keith thomas, et al. v. magnachip semiconductor...

CORRECTED AMENDED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS

JURY TRIAL DEMANDED

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Case3:14-cv-01160-JST Document38 Filed10/01/14 Page1 of 37

1 POMERANTZ LLP Marc I. Gross Jeremy A. Lieberman Michael J. Wernke 600 Third Avenue, 20th Floor New York, New York 10016 Telephone: (212) 661-1100 Facsimile: (212) 661-8665 Email: [email protected]

[email protected] [email protected]

Lead Counsel for Plaintiffs

LIONEL Z. GLANCY (#134180) MICHAEL GOLDBERG (#188669) ROBERT V. PRONGAY (#270796) GLANCY BINKOW & GOLDBERG LLP 1925 Century Park East, Suite 2100 Los Angeles, California 90067 Telephone: (310) 201-9150 Facsimile: (310) 201-9160 E-mail: [email protected]

[email protected] [email protected] [email protected]

Liaison Counsel for Plaintiffs

UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA

KEITH THOMAS and RICHARD HAYES, Case No.: 3:14-cv-01160-JST

Plaintiffs, CLASS ACTION

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v.

MAGNACHIP SEMICONDUCTOR CORP., SANG PARK, TAE YOUNG HWANG, MARGARET SAKAI, R. DOUGLAS NORBY, ILBOK LEE, NADER TAVAKOLI, RANDAL KLEIN, MICHAEL ELKINS and AVENUE CAPITAL MANAGEMENT II, L.P.

Defendants



1 Lead Plaintiff Keith Thomas and plaintiff Richard Hayes (“Plaintiffs”), individually and on

2 behalf of all other persons similarly situated, by their undersigned attorneys, for their complaint against

3 defendants, allege the following based upon personal knowledge as to themselves and their own acts,

4 and information and belief as to all other matters, based upon, inter alia, the investigation conducted by

5 and through their attorneys, which included, among other things, a review of defendants’ public

6 7 documents, conference calls and announcements made by defendants, United States Securities and

8 Exchange Commission (“SEC”) filings, wire and press releases published by and regarding MagnaChip

9 Semiconductor Corporation, (“MagnaChip” or the “Company”), analysts’ reports and advisories about

10 the Company, and information readily obtainable on the Internet.

11 NATURE OF THE ACTION

12

13 1. This is a federal securities class action on behalf of all persons other than defendants

14 who purchased or otherwise acquired MagnaChip securities between February 1, 2012 and March 11,

15 2014, both dates inclusive (the “Class Period”), seeking to recover damages caused by defendants’

16 violations of the federal securities laws and to pursue remedies under §§ 10(b) and 20(a) of the

17 Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5 promulgated thereunder against 18

the Company and certain of its top officials. 19

20 2. MagnaChip designs and manufactures semiconductor products for high-volume

21 consumer applications. The Company sells its products, inter alia, through a network of distributors in

22 the United States and Asia.

23 3. Throughout the Class Period, defendants engaged in a scheme to materially inflate the

24 Company’s reported results by improperly recognizing revenues when products were shipped to its

25 26 distributors, rather than when they were sold by the distributors. This practice was in direct

27 contravention of the Company’s own stated revenue recognition policies as well as Generally Accepted

28 CORRECTED AMENDED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS

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1 Accounting Principles (“GAAP”). As a direct and intended result, MagnaChip’s reported earnings and

2 stock prices were materially inflated.

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4. While the scheme damaged Plaintiffs and other Class members who purchased

4 MagnaChip shares, it significantly benefited (by design) the Company’s controlling shareholder,

5 Avenue Capital Management II, L.P., and its various affiliated funds that it managed (“Avenue

6 7 Capital”). Avenue Capital controlled MagnaChip, owning as much as 70% of the Company and having

8 appointed four of the seven members of MagnaChip’s Board of Directors (three of whom were Avenue

9 Capital’s own employees). It was only after Avenue Capital had unloaded more than 83% of its

10 holdings for over $300 million that the Company finally admitted its fraudulent accounting practices.

11 5. As the Company repeatedly reported fraudulent financial results, the Company’s stock

12 13 price soared from $5.81 to as high as $23.00 per share. During this time, the Company’s executives

14 reaped huge bonuses for reporting higher than expected results.

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6. Investors did not learn of this fraudulent scheme until MagnaChip made a series of

16 disclosures in 2014. On January 27, 2014, the Company announced that it would postpone its fourth

17 quarter 2013 earnings release to provide additional time for the Company to complete its review of its 18

financial results for the fourth quarter and full year 2013. 19

20 7. In response, MagnaChip stock price immediately plummeted 8%, from $18.57 to $16.16

21 per share.

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8. On March 11, 2014 (the end of the Class Period), the Company admitted for the first

23 time that it had been inflating revenues for the past several years, contrary to its stated policies, and 24

needed to restate results for 2011 through 2013. Two weeks later, the Company’s Chief Financial 25 26 Officer (“CFO”), Defendant Margaret Sakai, resigned. Shortly thereafter, the Company’s Chief

27 Executive Officer (“CEO”), Defendant Sang Park, resigned.

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CORRECTED AMENDED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS 2


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As a result of these revelations, MagnaChip stock price plummeted another 12.5% from

2 I $14.33 on March 10, 2014 to $12.55 on May 21, 2014.

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10. Indicative of the vast nature of the fraud, the Company still has not issued its restated

4 financials. Indeed, on August 12, 2014, the Company announced that its investigation had been

5 expanded beyond the timing of revenue recognition to include, among other things, “cost of goods sold,

6 7 inventory and reserves, as well as related business practices, for both distributors and non-distributor

8 customers.” At this time, the Company has not even estimated when restated financials will be issued,

9 or when it will issue current period results.

10 JURISDICTION AND VENUE

11 11. The claims asserted herein arise under and pursuant to Sections 10(b) and 20(a) of the

12 13 Exchange Act (15 U.S.C. § 78j(b) and 78t(a)) and Rule 10b-5 promulgated thereunder (17 C.F.R. §

14 240.10b-5).

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12. This Court has jurisdiction over the subject matter of this action pursuant to § 27 of the

16 Exchange Act (15 U.S.C. § 78aa) and 28 U.S.C. § 1331.

17 13. Venue is proper in this District pursuant to §27 of the Exchange Act, 15 U.S.C. §78aa

18 and 28 U.S.C. §1391(b), as the Company maintains corporate offices in this District.

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20 14. In connection with the acts, conduct and other wrongs alleged in this Complaint,

21 defendants, directly or indirectly, used the means and instrumentalities of interstate commerce,

22 including but not limited to, the United States mail, interstate telephone communications and the

23 facilities of the national securities exchange. 24

PARTIES 25

26 15. Plaintiff Richard Hayes commenced this action on March 12, 2014 through the filing of

27 the Complaint (Doc. #1). Pursuant to the Court’s Order of July 3, 2014 (Doc. #32), Keith Thomas was

28 appointed Lead Plaintiff. Plaintiffs, as set forth in the previously-filed Certifications, acquired



1 MagnaChip securities at artificially inflated prices during the Class Period and were damaged upon the

2 revelation of the alleged corrective disclosures.

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16. Defendant MagnaChip is a Delaware corporation with its principal executive offices

4 located at 1, Hyangjeong-Dong, Heungdeok-Gu, Seoul, 361728. MagnaChip’s common stock trades on

5 the New York Stock Exchange (“NYSE”) under the ticker symbol “MX.” The Company also

6 7 maintains corporate offices in this District.

8 17. Defendant Sang Park (“Park”) was, at all relevant times, the Company’s Chairman of the

9 I Board of Directors and CEO.

10 18. Defendant Margaret Sakai (“Sakai”) was, at all relevant times, the Company’s Executive

11 Vice President, CFO and “principal accounting officer.” 12

13 19. Defendant Tae Young Hwang (“Hwang”) was, at all relevant times, the Company’s

14 President and Chief Operating Officer (“COO”).

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20. The defendants referenced above in ¶¶ 17-19 are sometimes referred to herein as the

16 I “Executive Defendants.”

17 21. At the time of the Class Period, the Executive Defendants had been with the Company

18 many years, serving in various capacities, including through bankruptcy reorganization, and as a result

19 20 were knowledgeable about all aspects of MagnaChip’s financial and business operations, especially

21 core business issues such as the Company’s revenue recognition policies and practices, and internal

22 controls. Defendant Park was MagnaChip’s CEO since 2006. Defendant Sakai was MagnaChip’s CFO

23 since April 2009, and previously served as the Company’s Senior Vice President, Finance since 24

November 2006. Defendant Hwang had served as the Company’s COO since November 2009 and 25 26 served in other executive roles with the Company since October 2004. They ran the Company as

27 “hands-on” managers, oversaw MagnaChip’s operations and finances, and made the material false and

28 misleading statements described herein. They also were involved in deciding which disclosures would



1 be made by MagnaChip. Indeed, Defendants’ Park and Sakai made various public statements for

2 MagnaChip during the Class Period and participated in all Class Period investor conferences. They also

3 signed MagnaChip’s filings with the SEC during the Class Period, including certificates filed pursuant

4 to the Sarbanes-Oxley Act of 2002 (“SOX”) stating the financial reports were accurate and complied

5 with GAAP. In these filings, Defendants Park and Sakai also certified that they were responsible for,

6 7 designed, and had evaluated the Company’s disclosure and internal controls over financial reporting,

8 and that the controls were effective.

9

22. Defendant Avenue Capital Management II, L.P. is a Delaware corporation with its

10 principal executive offices located at 399 Park Avenue, New York, New York 10022, United States.

11 23. Avenue Capital Management II, L.P. is a global investment management firm. It and its

12 13 affiliated funds specialize in investing in high yield debt, debt of insolvent or financially distressed

14 companies and equity of companies undergoing financial or operational turnarounds or reorganizations.

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24. During the Class Period, Avenue Capital Management II, L.P. was the investment

16 manager for the following affiliated funds, among others: Avenue Investments, L.P., Avenue

17 International Master, L.P., Avenue-CDP Global Opportunities Fund, L.P., Avenue Special Situations 18

Fund IV, L.P., and Avenue Special Situations Fund V, L.P. (the “Avenue Funds” and together with 19 20 Avenue Capital Management II, L.P, “Avenue Capital”). At all relevant times, Avenue Capital

21 Management II, L.P. beneficially owned all MagnaChip shares owned by the Avenue Funds, along with

22 voting power and dispositive power over those shares.

23 25. Avenue Capital was the majority shareholder of MagnaChip during the Class Period. It 24

appointed a majority of the members of the Company’s Board of Directors and even placed its own 25 26 employees on the Company’s Audit Committee. As the Company reported quarter after quarter of

27 expectation beating financial results, and the Board of Directors approved larger and larger stock

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1 repurchases by the Company, expressing confidence in the Company’s future to the market, Avenue

2 Capital dumped over 83% of its shares, for total proceeds of over $310 million.

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26. Defendant R. Douglas Norby (“Norby”) was, at all relevant times, a member of the

4 Company’s Board of Directors and Chairman of the Audit Committee.

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27. Defendant Ilbok Lee (“Lee”) was, at all relevant times, a member of the Company’s 6 7 Board of Directors. Lee was also a member of the Company’s Audit Committee from March 2012 until

8 approximately April 2013.

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28. Defendant Nader Tavakoli (“Tavakoli”) was, at all relevant times, a member of the

10 Company’s Board of Directors and Audit Committee.

11 29. Defendant Randal Klein (“Klein”) was, at all relevant times, a member of the

12 13 Company’s Board of Directors. Klein became a director of MagnaChip in November 2009. Klein was

14 also a member of the Company’s Audit Committee until March 2012. At all relevant times, Klein was

15 also an employee of Avenue Capital, serving as a Portfolio Manager and a Senior Vice President of

16 certain U.S. funds.

17 30. Defendant Michael Elkins (“Elkins”) was, at all relevant times, a member of the

18 Company’s Board of Directors. Elkins became a director of MagnaChip in November 2009. Elkins

19 20 was also a member of the Company’s Audit Committee from approximately April 2013 through the end

21 of the Class Period. Elkins was also an employee of Avenue Capital, serving as a Portfolio Manager of

22 certain U.S. funds. He continued to be an employee until December 31, 2012 at which time he became

23 a “consultant” to Avenue Capital. 24

31. The defendants referenced above in ¶¶ 26-30 are sometimes referred to herein as the 25 26 “Audit Committee Defendants.”

27 32. The defendants referenced above in ¶¶ 16-19, 26-30 are sometimes referred to herein as

28 I the “MagnaChip Defendants.”



1 33. The defendants referenced above in ¶¶ 17-19, 26-30 are sometimes referred to herein as

2 the “Individual Defendants.”

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34. During the Class Period, the Audit Committee Defendants were knowledgeable about

4 the Company’s revenue recognition policies and practices, and internal controls. They also signed the

5 Company’s annual financial statements. The primary purpose of the Audit Committee was to assist the

6 7 Board of Directors in fulfilling its oversight responsibilities by reviewing and reporting to the Board on

8 the integrity of the financial reports and other financial information provided by the Company to the

9 public, the SEC and any other governmental regulatory body, and on the Company’s compliance with

10 other legal and regulatory requirements. The Audit Committee was responsible for the appointment,

11 retention, review and oversight of the Company’s independent auditor, and the review and oversight of 12 13 the Company’s internal financial reporting, policies and processes. The Audit Committee was also

14 responsible for reviewing related party transactions, risk management, and legal and ethics compliance.

15 Furthermore, Defendants Park and Sakai each certified that, at all times during the Class Period, the

16 Audit Committee Defendants were informed of all significant deficiencies and material weaknesses in

17 the design or operation of the Company’s internal controls over financial reporting. 18

SUBSTANTIVE ALLEGATIONS 19

20 Background

21 35. MagnaChip designs and manufactures analog and mixed-signal semiconductor products

22 I for high-volume consumer applications, including LCD, LED, 3d televisions, smartphones, desktop

23 PC’s, and tablet PCs. The Company provides its products and services through a direct sales force, as

24 well as through a network of authorized agents and distributors in the United States, Korea, Taiwan, 25

China, Japan, Hong Kong, and Macau. The company is headquartered in Seoul, South Korea. 26

27 MagnaChip’s Troubled History and “Turnaround”

28 36. Prior to the Class Period, MagnaChip had a long history of losses. Since it began

operations in 2004, the Company had reported significant yearly losses. In 2006, the Company hired CORRECTED AMENDED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS

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1 Defendant Park as its new CEO to jump-start its product and sales efforts. The self-proclaimed

2 turnaround strategy lasted less than a year before the bottom fell out of the Company. A planned initial

3 public offering (“IPO”) in the United States was scrapped in late 2007.

4 37. Having accumulated a crushing deficit of $964.8 million, on June 12, 2009, the

5 Company filed for Chapter 11 bankruptcy protection in the United States, in which the Company

6 7 submitted a reorganization plan that was approved by the court. On November 9, 2009, the Company’s

8 plan of reorganization became effective. The Chapter 11 process allowed MagnaChip to restructure its

9 balance sheet and its debt was reduced to approximately $62 million.

10 38. However, the reorganization also completely wiped out its private equity shareholders.

11 When the Company emerged from bankruptcy, Avenue Capital was its majority shareholder, owning 12 13 over 70% of the Company’s shares.

14 39. A new Board of Directors was appointed in November 2009. Pursuant to the terms of

15 the reorganization and MagnaChip’s Fifth Amended and Restated Limited Liability Company

16 Operating Agreement, Avenue Capital had the power to appoint a majority of the members of the

17 Company’s Board of Directors and could continue to do so as long as Avenue Capital controlled a 18

majority of the Company’s outstanding shares. Exercising this power, Avenue Capital appointed four 19 20 of the seven members to the Board of Directors. Three of the directors were employees of Avenue

21 Capital.

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40. On March 10, 2011, the Company completed its IPO at $14.00 per share.

23 41. Upon completion of the IPO, Avenue Capital continued to control over 50% of the 24

Company’s outstanding common stock. 25

26 42. The semiconductor industry is highly cyclical and is characterized by constant and rapid

27 I technological change and price erosion, causing significant upturns and downturns in companies’

28 reported results. However, starting after the IPO, MagnaChip’s reported results consistently beat



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analysts’ consensus estimates, thereby buffering it against industry trends, and causing the stock to

ultimately skyrocket to a Class Period high of $23.57.

The Company’s Stated Revenue Recognition Policies

43. Throughout the Class Period, MagnaChip derived 23% to 29% of its net revenues from

sales through distributors.

44. Defendants repeatedly represented throughout the Class Period that revenues were

recognized only upon acceptance by the customer, which was not the case with MagnaChip’s

distributors (who had the right to return to the Company products they were unable to sell to

customers). The Company’s 10-Ks which were filed with the SEC during the Class Period, and signed

by Defendants Park, Sakai and the Audit Committee Defendants, stated:

Our revenue is primarily derived from the sale of semiconductor products that we design and the manufacture of semiconductor wafers for third parties. We recognize revenue when persuasive evidence of an arrangement exists, the product has been delivered and title and risk of loss have transferred, the price is fixed and determinable and collection of resulting receivables is reasonably assured.

We recognize revenue upon shipment, upon delivery of the product at the customer’s location or upon customer acceptance depending on terms of the arrangements, when the risks and rewards of ownership have passed to the customer. Certain sale arrangements include customer acceptance provisions that require written notification of acceptance within the pre-determined period from the date of delivery of the product. If the pre-determined period has ended without written notification, customer acceptance is deemed to have occurred pursuant to the underlying sales arrangements. In such cases, we recognize revenue the earlier of the written notification or the pre-determined period from date of delivery. Specialty semiconductor manufacturing services are performed pursuant to manufacturing agreements and purchase orders. Standard products are shipped and sold based upon purchase orders from customers. Our revenue recognition policy is consistent across our product lines, marketing venues and all geographic areas.

45. The Company’s stated (but violated) revenue recognition policy was consistent with

GAAP. Financial Accounting Statement Bulletin (“FASB”) Statement of Concepts No. 5 (FASB CON

No. 5), provides the basic requirements for revenue to be recognizable: (i) revenue must have been

earned; and (ii) revenue must be realizable (collectible). SEC Staff Accounting Bulletin (“SAB”) Topic

13(A)(1) provides that revenue generally is realized or realizable and earned when all of the following CORRECTED AMENDED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS

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1 criteria are met: (1) Persuasive evidence of an arrangement exists, (2) Delivery has occurred or services

2 have been rendered, (3) The seller’s price to the buyer is fixed or determinable, and (4) Collectability is

3 reasonably assured. Because sales to distributors can be subject to returns, discounts and other

4 modifications, GAAP requires that companies not recognize revenue for products sold to distributors

5 until those products have been shipped to an end customer (unless specific restrictions are imposed on

6 7 the distributor and other requirements are met, which is not the case here).

8 46. There is no question that the Company’s CFO and “principal accounting officer”,

9 Defendant Sakai, was intimately knowledgeable of proper revenue recognition requirements. Prior to

10 her long tenure at the Company in financial and accounting roles, Sakai had served as CFO for several

11 other companies, had worked as an Audit Supervisor at Coopers & Lybrand, is a Certified Public 12 13 Accountant and holds a B.A. degree in Accounting from Babson College.

14 47. Similarly, as Chairman of the Audit Committee, Defendant Norby was also well aware

15 of revenue recognition requirements. Norby had been the Chairman of the Audit Committee since May

16 2006. He had served as CFO to numerous companies, received a B.A. degree in Economics from

17 Harvard University, an M.B.A. from Harvard Business School, and was selected to serve as Chairman 18

of the Audit Committee because of “his extensive experience as a chief financial officer, his extensive 19 20 experience in accounting and his experience as a public company director and audit committee chair.”

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48. Despite the fundamental nature of these accounting policies, their significance to the

22 Company’s financial condition, and the Company’s repeated and specific statements of compliance

23 with them, throughout the Class Period, Defendants perpetrated an accounting scheme in direct 24

violation of these policies – recognizing revenue as soon as a product was shipped to the Company’s 25 26 distributor even though there was no evidence that the product was ever sold, shipped or delivered to a

27 customer.

28 The Company’s Material Weakness in Internal Controls Concerning Revenue Recognition



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49. Defendants also had a responsibility to present MagnaChip’s business activities in

accordance with § 13 of the Exchange Act, which provides:

Every issuer which has a class of securities registered pursuant to Section 12 of this title and every issuer which is required to file reports pursuant to Section 15(d) of this title shall - -

A. make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer; and

B. devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that - -

i. transactions are executed in accordance with management’s general or specific authorization;

ii. transactions are recorded as necessary (a) to permit preparation of financial statements in conformity with generally accepted accounting principles or any other criteria applicable to such statements, and (b) to maintain accountability for assets;

iii. access to assets is permitted only in accordance with management’s general or specific authorization; and

iv. the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences.

Defendants also had a responsibility to certify pursuant to SOX that the Company’s internal

controls were effective.

50. Prior to the Class Period, in connection with audits of MagnaChip’s consolidated

financial statements for the period ended December 31, 2009, the Company’s independent registered

public accounting firm reported two control deficiencies which it concluded represented a “material

weakness in [the Company’s] internal control over financial reporting.” The two control deficiencies

which represented a material weakness were that the Company did not have a sufficient number of

financial personnel with the requisite financial accounting experience and that the Company’s controls

over non-routine transactions were not effective to ensure that accounting considerations are identified

and appropriately recorded.



1 51. After having been alerted to the Company’s prior failure to maintain adequate internal

2 controls, Defendants were obliged to exercise even more caution before signing off on the Company’s

3 financial statements, especially with respect to the critical financial metrics associated with revenue

4 recognition.

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52. Nonetheless, the Company did not have a Chief Accounting Officer at any point in time 6 7 during the Class Period. Rather, Defendant Sakai served as the Company’s CFO as well as its

8 “principal accounting officer.” Nevertheless, the Company’s public filings asserted that “[b]ased upon

9 the remediation actions taken by us, our management has concluded that these two control deficiencies

10 no longer exist as of December 31, 2010.” This was belied by the Company’s subsequent admission at

11 the end of the Class Period of the need to restate, and admission at the time that “one or more material 12 13 weaknesses exist in the Company’s internal controls over financial reporting and that, as a result,

14 internal controls over financial reporting and disclosure controls and procedures were not effective.”

15

Materially False and Misleading Statements Issued During the Class Period

16 53. On February 1, 2012, MagnaChip announced results for the quarter and year ended

17 December 31, 2011. The Company reported that 4Q11 revenue was $180.8 million, and the full year 18

was $772.8 million. Net income for 4Q11 totaled $23.7 million or $0.61 per diluted share, and the full 19 20 year was $21.8 million or $0.55 per diluted share. The Company also reported 4Q11 adjusted net

21 income of $10.0 million or $0.26 per diluted share, and full year adjusted net income of $66.4 million

22 or $1.67 per diluted share. This exceeded the analyst consensus EPS estimate for 4Q11 of $0.20 per

23 diluted share by over 25%. 24

54. The foregoing representations in ¶ 53 were materially false and/or misleading because 25 26 the defendants concealed from the investing public that the Company’s reported revenues and profits

27 were materially inflated.

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55. On this news, the Company stock price increased $1.38, or 14.2%, from $9.72 on



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January 31 to $11.10 on February 3.

56. On March 8, 2012, the Company filed an annual report for the year ended December 31,

2011 on a Form 10-K with the SEC, which was signed by Defendants Park, Sakai and the Audit

Committee Defendants and reiterated the Company’s previously announced quarterly financial results

and financial position.

57. Regarding revenue recognition, the Company’s 2011 Form 10-K stated in

Management’s Discussion and Analysis of Financial Condition and Results of Operations that:

We recognize revenue when risk and reward of ownership passes to the customer either upon shipment, upon product delivery at the customer’s location or upon customer acceptance, depending on the terms of the arrangement.

Under the heading “Revenue Recognition ” in the notes to the financial statements, the Form 10-

K stated:

Revenue is recognized when persuasive evidence of an arrangement exists, the product has been delivered and title and risk of loss have transferred, the price is fixed and determinable, and collection of the resulting receivable is reasonably assured. Utilizing these criteria, product revenue is recognized either upon shipment, upon delivery of the product at the customer’s location or upon customer acceptance, depending on the terms of the arrangements. . . . The Company’s revenue recognition policy is consistent across its product lines, marketing venues, and geographic areas.

(Hereinafter referred to as the “Company’s Revenue Recognition Policies”)

58. In addition, the Form 10-K contained signed certifications pursuant to SOX by

Defendants Park and Sakai, stating that the financial information contained in the Form 10-K “fairly

present in all material respects the financial condition, results of operations and cash flows of [the

Company]”, that Defendants Park and Sakai “[d]esigned such internal control over financial reporting .

. . in accordance with generally accepted accounting principles”, and that they “[d]isclosed in the

Report any change in the registrant’s internal control over financial reporting . . . [and] [a]ll significant

deficiencies and material weaknesses in the design or operation of internal control over financial

reporting.” (Hereinafter referred to as “SOX Certification”)



59. The foregoing representations in ¶¶ 56-58 were materially false and/or misleading for

the reasons set forth in ¶ 54, and because the following facts were known by the defendants but

concealed from the investing public:

a) The Company improperly recognized revenue on transactions with its distributors by recognizing said revenues immediately upon shipment of products to a distributor, as opposed to when the distributor shipped the product to the customer, contrary to the Company’s own stated revenue recognition policy and GAAP; and

b) material weaknesses existed in the Company’s internal controls over financial reporting that prevented the Company from accurately reporting its financial results, contrary to the Company’s representations of “effective” internal controls;

60. On April 25, 2012, after the close of trading, MagnaChip announced financial results for

the first quarter ended March 31, 2012. The Company reported revenue for 1Q12 of $177.0 million and

net income of $15.3 million or $0.40 per diluted share. The Company also reported adjusted net

income for 1Q12 of $6.5 million or $0.17 per diluted share. This exceeded the analyst consensus EPS

estimate of $0.03 per diluted share by almost 500%.

61. The foregoing representations in ¶ 60 were materially false and/or misleading for the

reasons set forth in ¶ 54.

62. On this news, the Company stock price increased $0.82, or 7.6%, from $10.83 on April

25, 2012 to $11.65 on April 26, 2012.

63. On May 15, 2012, the Company filed a quarterly report for the quarter ended March 31,

2012 on a Form 10-Q with the SEC, which was signed by Defendants Park and Sakai, and reiterated the

Company’s previously announced quarterly financial results and financial position. In addition, the

Form 10-Q reiterated the Company’s Revenue Recognition Policies and contained SOX Certifications

signed by Defendants Park and Sakai.



65. On August 2, 2012, after the close of trading, MagnaChip announced financial results

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1 for the second quarter ended June 30, 2012. The Company reported revenue for 2Q12 of $202.6

2 million and net income of $4.3 million or $0.12 per diluted share. Reported adjusted net income for

3 2Q12 was $17.9 million or $0.48 per diluted share. This significantly exceeded the analyst consensus

4 EPS estimate of $0.36 per diluted share.

5

66. The foregoing representations in ¶ 65 were materially false and/or misleading for the 6 7 reasons set forth in ¶ 54.

8 67. On this news, the Company stock price increased $2.00, or 19.4%, from $10.31 on

9 August 2, 2012 to $12.31 on August 3, 2012.

10 68. On August 8, 2012, the Company filed a quarterly report for the quarter ended June 30,

11 2012 on a Form 10-Q with the SEC, which was signed by Defendants Park and Sakai, and reiterated the 12 13 Company’s previously announced quarterly financial results and financial position. In addition, the

14 Form 10-Q reiterated the Company’s Revenue Recognition Policies and contained SOX Certifications

15 signed by Defendants Park and Sakai.

16 69. The foregoing representations in ¶ 68 were materially false and/or misleading for the

17 reasons set forth in ¶ 59. 18

70. On November 1, 2012, MagnaChip announced financial results for the third quarter 19 20 ended September 30, 2012. The Company reported revenue for 3Q12 of $221.9 million and net income

21 of $48.4 million or $1.30 per diluted share. The Company also reported adjusted net income for 3Q12

22 of $30.4 million or $0.81 per diluted share. This significantly exceeded the analyst consensus EPS

23 estimate of $0.59 per diluted share. 24

71. The foregoing representations in ¶ 70 were materially false and/or misleading for the 25 26 reasons set forth in ¶ 54.

27 72. On this news, the Company stock price increased $1.57, or 14%, from $11.25 on

28 October 31 to $12.82 on November 2, 2012.



1 73. On November 6, 2012, the Company filed a quarterly report for the quarter ended

2 September 30, 2012 on a Form 10-Q with the SEC, which was signed by Defendants Park and Sakai,

3 and reiterated the Company’s previously announced quarterly financial results and financial position.

4 In addition, the Form 10-Q reiterated the Company’s Revenue Recognition Policies and contained SOX

5 Certifications signed by Defendants Park and Sakai.

6


8 reasons set forth in ¶ 59.

9

75. On January 30, 2013, MagnaChip issued a press release announcing its financial and

10 operating results for the quarter and year ended December 31, 2012. The Company reported revenue

11 for 4Q12 of $218.1 million and full year 2012 revenue of $819.6 million. The Company also reported 12 13 4Q12 net income of $125.3 million or $3.38 per diluted share, and full year net income of $193.3

14 million or $5.16 per diluted share. Reported adjusted net income for 4Q12 was $28.7 million or $0.77

15 per diluted share, and full year adjusted net income was $83.5 million or $2.23 per diluted share. This

16 exceeded the analyst consensus EPS estimate for 4Q12 of $0.71 per diluted share.



19

20 77. On February 22, 2013, the Company filed an annual report for the year ended December

21 31, 2012 on a Form 10-K with the SEC, which was signed by Defendants Park, Sakai, and the Audit

22 Committee Defendants, and reiterated the Company’s previously announced quarterly financial results

23 and financial position. In addition, the Form 10-K reiterated the Company’s Revenue Recognition 24

Policies and contained SOX Certifications signed by Defendants Park and Sakai. 25



28

79. In recommending MagnaChip to investors, analysts’ placed particular significance on



the Company’s uncanny ability to exceed the market’s expectations. For example, on April 3, 2013, an

analyst for Deutshe Bank stated:

This quarter represents the 9th consecutive quarter that the company has met or beat guidance, exhibiting a level of stability and execution that is inconsistent with the stock's current valuation (~0.6x EV/Sales). Overall, we believe MX can continue to deliver on its growth strategy and narrow its valuation gap with peers. Consequently we reiterate our Buy rating and raise our P/T to $22.

80. On April 30, 2013, MagnaChip announced financial results for the first quarter ended

March 31, 2013. The Company reported revenue for 1Q13 of $205.3 million and a net loss of $7.4

million or $0.21 per diluted share. The Company also reported adjusted net income for 1Q13 of $19.7

million or $0.53 per diluted share. This exceeded the analyst consensus EPS estimate of $0.47 per

diluted share.



82. On May 3, 2013, the Company filed a quarterly report for the quarter ended March 31,

2013 on a Form 10-Q with the SEC, which was signed by Defendants Park and Sakai, and reiterated the

Company’s previously announced quarterly financial results and financial position. In addition, the

Form 10-Q reiterated the Company’s Revenue Recognition Policies and contained SOX Certifications

signed by Defendants Park and Sakai.



84. On July 30, 2013, after the close of trading, MagnaChip announced financial results for

the second quarter ended June 30, 2013. The Company reported revenue for 2Q13 of $215.3 million

and net income of $4.4 million or $0.12 per diluted share. Reported adjusted net income for 2Q13

totaled $26.2 million or $0.71 per diluted share. This once again greatly exceeded the analyst

consensus EPS estimate of $0.60 per diluted share.


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1 85. On this news, the Company stock price increased $3.20, or 18.4%, from $17.36 on July

2 30, 2013 to $20.56 on July 31, 2013.

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87. On August 5, 2013, the Company filed a quarterly report for the quarter ended June 30, 6 7 2013 on a Form 10-Q with the SEC, which was signed by Defendants Park and Sakai, and reiterated the

8 Company’s previously announced quarterly financial results and financial position. In addition, the

9 Form 10-Q reiterated the Company’s Revenue Recognition Policies and contained SOX Certifications

10 signed by Defendants Park and Sakai.


12 13 reasons set forth in ¶ 59.

14 89. On October 29, 2013, MagnaChip announced financial results for the third quarter ended

15 I September 30, 2013. The Company reported that revenue for 3Q13 was $217.8 million and net income

16 was $46.7 million or $1.24 per diluted share. Reported adjusted net income for 3Q13 totaled $28.6

17 million or $0.76 per diluted share, exceeding the analyst consensus EPS estimate of $0.71 per diluted 18

share. 19



22

91. On November 8, 2013, the Company filed a quarterly report for the quarter ended

23 September 30, 2013 on a Form 10-Q with the SEC, which was signed by Defendants Park and Sakai, 24

and reiterated the Company’s previously announced quarterly financial results and financial position. 25 26 In addition, the Form 10-Q reiterated the Company’s Revenue Recognition Policies and contained SOX

27 Certifications signed by Defendants Park and Sakai.

28





2 The Truth Begins to Emerge

3

93. On January 27, 2013, after the market closed, the Company abruptly announced that it

4 was postponing its fourth quarter 2013 earnings release and investor conference call scheduled for the

5 next day to provide additional time for the Company to complete its review of its financial results for

6 7 the fourth quarter and fiscal year.

8 94. On this news, MagnaChip securities declined $1.41 per share or over 8%, to close at

9 I $16.16 per share on January 28, 2014.

10 95. On March 11, 2014, the Company issued a press release announcing the need to restate

11 its financial statements from 2011 through 2013 because the Company had been improperly 12 13 recognizing revenues for products sold through its distributors in violation of its stated policies and

14 GAAP:

15

Revenue on these transactions was recognized when products were shipped to a distributor but should have been recognized when the distributor shipped the product to

16 the customer.

17 96. The Company stated that as a result of these improper practices:

18 [A]ll earnings press releases and similar prior communications issued by the Company

19 as well as other prior statements made by or on behalf of the Company relating to those

20 periods should not be relied upon.

21 97. The Company also announced that there were “material weaknesses” in its internal

22 controls and, as a result, “internal controls over financial reporting and disclosure controls and

23 procedures were not effective.”

24 98. In the same press release, the Company announced that the above conclusions were

25 reached on March 6, 2014 and that by March 9, 2014 the Company had relieved Defendant Sakai of her

26 27 position as the Company’s “principal accounting officer”, replacing her with a newly hired individual,

28 who would have the title “principal accounting officer” as well as Chief Accounting Officer, a position

which did not previously exist at the Company. CORRECTED AMENDED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS

19


1 99. On this news, the Company’s shares fell 3%, to close at $13.93 per share on March 12,

2 2014.

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100. Following this announcement, analysts attributed the stock’s precipitous decline since

4 January 27, 2014 to the restatement issue. For example, one analyst from Barclays stated in a reported

5 dated March 12, 2014 that “[w]ith the stock down nearly 30% (vs. +5% for S&P 500) since the initial

6 7 postponement, we believe the market is already pricing in much of this issue.”

8 101. However, the market did not yet know the full extent or nature of the fraud, which came

9 more into focus when Defendant Sakai was forced to resign from the Company. On March 28, 2014,

10 after the close of trading, the Company issued a press release announcing that “Margaret Sakai has

11 resigned as the Company’s Executive Vice President and Chief Financial Officer and from all other 12 13 officer and director positions with the Company and its subsidiaries, effectively immediately .”

14 102. The news sent MagnaChip's stock sharply lower after hours, with shares falling 7% to

15

$13.50.

16 103. It was not long after that Defendant Park was also forced to resign. On May 20, 2014,

17 after the close of trading, the Company issued a press release announcing that “Sang Park, 67, has 18

retired as Chairman, Chief Executive Officer and Director, effective immediately .” 19

20 104. On this news, the Company’s stock price declined $0.44, or 3.4%, from $12.99 on May

21 20, 2014 to $12.55 on May 21, 2014.

22

105. Defendants’ fraudulent manipulation of the Company’s financial statements was so vast

23 that even six months after the initial conclusion that a restatement would be required, the investigation 24

into the scheme not only continues but is expanding and preventing the Company from announcing 25 26 results for current periods as well. On August 12, 2014, the Company filed with the SEC a Form NT

27 10-Q, stating that it was unable to file its quarterly report on Form 10-Q for the quarter ended June 30,

28 2014 within the prescribed time period because of the ongoing investigation into the Company’s



improper accounting practices and procedures. The Company also announced that the scope of the

investigation had been expanded to include, among other things:

errors and adjustments related to revenue recognition, cost of goods sold, inventory and reserves, as well as related business practices, for both distributors and non-distributor customers.

Indeed, the fraud was so large that the Company is still “unable to estimate when the restatement and

related SEC periodic reports will be completed.” However, the Company stated that it expects that the

impact of the restatement will be “material.”

Additional Scienter/Motive Allegations

106. MagnaChip’s financial results were manipulated in significant part to inflate the

Company’s stock price so that the Company’s controlling shareholder, Avenue Capital, could sell its

shares in the Company for as much as possible.

107. When MagnaChip filed for bankruptcy in June 2009, the reorganization completely

I wiped out its private equity shareholders Citigroup Venture Capital, CVC Asia Pacific and Francisco

Partners. When the Company emerged from bankruptcy in November 2009, Avenue Capital was its

majority shareholder, owning 27,365,928 shares, or approximately 70%, of the Company. Avenue

Capital was determined not to suffer the same fate as MagnaChip’s prior investors.

108. As a majority owner of the Company, Avenue Capital exercised significant control over

MagnaChip. Avenue Capital had the power to elect a majority of the Board of Directors. Exercising

this power, Avenue Capital appointed four of the seven Board members, including three of its own

employees.

109. As the Company acknowledged in its public filings, “Avenue will continue to have

significant influence over [the Company’s] affairs for the foreseeable future.” The Company further

acknowledged that “Avenue will be able to control most matters requiring stockholder approval,

including the election of directors and approval of significant corporate transactions, including mergers


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1 and sales of substantially all of our assets” and that “[i]t is possible that the interests of Avenue may in

2 some circumstances conflict with our interests and the interests of our other stockholders.” Because of

3 the equity ownership of Avenue Capital, MagnaChip was considered a “controlled company” for

4 purposes of the NYSE listing requirements. At the time of the Company’s IPO, a majority of

5 MagnaChip’s Board of Directors was not “independent” as defined under SEC and NYSE rules.

6

7 110. With this control in place, Avenue Capital decided to do an IPO for MagnaChip in

8 March 2011, so it could begin to cash out of the Company.

9

111. Pursuant to the Company’s IPO, 9.5 million shares were offered at a price of $14.00 per

10 I share. However, only 950,000 of those shares were offered by the Company for total proceeds of

11 $12,369,000. The vast majority of shares offered, 6,576,389, were offered by Avenue Capital, reaping 12 13 proceeds of $85,624,584.78. Not only did the Company receive a small percentage of the proceeds

14 from the IPO (and none from the sale of the shares offered by Avenue Capital), but it was also required

15 to pay the offering expenses, totaling approximately $10.8 million.

16 112. Following the IPO, there were 39,351,985 MagnaChip shares outstanding, of which

17 Avenue Capital beneficially owned approximately 20,789,539, or 53%. 18

113. Avenue Capital’s plan to recoup its investment in MagnaChip was in jeopardy following 19 20 the IPO as MagnaChip’s stock steadily declined throughout 2011, closing the year at $7.48 per share.

21 During this time, Avenue Capital did not sell a single share of stock.

22

114. At the start of the Class Period, everything (apparently) changed. Following the

23 Company’s announcements of analyst beating financial results on February 2 and April 25, 2012, the 24

Company stock was once again trading over $11.00 a share. 25

26 115. Evidencing Avenue Capital’s knowledge that the stock price would be increasing, the

27 very next day, April 26, 2012, the registration statement pursuant to which Avenue Capital could sell

28 more of its shares to the market was declared effective by the SEC. Within days, Avenue Capital



1 offered and sold another 7 million shares of stock at $11.40 for total proceeds of $76,009,500 pursuant

2 to a prospectus dated May 1, 2012. The Company did not receive any proceeds from these sales of

3 stock. Nevertheless, it was required to pay the expenses in connection with the offering, totaling

4 approximately $861,253.

5 116. As the Company continued to announce financial results for the second, third and fourth

6 7 quarter of 2012 that exceeded analysts’ expectations, the Company stock price continued to increase as

8 well, consistently trading over $14.00 per share by early February 2013. As the analyst beating

9 financial results continued throughout 2013, MagnaChip stock was trading above $22.00 by September

10 2013. Avenue seized on this opportunity to dump its stock on unsuspecting investors.

11 117. Pursuant to a prospectus dated February 8, 2013, Avenue Capital sold 5.75 million

12 13 shares of stock at $14.50 for total proceeds of $79,414,687.5. The Company did not receive any

14 proceeds from the sale of stock. However, once again, it was required to pay the expenses in connection

15 with Avenue Capital’s offering, totaling approximately $650,000.

16 118. On August 1, 2013, Avenue Capital sold another 1,694,600 shares at $19.76 per share,

17 for a total of $33,485,296. 18

119. Finally, pursuant to a prospectus dated September 9, 2013, Avenue Capital sold another 19 20 1.7 million shares of stock at $21.20 per share for total proceeds of $35.7 million. Once again, the

21 Company did not receive any proceeds from the sale of stock but nevertheless was required to pay the

22 expenses in connection with Avenue Capital’s offering, totaling approximately $450,000.

23 120. All told, between the time of the IPO on March 10, 2011 and September 2013, Avenue

24 Capital dumped over 83% of its holdings in MagnaChip , reducing its holding from 27,365,928 to

25 26 4,644,939 for total proceeds of approximately $310,234,068.28 .

27 121. At the same time that Avenue Capital was conducting a wholesale liquidation of its

28 I position in MagnaChip, the Board of Directors, which was controlled by Avenue Capital, was causing



1 the Company to do the exact opposite – repurchase more and more shares on the open market, exuding

2 a false sense of confidence in the Company’s prospects to further inflate the stock price.

3

122. To facilitate Avenue Capital’s dumping of shares at inflated prices its appointees to the

4 Board authorized the repurchase of shares on the market. On October 11, 2011, the Company

5 announced that its Board of Directors adopted a stock repurchase program whereby the Company could

6 7 repurchase up to $35.0 million of common stock. In August 2012, the Board of Directors extended and

8 increased the program by an additional $25 million. On July 30, 2013, the Board of Directors approved

9 a new stock repurchase program authorizing the repurchase of up to $100 million of common stock. As

10 of September 30, 2013, the Company had repurchased 5,553,418 shares of common stock under these

11 programs at an aggregate cost of $70.9 million. 12

13 123. The Executive Defendants were also incentivized to maximize revenues through its

14 Profit Sharing Plan. As disclosed in the Company’s SEC filings, “our Board intends for the Profit

15 Sharing Plan to incentivize our named executive officers, officers and employees to exceed

16 expectations throughout our entire fiscal year.” The Executive Defendants’ bonuses were determined

17 by their ability to meet a “Base Target”, which was “calculated as a percentage of our forecasted gross 18

annual revenue for the upcoming fiscal year.” 19

20 124. Under this plan, Defendants Park, Sakai and Hwang received $311,751, $123,333 and

21 $133,710, respectively for their performance in 2012. Defendants Park, Sakai and Hwang were also

22 paid “discretionary bonuses” by the board of directors in 2012 in the amounts of $175,648, $50,185 and

23 $25,093, respectively. 24

PLAINTIFFS’ CLASS ACTION ALLEGATIONS 25

26 125. Plaintiffs bring this action as a class action pursuant to Federal Rule of Civil Procedure

27 23(a) and (b)(3) on behalf of a Class, consisting of all those who purchased or otherwise acquired

28 MagnaChip securities during the Class Period (the “Class”); and were damaged upon the revelation of



the alleged corrective disclosures. Excluded from the Class are defendants herein, 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.

126. The members of the Class are so numerous that joinder of all members is impracticable.

Throughout the Class Period, MagnaChip securities were actively traded on the NYSE. While the exact

number of Class members is unknown to Plaintiffs at this time and can be ascertained only through

appropriate discovery, Plaintiffs believe 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 MagnaChip 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.

127. Plaintiffs’ claims are typical of the claims of the members of the Class as all members of

the Class are similarly affected by defendants’ wrongful conduct in violation of federal law that is

complained of herein.

128. Plaintiffs will fairly and adequately protect the interests of the members of the Class and

have retained counsel competent and experienced in class and securities litigation. Plaintiffs have no

interests antagonistic to or in conflict with those of the Class.

129. 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:

. whether the federal securities laws were violated by defendants’ acts as alleged herein;

. whether statements made by defendants to the investing public during the Class Period misrepresented material facts about the business, operations and management of MagnaChip;

. whether the Individual Defendants caused MagnaChip to issue false and misleading financial statements during the Class Period;

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whether defendants acted knowingly or recklessly in issuing false and misleading financial statements;

whether the prices of MagnaChip securities during the Class Period were artificially inflated because of the defendants’ conduct complained of herein; and

whether the members of the Class have sustained damages and, if so, what is the proper measure of damages.

130. 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

I 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.

131. Plaintiffs will rely, in part, upon the presumption of reliance established by the fraud-on-

the-market doctrine in that:

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defendants made public misrepresentations or failed to disclose material facts during the Class Period;

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the omissions and misrepresentations were material;

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MagnaChip securities are traded in an efficient market;

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the Company’s shares were liquid and traded with moderate to heavy volume during the Class Period;

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the Company traded on the NYSE and was covered by multiple analysts;

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the misrepresentations and omissions alleged would tend to induce a reasonable investor to misjudge the value of the Company’s securities; and

~ Plaintiffs and members of the Class purchased, acquired and/or sold MagnaChip securities between the time the defendants failed to disclose or misrepresented material facts and the time the true facts were disclosed, without knowledge of the omitted or misrepresented facts.

132. Based upon the foregoing, Plaintiffs and the members of the Class are entitled to a

presumption of reliance upon the integrity of the market.

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133. Alternatively, Plaintiffs and the members of the Class are entitled to the presumption of

reliance established by the Supreme Court in Affiliated Ute Citizens of the State of Utah v. United

States , 406 U.S. 128, 92 S. Ct. 2430 (1972), as the defendants omitted material information in their

Class Period statements in violation of a duty to disclose such information, as detailed above.

COUNT I

(Against All MagnaChip Defendants For Violations of Section 10(b) And Rule 10b-5 Promulgated Thereunder)

134. Plaintiffs repeat and reallege each and every allegation contained above as if fully set

forth herein.

135. This Count is asserted against defendants and is based upon Section 10(b) of the

I Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder by the SEC.

136. During the Class Period, defendants engaged in a plan, scheme, conspiracy and course of

conduct, pursuant to which they knowingly or recklessly engaged in acts, transactions, practices and

courses of business which operated as a fraud and deceit upon Plaintiffs and the other members of the

Class; made various untrue statements of material facts and omitted to state material facts necessary in

order to make the statements made, in light of the circumstances under which they were made, not

misleading; and employed devices, schemes and artifices to defraud in connection with the purchase

and sale of securities. Such scheme was intended to, and, throughout the Class Period, did: (i) deceive

the investing public, including Plaintiffs and other Class members, as alleged herein; (ii) artificially

inflate and maintain the market price of MagnaChip securities; and (iii) cause Plaintiffs and other

members of the Class to purchase or otherwise acquire MagnaChip securities and options at artificially

inflated prices. In furtherance of this unlawful scheme, plan and course of conduct, defendants, and

each of them, took the actions set forth herein.

137. Pursuant to the above plan, scheme, conspiracy and course of conduct, each of the

defendants participated directly or indirectly in the preparation and/or issuance of the quarterly and



1 annual reports, SEC filings, press releases and other statements and documents described above,

2 including statements made to securities analysts and the media that were designed to influence the

3 market for MagnaChip securities. Such reports, filings, releases and statements were materially false

4 and misleading in that they failed to disclose material adverse information and misrepresented the truth

5 about MagnaChip’s finances and business prospects.

6

7 138. By virtue of their positions at MagnaChip, defendants had actual knowledge of the

8 materially false and misleading statements and material omissions alleged herein and intended thereby

9 to deceive Plaintiffs and the other members of the Class, or, in the alternative, defendants acted with

10 reckless disregard for the truth in that they failed or refused to ascertain and disclose such facts as

11 would reveal the materially false and misleading nature of the statements made, although such facts 12 13 were readily available to defendants. Said acts and omissions of defendants were committed willfully

14 or with reckless disregard for the truth. In addition, each defendant knew or recklessly disregarded that

15 material facts were being misrepresented or omitted as described above.

16 139. Information showing that defendants acted knowingly or with reckless disregard for the

17 truth is peculiarly within defendants’ knowledge and control. As the senior managers and/or directors 18

of MagnaChip, the Individual Defendants had knowledge of the details of MagnaChip’s internal affairs. 19

20 140. The Individual Defendants are liable both directly and indirectly for the wrongs

21 complained of herein. Because of their positions of control and authority, the Individual Defendants

22 were able to and did, directly or indirectly, control the content of the statements of MagnaChip. As

23 officers and/or directors of a publicly-held company, the Individual Defendants had a duty to 24

disseminate timely, accurate, and truthful information with respect to MagnaChip’s businesses, 25 26 operations, future financial condition and future prospects. As a result of the dissemination of the

27 aforementioned false and misleading reports, releases and public statements, the market price of

28 MagnaChip securities was artificially inflated throughout the Class Period. In ignorance of the adverse



1 facts concerning MagnaChip’s business and financial condition which were concealed by defendants,

2 Plaintiffs and the other members of the Class purchased or otherwise acquired MagnaChip securities at

3 artificially inflated prices and relied upon the price of the securities, the integrity of the market for the

4 securities and/or upon statements disseminated by defendants, and were damaged thereby.

5 141. During the Class Period, MagnaChip securities were traded on an active and efficient

6 7 market. Plaintiffs and the other members of the Class, relying on the materially false and misleading

8 statements described herein, which the defendants made, issued or caused to be disseminated, or relying

9 upon the integrity of the market, purchased or otherwise acquired shares of MagnaChip securities at

10 prices artificially inflated by defendants’ wrongful conduct. Had Plaintiffs and the other members of

11 the Class known the truth, they would not have purchased or otherwise acquired said securities, or 12 13 would not have purchased or otherwise acquired them at the inflated prices that were paid. At the time

14 of the purchases and/or acquisitions by Plaintiffs and the Class, the true value of MagnaChip securities

15 was substantially lower than the prices paid by Plaintiffs and the other members of the Class. The

16 market price of MagnaChip securities declined sharply upon public disclosure of the facts alleged

17 herein to the injury of Plaintiffs and Class members. 18

142. By reason of the conduct alleged herein, defendants knowingly or recklessly, directly or 19 20 indirectly, have violated Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder.

21

143. As a direct and proximate result of defendants’ wrongful conduct, Plaintiffs and the

22 other members of the Class suffered damages in connection with their respective purchases,

23 acquisitions and sales of the Company’s securities during the Class Period, upon the disclosure that the 24

Company had been disseminating misrepresented financial statements to the investing public. 25

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COUNT II

1 (Violations of Section 20(a) of the

2 Exchange Act Against The Individual Defendants)

3

144. Plaintiffs repeat and reallege each and every allegation contained in the foregoing

4 paragraphs as if fully set forth herein.

5 145. During the Class Period, the Individual Defendants participated in the operation and

6 7 management of MagnaChip, and conducted and participated, directly and indirectly, in the conduct of

8 MagnaChip’s business affairs. Because of the Individual Defendants’ senior positions, they knew the

9 adverse non-public information about MagnaChip’s misstatement of income and expenses and false

10 financial statements.

11 146. As officers and/or directors of a publicly owned company, the Individual Defendants had

12 13 a duty to disseminate accurate and truthful information with respect to MagnaChip’s financial condition

14 and results of operations, and to correct promptly any public statements issued by MagnaChip which

15 had become materially false or misleading.

16 147. Because of their positions of control and authority, the Individual Defendants were able

17 to, and did, control the contents of the various reports, press releases and public filings which 18

MagnaChip disseminated in the marketplace during the Class Period concerning MagnaChip’s results 19 20 of operations. Throughout the Class Period, the Individual Defendants exercised their power and

21 authority to cause MagnaChip to engage in the wrongful acts complained of herein. The Individual

22 Defendants therefore, were “controlling persons” of MagnaChip within the meaning of Section 20(a) of

23 the Exchange Act. In this capacity, they participated in the unlawful conduct alleged which artificially 24

inflated the market price of MagnaChip securities. 25

26 148. Each of the Individual Defendants, therefore, acted as a controlling person of

27 I MagnaChip. By reason of their senior management positions and/or being directors of MagnaChip,

28 each of the Individual Defendants had the power to direct the actions of, and exercised the same to



1 cause, MagnaChip to engage in the unlawful acts and conduct complained of herein. Each of the

2 Individual Defendants exercised control over the general operations of MagnaChip and possessed the

3 power to control the specific activities which comprise the primary violations about which Plaintiffs

4 and the other members of the Class complain.

5 149. By reason of the above conduct, the Individual Defendants are liable pursuant to Section

6 7 20(a) of the Exchange Act for the violations committed by MagnaChip.

8 COUNT III

(Violations of Section 20(a) of the

9

Exchange Act Against Avenue Capital)

10 150. Plaintiffs repeat and reallege each and every allegation contained in the foregoing

11 paragraphs as if fully set forth herein. 12

13 151. Avenue Capital owned a majority of MagnaChip’s common stock and was considered an

14 “affiliate” of the Company. It appointed a majority of the members of the Company’s Board of

15 Directors, including three employees of Avenue Capital, some of whom also sat on the Audit

16 Committee. As the Company acknowledged in its public filings, Avenue Capital had “significant

17 influence over [the Company’s] affairs.” The Company further acknowledged that “Avenue will be 18

able to control most matters requiring stockholder approval, including the election of directors and 19 20 approval of significant corporate transactions, including mergers and sales of substantially all of our

21 assets.” Because of the equity ownership of Avenue Capital, MagnaChip was considered a “controlled

22 company” for purposes of the NYSE listing requirements. When selling its shares, Avenue Capital and

23 certain affiliated funds appointed as “attorneys-in-fact” members of the Board of Directors, who were 24

also employees of Avenue Capital. 25

26 152. During the Class Period, Avenue Capital participated in the operation and management

27 of MagnaChip, and conducted and participated, directly and indirectly, in the conduct of MagnaChip’s

28 business affairs. Because of Avenue Capital’s position as the Company’s largest shareholder,



1 participation through its appointees on the Audit Committee, and control over Board members, it knew

2 the adverse non-public information about MagnaChip’s misstatement of income and expenses and false

3 I financial statements.

4 153. Because of its position of control and authority, Avenue Capital was able to, and did,

5 control the contents of the various reports, press releases and public filings which MagnaChip

6 7 disseminated in the marketplace during the Class Period concerning MagnaChip’s results of operations.

8 Throughout the Class Period, Avenue Capital exercised its power and authority to cause MagnaChip to

9 engage in the wrongful acts complained of herein. Avenue Capital therefore, was a “controlling person”

10 of MagnaChip within the meaning of Section 20(a) of the Exchange Act. In this capacity, Avenue

11 Capital participated in the unlawful conduct alleged which artificially inflated the market price of 12 13 MagnaChip securities.

14 154. Avenue Capital, therefore, acted as a controlling person of MagnaChip. By reason of its

15 position as controlling shareholder, participation through its appointees on the Audit Committee, and

16 control over Board members, Avenue Capital had the power to direct the actions of, and exercised the

17 same to cause, MagnaChip to engage in the unlawful acts and conduct complained of herein. Avenue 18

Capital exercised control over the general operations of MagnaChip and possessed the power to control 19 20 the specific activities which comprise the primary violations about which Plaintiffs and the other

21 members of the Class complain.

22

155. By reason of the above conduct, Avenue Capital is liable pursuant to Section 20(a) of the

23 Exchange Act for the violations committed by MagnaChip. 24

PRAYER FOR RELIEF 25

26 WHEREFORE , Plaintiffs demand judgment against defendants as follows:

27 A. Determining that the instant action may be maintained as a class action under Rule 23 of

28 the Federal Rules of Civil Procedure, and certifying Plaintiffs as the Class representatives;



B. Requiring defendants to pay damages sustained by Plaintiffs and the Class by reason of 1

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By: s/ Robert V. Prongay Lionel Z. Glancy Michael Goldberg Robert V. Prongay 1925 Century Park East, Suite 2100 Los Angeles, CA 90067 Telephone: (310) 201-9150 Facsimile: (310) 201-9160 Email: [email protected]

Liaison Counsel for Plaintiffs

POMERANTZ LLP Marc I. Gross Jeremy A. Lieberman Michael J. Wernke 600 Third Avenue, 20th Floor New York, New York 10016 Telephone: (212) 661-1100 Facsimile: (212) 661-8665 Email: [email protected]

[email protected] [email protected]

Lead Counsel for Plaintiffs

the acts and transactions alleged herein;

C. Awarding Plaintiffs and the other members of the Class prejudgment and post-judgment

interest, as well as his reasonable attorneys’ fees, expert fees and other costs; and

D. Awarding such other and further relief as this Court may deem just and proper.

DEMAND FOR TRIAL BY JURY

Plaintiffs hereby demand a trial by jury.

Dated: October 1, 2014 GLANCY BINKOW & GOLDBERG LLP



PROOF OF SERVICE VIA ELECTRONIC POSTING PURSUANT TO NORTHERN DISTRICT OF CALIFORNIA LOCAL RULES AND LOCAL CIVIL RULE 5-1

I, the undersigned, say:

I am a citizen of the United States and am over the age of 18 and not a party to the within action. My business address is 1925 Century Park East, Suite 2100, Los Angeles, California 90067.

On October 1, 2014, I served the following document:


By posting the document to the ECF Website of the United States District Court for the Northern District of California, for receipt electronically by the parties as listed on the attached Court’s ECF Service List.

And on any non-ECF registered parties:

By U.S. Mail: By placing true and correct copies thereof in individual sealed envelope: with postage thereon fully prepaid, which I deposited with my employer for collection and mailing by the United States Postal Service. I am readily familiar with my employer’s practice for the collection and processing of correspondence or mailing with the United States Postal Service. In the ordinary course of business, this correspondence would be deposited by my employer with the United States Postal Service that same day.

I certify under penalty of perjury under the laws of the United States of America that the foregoing is true and correct. Executed on October 1, 2014, at Los Angeles, California.

s/ Robert V. Prongay Robert V. Prongay

292651.1 MAGNACHIP

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Mailing Information for a Case 3:14-cv-01160-JST Hayes v. Magnachip Semiconductor Corp. et al

Electronic Mail Notice List

The following are those who are currently on the list to receive e-mail notices for this case.

• Lionel Z. Glancy [email protected],[email protected] ,[email protected]

• Michael M. Goldberg [email protected],[email protected] ,[email protected],[email protected]

• Marc Ian Gross [email protected]

• Daniel J. Kramer [email protected]

• Robert N Kravitz [email protected]

• Jeremy A Lieberman [email protected] ,[email protected]

• Jeremy Alan Lieberman [email protected]

• Francis P McConville [email protected]

• Alex Young K. Oh [email protected]

• Lesley F. Portnoy [email protected]

• Robert Vincent Prongay [email protected],[email protected],[email protected]

• John C. Tang [email protected] ,[email protected] ,[email protected]

• Michael J. Wernke [email protected]

Manual Notice List

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The following is the list of attorneys who are not on the list to receive e-mail notices for this case (who

therefore require manual noticing). You may wish to use your mouse to select and copy this list into your word

processing program in order to create notices or labels for these recipients.

Patrick V. Dahlstrom Pomerantz LLP Ten South La Salle Street, Suite 3505 Chicago, IL 60603

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