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Fouad v. Isilon Systems, Inc., et al.
(United States District Court for the Western District of Washington)
This is a class action on behalf of all persons who acquired the common
stock of Isilon Systems, Inc. (“Isilon” or the “Company”) pursuant or traceable
to the Company’s initial public offering (“IPO”) on December 14, 2006, and on behalf
of all persons who acquired the Company’s stock between December 14, 2006 and
November 8, 2007 (the “Class Period”).
On February 4, 2008, the Honorable Marsha J. Pechman consolidated related
actions and appointed Dr. Magdy Fouad as lead plaintiff. A
Consolidated Class
Action Complaint (“Complaint”) was filed on April 18, 2008. BLB&G is counsel
for named plaintiff Southwest Carpenters Pension Trust.
Isilon, headquartered in Seattle, Washington, is a provider of clustered
storage systems for digital content, including video and audio. The Company’s
storage systems are composed of three or more nodes that are integrated with
Isilon’s operating system software, which unifies the nodes into a single shared resource.
Plaintiffs bring federal securities claims against the Company; several of its current and
former officers and directors; the underwriters for the IPO; and several venture capital
firms that collectively beneficially owned 69.8% and 60.2% of the shares of Isilon
immediately before and after the IPO, respectively.
The Complaint alleges that, in connection with the IPO, the registration statement and
accompanying prospectus contained materially false and misleading statements and omissions
regarding Isilon’s sales, revenues, earnings, and financial condition. Moreover, Plaintiffs
allege that, throughout the Class Period, Defendants issued materially false and misleading
statements regarding sales, revenue, accounts receivable, earnings, Isilon’s overall
financial condition, and the Company’s prospects. The Complaint alleges that Defendants
engaged in a variety of improper revenue recognition practices to inflate the Company’s financial results artificially.
In February 2008, the Company announced that its Audit Committee had identified numerous
errors in the Company’s recognition of revenue, and the Company was forced to restate its
financials for 2006 and the first two quarters of 2007. The restatement indicated that
revenue was recognized prematurely on certain transactions and that revenue should not have
been recognized at all for others. In all, the restated financials reduced previously
reported revenue by almost $7 million, or over 15% of that originally reported. Moreover,
the restatement noted that the Audit Committee had found evidence that Isilon’s former chief
executive officer, former chief financial officer, and former vice president of North
America sales all participated directly in certain of the transactions leading to the restatement.
As a result of Defendants’ false and misleading statements, Isilon’s stock price climbed
77% immediately following the IPO, and it subsequently climbed as high as $27.37 per share
on December 29, 2006. Between February and November of 2007, however, as the truth began to
emerge regarding the Company’s financial condition and the risks of the fraud materialized,
the inflation was removed from Isilon’s stock and the price collapsed. When the Company
finally announced on November 8, 2007 that the Audit Committee was reviewing certain sales to
customers, the timing and treatment of revenue recognition, and whether the Company’s internal
controls related to revenue recognition were sufficient, the price of Isilon shares opened the
next day at $4.65 per share, a fraction of the Class Period high.
Firm partner Blair Nicholas, senior counsel
Niki Mendoza, and associates
David Thorpe and Jon Worm are responsible for prosecuting this action.
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