"Amended" Class Action Lawsuit: PART FOUR
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 50-66:
(bold added for emphasis)
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151. To facilitate the acquisition of Go2Net, InfoSpace filed with the SEC a Registration Statement on Form S-4 on September 8, 2000. This Registration Statement was signed by Defendants Jain and Halstead. This Registration Statement contained the Company's financial statements for the year ending December 31, 1999 and the six-month period ending June 30, 2000, and was therefore false and misleading for the same reasons identified in (paragraphs) 193-216.
153. The Registration Statement also represented that the Company had experienced significant growth in "our customer and merchant services as a result of the expansion of our affiliate network, which consists of more than 3,100 websites."
154. In fact, defendants were aware that the consumer business they had been promoting was deteriorating. During the fall of 2000, this deterioration was discussed at the highest levels of the Company and led to a heated split between the Go2Net executives and Jain, Halstead and others. This deterioration was not revealed until after the Class Period when Jain announced that the Company would deliver a "revised operating plan" as well as 3revised guidance,2 and that it would jettison its consumer business. As one analyst called it after announcing the departure of the three key Go2Net executives, Jain "dropped the other proverbial shoe yesterday with a loud thud."
155. Representations regarding the wireless customers were misleading. During most of 2000, defendants were aware that at least 10-15% of these wireline customers were high risk. This included but was not limited to companies such a Women.com; 800USSEARCH.com; Insweb; Cyberian Outpost and Village. These high-risk accounts were facing liquidity problems, announcing layoffs and/or were being delisted by NASDAQ. Nonetheless, revenues from these accounts were included in revenue projections made by the InfoSpace Defendants, resulting in a material overstatement. Further, even assuming that there had been "significant growth in merchant and consumer services," beginning in June 2000, InfoSpace's executives were reporting a decrease in advertising expenses, which in turn placed InfoSpace's consumer business at serious risk.
156. After the Go2Net merger, Arun Sarin continued as InfoSpace1s CEO, but took on the additional title of vice-chairman. Russell Horowitz, the former CEO of Go2Net, became president and vice-chairman of InfoSpace.
157. On September 14, 2000, Defendants held InfoSpace's first analyst day in Seattle. Defendant Jain arranged for senior InfoSpace and Go2Net executives as well as important InfoSpace distribution partners AT&T Wireless and Nortel to present their "vision" of the combined Company. During the six hours of presentations to more than 100 analysts, defendant Jain and InfoSpace CFO Rand Rosenberg revealed that InfoSpace would continue to generate strong revenue growth during FY 2000 and that InfoSpace would post FY 2001 revenue and EPS of more than $360+ million and $0.16, respectively. For the reasons stated above these statements were false and misleading.
158. On September 15, 2000, Merrill Lynch and Blodget issued a glowing report based on presentations by and conversations with InfoSpace Management at the analyst day. The report stated, in part:
InfoSpace hosted its first analyst day in Seattle yesterday. Management of InfoSpace and Go2Net presented their vision for the combined company, and discussed each business unit (wireline, merchant, wireless and broadband).
We believe that InfoSpace has a huge market opportunity, a powerful vision, and that Go2Net is additive to that vision. We think most investors came away with a similar impression
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InfoSpace laid out pro forma financial expectations as follows: Q3 rev., $53.5mm (+12% seq.), Q4 rev. $64.4mm (+20%), 2001 rev. of $261mm (+78%). EPA of $0.01 in Q3, $0.01 in Q4 and approx. $0.17-$0.18 in 2001.
159. These statements were false and misleading because of the deterioration set forth above as well as the fact that earlier revenues were overstated.
160. These statements were false and misleading because of the deterioration in the business set forth above as well as due to the fact that the earlier revenues were overstated.
166. When a Merrill Lynch broker eventually complained on October 20, 2000 about Blodget1s price objective and rating of InfoSpace stock, Blodget contacted a fellow analyst: "I am so tired of getting these things. Can we please reset this stupid price target and rip this piece of junk off whatever list it's on. If you have to downgrade it, downgrade it." ML 06578. InfoSpace, however, was not removed from the "Favored 15" until December 5, 2000 (ML 06700) and was not downgraded until December 11, 2000. (ML 00388; see also ML 61784-85).
167. To the extent any doubt existed as to receipt of positive recommendations, and as part of his efforts to artificially inflate the price of InfoSpace stock, Jain withheld Merrill Lynch's fee for its role in the Go2Net/InfoSpace merger until Defendant Merrill Lynch issued a positive post-merger report. Pursuant to Jain's threat, he reached an agreement with Henry Blodget (the Merrill Lynch analyst) whereby Merrill Lynch and Blodget issued a positive research report after the merger. On October 23 and October 26, 2000, in two separate reports, Merrill Lynch reiterated its "BUY" recommendation despite Blodget's unbiased opinion that the price target should be reset because InfoSpace stock was a "piece of junk." The Merrill Lynch report, based on information provided by Jain, projected 2001 revenues of $360 million. Further, turning to metrics, the report noted that "management cited 3,200 affiliates." For the reasons stated above, all those representations were false or omitted material information. After these reports, Jain authorized Go2Net to pay Merrill Lynch the fee it was to receive for its role as financial advisor to Go2Net. Thus, upon information and belief, Jain manipulated a key analyst's report in order to maintain and artificially inflate the price of InfoSpace stock.
168. In its October 23, 2000 analyst report authored by Defendant Blodget that was entitled "Q3 Preview," Merrill Lynch again assigned "Buy" and Long-term "Buy" ratings to InfoSpace's stock. This report primed the market for outstanding financial results from InfoSpace, and talked up the Company's future prospects:
The stock has suffered from outsize expectations for wireless, set earlier this year. We believe Go2Net is a powerful addition to InfoSpace's core infrastructure business, and that if any company can demonstrate strong growth in the consumer and merchant business, as well as continued progress in wireless, stock performance should improve.
169. On October 26, 2000, Merrill Lynch issued another analyst report, this one entitled "Q3 Results" which called InfoSpace's Q3 "very strong." The report reiterated Merrill Lynch's "Buy" and Long-term "Buy" ratings. This Merrill Lynch report, based upon information provided by Jain, also projected 2001 revenues of $360 million. Further, turning to metrics, the report noted that, "management cited 3,200 affiliates." For the reasons stated above, all of these representations were false or omitted material information that was necessary to make them not misleading.
170. After these very favorable reports, Jain authorized Go2Net to pay Defendant Merrill Lynch the fee it was to receive for its role as financial advisor to Go2Net. Thus, InfoSpace, Jain and Merrill Lynch manipulated a key analyst's report in order to maintain and artificially inflate the price of InfoSpace stock.
171. At or shortly after the merger, however, InfoSpace secretly changed its business model to de-emphasize consumer advertising and focus on the wireless aspect of its business as well services for merchants. InfoSpace did not, however, have nearly the same presence in those segments of the market. When Jain announced his plans to Sarin and Horowitz, any synergic or benefits of the Go2Net merger disappeared. A bitter internal battle ensued. At one point the Board of Directors appointed Sarin as new CEO, effectively ousting Jain. Jain, however, threatened to leave InfoSpace and start up another company (taking key personnel and proprietary technology with him) and refused to sign a non-compete agreement. Due to those circumstances, the InfoSpace Board decided to put Jain back in charge and a number of the Go2Net executives abruptly left.
172. The market also believed that the Go2Net merger would provide the company with the depth of management it needed to enter a more mature growth phase. Arun Sarin was viewed by the market as "a significant asset to fully develop and market InfoSpace's wireless platform as a credible offering, and an experience and highly skilled chief executive who could grow the company to the next level."
180. On December 20, 2000, Merrill Lynch and Blodget reiterated their accumulation buy (2-1) rating. They repeated this positive rating despite Merrill Lynch's internal opinions of InfoSpace management, referenced above.
181. On December 29, 2000, defendant Jain dumped 221,713 more InfoSpace shares on the market, reaping illegal insider proceeds of at least $1,981,559. Just days before, in an internal e-mail, Blodget had referred to Jain as "what a sleazebag"
182. On January 22, 2001, Defendants issued a release and convened a nationwide conference call for analysts, large InfoSpace shareholders, hedge fund managers and other market participants in which defendant Jain represented:
Defendant Jain would be replacing Arun Sarin as CEO.
Tammy Halstead would be replacing Rand Rosenberg as CFO.
InfoSpace remained extremely well positioned to capitalize on the numerous opportunities existing in its key business segments.
184. This announcement meant that the company's entire top management team, except for defendant Jain, had resigned. Russell Horowitz, according to the Company, quit as InfoSpace's President and COO (after taking the job in August 2000) but became an "executive consultant and advisor" to InfoSpace. Ed Belsheim, previously the company's Senior Vice President and General Counsel, was promoted to Chief Operating Officer. Rand Rosenberg, who had been InfoSpace's CFO for just over six months (since June 2000), quit without explanation. Rosenberg had previously been the head of telecom and media investment banking at Montgomery Securities.
185. Most surprisingly, the Company stated that after only eight months on the job, CEO Arun Sarin quit because he wanted to spend more time with his family, but would remain on the Board of Directors. In fact Sarin had no such plans. He left after the leadership struggle identified above and due to the fact he had grown to distrust Jain, who on a number of occasions made statements to analysts and employees that Sarin felt were false. These included the $300 million plus revenue projections. Further, Sarin realized that the advertising business that had been the Company's core, was failing and without it could not possibly realize the revenue growth being projected.
186. In an interview, defendant Jain spun the January departures of Sarin as CEO and Rosenberg as CFO as benefits to the company, stating they had previously been planning on leaving the Company. Commenting on the wholesale replacement, Jain stated that, "InfoSpace is not a job.... It is a religion, a crusade. And when you are on a crusade, you need leadership that is stable." (Footnote: Quote taken from ecompany.com 1/26/01 article "The Vacuum at InfoSpace).
187. But the stable leadership Jain bragged about was indeed just a house of cards, waiting to tumble. Three weeks later, on February 13, 2001, "after a month of layoffs, revolving-door management and a reeling stock price," the company announced that former CEO Sarin would now completely dissociate himself from InfoSpace. As The Seattle Times reported:
News that Sarin was severing ties with InfoSpace deflated expectations [about the Company] even more. Sarin had been recruited from Vodaphone to boldly lead the company into wireless. "It's surprising that he will leave just a few weeks after he stepped down," said Safa Rashtchy, analyst for U.S. Bancorp Piper Jaffrey. "It was expected he would stay active."
Sarin's departure is the latest in a long string of executive flights. Since the beginning of this month, most of the principals who came over from Go2Net have stepped down. Go2Net co-founders, Russell Horowitz, John Keister and former Go2Net Chief Financial Officer Rick Thompson have filed to sell a total of more than 6 million shares of InfoSpace stock since they left.
188. Various other media also noted the true effect of the departures. One magazine article stated that: "That giant sucking sound you hear is InfoSpace's top management team running for the exits."
189. Defendants' surprising January 22, 2001 revelations concerning the replacement of InfoSpace's senior management team surprised the market, leading to widespread concern that Defendants might have overstated InfoSpace1s ability to report FY 2001 revenue and EPS of $360 million and $0.16+, respectively.
190. Following the close of the market on January 29, 2001, the price of InfoSpace shares dropped to as low as $5-7/16 per share as Defendants finally began to disclose the falsity of their Class Period assurances that InfoSpace was continuing to experience strong momentum, including assurances by Defendants just weeks before the end of the Class Period that InfoSpace would report positive FY 2001 revenue and EPS of $360 million and $0.16+, respectively.
191. The next day, Defendants confirmed InfoSpace investors' worst nightmare: the Company was suffering declining consumer service revenue and would post substantially worse losses for FY 2001 than it was predicting, and its vaunted "growth" had never occurred, and would be flat over 2001. Further, since most of its upper management had quit and the Company was in disarray, Jain refused to even tell investors where the Company was headed.
As reported by the Associated Press January 30, 2001:
InfoSpace Inc. investors will have to wait as long as 30 days to get a better financial picture for the content-delivery company, as it decides how to cut back on consumer businesses.
In a Monday conference call with analysts, InfoSpace executives said they would release a strategic plan within 30 days, including updated financial targets.
The Bellevue, Wash. based company plans to scale back or sell most of its consumer-oriented units to focus on Internet content and commerce infrastructure services.
"At this point, we have made a very conscious decision to de-emphasize some of the business we acquired with Go2Net," Chief Executive Naveen Jain told analysts.
192. Thereafter, during February-March 2001, the Puget Sound Business Journal reported that InfoSpace had failed to pay its employees between $3 million and $5 million in overtime pay:
Current and former employees of InfoSpace Corp. of Bellevue are due an estimated $3 million to $5 million in unpaid overtime, a federal audit has found.
The audit, disclosed this week in the Internet company's annual Securities and Exchange Commission filing, found that more than 200 employees may be due overtime pay, said InfoSpace chief financial officer Tammy Halstead.
A U.S. Department of Labor spokesman in Seattle, Michael Shimizu, said his agency could not comment because the case is "still under investigation."
But State Department of Labor and Industries officials said that even at $3 million, the total would rank high in the annals of unpaid overtime cases.
"That'd certainly be one of the biggest ones I've ever seen," said Jim Ashcraft, who oversees such cases as a compliance specialty supervisor in the department's Seattle employment standards unit.
This failure to recognize their obligations further served to artificially inflate the net income and assets reported by InfoSpace. |
