"Amended" Class Action Lawsuit: PART ONE
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
Below are some selected excerpts which are only a small fraction of the 101-page filing. Please refer to the entire document for the complete context, chronology, details, and the full allegations contained in the filing.
Excerpts below taken from Pages 1-5:
(bold added for emphasis)
* * * * * * * * * * * * * * * * * * * * * * * * * * *
The Honorable Thomas S. Zilly
UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF WASHINGTON
AT SEATTLE
---------------------------------------
IN RE
INFOSPACE, INC. SECURITIES
LITIGATION
---------------------------------------
No. C-01-0913-Z
CLASS ACTION
--------------------------
FIRST CONSOLIDATED AND
AMENDED COMPLAINT FOR
VIOLATION OF THE FEDERAL
SECURITIES LAWS
--------------------------
This Document Relates To:
ALL ACTIONS
--------------------------
DEMAND FOR JURY TRIAL
--------------------------
I. NATURE OF THE ACTION
1. This is a securities fraud class action brought on behalf of all persons who purchased or otherwise acquired the securities of InfoSpace, Inc. ("InfoSpace" or the "Company") between January 26, 2000 and January 30, 2001 (the "Class Period") against InfoSpace and its founder and chairman Naveen Jain and its Chief Financial Officer Tammy Halstead (collectively, the "InfoSpace Defendants"); as well as Merrill Lynch & Co., Inc. and its head internet group analyst Henry Blodget (collectively, the "Merrill Lynch Defendants") for violations of the federal securities laws arising out of all Defendants' misrepresentations regarding InfoSpace during the Class Period. Also included as a subclass, are former shareholders of Go2Net Corp. (3Go2Net2) who acquired InfoSpace stock pursuant to InfoSpace's September 8, 2000 purchase of Go2Net.
2. At the heart of InfoSpace was Naveen Jain, the founder of InfoSpace and a self-proclaimed genius. One of Jain's primary motives as CEO of InfoSpace was, and is, to drive InfoSpace1s stock price as high as possible so that he could become one of the wealthiest individuals in the Pacific Northwest and surpass his "prior employer," Bill Gates. As set forth below, in order to achieve this objective, and at the expense of plaintiffs and members of the class, Jain sought to accomplish his goals by issuing false and misleading statements concerning InfoSpace's future. During the Class Period he continuously issued statements which a leading analyst would internally describe, in documents disclosed after the stock had collapsed, as "Jain hyperbole" or "aggressive." Those statements included representations that InfoSpace would have a trillion dollar market capitalization, would achieve $300 million or more in revenues in 2001, and would realize $2 $3 per month in subscription fees from millions of wireless customers. All of these statements, which fueled a rise in the price of InfoSpace stock, were false and/or misleading and eventually lead one Merrill Lynch analyst to describe Jain as a "sleazebag."
3. As part of Jain's scheme, prior to, during and after the Class Period, the InfoSpace Defendants disseminated false and misleading information concerning InfoSpace's actual FY 1999 and 2000 financial performance and Defendants' expectations concerning InfoSpace1s FY 2001 revenue and earnings. The InfoSpace Defendants manipulated InfoSpace's reported results and deceived plaintiffs and other class members during the Class Period into thinking that InfoSpace's reported financial results were accurate and that InfoSpace1s prospects were improving. In fact, neither InfoSpace's reported FY 1999 and FY 2000 results nor its projected FY 2001 performance were accurately portrayed.
4. A key part of InfoSpace's and Jain's scheme to boost InfoSpace's stock price was obtaining favorable analyst coverage from a prominent analyst at a respected investment banking firm. Henry Blodget, who headed Merrill Lynch's Internet group was considered by the investment community to be a "star" analyst in the internet field. Merrill Lynch had begun coverage of InfoSpace in December 1999. Merrill Lynch was also aggressively courting lucrative investment-banking work from InfoSpace, and was all too happy to help InfoSpace by acting as its unabashed promoter issuing false and misleading analyst reports that did not reflect the true views of its analysts. These misleading reports were viewed by Merrill Lynch as a necessary tool to help sell investment-banking work. Merrill Lynch's glowing analyst reports, issued throughout the Class Period, served to artificially inflate the price of InfoSpace stock, as detailed herein.
5. Thus, during the Class Period, as agreed to by Jain and Merrill Lynch, Merrill issued numerous glowing analyst reports, always maintaining a "Buy" rating on the stock through December 2000, despite Defendant Blodget's candid and undisclosed admissions, beginning in at least July 2000, that InfoSpace's stock was a "powder keg" and that "many institutions" had raised "bad smell comments about it," and despite his view in October 2000 that InfoSpace stock was a "piece of junk" and that Jain was a "sleazebag."
6. The Attorney General of New York has recently concluded that systemic failures within Merrill Lynch allowed the investment-banking group to influence the published analyst opinions of the Company. On April 8, 2002, the Attorney General obtained an Order from the Supreme Court of New York for New York County requiring immediate reforms in Merrill Lynch's analyst report preparation and dissemination. New York Attorney General Spitzer called Merrill Lynch's conduct "a shocking betrayal of trust by one of Wall Street's most trusted names." The Attorney General obtained this order by submitting to the court an Affidavit in Support of Application for an Order Pursuant to General Business Law Section 354 detailing the systemic failures within Merrill Lynch that rendered their research biased, including "two troubling examples of Merrill Lynch's treatment of two stocks." One of these two examples of biased analyst coverage was Merrill Lynch's coverage of InfoSpace.
7. Defendants' scheme was designed to (and did) allow: (i) Jain to sell his own InfoSpace shares at artificially inflated prices so that he realized proceeds of $192 million; (ii) Defendants to complete a series of acquisitions using shares of InfoSpace's artificially inflated stock as currency worth almost $6 billion, including the October 2000 acquisition of Go2Net; and (iii) Merrill Lynch to obtain lucrative investment-banking contracts, including acting as Go2Net's financial advisor in connection with that Company's acquisition by InfoSpace, where most of their compensation was contingent upon successful closing of the acquisition which could only occur if InfoSpace stock remained strong.
8. During the year 2000, InfoSpace sought to portray itself as transforming from an Internet information company (providing data such as telephone listings and maps to web sites) to a wireless services information company (providing the same type of information to cellular telephone users through advanced services on a new generation of mobile phones). Its makeover came at a time when the value of Internet information company stocks had begun to sink to new lows. In the process of the appearance change, however, the Defendants directly misrepresented the then-current business conditions at InfoSpace, misrepresented the financial status of the Company, and misrepresented the Company's ability to handle the makeover.
9. During October 2000, InfoSpace, in an effort to bolster its declining stock price, completed a merger with Go2Net. This merger was purported to allow InfoSpace to be "strategically positioned like never before."
10. By the end of the Class Period, the InfoSpace Defendants finally admitted that at the same time the Company was trying to transition to the wireless services, it had failed to protect its base of conventional Internet services, and was suffering mightily because of this combined failure. As the Class Period came to an end, InfoSpace announced the departure of three key executives and, as one analyst noted, "dropped the proverbial other shoe" by drastically lowering expectations as to future performance, including the complete dissolution of its consumer business. It subsequently revealed in short order that the merger with Go2Net was a failure and it laid-off many of the 500 Go2Net employees.
11. On January 30, 2001, after Defendants had completed more than $6 billion worth of acquisitions using inflated InfoSpace shares as currency and after Defendant Jain unloaded more than $192 million of his own InfoSpace shares on an unwitting market, and after other insiders sold tens of millions of their InfoSpace stock, InfoSpace disclosed that, contrary to the representations made by them during 2000, the Company would report no revenue growth or EPS for FY 2001, but rather would report declining revenue and a significant loss for the year. Jain had repeatedly stated that 2001 revenue would exceed $300 million. As Defendants began to reveal some of their improper conduct, including the fact that Defendants' projected revenues of $300 million and earnings estimates were false and lacking in foundation, InfoSpace's shares had declined to less than $6 per share, a 95% decline from their Class Period high of $138-1/2 per share. (Footnote No.1: All shares and per share amounts have been adjusted to reflect InfoSpace's 2-for-1 stock split in April 2000). Thereafter, as the extent of InfoSpace's prospects and financial status was more fully understood, its shares continued to decline, reaching just $2-1/4 per share on April 6, 2001, when it was then revealed that, in addition to the foregoing misrepresentations, InfoSpace's financial statements had been overstated as a result of Defendants' refusal to pay its employees overtime they were legally owed. |
