"Amended" Class Action Lawsuit: PART THREE
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 38-50:
(bold added for emphasis)
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111. During April 2000, Jain informed reporters that InfoSpace held a no-lose position in the Internet information-providing services field. "InfoSpace is an arms dealer, no matter who wins AOL, Yahoo!, Palm, wireless or Web we win." (Footnote No.1: Quote taken from the street.com 4/19/00 article "InfoSpace lands a new pilot." Cory Johnson). This remark was false when made as Yahoo was a competitor for InfoSpace's directory services, community services and merchant services and AOL was a competitor for its community services, merchant services and wireless commerce services.
116. Defendants' February through April 2000 statements were false and misleading when made. The true facts that were then known by defendants based upon their review of internal data were:
a. InfoSpace1s financial statements and the financial information contained therein had not been prepared in conformity with GAAP as set forth below at (paragraphs)193-216;
b. InfoSpace's reported profits were overstated due to the barter ads and "Lazy Susan" deals described below;
c. The reported revenue backlog was overstated for a variety of reasons including the barter ads, and the fact that during this period InfoSpace began to receive reports that a significant number of companies they had counted in these revenue commitments had gone out of business. By way of example, an accounting firm that was part of the revenue backlog that was competing with Quicken and Intuit, had committed to a multi-year contract with InfoSpace, when payment was not received the company was found to have gone out of business. As a result, its revenues that were part of the reported backlog could not be realized. A material number of companies fell into the same category;
d. There was no reasonable basis that FY 2001 revenues would be "at least $300 million." Much of the "basis" for this revenue projection, which came from Jain, was the purported strength of the wireless business and the assumption that InfoSpace would earn a monthly fee of $2-$3 for every cell phone subscriber that utilized its services. In fact, at the time the statement was made, InfoSpace had received few, if any, commitments from wireless carriers to charge and pass on to InfoSpace such a fee, and thus the projections from revenues for wireless services were without reasonable basis. Further, at this time Jain began to receive reports from his lieutenants, that demand for the companies' traditional advertising revenues would slow in 2000 and 2001 due to a general decrease in advertising expenditures. These reports were in the form of e-mails and oral reports and cast doubt on the revenue projections. In fact, the revenue projection of $300 million or more was largely a guess made by Jain;
e. InfoSpace was not making "significant progress in executing its strategy to provide the most comprehensive wireless platform." Although InfoSpace was signing agreements with providers, these agreements were not providing InfoSpace with the revenues required to realize InfoSpace1s business models or its revenue projections as provided to the market;
f. InfoSpace1s repeated representations that it was a global leader in infrastructure services for wireless devices were trumpeted to the public even though they represented less than one half of one percent of InfoSpace1s traffic. Over 99.5% of InfoSpace1s hits came from traditional wireline events, but this fact was never made available to the public;
g. The statements that the Company was experiencing "rapid growth" when combined with a listing of the carriers it had relationships with, were designed to create the impression that InfoSpace had a wide revenue base for its wireless service. In fact, the revenues from these relationships were far from certain and in some cases, such as with U.S. West and GTE, those companies' generated virtually no value to Infospace as they used their own or other platforms to provide these services; and
h. InfoSpace's "platform" was not helping to turn every mobile device into a true "transaction device" due to the technology flaws described above.
122. The close relationship between InfoSpace and Jain is revealed in a May 19, 2000 e-mail where it is clear that Blodget and Jain were engaging in a dialogue on how to pitch InfoSpace to the market:
"[T]old Naveen to stop saying that ... I got him to stop trashing AOL ... there's only so much I can accomplish in a month with him Š he's like a five year old."
126. Taking advantage of the favorable Merrill Lynch report that he helped engineer, on June 9, 12 and 13, 2000, defendant Jain sold a whopping 1.28 million shares of InfoSpace stock for proceeds of at least $66,647,492.
127. On June 15, 2000, Defendant Blodget e-mailed Ghachem, confessing "enormous skepticism" about InfoSpace stock. In fact, Blodget indicated that InfoSpace stock had been built up on Jain's "hyperbole":
great. glad you're on top of it. enormous skepticism about this one now Š got questions yesterday about the exact extent of svcs/content that insp provides to "50% of global and 80% of US carriers". AT&T apparently saying "they give us maps and directories, not a "platform" whooptedo. In three yrs, the $1/sub will be $0.10/sub)2 stock obviously caught in backlash of naveen hyperbole, unfortunately. just like ICGEŠ
128. On June 20, 2000, Ghachem e-mailed Blodget to inform him that the investment-banking team from Merrill Lynch was meeting with InfoSpace on June 27, 2000, and that the investment bankers had promised that Blodget would attend the meeting. The mail noted that if Blodget did not attend, InfoSpace would be "unhappy."
129. The same day, June 20, 2000, Merrill Lynch and Blodget issued another "Intra-Day Special Note," which reiterated the company's buy-buy rating.
130. In an interview on June 28, 2000, Jain gave an interview in which he stated:
JAIN: If you look at the wireless market, there are gonna be 1 _ billion to 2 billion cell phones out there. And if you're getting paid $1 to $3 per cell per month, I mean, you don't have to be a rocket scientist to figure out it1s a lot of money that we can generate.
FRANK: Its no-name strategy is deliberate, allowing clients like AT&T Wireless Services and its rival, Verizon Wireless, to make InfoSpace's Web content and commerce offerings available on their wireless services under their own brands. That increases their customer loyalty, while InfoSpace profits no matter who wins. (A restatement of a prior Jain quote.)
JAIN: We are essentially going out and looking and saying, 'How can we dominate this industry?' And when we say domination, I don't mean 99 percent market share. I mean 100 percent market share.
FRANK: Not exactly words you'd expect to hear from a Microsoft veteran whose office is just a few miles from his old employer. But it's vintage Naveen.
JAIN: And it's not greedy to have 100 market 100 percent market share. Today in our wireless market in the US today, we have over 85 percent market share. Are we satisfied? Absolutely not. Yeah, I have sleepless nights trying to figure out how to get the last 15 percent.
FRANK: That, Jain says, should lead his company, currently worth almost $15 billion, to a market value in excess of $1 trillion, about as much as Microsoft, Intel and Cisco combined. Jain, who on paper is worth nearly $4 billion, has come a long way from India, where he grew up in the middle class, studied engineering and got an MBA.
Jain's critics suggest he often talks a better game than he delivers. For all his talk of market dominance, for example, InfoSpace's total revenues last quarter were a relatively paltry $19 million. Are his trillion-dollar dreams just wacky?
JAIN: It's not wacky. Its simple I mean, we we're looking at the market proportionately and what we're seeing is that we have been very successful in executing it and our belief is that we can successfully continue to execute it. And if we work to be true, these numbers will look very small someday.
131. The above statements, which were repeated throughout the Class Period, were false and misleading in that:
a. assuming that InfoSpace had "85% of the wireless market" that statement is false and misleading in that the actual content the Company was providing to wireless partners, as internally acknowledged by Blodget, had little value in that it primarily consisted of maps and directories;
b. the statement that InfoSpace would realize the success of a Microsoft or Cisco, was without reasonable basis as InfoSpace1s only real chance of realizing such revenues was in the wireless market, and Jain had no basis to project a significant number of customers would pay $2-$3 per call per month and in fact significant numbers have not done so;
c. InfoSpace had not been "very successful" in executing its wireless strategy as Jain admitted when he claimed "Version 2" would fix the technical flaws in "Version 1."
132. Late in that same month, according to the Company's SEC filings, defendant Jain and Arun Sarin telephoned Go2Net's CEO Russell Horowitz "and indicated that InfoSpace would be interested in pursuing a business combination with Go2Net."
133. On June 29, 2000, Merrill Lynch and Blodget again reiterated the firm's Buy-Buy rating of InfoSpace.
134. On July 10, 2000, Go2Net went on Merrill Lynch's "Grey Scan" list because Go2Net had retained Merrill Lynch to undertake a sale of Go2Net to InfoSpace. On information and belief, the "Gray Scan" list is a situation where Merrill Lynch will not comment on a stock while they are in a negotiation for a client.
135. With a deal in the works, and Merrill Lynch's fee being contingent on a transaction, the firm was desperate to keep InfoSpace's stock up so that the Go2Net shareholders would approve the deal.
136. Thus, on July 11, 2000, Merrill Lynch issued a "company update" on InfoSpace for no apparent reason that reiterated its "buy" rating on the company. That July 11, 2000 analyst report also maintained that InfoSpace was "one of the best ways to play the wireless internet." In the report, Blodget made it clear that his comments were based on extensive discussions with management, on all risk factors. These discussions included Jain. InfoSpace management indicated that, among other issues, it had "no barter advertising agreements," a statement that was, as set forth below, false. In fact, InfoSpace had many such agreements in 2000 which had revenues of $9,800,000 and expenses totaling $8,700,000, which were not separately disclosed and later admitted by InfoSpace in the 2001 10-K. This report was false and misleading in light of Defendant Blodget's "enormous skepticism" about InfoSpace, as well as his feelings (expressed in July of 2000) that InfoSpace was a "powder keg" and that "many institutions" had raised "bad smell comments about it."
137. On July 10, a Merrill Lynch client wrote Blodget and asked if, in light of Jain1s sale of shares, should "we worry." Blodget in an e-mail to Ghachem observed "Ugh: I'm getting killed on this thing."
138. On July 17, 2000, Merrill Lynch entered into an engagement letter with Go2Net to advise it with respect to a sale of the company to InfoSpace.
139. In mid-July 2000, Blodget complained to Ghachem that, "I'm getting killed on this [InfoSpace] thing." Yet his analyst ratings on InfoSpace continued, even as InfoSpace stock continued to decline.
142. In a July 2000 interview, Jain stated that the services that InfoSpace provided wireless carriers would be a boon to the company. According to Jain, the carriers paid InfoSpace $1 to $3 per month for each subscriber. "You can do the math,2 Jain said. "That is a shitload of money." (Footnote: Quote taken from Business 2.0 July 200 isue (on internet) Erick Schonfeld). However, Defendants would not release the number of subscribers of the various wireless carriers InfoSpace had contracted with or the frequency with which users dialed up the services. There was a reason for this omission, few subscribers were actually paying $1 to $3 a month and revelations of the exact number would have alerted the market to the fact that Jain's revenue projection of $300 million or more for 2001 was widely exaggerated.
143. On July 26, 2000, InfoSpace also issued a release stating that the Company would acquire Go2Net, a provider of applications and consumer infrastructure services, via a stock-for-stock merger pursuant to which InfoSpace would issue 1.82 shares of InfoSpace common stock for each outstanding share of Go2Net, or approximately 90 million InfoSpace shares. |
