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A10 Shareholders Sue After 67% Post-IPO Drop

(CN) - Software maker A10 Networks deceived investors ahead of its initial public offering last year, a class action alleges, pointing to a 67 percent drop since March.

The City of Warren Police And Fire Retirement System filed the complaint against San Jose, Calif.-based A10 in Santa Clara County Superior Court.

When A10, a provider of software-based application networking solutions, made its initial public offering on March 21, 2014, a decade after its founding, it had several products in its wheelhouse that signaled positive revenue trends, according to the Jan. 29 complaint.

The class highlights the 2005 launch of the AX series of application delivery controllers, which optimize data-center performance, and the May 2013 rollout of the "Thunder Series" family of appliances to integrate such controllers.

Critical to the class's claims, however, is that "the products in the two product families are not interchangeable, and as A10's Thunder Series product sales increased and AX Series products decreased, the company built up an inventory of obsolete AX Series product."

Since A10 sales cycles can stretch past 12 months for large-end customers, A10 has "tremendous visibility into where the company is tracking on sales at any given point in time," the class says.

That means "A10 had strong visibility into sales outcomes for at least the four quarters of fiscal 2014 at the time of the March 21, 2014, IPO, and at least some visibility into sales outcomes for 1Q [the first quarter] 2015," according to the complaint.

Despite the bloat of obsolete product on its books at inflated values, A10 allegedly took only "a partial inventory write-down of $2.6 million at the end of fiscal 2013."

"Significant obsolete inventory" allegedly remained on A10's books at inflated values at the time of the IPO, the complaint alleges.

A10 sold 9 million shares in the IPO, plus another 3.845 million shares were sold by certain selling stockholders, raising more than $135 million in gross proceeds for the company and $57.675 million for the selling stockholders, according to the action.

Claiming that the company's registration statement with the Securities and Exchange Commission was misleading, the class notes that it "emphasized A10's purportedly strong on-going sales growth rate ... without disclosing any then present downturn in that sales trend."

The class specifies that one section of the registration statement "conceal[ed] that a significant portion of the 2013 sales growth was due to existing customers exchanging AX series product for the newly rolled out Thunder Series product."

What A10 should have disclosed was that its 2013 sales growth had been substantially augmented by" such product conversions, "rather than through organic sales to new customers, and this upgrade cycle had largely extinguished itself by the time of the IPO," according to the complaint.

Indeed A10 was allegedly finding it difficult "to protect its intellectual property and to compete with unique product offerings" after a 2012 civil settlement required it to license all of its patents to Brocade Communications Systems through 2025.

The class says A10 also concealed that it "was then experiencing lower revenue bookings from its all-important North American service provider customers."

In addition to lacking sufficient engineering staff to timely close sales, A10 furthermore "did not have sufficient management oversight and involvement in those sales," the complaint states.

Though A10 was not on track to achieve the financial results, the company failed in its duty to disclose those declining trends, according to the complaint.

By the time the class filed suit, A10 stock was trading at $5 a share, "a more than 67% decline from the IPO price," according to the complaint.

A10 and its CEO, Lee Chen, are named as defendants to the action along with five other individual officers and directors, and several financial institutions that allegedly performed underwriting services for A10. Those companies are Morgan Stanley & Co. LLC; Merrill Lynch, Pierce, Fenner & Smith Inc.; J.P. Morgan Securities LLC; RBC Capital Markets LLC; Pacific Crest Securities LLC; Oppenheimer & Co. Inc.

The class seeks damages, rescission and injunction for violations of the Securities Act.

It is represented by Shawn Williams with Robins Geller Rudman & Dowd in San Francisco.

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