withstand analysis.

This Court has examined the parties' arguments with care.
Class counsel have provided a powerful memorandum that delivers
an effective point-by-point response to the Pontikes-Vosicky
attack. It graphically demonstrates that the Complaint more than
suffices to state a claim with the level of particularity
required by the securities law.

There is consequently no need to reinvent the wheel here.
Simply put, the motion to dismiss is denied, and Pontikes and
Vosicky are ordered to file an answer to the Complaint in this
Court's chambers (with a copy of course to be delivered to class
counsel) on or before April 17, 2003. This action is set fora
status hearing at 8:45 a.m. April 21, 2003 to discuss the
establishment of a plan to move the case forward to as

expeditious a trial as possible.

Milton I. Shadur
Senior United States District Judge

Date: March 31, 2003


“Internet Age.” $39. While praising Prism as offering “a unique opportunity to offer customers
the best technology infrastructure solutions,” and proclaiming the symbiotic connéction between
Comdisco’s existing customers and the new Prism endeavors, defendants concealed the fact that
Comdisco’s existing customers were uniformly rejecting Prism’s services. {J 40-42, 49.
Comdisco made a series of announcements concerning the “expansion” of Prism services into
new markets, announcing administrative approvals in various states and cities for the roll-out of
its “RED DSL service.” 4] 50, 55, 63, 64, 71. Defendants, however, failed to disclose that
Prism was unable to provide service in these new markets, was not signing up substantial
numbers of new customers in its already existing market areas, and could not provide the
promised services to the few customers that it did have. { 50. For example, Comdisco publicly
represented that, in the New York market, there was “overwhelming interest and support for
RED,” despite the fact that at the time, Prism had less than 2,000 customers in all of its markets
combined. J 54 (quoting February 17, 2000 statement of Dennis Kruse, Prism’s chief marketing
officer).
Defendants’ plan to salvage Comdisco’s investment in Prism was, from at least as early
_ as November 1999, the beginning of the Class Period, to spin Prism off in an IPO. ff] 4, 43, 44,
47, 55, 57, 50, 64, 68, 72, 93. In connection with this plan, Comdisco sought to generate public
“buzz” about Prism’s prospects, benefiting Comdisco in the process, while allowing Comdisco to
rid itself of Prism before its non-viability and true outlook became publicly known. Jd. As is
apparent from the behavior alleged in the Complaint, defendants were willing to tell the market
whatever it needed to hear to prepare it for such an IPO.
Defendants repeatedly issued press releases and other public statements describing Prism
as a “leading telecommunications provider” and “on the forefront” of companies in its field. {

62-63. One press release went so far as to state that Prism “dramatically reduces provisioning

-5-



3, 1999 and October 3, 2000, defendants -- individually and as controlling persons of Comdisco,*
as well as other Comdisco officers and directors, repeatedly misrepresented Comdisco's financial
condition, business activities, and prospects, particularly with respect to its wholly-owned
subsidiary Prism Communications Services ("Prism"). Defendants, individually and as
controlling persons of Comdisco, made a series of materially false and misleading statements and
omissions about Comdisco's business dealings, intentions, and prospects with respect to Prism,
the center of Comdisco's purported recasting of itself as a cutting edge Internet company and a
major player in the Internet "revolution." 2.

Throughout the Class Period, defendants falsely and repeatedly highlighted Prism's
purported position as, inter alia, a “market leader," { 56, and a "leading integrated
communications provider," { 57, and further promoted Comdisco's purported ability to cross-sell
Prism's services to its existing customers. Defendants did so with full knowledge that Prism had
virtually no market share, was losing the few customers it did have, and that Comdisco's existing
customers had no desire to acquire DSL lines from Prism or to subscribe to any of Prism's
services and that Comdisco, in fact, was losing existing customers as a result of its efforts to
saddle them with unwanted Prism services. {J 3, 48-49, 54, 57-58.

Defendants were highly motivated to overstate Prism's value and operations and to
conceal the complete failure of the acquisition. Defendants repeatedly hyped their purported
plans to spin Prism off in an initial public offering ("IPO"), despite their awareness throughout
the Class Period that Prism was not viable, in an effort to shed Prism before the investing public

leamed of its shortcomings. {J 3, 4, 55. When they finally announced the inevitable

cancellation of the Prism IPO plans, defendants continued to misrepresent the facts and withheld

* For the reasons set forth below, Comdisco's complete ownership and utter domination and control of
Prism during the time period relevant to this litigation render defendants liable for Prism's false and
misleading statements and omissions during this time period as well. See, e.g., 11 36, 37, 42-44.

-2-



UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION
IN RE COMDISCO SECURITIES Master File No. 01 C 2110
LITIGATION
Judge Milton I. Shadur

PLAINTIFFS' MEMORANDUM OF LAW
IN OPPOSITION TO DEFENDANTS' MOTION TO
DISMISS THE AMENDED CLASS ACTION COMPLAINT

£ the Federal Securities Laws-(the"Complaint")!
I. PRELIMINARY STATEMENT?

This case involves a fraud implemented by defendants to deceive purchasers of

Comdisco’ (the "Company") common stock. As set forth in the Complaint, between November

Citations to the Complaint are referenced as"J__."

? As an initial matter, defendants’ assertion that "plaintiffs could have proceeded without delay against
the two individual defendants, [but].chose not to do so," Defendants' Memorandum in Support of Their
Motion to Dismiss the Amended Class Action Complaint ("Defs. Mem.") at 2, is a gross distortion of the
record, At the July 17, 2001 status hearing, plaintiffs, in light of Comdisco, Inc.'s ("Comdisco" or the
"Company") pending Chapter 11 bankruptcy reorganization proceedings, sought leave to file their
Amended Complaint solely against individual defendants Pontikes and Vosicky. This Court denied
plaintiffs' request and instructed plaintiffs' counsel to move the bankruptcy court overseeing Comdisco's
Chapter 11 bankruptcy reorganization proceedings for a partial modification of the automatic stay,
pursuant to 11 U.S.C. § 362, to enable this Court to adjudicate a single set of challenges to the sufficiency
of any amended complaint plaintiffs would file against all defendants. Subsequent motion practice in the
bankruptcy court with respect to the stay modification issue (which motion was ultimately denied), and
arising out of plaintiffs' opposition to Comdisco's bankruptcy counsel's efforts to release plaintiffs'
securities fraud claims against defendants Pontikes and Vosicky (which resulted in an agreement that such
claims would not be released) ended in mid-2002. Plaintiffs moved this Court for leave to file their
Complaint soon thereafter.

> By virtue of its bankruptcy filing and by agreement (see footnote 2, above), Comdisco is not named as a
defendant in this case and plaintiffs are pursuing their claims only against defendants Pontikes and

Vosicky. J 1.



Il. SUMMARY OF THE FACTUAL ALLEGATIONS OF THE COMPLAINT

Comdisco was a leader in the business of leasing computer systems and mainframes.
4/27. In January 1999, Comdisco announced that it was moving away from these traditional core
businesses to focus on “next-generation technologies,” such as the provision of broadband
services and equipment. {] 32-33. This repositioning of the company away from the business
segments that had brought it success since its inception in 1969 was driven by defendant
Nicholas Pontikes, the son of Ken Pontikes, Comdisco’s founder. { 31. Nicholas Pontikes,
Ken’s designated heir, had little exposure to the basic business of the Company. §J 28, 29. His
background was in investment banking and junk bond trading. 29. As one financial expert put
it, he was primarily oriented toward “packaging his company to fit the buzz.” { 30 (quoting
Professor James Schrager of the Chicago School of Business).

The acquisition of Prism was a key element of Comdisco's transition to a "new age
company" { 33. This acquisition cost Comdisco more than $125 million (and, ultimately, more
than $478 million, J 86), for which it received nothing more than a start-up telecommunications
company with little infrastructure, almost no customers, and virtually no management. 38.
Despite these facts, Comdisco represented Prism as one of its core business divisions, { 32, and
set about to convince the investing public that it represented Comdisco’s future.

At all times relevant to this action, Comdisco completely controlled Prism. According to
a former Prism Director of Operations and Director of Information Technologies, "Comdisco
took [Prism] over and ran it the way they wanted." 44. Indeed, following its acquisition,
Prism’s operations were overseen by Comdisco employees and did not have independent
leadership, including a CEO. 743, 44.

Through Comdisco’s acquisition of this barely established company, defendants sought

to hype Comdisco stock, convincing the market that Comdisco was a powerful figure in the new

-4-



Minute Order Form (06/97)

United States District Court, Northern District of Mlinois

Nameetasige Jot | Milton Shadur_ | Ste ade ner
CASE NUMBER 01C 2110 DATE 3/31/2003
CASE In Re: Comdisco Securities Litigation
TITLE
[In the following box (a) indicate the party filing the motion, e.g., plaintiff, defendant, 3rd pasty plaintiff, and (b) state briefly the nature
MOTION: of the motion being presented.]
DOCKET ENTRY:
(1) Qa Filed motion of [ use listing in “Motion” box above.]
(2) Qo Brief in support of motion due_____.
8 Oo Answer brief to motion due___. Reply to answer brief due___.
(4) 0 Ruling/Hearing on__setfor__at
(5) o Status hearing[held/continued to] [set for/re-set for]on___——ssetfor__— at
(6) Qo Pretrial conference[held/continued to] [set for/re-set for]on___—s—_ssetfor_ at,
(es) Oo Trial[set for/re-set for] on__at
(8) Oo (Bench/Jury trial] [Hearing] held/continued to____—at
(9) o This case is dismissed [with/without] prejudice and without costs[by/agreement/pursuant to]

DOFRCP4(m) ClLocal Rule 41.1 OFRCP41(a(1) OO FRCP41(a)(2).

(10) Mi [Other docket entry) ENTER MEMORANDUM OPINION AND ORDER. Motion to dismiss
is denied, and Pontikes and Vosicky are ordered to file an answer to the Complaint in this Court’s
chambers (with a copy of course to be delivered to class counsel) on or before 4/17/03. This action is set
for a status at 8:45am on 4/21/03 to discuss the establishment of a plan to move the case forward to as
expeditious a trial as possible.

(1) ff [For further detail see order attached to the original minute order.]

No notices required, advised in open court.

No notices required.

o | Notices mailed by judge’s staff.
Notified counsel by telephone.

Docketing to mail notices.

Mail AO 450 form. tuno
Copy to judge/magistrate judge. fh 4 S10 "sq
urtroom: 2 q 7h date mailed notice
1D deputy Hd Ie dyn eu a
ital OT UF nehentig ngceived in
ceniral 's Office ‘mailing deputy initials



and its subsidiaries, would prevent the offering from being consummated.” § 80. The Note
Offering was successfully completed on August 8, 2000. Less than eight weeks later, on October
3, 2000, Comdisco finally revealed the true status of Prism, issuing a press release that it would
cease funding of Prism and sell off its assets, charging them against the Company’s fourth
quarter financial results. ¥ 85.

Immediately after defendants made this belated disclosure, the three top credit rating
agencies lowered Comdisco’s debt rating. Also in the immediate aftermath, Comdisco’s stock
price experienced a one day drop in share price of 24% from $17.5625 per share to $13.375 per
share. | 88. This lawsuit followed. Within a few months of Comdisco’s disclosure concerning
Prism, defendant Pontikes resigned as President and CEO of Comdisco, stating that ““Comdisco
needed a more experienced leader.” { 89. On July 16, 2001, Comdisco filed for protection
under Chapter 11 of the United States Bankruptcy Code. ]] 89. Its stock is presently without
value, down from a high at the apex of Comdisco’s fraudulent hype of $57.25 per share. { 88-
89.

7-—-_ ARGUMENT
TH. ARGUMENFE

STANDARDS ON A MOTION TO DISMISS



time to 5 to 7 days” (despite the fact that their provisioning actually took between 3 and 6
months for each new account, a reality which cost Prism a significant number of customers,
according to a former Prism Senior Field Operations Manager). 68-69. As a result of this
increased promotion Comdisco’s stock price continued to rise on a wave of artificial inflation,
reaching an ail time high, on March 10, 2000, of $57.25 (up from $36.25, where it had closed on
February 7, 2000, the day that Comdisco announced its retention of Saatchi & Saatchi, the global
advertising firm, to promote Prism). 61-64. Throughout this period, Comdisco insiders sold
substantial portions of their personal Comdisco holdings. See, e.g., J] 61, 66-67, 96. For
example, between March 6, 2000 and March 10, 2000, defendant Vosicky alone sold 123,157
shares of his stock, worth more than $5,862,000. { 96.

When they were forced to reveal that their IPO plan could not be realized, defendants still
withheld the truth of Prism’s condition from the market, instead announcing, on July 26, 2000,
that they were determined to look for other “strategic alternatives” for Prism. 74. Even in
disclosing that Comdisco had discarded its plans for a Prism IPO, defendants continued to hide
the true condition of Prism’s dysfunctional operations and nearly non-existent customer base
from the public, J 76; instead Comdisco claimed to be looking for new strategic alternatives even
though defendants knew that Comdisco’s only alternative would be to terminate Prism’s
operations entirely, because Prism had no value as a continuing business entity. | 76.

Defendants' motivation for withholding the truth about Prism was to ensure the continued
artificial inflation of Comdisco’s stock price, as well as permit Comdisco to complete the Note
Offering. | 79. The fraud was necessary to the completion of this offering because, pursuant to
the terms of the S-3 Registration Statement upon which the note offering was based, “any
material adverse change in, or any material development known to management which is likely

to result in a material adverse change in the condition, financial or otherwise, of the Company -

-6-



their plan to shut down Prism until Comdisco was able to close its then-pending offering of $500
million of its notes (the "Note Offering"). J 4-5, 74-81. On October 3, 2000, having closed the
Note Offering and thus having milked the last possible benefits from the Prism hype, defendants
revealed Comdisco's plans to shut Prism down, causing an immediate downgrade of Comdisco's
bond rating and causing its stock price to slide more than 24% on that day -- and more than 77%
from its Class Period high. {J 5-6, 85-88.

The Complaint properly pleads, with great detail, that during the Class Period, the
defendants knowingly issued materially false and misleading statements and made material
omissions as part of a fraudulent scheme to artificially inflate the price of Comdisco's common
stock. Notably, in their motion papers, defendants do not deny that any of the alleged
misstatements were made nor that they are specifically alleged to be false. Rather, defendants
devote the vast majority of their brief attempting to explain the purported true context of each of
their misstatements, or asserting that those statements were immaterial, misconstrued, or mere
puffery. Not only do defendants’ efforts, at best, raise questions of fact that cannot presently be
resolved, but their inability to disclaim any of the alleged misrepresentations speaks volumes.
Indeed, defendants’ premature factual contentions and unavailing arguments that the Complaint
does not sufficiently connect them to the false and misleading statements alleged, cannot sustain

their heavy burden on a motion to dismiss, and thus, their motion should be denied.



(emphasis in original) puts it:

The fraud-on-the-market doctrine assumes that the

market will absorb all publicly-available information

about the price of a widely-traded stock.

But if that is really so -- if the market here (that is, the
universe of investors and perspective investors) really processed
all of the information about Prism that Comdisco was putting out,
both good and bad, in pegging the price of Comdisco stock at all
times -- it is difficult to understand why the revelation of the
news about Comdisco's giving up on the Prism venture should have
caused such a major and precipitate drop in the stock price if,
as Pontikes and Vosicky would have it, their earlier and
assertedly accurate statements should have prepared the investing
public for thé reality that “something is rotten in the state of
Prism.”* In an important sense, the Pontikes-Vosicky arguments
about the omniscience of the market and market forces really
undercut what they now attempt to urge on this Court.

This is not a matter of arguing from results -- of post hoc
ergo propter hoc. It is rather that the contentions put forth by
Pontikes and Vosicky -- that Comdisco's representations about
Prism, about how well it was doing and would do in the future,
were no more than mere puffery readily recognizable as such by

the market, and that the purported “safe harbor” hedges operated

to prevent investor deception in that respect -- really do not
‘ Cf. William Shakespeare, Hamlet act I, sc.4, line 90.

3



their Reply and Memorandum ("R. Mem.”), Pontikes and Vosicky
assert (emphasis in original):

In this case, when the Court looks at everything

Comdisco said about Prism? during the purported class

period, it becomes clear that investors would not have

been misled about what Prism had already achieved or

what it hoped to achieve in the future.

That contention does not adequately credit, as this Court must
for Rule 12(b) (6) purposes, the well-pleaded allegations of the
Complaint.* Those allegations plainly entitle the class to stay
in court as having advanced a viable complaint against Pontikes
and Vosicky for violation of the securities laws.

Indeed, it is worth adding a point that is not sufficiently
remarked in the case law in situations where the effect of the
material misrepresentations or material omissions, which form the
gravamen of the securities law claims, itself provides further
confirmation of the sustainability of such claims. In that
respect counsel for Pontikes and Vosicky have essentially urged

the “total mix” approach first articulated in TS¢ Indus. :

Northway, Inc., 426 U.S. 438, 449 (1976) -- as R.Mem. 3-4

2 [Footnote by this Court] Prism was the ultimately ill-
fated venture whose collapse was a major (but by no means the
only) factor in Comdisco's ultimately being brought to its knees.

3 In lieu of providing its own summary of those
allegations, this opinion simply attaches class counsel's
accurate summary, as set forth at their Mem. 4-7 directed to the
current motion. Because class counsel's Preliminary Statement at
their Mem. 1-3 also provides an accurate analysis of the legal
effect of those allegations in the current Rule 12(b) (6) context,
that Preliminary Statement is attached as well.

2



IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION

In re
No. 01 C 2110
COMDISCO SECURITIES LITIGATION

MEMORANDUM OPINION AND ORDER q 2003

With Comdisco, Inc. (“Comdisco”) having vanished as a
potential defendant in consequence of its bankruptcy,? counsel
for the proposed plaintiff class have tendered an Amended Class
Action Complaint for Violations of the Federal Securities Laws
(“Complaint”) against individual defendants Nicholas Pontikes
(*“Pontikes”) and John Vosicky ("“Vosicky”). Pontikes and Vosicky
have in turn moved to dismiss the Complaint, and the parties have
submitted bulky memoranda (and, on the part of Pontikes and
Vosicky, far bulkier exhibits) to address the issues.

But the answer to the question of the Complaint's legal
sustainability in Fed.R.Civ.P. (“Rule”) 12(b) (6) terms can be
stated far more simply than the volume of the litigants’ input

would suggest. As briefly summarized in the Introduction to

2 This Court has heretofore sought to be circumspect in

not responding (in kind or otherwise) to the ill-considered (and
unfortunately ill-mannered) handling by the former Bankruptcy
Judge of the sensible and non-intrusive partial modification of
the bankruptcy stay that had been sought to permit a test of the
potential facial viability of a like complaint against Comdisco
(which could of course have been pursued only upon its emergence
from bankruptcy) as well as against Pontikes and Vosicky.
Despite the regrettable and extensive delay that was caused by
the needless rejection of that effort, nothing other than this
footnote will be said on the subject.