"Amended" Class Action Lawsuit: PROLOGUE
Hi Bob. I hope you and yours are doing well!
The big class action lawsuit on behalf of shareholders of InfoSpace was "amended" in an April 15, 2002 press release from one of the three co-lead counsel law firms, Seattle based Hagens-Berman. The final "amended" version was filed last Thursday, on May 9, 2002. It contains an absolutely staggering array of allegations, all linked in highly detailed chronological order. They've added Merrill Lynch and its former analyst Henry Blodget as additional "Defendants." This new development seems to greatly expand the scope of the case into a huge unprecedented dimension, as well as potentially providing a windfall of new witnesses and documents. It came about primarily because of the discoveries by New York Attorney General Eliot Spitzer, during his investigation of Merrill Lynch.
The full public document titled "First Consolidated and Amended Complaint for Violation of the Federal Securities Laws," was filed on May 9, 2002 with the U.S. District Court. A PDF copy can be downloaded from: hagens-berman.com
Ironically, Spitzer apparently first became interested in what the Merrill Lynch company had been up to when his curiosity was piqued regarding the rather rapid and large settlement they reached with a former INSP shareholder. A shareholder who successfully sued Merrill, in what was later labeled a "watershed case." The shareholder claimed, among other things, to having been "duped by the company's Internet stock analyst (Henry Blodget)." The INSP shareholder ultimately received a $400,000 settlement from Merrill. And now the entire InfoSpace/Merrill connection seems to have come full circle, right back to the shareholders of INSP again.
The only individuals now named as "Defendants" in the amended lawsuit consist of just three people: Naveen Jain, Tammy Halstead, and Henry Blodget...plus the companies: InfoSpace and Merrill Lynch. The lawsuit does mention that Ellen Alben who was formerly INSP's Vice President, Legal and Business Affairs Secretary is not currently a defendant, but may be added later.
BTW, didn't Jain once modestly proclaim during an interview, I believe while bragging about how he was creating InfoSpace into becoming an absolute "monopoly" of worldwide dominance (the World's trillion dollar company, bigger than MSFT, CSCO, and INTC combined), saying something to the effect, "I HOPE somebody sues us." Well...he's certainly getting his wish, although NOT for being a "monoply"...Oh no. For something very VERY different!
In e-mails published in a recent May 7, 2000 article by Joshua Chaffin, titled "Notes On the Bursting of Henry's Bubble," Blodget seems to have an amazingly cavalier attitude about his new legal difficulties: news.ft.com
When the bubble finally burst, the analyst and his team seemed bewildered. "Shame on me/us for giving them any benefit of the doubt," he lamented after yet another of his recommendations had collapsed.
He seemed remarkably unruffled in a note to Kirsten Campbell, a former research colleague, last July, just after Mr Spitzer had launched his probe:
"Have fun with the lawyers, and don't worry about it," Mr Blodget advised. "I was scared to death in the beginning, but have since learned that these things happen all the time. Look forward to having lunch at some point. H."
The lawsuit contains some absolutely amazing accusations against the named "Defendants," each allegedly playing a key and significant roll in deceptions spanning several years. It sure sounds to me like a lot of unbelievable "Enron-like" stuff was going on. In fact, if the accusations are eventually proven to be true, these guys could have taught the Enron gang a thing or two about shareholder deception. And if just a fraction of the lawsuit's accusations can be proved in a court of law, it sure seems to me (as a non-lawyer) that some big-time REALLY NAUGHTY STUFF was going on...not to mention the allegations of some of the most creative accounting, earnings-reporting, and phony inflated "expenses" tricks that I've ever heard. I knew about the "barter" earnings game INSP has admitted playing. But I didn't know anything about "Lazy-Susan" deals, "Purchasing Revenue" deals, "Trade-Back" inflated earnings deals, "Tradeout" deals, "Roundtrip" transactions, "Sham" transactions, and the other non-GAAP phony and illegal accounting tricks, all alleged by the "Lead Counsel" to have been committed by INSP, and all apparently designed to completely deceive the shareholders, analysts, and Wall Street. There's so SO much more contained in the full lawsuit filing. No alleged illicit sex or graphic violence yet, but it ain't over til it's over...or at least til the fat lady "sings." :)
IMO, the allegations contained in the lawsuit seem to paint a very clear picture of an extremely complex interwoven web spun by the "Defendants" into an incredibly sophisticated and elaborate scheme of massive shareholder deception, involving stock price manipulation, deceitful analyst ratings, illegal insider selling, false and misleading financial reports, dishonest earnings shenanigans, phony earnings projections, and outright fraud...all alleged by the "Lead Councel" to have been secretly controlled by the small gang now called "The Defendants," and being lead right down the proverbial garden path and right on over the cliff - that separates right from wrong - like lemmings, with an all-consuming greed for wealth and power.
Reading the lawsuit and reflecting on some of the Merrill Lynch private e-mails uncovered by Spitzer, I recalled some statements purportedly made by Jain in an old four-page December 2000 Business2.com article by Erik Schonfeld, published just two months after after INSP merged with GNET, and titled (with tongue firmly planted in cheek) "Naveen Jain Is the Greatest High-Tech Entrepreneur of All Human History":
business2.com
A few classic Jainisms from the above article:
In all earnestness he (Jain) declares, "I know I can get any deal done because I can always outsmart the person across the table."
Jain says, "people don't know how to distinguish between confidence and arrogance." According to him, if somebody finds him arrogant, they must suffer from low self-esteem; if they think him merely confident, their self-esteem is intact. Thus, jujitsu-like, Jain's arrogance becomes someone else's character defect.
Those who know Jain describe him not only as arrogant but also as "outlandish," "a maniac," and "Naveen-centric." And those are the people who like him.
"I have a great gift for telling people they are stupid," Jain explains, "and they don't really think I mean it."
In a way, Jain's greatest strength - dealmaking prowess - may also be his Achilles' heel. At InfoSpace there is no such thing as a bad deal.
That sort of detail-oriented work is not Jain's strong suit. He has a reputation for doing deals on a handshake, then leaving others to clean up after him, and at least once this technique has come back to haunt him. Last year, InfoSpace settled two lawsuits totaling $15 million with former employees who said they were promised options they never got.
It certainly appears from the allegations contained in the lawsuit that the "Lead Counsel" already has a substantial collection of "insiders" (current and/or previous?) willing to completely spill-the-beans and testify in court, as well as a massive collection of documents to back up the charges in exquisite painstaking blow-by-blow chronological detail. These attorneys are top-of-the-line when it comes to class action cases, and incredibly thorough in their investigative techniques, rarely leaving a stone unturned. And they've got their top financial detective and accounting fraud wizard, Karl Barth (who is both an attorney and a CPA) on this case, as a lead attorney for Hagens-Berman (see his resume in the firm's website link above). From reading the lawsuit, I got the distinct impression that the plaintiff's attorneys already know much more, and have many more cards to play, with many other surprises in store for the "Defendants," than is spelled out in the outline form of the lawsuit, despite its well-documented detail. I don't know if they've done any DNA testing yet, but I wouldn't be at all surprised. ;)
A few other personal observations. Do I think that shareholder "class action" lawsuits are often just a con game, sometimes bordering on legal extortion, sort of like playing a big expensive game of "chicken"?...YES, sometimes! Do I think that the attorneys who bring these types of cases often hit a jackpot or "gold mine," bringing incredible financial riches for themselves in settlements and jury awards?...YES! And, do I think, even despite a major victory, that the shareholders are ever made "whole" in terms of the losses they have suffered at the hands of fraudulent and deceitful companies?...NO, not even close! Is this particular class action lawsuit costing the InfoSpace shareholders who are members of the "Class" a single penny in legal fees?...NOPE! Are the attorneys taking all of the financial risk and legal expenses upon themselves?...YEP!
Do I believe that a company (any company) and their "insiders" who have (and can be proven to have) dishonestly manipulated a stock, deliberately falsified records, and illegally reaped huge personal fortunes for themselves in the process (all virtually stolen from the shareholders) should just be ignored and be allowed to go off on their merry way, unpunished and Scott-Free???...HELL NO! That's why we have a criminal and civil justice system in this country, to punish the guilty and try to compensate the victims of crime and corruption, hopefully reaching some form of justice for those who were victimized.
It certainly seems very clear to me that the shareholders of Go2Net were sold a complete "bill of goods," regarding the merger with InfoSpace. I also truly believe that the executives and management of GNET (including the largest shareholder, Paul Allen), were totally blind-sided into swallowing hook-line-and-sinker the belief that "merging" with INSP, as a (self-proclaimed) future dominant gorilla in wireless infrastructure business, would be a boon to shareholders (and GNET employees). Apparently once inside the company, it only took Russell Horowitz and the GNET team less than 3 months to discover the truth as to what was really hidden behind the wizard's curtain. To quote from the lawsuit, "a bitter fight ensued." Included in allegations contained in the lawsuit, are many words such as "fraud," and "sham," referring to INSP. And remember who provided the "financial advisor" roll for GNET in the merger? None other than the now infamous firm of Merrill Lynch itself, with it's top Internet analyst, Blodget, allegedly working with Jain to help artificially keep INSP's stock price up, at least until the deal with GNET closed and Merrill received their +/-$10-15 million "financial advisor" fee, when they finally downgraded it two months later. And also remember, not a single former executive, manager, or employee of GNET is named in the shareholder lawsuit against INSP (or any other lawsuit that I am aware of). Not a single one!!! In addition, INSP's most recent 10-K states they have approximately 14 other lawsuits currently filed against them, and that's excluding this big well-publicized class action one. That speaks volumes to me.
As a side note, I wonder if the Washington State Attorney General is keeping a close watch on the developments in this case, to perhaps determine if any additional criminal and/or fraud charges against some (or all) of the named "Defendants" is merited. This may depend on whether or not Judge Thomas Zilly allows the case to proceed. And if it does, which of the allegations can be proven in a court of law, and/or what kind of settlement is ultimately reached, or what will a jury ultimately rule, including what awards to grant the plaintiffs...and for what violations of law. The Wash. State AG has a reputation for playing hardball, and being an extremely aggressive prosecutor, winning (among other things) major victories against "big tobacco" for the state. We'll all just have to wait and see whether there is another chapter to be written in this "still developing" story...yet to be told.
Anyway, download lawsuit if you're at all interested, and/or are a member of the plaintiffs shareholder "Class." Read it at your leisure...but AFTER you've put all the kids and your spouse (or significant-other) off to bed (preferably in a sound-proof room, so they can't hear the firestorm of expletives you'll soon be emitting), and then have yourself a few stiff drinks of your favorite adult beverage, well BEFORE you begin reading it. Warning: this is a pretty scary 101-page alleged shareholder horror story. But for some, it will be a page-turner that's hard to put down once you get into it. Some of it may make your skin crawl, and the hair on the back of your neck bristle with utter disgust, contempt, and yes...perhaps both grief and sadness, for what the allegations contained in the lawsuit purport to expose as the truth of what REALLY happened behind those closed doors at InfoSpace, in secret.
I'll leave you with a final thought. Here's a portion of just one statement from the (new and improved) "amended" INSP class action lawsuit, that pretty much concisely sums up the whole damn thing for me:
"...just a house of cards, waiting to tumble."
And tumble it did.
(losing 99.46% value in 26+ mos: $138.5/share to $0.75)
To be continued . . .
Roger (All just my most "humbled" opinions) |
