Isilon may have knowingly overstated its revenues to bolster the stock performance during its IPO, giving the then-existing venture capitalists investors an ability to cash out at artificially inflated prices.

Investigation and pending class action lawsuit on behalf of all persons who acquired the common stock of Isilon Systems, Inc. pursuant or traceable to the Isilon's initial public offering ("IPO") on December 14, 2006, and on behalf of all persons who acquired the Isilon's stock between December 14, 2006 and November 8, 2007 (the "Class Period").

Isilon, headquartered in Seattle, Washington, is a provider of clustered storage systems for digital content, including video and audio. The Isilon's storage systems are composed of three or more nodes that are integrated with Isilon's operating system software, which unifies the nodes into a single shared resource.

This class action securities lawsuit is brought against Isilon; several of its current and former officers and directors; the underwriters for the IPO including Morgan Stanley, Merrill Lynch, Needham & Co., and RBC Capital Management; and several venture capital firms that collectively beneficially owned 69.8% and 60.2% of the shares of Isilon immediately before and after the IPO, respectively, including Madrona Venture Group, Atlas Venture Group and Sequoia Capital.

The Complaint alleges that, in connection with the IPO, the registration statement and accompanying prospectus contained materially false and misleading statements and omissions regarding Isilon's sales, revenues, earnings, and financial condition. Moreover, Plaintiffs allege that, throughout the Class Period, Isilon issued materially false and misleading statements regarding sales, revenue, accounts receivable, earnings, Isilon's overall financial condition, and the Company's prospects.

The Complaint alleges that Isilon engaged in a variety of improper revenue recognition practices to inflate the Company's financial results artificially. In February 2008, Isilon announced that its Audit Committee had identified numerous errors in the Company's recognition of revenue, and Isilon was forced to restate its financials for 2006 and the first two quarters of 2007. The restatement indicated that revenue was recognized prematurely on certain transactions and that revenue should not have been recognized at all for others.

In all, the restated financials reduced previously reported revenue by almost $7 million, or over 15% of that originally reported. Moreover, the restatement noted that the Audit Committee had found evidence that Isilon's former chief executive officer, former chief financial officer, and former vice president of North America sales all participated directly in certain of the transactions leading to the restatement. As a result of Defendants' false and misleading statements, Isilon's stock price climbed 77% immediately following the IPO, and it subsequently climbed as high as $27.37 per share on December 29, 2006.

Between February and November of 2007, however, as the truth began to emerge regarding the Company's financial condition and the risks of the fraud materialized, the inflation was removed from Isilon's stock and the price collapsed. When Isilon finally announced on November 8, 2007 that the Audit Committee was reviewing certain sales to customers, the timing and treatment of revenue recognition, and whether the Company's internal controls related to revenue recognition were sufficient, the price of Isilon shares opened the next day at $4.65 per share, a fraction of the Class Period high.