
11 statements of OrthoClear and the D&O Defendants, they purchased the company's securities
12 during the Class period. These securities are now worthless, as OrthoClear voluntarily has
13 abandoned its aligner business.
14 137. Asa direct and proximate result of OrthoClear and the D&O Defendants'
15 wrongful conduct, Plaintiffs and the Class have suffered damages in connection with their
16 purchases and acquisitions of OrthoClear Holdings securities in an amount in excess of $ 10
17 million subject to proof at trial.
18
19 COUNT II
20 Violation Of Section 12(a)(1) Of The Securities Act of 1933(Against OrthoClear)
21
22 . 158. Plaintiffs incorporate herein by reference each of the allegations set forth in
23 Paragraphs 1 through 137 above.
24 139. This Count is asserted by Plaintiffs on behalf of themselves and the Class against
25 OrthoClear and the D&O Defendants and is based upon Section 12(a)(1) of the Exchange Act, 15
26 U.S.C. §781(a)(1).
27 140. During the Class Period, OrthoClear sold and offered to sell securities to members
28 of the Class in the absence of a registration statement. OrthoClear used the instrumentalities of
-41-SECOND AMENDED CLASS ACTION COMPLAINT
C e 3:07-cv-01429 -JSW Document 58-2 Filed 08/20/2007 Page 51 of 57r,ase 3:07-cv-01429-JSW Document 47 Filed 07/24/2007 Page 43 of 48
1
2
3
4
5
6
7
8
9
10I
1
12
13
14
15
16
17
18
19
20
21
22
interstate commerce in connection with the sales and offers.
141. As a direct and proximate result of OrthoClear's wrongful conduct, Plaintiffs and
the Class have suffered damages in connection with their purchases and acquisitions of
OrthoClear Holdings securities in an amount in excess of $10 million subject to proof at trial.
COUNT IU
Intentional Misrepresentation (Against OrthoClear, the D&ODefendants and Badawi)
142. ^ Plaintiffs incorporate herein by reference each ofthe allegations set forth in
11 Paragraphs 1 through 141 -above.
143. OrthoClear, theD&O Defendants, and Badawi deceived Plaintiffs about the true
I circumstances of and reasons for the Align settlement. Collectively, they intentionally
misrepresented material facts to Plaintiffs by falsely stating at the time of the Align settlement
that: (a) the remaining Company assets would be used to meet obligations to all shareholders;
(b) no decisions had been taken or were being taken as to specific payments to shareholders; and
(c) amount's due-to each class of shareholders could not be determined until an actual liquidation
took place. In the meantime, OrthoClear and 3i secretly entered into an arrangement that
unlawfully diverted a substantial part of OrthoClear's remaining assets to 3i.
144. These misrepresentations were made with knowledge that they were false and
were intended to induce Plaintiffs to rely upon them.
145.' Plaintiffs reasonably relied on these misrepresentations by not taking further
actions to obtain a return of their funds.
23 ` 146. As a direct and proximate result of these misrepresentations, Plaintiffs and the
24 Class suffered damages in that the funds that otherwise would have been available to distribute to
25 11 them were otherwise dissipated.
26COUNT IV
27Negligent Misrepresentation (Against OrthoClear and the
28 D&O Defendants)
SECOND AMENDED CLASS ACTION COMPLAINT
Casease3 :9:07- vcv--0OI24R9JSW uocumen 547-2 File 077 4T2^0707Page o?49f 57
IF^
1 147. Plaintiffs incorporate herein by reference each of the allegations set forth in
2 Paragraphs 1 through 146 above.
3 148. OrthoClear and the D&O Defendants negligently misrepresented material facts to
4 Plaintiffs by stating that: (a) the claims of Align in the Align Litigation were without merit;
5 (b) the operation of OrthoClear's business does not infringe any patent or other proprietary rights
6 of others respecting any of the same; and (c) OrthoClear soon would be issuing an IPO.
7 149. These misrepresentations were made without a reasonable ground for believing
8 that they were true.
9 150. OrthoClear and the D&O Defendants also negligently misrepresented facts to
10 Plaintiffs by omitting to inform them that: (a) there was a real likelihood that Align would
11 prevail in the Align Litigation; (b) that the costs of defending the Align Litigation could force
12 OrthoClear to settle the claims on terms so unfavorable as to constitute a virtual surrender of its
13 business; and (c) that Align's claims were in fact meritorious.
14 151. In addition, OrthoClear, the D&O Defendants and Badawi negligently
15 misrepresented to shareholders that $10 million ofthe settlement funds would be used to meet
16 obligations to shareholders and that no decision had been taken or were being taken as to specific
17 payments, and that amounts due to each class could not be determined until an "actual
18 liquidation."
19 152. These omissions were made without a reasonable basis for failing to inform
20 Plaintiffs of these facts.
21 153. Plaintiffs reasonably relied on these misrepresentations and/or omissions by
22 purchasing or otherwise acquiring OrthoClear Holdings securities that were ultimately worthless.
23 154. As a direct and proximate result of this negligence, Plaintiffs and the Class
24 suffered damages in connection with their purchases and acquisitions of OrthoClear Holdings
25 securities in an amount in excess of $10 million subject to proof at trial.
26
27
28
-43-SECOND AMENDED CLASS ACTION COMPLAINT
se 3:07-cv-01429-JSW Document 58-2 Filed 08/20/2007 Page 53 of 57,Case 3:07-cv-01429-JSW Document 47 Filed 07/24/2007 Page 45 of 48
COUNT V
2
3
4
5
Breach of Fiduciary Duty (Against D&O Defendants and Badawi)
155. Plaintiffs incorporate herein by reference each of the allegations set forth in
11 Paragraphs 1 through 154 above.
156. Having undertaken to act as officers or directors of OrthoClear Holdings, the
6 D&O Defendants became fiduciaries ofmembers of the Class, shareholders of OrthoClear
7 Holdings, owing them the very highest standard of loyalty, prudence and skill in the performance
8 of their duties. Specifically, Defendant directors had the fiduciary duty to preserve and protect
9 the assets of OrthoClear Holdings and not to waste its funds. Defendants also had the duty of
10 loyalty, to the shareholders and the obligation not to favor the interests of 3i or any other
11 shareholder or group of shareholders over the interests of the remaining shareholders. In
12 addition, they had an obligation not to mislead shareholders regarding OrthoClear's ownership of
13 the Intellectual Property underlying its business, its prospects for surviving the Align Litigation
14 and its prospects for,undertaking an initial public offering.
15 157. The breaches of their fiduciary duties to Plaintiffs by the D&O Defendants
16 included, but were not limited to: (a) transferring a substantial sum of as much as $10 million
17 that OrthoClear Holdings obtained-from" Align as part of the settlement of the Align Litigation to
18 Defendant Badawi's eri ployer, 3i;'(b) intentionally or negligently misleading the Class members
19 regarding O'rihoClear's ownership of the intellectual property underlying its business, its
20 prospects for surviving the Align Litigation and its prospects for undertaking andnitial public
21 offering; and, (c) .reassuring shareholders that $10 million ofthe settlement funds would be used
22 :to meet obligations to shareholders and that no decision had been•taken or were being taken as to
23 specific payments, and-that amounts due to each class could not be determined until an "actual
24 liquidation."
25 158. Asa direct and'proximate result of Defendants' breaches of fiduciary duty,
26 Plaintiffs and the Class .have been damaged in an amount up to $10 million subject to proof at
27 II trial.
28
SECOND AMENDED CLASS ACTION COMPLAINT
C e 3: 7- v-01429-J V^ Document 458-2 Fed 8/20/2007 Page 54 of 57ase Document 7 File
07P4 2007 ' Page 46 of 48
1 COUNT VI
2 Violation of British Virgin Island ("BVI") BusinessCompanies Act §121
3159. Plaintiffs incorporate herein by reference each of the allegations set forth in
4Paragraphs 1 through 158 above.
5160. Pursuant to the BVI Business Companies Act of 2004 §121, the D&O Defendants
6and Defendant Badawi had a duty to exercise their powers as directors and officers for a proper
7purpose, and could not act, or agree to the company acting, in a manner that contravened the BVI
8Business Companies Act or its Memorandum or Articles of Association.
9161. The distribution to 3i violated OrthoClear Holdings' Articles and Memorandum of
10Association in that the Articles and Memorandum did not empower the D&O Defendants to
11make distributions favoring one class of preferred shareholders over another. Nor did these
12agreements empower OrthoClear Holdings to repurchase shares without consent of the remaining
13shareholders.
14162. As a direct and proximate result of the D&O Defendants' actions, Plaintiffs and
15the Class have been damaged in an amount up to $10 million subject to proof at trial.
16
17 COUNT VII
18 Breach of California Corporations Code §2116
19 163. Plaintiffs incorporate herein by reference each of the allegations set forth in
20 Paragraphs 1 through 162 above.
21 164. Pursuant to California Corporations Code Section 2116, the directors of a foreign
22 corporation transacting intrastate business are liable to the corporation for the making of an
23 unauthorized distribution of assets according to any applicable law of the state or place of
24 incorporation, whether committed or done in California or elsewhere.
25 165. Asa direct and proximate result of the D&0 Defendants' unlawful and
26 unauthorized distribution to 3i in violation of OrthoClear Holdings' Memorandum and Articles
27 of Association and the applicable law of the British Virgin Islands, OrthoClear Holdings has
28 violated Section 2116, resulting in loss to Plaintiffs and the Class in an amount of up to $10
-45-SECOND AMENDED CLASS ACTION COMPLAINT
3:07-cv-01429 -JSW Document 58-2 Filed 08/20/2007 Page 55 of 57.se 3:07-cv-01429-JSW Document 47 Filed 07/24/2007 . Page 47 of 48
1 1I million subject to proof at trial.
2,11.
3 COUNT VIII
4 Constructive Trust,(A:gainst 31)
5 166. Plaintiffs.incorporate herein by reference each of the allegations set forth in
6 Paragraphs 1 through 165 above.
7 167. As discussed^above, up to $10 million that belonge'd' to OrthoClear Holdings and
8 its shareholders 'was unlawfully paid to 3i. This payment was ade in breach of the fiduciary
9 duties owedby the Company, BadaWi and the D&O Defendants to,Class A;'B' and C preferred
10 shareholders and in breach of OrthoClear's Articles and Memorandum ofAssociation and the
11 BVI Companies Act. In other words, 3i obtained this money through the unlawful conduct,
12 including a breach of a fiduciary duty by the D&O Defendants`and Badawi.
13 168. As a'direct and proximate result, Defendant 3iholds the sum ofup to $10 million
14 transferredao'it by Defendant OrthoCleat Holdiugs'in constructive trust for the Class A,.B and C
15 preferred shareholders of OrthoClear Holdings.
16
17 COUNT IX
18 Violation Of Section 25110 Of The California CorporationsCode (Against OrthoClear)
19
20 11 169. Plaintiffs incorporate herein by reference each of the allegations set forth in
21 Paragraphs 1 through 137 above.
22 170. This Count is asserted by Plaintiffs on behalf ofthemselves and the Class. against
23 OrthoClear and the D&O Defendants and is based upon California Corporations Code Section
24 1125110.
25 171. During the Class Period OrthoClear issued Class A, B, and C preferred shares and
26 received payment for such securities from members of the Class that had not been qualified with
27 the Commissioner of Corporations ofthe State of California. Upon information and belief, these
28 securities were not exempt from the requirements of the California Corporations Code pursuant
SECOND AMENDED CLASS ACTION COMPLAINT
C ^s 037Q^ c8^f ^ S N QL98 t 2 File ^7RWI2LT307Page o
64157
I to Sections 25100, 25102 , or 25105, and as a result violated Section 25110.
2 172. As a direct and proximate result of OrthoClear ' s wrongful conduct, Plaintiffs and
3 the Class have suffered damages in connection with their purchases and acquisitions of
4 OrthoClear Holdings securities in an amount in excess of $10 million subject to proof at trial.
5
6 PRAYER FOR RELIEF
7 WHEREFORE, Plaintiffs pray for judgment as follows:
8 1. For damages as authorized by law, including compensatory, consequential and
9 other damages in excess of $ 10 million, an amount to be determined at trial;
10 2. For punitive damages;
11 3. For prejudgment interest;
12 4. For attorneys' fees;
13 5. For costs incurred herein to the extent permitted by law, and;
14 6. For such other and further relief as the Court deems just and proper.
15
16 DEMAND FOR JURY TRIAL
17 Plaintiffs demand a trial by jury.
18
19 DATED : July 24, 2007 Respectfully submitted,
20 LAW :OFFICES OF ALAN W. SPARER
21
22 By:ALAN W. SPPER
23
24Attorneys for Plaintiffs
25
26 -
27
28
-47-SECOND AMENDED CLASS ACTION COMPLAINT
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