"Amended" Class Action Lawsuit: PART TWO
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 29-37:
(bold added for emphasis)
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C. The Jain-Merrill Lynch-Blodget Connection
86. Jain, who for the reasons stated above, needed to keep InfoSpace stock as high as possible, viewed Blodget and Merrill Lynch as a vehicle to reach that objective. Blodget, for his part, was looking for new clients who could not only report on but also secure fees from for underwriting work.
87. Jain and Merrill Lynch, commencing in December 1999 and continuing through the Class Period, met to plot how Merrill Lynch could promote InfoSpace. During the Class Period Jain provided Blodget and other Merrill Lynch analysts with the information later contained in Merrill Lynch's reports on InfoSpace.
VII. FALSE AND MISLEADING STATEMENTS MADE BY
DEFENDANTS DURING THE CLASS PERIOD
92. The InfoSpace Defendants' January 2000 statements were false and misleading when made. The true facts that were then known to the InfoSpace Defendants based upon their review of internal InfoSpace data were:
a. InfoSpace's financial statements and the financial information contained therein had not been prepared in conformity with GAAP as detailed below;
b. InfoSpace was not experiencing "strong demand," but rather the InfoSpace Defendants were overstating InfoSpace's revenue and EPS by using improper accounting methods, as detailed below, including understating the number and types of non-revenue producing "barter" deals with customers, in which the Company agreed with customers to have them use InfoSpace investment cash, and then turned around and handed back to InfoSpace the use which it recognized as revenue. For example, during the year 2000, one out of every 20 advertisements posted on InfoSpace was a barter advertisement. A barter advertisement meant that the customer got a free ad for a certain period of time in exchange for allowing InfoSpace to put its customer ads on the Company's website. Barter advertisements were agreed to with many clients, including but not limited to E-Bay and Look Smart. In reporting revenues and advertising commitments, as set forth above, Defendants concealed that these revenues and the volume of business were in fact overstated by the existence of barter agreements and were not being recognized based on fair market value as required by GAAP. In the summer of 2001, at a company-wide meeting, Jain informed employees that InfoSpace was "going to flush the toilet" of "bad deals made by salesmen that weren't making money." Jain was referring to the barter deals that he knew had been overstating revenues and orders;
c. That InfoSpace was not experiencing "Strong Demand for its wireless services," but was signing generating agreements with wireless carriers in an attempt to have some presence in the market and in return InfoSpace was providing a platform that had little content beyond maps and directories and hence was unlikely to generate revenues. Most of the services InfoSpace was selling to wireless carriers were generic directory and map services that generated little income, and were not the e-commerce services that were designed to generate growing revenues and which was the type of revenue analysts would associate with "strong demand" for wireless products;
d. InfoSpace was not making "significant progress in executing its strategy to provide the most comprehensive merchant platform." Although InfoSpace was signing agreements with "3200" providers, these agreements were not providing InfoSpace with the revenues required to realize InfoSpace's business models or its revenue projections as provided to the market.
e. InfoSpace's "progress" in its "wireless strategy" was being impaired by a lack of technology necessary to support e-commerce on wireless devices. For example, at the time of the above statements, a few cell phone companies did provide the "Internet enabled phones," which were carried around by the InfoSpace sales force and InfoSpace management. However, even for those who are technically savvy, it was difficult if not impossible to use the technology. For example, if a user wanted to use the yellow pages offered by InfoSpace on a cellular phone to look up a number for a restaurant, for example, the "Slanted Door" he or she would have to type "7-7-7-7(S), 5-5-5(L), 2(A) 6-6(N), 8(T) 3-3(E), 3(D) O space, 3(D) 6-6-6(O), 6-6-6(O), 7-7-7(R)." Not surprisingly, this cumbersome technology was not being accepted by consumers. In addition, often times the internet wireless services did not work when the user traveled. Jain would later admit that the technology in existence was "Version 1" and that "Version 2" would cure the problem. However, in the meantime, these issues were in fact impairing InfoSpace1s strategy and the acceptance of its products
95. In conversations with Merrill Lynch, Jain told Merrill Lynch analysts that InfoSpace's future was rosy, and that InfoSpace expects to receive $2-3 a month in subscription fees from a user of a web cell phone. With 500 million cell phone users being able to access the web (according to Jain), Jain was proclaiming that, "there's no reason this won't be a trillion-dollar company." These statements were in part the basis for Blodget's reports. In fact, Jain's $2-$3 a-month subscription fee was without any basis, other than his speculation and such a fee never developed and never even close to becoming a reality. Further, as described above, there were serious flaws in the technology used to provide internet wireless services, and such flaws were hampering acceptance, demand and revenues.
96. In reaction to these positive statements from both the InfoSpace Defendants and the Merrill Lynch Defendants, as Jain intended, InfoSpace's stock price climbed from $42 per share to approximately $70 per share by the end of January, 2000.
97. On January 31, 2000, having pumped up the market with these positive statements, Defendant Jain sold 1,562,716 shares of InfoSpace's stock at $70.75 per share, for a total of $110,562,157 in illegal insider trading proceeds. At the same time, aware that the positive statements being issued were misleading, Halstead sold 4,504 shares and realized proceeds of $637,317. She had never sold before. Another key corporate insider, Senior Vice President, Legal and Business Affairs Secretary, Ellen Alben ("Allen"), who is not a defendant but may be added later, also sold a substantial number of shares in two transactions, resulting in proceeds of $716,900 and $1,553,112. She had not sold shares before. These three insiders knew what the rest of the market did not - that InfoSpace was a house of cards, built mainly on the hype and false statements of InfoSpace and Merrill Lynch.
98. On information and belief, in January and early February, Jain and Blodget discussed whether Merrill Lynch would issue a "buy" rating. Jain informed Blodget that InfoSpace was poised to tap soaring demand from cell phone users and online shopping for InfoSpace's on line services. At the time of this statement, Jain had no evidence that cell phone users would pay $2-3 per subscription given the cost and content of InfoSpace's service, or would use InfoSpace's services, and in fact there were serious issues with respect to the technology. In fact at that time, InfoSpace had provided wireless carriers with a platform consisting mainly of maps and directories, a platform that was not likely to result in soaring demand for InfoSpace's products.
101. In March 2000, InfoSpace and Jain decided to promote InfoSpace's transition from a company often called "the Internet Yellow Pages" to one moving rapidly into the wireless business. At that time, March 2000, InfoSpace, unlike many other internet companies, had seen its stock rise over 136% in 2000 alone. Jain was anxious to have the market believe that he was a visionary, a genius, and that his company would be the next Microsoft. At a Chase-hosted internet conference, Jain told analysts and investors that his company had a brilliant future, would be widely successful and would become the "first trillion-dollar company": According to Jain there were just two kinds of people:
In other words, those who don't believe in God and those who believe in God and InfoSpace. That's ok the nonbelievers will be converted when we become a trillion-dollar company."
102. This "trillion dollar" statement, combined with other statements by Jain (described throughout the complaint) and the spectacular rise that had already occurred in InfoSpace's stock price, caused the market to believe that InfoSpace was a star internet company with unlimited potential and that it was on the verge of tapping a huge revenue base. Jain's statements kept the price of InfoSpace artificially inflated. These statements were false and/or misleading as at the time (1) InfoSpace1s traditional "yellow page" business was not progressing as planned; (2) there was no basis to predict that wireless customers would pay a $2 to $3 monthly fee for InfoSpace1s services; (3) InfoSpace did not have the technology (as explained above) to provide these services in a manner that would generate demand; and (4) major wireless carriers would provide wireless services themselves if they were as profitable as Jain predicted they would be.
106. Around this time, Merrill Lynch was seeking investment-banking business from Go2Net. On an April 5, 2000 conference call, Henry Blodget and Thomas Mazzucco (a Merrill Lynch investment banker) gave a sales presentation to Go2Net about Merrill Lynch's investment-banking abilities. In written materials, Blodget was promoted with a photograph, and InfoSpace was listed as one of Merrill Lynch's covered stocks.
107. On March 30, 2000, InfoSpace filed its annual report on Form 10-K with the SEC. This Form 10-K contained the same financial information as the January 26, 2000 press release, and was false and misleading for the same reasons, and for those set forth below.
108. On April 19, 2000, Defendants announced the hiring of Arun Sarin as InfoSpace1s Chief Executive Officer. Although the announcement said Defendant Jain would no longer serve as CEO, Jain stated that Sarin and he would share the job description and that "zero responsibilities had changed." To lure Sarin to InfoSpace, Defendants offered him an options package valued at as much as $1.2 billion. Sarin had worked as the CEO of Vodaphone AirTouch. |
