Sunday, June 7, 2009

The United States v WHITNEY INFORMATION NETWORK, INC Class Action, by Thomas Anderson Reuters

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UNITED STATES DISTRICT COURT
MIDDLE DISTRICT OF FLORIDA
FT. MYERS DIVISION
RODNEY DURHAM and ARNOLD
FRIEDMAN, Individually And
On Behalf of All Others Similarly Situated,
Plaintiffs
vs
WHITNEY INFORMATION NETWORK, INC.,
RUSSELL A. WHITNEY, RONALD S. SIMON,
ALFRED R. NOVAS, JOHN F. KANE,
NICHOLAS S. MATURO, RANCE MASHECK
and EHRHART KEEFE STEINER &
HOTTMAN PC,
Defendants.
Case No. 2:06-cv-687-FtM-34DNF
CONSOLIDATED AMENDED
CLASS ACTION COMPLAINT
FOR VIOLATIONS OF
FEDERAL SECURITIES LAWS
JURY TRIAL DEMANDED
BASIS OF ALLEGATIONS
Plaintiff has alleged the following - except as to allegations specifically pertaining to
Plaintiff and Plaintiff's counsel - based upon the investigation of Plaintiff's counsel, which
investigation included review and analysis of publicly available SEC filings, regulatory filings
and reports, securities analysts' reports and advisories, press releases and other public statements
and media reports, as well as other discussions with both public and confidential witnesses.
Plaintiff believes that substantial additional evidentiary support will exist for the allegations set
forth herein after a reasonable opportunity for discovery.
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NATURE OF THE ACTION
1.
This is a federal class action on behalf of purchasers of the common stock of
Whitney Information Network, Inc. (`Whitney" or the "Company") between August 11, 2005
and December 15, 2006, inclusive (the "Class Period"), seeking to pursue remedies under the
Securities Exchange Act of 1934 (the "Exchange Act"). As alleged herein, Defendants published
a series of materially false and misleading statements which Defendants knew and/or recklessly
disregarded were materially false and misleading at the time of such publication, and which
omitted to reveal material information necessary to make Defendants' statements, in light of
such material omissions, not materially false and misleading. As a result of Defendants' scheme
and course of conduct, Plaintiff and the members of the Class, who purchased Whitney common
stock at artificially-inflated prices, were damaged when the stock price plummeted as the true,
concealed facts were ultimately revealed to the market.
OVERVIEW OF THE ACTION
Company's Purported Profile and Mission
2.
According to its website at http://www.wincorporate.com/profile.htm, Whitney
defines its Corporate Profile, in part, as follows:
COMPANY PROFILE
Whitney Information Network, Inc. provides post-secondary education and
training courses in the United States, Canada, and the United Kingdom. Its
courses provide instruction in real estate investing, business strategies, stock
market investment techniques, cash management, asset protection, and other
financially-oriented subjects. The company also develops and sells educational
resource materials, as well as offers various software products for the real estate,
small business, and the stock trading industries. Whitney Information Network
was founded in 1992. It was formerly known as WIN Systems International, Inc.
and changed its name to Whitney Information Network, Inc. in 1999. The
company is headquartered in Cape Coral, Florida.
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3.
On its Internet site, http://www.wincorporate.com/default.htm, the Company
defines its "Mission," as follows:
OUR MISSION
It is our mission to educate people on how to create wealth. We supply a growing
line of products, training, and services in the areas of real estate investing,
business development, financial investment, and asset protection - both nationally
and internationally. We accomplish this by using cutting-edge teaching methods
delivered through the most powerful distribution channels available. Through live
classroom instruction, mentoring, personal phone coaching, online and on
demand training, advising, and state-of-the-art software, we are able to help
people reach theirfinancial goals. Our students come to us seeking ways to gain
financial independence and our instructors teach them solid fundamentals,
combined with proven methods and applications.
(Emphasis added.)
Russ Whitney: A "Rats to Riches" Tale
4.
One of the multitude of Internet web-sites associated with or owned by the
Company, called Russ Whitney' s Building Wealth, http://www.russwhitney.com/advanced-
training.aspx, purports to provide a biography of Russ Whitney, including his purported "rags to
riches" story, as follows:
Russ Whitney, Millionaire, best-selling author and CEO of Whitney Information
Network, Inc. is a hard-driving, intense achiever and leader who never slows his
tireless pace.
From running a multi-million dollar educational company to spending time with
his family, Russ Whitney is the picture and embodiment of success of the
American Dream. But it wasn't always like it is now.
As a teenager, people who knew Russ Whitney viewed him as nothing more
than another high school dropout, street-wise, but headed nowhere. By the
age of 20, Russ found himself trying to support his wife and child while employed
by the Tobin Meat Packing slaughterhouse in Albany, New York for $5 an hour.
Consumed by the desire to give his family a better life, Russ began researching
techniques intended to build wealth.
"I started answering ads for money-making opportunities. Some of them were
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pure junk, some required capital I didn't have and some just didn't suit me. But
then I ordered a book that had a couple of ideas that made sense. I finally found
something that I could do that didn't require a lot of money to start, and in 3
weeks, I made $11,000."
Russ realized that wasting this money went against the principles of his new
wealth-building strategy. So, he and his family celebrated his initial financial
success with a commitment to use that money to make more money. He quickly
invested it in another money-making vehicle.
A little over a year later, at the age of 22, he had racked up $117,000 in profits.
At the age of 25, Russ Whitney decided to move his family to Cape Coral,
Florida. In 18 months, with only a thousand borrowed dollars, Whitney
streamlined his techniques and amassed a fortune of $4.7 million in real
estate.
Register Now and Receive a GIFT valued at $195 FREE when You Attend the
Training!
(Emphasis added.)
Promotion of High-End Services
5.
This website also promoted Russ Whitney and Whitney products and services as
very high-end services that would allow people to gain the advanced skills, knowledge and
education necessary to have a reasonable chance of succeeding as professional real estate
investors and/or stock traders. In fact, Russ Whitney reinforced this fact by holding out his
purported best-selling books, as a purported demonstration of the underlying quality of
information being conveyed by the Company at in- or out-of-house seminars and classes, camps,
Internet training, and/or offered through coaching or mentoring services.
6.
In fact, because the "value" of the information conveyed in these classes was
purportedly so high, prices for full educational packages run into the tens of thousands of
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dollars and reach more than $50,000 - the approximate cost of Whitney's Platinum Package.
As evidence of the purported value of the information sold by Whitney, the Wealth Builder
continues, in part, as follows:
Realizing the tremendous need for quality training material on the various aspects
of wealth building, Russ developed a complete educational system to help people
learn his methods - and put them into practice. With a significant percentage of
Whitney's students being lawyers, doctors, business owners and other
professionals who had grown weary of working 70 to 80 hours a week to maintain
a standard of living, Whitney learned the value of his wealth-building strategies.
To reach a broader number of people, Russ Whitney developed a series of
workshops, conferences, and other educational programs designed to provide
the information and tools necessary for anyone to achieve financial
independence and security.
(Emphasis added.)
Company's Purported Success and Rising Revenue
7.
As a result of the Company's purported success in capitalizing on the rising
demand for Whitney's real estate and stock investment educational services, from 2001 until
2006, as the chart below indicates, Whitney reported continuously improving revenues:
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8.
Despite these rising revenues, by the fall of 2005 Whitney was already beginning
to see a shift away from real estate investment educational courses and sales and, at the same
time, an increase in demand for stock trading and investment education. This shift, which
signified the growing importance of stock education to the future financial strength and
profitability of the Company at that time, is also reflected by the following chart that compares
the Philadelphia Exchange Housing Index (HGX), to the S&P 500 Index (GSPC) and the
NASDAQ Composite Index (IXIC), as follows:
^HG}
+250
+200%
+1502
+1002
+50
0
80.0
60.0
0
40.0
20.0
0.0
Copyright 2007 Yahoo! Inc.
Splits:"
as of22-Jun-2007
........................................................................................................... .. ..........................................................,.........
'HGX
http://finance.gahoo.com/
Defendants' Scheme To Defraud Investors
9.
Throughout the Class Period, Defendants publicly represented, inter alia, that
Whitney was achieving "record revenues" and earnings, that its backlog of products purchased
but not delivered was decreasing, that the Company and its business model were on a positive
track toward ever-increasing revenues and positive growth projections, that it maintained
controls that were at least sufficient to monitor and control the Company's operations in a
reasonably sound manner, and that it complied with Generally Accepted Accounting Principles
(GAAP), Sarbanes-Oxley, SEC Rules, and its own Code of Conduct.
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10.
For example, as alleged in detail herein below in the Section entitled "False and
Misleading Statements Made During the Class Period," Defendants made the following public
false and misleading statements, among many others, regarding the Company, its management,
its financial results, its products, its revenue recognition policy, its compliance with GAAP, its
compliance with Sarbanes Oxley, and its Code of Conduct:
-"record results for the second quarter ended June 30, 2005" - August 11, 2005 press
release;
-"the Company cited its expansion ofon-demand and real-time Advanced Training
delivered over the Internet as a keyfactorfavorably impacting the Company's bottom
line;" Id.;
-"The consolidated statements have been prepared in accordance with accounting
principles generally accepted in the United States ofAmerica for interim financial
reporting and Securities and Exchange Commission regulations ...." 1OQ for 2Q:05;
-"The change in net income is a trend that is expected to continue, as the backlog of
course trainings purchased and undelivered is reduced, the amount ofcourse
deliveries will continue to grow, and no significant change in the ratio ofexpense is
anticipatecL Deferred revenue, which is the net backlog oftraining courses purchased
and notyet delivered, increased by $12,863,000 during these three months of 2005,
compared to an increase of $11,264,000 for the same comparable period in 2004;" Id.;
-"this report does not contain any untrue statement ofa materialfact or omit to state a
materialfact necessary to make the statements made, in light ofthe circumstances
under which such statements were made, not misleading;" Certification to 2Q:05;
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- "The dramatic increase in revenue in the third quarter of2005 was a result ofnew
pricing strategies, increasedfocus on marketing to geographic markets that have
responded strongly to the Company's sales efforts, and an increase in delivery ofthe
Company 's Advanced Training courses;" November 9, 2005 Press Release;
-"Through our team's hard work, efficiency gains and cost controls, we believe 2005
represents an inflection pointfor our Company and aplatformfor sustained growth in
2006 and beyond." Russ Whitney, statement in November 9, 2005 Release;
-"The depth ofour advanced courses, the emerging electronic delivery ofour course
content and overall margin management providedfor a terrific 2005 and the seedsfor
a strong 2006." Defendant Maturo, statement in November 9, 2005 Release;
-" When a student attends the course, that will trigger the revenue that will be
recognized. So it is primarily based on attendance. We will also calculate the likelihood
of a student's attendance when it is deemed remote. The combination of those two items
in essence will be the revenue recognition of the Company." Defendant Novas,
statement during June 28, 2006 conference call for analysts and investors; and
-"The Code ofEthics ("the Code') embodies the commitment of Whitney Information
Network, Inc., its affiliates and subsidiaries (collectively, "WIN') to conduct its
business with the highest ethical standards and in accordance with all applicable laws,
rules and regulations of the countries in which WIN engages in business.
(Emphasis added.)
11.
In truth, however, from the inception of the Class Period, at the same time that
Defendants were issuing these materially false and misleading statements in Whitney public
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filings, Defendants knew but failed to disclose the following known, adverse material facts,
among others discussed in detail herein:
(i)
Defendants' business model had no chance of success because it was based on
scamming consumers by inducing them to buy unconscionably overpriced and essentially
worthless so-called "educational products." The "product" provided was essentially a lecture that
more products were needed and more money had to be spent by the customer in order to get the
money-making skills promoted by the Company, which inevitably resulted in customers'
demands for refunds or attempts to obtain chargebacks through their credit card companies'
fraud protection programs, and the inability of the Company to sustain its revenues and growth;
(ii)
Throughout the Class Period, Defendants recorded as revenue all "educational"
packages sold within one year of the contract purchase date at the latest, despite failure in all
instances to finish delivering all services and products that the customer purchased within that
time period, including one year of post-class coaching services, camps, and events and follow-up
with Advisors;
(iii) Defendants failed to disclose the true background and credentials of Defendant Russ
Whitney, which show the material facts that he was a convicted felon without the financial assets
that he touted early on, and that he was unethical, including:
(a)
Defendants knew but concealed the fact that in 1974, when Russ Whitney
was purportedly working to build his first real estate fortune, he was actually pleading guilty to
and serving prison time for robbery;
(b)
Defendants knew but concealed the fact that Russ Whitney did not make
his first real estate fortune by his 25th birthday as reported, but rather had no more than
approximately $100,000 worth of highly-leveraged properties at that time;
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(c)
Defendants knew but concealed the fact that in 1980 Russ Whitney was
involved in a hit and run in which a jury found him liable for serious injuries to a 19-year-old
pedestrian. Rather than pay the $1.2M jury verdict, Russ Whitney complained that he would go
bankrupt before paying the full amount and ended up paying less than a third of the money;
(iv) Defendants failed to disclose serious problems within the Company that they were
aware of from prior to or at the very latest less than a week into the Class Period. As discussed
in detail infra, first in mid-July of 2005, and then in mid-August of 2005, senior management
including Defendants named herein received copies of e-mails prepared by two Company
managers addressing a host of serious law, reporting, ethics and fair business violations and
demonstrating that Defendants, jointly and individually, were aware of these material, adverse
facts but concealed them from the marketplace. These specific issues included, in part, the
following:
• Credit card "chargebacks" had reached a crisis level and Whitney was in jeopardy
of being denied credit card processing services. Therefore, the Company's entire
future ability to conduct business was at stake. Unbeknownst to shareholders, by
that time, Whitney had already been blacklisted by major reputable card
processors, and by the fall of 2005, even the processors willing to continue to
conduct business with Whitney were complaining about the huge spike in
disputed charges, and they too were threatening to close accounts.
• The massive sudden spike in chargebacks and charge disputes resulted from the
combination of increased volume enrollment, the resulting scarcity of resources
within the Company to address satisfactory resolution, and, finally, a Zero Return
Policy that had secretly been adopted by Defendants months before.
• The Company's unreasonable and illegal refusal to grant refunds to students
making legitimate refund requests resulted in a disproportionate number of
customers attempting to resolve the issue by contacting their credit card
companies - claiming fraud protection and a failure of delivery of services.
• The arbitrary and unreasonable refusal to grant legitimate refunds also resulted in
artificially inflated deferred revenues, as Defendants kept tens of millions of
dollars on the Company's books that should have been returned to consumers.
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• The Company arbitrarily designated "Coaching" services as an immediate
revenue item, while "Mentoring" or other similar services - necessarily provided
at a later date - were classified as Deferred Revenues. This intentional
misclassification of "Coaching" as immediate revenue enabled Defendants to
improperly realize tens of millions of dollars in additional revenues that rightly
should have been reported only when such Coaching services were supplied - up
to 2.5 years in the future.
• Whitney was operating in violation of GAAP rules, SEC accounting and reporting
regulations, the Company's own Codes of Ethics and Business Guidelines, and
the Sarbanes-Oxley Act, among other state and federal rules and regulations;
(v)
Defendants also knew of or recklessly disregarded the problems related to the
Company's manipulation of returns and deferred revenue accounting, discussed in detail herein,
they also knew or recklessly disregarded that Whitney had provided false financial statements to
regulators and had violated federal securities laws, from at least the inception of the Class
Period;
(vi)
Contrary to the Company's representations in its Class Period filings, the
Company's Code of Conduct was not designed to moderate the activities of those within the
organization and Company employees were not required to uphold basic standards of acceptable
business conduct and moral decency. To the contrary, the Code of Conduct was a complete sham
designed to create the impression that the Company had proper and ethical business practices
when it did not; and
(vii)
From at least the inception of the Class Period, Defendants had failed to properly
report Deferred Revenues in accordance with GAAP or SEC reporting rules. Defendants violated
GAAP in connection with their reporting of deferred revenue. It is a fundamental principal of
GAAP that revenues are not reported unless earned. It is also a long-established GAAP
convention that revenues are not earned until all conditions associated with the delivery of the
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goods or services that form the basis of those revenues have been fully performed and are non-
contingent.
12.
Rather than report the true adverse, concealed facts that would reveal the financial
and operational condition of the Company that existed from the inception of the Class Period,
and the related problems with management, its core business plan, its useless, sham products, its
rampant GAAP violations and dramatically overstated revenues and improper and wrongful
revenue recognition practices, Defendants engaged in a scheme and course of conduct that
operated as a fraud or deceit on purchasers of Whitney common stock by disseminating
materially false and misleading positive statements and/or concealing material adverse facts. The
scheme : (i) deceived the investing public regarding Whitney 's business, operations, management
and the intrinsic value of Whitney common stock; (ii) enabled Defendants to artificially inflate
the price of Whitney shares; (iii) enabled Whitney insiders to sell a total of over $8 million of
Company stock during the Class Period; (iv) enabled Defendants to sell $13.5 M in Whitney
stock to PIPE (Private Investment in Public Equity) investors prior to the registration of those
shares and thereafter enabled Defendants to register for sale $13.5 million in Whitney shares,
that were sold by PIPE Purchasers; (v) enabled Defendants to register over $33.0 million more
EduTrades shares - to be sold to more public investors in a later-aborted spin-off transaction;
(vi) enabled Defendants to conduct a $1.00 per share " Special Dividend" - the maj ority of which
was paid to insiders of the Company who held Whitney shares; and (vii) caused Plaintiff and
other members of the Class to purchase Whitney common stock at artificially-inflated prices and
to be damaged when the truth was ultimately revealed and the price of the stock dropped
dramatically.
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The Truth Begins To Be Revealed
13.
On November 21, 2006, Defendants shocked and alarmed investors after they
published a release that revealed, for the first time, that the SEC had begun non-public
investigation into the Company. According to Whitney, the SEC was examining the Company's
compliance with federal securities laws in connection with: (i) the efficacy or trading success of
the Company's market education programs - EduTrades; and (ii) the Company's prior
acquisitions of certain other entities.
14.
The revelations that the Company had materially misrepresented the efficacy and
success of its stock education products were critical to investors because much of the Company's
future growth and development had been tied to the development of its stock education business
and because the Company had been preparing to sell over $33 million in EduTrades shares in the
open market. As evidence of this, on November 21, 2006, shares of the Company plummeted to
a low of $5.25 per share - a one day decline of almost 36 % - compared to the closing price of
$8.20 per share the prior day, November 20, 2006.
15.
On December 15, the last day of the Class Period, after the market closed, the
Company issued a press release revealing that Whitney had received a Grand Jury Subpoena
from the United States Attorney for the Eastern District of Virginia and had been notified that
the Company was being investigated for its marketing activities.
16.
On December 18, 2006, shares of the Company would dropped below $3.25 per
share, in response to the December 15, 2006 press release.
17.
The following day, on December 19, 2006, as shares of the Company continued to
trade even lower, the Company published another release announcing the "termination of
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employment of Nicholas S. Maturo, President and Chief Operating Officer and Rance Masheck,
Vice President, Sales and Marketing ofEduTrades, Inc. (a subsidiary of the Company)."
18.
On December 21, 2006, investors learned that Whitney had accused Defendant
Masheck, the former Vice President, Sales and Marketing of EduTrades, of making false
statements about his prior trading success as well as the efficacy of the Whitney stock trading
system. That day, in connection with the additional termination of Richard O'Dor, former
Director of Corporate Communications, Defendants also published a release that stated, in part,
the following:
Mr. O'Dor resigned after Management of the Company learned that Mr. O'Dor
had made a misstatement to the press without the knowledge of, or authorization
by, the Company, regarding the reason for the termination of Rance Masheck,
Vice President, Sales and Marketing of EduTrades, Inc. (a subsidiary of the
Company), which was announced on December 19, 2006. Mr. Masheck was
terminated due to the fact that his trading records do not substantiate claims
which he made, and which the Company broadcasted publicly, regarding his
trading success. The Company discovered this fact during its internal
investigation related to both the grand jury investigation by the United States
Attorney's Office for the Eastern District of Virginia, which was announced by
the Company on December 15, 2006, and the investigation and subpoena by the
Securities and Exchange Commission, which was announced by the Company on
November 20, 2006.
JURISDICTION AND VENUE
19.
The claims asserted herein arise under and pursuant to Sections 10(b) and 20(a) of
the Exchange Act [15 U.S.C. §§ 78j(b) and 78t(a)] and Rule lOb-5 promulgated thereunder by
the United States Securities and Exchange Commission ("SEC") [17 C.F.R. § 240.10b-5].
20.
This Court has jurisdiction over the subject matter of this action pursuant to 28
U.S.C. §§ 1331 and 1337, and Section 27 of the Exchange Act [15 U.S.C. § 78aa].
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21.
Venue is proper in this District pursuant to Section 27 of the Exchange Act, and
28 U.S.C. § 1391(b). Whitney maintains its principal place of business in this District and many
of the acts and practices complained of herein occurred in substantial part in this District.
22.
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 mails, interstate telephone communications and the facilities of the national
securities markets.
PARTIES
Plaintiff
23.
Lead Plaintiff Dr. Arnold Friedman ("Lead Plaintiff' or "Plaintiff") was
appointed Lead Plaintiff by Order of this Court dated April 25, 2007. As set forth in the
Certification attached to the previous filing in this action, and as incorporated by reference
herein, Lead Plaintiff purchased the common stock of Whitney at artificially-inflated prices
during the Class Period. When the truth was revealed, the price of Whitney stock dropped and
Plaintiff has been damaged thereby. Rodney Durham was the named plaintiff in the first-filed
action and his name appears in the caption herein above solely for administrative purposes. Lead
Plaintiff intends to seek leave of the Court to update the caption accordingly to reflect the fact
that Lead Plaintiff is the sole named plaintiff in the action.
Corporate Defendant
24.
Defendant WHITNEY INFORMATION NETWORK, INC. is a Colorado
corporation with its principal place of business located at 1612 Cape Coral Parkway, East, Cape
Coral, FL 33904. According to the Company's profile, posted during the Class Period on
Yahoo.com, http://finance.yahoo.com/q/pr?s=RUSSE.OB, Whitney provides "post-secondary
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educational and training courses" for students in the United States, Canada, the United Kingdom,
and Costa Rica. The Company purports to offer non-accredited introductory workshops, primary
and advanced courses, and training in the fields of real estate and financial markets education.
The Company's courses purport to provide instruction in real estate investing, business
strategies, stock market investment techniques, cash management, asset protection, and other
financially-oriented subjects. Whitney Information also develops and sells educational resource
materials and "mentoring" and "coaching" services. Founded in 1992 as Gimmel Enterprises,
Inc., in 1998 the Company changed its name to WIN Systems International, Inc. and again, in
1999, changed its name to Whitney Information Network, Inc.
Individual Defendants
25.
Defendant RUSSELL A. WHITNEY ("Russ Whitney") was, during the Class
Period, Chairman and Chief Executive Officer. Russ Whitney was also the Founder of the
Company. During the Class Period, Defendant Russ Whitney signed the Company's SEC filings,
including but not limited to Whitney's Form(s) 10-Q and Form 10-K and the Registration
Statements filed with the SEC in connection with the Company's PIPE Registration in
November 2006 and its now-aborted spin-off Registration of EduTrades, the Company's stock-
trading educational subsidiary . Also, during the Class Period, while in possession of material,
adverse, non-public information about the Company, Defendant Russ Whitney liquidated
$5,626,000 (in connection with the Company's $13.5 million PIPE transaction discussed herein),
and another $950,000 worth of additional shares of his personally-held Whitney common stock,
thereby taking further advantage of the artificial inflation in the price of Company stock caused
by Defendants' improper and illegal conduct.
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26.
Defendant RONALD S. SIMON ("Simon") was, during the Class Period,
Executive Vice President and Acting Chief Financial Officer (until 1/25/06), and is currently Co-
President and Chief Operating Officer of the Company. During the Class Period, Defendant
Simon signed the Company's SEC filings, including but not limited to Whitney's Form(s) 10-Q
and Form 10-K and the Registration Statements filed with the SEC in connection with the
Company's PIPE Registration in November 2006 and its now-aborted spin-off Registration of
EduTrades, the Company's stock-trading educational subsidiary. Also, during the Class Period,
while in possession of material adverse, non-public information about the Company, Defendant
Simon liquidated over $911,999 worth of his personally-held Whitney common stock, thereby
taking further advantage of the artificial inflation in the price of Company stock caused by
Defendants' improper and illegal conduct.
27.
Defendant ALFRED R. NOVAS ("Novas") was, during the Class Period, Chief
Financial Officer of the Company from at least January 25, 2006. During the Class Period,
Defendant Novas signed the Company's SEC filings, including but not limited to Whitney's
Form(s) 10-Q and Form 10-K and the Registration Statements filed with the SEC in connection
with the Company's now-aborted spin-off Registration of EduTrades, the Company's stock
trading educational subsidiary.
28.
Defendant JOHN F. KANE ("Kane") was, during the Class Period, Executive
Vice President of Operations for the Company. During the Class Period, Defendant Kane aided
and/or assisted in the preparation of the Company's SEC filings, including but not limited to
Whitney's Form(s) 10-Q and Form 10-K and the Registration Statements filed with the SEC in
connection with the Company's PIPE Registration in November 2006 and its now-aborted spin-
off Registration of EduTrades, the Company's stock trading educational subsidiary. Also, during
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the Class Period, while in possession of material adverse, non-public information about the
Company, Defendant Kane liquidated over $414,000 of his personally-held Whitney common
stock, thereby taking further advantage of the artificial inflation in the price of Company stock
caused by Defendants' improper and illegal conduct.
29.
Defendant NICHOLAS S. MATURO ("Maturo") was, during the Class Period,
President and Chief Operating officer of the Company until his sudden, unscheduled termination
reported on or about December 19, 2006. During the Class Period, Defendant Maturo signed the
Company's SEC filings, including but not limited to Whitney's Form(s) 10-Q and Form 10-K
and the Registration Statements filed with the SEC in connection with the Company's PIPE
Registration in November 2006 and its now-aborted spin-off Registration of EduTrades, the
Company's stock-trading educational subsidiary.
30.
Defendant RANCE MASHECK ("Masheck") was, during the Class Period,
Vice President of Sales and Marketing of EduTrades and served in that position at all times until
he was suddenly termination, as announced in a unscheduled report, on or about December 19,
2006. During the Class Period, Defendant Masheck aided and assisted in the preparation of the
Company's SEC filings, including but not limited to Whitney's Form(s) 10-Q and Form 10-K
and the Registration Statement filed with the SEC in connection with the now-aborted spin-off
Registration ofEduTrades.
31.
The Defendants referenced above in ¶¶ 25-30 are referred to herein as the
"Individual Defendants."
Independent Auditors Defendant
32.
Defendant EHRHARDT KEEFE STEINER & HOTTMAN PC ("Ehrhardt
Keefe") was, during the Class Period, one of the Company's independent, outside auditors.
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Defendant Ehrhardt Keefe signed an Independent Auditors Report certifying the veracity and
completeness of the Company's SEC filings made during the Class Period. In connection with
the Company's November 2006 PIPE Registration and in connection with the Company's now-
aborted EduTrades public spin-off, investors paid Ehrhardt Keefe over $1,788,000 in purported
accounting fees and expenses.
33.
During the Class Period, Defendant Ehrhardt Keefe provided letters of consent
and/or authorized the use of the Company's financial statements and disclosures within filings
made by the Company with the SEC, including but not limited to Whitney's materially false and
misleading Registration Statement filed with, but not approved by, the SEC in connection with
the attempted sale and offering of over $33 million in EduTrades public offering stock.
34.
The Auditor Defendant participated in the drafting, preparation, and/or approval
of the various public and shareholder and investor reports and other communications complained
of herein, were aware of, or recklessly disregarded, the misstatements contained therein and
omissions therefrom, and were aware of their materially false and misleading nature. Because of
its oversight positions with Whitney, the Auditor Defendant had access to the adverse
undisclosed information about Whitney's business prospects and financial condition and
performance as particularized herein and knew (or recklessly disregarded) that these adverse
facts rendered the positive representations made by or about Whitney and its business issued or
adopted by the Company materially false and misleading.
35.
The Auditor Defendant, because of its position with the Company, was able to
and did control the content of the various SEC filings, press releases and other public statements
pertaining to the Company during the Class Period. The Auditor Defendant was provided with
copies of the documents alleged herein to be misleading prior to or shortly after their issuance
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and/or had the ability and/or opportunity to prevent their issuance or cause them to be corrected.
Accordingly, this Defendant is responsible for the accuracy of the public reports and releases
detailed herein and is therefore primarily liable for the representations contained therein.
SUBSTANTIVE ALLEGATIONS
Documentary Evidence Demonstrating Defendants' Knowledge and/or Reckless Disregard
of the True Adverse Facts At the Beginning of the Class Period
36.
Defendants were aware of the material falsity of these Company disclosures,
and/or that Defendants had recklessly disregarded the falsity of these statements no later than
August 18, 2005 - only one week after the inception of the Class Period. On that date an email
memorandum was circulated to the senior officers and directors of the Company by former
Regional Manager, Robert Paisola, which recited a series of control violations and Federal
Securities Law and Sarbanes-Oxley violations, as well as violations of the Company's own
internal Code of Conduct and Fair Business Practices. In summary, this Memorandum, e-mailed
to `Joe Gnapp,' and cc' d, at russwhitney .com addresses, to: John Kane, Nick Maturo, Ron
Simon, Thomas McElroy, and rwjr@russwhitney.com, addressed the following disturbing
problems at the Company:
Gross Abuse ofRefund Policy;
Manipulation ofDeferred Revenues;
Credit Chargebacks andAbuse ofMerchant CreditAccounts; and
ArtificialInflation ofRevenue Figures.
37.
Following the completion of a site visitation audit from at least August 8, 2005 to
at least August 12, 2005, (former) Salt Lake City Regional Manager Paisola provided
Defendants with a memorandum detailing the "substantial" corporate exposure that resulted
from the Company' s gross abuse of refund policies . As Paisola reported to management, "One
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thing that became quickly apparent to me and the support staff in Utah was that there was a
corporate mandate that had been directed to lower management that there would be NO
REFUNDS in any case, for any reason, with few exceptions." As a result of this "discovery"
Manager Paisola advised management, as follows:
Based upon this preliminary analysis, I began to dive into the problem head first. I
knew that we were a large revenue company; however, I assumed that the
caseload of unsatisfied students would be mitigated by the direct revenue
generated by the parent divisions having the problems, this it may be able to be
looked at as simple "growing pains" of the organization.
Last month, I received a copy of the 2003, 2004 and 2005 Merchant Account
Transaction Analysis reports. This was a critical gage in the indexing of this
apparent issue. I spent lengthy [sic] time reviewing the excel data that was
presented to each of you, and looked at all ofthe relevant data to come up with
some plausible reason why our chargeback rates in certain divisions were so
out ofcontrol (within established and accepted industry normative guidelines).
The result was the establishment of my direct relationship with Will [Trefethen,
WEG Accounting Operations Director, responsible for acquisition and
maintenance of all merchant accounts] in the Cape Coral Office. Will is a
superstar in my book, and I believe that he is a huge asset of the organization. He
deserves to be heard.
Going forward, we reviewed some of the cases and together determined that
it was essential to gain the attention ofsenior management of the magnitude
ofthis problem. Ilistened to the plights ofthe past and the previous efforts to
resolve some ofthese issues, PRIOR to the crisis point that was eminent.
(Emphasis added.)
38.
Not only did Regional Manager Paisola identify the abuse of the Company's
Refund Policy, but he next identified how this policy was eroding the Company's merchant
credit card accounts and was fundamentally undermining operations - and how this had reached
crisis levels by the inception of the Class Period. In this regard, the August 18, 2005 e-mail
memorandum continued, in part, as follows:
Based on this "line in the sand" directive [or "zero refund policy"], the
respective merchant accounts have been greatly affected This is evidenced by a
spreadsheet that was received last week, analyzing the 2003-2004 and 2005
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periods, which clearly show the exposure that the Merchant Banks are facing
as a result ofour relationship with their institutions.....
The new goal of the management team should be to meet in the middle,
comparing and contrasting our student 's needs, our legal liability under the
law, the merchant guidelines and our ability as an organization to have key
executives within the organization responsibly manage the issuance ofrefunds,
without continuing to put our valuable merchant accounts at risk...
(Emphasis added.)
39.
The admonitions cited by Manager Paisola to the Company senior management
mirrored an email that was previously sent to many within Whitney, by Will Trefethen, Director
of the Merchant Account Program, on or about July 28, 2005, that warned that the Company's
present course of conduct would result in another Terminated Merchant Account File (`TMF" 1)
"blacklisting." This earlier e-mail also warned of the impending crisis - and even offered
suggestions to further "hide" the Company's growing chargeback crisis situation - in part, as
follows:
Thu 7/28/05 2:11 PM
All,
I have completed a summary review of the chargeback situation. A detailed report
on WCS chargeback issues is being complied [sic] to find any common threads
that can be targeted for improvement....
I have highlighted chargeback percentages that are greater than 1 % each
month. Some ofthose accounts are now defunct, meaning that no charges are
being run on them, however, we are still receiving chargebacks on those
accounts. Although there are several specific accounts that rose above critical
marker at different times, the processors are greatly concerned with those
accounts that consistently remain above that mark.
1 "TMF" is synonymous with the more current acronym Member Alert To Control High-Risk (or
"MATCH") Files . A MATCH File or TMF File is a file containing a merchant account that has
been terminated for cause. Such files are important tools for member banks to assess credit risk
and assign credit rates and reserve requirements, prior to servicing an account.
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The figures show two genuine areas of concern; WCS (Whitney Consulting
Services) and WIN (Wealth Intelligence Network)
We have shifted the responsibility for billing WIN subscriptions to IAS, so the
WIN account chargeback issue has been resolved.
This leaves WCS as the sole area of concern, as it has always been. Obviously,
better customer service and timely coaching contracts is key [sic] to reducing the
numbers. I am detailing a few ways we may combat this problem.
1.
Improve our compliance sent to customers to include pertinent
information and make sure they sign it and return it before charging
card orproviding service.
2.
Use a merchant account with a better chargeback percentage, to absorb
(hide) the high level ofsales we have lost to chargebacks.
3.
Deliver at the time of sale on these telemarketing orders, showing proof of
delivery of a product or service to the credit card companies and banks.
Giving the student 1 year to physically attend. [sic]
No Signature on contract ! No delivery of product or service ! No chance of
winning chargeback ! [sic]
The most alarming figure is comparing the 2004 figures with YTD 2005. We have
exceeded the number of chargebacks in 6 months of 2005 than 2004 in whole.
Total number of charges through June is 77% of 2005 total. We have done a great
job keeping refunds down; however, chargeback percentages have risen
noticeably. I am certainly open to hearing other remedies to this problem. We
must do something. Inaction will certainly lead us to another TMF listing,
making it very difficult to open new merchant accounts. AMEX has already
expressed concern directly with a letter...
(Emphasis added.)
40.
Similarly, in his August 18, 2005 e-mail memorandum, Manager Paisola also
identified several accounts, at least one of which was described as in crisis at that time, in part,
as follows:
For the past five months, the WCS Merchant Account ending in... 150, which is
the PAYSYSTEMS account, we have been over the threshold since the account
was opened in February of 2005. In recent discussions with the provider, they
have stated that, "the [sic] understand our business," however, our fear is that the
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actual backend bank will terminate us based upon the visa MaserCard regulations
that the processors must follow...
The Three Year Credit Card chargeback report was reviewed and it is clear that
we are over the exposure limits on all basis of accountability. Of primary concern
is the WIA Merchant Account, as the percentages are very high (four to eight
basis points).
In Account ending in ... 889 (Also known as the MOTO Account) we run the
WEG Telemarketing Account Charges. This is where all of the sales that are
referred by PLATINUM are run also.
This is the account that is in a crisis mode. There are a few options to reduce the
percentages that we are being faced with (regarding chargeback's) on this specific
account.
We can move some of the sales or "cherry pick" the sales that are posted
to this account. By posting safer and different brands in the product lineup. This
will dilute the chargeback percentages and will create a short term solution;
however, the long term problem will remain and should be aggressively dealing
with the underlying problems.
41.
In addition to the foregoing, the August 18, 2005 Paisola e-mail memorandum
also raised issues that relate to the Company's failure to comply with GAAP and Sarbanes-
Oxley disclosure issues. In this regard, the Manager's Memorandum stated, in part, the
following:
As of the date of this report, it is evident that the merchant banks have not been
made aware of the one year period threshold that is taken and needed to complete
a transaction internally, because of the promises of the one year of coaching and
the one year disclaimer to resolve the camps. Thefact that we as an organization
do not disclose this to our merchant accountprocessors is substantial....
Under the current regulations with the Visa MasterCard Program, the clock
essentially starts ticking after we have finished delivering ALL services and
products that the student has purchased.
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The student has another eighteen months AFTER FINALLY DELIVERY to
initiate a chargeback. This essentially means that our exposure period to any
transaction is the initial year that it takes to complete the coaching, camps, events
AND one year of follow-up with the Advisors. And at the end of that period of
completion there is another 18 months where the customers can chargeback even
though all materials, camps, coaching etc. has been fully received.
Ultimately, this leads to a total exposure of 2.5 years on each and every
transaction.
(Emphasis original.)
42.
In addition to the questionable revenue recognition that was reported above, and
the lack of disclosure to the credit card merchants of the full risk underlying the Company's
business, the Paisola e-mail memorandum also highlighted another important violation of
accounting conventions. This Memorandum reported that the Company had also manipulated the
Company's reported "Deferred Income," by arbitrarily choosing to defer recording revenue on
"camps" and "mentoring," but failing to defer revenue for "coaching services." In this regard,
the Paisola Memorandum further states, in part, the following:
The bottom line problem with this is that we are choosing to defer revenue on
camps and mentoring ONLY. Coaching is not a deferred item, as all of the
revenue is immediately booked. This is not proper.
The estimated sales volume per month in the coaching program is approximately
500K. All of this money is NOT being deferred and is increasing our corporate
liability at a rate of 500K per month (on a going forward AND retroactive basis,
because of this deferred revenue game that we are playing. This is also an SEC
issue that we can head off now.
(Emphasis original.)
43.
While Mr. Paisola concluded this report optimistically by stating at that time that
he was "committed to assisting the management team resolve these issues," and that the entire
analysis contained in the Memorandum had been done in an effort to reinforce the value that one
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capable of such conscientious analysis "brings to the team," Mr. Paisola was fired almost
immediately after submitting this analysis.
44.
Thereafter, charging a retaliatory termination - in response to writing the
memorandum - Mr. Paisola filed a complaint with the United States Department of Labor,
Occupational Safety and Health Administration, Case. No. 2005 - SOX - TBA ("OSHA"). The
Paisola OSHA Complaint was never disclosed by the Company in any SEC filings, 8K, 10K, or
otherwise. That Complaint alleged that retaliatory termination had occurred after he reported to
senior management of Whitney, in part, the following points, in addition to those conveyed in
his Memorandum to senior management:
(a)
On August 1, 2005, Complainant had a conference call with Joe Gnapp,
wherein he "clearly explained to Mr. Gnapp that [he] had been running into many serious
issues ... that could prove extremely problematic for the organization," including "the fact that
employees of the organization were issuing duplicate andfabricated contracts to the students,
in order to coerce the students into paying for goods and services that were not received or
delivered, lying to students by sales staff, lying to merchant cardproviders regarding the true
status of the Initial Sales Fulfillment Timeline, Corporate Financial Data Manipulation on
SEC Filings." OSHA Complaint, * 18 (emphasis added);
(b)
On the August 1, 2005 conference call with Joe Gnapp, Paisola conveyed
his analysis of the financial reports sent from Will Trefethen in his July 28, 2005 email, whereby
he "realized that the rumor that the organization had issued an "unofficial" order to stop ordering
refunds in any case, became clear when reviewed with the data provided by Trefethen and his
commentary contained therein." OSHA Complaint, *18. In fact, Mr. Paisola sent an email that
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day to Joe Gnapp and Will Trefethen stating that "[t]he WCS portfolio certainly represents a
point of risk for the organization." OSHA Complaint, *19-20; and
45.
In addition to the aforementioned reports Mr. Paisola conveyed to senior
management, the Paisola OSHA report references "a formal memorandum from [the office of
Anne Willcoxon, Manager of Regulatory Compliance] to the Senior Management Team
discussing many serious issues" *26:
To: Michael McKenna - Corporate Legal Counsel
From: Anne Willcoxon - Manager of Regulatory Compliance
Date: August 5, 2004
Subject: Student Complaints
The Student Resolution section of the Regulatory Compliance department has
handled 1984 student complaints since January 1, 2004.
*
*
*
-students are saying the road crew advised them they can attend thefirst day of
the first advanced training class, submit a request in writing and receive a full
refund oftheir totalpackage purchase.
*
*
*
In our telesales division we continue to see exaggerated claims such as you can
make thousands of dollars in the first six months; you have your coach for a
year but the program is not explained accurately, students think their coach is
available 24/7 immediately for any deal they may be in the bank officer's office
for. They are not contacted immediately by their coach, they requested
information be sent to them before purchase but was never done, asked their
credit cards not be charged until they have spoken with their spouse, etc.
Some complaints have no validity while others should be taken very seriously.
Having been in sales myself, I know the pressure to meet sales goals is enormous
but perhaps it is at the expense of our integrity. Overpromising is a big problem
both on the road and through telesales.
For Pre Academy customer complaints the common reason to complain or request
a refund is buyer's remorse, we didn't come back to their immediate area for the 3
Day but instead are too far away, your contracts on the software are illegal or your
business practices are illegal ( BBB etc.). For those Pre Academy customers who
have attended the 3 Day Training Academy the biggest complaint is the training
was too much of a sales hype and not enough information. At the previews the
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customer is assured they will walk away with enough information to make a real
estate deal but attend the 3 Day and find it is a sales pitch and a cheerleading
session. A Big complaint is the idea of increasing their credit card limits with the
promise to purchase real estate the next day but they realize it was to purchase an
advanced training package.
With both real estate and trading we strongly recommend a specific educational
path for our students. Often they do not attend the recommended initial trainings
and immediately attend classes for the more advanced and experienced investor.
Unfortunately the student does not have the needed education or experience to
begin investing and plunge in head first. This results in bad deals, loss of revenue,
and sometimes affects their credit. We are blamed for their indebted situation and
they are desperate to recoup funds.
(Emphasis added.)
46.
The documentary evidence detailed in the allegations in this Section supports a
strong inference of scienter that is cogent and at least as -- in fact far more -- compelling than
any opposing inference that can properly be drawn. These allegations are further bolstered by the
allegations set forth directly below addressing Defendants' secret "Zero Tolerance Refund
Policy" and resulting dramatic increase in chargebacks because customers were routinely forced
to turn to their credit card companies for fraud protection from Whitney, as well as information
from discussions with former employees and internal memoranda that illustrate the Company
could not sustain its business model, which was based on a "scam" to bilk customers for
unconscionably high fees for worthless "educational" products.
Secret "Zero Tolerance Refund Policy" and Resulting Dramatic Increase in Chargebacks
47.
For the first half of 2004, Whitney 's Regulatory Compliance Department handled
1,984 student complaints and Whitney issued $11 million in 2004 refunds and incurred $1
million in customer chargebacks. To fight this growing number of complaints and its ultimately
negative financial impact on revenues, throughout the Class Period Whitney instituted a Refund
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Policy designed to make it virtually impossible for customers to attain a refund after a right of
rescission period ("ROR") of just 72 hours.2 Whitney's "line in the sand" was designed to both
obfuscate and thwart customer refund and chargeback requests - and was particularly revealing
in the face of the fact that the Company had been required to increase by millions of dollars its
merchant account reserves.
48.
Excerpts from an August 1, 2005 conference call - obtained by Lead Counsel in
the course of its investigation - among Whitney employees Joe Gnapp, Will Trefethen,
Merchant Services Director, and Rob Paisola, District Manager, evidence that while the Zero
Tolerance Refund Policy was having the intended effect of minimizing refunds and increasing
revenues, chargebacks were dramatically increasing - notwithstanding that Whitney had
registered back-up merchant accounts anticipating cancellation - and the Company needed a
solution fast:
Will Trefethen: Right now we've already got one terminated merchant [account],
and we're looking at, if we keep going with the current thing we're going to have
another one. It's really impossible to open another merchant account.
We have a way of responding to these [chargebacks]. Um, unfortunately, when
you make a sale andyou say all sales arefinal, no refunds, and then you don't
provide any service, these people are doing the chargebacks and we 've got a
compliance tape but they 're claiming we haven 't provided them the service that
we've promised them, how are you going to combat that with a US title code I
don't know.
[In 2005], we've already eclipsed the number of chargebacks from last year just
half way through the year and the dollar amount is almost equal.
2
Willcoxon 9/13/2004 Refund Policy Memo and Whitney refund denial letters,
obtained by Lead Counsel in the course of its investigation.
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The thing here we're talking about the fact that chargebacks are up but returns are
down, refunds are down, voluntary refunds are down. .. we're saying no more, so
the consumer 's getting a little more aggressive with us...it's our fault that the
chargebacks are happening.
Rob Paisola: Absolutely, because we made a decision, a line in the sand, that
said no more [refunds], zero.
Joe Gnapp: Right. What we're doing isjust damage control.
Will Trefethen: There are backup merchant accounts to be utilized if something
were to go wrong with our current choice of processor... we do have somewhat of
a backup plan as far as that goes.
(Emphasis added.)
49.
On this conference call, various ideas were proposed that would permit Whitney
to purportedly comply with merchant bank rules, all designed to thwart chargebacks and deprive
customers of their ability to get their money back after purchasing worthless "educational"
products from the Company. These ideas included pressuring customers who purchased $20,000
services (via a telemarketing call) to access a website to click a button manifesting ironclad
consent to accept such services that would prohibit refunds or chargebacks.
50.
Moreover because it was critical for Defendants to avoid giving refunds once they
had extracted up to $50,000.00 from a single student at a live seminar, much of the enrollment
and sign-up process was designed for the sole purpose of reducing students' ability to later
obtain a refund through a credit card processor or bank. This was also demonstrated by the
aforementioned e-mail memorandum, prepared by the Company's then District Manager Rob
Paisola, which suggested even more sophisticated methods that could be adopted by the
Company to make it more likely that Whitney would prevail against the credit card processors -
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while giving little or no attention to the underlying cause of this ground-swell of customer
dissatisfaction.
51.
Thus, the rise in chargebacks was a direct result of Defendants' manipulation of
refunds and Whitney 's failed attempts to make their enrollment process Visa and MasterCard
collection-rules compliant such that no customer could ever get a refund after three days -
regardless of the Company's representations to that person and regardless of cause.
Information from Former Employees and Internal Memoranda Show the
Underlying "Educational" Products Were a Sham and Defendants Knew the
Company Could not Sustain Its Business Model or Revenues Based on the Sham
Internal Document Shows Purpose of "Classes" is to "Upsell" - Not Educate
52.
Contrary to Defendants' public statements discussed herein below in detail
regarding the Company's purpose and intention in purporting to provide educational services
and product sales to consumers, in fact, as internal Company documents illustrate, Defendants'
primary purpose in hosting both real estate and stock market trading and investing classes was
not to educate students, but rather to "up-sell" them even more unconscionably expensive and
worthless classes. An excerpt from the August 18, 2005 E-mail Memorandum demonstrates, in
part, the following:
We discussed the structure of the sales process, as it is currently structured.
The Sweep
Cost: 30K per week break even at best
This is the event that captures all of the prospective buyers in a room with the
primary mission of up selling to the 3 day training. The current price for entry to
the sweep is FREE
The Three Day Fulfillment:
Creates Approximately 500K per week in income.
This event is sold for a unit cost of 99.00 to 199.00. This is where the basics of
the business are discussed and the push is for the up sell to the Personal Mentor
Program...
Telemarketing Up-Sell Program (SLC UTAH)
This is the portion of the business model that is currently the highest exposure to
the organization... The overwhelming position in Cape Coral is that this is where
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all of the high paid salesmen are located and that this is where all of the problems
in the organization stem. It is openly viewed as the department that "data mines"
the current customer base, to produce additional revenue, selling with wanton
disregard for the Students Abilities or Our ability to fulfill as promised.
Discussions with Former Employees Further Confirm: the Underlying "Product"
was a Sham - Entire Goal of Seminars Was To Sell More Product
53.
Students in every branch of the Whitney seminar system across multiple states
appeared to experience the same problems with the Company: inability to get properly-requested
refunds; failure of the Company to respond to their complaints; failure of the seminars to provide
the information touted at sales pitches which instead provided worthless or irrelevant
information and operated as a forum for Defendants to pressure students to purchase more and
more of the Company's unconscionably expensive and useless packages; failure of the coaching
sessions to yield any useful information, and being scammed or pressured by the Company to
purchase more worthless products.
54.
Confidential Witness #1 stated that though (s)he was a member of the Technical
Support Team during the Class Period, (s)he had gotten a few calls which should have been
routed to Customer Service, all of which were from customers who were unhappy with the
products. The most common complaint was that they were misinformed about a contract they
had signed. Customers had been put under pressure to assign a complicated, detailed contract
quickly, while they were at the seminars, but the contract was not adequately explained. In
particular, there was a monthly data charge of $59. 95 in addition to a $300 package, which was a
one month trial of the basic stock trading course. Customers who had never even downloaded
the software were still charge for data usage. The $59.95 per month charges also continued after
the contract had been fulfilled, and sales people did not tell customers that the charges for the
data feed started immediately on the date the contract was signed.
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55.
Confidential Witness #1 visited the telesales floor and heard sales people
pressuring customers to buy and encouraging them to spread the cost out over multiple credit
cards, which would result in massive debt.
56.
Confidential Witness #2, a member of the seminar sales team during the Class
Period, stated, "In my estimation, about 90% of people will not make their money back. You
have to be responsible for your trades. It is really hard to make money in the market without
discipline. I feel that I was misled [as a student in the program] and given unrealistic
expectations. It's not as easy to make money as it is made out to be. CW#2 continued that at
least half of a class was a sales pitch for more seminars and more products. The enthusiastic
speakers would "sell the dream". Every speaker was a sales person. They told customers they
made a lot of money trading, when in fact they made their money selling the stock programs.
CW#5, who was trained at the corporate office, learned on the road that the objective was to
close the sales. "You sit down and you watch other sales people go through it with customers.
It's a high-pressure sales environment. Any student that doesn't buy on Saturday is called back,
like a used car salesman."
Critical Need to Maintain Multitude of Merchant Accounts
57.
In order to accept credit cards - the primary form of payment by students for
Whitney courses - in the face of huge and quickly-growing numbers of customer complaints,
Whitney deemed it critical to maintain a multitude of merchant accounts for its assortment of
services through which it could effectuate credit card processing through either a merchant bank
or merchant service provider. Without access to merchant accounts, Whitney would be out of
business, as credit card payments accounted for $120 million of the $139 million in 2004
revenues reported in Whitney's 10K. As important as Whitney's merchant accounts were to its
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ability to process payments, it was similarly imperative for Whitney to assure that chargebacks -
customer requests for a refund from their card company because they are not satisfied with the
quality of a service - remained low, lest Whitney incur not only reversals of revenue, but
additional fees, increased requirements for higher merchant account reserves which represent
funds on deposit with credit card processors, or complete termination of its merchant accounts.
Manipulation of Returns and Lack of Veracity of Company's Public Filings
58.
Defendants' manipulation of returns and its abuse of credit collection affiliates
and customers and other arbitrary reporting had an immediate impact on the veracity and
completeness of the Company's financial reports, for at least the following reasons: (i)
Whitney's financial reports did not present a true and accurate portrayal of the financial health,
flexibility and profitability of the Company, so that investors could make reasonable investment
decisions based upon those disclosures; (ii) Defendants artificially inflated reported Deferred
Revenues, by representing that the cash already collected and being held by Whitney belonged
to the Company, and that such students had simply not yet taken their classes when, in fact,
many of the same students had already made a demand for repayment of the same funds; and
(iii) Defendants manipulated revenue recognition, immediately recognizing material amounts of
"Coaching" fees, despite the fact that these services were virtually identical to mentoring
services, which were required to be recorded as deferred revenues.
59.
Just as Defendants hid these accounting issues from shareholders of the Company,
according to documents obtained by Lead Counsel in the course of its investigation, including
those referenced herein, infra, from the inception of the Class Period to its end, Defendants also
attempted to hide these problems from its credit card affiliates. Thus, in addition to the
foregoing, during the Class Period, Defendants also engaged in the manipulation of its actual
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credit card processing accounts - thereby "hiding" adverse information from the card processors.
It is for these reasons too that, when Defendants reported results for 2Q:05, the first reported
period within the Class Period, they announced that credit card processing reserves had been
raised from 1% to 5%. At that time, however, Defendants gave no explanation as to why these
rates had been raised a whopping 500% in that quarter, nor gave any indication to investors of
the true, pervasive problems at the Company, including the inability to sustain revenue based on
a scam to pressure customers to purchase worthless educational products which resulted in a
large percentage of those customers were demanding refunds or obtaining chargebacks that were
adversely impacting Whitney at that time and throughout the Class Period.
60.
Also, unbeknownst to investors, the aforementioned undisclosed problems were
also exacerbating material "weaknesses" at Whitney which were being disclosed by Defendants
in piecemeal fashion during the Class Period as discussed herein. Specifically, it was because
investors did not know the true impaired condition of Whitney at the inception of the Class
Period that they could not effectively gauge the impact of the Company's restatement of its
interim and annual financials for the years 2003 through 2005.
61.
While Defendants were aware that skyrocketing chargebacks were the first
warning signs that their arbitrary and abusive Returns policy discussed in detail herein was
causing customer backlash, this was not the final adverse effect of Defendants' illegal and
wrongful conduct. Accordingly, abused customers were not only complaining to their credit card
companies, but after continually being rebuffed by Defendants and having to wade through the
morass of obstacles that Whitney put in place in its enrollment process that made it nearly
impossible to obtain a refund, were also, in some instances, complaining to government
regulators - including United States Attorney Generals and the SEC itself.
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Edu Trades: Whitney' s Stock Trading Education Unit
62.
The Company's stock trading education unit - EduTrades Inc. - was so important
to the future strength and profitability of the Company that, by the inception of the Class Period,
Defendants had decided to spin off approximately 30% of this subsidiary, in order to obtain
proceeds as high as $33.0 million and in order to establish new currency to underwrite future
acquisitions for the Company. The spin-off was ultimately unsuccessful and was aborted as
discussed herein below.
63.
Throughout the Class Period, the EduTrades division was run by Rance Masheck
who was hired by the Company in July 2004 as Vice President of Sales, and who was described
by Whitney as follows:
Masheck has significant experience in creating and implementing training programs for
financial services organizations and for the sales staffs at leading corporations. He has led
expert trainings in the financial industry for floor traders, fund managers and brokers, and
has conducted extensive sales trainings for Fortune 500 companies including General
Motors, Re-Max, and Minolta.
64.
The EduTrades proposed IPO never occurred and was ultimately withdrawn.
According to Confidential Witness #3, a member of the Company's technical support team
during the Class Period, around September of 2006, the EduTrades SEC Registration was
withdrawn because information in the registration was not "matching up."
Defendants' Materially False and Misleading
Statements Made During the Class Period
August 11, 2005 Press Release
65.
On August 11, 2005, Defendants published a release announcing purported
"Record" setting results for the second quarter of 2005, ended June 30, 2005. This release also
stated, in part, the following:
Whitney Information Network, Inc. Posts Record Sales of $46.5 Million and
Net Income of $3.1 Million for the Second Quarter of 2005
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CAPE CORAL, Fla.--(BUSINESS WIRE)--Aug. 11, 2005--Whitney Information
Network, Inc. (OTCBB:RUSS), an international provider of post secondary career
education programs, today reported record results for the second quarter ended
June 30, 2005. Major achievements for the quarter include:
-- Record Sales of $46.5 Million for the quarter
-- Operating Cash Flow of $8.9 Million
-- Net Income of $3.1 Million for the quarter
-- Cash and equivalents of $16.0 Million at June 30
-- Strong sales, earnings and cash flow continuing throughout 2005
... A key dynamic driving the Company's sales growth was an optimization of its
pricing strategy that resulted in a 105% increase in attendance at the Company's
3-Day Basic Training Courses and an increase of 33% in Advanced Trainings
attendance as compared to the corresponding period in 2004.
66.
The Company's August 11, 2005 press release attributed Whitney's current
purportedly favorable results and its foreseeable future positive results to the following actions,
that were reported to have been taken by Defendants during 2Q:05, in part, as follows:
Among the successful second quarter initiatives deployed by the Company
was an aggressive campaign to test new marketing vehicles and messages.
This effort led to significantly improved response rates for all of the
Company's core brands, particularly in major markets where these brands have
been well established.
In the last six months the company's marketing research identified which
market segments were most responsive to the Company's message, resulting
in more efficient use ofits advertising dollars.
As the leading provider of advanced course offerings in its market segment, the
Company continued to capitalize on its unique position by expanding both the
number and diversity of Advanced Trainings offered to students via alternate
delivery methods. In particular, the Company cited its expansion ofon-demand
and real-time Advanced Training delivered over the Internet as a key factor
favorably impacting the Company's bottom line.
(Emphasis added.)
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100 for Second Quarter 2005
67.
The following day, August 12, 2005, Defendants filed with the SEC the
Company's 2Q:05 Form 10-Q, for the quarter ended June 30, 2005, signed by Defendants Russ
Whitney, Maturo, and Simon, among others, and Certified by Defendants Russ Whitney and
Simon. The 2Q:05 Form 10-Q provided statements concerning the Company's Significant
Accounting Policies and the basis of its accounting presentation, in part, as follows:
Note 1 - Significant Accounting Policies
The accompanying consolidated financial statements have been prepared by the
Company, without audit, and reflect all adjustments which are, in the opinion of
management, necessary for a fair statement of the results for the interim periods.
The consolidated statements have been prepared in accordance with
accounting principles generally accepted in the United States ofAmerica for
interim financial reporting and Securities and Exchange Commission
regulations.... In the opinion of management, the financial statements reflect all
adjustments (of a normal and recurring nature) which are necessary for a fair
presentation of the financial position, results of operations and cash flows for the
interim periods....
(Emphasis added.)
68.
In addition to the foregoing, the Company's 2Q:05 Form 10-Q also reported at
least two other accounting policies, defined as "significant," including:
The Company's contracts for courses require that courses must be attended
within one year ofregistration. The Company's policy has been to recognize
revenue at the earlier of the attendance of the course or one year from the
date ofregistration. During the second quarter of 2005, the Company's United
Kingdom subsidiary modified its contracts to be consistent with that of its parent
and recognized approximately $1.3 million of revenue from course registrations
that had been outstanding for greater than one year.
During the second quarter of 2005, the entity that handles the Company's
merchant credit cardprocessing increased the reservefor returns on credit card
transactions from less than I% of monthly credit card transactions to 5% of
monthly credit card transactions.
(Emphasis added.)
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69.
The 2Q:05 Form 10-Q reported revenues, net income and deferred revenues, in
part, as follows:
Results of Operations
Three Months Ended June 30, 2005 compared to June 30, 2004
Total revenue for the three months ended June 30, 2005 was $ 46,520,000, an
increase of $7,913,000, or 20% compared to the same period in 2004. Tuition for
our 3-Day Basic Training events from students enrolled in our Free Preview was
$6,697,000 a decrease of $3,826,000 over the comparable period in 2004. This
decrease is a result of reduction in the tuition charged to the basic courses which
we instituted with the goal of increasing the number of students enrolling in the
advanced courses. The enrollment in our advanced courses begins at the 3-Day
Training, and the fulfillment of which starts about one-to-two months later.
Revenue from our advanced training events was $26,797,000, an increase of
$8,990,000 over the comparable period in 2004.
Net Income
Net income for the three months ended June 30, 2005 was $3,159,000, as
compared to a loss of 4,319,000 for the three months ending June 30, 2004, an
increase of $7,478,000. Net income per share was $.36, as compared to $(.50) for
a similar period last year. This increase is directly attributable to an increase in the
delivery of 3 Day basic training courses, realization of more efficient advertising,
and general and administrative costs. The change in net income is a trend that is
expected to continue, as the backlog of course trainings purchased and
undelivered is reduced, the amount of course deliveries will continue to grow,
and no significant change in the ratio of expense is anticipatecL Deferred
revenue, which is the net backlog of training courses purchased and not yet
delivered, increased by $11,863,000 during these three months of 2005,
compared to an increase of $11,264, 000 for the same comparable period in
2004.
(Emphasis added.)
70.
The Company's 2Q:05 Form 10-Q also contained representations which attested
to the purported effectiveness and sufficiency of the Company's controls and procedures, as
follows:
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ITEM 4. CONTROLS AND PROCEDURES
Our Chief Executive Officer and Chief Financial Officer have evaluated the
effectiveness of our disclosure controls and procedures ... under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), as of the period
covered by this report. Based on such evaluation, such officers have concluded
that, as of June 30, 2005, our disclosures and procedures are effective in
alerting them on a timely basis to material information relating to our
Company (including our controlled subsidiaries) required to be included in
our reports filed or submitted under the Exchange Act....
(Emphasis added.)
71.
While the Company stated that its controls and procedures were effective, during
2Q:05 Whitney's independent auditors, Ehrhardt Keefe, informed the Board of the Company
that certain material weaknesses existed at Whitney, related to the human resources dedicated to
accounting and financial reporting. According to the 2Q:05 Form 10-Q, by that time Ehrhardt
Keefe knew and was well aware of these control deficiencies, and had reported it to Whitney, as
follows:
In connection with the interim review of the Company's financial statements, the
Company's auditors communicated to the Company's management and the Audit
Committee of the Board of Directors material weaknesses involving the
Company's internal financial controls. The material weaknesses noted by the
auditors relate primarily sufficient human resources within our accounting and
financial reporting function and the preparation of financial statement
disclosures relating thereto. The Company has assigned a high priority to the
remediation ofthe reportable conditions.
In connection with the audit of the year ended December 31, 2004, there were no
"Reportable Events" within the meaning of Item 304(a)(1)(v) of Regulation S-K.
However, the Company's auditors communicated to the Registrant matters it
considered to be weaknesses in the Registrant's internal controls relating to the
adequacy of staffing of its accounting and finance department. The Registrant
believes it has addressed this concern and has further enhanced its staffing and
procedures.
(Emphasis added.)
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72.
Further supporting Defendants' statements that Whitney had sufficient control
and procedures in place at that time, the 2Q:05 Form 10-Q contained Certifications by
Defendants Russ Whitney and Simon. These Certifications attested to the purported accuracy
and completeness of the Company's financial and operational reports, stating, in part, "this
report does not contain any untrue statement ofa material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by this
quarterly report," and that "the financials statements, and other financial information
included in this report, fairlypresent in all material respects the financial condition, results
ofoperations and cash flows of the registrant as of, and for, the periods presented in this
quarterly report," and that "The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of registrant's board of directors ... a) all significant
deficiencies in the design or operation of internal controls over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record, process, summarize and
report financial information; and b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's internal control
over financial reporting." (Emphasis added.)
73.
The 2Q:05 Form 10-Q also contained Sarbanes-Oxley Certifications for the
period ending June 30, 2004, dated August 10, 2005 and signed by Defendants Russ Whitney
and Simon, certifying that "the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the Company."
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74.
Demonstrating a complete lack of diligence in "reviewing" the document being
signed, Defendant Simon apparently signed the Section 906 Certification that certified that
Charles Miller had reviewed the information presented!
75.
The statements made by Defendants and contained in the Company's August 11,
2005 release and in Whitney's 2Q:05 Form 10-Q were materially false and misleading when
made, and were know by Defendants to be false at that time or were recklessly disregarded as
such thereby for the following known, concealed materially adverse reasons, among others:
(a)
At all times during the Class Period, the Company's purported success
was not the result of its integration of acquisitions or its products or business model. In truth,
throughout the Class Period, Defendants had propped up the Company's results by manipulating
Whitney's accounting for revenues and income. The Company's inaccurate accounting methods
and failure to properly recognize revenue and income resulted in artificially optimistic financial
statements, creating a deceptively successful outlook for the Company;
(b)
At all times during the Class Period, Defendants concealed and failed to
disclose to investors significant credit card processor account problems faced by Whitney
through which customers were able to effectively secure "refunds" from the credit card
companies through the chargeback process after they were denied refunds by the Company;
(c)
By the inception of the Class Period, such a large percentage of Whitney
customers were demanding refunds that the credit card companies required a 500% increase in
account reserves by the Company;
(d)
At all times during the Class Period, Defendants represented to customers
that they could obtain refunds if they so requested within 72 hours (or a similar short time frame
of up to five days in certain circumstances), when in fact Defendants did everything in their
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power to prevent customers who properly requested such refunds within the prescribed time
period from receiving said refunds, and engaged in a pattern and practice of gaming the system
in order to subvert customer's legitimate and rightful attempts to obtain a refund after a timely
request following the established contractual protocol - including considering a policy of getting
customers to "waive" their right of rescission by clicking a button on an internet website;
(e)
Throughout the Class Period, Defendants' "Zero Tolerance Refund"\
Policy" or "line in the sand" policy had a dramatic, negative effect on merchant accounts, as the
merchant banks faced exposure as a result of Whitney' s relationship with their institutions;
(f)
Throughout the Class Period, the Company had a growing chargeback
"crisis": while refunds were going down, chargebacks were rising fast;
(g)
Throughout the Class Period, Defendants recorded as revenue all packages
sold within one year of the contract purchase date at the latest, despite failure in all instances to
finish delivering all services and products that the customer purchased within that time period,
including one year of post-class coaching services, camps, and events and follow-up with
Advisors;
(h)
Defendants' business model had no chance of success because it was
based on scamming consumers by inducing them to buy unconscionably overpriced and
essentially worthless so-called "educational products" - the "product" provided was essentially a
lecture that more products were needed and more money had to be spent by the customer in
order to get the money-making skills promoted by the Company, which inevitably resulted in
customers' demands for refunds or attempts to obtain chargebacks through their credit card
companies' fraud protection programs, and the inability of the Company to sustain its revenues
and growth;
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(i)
Throughout the Class Period, Defendants faced serious problems with
compliance, including charging customers before contracts were signed and returned and
charging customers before providing any service, and even fabricating contracts;
(j)
At all times during the Class Period, unbeknownst to investors,
Defendants had materially overstated the Company's profitability by failing to properly account
for the Company's results of operations and by artificially inflating the Company's financial
results - primarily as a result of Defendants' manipulation of deferred revenue accounting and
Whitney's abuse of its Refund Policy. Instead of properly characterizing what was actually
deferred income, the Company designated some revenue as immediate, allowing the Company to
prematurely and improperly realize tens of millions of dollars in additional revenues. The
Company also designed a hard-line, difficult-to-defeat (and eventually non-existent) refund
policy which made it virtually impossible for unsatisfied customers to recoup their money from
the Company, and forced customers instead to turn to the credit card companies for fraud
protection;
(k)
Throughout the Class Period, Whitney did not have adequate systems of
internal operational or financial controls. Therefore, Whitney's reported financial statements
were not true, accurate, or reliable;
(1)
As a result of the foregoing accounting improprieties, throughout the Class
Period the Company's financial statements and reports were not prepared in accordance with
GAAP and SEC rules. Defendants violated GAAP by manipulating their accounting results,
failing to disclose information which would be necessary for investors to make informed
decisions, mischaracterizing some revenue as immediate when it should have been deferred, and
improperly representing their internal controls and business standards as adequate and complete;
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(m)
Contrary to the Company's representations in its Class Period filings, the
Company's Code of Conduct was not designed to moderate the activities of those within the
organization and Company employees were not required to uphold basic standards of acceptable
business conduct and moral decency. To the contrary, the Code of Conduct was a complete sham
designed to create the impression that the Company had proper and ethical business practices
when it did not;
(n)
From at least the inception of the Class Period, Defendants had failed to
properly report Deferred Revenues in accordance with GAAP or SEC reporting rules.
Defendants violated GAAP in connection with their reporting of deferred revenue. It is a
fundamental principal of GAAP that revenues are not reported unless earned. It is also a long-
established GAAP convention that revenues are not earned until all conditions associated with
the delivery of the goods or services that form the basis of those revenues have been fully
performed and are non-contingent;
(o)
Defendants manipulated Deferred Revenue recording by failing to record
certain items as deferred and by recording as deferred what should have been refunded. Thus, in
addition to the foregoing, the Company's financial statements were not true, accurate or reliable,
for the following reasons, among others: (i) Defendants had failed to report "Coaching" revenues
as deferred revenues, consistently with future "camps" and "mentoring." Failing to treat
Coaching as Deferred Revenue allowed Defendants to immediately record any revenue
categorized this way- despite the fact that these services were intended to be performed over at
least an 18 month period. Failing to treat Coaching as Deferred Revenue allowed Defendants to
channel material amounts of improperly booked revenue into Whitney; and (ii) Defendants'
refusal to grant refunds to customers who made proper and timely refund requests also inflated
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Deferred Revenues, because it kept revenue on the Company's books that would otherwise have
been returned. Throughout the Class Period, Defendants either adopted a policy of outright
refund denials, or they took actions to make it virtually impossible for customers to attain such
refunds by carefully designing the delivery of Company services in a manner intended to
circumvent merchant banks' chargeback rules and outwit Company customers, by having them
sign contract agreements which customers were discouraged from reading or who relied on
statements by sales representatives that were not borne out by the contracts, the sole purpose and
effect of which is to make obtaining a refund impossible;
(p)
While Defendants pretended that they did not know until the SEC and US
AG investigations were announced that the head of Edutrades, Defendant Masheck, had
fabricated credentials and made misrepresentations throughout the Class Period of the
Company's products and services, that is not true. In reality, Defendants had conducted a due
diligence investigation into EduTrades at the inception of the Class Period - in connection with
its proposed spin-off, which was to be headed by Masheck. Therefore, Defendants knew or
recklessly disregarded that Masheck did not have the qualifications he pretended and was
actively engaged in misrepresenting the Company's products and services as Vice President of
Sales and effective head ofEduTrades; and
(q)
As a result of the aforementioned adverse conditions which Defendants
failed to disclose, throughout the Class Period, Defendants lacked any reasonable basis to claim
that Whitney was operating according to plan, or that Whitney could achieve guidance sponsored
and/or endorsed by Defendants. The "reasonable basis" on which Defendants relied was the
soundness and reliability of the Company's audit. However, as a result of manipulated
accounting and non-compliance with the basics of GAAP, the audit itself was not based on
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accurate information and, knowing this, Defendants could not reasonably rely on it as a basis for
claims about the Company's prospects.
76.
Rather than admit to any of these critical issues that existed within the Company
from at least the inception of the Class Period, Defendants instead prepared to take advantage of
the almost 20% inflation that had already occurred in the price of Company stock, as a result of
Defendants' false statements and omissions. As evidence of this, on September 15, 2005,
Defendants published a release on Business Wire, announcing the Company's plans to spin off
EduTrades in an Initial Public Offering. This release also stated, in part, the following:
Whitney Information Network, Inc. (OTCBB:RUSS) announced today that one of
its wholly owned subsidiaries, EduTrades, Inc. ("EduTrades"), has entered into a
non-binding letter of intent with an NASD licensed broker-dealer to conduct an
initial public offering for EduTrades.
Under the terms ofthe letter ofintent, Edu Trades will offer approximately 33%
ofits common stock to the publicfor approximately $20 million. The remaining
approximately 67% of EduTrades will be retained by Whitney Information
Network, Inc. EduTrades provides course training programs covering stock
market investing and trading.
(Emphasis added.)
100 for Third Quarter 2005
77.
On November 9, 2005, Defendants published a release announcing purported
"Record" setting results for the third quarter of 2005, ended September 30, 2005. This release
also stated, in part, the following:
HEADLINE: Whitney Information Network, Inc. Reports Results for the Third
Quarter Ended September 30, 2005
Whitney Information Network, Inc. (OTC BB: RUSS):
• Pro Forma Operating Cash Flow of $ 8.6 Million, or $0.92 per share (fully
diluted),
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• Record Sales of $47.7 Million, Net Income of $2.5 Million before tax benefit
of $6.7 Million
Whitney Information Network, Inc. (OTC BB: RUSS), an international provider
of post secondary career education programs, today reported record results for the
third quarter ended September 30, 2005.
*
Other Highlights include:
*
Pro Forma Operating Cash Flow of $28.3 million for Nine Months ended
September 30
*
Record Sales of $134.3 million for Nine Month ended September 30
*
Cash and equivalents of $28.2 million at September 30 (includes restricted
cash)
*
Sales, earnings and cash flow growth expected to continue throughout
2005.
78.
The Company's November 9, 2005 press release attributed Whitney's current
purportedly favorable results and its foreseeable future positive results to the following actions,
that were reported to have been taken by Defendants during 3Q:05, in part, as follows:
The dramatic increase in revenue in the third quarter of 2005 was a result of
new pricing strategies, increasedfocus on marketing to geographic markets that
have responded strongly to the Company's sales efforts, and an increase in
delivery ofthe Company's Advanced Training courses.
The various marketing initiatives that have been implemented as well as many of
the planned projects that are being introduced over the course of the rest of the
year could successfully expand the market and result in further sales gains.
Increased sales coupled with cost savings from more efficient advertising
expenditures including efficient media buys and scheduling and tighter control of
general and administrative expenses, which are expected to grow at a slower pace
than sales, should result in a continuation of the trend of improving margins.
(Emphasis added.)
79.
In addition to the foregoing, the November 9, 2005 release also provided investors
with purported non-GAAP calculations and metrics - such as Pro Forma Operating Cash Flow -
which Defendants stated "measures the impact of accounting for deferred revenue and the costs
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associated with deferred revenue and other cash items and may better portray the operating
performance of the Company than the usual method of calculating operating cash flow." This
calculation was stated, in part, as follows:
Pro Forma Operating Cash flow (a non-GAAP calculation) was $8 .6 million for
the three months ended September 30, 2005 or $0.99 per share (basic) and $0.92
per share fully dilutive and $28.3 million for the nine months or $3.25 per share
(basic) and $3 . 13 per share (fully diluted).
80.
In furtherance of Defendants' scheme to sell shares in its EduTrades subsidiary, at
the same time the market for its own shares was artificially inflated by Defendants material
misstatements and omissions, on November 14, 2005, Defendants published a release
announcing that EduTrades had filed a Registration Statement with the SEC, in advance of its
expected spin-off IPO transaction.
81.
The EduTrades proposed IPO never occurred and was withdrawn. According to
Confidential Witness #3, a member of the Company's technical support team during the Class
Period, around September of 2006, the EduTrades SEC Registration was withdrawn because
information in the registration was not "matching up."
82.
On or about November 21, 2005, Defendants filed with the SEC the Company's
3Q:05 Form 10-Q, for the quarter ended September 31, 2005, signed by Defendants Russ
Whitney, Maturo, and Simon, among others, and certified by Defendants Russ Whitney and
Simon. In addition to making substantially similar statements concerning the Company
operations, including expenses, costs and ratios, as had been published previously, the 3Q:05
Form 10-Q also provided statements concerning the Company's Significant Accounting Policies
and the Basis of its accounting presentation, in part, as follows:
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Note 1- Significant Accounting Policies
The Company's contracts for courses require that courses must be attended
within one year ofregistration. The Company's policy has been to recognize
revenue at the earlier of the attendance of the course or one year from the
date ofregistration. During the second quarter of 2005, the Company's United
Kingdom subsidiary modified its contracts to be consistent with that of its parent
and recognized approximately $1.3 million of revenue from course registrations
that had been outstanding for greater than one year.
83.
In addition to the foregoing, the Company's 3Q:05 Form 10-Q reported quarterly
Net Income and Deferred Revenue, in part, as follows:
Net Income
Net income for the three months ended September 30, 2005 was $9,314,000 as
compared to a loss of $12,020,000 for the three months ending
September 30, 2004, an increase of $21,334,000. Net income per share was $1.04,
as compared to $(1.40) for a similar period last year. This increase is directly
attributable to an increase in the delivery of advanced training courses, realization
of more efficient advertising, and general and administrative costs, and a $6.6
million deferred tax benefit. The change in net income is a trend that is
expected to continue, as the backlog ofcourse trainings purchased and
undelivered is reduced, the amount ofcourse deliveries will continue to grow,
and no significant change in the ratio ofexpense is anticipated. Deferred
revenue, which is the net backlog of training courses purchased and not yet
delivered, increased by $17, 774, 000 during these nine months of2005,
compared to an increase of $16,990,000 for the same comparable period in 2004.
In the third quarter of 2005, we have reversed the valuation allowance of our
deferred tax assets. This created a tax benefit in the period of $6,679,000.
The Company's 3Q:05 Form 10-Q also contained representations which attested
to the purported effectiveness and sufficiency of the Company's controls and
procedures, including "Our Chief Executive Officer and Chief Financial Officer
have evaluated the effectiveness of our disclosure controls [and] have concluded
that, as of September 30, 2005, our disclosures and procedures are effective in
alerting them on a timely basis to material information relating to our Company
(including our controlled subsidiaries) required to be included in our reports filed
or submitted under the Exchange Act.... In connection with the interim review of
the Company's financial statements, the Company's auditors communicated to the
Company's management and the Audit Committee of the Board of Directors
material weaknesses involving the Company's internal financial controls. The
material weaknesses noted by the auditors relate primarily to having
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sufficient human resources within our accounting and financial reporting
function and the preparation offinancial statement disclosures relating
thereto. The Company has assigned a high priority to the remediation of the
reportable conditions.
(Emphasis added).
84.
Further supporting Defendants' statements that Whitney had sufficient control
and procedures in place at that time, the 3Q:05 Form 10-Q also contained Sarbanes-Oxley
Certifications for the period ending September 30, 2005, dated November 18, 2005 and signed
by Defendants Russ Whitney and Simon, certifying that "the information contained in the Report
fairly presents, in all material respects, the financial condition and results of operations of the
Company."
85.
The 3Q:05 Form 10-Q also reported that Defendant Russ Whitney, together with
the Company, had engaged in the private placement of certain Company securities with 16
private institutional investors, in a PIPE Transaction - designed to further allow Russ Whitney
and the Company to profit from the artificial inflation in the price of Company stock. This PIPE
Transaction was reported in the 3Q:05 Form 10-Q, in part, as follows:
NOTE 6. SUBSEQUENT EVENTS
On November 2, 2005 the Company commenced an unregistered offering of up to
2,500,000 units of its securities, each unit consisting of one share of its common
stock and 1/2 common stock purchase warrant to purchase an additional 1/2 share
at $6 per share. The units are being offered at $4.50 per unit. The securities have
not been registered for sale and may not be offered or sold without registration or
an exemption.
Russell Whitney, the Company's Chief Executive Officer, has committed to sell
up to 750,000 of the 2,500,000 units being offered and has the right sell up to
50% of all the units sold.
The Company is required to register the common stock and the common stock
underlying the warrants upon completion of the offering.
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The first 600,000 units were sold on November 2, 2005 to one institutional
investor.
86.
On December 13, 2005, Defendants published a release formally announcing the
$13.5 million private placement of common stock and warrants. At that time, Defendants
revealed that Defendant Russ Whitney would sell at least 1.25 million units, consisting of one
share of Company common stock and 1/2 warrant to purchase an additional share at $6.00 per
share, at $4.50 per unit. At that time Defendants also reported that the Company would file a
registration statement covering these securities within 30 days, from that date.
87.
In connection with this sale, Defendant Russ Whitney grossed at least $5.625
million in illegal insider trading proceeds. At the time Russ Whitney liquidated these shares, he
was in possession of material adverse non-public information about the Company. Moreover, the
sale of these shares also allowed Whitney to prevent suffering substantial losses on
approximately 25% of his entire Whitney portfolio.
88.
The statements made by Defendants and contained in the Company's November
9, 2005 release and those statements also contained in the Company's 3Q:05 Form 10-Q, were
each materially false and misleading when made and were know by Defendants to be false at
that time, or were recklessly disregarded as such thereby, for the reasons stated herein at ¶¶ 11,
36-42, 44, 45, 47, 58 and 75, supra.
89.
Following this placement of $13.5 million in private equity, on January 9, 2006,
Knobias.com, a stock research website, published a comprehensive report on the Company,
which noted that, "after losses in 2003 and 2004, WIN is again showing a profit; while a series
of corporate actions are awakening RUSS shares from a seven-year slumber." This release noted
the Company's recent purported financial strength and foreseeable growth, in part, as follows:
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In the first half 2005, reported revenue growth fell sharply to just 12%. In late
December, Nicholas "Nick" Maturo, WIN President and COO, told Knobias that
the TV ads had "grown stale" and needed to be "refreshed".
Mission accomplished; in Q3 2005, year over year reported revenue accelerated
by 48%.
Maturo now expects WIN to achieve $195 million in 2005 cash sales (incl.
deferred revenue gain) up from $167 million in 2004. He credits more efficient
marketing. "From 2004 to 2005 we have invested the same advertising dollars
with a considerably higher (customer) response rate."
90.
While the January 9, 2006 Knobias.com report noted that the Company's
merchant card processing bank had unexpectedly hiked its reserve holdback from 1% to 5%, this
report also quoted Defendant Maturo as stating that in response to this unjustified increase, the
Company had sued this bank and diversified its business. In this regard, the Knobias.com report
stated, in part, the following:
WIN uses the lure of wealth to sell its financial training. Some customers know
the terrain and have appropriate expectations. Maturo said, "Some customers sign
up for 3 of the intensive courses, but get all they need out ofjust one or two."
Others buy courses only to change their minds later and demand refunds. Maturo
said that the bank which provides merchant card processing for WIN, suddenly
and unexpectedly hiked its reserve holdback from 1% to 5% of credit card
transactions. He said WIN is now suing the bank for $2.5 million of the withheld
reserves. WIN has also discontinued business with the bank and diversified the
business to "6 or 7 others".
91.
The Knobias.com report concluded by projecting positive results for Whitney, in
the foreseeable near-term, in part, as follows:
What is next?
WIN should be able to report a significant year-end cash position. In September,
the Company had $20.9 million in unrestricted and $7.3 million in restricted cash.
Since then it has conducted a secondary offering raising $7.9 million for the
company (before expenses). The Edutrades.com IPO is expected to raise $15 to
20 million in early 2006. Under equity accounting rules, WIN which will retain
two-thirds of Edutrades.com stock, will reflect a proportional increase in its own
shareholder equity line.
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92.
Pursuant to the terms of Whitney and Russ Whitney's private equity transaction,
on January 11, 2006, Defendants filed with the SEC a Registration Statement pursuant to Form
S-1. This Registration Statement described the Offering and the Selling Shareholders, in part, as
follows:
In December 2005 the Company closed a private placement of 3,300,000 units of
its securities, each unit consisting of one share of common stock and one-half
common stock purchase warrant to purchase an additional one-half share at $6.00
per share. The units were sold at $4.50 per unit. The securities are being
registered for sale pursuant to this prospectus. Russell A. Whitney, the Company's
Chief Executive Officer, sold 1,250,000 of the units and the Company sold the
remaining 1,750,000 units. The private placement generated gross proceeds to us
of $7,875,000.
Shares
Underlying
Warrants
Shares
Percent
Shares Owned
Owned
Owned
Owned
Prior to
Prior to
After
After
Name of Beneficial Owner
Offering
Offering
Offering Offering
Cerisano, Michael
10,000
5,000
0
0
CSL Associates, LP
35,000
17,500
0
0
Credit Agricole (Suisse) SA
Mosaic Europe Agrichg^g Funds
55,000
27,500
0
0
Double U Master Fund LP c/o
Navigator Management Ltd.
11,110
5,555
0
0
Ferl:in, Martin J .
13,404
6,702
0
0
Heartland Value Fund
600,000
300,000
0
0
Iroquois Master Fund Ltd.
50,000
25,000
0
0
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Lazarus Investment Partners
LLLP
Lewis Opportunity Fuld LP
Mosaic Partners Fund
Mosaic Partners Fund (U.S.), LP
Noble International Investments,
Inc.(1)
Noble Special Situations Fund,
LP
Pequot Mariner Master Fund,
L.P. c/o Pequot Capital
Management, Inc.
Pequot Scout Fund, L. P. c/o
Pequot Capital Manageimment,
Inc.
Prides Capital Fund I, LP c/o
Prides Capital
QVT Financial Group LLC
Radcliffe Investment Partners I
Sunrise Equity Partners, L.P.
Wasserman, Eric
Total s
222,222
111,111
0
0
20,000
10,000
0
0
37,000
18,500
0
0
28,000
14,000
0
0
300,000
150,000
0
0
40,000
20,000
0
0
113,608
56,804
0
0
2I9,656
109,828
0
0
1,100,000
550,000
0
0
400,000
200,000
0
0
5,000
2,500
0
0
30,000
15,000
0
0
10,000
5,000
0
0
3,300,000
1,650,000
0
0
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93.
Regarding the Company's purported Revenue, Net Income and Deferred
Revenues, this Registration Statement stated, in part, the following:
Year Ended December 31, 2004 Compared to December 31, 2003
Revenue
Total revenue for the year ended December 31, 2004 was $139,859,000, an
increase of $44,901,000 or 47%, compared to the same period in 2003. The
increase in sales was caused by several factors. There was significant growth in
all segments of the business.
Net Income
Net loss for the year ended December 31, 2004 was $29,896,000, as compared
with a net loss of $1,558,000 for the year ended December 31, 2003, an increased
loss of 1,819% or $(3.48) per share, as compared to $(0.19) per share for the prior
year. The increased loss is directly attributable to increased expenses in all
categories in 2004 over the prior period, and to the fact that new sales of
advanced training courses continue to outpace the rate at which courses are
offered and delivered to students. This is reflected in the fact that deferred
revenue increased by S24,096, 000 in 2004, as compared to an increase ofonly
$14,044, 000 in 2003. As long as our sales show high growth rates, we must
also expand our course offerings to keep pace with that growth. This is a
critical performance indicator for us. So long as course delivery can keep pace
with sales, we can report net income more closely related to cash provided from
operations. In the event that sales of courses continue to outpace the delivery of
those courses, then we may continue to show losses, or lower net profits.
(Emphasis added.)
94.
The Company's January 11, 2006 Form S-1 also contained the following
information regarding Russ Whitney himself:
Russell A. Whitney, Chief Executive Officer, is our founder and has been Chief
Executive Officer of our company and its predecessors since 1987. He is also Chief
Executive Officer and a director of all of our wholly-owned subsidiaries, written and
published three books on wealth building topics. Mr. Whitney devotes substantially all
of his time to our business.
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95.
The Company's January 11, 2006 Form S-1 also contained a purported Report by
the Company's Independent Registered Public Accountants, Ehrhardt Keefe, which stated, in
part, the following:
We have audited the accompanying consolidated balance sheet of Whitney
Information Network and Subsidiaries as of December 31, 2004 and 2003, and the
related consolidated statements of operations, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 2004. ...In our
opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Whitney Information
Network, Inc. and Subsidiaries as ofDecember 31, 2004 and 2003, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2004 in conformity with accounting
principles generally accepted in the United States ofAmerica.
(Emphasis added.)
96.
The statements made by Defendants and contained in the Company's January
2006 PIPE Transaction Form S-1 Registration Statement and those statements made by the
Company's Independent Auditors and contained in the Ehrhardt Keefe April 12, 2005 Report,
contained therein, were each materially false and misleading when made and were know by
Defendants to be false at that time, or were recklessly disregarded as such thereby, for the
reasons stated herein in ¶¶ 11, 36-42, 44, 45, 47, 58 and 75, supra.
March 31, 2006 Press Release
97.
On March 31, 2006, Defendants published a release announcing purported record-
setting results for the fourth quarter and full year ended December 31, 2005. This release also
stated, in part, the following:
HEADLINE: Whitney Information Network, Inc. Reports Record Revenues,
Earnings and Adjusted EBITDA for 2005
Whitney Information Network, Inc. (OTCBB:RUSS), an international leader in
the postsecondary education industry focused on educating individual investors in
real estate and financial markets, reported full year 2005 revenue of $178.6
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million, up 28% over the prior year, net earnings of $17.4 million vs. a net loss of
$(30.1) million in 2004, and Adjusted EBITDA of $23.4 million compared with
negative Adjusted EBITDA of ($6.4) million in the prior year.
2005 Highlights
--
Student attendance increased 9.1% to nearly 370,000 vs. 2004
--
Cash received from course and product sales totaled $196.5 million, a
20% increase over 2004
--
Reported earnings per diluted share totaled $1.86 vs. loss per diluted share
of $(3.50) in 2004
--
Cash flows provided by operations amounted to $17.1 million, vs. $(1.5)
million over prior year
--
Cash, cash equivalents and restricted cash totaled $38.7 million vs. $6.8
million in 2004
98.
In addition to the foregoing, this release also quoted Defendants Russ Whitney
and Maturo, in part, as follows:
"We are proud of the significant achievements our team attained in 2005," said
Russell A. Whitney, founder, Chairman of the Board and Chief Executive Officer.
" Through our team 's hard work, efficiency gains and cost controls, we
believe 2005 represents an inflection point for our Company and a platform
for sustained growth in 2006 and beyond. We take tremendous satisfaction in
the growing number of individuals who benefited in multiple ways from our
training and ongoing support."
President and Chief Operating Officer Nicholas S. Maturo said, "Our relevant and
compelling course offerings proved our ability to provide pertinent education
content and deliver it on a cost effective basis. Our portfolio of strong brands in
both real estate and financial markets education catered to the individual investor.
The depth ofour advanced courses, the emerging electronic delivery ofour
course content and overall margin management provided for a terrific 2005
and the seeds for a strong 2006."
(Emphasis added)
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99.
In addition to conventional GAAP earnings, this release also conditioned
investors to focus on "Cash Received From Course and Product Sales" as an "important measure
of cash receipts and overall business volume."
2005 Form 10-K
100.
On or about March 31, 2006, Defendants filed with the SEC the Company's 2005
Form 10-K, for the year ended December 31, 2006, signed by Defendants Russ Whitney,
Maturo, Novas, and Simon, among others, and certified by Defendants Russ Whitney and
Novas. In addition to making substantially similar statements concerning the Company's
operations as had been made by Defendants previously - including revenue, net income,
expenses and costs - the 2005 Form 10-K also reported the Company 's treatment of Deferred
Revenues, in part, as follows:
Due to the timing differences between cash collection and the time at which our
students actually take the course (or course expiration, which ever is earlier), we
have historically recorded a substantial amount of deferred revenue. Most of the
deferred revenue at the end of each year will result in reported revenues in the
next year. As reflected in the table below, our deferred revenue as a percentage of
total revenue have ranged from the high 30% to mid 40% range since 2002 (in
thousands).
Year ended December 31,
2005
2004
2003
2002
2001
Deferred revenue
$ 80,550 $ 62,689 $38,593 $ 24,549 $ 23,9;7
Revenue for financial reporting
178,564
139, 859
94,958
62, 145
42,158
purposes
Deferred as a percentage of
45. I ° o
44.8010
400,o
39.500
5().800
revenue
Critical Accounting Policies
Deferred revenue
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We are engaged primarily in the business ofproviding real estate and
financial education to individual investors through courses ofstudy, as well
as educational materials. Students pay for the courses in advance and we
record the proceeds from the sale ofcourses as deferred revenue when it is
received. Revenue is earned when the student attends the training program
or at the expiration ofour obligation to provide training, whichever comes
first. The fees are generally nonrefundable, and the students are allowed one
year to complete theirprogram. A student may receive a refund within three
days of their purchase by exercising a right ofrescission. In such cases, the
corresponding amount ofdeferred revenue is relieved with no impact on the
consolidatedincome statement.
Revenue Recognition, Deferred Revenue and Deferred Seminar Expenses
We recognize revenue for the sale ofproducts and software, upon delivery.
Revenue from educational seminars is recognized upon the earlier of
(1) when the nonrefundable deposit is received for the seminars and the
seminar has taken place; or (2) upon the contractual expiration ofour
obligation to provide a seminar only if the seminar was paid for. Deferred
revenue is recorded when the seminar proceeds are received prior to the
related seminar taking place. Expenses for commission payments made to our
speakers directly related to additional courses sold are considered acquisition
costs of those revenues and deferred until the related revenue is recognized in
accordance with the guidance in SAB 104.
(Emphasis added.)
101.
The Company's 2005 Form 10-K also contained representations which attested to
the purported effectiveness and sufficiency of the Company's controls and procedures, as
follows:
...Our management, with the participation and oversight of our chief executive
officer and chief financial officer, evaluated the design and effectiveness of our
disclosure controls and procedures as of the end of the period covered by this
report. In conducting this evaluation, several material weaknesses were identified
in our internal control over financial reporting relating to timely account
reconciliations, preparation and review of financial statements and disclosures,
accounting for foreign currency, deferred revenue, inventory valuation, and
recordkeeping for equity incentive awards and agreements. Specifically, our
personnel lacked sufficient knowledge and experience and did not have
appropriate oversight. The Company's accounting department has experienced
significant turnover at various levels. This turnover and abilities of these
personnel have contributed to the internal control issues described above.
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On the basis of these findings, our chiefexecutive officer and our chief
financial officer have concluded that our disclosure controls andprocedures
were not effective, as of the end of the period covered by this report. In
connection with the 2005 audit of our financial statements, our independent
registered public accounting arm, issued a management letter which noted
that we had the material weaknesses described above in our internal control
over financial reporting.
Subsequent to identifying the material weaknesses in our internal control
over financial reporting our CEO and acting CFO have initiated corrective
actions to address these internal control deficiencies, and will continue to
evaluate the effectiveness ofour disclosure controls and internal controls and
procedures on an ongoing basis, taking corrective action as appropriate. The
actions implemented include recruiting additional experienced stafffor
newly createdpositions that will directly address the control deficiencies, and
the formalization ofpolicies and procedures and addition ofmonitoring
controls.....
On September 21, 2005, the SEC extended the compliance dates related to
Section 404 of the Sarbanes-Oxley Act for non-accelerated filers. Under this
extension a company that is not required to file its annual and quarterly reports on
an accelerated basis (non-accelerated filer) must begin to comply with the internal
control over financial reporting requirements for its first fiscal year ending on or
after July 15, 2007. We anticipate that we may become an accelerated filer in
calendar 2006 and therefore we could be required to comply with these
requirements for the year ending December 31, 2006. We are currently in the
process ofdocumenting our internal control structure.
(Emphasis added.)
102.
Further supporting Defendants' statements that Whitney had sufficient control
and procedures in place at that time, the 2005 Form 10-K also contained Sarbanes-Oxley
Certifications for the period ending December 31, 2005, dated March 31, 2006 and signed by
Defendants Russ Whitney and Novas, certifying that "the information contained in the Report
fairly presents, in all material respects, the financial condition and results of operations of the
Company."
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103.
The Company's 2005 Form 10-K also contained a purported Report by the
Company's Independent Registered Public Accountants, Ehrhardt Keefe, which stated, in part,
the following:
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Whitney Information
Network, Inc. and Subsidiaries as of December 31, 2005 and 2004, and the results
of their operations and their cash flows for each of the three years in the period
ended December 31, 2005 in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, the financial
statement schedule II for the year ended December 31, 2005, when
considered in relation to the basic consolidated financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
(Emphasis added.)
104.
The statements made by Defendants and contained in the Company's March 31,
2006 release and those statements also contained in the Company's 2005 Form 10-K were each
materially false and misleading when made and were know by Defendants to be false at that
time, or were recklessly disregarded as such thereby, for the reasons stated herein at ¶¶ 11, 36-
42, 44, 45, 47, 58 and 75, supra.
105.
With shares of the Company then trading between $8.00 and $10.00 each,
Defendants next took advantage in the artificial inflation in the price of Company shares caused
as a result of the publication of their materially false and misleading statements and between
early February and early May 2006, insiders raced to the market to liquidate more of their
privately-held Whitney common stock - to reap millions more of additional unearned stock
profits. As evidence of this, on February 3, 2006 Defendant Simon sold over 100,000 shares of
Whitney stock at $9.12 per share to gross $911,999.00; on March 17, 2006, Defendant Russ
Whitney also liquidated another 100,000 Whitney shares at $9.50 per share to gross
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$950,000.00; and Defendant Kane liquidated 40,000 shares of Whitney stock at $10.35 per share
to reap gross proceeds of at least $414,000.00.
May 15, 2006: Announcement of Need to Restate Financial Results
106.
Despite the Company's prior statements that its financial reports were prepared in
accordance with GAAP and SEC reporting requirements, that it maintained at least the minimum
financial controls and procedures - and that the Company was also working diligently to
augment these procedures - on May 15, 2006, Defendants published a release announcing that
Whitney would be forced to restate its financial results. This release stated, in part, the
following:
HEADLINE: Whitney Information Network, Inc. Restates Earnings - No
Economic or Cash Flow Impact
Whitney Information Network, Inc. (OTCBB:RUSS) will restate financial
results for the years 2004 and 2005 and the related quarterly periods. The
cumulative restatements have no effect on the timing or amount of the Company's
consolidated operating cash flows or its cash position.
Restatement
The financial restatements reflect:
-
a modification associated with a change in revenue recognition policy
solely at its United Kingdom subsidiary and restatement of revenue from
expired contracts in the United Kingdom recorded in 2005 that relate to
2004;
--
reclassifications in prior period line item expense categories and the
timing ofaccruals necessary for comparability to the current period's
presentation; and
--
a revision to the revenue recognition policy with respect to the
Company's teleconferencing product and service offering.
Quarter ended March 31, 2006
The Company had $43.7 million of cash, cash equivalents and restricted cash on
its consolidated balance sheets as of March 31, 2006, as compared to $38.7
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million at December 31, 2005. Consolidated cash flows from operations for the
three months ended March 31, 2006 increased 16.6% to $8.7 million over the
comparable period in 2005. The cumulative restatements have no effect on the
timing or amount of the Company's consolidated operating cash flows or its cash
position.
(Emphasis added.)
107.
This release attributed the Company's change in accounting to scrutiny over
Whitney' s accounting, which had resulted in connection with the SEC's review of the
EduTrades Registration Statement. This release further described the results of this restatement,
in part, as follows:
In connection with the review of the Company's Registration Statement on Form
S-1, the Company had discussions with Staff members of the Securities and
Exchange Commission (SEC) regarding the May 2005 change in policy with
respect to revenue recognition in the United Kingdom. The Company elected to
amend its policy in the United Kingdom with respect to the acceptance of students
allowed to take courses subsequent to the expiration of the contract the Company
had with the student.
The original policy was established at the inception of the Company's European
operations and was initially driven by customer service and capacity
considerations. As the United Kingdom operations matured, the Company sought
to establish conformity with its North American operations; therefore, the policy
changed in May 2005 to recognize revenue upon the student contract's expiry. In
the second quarter of 2005, the Company changed its policy and recorded $1.3
million in revenue in connection with expired contracts.
The Company intends to modify the May 2005 policy associated with
delivering education content to those students who will attend classes after
the expiration of the contract. The Company will also restate revenue from
expired contracts in the United Kingdom recorded in 2005 that relate to
2004. The United Kingdom subsidiary represented approximately 3.0% of the
Company's cash received from course or product sales in 2005. These
restatements will have no cumulative effect on the Company's consolidated
statement of cash flows.
The Company also reviewed the classification of expenses by both period and
line item, and will restate prior periods necessary for comparability with the
current period's presentation . These changes and reclassifications will have no
cumulative effect on reported earnings or cash flows or adjusted earnings before
interest taxes depreciation and amortization (EBITDA).
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Upon review of the Company's revenue recognition policies for all service
and product offerings, the Company concluded the previous revenue
recognition policy with respect to its teleconferencing offering needed to
comply with Financial Accounting Standard Board's Emerging Issues Task
Force Issue No. 00-21, Revenue Arrangements with Multiple Deliverables.
Teleconferencing represented approximately 0.8% of cash received from course
or product sales in 2005. This restatement has no effect on the Company's
consolidated cash flows from operations.
(Emphasis added.)
108.
The statements made by Defendants and contained in the Company's May 15,
2006 release were each materially false and misleading when made and were know by
Defendants to be false at that time, or were recklessly disregarded as such thereby, for the
reasons stated herein at ¶¶ 11, 36-42, 44, 45, 47, 58 and 75, supra. In addition, these statements
were also materially false and misleading because this restatement was evidence of the radically
insufficient internal controls within the Company, not a non-material event that should have
been disregarded, as Defendants intimated, because of its limited impact on performance metrics
such as cash flow. Moreover, the May 15, 2006 Restatement release was also materially false
and misleading, and was known by Defendants to be false at that time, or recklessly disregarded
as such, because at that time, Defendants were also aware that this purported restatement still did
not render the Company in compliance with GAAP and SEC reporting rules, because
Defendants were still manipulating and abusing Deferred Revenue reporting as a method of
artificially inflating the Company's results, and Defendants were still manipulating Whitney's
return policies in a manner also designed to inflate reported Deferred Revenues.
May 22, 2006 Press Release
109.
In order to apply its new revenue recognition policies, the Company also delayed
its announcement of financial results for the first quarter ended March 31, 2006 until May 22,
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2006. That day, Defendants published a release announcing "1Q 2006 Preliminary Results and
Restatement Update." This release stated, in part, the following:
The Company is pleased with the start of 2006 and the continued momentum of
the business . The Company' s restatement of its historical financial statements
does not affect the economics or cash flows of our business.
Quarter ended March 31, 2006 Preliminary Results
Key drivers for the first quarter's growth in cash received from course and product
sales include the continued expansion of our outreach program (an increase of
$6.2 million) and advanced course sales (an increase of $3.9 million) over the
comparable year ago period. This more than offset a slight $0.4 million decline in
our three-day sessions, which resulted from our decision to reduce tuition prices
in 2005 and provides the opportunity for more students to benefit from our course
offerings and exposure to our advanced courses.
110.
In addition, the May 22, 2006 release also provided additional information related
to the Company's previously announced Restatement, in part, as follows:
Restatement Update
In connection with the review of the Company's Registration Statement on Form
S-1, the Company had discussions with Staff members of the U.S. Securities and
Exchange Commission ("SEC") regarding our May 2005 change in policy with
respect to revenue recognition in the United Kingdom. The SEC further inquired
about the revenue recognition policy in United States and Canada with respect to
expired contracts. We will modify our policy associated with delivering education
content, to those students who attend classes after the expiration of the contract, to
be consistent worldwide.
Once the policy isfinalized, the reportedperiods that need to be restatedperiods
will be determined. The anticipated cumulative restatements are not expected to
have an effect on the timing or amount of the Company's consolidated statement
of cash flows and its cash position.
Upon review of our revenue recognition policies for all service and product
offerings, we concluded the previous revenue recognition policy with respect to
our teleconferencing offering needed to comply with Financial Accounting
Standard Board's Emerging Issues Task
Arrangements with Multiple Deliverables.
consolidated cash flows from operations.
Force Issue No. 00-21, Revenue
This restatement has no effect on our
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In summary, the financial restatements will reflect:
--
a modification associated with a change in revenue recognition policy for
expired contracts and any related attendance subsequent to the contract expiration;
--
reclassifications in prior period line item expense categories and the
timing of accruals necessary for comparability to the current period's presentation;
and
--
a revision to the revenue recognition policy with respect to the Company's
teleconferencing product and service offering.
111.
Further conditioning the market in advance of the planned EduTrades IPO, on
May 22, 2006, Defendants published a release announcing that the Company had increased the
size of this offering, and had filed with the SEC an "updated" Registration Statement. According
to this release, Defendants then intended to sell at least 3 .0 million shares of EduTrades stock,
priced as high as $11.00 - for expected gross proceeds of at much as $33.0 million.
10-0 for First Quarter 2006
112.
On or about June 23, 2006, Defendants filed with the SEC the Company's 1Q:06
Form 10-Q, for the quarter ended March 31, 2006, signed by Defendants Russ Whitney, Maturo,
Novas and Simon, among others, and certified by Defendants Russ Whitney and Novas. In
addition to making substantially similar statements concerning the Company operations,
including expenses, costs and ratios, as had been discussed previously, the 1Q:06 Form 10-Q
reiterated many of the same or similar statements concerning the Company' s restatement, in
addition to reciting the Company's purported basis of accounting presentation, in part, as
follows:
Note ]-Basis ofPresentation
These Consolidated Financial Statements have been prepared in accordance with
accounting principles generally accepted in the United States of America (U.S.
GAAP .... The Company is in the process of amending its Annual Report on
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Form 10-K for the year ended December 31, 2005 to reflect certain policy
revisions and the effect of such revisions on its historical Consolidated Financial
Statements.
113.
The 1Q:06 Form 10-Q also reported the impact of the Restatement upon the
Company's Controls and Procedures, in part, as follows:
... Our management, with the participation and oversight of our chief executive
officer and chief financial officer, evaluated the design and effectiveness of our
disclosure controls and procedures as of the end of the period covered by this
report. In conducting this evaluation, several material weaknesses were identified
in our internal control over financial reporting relating to timely account
reconciliations, preparation and review offinancial statements and disclosures,
accounting for foreign currency, deferred revenue, inventory valuation, and
recordkeeping for equity incentive awards and agreements. Specifically, our
personnel lacked sufficient knowledge and experience and did not have
appropriate oversight. The Company's accounting department has experienced
significant turnover at various levels. This turnover and abilities of these
personnel have contributed to the internal control issues described above.
On the basis of these findings, our Chief Executive Officer and our Chief
Financial Officer have concluded that our disclosure controls and procedures
were not effective, as of the end of the period covered by this report. In
connection with the 2005 audit of our Consolidated Financial Statements, our
independent registered public accounting firm, issued a management letter which
noted that we had the material weaknesses described above in our internal control
over financial reporting. These deficiencies included:

Bank reconciliations were incorrectly prepared containing improper
reconciling items resulting in misstatements to the recorded balance in the general
ledger.

Errors in deferred revenue and revenue recognition were noted. The
Company places excessive reliance on its systems in certain circumstances
without adequate review over systems and processes.

A general lack of review over the accounting and reporting functions and
inadequate reconciliation procedures exist in many areas of the accounting
function.
Inadequate EDP controls including general access controls.

The Company does not currently maintain complete records and adequate
supporting documentation over its stock options and warrants.
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The Company' s calculation of its foreign currency translation adjustments
contained errors.

The Company does not have adequate procedures to provide for inventory
obsolescence.
These material weaknesses are a result of a lack of sufficient and qualified
personnel over the accounting and reporting function, a lack of formalized
processes and procedures over key areas in the accounting and reporting functions
and inadequate supervision and review over the financial reporting function.
(b)
There have been no changes in our internal control over financial
reporting during the period covered by this report that materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting.
Subsequent to identifying the material weaknesses in our internal control over
financial reporting we initiated corrective actions to address these internal control
deficiencies, and will continue to evaluate the effectiveness of our disclosure
controls and internal controls and procedures on an ongoing basis, taking
corrective action as appropriate. In the first quarter of 2006, we hired experienced
Chief Financial Officers for both the Parent Company and for our wholly owned
subsidiary, EduTrades, Inc. We are also actively recruiting for several new
positions that have been approved by the Board of Directors in the areas of
financial reporting, financial planning and analysis, financial systems and
continued upgrades in the Controller's department. In the interim, we have
retained the services of two certified public accountants and other accounting
professionals to assist in the preparation of our Consolidated Financial Statements
until the positions are filled. Should additional significant deficiencies in our
internal controls be discovered in the future, a failure to remediate them or to
implement required new or improved controls could harm our operating results,
cause us to fail to meet our reporting obligations or result in misstatements in our
Consolidated Financial Statements.
(Emphasis added.)
114.
Further supporting Defendants' statements that Whitney had sufficient control
and procedures in place at that time, the 1Q:06 Form 10-Q also contained Sarbanes-Oxley
Certifications for the period ending March 31, 2006, dated June 23, 2006 and signed by
Defendants Russ Whitney and Novas, certifying that "the information contained in the Report
fairly presents, in all material respects, the financial condition and results of operations of the
Company."
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115.
The statements made by Defendants and contained in the Company's May 22,
2006 release and those statements also contained in the Company's 1Q:06 Form 10-Q, were
each materially false and misleading when made and were know by Defendants to be false at
that time, or were recklessly disregarded as such thereby, for the reasons stated herein at ¶¶ 11,
36-42, 44, 45, 47, 58 and 75, supra.
116.
Thereafter, on June 28, 2006, Defendants also hosted a conference call for
analysts and investors. Following this call, which was available over the internet and on a free
call-in basis, Fair Disclosure newswire service published a transcript that stated, in part, the
following:
NICHOLAS MATURO,
PRESIDENT,
COO,
WHITNEY EDUCATION
GROUP: Thank you, Steve. Good morning, everyone and thank you for listening
in. Let me start by saying that I would like to apologize for the delay in issuing
the first quarter Q. In relation to the review of our registration statement on Form
S-1 and after discussions with SEC staff, we determined and announced that we
would restate certain historical financial results. We changed our revenue
recognition procedures for expired student contracts and it proved to be a time-
consuming project to go back to the year 2000 for these student contracts. But
rest assured it had no impact on adjusted EBITDA and cash flow generated from
operations and what we believe to be the more appropriate method of tracking our
Company's performance. Also, rest assured that our business is strong and that
our balance sheet with over 43 million in cash at March 31 and our cash sales are
at all-time record highs.
In summary, our first quarter 2006 performance was solid with an increase in
revenue of 17.9% to 45 .3 million reported and an increase in cash flow of 30.2%
to $8.7 million.
(Emphasis added.)
117.
In addition to the foregoing, during this call Defendant Novas, CFO of the
Company, announced the effect of the changes in Whitney's revenue recognition policy, in part,
as follows:
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I'd like to turn our attention then briefly to the change in revenue recognition
policy. As Nick indicated earlier, in connection with the review of our registration
statement on Form S I, we had discussions with the staff members of the
Securities and Exchange Commission regarding our revenue recognition policy
and I refer you to the recently filed 10-Q for a much more detailed discussion on
those changes. But in summary, our revenue recognition policy will be based on
the following. When a student attends the course, that will trigger the revenue
that will be recognized, So it is primarily based on attendance. We will also
calculate the likelihood ofa student 's attendance when it is deemed remote. The
combination ofthose two items in essence will be the revenue recognition policy
ofthe Company.
Lastly, with respect to the status on the restatement of our financials, we are in the
process of amending our annual reports on Form 10-Q for the years 2003 through
2005 to reflect our policy revisions and the effect of such revisions on our
historical financial statements. We may find it necessary to restate periods prior to
2003. We expect to determine how far back we will need to restate over the next
few weeks. Once we determine this, we will issue a press release.
(Emphasis added.)
118.
When questioned directly about the Company's limited ability to generate returns
for investors, and the obvious ability to sell Whitney to private equity investors, by analyst Brian
Wilkinson, from Lewis Asset Management, Defendant Maturo responded, in part, as follows:
I think we are demonstrating that there is solid basis performance in this business,
tremendous cash flow generation, and at the same time it's very early on in the
process. We did not complete the Pipe until mid-December as we have had
roadshows since and we plan to get back on the road again and create a greater
ground swell of interest.
And I think that is really our primary strategy right now, is to continue to tell the
story on the Company, and by all the meetings I have had, the response has been
very positive, very strong. I think we have got a little bit of a delay here because
of our restatement matter but other than that, there's nothing fundamentally
changed in the restructuring of the operations of the business, the potential of the
business...
August 15, 2006 Press Release
119.
Following the report of the Company' s Restatement and in an effort to reassure
investors that Whitney still had tremendous confidence in its ability to continue to grow its
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business - and that it maintained at least adequate internal operational and financial controls to
accomplish this task - on August 15, 2006 Defendants published a release announcing a large
dividend. At that time, Defendants published a release that stated, in part, the following:
Whitney Information Network, Inc. (OTCBB: RUSS), an international leader in
the postsecondary education industry focused on educating individual investors in
real estate and financial markets, announced today that our Board of Directors had
declared a cash dividend of $1.00 per share.
The special cash dividend reflects the confidence by our Board in our ability to
continue to grow our business, increase free cash flow and build shareholder
value. It also demonstrates our appreciation to our shareholders....
120.
The August 15, 2006 release also provided purported Highlights for 2Q:06, in
part, as follows:
Q2 2006 Highlights
--
Paid student attendance increased 25.6% over the same period in 2005
--
Cash received from course and product sales totaled a record $59.7
million, a 17.1% increase vs. Q2 2005
--
Cash flows provided by operations amounted to $5.5 million vs. $2.2
million, a 153% increase over the same period in 2005
--
Cash, cash equivalents and restricted cash totaled $49.9 million at June 30,
2006 vs. $21.4 million at June 30, 2005, a $28.5 million increase
For the three months ended June 30, 2006, we reported record revenue of $47.5
million, an increase of 16.1% over the restated prior year amount of $40.9
million, and a net loss of $4.6 million vs. a restated net loss of $2.1 million in the
comparable 2005 period. For the second quarter ended June 30, 2006, we
recorded Adjusted EBITDA of $6.9 million, essentially the same as in the
comparable 2005 period.
In addition to conventional GAAP earnings, the August 15, 2006 release also conditioned
investors to focus on "Cash Received From Course and Product Sales" as an "important measure
of cash receipts and overall business volume."
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121.
Thereafter, on August 15, 2006, Defendants also hosted a conference call for
analysts and investors. Following this call, which was available over the internet and on a free
call-in basis, Fair Disclosure newswire service published a transcript that stated, in part, the
following:
NICHOLAS MATURO, PRESIDENT, COO, WHITNEY INFORMATION
NETWORK: Thank you, Al. Good morning, everyone. We are particularly
pleased to announce record sales results for the current three and six month
periods and our first ever cash dividend and, at $1.00 a share, a pretty sizeable one
at that.
I would like to note certain business highlights. Our overall business remains
brisk and continues to grow. Cash sales reached a record $59.7 million and our
business continues to generate significant pre-cash flow. This quarter's adjusted
EBITDA was $6.9 million, contributing to our growing $50 million of cash, cash
equivalents and restricted cash....
122.
During this conference call, following the presentation by Defendant Maturo,
Defendant Novas also stated, in part, the following:
AL NOVAS:
... Starting with our Q2 performance, we recorded a 60.1% increase in second
quarter GAAP revenue to $47.5 million versus a restated $40.9 million in Q2
2005. [Inaudible] attendance increased by 25.6% for the quarter. Cash received
from course and product sales increased 17.1% to $59.7 million versus last year's
$50.9 million. Our outreach, our telemarketing program, grew 61.7% in the
quarter and now represents 27% of our total cash sales compared to 19.6% in Q2
'05. On a segment basis, EduTrades had an outstanding quarter in topline
performance. Cash received from course and product sales increased over 70%
led by the Teach Me to Trade brand, our leading brand company-wide. So we
expect this brand to [gross] $100 million alone in 2007.
This quarter was a strong cash flow quarter. We generated approximately $5.5
million in cash flow from operations which equals an increase of 153% over last
year's number. Adjusted EBITDA was $6.9 million, essentially flat the last year.
Our cash flow generating capability remains strong. For the first half of the year,
we were 60% above last year from cash flow from operations and our cash
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balance stood at $50 million at June 30 compared to $33.2 million at December
31, 2005.
123.
The statements made by Defendants and contained in the Company's June 28,
2006 Conference Call, those statements made by Defendants and contained in the Company's
August 15, 2006 release, and those statements made by the Company and contained in the
Company's August 15, 2006 Conference Call, were each materially false and misleading when
made and were know by Defendants to be false at that time, or were recklessly disregarded as
such thereby, for the reasons stated herein in ¶¶ 11, 36-42, 44, 45, 47, 58 and 75, supra.
Form 10-Q for Second Quarter 2006
124.
On or about August 14, 2006, Defendants filed with the SEC the Company's
2Q:06 Form 10-Q for the quarter ended June 30, 2006, signed by Defendants Russ Whitney,
Maturo, Novas, and Simon, among others, and certified by Defendants Russ Whitney and
Novas. In addition to making substantially similar statements concerning the Company
operations, including revenues, deferred revenues, net income and earnings, as had been
published previously, the 2Q:06 Form 10-Q also provided an updated Revenue Recognition
statement - introducing the concept of "breakage" - in part, as follows:
Revenue recognition policy
We are engaged primarily in the business of providing real estate and financial
education to individual investors through courses of study as well as educational
materials. We offer our students multiple course packages. Students pay for the
courses in advance and we record the proceeds from the sale of courses as
deferred revenue when it is received. Revenue is earned when the student attends
the course.
The student is permitted to attend courses (in all available learning formats)
throughout the life of the student contract. We allow students to attend courses
subsequent to expiration upon request. The tuition is generally nonrefundable. A
student may receive a refund within three days of the purchase by exercising a
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right of rescission. In such cases, the corresponding amount of deferred revenue is
relieved with no impact on the Consolidated Statement of Operations.
We recognize revenue based on:

when the course is attended by the student; or

likelihood of the attendance by the student is remote (course breakage), which
is based on the historical:
percentage of students who never attended a course and those
students who never attended a course subsequent to expiration; and
highest number of days in which 95% of those students who
attended our courses subsequent to expiry.
We determine our course breakage rate based upon estimates developed from
historical student attendance patterns. Based on our historical information, we can
determine the likelihood of an expired course remaining unattended. Moreover,
we determined that we do not have a legal obligation to remit the value of expired
courses to relevant taxing jurisdictions.
To apply course breakage, we calculate verifiable and objective supporting data as
of each balance sheet date.
To the extent our financial markets education division (EduTrades, Inc. a wholly
owned subsidiary) and United Kingdom businesses do not have three full years of
data (subsequent to course expiration), we recognize revenue based on course
attendance. Only at such time that we have developed verifiable and objective
data over a three year period subsequent to course expiration will we apply course
breakage based on the methodology described above.
With respect to financial markets education division and United Kingdom, the
Company expects to have sufficient data to apply course breakage by the end of
2006. Accordingly, we anticipate reflecting course breakage as contemplated
above for the quarter ending December 31, 2006, for the courses sold during the
fourth quarter of 2003 through the fourth quarter of 2006 which remains expired
and unattended. We expect to recognize a significant amount of deferred revenue
in the fourth quarter of 2006 from initial application of the course breakage to our
financial markets education division and United Kingdom businesses.
As a result of applying this policy, during the three months ended March 31, 2006
and 2005 we recognized $1.9 million and $3.6 million, respectively, in revenue
related to course breakage.
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125.
The 2Q:06 Form 10-Q also provided statements concerning the Company's
Controls and Procedures that were similar to those reported the prior quarter, including stating,
in part, the following:
To address the formerly disclosed material weaknesses in the bank reconciliation
process we have implemented several controls to ensure accuracy and
completeness in the reconciliations to properly support the recorded balance in the
general ledger. These new controls have been designed and are operating
adequately. We also upgraded our current accounting and financial reporting
systems.
126.
Further supporting Defendants' statements that Whitney had sufficient control
and procedures in place at that time, the 2Q:06 Form 10-Q also contained Sarbanes-Oxley
Certifications for the period ending June 30, 2006, dated August 14, 2006 and signed by
Defendants Russ Whitney and Novas, certifying that "the information contained in the Report
fairly presents, in all material respects, the financial condition and results of operations of the
Company."
127.
In addition to the foregoing, for the first time, Defendants also reported the
significant additional costs associated with Defendant Whitney and Russ Whitney's private
equity sale - all of which was being paid by the Company at a penalty rate of at least $4,500 per
day - in part, as follows:
Note 10-Commitments and contingencies
Liquidated damages provision in registration rights agreement
If we failed to have the Registration Statement declared effective by April 11,
2006 (or if effectiveness is not maintained), the registration rights agreement
requires the payment of liquidated damages to the investors on a daily basis of
$4,500 (which represents 1% per month of the proceeds in cash) until the
registration statement is declared effective or effectiveness is maintained. We
have a maximum liability of one year under the registration rights agreement.
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128.
The statements made by Defendants and contained in the Company's 2Q:06 Form
10-Q were each materially false and misleading when made and were know by Defendants to be
false at that time, or were recklessly disregarded as such thereby, for the reasons stated herein in
¶¶ 11, 36-42, 44, 45, 47, 58 and 75, supra.
129.
On November 13, 2006, the SEC declared effective the Registration of the 4.95
million shares that the Company had been attempting to register for over a year - shares related
to the Company's and Russ Whitney's PIPE Transaction. That day, Defendants filed with the
SEC, pursuant to Form 424131, a final Registration Statement that reiterated the Company's
revenue recognition policy, as follows:
In connection with the review of our Registration Statement on Form S-1, we had
discussions with Staff members of the Securities and Exchange Commission
("SEC") regarding the May 2005 change in policy with respect to revenue
recognition in the United Kingdom. Through these discussions, we identified
errors in the application of our revenue recognition policy in compliance with
generally accepted accounting principles in the United Kingdom and in North
America because our business practice of allowing students to complete courses
after the expiration of their contracts was not consistent with our revenue
recognition policy in the United Kingdom and in North America between 2001-
2005.
Accordingly, we elected to restate our Consolidated Financial Statements to
correct these errors. Upon implementation of the new revenue recognition
policy, we restated our Consolidated Financial Statements from 2001 through
and including 2005. These restatements resulted in recognition of revenue
based upon when the course is attended or once the likelihood of attendance by
the student becomes remote, as describedfurther in our Revenue Recognition
Policy below.
Our revenue recognition policy is consistently applied worldwide. Moreover, our
worldwide business practice to allow our students to attend courses subsequent to
the expiration of the contract remains our business practice today and for the
foreseeable future.
Revenue recognition policy
We are engaged primarily in the business of providing real estate and financial
markets education to individual investors through courses of study as well as
educational materials. We offer our students multiple course packages. Students
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pay for the courses in advance and we record the proceeds from the sale of
courses as deferred revenue when it is received, Revenue is earned when the
student attends the course.
The student is permitted to attend courses (in all available learning formats)
throughout the life of the student contract. We allow students to attend courses
subsequent to expiration upon request. The tuition is generally nonrefundable.
A student may receive a refund within three days of the purchase by exercising
a right of rescission. In such cases, the corresponding amount of deferred
revenue is relieved with no impact on the Consolidated Statement of
Operations.
(Emphasis added.)
130.
Again Defendants explained the Company's revenue recognition policies and
their effects of what the Company defined as "breakage" accounting, in part, as follows:
We recognize revenue based on:

when the course is attended by the student; or

likelihood of the attendance by the student is remote (course breakage),
which is based on the historical:
- percentage of students who never attended a course and those
students who never attended a course subsequent to expiration; and
- highest number ofdays in which 95% ofthose students who attended
our courses subsequent to expiry.
We determine our course breakage rate based upon estimates developed
from historical student attendance patterns. Based on our historical
information, we can determine the likelihood of an expired course
remaining unattended, Moreover, we determined that we do not have a
legal obligation to remit the value of expired courses to relevant taxing
jurisdictions.
To apply course breakage, we calculate verifiable and objective supporting data
as ofeach balance sheet date.
To the extent our financial markets education division (EduTrades, Inc. a wholly
owned subsidiary) and United Kingdom businesses do not have three full years of
data (subsequent to course expiration), we recognize revenue based on course
attendance. Only at such time that we have developed verifiable and objective
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data over a three year period subsequent to course expiration will we apply course
breakage based on the methodology described above.
With respect to our EduTrades division and the United Kingdom, we expect to
have sufficient data to apply course breakage by the end of 2006. Accordingly, we
anticipate reflecting course breakage as contemplated above in the quarter ending
December 31, 2006, for the courses sold as of the beginning of the first quarter of
2003 through the end of the fourth quarter of 2005 which remain expired and
unattended. We expect to recognize between approximately $18 million and
$22 million of deferred revenue in the fourth quarter of 2006 from initial
application of the course breakage related to the period prior to January 1, 2006 to
our EduTrades division and United Kingdom businesses.
As a result of applying this policy, during the years ended December 31, 2005,
2004 and 2003 we recognized $16.6 million, $18.1 million and $19.0 million,
respectively, in revenue related to course breakage.
(Emphasis added.)
131.
On November 14, 2006, Defendants published a release announcing the 4.95
million share common stock registration, as well as highlights for 3Q:06, which stated in part,
the following:
Whitney Information Network, Inc. Announces: Registration of 4.95 Million
Shares of Common Stock Intention to List on a National Exchange Q3 2006
Operating Results
CAPE CORAL, Fla., Nov 14, 2006 (BUSINESS WIRE) -- Whitney Information
Network, Inc. (OTCBB:RUSS), an international leader in the postsecondary
education industry focused on educating individual investors in real estate and
financial markets, announces that a Registration Statement filed with the
Securities and Exchange Commission was declared effective yesterday at 5:00pm
EST. The Registration Statement covers 4.95 million shares of common stock in
connection with a private placement completed in December 2005.
We also announce our intention to list our shares on a national stock exchange.
We will commence an evaluation as to which exchange is best suited for our
investors and take the necessary steps to accomplish this objective.
Q3 2006 Highlights
-- Cash received from course and product sales totaled a record $58.3 million, an
8.8% increase vs. Q3 2005, while GAAP revenues increased 18.8% to $52.3
million
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-- Cash flows provided by operations amounted to $7.9 million vs. $6.0 million, a
31.2% increase over the same period in 2005
-- Cash, cash equivalents and restricted cash totaled $61.9 million at September
30, 2006 vs. $28.2 million at September 30, 2005, a $33.7 million increase
For the three months ended September 30, 2006, we reported record revenue of
$52.3 million, an increase of 18.8% over the restated prior year amount of $44.1
million, and a net loss of $1.3 million vs. restated net earnings of $5.3 million in
the comparable 2005 period. Net earnings in the 2005 period included a $6.7
million tax benefit. For the third quarter ended September 30, 2006, we recorded
Adjusted EBITDA of $4.3 million, a $2.7 million decrease when compared to the
same period in 2005.
During the first three quarters of 2006, we recorded revenue of $144.8 million, a
17.3% increase over the restated $123.4 million in the nine months of 2005, and a
net loss of $9.7 million vs. restated net earnings of $3.9 million for 2005.
Adjusted EBITDA for the first nine months of 2006 was $19.9 million compared
to $23.3 million for the same period in 2005.
132.
In addition to conventional GAAP earnings, this release also conditioned
investors to focus on "Cash Received From Course and Product Sales" as an "important measure
of cash receipts and overall business volume."
133.
The statements made by Defendants and contained in the Company's November
2006 revised PIPE Transaction Registration and those statements contained in the Company's
November 14, 2006 release announcing this Registration, were each materially false and
misleading when made and were know by Defendants to be false at that time, or were recklessly
disregarded as such thereby, for the reasons stated herein in ¶¶ 11, 36-42, 44, 45, 47, 58 and 75,
supra.
Code of Conduct, Code of Ethics, Standards of Business Practice
134.
In addition to violating SEC and federal securities laws and disclosure
regulations, as well as other state and federal laws, the manipulation of refunds as well as
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Defendants' other misrepresentations to its shareholders, Defendants also violated the
Company's Code of Conduct, Code of Ethics and standards of business practices and made
misrepresentations and omissions with respect thereto. As evidence of this, the Code of Ethics
for the CEO, President and Senior Officers of the Company (adopted March 9, 2004), signed by
each of these senior managers, states the following:
Whitney Information Network, Inc. (the "Company") is committed to conducting
our business in accordance with applicable laws, rules and regulations and the
highest standards of business ethics, and to full and accurate financial disclosure
in compliance with applicable law. This Code of Ethics, applicable to the
Company's Chief Executive Officer, President, Chief Financial Officer,
Treasurer, Vice President of Finance and other senior executive officers
(collectively, "Senior Officers") sets forth specific policies to guide you in the
performance of your duties. To the extent the positions specified in the immediate
preceding sentence exist at any of the Company's subsidiaries, this Code of Ethics
will also be applicable to, and the term "Senior Officers" will include, such
officers of the Company's subsidiary.
135.
Similarly, the very first page of the Company's Code of Conduct pertaining to all
Whitney directors, officers and employees, contains a statement of Corporate Responsibility,
signed by Defendant Russ Whitney, which stated in part, the following:
CORPORATE RESPONSIBILITY
We at Whitney Information Network, Inc. recognize that to be a leader in the post
secondary education market we must demonstrate a commitment to corporate
governance and responsibility by conducting our business with the highest ethical
standards in accordance with all applicable laws, rules and regulations of the
countries in which we engage in business.
The Code of Conduct has been developed to summarize the principles and
standards that will guide our Company in our mission to empower individuals to
create financial independence by incorporating our core values--integrity,
accountability, commitment to excellence, and team-player mentality--into our
every day business life. These values are the foundation that will guide us through
our mission and will strengthen our ability to attract and retain employees,
develop business, and reduce costs and risks.
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136.
The Company's Code of Ethics also imposes duties that bear a direct relation to
Whitney' s federal reporting responsibilities and that were designed to ensure GAAP compliance.
These statements also include, in part, the following:
INTRODUCTION
This Code of Ethics ("the Code") embodies the commitment of Whitney
Information Network, Inc., its affiliates and subsidiaries (collectively, "WIN") to
conduct its business with the highest ethical standards and in accordance with all
applicable laws, rules and regulations of the countries in which WIN engages in
business. All members of the Board of Directors, Executive Officers, and Senior
Financial Officers are expected to adhere to the principles and procedures set
forth in this Code. Directors, Executive Officers, and Senior Financial Officers
that are also WIN employees are also required to abide by WIN's Employee Code
of Conduct, which is not part of this Code.
Standard 1.2 - Honesty
Each Director, Executive Officer, and Senior Financial Officer owes a duty to
WIN to act with integrity. Integrity requires, among other things, being honest.
Standard 2.3 - Full, Fair, Accurate, and Timely Disclosures
Senior Financial Officers shall provide full, fair, accurate, timely, and
understandable disclosures in reports and documents that are filed with or
submitted to the SEC and other governmental agencies and in any press release or
other public communications.
Standard 2.4 - Disclosures free of Misrepresentations
Senior Financial Officers shall provide full, fair, accurate, timely, and
understandable information, without misrepresenting or causing others to
misrepresent, material facts about WIN to the SEC, WIN's independent auditors,
WIN employees or independent contractors.
Standard 2.5 - Compliance with Laws & Regulatory Agencies
Senior Financial Officers shall comply with laws, rules and regulations of
national, state, provincial, and local governments and other appropriate regulatory
agencies and self-regulatory bodies.
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137.
The foregoing statements regarding the Company's compliance with laws, rules,
and its own Code of Conduct were materially false and misleading because Defendants knew or
recklessly disregarded during the Class Period that its financial statements did not comply with
GAAP and SEC rules because, inter alia, revenue was improperly and prematurely recognized,
and that rather than providing full, fair, and accurate disclosures, in fact Defendants concealed
the true fact that Russ Whitney' s and the Company' s entire business model was a sham,
premised on the concept of luring unsophisticated students into signing up for near-worthless
and unconscionably-overpriced courses and then using the courses themselves as a platform to
sell still more worthless courses as further described in the section directly below. As a result,
Whitney' s secret, fraudulent business model was doomed to failure and ultimately resulted in
dissatisfied customers demanding refunds, not attending courses, and accusing the Company of
bad business practices at best and an artful con game at worst, as well as serious problems with
credit card companies, including AMEX, regarding chargebacks and customers' refusals to pay.
138.
Throughout the Class Period, the statements regarding the Company's Code of
Conduct as set forth above were materially false and misleading when made because, inter alia,
the Company's Code of Conduct was not designed to moderate the activities of those within the
organization and Company employees were not required to uphold basic standards of acceptable
business conduct and moral decency. To the contrary, the Code of Conduct was a complete sham
designed to create the impression that the Company had proper and ethical business practices
when it did not.
THE TRUE OPERATIONAL CONDITION
OF WHITNEY IS BELATEDLY DISCLOSED
139.
On November 21, 2006, Defendants shocked and alarmed investors after they
published a release that revealed, for the first time, that the SEC had begun an investigation into
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the Company. According to Whitney, the SEC was examining the Company's compliance with
federal securities laws in connection with: (i) the efficacy or trading success of the Company's
market education programs - EduTrades; and (ii) the Company's prior acquisitions of certain
other entities.
140.
The revelations that the Company had materially misrepresented the efficacy and
success of its stock education products were critical to investors because much of the Company's
future growth and development had been tied to the development of its stock education business
and because the Company had been preparing to sell over $33 million in EduTrades shares in the
open market. As evidence of this, on November 21, 2006, shares of the Company plummeted to
a low of $5.25 per share - a one day decline ofalmost 36 % - compared to the closing price of
$8.20 per share the prior day, November 20, 2006.
141.
On December 15, 2006, after the market closed, Defendants further shocked the
market by revealing that Whitney had received a Grand Jury Subpoena from the United States
Attorney for the Eastern District of Virginia and had been notified that the Company was being
investigated for its marketing activities. The Company's press release, announcing the Grand
Jury Investigation into Whitney stated, in part, the following:
CAPE CORAL, FL, Dec. 15, 2006 (BUSINESS WIRE)
Whitney Information
Network, Inc. (OTCBB:RUSS) announced today that the United States Attorney
for the Eastern District of Virginia has notified the Company that it has
commenced a grand jury investigation into certain of the Company's marketing
activities. The Company received a subpoena on December 11, 2006 in
connection with this investigation requesting documents and information from
January 1, 2002 to the present relating to its marketing activities. The
Company intends to cooperate fully with this investigation.
The Company's Board of Directors has established a Special Committee of
independent directors to conduct an internal investigation of these activities
and the Company's acquisitions of other companies. The Committee has engaged
the law firm of Wilmer Cutler Pickering Hale and Dorr to assist it with this
investigation.
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Separately, the Company also announced today that it intends to withdraw its
EduTrades, Inc. registration statement filed with the Securities and Exchange
Commission.
Post Class Period Events
142.
On the next trading day, December 18, 2006, shares of the Company traded to a
low of $3 .1 per share.
143.
The following day, on December 19, 2006, the Company published another
release announcing the departure of Defendants Maturo and Masheck. The release published by
Defendants at that time, stated, in substantial part, the following:
Whitney Information Network, Inc. Announces Departure of Officers
CAPE CORAL, Fla.--(BUSINESS WIRE)--Dec. 19, 2006--Whitney Information
Network, Inc. (OTCBB:RUSS) announced today the termination of employment
of Nicholas S. Maturo, President and Chief Operating Officer and Rance
Masheck, Vice President, Sales and Marketing of EduTrades, Inc. (a subsidiary of
the Company).
144.
On December 21, 2006, Whitney revealed that it had accused Defendant
Masheck, the former Vice President, Sales and Marketing of EduTrades, of making false
statements about his prior trading success as well as the efficacy of the Whitney stock trading
system. That day, in connection with the additional termination of Richard O'Dor, former
Director of Corporate Communications, Defendants also published a release that stated, in part,
the following:
Whitney Information Network, Inc. Announces Resignation of Director,
Corporate Communications and Details Recent Termination
CAPE CORAL, Fla.--(BUSINESS WIRE)--Dec. 21, 2006--Whitney Information
Network, Inc. (OTCBB:RUSS) announced today the resignation of Richard
O'Dor, Director, Corporate Communications for the Company. Mr. O'Dor
resigned after Management of the Company learned that Mr. O'Dor had made a
misstatement to the press without the knowledge of, or authorization by, the
Company, regarding the reason for the termination of Rance Masheck, Vice
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President, Sales and Marketing of EduTrades, Inc. (a subsidiary of the Company),
which was announced on December 19, 2006. Mr. Masheck was terminated due
to the fact that his trading records do not substantiate claims which he made,
and which the Company broadcasted publicly, regarding his trading success.
The Company discovered this fact during its internal investigation related to both
the grand jury investigation by the United States Attorney's Office for the Eastern
District of Virginia, which was announced by the Company on December 15,
2006, and the investigation and subpoena by the Securities and Exchange
Commission, which was announced by the Company on November 20, 2006.
(Emphasis added.)
145.
On February 2, 2007, Defendants announced that Whitney had undergone a
significant Reorganization. Pursuant thereto, Defendant Simon was elevated to the position of
Co-President and Chief Operating Officer and Defendant Novas was promoted from Chief
Financial Officer to the position of Co-President and Chief Financial Officer.
Russ Whitney: True Facts Regarding Felony Conviction,
Financial History, Prior Bad Acts
146.
Following the end of the Class Period, in the face of the above-mentioned
disturbing developments, the media began to question statements and potential omissions
relating directly to Russ Whitney himself, including the validity of specific points in his resume.
147.
According to a report published on a locally-oriented website called the
EastBayExpress.com in February 2007, a local East Bay resident, John Reed, had previously
defended himself in a suit by Whitney (designed to prevent Reed from making critical
statements about Whitney, on Reed' s own website), and had discovered that:
• In 1974, when Russ Whitney was purportedly building his first real estate
empire, he was in factpleading guilty to participating in a 1972 robbery ofa
convenience store, and served 19 months, before being paroled in March of
1976.

After going to Schenectady, NY, the purported site of Russ Whitney's first real
estate fortune, Reed was able to determine that upon his 25th birthday, Russ
Whitney appeared to own six "highly leveraged"properties with a combined
value ofunder $100, 000.
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• In 1980, Russ Whitney was involved in a hit-and-run accident where he
seriously injured a 19year old pedestrian, running him over with a pick-up
truck, causing brain injury and fleeing the scene, leaving the injured man without
medical attention for hours. A civil action against Russ Whitney relating to
these events resulted in a $1.2 million judgment for Whitney's victim. Russ
Whitney ultimately paid only about one third ofthejudgment for the victim,
after threatening to file for bankruptcy before paying the fulljudgment.
148.
A March 18, 2007, New York Times expose on the Company stated, in part, the
following:
And "Have you ever wondered how it would feel being rich?"
Visions of wine-sipping then fill the screen, of golf-playing, of sailboats sailing
into the sunset. Strolling down a dock, a smart-looking fellow in a bright polo
shirt and khaki shorts turns to the camera and says, "With real estate, there's no
question you can amass the most amount of money in the least amount of
time. "
This is Russ Whitney, "who started out working in a slaughterhouse for $5 an
hour, " the announcer tells us, "and turned $1,000 in borrowed money into a
personal wealth of $4.7 million -- in only 18 months! " He has since devoted
himself to helping others, the spot continues, and "on this important television
special, " Whitney will show you how to build wealth -- "even with only a part-
time effort! "
To look at Whitney now, you don't have to wonder how it feels to be rich. He has
been all over television talking about it. He's spoken of it to countless audiences,
written about it in several books, including "Millionaire Real Estate Mentor," a
BusinessWeek best seller. (Last fall, Whitney also appeared in New York City as
a panelist at a New York Times-sponsored event, the Great Read in the Park.) His
rags-to-riches tale has been worn smooth, but he knows it's a good story, and
nothing else quite conveys his exceptional pluck.
149.
The New York Times article further reported on the Company's business structure
and some typical experiences that it discovered during its investigation, including the following:
By this time, however, Whitney has switched into the future tense, and it becomes
clear he is not actually going to reveal any of his wealth-building techniques until
you attend one of his "truly unique" workshops. Not only is admission to this
"special, limited-seating event" free, but Whitney will also give you, "absolutely
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free," his special Russ Whitney's Building Wealth Entrepreneur Start-Up Kit -- "a
$199 value." In other words, he will pay you to attend, so how could you not?
"You have everything to gain by attending!" "Call now!" "Operators are standing
by."
And
so
on....
In staging some 4,700 free events a year, Whitney Information Network attracts
some 280,000 people, of whom 22,000 go on to enroll as students in advanced
courses. Last November at the Clarion Hotel in Louisville, Pat Yarbrough, a 56-
year-old custodian at the University of Louisville, became one of them. "Fast
money," she explained later, "that's all I'm interested in." At the front of the
conference room, a nice man had taught her how to raise her credit-card debt
limit, she said, and when she made her way with a cane to the back, a nice clerk
showed her what she could buy: three-day courses with names like Rehabbing for
Profit and Keys to Creative Real Estate Financing. The courses cost $4,995 each,
but less if you bought more. Yarbrough chose four, including the Millionaire U
Real Estate Training. She had $130,000 in debt, some of it on her seven credit
cards, and the clerk helped her to add $18,000 to it.
150.
According to the New York Times report, the Company was able to achieve its
multi-hundred-million dollar yearly revenues, because they charged students as much as $54,000
for Whitney's full course package - usually financed by the additional debt that Whitney
instructs its students to obtain. The Times also reported that, for this large investment - greater
then the cots of a 4 year college education at most state universities - students are given a mix of
pop-self help psychology and rudimentary real estate advice.
151.
In addition to the foregoing, the Times reported that Whitney students typically
justify the huge costs of these classes because they are confident that the riches that lie
immediately ahead of them will be sufficient to recover these one-time expenses. According to
the Times, this justification is also encouraged to be adopted by Whitney students, even by Russ
Whitney, who was also quoted in this report as stating, he was unabashed that his instructors
help students put the cost of those courses on credit cards and further stated that compared with
the cost of college, his school is "a bargain," and that the cost of a Whitney education can be
recovered very quickly through real estate or stock trading proceeds.
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152.
The Times report does, however, make this observation:
In his official company biography, Whitney says that "his greatest achievement is
the success of his students." The immediate effect of becoming a Whitney student,
though, is not to get rich, but poorer. The infomercial addresses people who are
"just getting by, making payments on debts and credit cards." Among the first
lessons Whitney instructors teach is how to raise the limits on their credit cards,
and then how to plunge deeper into debt buying Whitney courses.
153.
On March 23, 2007, Defendants announced the resignations of two of its
Directors, Stephen L. Cootley and Anthony Petrelli.
154.
In early April 2007, Defendants reported results for 1Q:07, the period ended
March 31, 2007. Thereafter, on April 6, 2007, Cashflow News reported that these results
amounted to a sudden negative reversal in the Company's Free Cash Flow - as well as an eight-
year low for this important metric.
155.
Evidencing continued control deficiencies, on May 29, 2007, Whitney revealed
that they would be unable to file with the SEC, the Company's 1Q:07 quarterly results pursuant
to Form 10-Q. At that time, Defendants stated that such report should be filed with the SEC by
May 21, 2007.
156.
As a result of its delayed filing, on May 29, 2007, Defendants filed a preliminary
report with the SEC pursuant to Form 8-K. This statement revealed that Defendant Russ
Whitney had refused to cooperate with the Company' s internal investigation and that he had
refused to answer questions by legal counsel to the Special Committee.
157.
On or about June 22, 2007, Whitney ceased trading on the OTC and thereafter
commenced trading in the pink sheets under the symbol RUSS-PK.
158.
On July 2, two large investors in the Company - Hudson Street Capital
Management LLC and Kingstown Capital Partners LLC - wrote a letter to the Independent
Directors "to express our concern that the RUSS Board of Directors, as currently configured,
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lacks independence from Russell Whitney, Chairman of the Board, CEO, and the Company's
largest shareholder. We believe that other shareholders' interests have been surrendered to the
self-interests and personal enrichment of Mr. Whitney, while shareholder value in general has
precipitously eroded.... It is our belief that, once free of Russell Whitney's self-dealing and
unchecked influence, the Special Committee could more expeditiously resolve the government
investigations that hang over the Company and hamper its operating performance on many
levels. In fact, the Company's Form 8-K dated May 29, 2007 discloses that `The Department of
Justice and/or the SEC may view [Mr. Whitney's refusal to submit to an interview by the Special
Committee's consultant WilmerHale] as lack of cooperation towards the Special Committee's
efforts to determine the facts in its internal investigation and prolong the SEC's investigation and
broaden the Department of Justice's investigation.."'
159.
On July 2, 2007, the Company announced that Chester P. Schwartz, the Chairman
of the audit committee, had abruptly resigned from the Board of Directors.
CAUSATION AND ECONOMIC LOSS
160.
During the Class Period, as detailed herein, Defendants engaged in an illegal and
improper course of conduct that acted to artificially inflate the price of Whitney stock, and that
operated as a fraud or deceit on Class Period purchasers of Whitney stock, by misrepresenting
the Company's financial results, its internal operations ad the effect of its controls and
procedures.
161.
Over a period of approximately sixteen (16) months, Defendants improperly
inflated the Company's financial results. Ultimately, however, when Defendants' prior
misrepresentations and fraudulent conduct came to be revealed to investors, shares of Whitney
declined precipitously - evidence that the prior artificial inflation in the price of Whitney's
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shares was eradicated. As a result of their purchases of Whitney stock during the Class Period,
Plaintiff and other members of the Class suffered economic losses, i.e. damages under the
federal securities laws.
162.
By
improperly
characterizing
the
Company's
financial
results
and
misrepresenting Whitney' s prospects, Defendants presented a misleading image of the
Company's business and future growth prospects. During the Class Period, Defendants
repeatedly emphasized the ability of the Company to monitor and control costs and expenses,
and to manage large deferred revenue accounts, and consistently reported revenues and earnings
growth at or above expectations.
163.
Defendants' false and materially misleading statements and omissions had the
intended effect of causing Whitney's shares to trade at artificially-inflated levels throughout the
Class Period - reaching a Class Period high of over $11.25 per share in early-May 2006.
164.
These claims caused and maintained the artificial inflation in Whitney's stock
price throughout the Class Period and until investors realized, in a series of partial disclosures
towards the end of the Class Period through which the truth was ultimately, belatedly revealed.
In mid-November, the Company announced that the SEC had begun an investigation and,
thereafter, the US AG for the ED VA announced that it had convened a Grand Jury to investigate
Whitney. These belated revelations caused shares of the Company to collapse, evidence that
Defendants ' belated revelations had an immediate, adverse impact on the price of Whitney
shares.
165.
These belated revelations also evidenced Defendants' prior falsification of
Whitney's business prospects due to Defendants' false statements. As investors and the market
learned, the Company's prior business prospects had been overstated, as were the Company's
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results of operations. As this adverse information became known to investors, the prior artificial
inflation began to be eliminated from Whitney share price, and Plaintiff was damaged as a result
of the related share price decline.
166.
As a direct result of investors learning the truth about the Company in mid-
November and mid-December 2006, Whitney's stock price collapsed to below $4.00 per share,
from above $9.00 per share - a decline of over 55%, on relatively heavy trading volume many
times the average daily trading volume for Whitney stock. This dramatic share price decline
eradicated much of the artificial inflation from Whitney's share price, causing real economic loss
to investors who purchased this stock during the Class Period.
167.
In sum, as the truth about Defendants' fraud and illegal course of conduct became
known to investors, and as the artificial inflation in the price of Whitney shares was eliminated,
Plaintiff and the other members of the Class were damaged, suffering an economic loss of at
approximately $ 5.00 per share.
168.
The decline in Whitney's stock price at the end of the Class Period on December
15, 2006, was a direct result of the nature and extent of Defendants' fraud being revealed to
investors and to the market. The timing and magnitude of Whitney' s stock price decline negates
any inference that the losses suffered by Plaintiff and the other members of the Class was caused
by changed market conditions, macroeconomic or industry factors or even Company-specific
facts unrelated to Defendants' fraudulent conduct. During the same period in which Whitney's
share price fell over 40% as a result of Defendants' fraud being revealed, the Standard & Poor's
500 securities index was relatively unchanged.
169.
The immediate post Class Period statements - e.g., the terminations of high-level
management team members Nicholas Maturo, Rance Mashek, and Richard O'Dor - had little
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impact on the market price - which dipped to a low of $3.2 on December 19, 2006 but recovered
to trade above $4 on December 22, 2006 - because the market had already absorbed the true
facts addressed in the Class Period corrective disclosures: that the Company was being
investigated by the SEC and US AG for the very type of fraudulent conduct at issue here
regarding the Company's materially false and misleading financial statements.
170.
The economic loss, i.e. damages suffered by Plaintiff and other members of the
Class, was a direct result of Defendants' fraudulent scheme to artificially inflate the price of
Whitney's stock and the subsequent significant decline in the value of the Company's shares
when Defendants' prior misstatements and other fraudulent conduct was revealed. This decline
and economic loss at the end of the Class Period - after the market learned of the belated
corrective disclosures about Whitney - is demonstrated by the chart below:
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VIOLATIONS OF GAAP AND SEC REPORTING RULES
171.
During the Class period, Defendants materially misled the investing public,
thereby inflating the price of the Company' s securities, by publicly issuing false and misleading
statements and omitting to disclose material facts necessary to make Defendants' statements, as
set forth herein, not false and misleading. Said statements and omissions were materially false
and misleading in that they failed to disclose material adverse information and misrepresented
the truth about the Company, its financial performance, accounting, reporting, and financial
condition in violation of the federal securities laws and GAAP.
172.
GAAP defines the accepted principles, conventions, rules and procedures of
accounting. An accounting procedure that does not accord with a Statement of Financial
Accounting Standards (`SFAS") or Statement of Concepts pronouncement by the Financial
Accounting Standards Board ("FASB") by definition does not accord with GAAP. During the
Class Period, as alleged in this complaint, Defendants' scheme and course of conduct violated
provisions of GAAP including but not limited to:
• Violation of SEC Rule 12b-20: For filing periodic reports which lacked the information
necessary to make the required statements, in light of the circumstances under which they
are made, not misleading;
• Violation of Item 303 of Regulation S-K: For failing to ensure that reports for interim
periods include a discussion of any material changes in the registrant's results of
operations and an identification of any significant elements of registrant's income that are
not necessarily representative of the registrant's ongoing business;
• Violation of SFAS No. 48 (Revenue Recognition When Right of Return Exists): For
improperly recognizing revenues when a right of return (via return or chargeback)
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existed, and the Company had historically suffered significant returns and dramatically
increasing chargebacks;
• Violation of SFAS No. 5: For not provisioning for losses at the time when such a loss
contingency exists and when there was a reasonable possibility that a loss may have been
incurred;
• Violation of APB Opinion No. 28 (Accounting for Contingencies): For failing to
adequately identify and reserve for foreseeable returns and chargebacks;
• Violation of FASB Statement of Concepts No. 2: For failing to adhere to the principal of
"conservatism" as a "prudent reaction to uncertainty;"
• Violation of FASB Statement of Concepts No. 1: For failing to ensure that the
Company's financial reports provided information about its financial performance that
was useful to investors in making investment decisions related to the Company;
• Violation of FASB Statement of Concepts No. 2: For failing to ensure that the
Company's financial reports were reliable and accurate, and that nothing material was
omitted;
• Violation of APB Opinion No. 22: For failing to disclose accounting policies and to
identify and describe the accounting principles followed by the Company and the
methods of applying those principles that materially affect its financial statements.
Regulation S-X, to which the Company is subject as a registrant under the Exchange Act, 17
C.F.R.210.4-01(a)(1), provides that financial statements filed with the SEC which are not
prepared in compliance with GAAP are presumptively misleading and inaccurate.
173.
Defendants had an obligation adequately to provision for estimated returns and
chargebacks. Their adoption of a "no return" policy did not free them of this obligation. Indeed,
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as alleged herein, that the adoption of the no-return policy merely shifted the efforts of
consumers to retrieve their payments prior to the provision of services from formal return
requests to chargeback requests via their credit card companies.
174.
The GAAP requirement for recognition of an adequate provision for foreseeable
costs and an associated allowance applies to interim financial statements as required by
Accounting Principles Board Opinion No. 28. Paragraph 17 of this authoritative pronouncement
states that:
The amounts of certain costs and expenses are frequently subjected to year-end
adjustments even though they can be reasonably approximated at interim dates.
To the extent possible such adjustments should be estimated and the estimated
costs and expenses assigned to interim periods so that the interim periods bear a
reasonable portion of the anticipated annual amount.
175.
The Company's financial statements contained in the fiscal 2005 Form 10-K
and/or the quarterly reports filed with the SEC on Forms 10-Q for the quarterly periods
throughout the Class Period were presented in a manner that violated the principle of fair
financial reporting and the following GAAP, among others:
(a)
The principle that financial reporting should provide information that is
useful to present and potential investors and creditors and other users in making rational
investment, credit and similar decisions (FASB Statement of Concepts No. 1).
(b)
The principle that financial reporting should provide information about an
enterprise's financial performance during a period (FASB Statement of Concepts No. 1).
(c)
The principle that financial reporting should be reliable in that it
represents what it purports to represent (FASB Statement of Concepts No. 2).
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(d)
The principle of completeness, which means that nothing material is left
out of the information that may be necessary to ensure that it validly represents underlying
events and conditions (FASB Statement of Concepts No. 2).
(e)
The principle that conservatism be used as a prudent reaction to
uncertainty to try to ensure that uncertainties and risks inherent in business situations are
adequately considered (FASB Statement of Concepts No. 2).
(f)
The principle that contingencies and other uncertainties that affect the
fairness of presentation of financial data at an interim date shall be disclosed in interim reports in
the same manner required for annual reports (APB Opinion No. 28).
(g)
The principle that disclosures of contingencies shall be repeated in interim
and annual reports until the contingencies have been removed, resolved, or have become
immaterial (APB Opinion No. 28).
(h)
The principle that management should provide commentary relating to the
effects of significant events upon the interim financial results (APB Opinion No. 28).
176.
In addition, during the Class Period, Defendants violated SEC disclosure rules:
(a)
Defendants failed to disclose the existence of known trends, events, or
uncertainties that they reasonably expected would have a material, unfavorable impact on net
revenues or income or that were reasonably likely to result in the Company's liquidity decreasing
in a material way, in violation of Item 303 of Regulation S-K under the federal securities laws
(17 C.F.R. 229.303), and that failure to disclose the information rendered the statements that
were made during the Class Period materially false and misleading; and
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(b)
Defendants failed to file financial statements with the SEC that
conformed to the requirements of GAAP, and such financial statements were presumptively
misleading and inaccurate pursuant to Regulation S-X, 17 C.F.R. ' 210.4-01(a)(1).
177.
Defendants were required to disclose, in the Company's financial statements, the
existence of the material facts described herein and to appropriately recognize and report actual
revenues, deferred revenues, true refund costs and expenses in conformity with GAAP. Thus,
because Defendants were manipulating refunds in violation of its own business practices and
corporate governance policies, and because of the impact of this manipulation on the Company's
reported revenues, deferred revenues, refund costs and overall expenses, gross margins, net
income and earnings, the Individual Defendants, the Auditor Defendants and the Company failed
to make such disclosures and to account for and to report its financial statements in conformity
with GAAP.
178.
Defendants knew, or were reckless in not knowing, the facts which indicated that
the fiscal 2005 Form 10-K and all of the Company' s interim financial statements, press releases,
public statements, and filings with the SEC, which were disseminated to the investing public
during the Class Period, were materially false and misleading for the reasons set forth herein.
Had the true financial position and results of operations of the Company been disclosed during
the Class period, the Company's common stock would have traded at prices well below that
which it did.
ADDITIONAL SCIENTER ALLEGATIONS
179.
As alleged herein, Defendants acted with scienter in that each Defendant knew
that the public documents and statements issued or disseminated in the name of the Company
were materially false and misleading; knew that such statements or documents would be issued
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or disseminated to the investing public; and knowingly and substantially participated or
acquiesced in the issuance or dissemination of such statements or documents as primary
violations of the federal securities laws. As set forth elsewhere herein in detail, Defendants, by
virtue of their receipt of information reflecting the true facts regarding Whitney, their control
over, and/or receipt and/or modification of Whitney' s allegedly materially misleading
misstatements, and/or their associations with the Company which made them privy to
confidential proprietary information concerning Whitney, participated in the fraudulent scheme
alleged herein.
180.
Defendants were motivated to materially misrepresent to the SEC and investors
the true financial condition of the Company because their scheme: (i) deceived the investing
public regarding Whitney' s business, operations, management and the intrinsic value of Whitney
common stock; (ii) enabled Defendants to artificially inflate the price of Whitney shares; (iii)
enabled Whitney insiders to sell a total of over $8 million of Company stock; and enabled
Defendants to register for sale $13 millions more of Whitney shares; (iv) enabled Defendants to
register over $33. 0 million more EduTrades shares - to be sold to more public investors in an
attempted spin-off transaction that ultimately failed; (v) enabled Defendants to conduct a $1.00
per share "Special Dividend" - the majority of which was paid to insiders of the Company who
held Whitney shares; and (vi) caused Plaintiff and other members of the Class to purchase
Whitney common stock at artificially-inflated prices and to be damaged when the truth was
ultimately revealed to the market and the price of Whitney stock plummeted.
181.
During the Class Period, Individual Defendants Whitney, Simon, and Kane
profited from sales of Whitney stock as follows:
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Sale Price per Number
Name
Date
Share
of Shares
Proceeds
Whitney, Russell
13 Dec OS
$4.50
1,250,000 $5,626,000
Simon, Ronald
3 Feb 06
$9.12
100,000
$911,999
Whitney, Russell
17 Feb 06
$9.50
100,000
$950,000
Kane, John
3 May 06
$10.35
40,000
$414,000
*The 12/13/05 $5.625m sale by Russ Whitney was in connection with the $13.5 M PIPE
Transaction.
182.
For the reasons set forth above, Plaintiff has alleged compelling and cogent facts
giving rise to a strong inference of scienter.
Additional Allegations Regarding the Individual Defendants
183.
Because of the Individual Defendants' positions with the Company, they had
access to the adverse undisclosed information about its business, operations, products,
operational trends, financial statements, markets, and present and future business prospects via
access to internal corporate documents (including the Company's operating plans, budgets and
forecasts and reports of actual operations compared thereto), conversations and connections with
other corporate officers and employees, attendance at management and Board of Directors
meetings and committees thereof, and via reports and other information provided to them in
connection therewith.
184.
It is appropriate to treat the Individual Defendants as a group for pleading
purposes and to presume that the false, misleading and incomplete information conveyed in the
Company's public filings, press releases and other publications as alleged herein are the
collective actions of the narrowly-defined group of Defendants identified above. Each of the
above officers of Whitney, by virtue of their high-level positions with the Company, directly
participated in the management of the Company, was directly involved in the day-to-day
operations of the Company at the highest levels, and was privy to confidential proprietary
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information concerning the Company and its business, operations, products, growth, financial
statements, and financial condition, as alleged herein. Said Defendants were involved in drafting,
producing, reviewing, and/or disseminating the false and misleading statements and information
alleged herein; were aware or recklessly disregarded that the false and misleading statements
were being issued regarding the Company; and approved or ratified these statements, in violation
of the federal securities laws.
185.
As officers and controlling persons of a publicly-held company whose common
stock was and is registered with the SEC pursuant to the Exchange Act, and was traded on the
OTC Bulletin Board (the "OTC Market"), an open and efficient market, and governed by the
provisions of the federal securities laws, the Individual Defendants each had a duty to promptly
disseminate accurate and truthful information with respect to the Company's financial condition
and performance, growth, operations, financial statements, business, products, markets,
management, earnings, and present and future business prospects, and to correct any previously-
issued statements that had become materially misleading or untrue, so that the market price of
the Company's publicly-traded common stock would be based upon truthful and accurate
information. The Individual Defendants' misrepresentations and omissions during the Class
Period violated these specific requirements and obligations.
186.
The Individual Defendants participated in the drafting, preparation, and/or
approval of the various public and shareholder and investor reports and other communications
complained of herein, were aware of, or recklessly disregarded, the misstatements contained
therein and omissions therefrom, and were aware of their materially false and misleading nature.
Because of their Board membership and/or executive, managerial, or oversight positions with
Whitney, each of the Individual Defendants had access to the adverse undisclosed information
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about Whitney' s business prospects and financial condition and performance as particularized
herein and knew (or recklessly disregarded) that these adverse facts rendered the positive
representations made by or about Whitney and its business issued or adopted by the Company
materially false and misleading.
187.
The Individual Defendants, because of their positions of control and authority as
officers and/or directors of the Company, were able to and did control the content of the various
SEC filings, press releases and other public statements pertaining to the Company during the
Class Period. Each Individual Defendant was provided with copies of the documents alleged
herein to be misleading prior to or shortly after their issuance and/or had the ability and/or
opportunity to prevent their issuance or cause them to be corrected. Accordingly, each of these
Defendants is responsible for the accuracy of the public reports and releases detailed herein, and
is therefore primarily liable for the representations contained therein.
PLAINTIFF'S CLASS ACTION ALLEGATIONS
188.
Plaintiff brings this action as a class action pursuant to Federal Rule of Civil
Procedure 23(a) and (b)(3) on behalf of a Class, consisting of all those who purchased or
otherwise acquired the common stock of Whitney between August 11, 2005 and December 15,
2006, inclusive (the "Class") and who were damaged thereby. Excluded from the Class are
Defendants, the officers and directors of the Company at all relevant times, members of their
immediate families and their legal representatives, heirs, successors or assigns, and any entity in
which Defendants have or had a controlling interest.
189.
The members of the Class are so numerous that joinder of all members is
impracticable. Throughout the Class Period, Whitney common shares were actively traded on
the OTC Market. As of March 27, 2006, the Company had over 10.878 million shares of
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common stock issued and outstanding. While the exact number of Class members is unknown to
Plaintiff at this time and can only be ascertained through appropriate discovery, Plaintiff believes
that there are hundreds or thousands of members in the proposed Class. Record owners and other
members of the Class may be identified from records maintained by Whitney or its transfer
agent and may be notified of the pendency of this action by mail, using the form of notice
similar to that customarily used in securities class actions. Only approximately 29% of the shares
of the Company are held by public shareholders, as distinguished from Whitney insiders, who
are excluded from the definition of the "Class" as set forth herein.
190.
Plaintiff's claims are typical of the claims of the members of the Class as all
members of the Class are similarly affected by Defendants' wrongful conduct in violation of
federal law that is complained of herein.
191.
Plaintiff will fairly and adequately protect the interests of the members of the
Class and has retained counsel competent and experienced in class action and securities
litigation.
192.
Common questions of law and fact exist as to all members of the Class and
predominate over any questions solely affecting individual members of the Class. Among the
questions of law and fact common to the Class are:
(a)
whether the federal securities laws were violated by Defendants' acts as
alleged herein;
(b)
whether statements made by Defendants to the investing public during the
Class Period misrepresented material facts about the business, operations and management of
Whitney; and
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(c)
to what extent the members of the Class have sustained damages and the
proper measure of damages.
193.
A class action is superior to all other available methods for the fair and efficient
adjudication of this controversy since joinder of all members is impracticable. Furthermore, as
the damages suffered by individual Class members may be relatively small, the expense and
burden of individual litigation make it impossible for members of the Class to individually
redress the wrongs done to them. There will be no difficulty in the management of this action as
a class action.
Applicability of Presumption of Reliance:
Fraud-On-The-Market Doctrine
194.
At all relevant times, the market for Whitney' s common stock was an efficient
market for the following reasons, among others:
(a)
Whitney's stock met the requirements for listing, and was listed and
actively traded on the Over The Counter ("OTC") market, a highly efficient and automated
market;
(b)
As a regulated issuer, Whitney filed periodic public reports with the SEC
and the OTC Market;
(c)
Whitney regularly communicated with public investors via established
market communication mechanisms, including through regular disseminations of press releases
on the national circuits of major newswire services and through other wide-ranging public
disclosures, such as communications with the financial press and other similar reporting services;
(d)
Whitney was followed by several securities analysts employed by major
brokerage firm(s) who wrote reports which were distributed to the sales force and certain
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customers of their respective brokerage firm(s). Each of these reports was publicly available and
entered the public marketplace;
(e)
Whitney was closely and regularly followed by investors on the internet;
(f)
the Company further exposed itself to the investor community via various
Company-controlled websites to promote itself to a broader audience; and
(g)
the price of Whitney shares reacted quickly to unexpected news events,
including the Company's positive press releases as well as negative news reported on the Internet
and/or in the print media about the Company. The price of Whitney shares rose and fell in
response to positive and negative news during the Class Period.
195.
As a result of the foregoing, the market for Whitney securities promptly digested
current information regarding Whitney from all publicly available sources and reflected such
information in Whitney stock price. Under these circumstances, all purchasers of Whitney
common stock during the Class Period suffered similar injury through their purchase of Whitney
common stock at artificially inflated prices and a presumption of reliance applies.
NO SAFE HARBOR
196.
The statutory safe harbor provided for forward-looking statements under certain
circumstances does not apply to any of the allegedly false statements pleaded in this complaint.
Many of the specific statements pleaded herein were not identified as "forward-looking
statements" when made. To the extent there were any forward-looking statements, there were no
meaningful cautionary statements identifying important factors that could cause actual results to
differ materially from those in the purportedly forward-looking statements . Alternatively, to the
extent that the statutory safe harbor does apply to any forward-looking statements pleaded
herein, Defendants are liable for those false forward-looking statements because at the time each
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of those forward-looking statements was made, the particular speaker knew that the particular
forward-looking statement was false, and/or the forward-looking statement was authorized
and/or approved by an executive officer of Whitney who knew that those statements were false
when made.
FIRST CLAIM
Violation of Section 10(b) of
the Exchange Act and Rule IOb-5
Promulgated Thereunder Against All Defendants
197.
Plaintiff repeats and realleges each and every allegation contained above as if
fully set forth herein.
198.
During the Class Period, Defendants carried out a plan, scheme and course of
conduct which was intended to and, throughout the Class Period, did: (i) deceive the investing
public regarding Whitney' s business, operations, management and the intrinsic value of Whitney
common stock; (ii) enable Defendants to artificially inflate the price of Whitney shares; (iii)
enable Whitney insiders to sell a total of over $8 million of Company stock; (iv) enabled
Defendants to sell $13.5 M in Whitney stock to PIPE investors prior to the registration of those
shares and thereafter enabled Defendants to register for sale $13.5 million in Whitney shares,
that were sold by PIPE Purchasers; (v) enabled Defendants to register over $33.0 million more
EduTrades shares - to be sold to more public investors in a spin-off transaction; (vi) enabled
Defendants to conduct a $1.00 per share "Special Dividend" - the majority of which was paid to
insiders of the Company who held Whitney shares; and (vii) caused Plaintiff and other members
of the Class to purchase Whitney common stock at artificially-inflated prices. In furtherance of
this unlawful scheme, plan, and course of conduct, Defendants each, jointly and individually
took the actions set forth herein.
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199.
Defendants (a) employed devices, schemes, and artifices to defraud; (b) made
untrue statements of material fact and/or omitted to state material facts necessary to make the
statements not misleading; and (c) engaged in acts, practices, and a course of business which
operated as a fraud and deceit upon the purchasers of the Company's common stock in an effort
to maintain artificially high market prices for Whitney's common stock in violation of Section
10(b) of the Exchange Act and Rule 10b-5. All Defendants are sued either as primary
participants in the wrongful and illegal conduct charged herein or as controlling persons as
alleged below.
200.
Defendants, individually and in concert, directly and indirectly, by the use,
means, or instrumentalities of interstate commerce and/or of the mails, engaged and participated
in a continuous course of conduct to conceal adverse material information about the business,
operations and future prospects of Whitney as specified herein.
201.
These Defendants employed devices, schemes, and artifices to defraud while in
possession of material, adverse, non-public information and engaged in acts, practices, and a
course of conduct as alleged herein in an effort to assure investors of Whitney's value and
performance and continued substantial growth, which included the making of, or the
participation in the making of, untrue statements of material facts and omitting to state material
facts necessary in order to make the statements made about Whitney and its business operations
and future prospects in the light of the circumstances under which they were made not
misleading, as set forth more particularly herein, and engaged in transactions, practices and a
course of business which operated as a fraud and deceit upon the purchasers of Whitney
common stock during the Class Period.
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202.
Each of the Individual Defendants' primary liability, and controlling person
liability, arises from the following facts: (i) the Individual Defendants were high-level
executives and/or directors at the Company during the Class Period and members of the
Company's management team, or acted as the Company's Independent Auditor, or had control
thereof; (ii) each of these Defendants, by virtue of his responsibilities and activities as a senior
officer and/or director of the Company and its Independent Auditors was privy to and
participated in the creation, development, and reporting of the Company's internal budgets,
plans, projections, and/or reports; (iii) each of these Defendants enjoyed significant personal
contact and familiarity with the other Defendants and was advised of and had access to other
members of the Company's management team, internal reports, and other data and information
about the Company's finances, operations, and sales at all relevant times; and (iv) each of these
Defendants was aware of the Company's dissemination of information to the investing public
which they knew or recklessly disregarded was materially false and misleading.
203.
As a result of the dissemination of the materially false and misleading information
and failure to disclose material facts, as set forth above, the market price of Whitney common
stock was artificially inflated during the Class Period. In ignorance of the fact that market prices
of Whitney's publicly-traded common stock were artificially inflated, and relying directly or
indirectly on the false and misleading statements made by Defendants, or upon the integrity of
the market in which the securities trade, and/or on the absence of material adverse information
that was known to or recklessly disregarded by Defendants but not disclosed in public statements
by Defendants during the Class Period, Plaintiff and the other members of the Class acquired
Whitney common stock during the Class Period at artificially high prices and were damaged
thereby.
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204.
At the time of said misrepresentations and omissions, Plaintiff and other members
of the Class were ignorant of their falsity and believed them to be true. Had Plaintiff and the
other members of the Class and the marketplace known the truth regarding the problems that
Whitney was experiencing, which were not disclosed by Defendants, Plaintiff and other
members of the Class would not have purchased or otherwise acquired their Whitney common
stock, or, if they had acquired such common stock during the Class Period, they would not have
done so at the artificially-inflated prices which they paid.
205.
By virtue of the foregoing, Defendants have violated Section 10(b) of the
Exchange Act, and Rule I Ob-5 promulgated thereunder.
206.
As a direct and proximate result of Defendants' wrongful conduct, Plaintiff and
the other members of the Class suffered damages in connection with their respective purchases
and sales of the Company's common stock during the Class Period.
SECOND CLAIM
Violation of Section 20(a) of
the Exchange Act Against Individual Defendants
207.
Plaintiff repeats and realleges each and every allegation contained above as if
fully set forth herein.
208.
The Individual Defendants acted as controlling persons of Whitney within the
meaning of Section 20(a) of the Exchange Act as alleged herein. By virtue of their high-level
positions, and their ownership and contractual rights, participation in and/or awareness of the
Company's operations, and/or intimate knowledge of the false financial statements filed by the
Company with the SEC and disseminated to the investing public, the Individual Defendants had
the power to influence and control and did influence and control, directly or indirectly, the
decision-making of the Company, including the content and dissemination of the various
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statements which Plaintiff contends are false and misleading. The Individual Defendants were
provided with or had unlimited access to copies of the Company's reports, press releases, public
filings, and other statements alleged by Plaintiff to be misleading prior to when and/or shortly
after these statements were issued and had the ability to prevent the issuance of the statements or
cause the statements to be corrected.
209.
In particular, each of these Defendants had direct and supervisory involvement in
the day-to-day operations of the Company and, therefore, is presumed to have had the power to
control or influence the particular transactions giving rise to the securities violations as alleged
herein, and exercised the same.
210.
As set forth above, Whitney and the Individual Defendants each violated Section
10(b) and Rule 10b-5 by their acts and omissions as alleged in this Complaint. By virtue of their
positions as controlling persons, the Individual Defendants are liable pursuant to Section 20(a) of
the Exchange Act. As a direct and proximate result of Defendants' wrongful conduct, Plaintiff
and other members of the Class suffered damages in connection with their purchases of the
Company's common stock during the Class Period.
WHEREFORE, Plaintiff prays for relief and judgment, as follows:
A.
Determining that this action is a proper class action under Rule 23 of the
Federal Rules of Civil Procedure and certifying Lead Plaintiff as a Class representative and
designating Lead Counsel as Class Counsel;
B.
Awarding compensatory damages in favor of Plaintiff and the other Class
members against all Defendants, jointly and severally, for all damages sustained as a result of
Defendants' wrongdoing, in an amount to be proven at trial, including interest thereon;
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C.
Awarding Plaintiff and the Class their reasonable costs and expenses
incurred in this action, including counsel fees and expert fees;
D.
Awarding extraordinary, equitable and/or injunctive relief as permitted by
law, equity, and the federal statutory provisions sued hereunder, pursuant to Rules 64 and 65 and
any appropriate state law remedies to assure that the Class has an effective remedy; and
E.
Such other and further relief as the Court may deem just and proper.
JURY TRIAL DEMANDED
Plaintiff hereby demands a trial by jury.
Dated: July 10, 2007
Michael A. Swick
Kim E. Miller (admittedpro hac vice)
KAHN GAUTHIER SWICK, LLC
114 East 39th Street
New York, NY 10016
Telephone: (212) 920-4310
Lewis S. Kahn
KAHN GAUTHIER SWICK, LLC
650 Poydras Street - Suite 2150
New Orleans, LA 70130
Telephone: (504) 455-1400
Facsimile: (504) 455-1498
Lead Counsel for Lead Plaintiff and the Class
SAXENA WHITE P.A.
Maya Saxena (0095494)
2424 North Federal Highway
Suite 257
Boca Raton, FL 33431
Tel: (561) 394-3399
Liaison Counsel
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CERTIFICATE OF SERVICE
I HEREBY CERTIFY that on the 10th day of July, 2007, I presented the
foregoing to the Clerk of the Court for filing and uploading to the CM/ECF system,
which will send notice of electronic filing to Akerman Senterfitt and Holland & Knight,
LLP. See attached Service List. I further certify that I mailed a copy of the foregoing
document, and the notice of electronic filing to non-CM/ECF participant Russell A.
Whitney at the address indicated in the attached Service List.
Kim E Miller
Service List
Mara Aronson
Brian P. Miller
HOLLAND & KNIGHT, LLP
Fla. Bar No. 0980633
=
701 Brickell Ave - Ste 3000
Samantha J. Kavanaugh
PO Box 015441
Fla. Bar No. 0194662
Miami, FL 33131-5441
Francisco A. Rodriguez
Tel.: (305) 374-8500
Fla. Bar No. 0653441
Fax: (305) 789-7799
AKERMAN SENTERFITT
Attorneyfor Defendant Nicholas S.
One Southeast Third Avenue, 28th Floor
Maturo
Miami, FL 33131
Tel.: (305) 374-5600
Fax: (305)374-5095
Attorneysfor Defendant Whitney
Information Network, Inc.
Russell A. Whitney
1612 Cape Coral Parkway
Cape Coral, Florida 33904
Defendant

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