Re: 10/18/01 - [GENI] David Osher v. Genesisintermedia, Inc. et al Complaint (Part 2 of 2)
39. On June 1, 2001, GenesisIntermedia reported conversion of convertible preferred and exercise warrants issued to Elliott Associates L.P. and Westgate International L.P., in a press release which stated, in part:
June 1, 2001 -- GenesisIntermedia, Inc. (Nasdaq:GENI) announced that the $3 million in Convertible Preferred shares issued to Elliott Associates L.P. and Westgate International L.P. in conjunction with a previously announced tranche of financing was completely converted into common shares.
Additionally, GenesisIntermedia announced that it realized proceeds of approximately $2.3 million from the exercise of warrants issued in conjunction with the Convertible Preferred.
40. On June 29, 2001, Carl C. Ichan's Riverdale LLC and GenesisIntermedia entered into an agreement for a $100 million credit facility and investment banking services, as announced by the Company in a press release which stated:
GenesisIntermedia, Inc. (Nasdaq:GENI) today announced that it has received a conditional commitment from Riverdale LLC, a company owned by Carl C. Icahn, the New York-based financier, to provide for a $100 million credit facility.
The purpose of the credit facility is to finance acquisitions as part of GenesisIntermedia's business plan of aggressive growth through acquisition. The agreement also calls for Riverdale LLC, or its affiliates, to provide investment-banking services related to the acquisition plan, including:
-- Advising on GenesisIntermedia's acquisition strategy
-- Sourcing acquisition candidates
-- Structuring acquisitions
-- Proposing alternative financing sources
-- Undertake due diligence of proposed acquisitions
Consummation of the financing transactions is subject to the negotiation and execution of definitive credit and security documents. Consummation of any financing under the facility is also subject to a number of conditions, including credit review of potential acquisition targets, lender due diligence of the acquisitions and other conditions to be set forth in the definitive credit agreement.
"We're excited by the opportunities that this credit facility and the investment banking relationship afford us. We expect to be able to act quickly as we continue to identify acquisition opportunities that will grow revenues and enhance value," stated Ramy El-Batrawi, chairman and chief executive officer of GenesisIntermedia.
"We expect that this arrangement should facilitate our ability to complete acquisitions of businesses that expand and enhance our operations while benefitting from the acumen and expertise of the Icahn group."
GenesisIntermedia continually reviews acquisition opportunities as part of its growth plan and is actively pursuing several acquisition targets at this time. GenesisIntermedia and Riverdale LLC are now studying these transactions under consideration.
The company believes that completion of targeted acquisitions will bolster the company's cash position and revenues. No assurances can be give that any acquisitions will be consummated. The company believes that the $100 million credit facility will enable GenesisIntermedia to more easily and rapidly complete transactions that are accretive to the company's earnings.
As described in the Form 8-K filed today by the company, in conjunction with the $100 million credit facility and investment banking services, the company issued warrants to acquire 4 million common shares and El-Batrawi has granted options to acquire a total of 1.5 million of his common shares to the Icahn entities. If all of the warrants and options were to be exercised, Riverdale LLC would hold an approximate 20 percent stake in the company. All of the shares underlying the warrants and options will be subject to a one-year lock-up described in the commitment.
Concurrent with the company's grant of the options, El-Batrawi and Ultimate Holdings, Ltd., a principal stockholder in the company, agreed to grant to the company similar options to purchase shares held by them in the event Riverdale LLC exercises the warrants issued by the company.
The exercise prices of these options equal the price to Riverdale LLC, so dilution for existing stockholders will be minimized as a result of the transaction.
41. On August 14, 2001, GenesisIntermedia announced second quarter 2001 results. The press release stated in part: GenesisIntermedia, Inc. (Nasdaq:GENI) today reported its results for the second quarter 2001 and six months ended June 30.
The Company reported revenues for the three months ended June 30, 2001 of $12,395,635, an increase of 69% over revenues of $7,315,341 for the three months ended June 30, 2000....
"During the quarter, we worked further to secure market share for the Car Rental Direct brand. We also achieved a complete network-wide functionality upgrade of Centerlinq in all retail properties. This upgrade will benefit retailers and mall managers with the ability to accommodate higher traffic and advertising feeds. Centerlinq's unique visits were up 74%, and ad views were up 30%, from the prior quarter," stated Ramy El-Batrawi, Chairman and Chief Executive Officer of GenesisIntermedia, Inc. "We believe the positive results will emerge from being pro-active in fulfilling the organizational, technical and market building needs of these companies."
Signaling a trend toward GenesisIntermedia's profitability objective, the Company reported that its loss from operations during the second quarter 2001 of $4,828,456 decreased by 32% from the loss from operations during the second quarter 2000 of $6,381,057 and sequentially, by 28% from its loss from operations during the first quarter 2001 of $6,218,726.
El-Batrawi continued, "We are also pleased that sales of our proprietary products continue to grow and that our thriving Utah operations continue to yield higher commissions for us. We are looking at continued product growth, both in the types of products offered and in our ability to utilize our core competencies in marketing and promotion to augment sales. The trend indicated in our decrease in operating loss can be attributed to a more precise allocation of our marketing-related assets that help us identify new target audiences for our products, and the most effective ways to reach them. We've brought an increased focus on direct marketing and customer relationship management, as well as a more efficient use of technology to our Utah-based sales and marketing, and customer service operations."
* * *
El-Batrawi added, "We are moving forward with continued measures to improve the Company's financial position and move us closer to profitability. We're currently working to convert some of our long-term debt to equity in order to reduce interest payments in future quarters. We expect to continue growing both internally and through acquisitions. At present, we're evaluating the integration of additional businesses that are marketing and media related. Our strengths have been, and will continue to be, in the marketing and media space, and in the sales of a variety of consumer goods and services by utilizing our core competencies in marketing. Any opportunities upon which we capitalize will strengthen our marketing core, and deliver increased value to shareholders."
42. On September 4, 2001, GenesisIntermedia issued a letter to shareholders which stated:
Dear Fellow Shareholders:
I am pleased to report to you that the past few months have seen exciting opportunities and changes at GenesisIntermedia. All of these events are in line with our goal of increasing shareholder value and the profitability potential of our company. I am especially pleased to be able to report that the second quarter of 2001 marked a continuation of positive trends in revenue generation. The 69% increase in revenues for the second quarter of 2001 over second quarter 2000 follows a first quarter of 2001 rise in revenues of 68% over first quarter 2000. We are also working to continue to cut operating losses. For the second quarter 2001, we cut losses from operations by 32% over second quarter 2000. Our loss from operations for the second quarter 2001 were [sic] also 28% lower than our first quarter 2001 loss from operations, and our first quarter 2001 loss was 54% less than that of the prior quarter. We have every reason to believe that these trends will continue. In early July, we completed an agreement with Carl Icahn's firm, Riverdale LLC, that provides for an initial $100 million contingent credit line to be used for the acquisition of additional businesses and companies. We are seeking to acquire businesses that build upon our core competencies, strengthen our business mix and enhance our objectives and profitability and value building. We are currently examining and evaluating a number of potential acquisition candidates. In addition to the credit line, we will benefit from Mr. Icahn's business savvy, foresight and experience. As you probably know, Mr. Icahn has been one of the most influential forces in the investment community for almost four decades, and we greatly value his involvement with GenesisIntermedia.
We also recently announced that our Car Rental Direct (CRD) subsidiary had been transitioned from a wholly owned subsidiary into a freely tradeable public entity. We accomplished this by brining CRD together with MAII Holdings, Inc. MAII will adopt the CRD name, and GenesisIntermedia will own a majority interest in the company. Therefore, we'll still be able to consolidate revenues, benefitting our future quarterly and annual results. Its current cash position is approximately $15 million. With its healthier, recapitalized balance sheet, CRD becomes an even more attractive candidate for additional lines of credit, and will be able to grow its operations faster than we originally envisioned. We anticipate working closely with CRD to uncover new opportunities, including the acquisition and roll up of competitors and the marketing of CRD's b2b capabilities to a wider audience of insurance industry professionals. Overall, we expect to see great things happen within CRD, and we look forward to helping build CRD to position to dominance in the replacement and suburban segments of the car rental industry.
In July, we announced that we had been added to the Russell 2000(R) Index. The Russell 2000(R) helps institutions and investors evaluate fund performance and determine short- and long-term investment trends by providing an objective benchmark for the overall stock market. Each year the Frank Russell Company ranks the 3,000 largest stocks in the U.S. equity market by capitalization as of May 31, creating the Russell 3000(R) Index. This was an important milestone for GenesisIntermedia. Our addition to the Russell 2000(R) Index boosted the visibility of our common stock to a larger institutional base, and resulted in more opportunities for institutional buying of our common stock. Increased institutional purchasing of our shares is in alignment with our goal to promote stability and shareholder value.
We are pleased that one of our long-term marketing partners, Viacom Outdoor, Inc., has strengthened its ties with us by exercising its existing options to purchase a 4.3% equity stake in GenesisIntermedia. This investment fortifies a relationship between the two companies that began with the formation of a strategic marketing alliance last year under which our Centerlinq subsidiary agreed to become Viacom Outdoor's interactive and video marketing partner. We anticipate that this relationship will continue to evolve and benefit us via new working relationships with other properties in the extensive Viacom family.
In addition, for the third time, our Centerlinq network received Microsoft's highest accolade -- the Retail Application Developer (RAD) award. This award is based on functionality, practicality and the benefits delivered to the retail industry, and is given by an independent panel of retain industry experts. GenesisIntermedia continues to make strides to fulfill our promise of shareholder value and growth. However, we remain concerned about the short selling that is still occurring with respect to our common shares. Managing corporate growth becomes more challenging when people are betting against your success, so we encourage all of our shareholders to contact your brokers and have your shares taken out of a street name or put into a cash account, or even better, have your broker deliver the physical stock certificate for you. By doing this, a short seller would not be able to borrow your stock for stock sale without your permission. When your stock is held in a margin account, brokers can loan it out. I feel more confident than ever that my own personal investment in GenesisIntermedia is a sound decision based on an investment philosophy oriented toward long-term growth. This is why I recently purchased an additional 1,329,500 shares for my own personal account through open market transactions. This brings my total personal holdings to 10,375,469 shares. I believe that I am investment in a solid growth platform.
The true value of our company, as in any public company, is in what the perceived future performance of the company will be. Within a relatively short amount of time, we've laid the foundation for future growth by creating an infrastructure that can support a wide variety of marketing initiatives. We've also enhanced and diversified our human resources, product mix and communications capabilities. We've attracted solid partners that will help us grow both internally and through acquisitions. We are well on the way to building a fundamentally strong company that will be a high performance growth vehicle. That's why I'm extremely excited about what the future holds for GenesisIntermedia. I am grateful for the support of a truly talented management team, all GenesisIntermedia employees and especially our loyal shareholders. I look forward to reporting additional positive developments very soon.
Thank you,
Ramy El-Batrawi
43. On September 25, 2001, Nasdaq halted trading of GenesisIntermedia and requested additional information from the Company. In a press release issued by Nasdaq, the exchange stated: The Nasdaq Stock Market(SM) announced that trading was halted in GenesisIntermedia, Inc., today at 4:55 p.m., Eastern Time, for "additional information requested" from the company at a last price of 5.90. Trading will remain halted until GenesisIntermedia, Inc. has fully satisfied Nasdaq's request for additional information.
44. On October 8, 2001, the Company issued a press release entitled, "Stephen A. Weber Named Interim Chief Executive Officr." The press release stated, in part:
GenesisIntermedia, Inc. announced that, after a meeting of the independent directors of the Company, Stephen A. Weber was named interim Chief Executive Officer of GenesisIntermedia, Inc. He succeeded Ramy El-Batrawi, who also resigned from all other positions within the Company including Chairman of the Board of Directors. The Company also announced that George W. Heyworth resigned from the Board of Directors, concurrent with the other management changes.
"I have concluded that the current circumstances dictate that it is in the best interest of the Company that I resign my positions. I have always put the needs of the Company first and foremost, and my stepping down at this time will enable a capable management team to continue exploring opportunities for GenesisIntermedia, and enable Nasdaq to evaluate the Company on its own merits. I am convinced that the Company will fulfill all the hopes and aspirations that I and others had for it and I remain committed to helping the Company in any way I can," stated Mr. El-Batrawi.
The Company's interim Chief Executive Officer, Stephen A. Weber, commented," ... We believe that our core business is strong, and we hope in this management transition to take all appropriate steps to enhance the Company's financial position and prospects." The Company also announced that Mr. Weber and other Company representatives met last Thursday with representatives of Nasdaq concerning the halting of trading in the Company's shares. Nasdaq has sought information relating to certain transactions, including transactions involving Ultimate Holdings, Ltd., a substantial shareholder of the Company, and Native Nations Securities, Inc., as well as Mr. El-Batrawi's possible role in those transactions. The Company has obtained Mr. El-Batrawi's agreement to respond to Nasdaq's request for information. The Company also announced that the Securities and Exchange Commission has commenced a formal investigation into certain matters relating to the Company and trading in its securities.
The Company is cooperating fully with the SEC in the investigation. Nasdaq has also raised issues relating to the Company's continued listing. The Company is seeking to respond to Nasdaq's questions, but there can be no assurance that the Company's stock will resume trading or continue to be listed on the Nasdaq.
45. On October 15, 2001, it was revealed in SEC filings that El-Batrawi sold 327,254 shares on September 25, 2001, just hours before the investigation and subsequent trading halt were announced.
46. The true facts which were known by each of the defendants, but concealed from the investing public during the Class Period, were as follows:
(a) That defendant Smith did not genuinely believe the positive statements he made. Further, that Smith was actually being paid by GenesisIntermedia in the form of millions of dollars worth of GenesisIntermedia shares to make those statements.
(b) That the Company's acquisition of DoWebsites.com was a sham transaction designed to conceal payoffs made to Smith in exchange for his fraudulent promotion of GenesisIntermedia stock. Further, defendants did not believe that their acquisition of DoWebsites.com would generate "increased revenue" as they expected to "close" the site as soon as it was acquired.
(c) That DoWebsites.com was not a "leading portal for webmasters" but was instead a Web site that produced no revenue, did not work properly and had little if any utility for the "Web" industry.
(d) That the Company was not "fundamentally strong" or otherwise on its way to becoming profitable. In fact, the Company's fundamentals were eroding.
FIRST CLAIM FOR RELIEF
For Violation of '10(b) of the 1934 Act and Rule 10b-5 Against All Defendants
47. Plaintiff incorporates 661-46 by reference.
48. During the Class Period, defendants disseminated or approved the false statements specified above, which they knew or deliberately disregarded were misleading in that they contained misrepresentations and failed to disclose material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading.
49. Defendants violated '10(b) of the 1934 Act and Rule 10b-5 in that they:
(a) Employed devices, schemes, and artifices to defraud;
(b) Made untrue statements of material facts or omitted to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or
(c) Engaged in acts, practices, and a course of business that operated as a fraud or deceit upon plaintiff and others similarly situated in connection with their purchases of GenesisIntermedia publicly traded securities during the Class Period.
50. Plaintiff and the Class have suffered damages in that, in reliance on the integrity of the market, they paid artificially inflated prices for GenesisIntermedia publicly traded securities. Plaintiff and the Class would not have purchased GenesisIntermedia publicly traded securities at the prices they paid, or at all, if they had been aware that the market prices had been artificially and falsely inflated by defendants' misleading statements.
51. As a direct and proximate result of these defendants' wrongful conduct, plaintiff and the other members of the Class suffered damages in connection with their purchases of GenesisIntermedia publicly traded securities during the Class Period.
SECOND CLAIM FOR RELIEF
For Violation of '20(a) of the 1934 Act Against the Individual Defendants and GenesisIntermedia
52. Plaintiff incorporates 661-51 by reference.
53. The Individual Defendants acted as controlling persons of GenesisIntermedia within the meaning of '20(a) of the 1934 Act. By reason of their positions as officers and/or directors of GenesisIntermedia, and their ownership of GenesisIntermedia stock, the Individual Defendants had the power and authority to cause GenesisIntermedia to engage in the wrongful conduct complained of herein. GenesisIntermedia controlled each of the Individual Defendants and all of its employees. By reason of such conduct, the Individual Defendants and GenesisIntermedia are liable pursuant to '20(a) of the 1934 Act.
CLASS ACTION ALLEGATIONS
54. Plaintiff brings this action as a class action pursuant to Rule 23 of the Federal Rules of Civil Procedure on behalf of all persons who purchased GenesisIntermedia publicly traded securities (the "Class") on the open market during the Class Period. Excluded from the Class are defendants.
55. The members of the Class are so numerous that joinder of all members is impracticable. The disposition of their claims in a class action will provide substantial benefits to the parties and the Court. GenesisIntermedia had more than 11 million shares of stock outstanding, owned by hundreds if not thousands of persons.
56. There is a well-defined community of interest in the questions of law and fact involved in this case. Questions of law and fact common to the members of the Class which predominate over questions which may affect individual Class members include:
(a) Whether the 1934 Act was violated by defendants;
(b) Whether defendants omitted and/or misrepresented material facts;
(c) Whether defendants' statements omitted material facts necessary to make the statements made, in light of the circumstances under which they were made, not misleading;
(d) Whether defendants knew or deliberately disregarded that their statements were false and misleading;
(e) Whether the prices of GenesisIntermedia's publicly traded securities were artificially inflated; and
(f) The extent of damage sustained by Class members and the appropriate measure of damages.
57. Plaintiff's claims are typical of those of the Class because plaintiff and the Class sustained damages from defendants' wrongful conduct.
58. Plaintiff will adequately protect the interests of the Class and has retained counsel who are experienced in class action securities litigation. Plaintiff has no interests which conflict with those of the Class.
59. A class action is superior to other available methods for the fair and efficient adjudication of this controversy.
PRAYER FOR RELIEF
WHEREFORE, plaintiff prays for judgment as follows:
A. Declaring this action to be a proper class action pursuant to Rule 23;
B. Awarding plaintiff and the members of the Class damages, interest and costs; and
C. Awarding such equitable/injunctive or other relief as the Court may deem just and proper.
JURY DEMAND
Plaintiff demands a trial by jury.
DATED: October 18, 2001 MILBERG WEISS BERSHAD
HYNES & LERACH LLP
WILLIAM S. LERACH
DARREN J. ROBBINS
DARREN J. ROBBINS
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
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