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IN RE VALENCE TECH.

November 5, 1997

IN RE VALENCE TECHNOLOGY, INC. SECURITIES LITIGATION; This Document Relates To: ALL ACTIONS


The opinion of the court was delivered by: WARE

 I. INTRODUCTION

 II. BACKGROUND

 This is a securities class action suit brought on behalf of all persons who purchased the securities of Valence Technology, Inc. ("Valence" or the "Company") between May 7, 1992 and August 10, 1994. Plaintiffs allege violations of Section 10(b) of the Securities and Exchange Act of 1934, 15 U.S.C. § 78j(b) and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5 against all Defendants and violations of Section 20(a) of the Securities Exchange Act of 1934 against individual Defendants Lev Dawson, Calvin Reed and Carl Berg.

 Plaintiffs allege that Defendants made fraudulent misrepresentations concerning the status of the technology and risks attendant to the development of commercial rechargeable lithium polymer batteries for the telecommunication, computer and automotive industry in connection with the initial public offering of the Company in May, 1992, which raised about $ 33 million, and additional stock offerings on November, 1992 and December 1993, which raised an additional $ 125 million. Plaintiffs allege that Defendants knew at all times that commercial mass production and usage of the lithium polymer battery was an illusion and that Defendants defrauded investors so that they could obtain millions of dollars in profits through insider sales. For example, Defendant Dawson allegedly sold over two million shares of Valence common stock for proceeds in excess of $ 40 million. During the relevant time period, Valence stock traded as high as $ 25.00 per share, and as low as $ 3.25 per share.

 The Special Master recommended that Defendants' motion for summary judgment be granted on the grounds that Plaintiffs' claims are barred by the applicable one-year statute of limitations. In brief, the Special Master reasoned that an article entitled "Story Stock" about Valence published on or about February 15, 1993 in Forbes magazine, a national business magazine, disclosed sufficient facts to put a reasonable investor on inquiry notice of possible fraud; that Plaintiffs first complaint was not filed until May 1994, more than one year after the Forbes article was published; and therefore Plaintiffs' claims are time barred. The article stated:

 
Want to get on the tech stock bandwagon? Here's an exciting company for you: Valence Technology, a San Jose, Calif. outfit that is developing a rechargeable lithium/polymer battery. Valence's battery packs more energy per pound than the well-established nickel/cadmium alternative, and it costs much, much less to manufacture. So says an "independent" scientist who has evaluated the technology. Valence has landed a $ 100 million order from Motorola -- so say new reports. And Valence, though now in the red, will be a thriving company, earning $ 3.25 a share in 1997. So says a stock analyst report.
 
* * *
 
And if you believe the story the story that goes with Valence, you probably don't know about these drawbacks: The Motorola contract is much less than meets the eye; the largest share holder in Valence has been involved in two other Silicon Valley startups that failed; and the outside scientist who evaluated the battery just took Valence insiders' word for it in judging manufacturing costs and durability.
 
* * *
 
As an experiment, compare these three documents: a Montgomery securities buy recommendation on the stock from last May, the government-sanctioned prospectus that came out with a 4.6 million-share offering in November, and a Valence press release issued in December. It's sometimes difficult to tell the three documents apart.
 
The press release, for example, contains a scientific-looking diagram of the lithium/polymer battery, marred by an arithmetic error on the dimensions of the battery's layers. Now look at the bullish report from Montgomery analysts Thomas Lloyd-Butler and Peter McGratty. It contains the same diagram, complete with the same error. And then there's the authoritative prospectus -- with the same diagram and the same error.
 
The Montgomery analysts say that Valence Technology is going to rake in precisely $ 536,050,000 in revenues in fiscal 1997. How do they know that? Well, the battery will sell like the dickens because it's much more compact and cheaper to make than competing batteries. The manufacturing cost of the Valence battery is going to be only 7 1/2 cents per watt-hour of energy capacity, says the Montgomery report, a tenth the figure for nickel/cadmium batteries, the current standard in computers, telephones and the like. The battery keeps a charge better than nicads, says the report, losing 0.5% of its juice per month, against 5% to 20% for the nicad.
 
And how do the analysts know all this? They got if from Digby Macdonald, a materials science professor at Penn State, described as an "independent consultant."
 
How does Macdonald know about the Valence battery's performance and cost? He spent a day watching Valence scientists record measurements. He didn't take away a sample for testing, so he had to take their word for long-term performance measures. The cost projections are also from inside Valence. Independent? ...

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