Re: 10/18/01 - [GENI] David Osher v. Genesisintermedia, Inc. et al Complaint (Part 1 of 2)
MILBERG WEISS BERSHAD
HYNES & LERACH LLP
WILLIAM S. LERACH (68581)
DARREN J. ROBBINS (168593)
600 West Broadway, Suite 1800
San Diego, CA 92101
Telephone: 619/231-1058
619/231-7423 (fax)
SCHIFFRIN & BARROWAY, LLP
MARC A. TOPAZ
Three Bala Plaza East, Suite 400
Bala Cynwyd, PA 19004
Telephone: 610/667-7706
610/667-7056 (fax)
CAULEY, GELLER, BOWMAN
& COATES, LLP
PAUL J. GELLER
One Boca Place, Suite 421A
2255 Glades Road
Boca Raton, FL 33431
Telephone: 561/750-3000
561/750-3364 (fax)
Attorneys for Plaintiff
UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
WESTERN DIVISION
DAVID OSHER, On Behalf of Himself
and All Others Similarly Situated,
Plaintiff,
vs.
GENESISINTERMEDIA, INC., RAMY
EL-BATRAWI, DOUGLAS E. JACOBSON
and COURTNEY SMITH,
Defendants.
No.
CLASS ACTION
COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS
DEMAND FOR JURY TRIAL
SUMMARY AND OVERVIEW
1. This is a securities class action on behalf of all purchasers of the publicly traded securities of GenesisIntermedia, Inc. ("GenesisIntermedia" or the "Company") between December 21, 1999 and September 25, 2001 (the "Class Period"), against GenesisIntermedia and certain of its officers, directors and a secretly paid financial commentator for violations of the Securities Exchange Act of 1934 (the "1934 Act").
2. GenesisIntermedia markets and sells products which it owns or has licensed through numerous cable channels, including network and cable TV, newspapers, magazines, radio and the Internet.
3. During the Class Period, GenesisIntermedia engaged in a series of deceitful acts designed to artificially inflate the price of GenesisIntermedia shares. In December 1999, the beginning of the Class Period, the defendants plotted and unleashed the first phase of their illegal scheme to inflate the price of GenesisIntermedia shares and gave shares worth more than $3 million to a financial commentator who helped send the stock soaring after he agreed to issue false, positive recommendations for it on CNN, CNBC and Bloomberg Television. However, defendants concealed the payment of 216,000 shares to the commentator until more than a year after GenesisIntermedia purchased and closed a Web site developed by the commentator, Courtney Smith, and even then, the disclosure was false at best. In fact, the disclosure of the payment in GenesisIntermedia's April 2001 10-K filed with the Securities and Exchange Commission makes no mention of Smith, the TV stock picker who became one of GenesisIntermedia's largest outside stockholders when he received the shares. [1]
4. Instead, GenesisIntermedia routed the shares to Smith through a tiny New York-based vitamin exporting company (United Pacific Alliance) owned by Angela Chen, a friend of Smith's.
5. Through these illegal bribes, defendants caused GenesisIntermedia shares to be recommended at least 18 times on financial TV networks beginning in December 1999 and continuing until as recently as March of 2001.
6. Smith later admitted that the stock he received might have been viewed as a reward from GenesisIntermedia for his efforts to promote the stock on television. "It's quite possible that's what was going through their minds," he said. "If (GenesisIntermedia) was trying to do that, that's OK because everyone made money on this thing."
7. In an interview, Chen admitted that she received a small fee for making her company the conduit for the transaction. [2]
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[1] The stake was worth about $3.6 million following his recommendation.
[2] She admitted she met GenesisIntermedia CEO Ramy El-Batrawi in Las Vegas, Nevada, accompanied by Smith to discuss the scheme.
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8. During his television appearances, Smith said he was attracted by the Company's "Centerlinq division," which operates kiosks in 32 shopping malls. However, less than 1% of GenesisIntermedia's revenue comes from the kiosk division, and when confronted with this fact, Smith stated: "That disturbs me." Instead, most of GenesisIntermedia's revenue comes from telemarketing and infomercials for products, including Ab Twister exercise machines and tapes with advice on love and personal finance.
9. When Smith first recommended the shares on television on December 21, 1999, he called the company "a very hot speculative pick" on Bloomberg TV. The shares rose 50%, to $2.25 from $1.50, the next day, trading 29 times their average volume over the prior three months. Six weeks later, on February 8, 2000, Smith predicted on Bloomberg TV that GenesisIntermedia shares would rise between threefold and fivefold. The next day, they gained 77%, to $3.92 from $2.21, on 24 times their average volume.
10. On February 25, 2000, two weeks later, Smith named GenesisIntermedia as his "Double Your Money Pick" on CNBC. The stock gained 70%, to $9.33 from $5.48, on 21 times its average volume.
11. In March 2000, Smith received his 216,000 shares from defendants after having pushed GenesisIntermedia shares to artificially inflated levels -- 700% above where they traded months earlier.
12. After that, Smith recommended GenesisIntermedia shares a total of 10 more times between April 2000 and March 2001 on Bloomberg, CNBC and CNN.
13. In an effort to continue to conceal the payment to Smith, the Company revealed that it had purchased a Web site called DoWebsites.com. This was purely a sham transaction. Smith admitted DoWebsites.com was designed to provide advice to others about creating Web sites. He further stated it had no advertising or other sources of revenue. "It didn't have much of anything when we sold it," he said, adding no other buyers were sought.
14. GenesisIntermedia first disclosed the purchase of the Web site from United Pacific Alliance and the simultaneous closure of the site in its 2000 annual report.
15. The Company, however, simultaneously said it "believes that the market for services offered by DoWebsites.com has decreased substantially due to the recent closure of many Internet related companies."
16. As a result of the defendants' false statements, GenesisIntermedia's stock price traded at inflated levels during the Class Period, increasing to as high as $25 in June 2001.
17. Then after the close of the market on September 25, 2001, GenesisIntermedia's shares were halted pending the resolution of an investigation into many of the activities described herein. GenesisIntermedia shares remain halted and are in essence, worthless. However, just hours before the announcement of the investigation and "halt," defendant El-Batrawi sold over $1.7 million dollars worth of his own shares.
JURISDICTION AND VENUE
18. Jurisdiction is conferred by '27 of the 1934 Act. The claims asserted herein arise under ''10(b) and 20(a) of the 1934 Act and Rule 10b-5.
19. (a) Venue is proper in this District pursuant to '27 of the 1934 Act. Many of the false and misleading statements were made in or issued from this District.
(b) The Company's principal executive offices are in Van Nuys, California, where the day-to-day operations of the Company are directed and managed.
THE PARTIES
20. Plaintiff David Osher purchased GenesisIntermedia publicly traded securities as described in the attached certification and was damaged thereby.
21. Defendant GenesisIntermedia markets and sells products which it owns or has licensed through numerous cable channels, including network and cable TV, newspapers, magazines, radio and the Internet.
22. (a) Defendant Ramy El-Batrawi ("El-Batrawi") was the Chairman and Chief Executive Officer of GenesisIntermedia.
(b) Defendant Douglas E. Jacobson ("Jacobson") was Chief Financial Officer of GenesisIntermedia.
23. The individuals named as defendants in 622(a)-(b) are referred to herein as the "Individual Defendants." The Individual Defendants, because of their positions with the Company, possessed the power and authority to control the contents of GenesisIntermedia's quarterly reports, press releases and presentations to securities analysts, money and portfolio managers and institutional investors, i.e., the market. Each defendant was provided with copies of the Company's reports and press releases alleged herein to be misleading prior to or shortly after their issuance and had the ability and opportunity to prevent their issuance or cause them to be corrected. Because of their positions and access to material non-public information available to them but not to the public, each of these defendants knew that the adverse facts specified herein had not been disclosed to and were being concealed from the public and that the positive representations which were being made were then materially false and misleading.
The Individual Defendants are liable for the false statements pleaded herein at 6633-37 and 39-42, as those statements were each "group-published" information, the result of the collective actions of the Individual Defendants.
24. Defendant Courtney Smith ("Smith") was the editor of the Wall Street Winners Newsletter. Smith was the former owner of the Web site DoWebsites.com, which Smith and defendants GenesisIntermedia, El-Batrawi and Jacobson used to facilitate a "sham transaction" to pay Smith millions of dollar in GenesisIntermedia shares in exchange for his positive and false recommendations of GenesisIntermedia shares on national television and various news services. When Smith made his recommendations of GenesisIntermedia shares he did not genuinely believe the positive recommendations/statements.
SCIENTER
25. In addition to the above-described involvement, each Individual Defendant had knowledge of GenesisIntermedia's problems and was motivated to conceal such problems. Jacobson, as CFO, was responsible for financial reporting and communications with the market. Many of the internal reports showing GenesisIntermedia's forecasted and actual growth were prepared by the finance department under Jacobson's direction as well as the sham transaction involving defendant Smith. El-Batrawi, as CEO and Chairman, was responsible for the financial results and press releases issued by the Company. Each Individual Defendant sought to demonstrate that he could lead the Company successfully and generate the growth expected by the market. El-Batrawi was instrumental in purposely concealing the payoffs to Smith.
26. Defendants were motivated to engage in the fraudulent practices alleged herein in order to obtain financing for the Company and participate in the Internet stock boom.
FRAUDULENT SCHEME AND COURSE OF BUSINESS
27. Each defendant is liable for (i) making false statements, or (ii) failing to disclose adverse facts known to him about GenesisIntermedia. Defendants' fraudulent scheme and course of business that operated as a fraud or deceit on purchasers of GenesisIntermedia publicly traded securities was a success, as it (i) deceived the investing public regarding GenesisIntermedia's prospects and business; (ii) artificially inflated the prices of GenesisIntermedia's publicly traded securities; (iii) allowed defendants to obtain larger bonuses which were directly tied to the performance of GenesisIntermedia shares; (iv) allowed defendants to consummate multiple rounds of financing totaling in excess of $40 million in order to fund their cash-starved operations; (v) allowed GenesisIntermedia to acquire companies in stock for stock acquisitions; (vi) allowed the Company to obtain listing on the Russell 2000 Index in order to increase the likelihood of large institutional purchases of its stock; (vii) caused the exercise of warrants via its inflated stock price allowing the Company to reap $2.3 million in proceeds; (viii) allowed defendants to arrange to sell and actually sell in excess of $1.7 million worth of GenesisIntermedia shares at artificially inflated prices; and (ix) caused plaintiff and other members of the Class to purchase GenesisIntermedia publicly traded securities at inflated prices.
DEFENDANTS' FALSE AND MISLEADING STATEMENTS ISSUED DURING THE CLASS PERIOD
28. On December 21, 1999, consistent with defendants' scheme and Smith's agreement to actively assist them (in exchange for more than $3 million worth of GenesisIntermedia shares), defendants and Smith arranged for Smith to appear on Bloomberg TV and recommend the purchase of GenesisIntermedia shares. There, Smith falsely characterized GenesisIntermedia as "a very hot speculative pick." Consistent with their plan, Smith concealed the fact that he was being paid millions of dollars for recommending the purchase of GenesisIntermedia shares.
29. Defendants' use of Smith had its intended effect and caused GenesisIntermedia shares to soar 50% to $2.25 from $1.50 the following day on volume which exceeded 2900% of their average daily volume.
30. On February 8, 2000, Smith appeared on Bloomberg TV (at the behest of defendants) and stated that he expected GenesisIntermedia's shares to rise between 300% and 500%. Also, consistent with the plan to conceal his multi-million dollar payment to be received from defendants so as not to taint the legitimacy of Smith's endorsement, defendants and Smith agreed that Smith would continue to conceal his payment from the public.
31. Smith's statements had their intended effect and caused GenesisIntermedia shares to spike 77% to $3.92 from $2.21, on 24 times their average volume.
32. On February 25, 2000, Smith named GenesisIntermedia as his "Double Your Money Pick" on CNBC. Again, Smith's statements combined with his concealment of his being paid millions of dollars to recommend the stock caused GenesisIntermedia shares to soar 77% the following day to $9.33 from $5.48 on 21 times their average daily volume.
33. On March 10, 2000, GenesisIntermedia.com, Inc. announced it had closed approximately $10 million in financing in a press release which stated in part:
GenesisIntermedia.com, Inc. (Nasdaq: GENI), (PCX: GNS; Frankfurt: GIA) announced that it closed the final phase of approximately $10,000,000 in financing, which started in early December 1999 and was completed today. In addition, the Company announced that it is currently negotiating the terms of additional funding, and that it anticipates the funding will close in several phases within approximately 90 days.
The recently closed financing consisted of a private placement of $1 million in debentures and warrants and approximately $9 million in long-term debt and warrants placed with accredited investors. Of the Company's recent financing activities, $3.275 million was repaid in December, concurrent with the Company's sale of the Contour License.
The Company intends to use net proceeds from the current and future phases of financing for the continued expansion of CENTERLINQ, and for the implementation of our business plan of investing in, and developing, new technologies and Internet-related businesses. The plan includes acquisitions primarily of Internet companies, which will serve to enhance GENI shareholder value. The Company plans to infuse a full range of resources, development strategies and the financial support needed to introduce innovative products and services to both business-to-business and business-to-consumer market segments.
With regard to the contemplated new financing, Ramy El-Batrawi, Chairman and Chief Executive Officer, stated "We will raise additional funding within 90 days through private placements and long-term debt through strategic investor groups.
"Our successfully completed financing, as well as anticipated new financing, strengthens the momentum of our evolution into an integrator of Internet and interactive media technologies with traditional marketing channels. It also demonstrates confidence in, and acceptance and support of our incubation business model
among members of the investment community," explained El-Batrawi. "We've already begun to identify potential technology and acquisition candidates that we hope to bring into the GenesisIntermedia.com, Inc. pipeline. "GENI intends to continue to seek out and develop ideas that it can generate into successful Internet businesses," continued El-Batrawi. "Obtaining funding enables us to build upon our successes with CENTERLINQ, and encourage, nurture and implement new ideas."
34. On March 31, 2000, GenesisIntermedia issued a press release which stated, in part:
GenesisIntermedia.com, Inc. (Nasdaq: GENI) (PCX: GNS; Frankfurt: GIA), a leading developer of Internet technologies and Internet companies, announced that it has acquired DoWebsites.com, Inc., the leading portal for webmasters. DoWebsites.com provides tools and resources for all webmasters, from beginners to professionals. This provides a powerful synergy to GENI's newly launched Internet education and mentoring program, as current and future subscribers to the program can utilize the complementary array of resources found on DoWebsites.com. This combination makes GENI and DoWebsites.com the largest provider of tools and resources for those developing web sites for business and for pleasure.
"This is GENI's second portal acquisition, joining the rapidly-expanding CENTERLINQ network," stated Ramy El-Batrawi, Chairman and Chief Executive Officer. "This further enhances our business plan of investing in, and developing new technologies and Internet-related businesses. We anticipate that this will create an immediate and sustainable boost to our presence and profitability in the Internet space."
The addition of DoWebsites to GENI's mentoring capabilities enables GENI to capitalize on the explosive growth associated with the need for experienced, innovative site developers and programmers, as well as the tools, resources and marketing expertise that new and experienced webmasters desire.
GENI will benefit from opportunities to cross-sell additional products and services, as the existing mentors, consultants and sales team can drive traffic to www.dowebsites.com, and the site will prompt users to gain additional site development and marketing advantages through the mentoring programs. Because traffic from DoWebsites.com will generate a substantially greater amount of leads for mentoring, GENI will have increased opportunities to sell Internet advertising banners, on which it can earn profits of up to 53%, to some of the most popular search engines.
"The acquisition of DoWebsites adds another valuable link to GENI's Internet mentoring capabilities," stated El-Batrawi, "Webmasters and site developers who use the mentoring program now have an additional resource for web-enhancement tools and services, and visitors to DoWebsites.com have the ability to access the many advantages of GENI's mentoring program. There are multiple routes to drive traffic between DoWebsites.com and GENI's mentoring operations, and we expect the combined operations to magnify exposure for every facet of our operations, thus driving increased revenues through fulfilment of a greater variety of high-demand services.
Direct access to DoWebsites.com will also be added to CENTERLINQ, GENI's fast-growing interactive, multimedia marketing and promotion network, so that upwards of 22 million consumers can learn about the features and benefits of GENI's comprehensive mentoring resources.
"We also anticipate that our mentoring capabilities will help us identify possible acquisition candidates, fueling even additional future profit potential. We foresee exponential growth possibility as we will be providing valuable services to webmasters plus boosting our ability to find new, exciting concepts for development. Ultimately, both for these purposes work to enhance shareholder value."
There are tens of millions of web sites, each with its own webmasters. The number of global Internet users grows daily, and the number of potential webmasters increases just as fast due to the space on the World Wide Web that users receive when they initiate service with an Internet service provider (ISP). DoWebsites [sic] extensive range of resources helps the novice webmasters, as well as the most advanced level, providing instruction, mentoring and tools.
* * *
GENI is one of the nation's premier marketing companies and leading provider of public Internet access portals in shopping malls, rapidly expanding in the United States and soon into Europe. The company markets products and services, which it develops, licenses exclusively or distributes for third parties. The company uses conventional marketing (network and cable television, radio, newspapers, magazines), as well as interactive multimedia, the Internet and the company's CENTERLINQ network.
GENI continues to build a presence as an incubation vehicle for new Internet companies and technologies. As it has done with CENTERLINQ, GENI leverages its strength and experience in operations, marketing and the deployment of traditional media to bring new and innovative technologies to fruition, and then advancement within strategically identified market segments. In addition, GENI creates, maintains and delivers direct communication with consumers through distribution channels that it owns, giving its companies under development the widespread exposure and market access that often eludes newer enterprises.
GENI's execution of the CENTERLINQ platform, the first technology deployed within the Company's incubation model, has resulted in rapid expansion for the network into 21 shopping malls in the United States, with 18 of those installations occurring in under a year.
35. On May 3, 2000, GenesisIntermedia issued a press release which stated, in part:
GenesisIntermedia.com, Inc. (Nasdaq: GENI) (PCX: GNS; Frankfurt Stock Exchange: GIA), a developer of Internet technologies and Internet companies, today announced that, as part of an ongoing fundraising program, it has completed its latest round of financing, consisting of a placement of $4 million in Series B Convertible Preferred with institutional investors, and $6 million in long-term debt. The funds will be used to expand GENI's infrastructure, for general corporate purposes and to expand the CENTERLINQ network.
Ramy El-Batrawi, Chairman of GenesisIntermedia.com, Inc., stated, "The new capital infusion will put us in a stronger market position, and gives us additional resources to extend the CENTERLINQ brand, maintain our first-mover position and bring additional talent into CENTERLINQ."
El Batrawi continues, "This tranche of financing helps us strengthen our existing core competencies, as we continue to drive high-growth businesses and technologies. Our incubation business model nurtured CENTERLINQ and gave it a good start, and even though we are still in the investment phase with respect to building the network, CENTERLINQ is beginning to influence the flows of retail advertising, and achieve respectable market share. We intend to continue building market share to make CENTERLINQ one of the most recognized and sought-after advertising networks in the country. A continued investment of this scope will be reflected in future quarterly results."
GenesisIntermedia.com, Inc. has historically derived its revenues from its conventional media and interactive multimedia technologies. The implementation of CENTERLINQ was the logical outgrowth of these core competencies, and now GENI is working toward creating long-term shareholder value by building a high-growth, technology investment platform to actively proliferate new opportunities. While continuing to invest in growth-oriented areas as part of its ongoing shareholder value initiative, the Company is likewise slowing down investments in capital-intensive, low-margin segments of its business, such as media placement, that do not provide enhanced long-term value for shareholders. The Company may determine similar steps for other areas of its broad-based business in the future.
36. On June 20, 2000, at 9:30 a.m., GenesisIntermedia issued a press release which stated in part:
GenesisIntermedia.com, Inc. (Nasdaq: GENI) (PCX; GNS; Frankfurt: GIA), a developer of Internet technologies and Internet companies, today announced that it has closed a financing round consisting of $10 million in long-term debt. The funds will be invested in the continued expansion of the Centerlinq network, as well as in the further development of newer GENI subsidiaries Car Rental Direct.com, DoWebsites.com and DynaMedia.
The latest round of financing brings the total amount of funds that GENI has raised since the beginning of 2000 to $30 million, and the Company anticipates the announcement of the completion of additional financing of between $25 million and $30 million within the next 90 days.
Ramy El-Batrawi, Chairman of GenesisIntermedia.com, Inc., stated, "This additional financing enables the continued strengthening of our business model of building high-growth businesses and technologies in the Internet space. We strongly believe in the value and power of our business model, which developed the Centerlinq network. Our funding requirements continue to be driven by the Centerlinq investment, and all development activities within GENI and its business units are aimed at enhancing long-term value for shareholders."
37. On November 7, 2000, GenesisIntermedia announced it had received a $5 million credit line. The press release stated in part:
GenesisIntermedia.com, Inc. (Nasdaq:GENI), a developer of Internet technologies and Internet companies, today announced that it had received an additional $5 million on an existing credit line from institutional investors. The Company intends to use the funding for the continued rollout of the Centerlinq network in shopping malls throughout the US, and for expanding the capabilities of other operating units.
GENI also announced that Car Rental Direct.com (CDR), one of its operating units, has had a previously extended credit line expanded by $9 million, brining the total funding extended to CDR to $20.2 million since it was bought by GENI.
Ramy El-Batrawi, Chairman of GenesisIntermedia.com, Inc., stated "GenesisIntermedia.com has been in an aggressive growth mode all year, and we are positioning our expanded operations to generate revenues from advertising sales, affiliations, consumer aggregation, product sales, car rentals and other activities.
Continued investment is necessary to elevate our revenue sources to their full potential."
The Centerlinq network continues an aggressive rollout during November and December, with installation in markets that are new to the network, including New York City, Chicago, Philadelphia, Boston, Dallas/Fort Worth and Washington, DC. Additionally, Centerlinq is being installed in shopping malls in existing Centerlinq markets that include Los Angeles and San Francisco. Other key markets where Centerlinq has either gone live or is expected to shortly go live include Detroit, Seattle, Tampa, Orlando, Denver, Phoenix, Cleveland and Buffalo.
Car Rental Direct.com currently has 11 locations and expects to have 16 by the end of 2000. Founded in November 1999, CRD has locations in Southern California and Arizona. CRD serves the replacement and suburban segments of the $18.3 billion car rental industry. CRD is in the enviable position of obtaining Internet exposure to a large consumer base at relatively little cost through promotion on Centerlinq. In addition, as the Centerlinq network expands to new markets, an instant introduction is created for CRD into those potential markets.
38. During the year ended December 31, 2000, the Company: (1) issued 780,000 shares of common stock in connection with the acquisition of Car Rental Direct.com, Inc.; (2) issued 216,000 shares of common stock in connection with the acquisition of DoWebsites.com; (3) converted $4,900,000 of debt into 2,100,000 shares of common stock as the holder of the debt exercised warrants at $2.33 per share: (4) entered into capital lease obligations of $1,555,403; and (5) financed revenue generating equipment through lines of credit of $4,755,985.
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