The suit alleges company officers and directors misrepresented information about the company's financial health, according to the plaintiffs.
The company contends the lawsuit is frivolous. "The suit is without merit and we intend to defend ourselves vigorously," said Steve Polcyn, investor relations director.
He added that some shares sold by the officers and directors were stock options that would expire unless exercised.
The suit claims that between April 1995 to January 1996 Read-Rite artificially inflated its stock, saying it was enjoying strong demand for its products due to market shortages of disk drive components and that it had a competitive advantage with its technology.
The company's stock jumped from 18-7/8 on April 19, 1995, to a high of 49-1/2 during early September of the same year.
During this period, plaintiffs claim the company had trouble developing new products and encountered softening demand for its products. Read-Rite, then, reported this January a sequential decline in its earnings and said revenues would fall in the future as well, which resulted in a sharp drop of its stock price.
Plaintiffs also said that as the stock soared, seven of the eight defendants unloaded 86 percent to 100 percent of their Read-Rite holdings. Meanwhile, the company's chief executive and chairman sold 69 percent of his holdings, the suit alleges.
The stock fell to 17-1/4 by the end of January. During the year, the company reported three consecutive quarters of revenues and losses of more than $85 million. Read-Rite also initiated layoffs and reduced capital spending.
Read-Rite's stock closed at 25-1/2 a share, up 1/4. The company has seen its stock climb from around $10 a share in late August to its current levels.