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XXXXXX Civil Action No. 99cv10647 - efh
XXXXXX and JURY TRIAL DEMANDED
XXXXXX
On behalf of themselves
and all others similarly
situated :Plaintiffs,
v.
LYCOS, INC. and ROBERT J. DAVIS,
Defendants. :
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CLASS ACTION COMPLAINT Plaintiffs, by their attorneys, as for themselves and all others similarly situated, allege the following upon their own personal knowledge, information and belief:
NATURE OF THE ACTION
1. This is a class action on behalf of all purchasers of Lycos common stock between January 8, 1999 and February 9, 1999, inclusive (the "Class Period"), seeking to pursue remedies under the Securities Exchange Act of 1934 (the "Exchange Act").
JURISDICTION AND VENUE
2. This Court has jurisdiction over the subject matter of this action pursuant to 28 U.S.C. §§ 1331, 1337 and 1367 and Section 27 of the Exchange Act (15 U.S.C. § 78aa).
3. This action arises under Sections 10(b) and 20(a) of the Exchange Act (15 U.S.C. §§ 78j(b) and 78t(a)) and Rule 10b-5 promulgated thereunder (17 C.F.R. § 240.10b-5).
4. Venue is proper in this District pursuant to Section 27 of the Exchange Act (15 U.S.C. § 78aa) and 28 U.S.C. § 1391(b) and (c). Substantial acts in furtherance of the alleged fraud and/or its effects have occurred within this District and Lycos maintains its principal executive offices in this District.
5. In connection with the acts and omissions alleged in this complaint, defendants, directly or indirectly, used the means and instrumentalities of interstate commerce, including, but not limited to, the mails, interstate telephone communications, and the facilities of the national securities markets.
THE PARTIES
6. Plaintiffs XXXXXX purchased Lycos common stock on or about January 12, 1999, and January 15, 1999 during the Class Period as set forth in the accompanying certification which is incorporated herein by reference, and as a result were damaged.
7. Plaintiffs XXXXXX and XXXXXXX purchased Lycos common stock on or about February 9, 1999, during the Class Period as set forth in the accompanying certification which is incorporated herein by reference and sustained damages as a result of this purchase.
8. Defendant Lycos is a Delaware corporation with its principal place of business located at 400-2 Totten Pond Road, Waltham, Massachusetts 02541. Lycos is a global internet navigator and community network dedicated to helping online users locate, retrieve and manage information personalized to their individual interests by providing easy-to-use information tools. It is well-known as one of the leading "Internet Portal" companies whose success and the trading value of its shares is tied closely to the extraordinary and dynamic performance of that fast emerging sector of the telecommunications industry.
9. Defendant Robert J. Davis ("Davis") serves as Lycos's President and Chief Executive Officer ("CEO"), as well as a director of the Company. Defendant Davis, as a senior officer and director of Lycos, was a controlling person of the Company and exercised his power and influence to cause and engage in the fraudulent practices complained of herein.
10. Each of the defendants is liable as a participant in a fraudulent scheme and course of business that operated as a fraud or deceit on purchasers of Lycos common stock, by disseminating materially false and misleading statements and/or concealing material adverse facts. The scheme: (i) deceived the investing public regarding Lycos's business and the intrinsic value of Lycos common stock; and (ii) caused plaintiff and other members of the Class to purchase Lycos common stock at artificially inflated prices.
PLAINTIFF'S CLASS ACTION ALLEGATIONS
11. Plaintiffs brings this action as a class action pursuant to Federal Rule of Civil Procedure 23(a) and (b)(3) on behalf of a class, consisting of all persons who purchased or otherwise acquired Lycos common stock between January 8, 1999 and February 9, 1999, inclusive (the "Class Period"), and who were damaged thereby (the "Class"). Excluded from the Class are defendants, members of the immediate family of each of the Individual Defendants, any subsidiary or affiliate of Lycos and the directors, officers and employees of Lycos or its subsidiaries or affiliates, or any entity in which any excluded person has a controlling interest, and the legal representatives, heirs, successors and assigns of any excluded person.
12. The members of the Class are so numerous that joinder of all members is impracticable. While the exact number of Class members is unknown to plaintiff at this time and can only be ascertained through appropriate discovery, plaintiff believes that there are thousands of members of the Class located throughout the United States. As of November 30, 1998, there were reportedly more than 42.9 million shares of Lycos common stock outstanding. Throughout the Class Period, Lycos common stock was actively traded on the NASDAQ National Market. Record owners and other members of the Class may be identified from records maintained by Lycos and/or its transfer agents and may be notified of the pendency of this action by mail, using a form of notice similar to that customarily used in securities class actions.
13. Plaintiff's claims are typical of the claims of the other members of the Class as all members of the Class were similarly affected by defendants' wrongful conduct in violation of federal law and state law that is complained of herein.
14. Plaintiff will fairly and adequately protect the interests of the members of the Class and has retained counsel competent and experienced in class and securities litigation.
15. Common questions of law and fact exist as to all members of the Class and predominate over any questions solely affecting individual members of the Class. Among the questions of law and fact common to the Class are:
(a) whether the federal securities laws were violated by defendants' acts and omissions as alleged herein;
(b) whether defendants participated in and pursued the common course of conduct complained of herein;
(c) whether documents, press releases and other statements disseminated to the investing public and the Company's shareholders during the Class Period misrepresented material facts about Lycos;
(d) whether the market price of Lycos common stock during the Class Period was artificially inflated due to the material misrepresentations and failures to correct the material misrepresentations complained of herein; and
(e) to what extent the members of the Class have sustained damages and the proper measure thereof.
16. A class action is superior to all other available methods for the fair and efficient adjudication of this controversy since joinder of all members is impracticable. Furthermore, as the damages suffered by individual Class members may be relatively small, the expense and burden of individual litigation make it impossible for members of the Class to individually redress the wrongs done to them. There will be no difficulty in the management of this suit as a class action.
SUBSTANTIVE ALLEGATIONS
17. Lycos has experienced a tremendous upsurge in the stock market value of its shares in less than a year. On February 24, 1998, the stock closed at $17-9/32 per share. On January 11, 1999, Lycos shares hit a 52 week high of $145-3/8 per share. On February 5, 1999, Lycos recorded its recent-closing high of $137 per share. On February 8, 1999, the stock continued to trade at high levels, closing at $127.25 per share.
18. The upsurge in the trading price of Lycos shares was driven by its having positioned itself as one of the leading players in providing access to the explosively developing Internet communications network.
19. Investors were purchasing the stock based on the expectation that Lycos would continue to be a "pure play" Internet stock that had positioned itself to stay at the front-rank of developments within the fast-burgeoning industry. Davis himself encouraged this view.
20. After the close of trading on January 7, 1999, Bloomberg News Service reported that defendant Davis, the Company's President and CEO and primary spokesperson, stated at the Morgan Stanley Dean Witter Software, Networking and Internet Conference in Scottsdale, Arizona, that Lycos was still hunting for acquisitions "with significant audience, and ones that have commerce infrastructure." Davis stated that Lycos is closing the gap between the percentage of Internet users visiting its Web sites and that for No. 1 Yahoo! Inc.:
He said Lycos had 45.2 percent audience reach in November, compared with Yahoo's 48 percent. Audience Reach is the percent of Internet users visiting a given Web site during a month. Every Lycos Web property has grown twice as fast as its nearest competitor, he said.
"I expect us to surpass Yahoo in reach," said Davis[.]
21. In reaction to Davis's comments on January 7, 1999, the price of Lycos common stock surged 28 percent or $20-1/4 per share on January 8, 1999, to close at $91-3/4 per share.
22. On January 12, 1999, Davis sold 60,000 shares of Lycos common stock to the investing public at $101.57 per share, generating gross proceeds of over $6 million. Davis's insider selling was unusual in its amount: the 60,000 shares sold represented over 95 percent of his direct holdings in Lycos stock at the time. Davis's insider selling was also unusual in its timing, occurring just 3 trading days after his presentation at the Morgan Stanley Dean Witter conference sent the price of Lycos common stock surging, and just 28 days before the Company announced a definitive merger agreement with USA Networks, Inc. ("USA Networks") that caused the price of Lycos common stock to drop 25 percent (as described more fully below. Davis's insider selling on January 12, 1999 was also the first time he sold Lycos common stock in over 1 year.
23. On January 19, 1999, Davis caused a Form 144 to be filed with the SEC to disclose his proposed sale of 60,000 shares of Lycos common stock.
24. On January 25, 1999, Davis presented the keynote address at the Massachusetts Software Council Annual Membership Meeting held at the Newton Mariott Hotel. During this presentation, which was publicly reported, Davis made the following public commitments regarding Lycos' competitive posture:
(a) that Lycos was committed to an independent strategy; and
(b) that Lycos has an obligation to consider any reasonable proposals for a strategic transaction but that it was only interested in remaining independent and was not considering selling a portion of the business.
25. On January 26, 1999, an article appeared in the New York Times concerning Lycos and highlighting that "Lycos Officials Plan To Stay Independent." The article contained the following important passage which quoted defendant Davis as stating:
Lycos, Inc., an Internet portal whose stock has ballooned as rumors have swirled about talks with potential partners, is committed to an independent future, the company's chief executive said today.
"What we're most committed to is the independence of Lycos," Robert Davis told reporters before a speech to the Massachusetts Software Council. But he added, "If there's a partnership out there that respects that, broadens our content brand and distribution, we'd be interested in it."
26. That same day, an article appeared in the Boston Herald regarding Lycos which reiterated the same themes. The article stated in pertinent part as follows:
Sale? What Sale?
Lycos Inc. Chief Executive Bob Davis yesterday downplayed talk that the Waltham Internet hub could soon sell some or all of its stock to a media or telecommunications giant.
Davis, speaking to reporters at a Massachusetts Software Council meeting in Newton, said that the company has flirted with potential partners for the past two years. And despite At Home Corp. snapping up rival Excite Inc. for $6.7 billion in stock last week, Davis said his company may well continue to go it alone.
"It's not for lack of interest," he added. Analysts have named media giants, including Time Warner, Inc., CBS Corp. and Bertelsmann in German, as the most likely buyers.
Experts say Lycos, which acts as a gateway to the Internet with everything from free e-mail to a Web director, could use a partner to help attract more users.
Still, Davis disputed reports that the company plans to sell 10 percent to 35 percent of its shares to a strategic partner. "The numbers are meaningless," he said. Davis said he has an obligation to consider any offers but remains "committed to an independent strategy."
Pointing to the Excite deal, Davis said it would be hard for employees to maintain their passion for building a major Internet hub once they are absorbed by another entity.
27. The statements referenced in paragraphs 19 and 23 through 25 were each materially false or misleading when issued as they misrepresented and/or omitted the following adverse facts which then existed and disclosure of which was necessary to make the statements made not false and/or misleading, including:
(a) that Lycos was in serious and advanced discussions to merge with USA Networks, Inc., with its shareholders constituting no more than 30 percent of the equity holders in the combined entity and that the form of such transaction would necessarily involve Lycos losing its "independent status";
(b) that Lycos was not "committed to an independent strategy" as it was then in serious and advanced discussions to sell itself, and transfer control, in a transaction that would vastly dilute its shareholders and reduce them to a distinct minority position in a newly-created company;
(c) that the Internet hyper-premium reflected in Lycos' stock market value was based on the false assumption that defendants were committed to maintaining Lycos as a "pure play" Internet operator, whereas, in fact, they were seriously exploring and arranging for the amalgamation of Lycos' operations with those of USA Networks, Inc., whose operations range from home shopping to ticket sales and other diversified operations that are remote from the Internet segment and not as highly valued by the market; and
(d) even to the extent that the market may have perceived or been led to assume that if Lycos did engage in a deal, its assumption was that it would only do so with a compatible Internet purveyor, such as Excite's merger with At Home, by which the super-valuation of the stock through its focus on the Internet segment could be maintained and potentially magnified.
28. On February 9, 1999, Lycos shocked the market by announcing that it signed a definitive agreement to merge with USA Networks, Inc.'s ("USA") e-commerce and Internet assets and Ticketmaster Online-Citysearch, Inc. ("Ticketmaster"). According to the Company's press release, under the agreements, Ticketmaster and Lycos will merge with USA will contribute its Home Shopping Network, Ticketmaster and Network/First Auction to the new company, which is to be named USA/Lycos Interactive Networks, Inc. Post-transaction, Lycos shareholders will own a mere 30 percent of the newly-formed company with Ticketmaster shareholders owing 8.5 percent and USA owning 61.5 percent. It was reported that Lycos shareholders will receive 2.25 shares of USA -- consideration of $94.50 per Lycos share, a discount to the then prevailing approximately $127 per share of Lycos - plus an option to buy preferred shares in the newly formed company.
29. Although the merger has been portrayed as a transaction by which USA will merge into Lycos, that is form prevailing over substance, as USA and its senior management will be the dominant players in the newly-combined entity. The primary player at USA is Barry Diller, a long established media executive who relinquishes control to no one.
30. The price of Lycos plummeted in response to this announcement -- which revealed that Lycos would be losing its independence and that its shareholders would be subsumed in a minority position in a newly-create company -- dropping from $127.25 per share to $94.25 per share, a decline of 25% on extremely heavy volume. The following day the price of Lycos stock slumped to $87.25 per share.
31. The market for Lycos's common stock was open, well-developed and efficient at all relevant times. As a result of these materially false and misleading statements and failures to disclose, Lycos common stock traded at artificially inflated prices during the Class Period until the time the fact that Lycos had engaged in the wrongful course of conduct described herein was finally communicated to and understood by the securities markets. Plaintiff and other members of the Class purchased or otherwise acquired Lycos common stock relying upon the integrity of the market price of Lycos stock and market information relating to Lycos and have been damaged thereby.
32. During the Class Period, defendants materially misled the investing public, thereby inflating the price of Lycos stock, by publicly issuing false and misleading statements and omitting to disclose material facts necessary to make defendants' statements, as set forth herein, not false and misleading, beginning with Davis's statement on January 7, 1999 that Lycos was still hunting for acquisitions. These statements and omissions were materially false and misleading in that they failed to disclose material adverse information and misrepresented the truth about the Company, its business, finances and operations, including, inter alia:
(a) that Lycos was in serious and advanced discussions to merge with USA Networks, Inc., with its shareholders constituting no more than 30 percent of the equity holders in the combined entry and that the form of such transaction would necessarily involve Lycos losing its "independent status";
(b) that Lycos was not "committed to an independent strategy" as it was then in serious and advanced discussions to sell itself, and transfer control, in a transaction that would vastly dilute its shareholders and reduce them to a distinct minority position in a newly-created company;
(c) that the Internet hyper-premium reflected in Lycos' stock market value was based on the false assumption that defendants were committed to maintaining Lycos as a "pure play" Internet operator, whereas, in fact, they were seriously exploring and arranging for the amalgamation of Lycos' operations with those of USA Networks, Inc., whose operations range from home shopping to ticket sales and other diversified operations that are remote from the Internet segment and not as highly valued by the market; and
(d) even to the extent that the market may have perceived or been led to assume that if Lycos did engage in a deal, its assumption was that it would only do so with a compatible Internet purveyor, such a Excite's merger with At Home, by which the super-valuation of the stock through its focus on the Internet segment could be maintained and potentially.
33. In addition, Davis had a duty to abstain from trading personally in Lycos securities without first disclosing all known material information concerning the Company, as set forth herein.
34. At all relevant times, the material misrepresentations and omissions particularized in this Complaint directly or proximately caused or were a substantial contributing cause of the damages sustained by plaintiff and other members of the Class. As described herein, during the Class Period, defendants made or caused to be made a series of materially false or misleading statements about Lycos's business and operations. These material misstatements and omissions had the cause and effect of creating in the market an unrealistically positive assessment of Lycos and its business and operations, thus causing the Company's common stock to be overvalued and artificially inflated at all relevant times. Defendants' materially false and misleading statements during the Class Period resulted in plaintiff and other members of the Class purchasing the Company's common stock at an artificially inflated price, thus causing the damages complained of herein.
APPLICABILITY OF PRESUMPTION OF
RELIANCE: FRAUD-ON-THE-MARKET DOCTRINE
35. At all relevant times, the market for Lycos common stock was an efficient market for the following reasons, among others:
(a) Lycos common stock met the requirements for listing, and was listed and actively traded, on the NASDAQ, a highly efficient market;
(b) As a regulated issuer, Lycos filed periodic public reports with the SEC and the NASDAQ;
(c) Lycos stock was followed by securities analysts employed by major brokerage firms who wrote reports which were distributed to the sales force and certain customers of their respective brokerage firms. Each of these reports was publicly available and entered the public marketplace.
(d) Lycos regularly issued press releases which were carried by national news wires. Each of these releases was publicly available and entered the public marketplace.
36. As a result, the market for Lycos securities promptly digested current information with respect to Lycos from all publicly-available sources and reflected such information in Lycos' stock price. Under these circumstances, all purchasers of Lycos common stock during the Class Period suffered similar injury through their purchase of stock at artificially inflated prices and a presumption of reliance applies.
NO SAFE HARBOR
37. The statutory safe harbor provided for forward-looking statements under certain circumstances does not apply to any of the allegedly false statements pleaded in this complaint. The specific statements pleaded herein were not identified as
"forward-looking statements" when made. Nor was it stated with respect to any of the statements forming the basis of this complaint that actual results "could differ materially from those projected." To the extent there were any forward-looking statements, there were no meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the purportedly forward-looking statements. Alternatively, to the extent that the statutory safe harbor does apply to any forward-looking statements pleaded herein, defendants are liable for those false forward-looking statements because at the time each of those forward-looking was made the particular speaker knew that the particular forward-looking statement was false, and/or the forward-looking statement was authorized and/or approved by an executive officer of Lycos who knew that those statements were false when made.
SCIENTER ALLEGATIONS
38. As alleged herein, defendants acted with scienter in that defendants knew that the public documents and statements, issued or disseminated by or in the name of the Company were materially false and misleading; knew or recklessly disregarded that such statements or documents would be issued or disseminated to the investing public; and knowingly and substantially participated or acquiesced in the issuance or dissemination of such statements or documents as primary violators of the federal securities laws. As set forth elsewhere herein in detail, defendants, by virtue of their receipt of information reflecting the true facts regarding Lycos and its business practices, their control over and/or receipt of Lycos's allegedly materially misleading misstatements and/or their association with the Company which made them privy to confidential proprietary information concerning Lycos were active and culpable participants in the fraudulent scheme alleged herein. Defendants knew and/or recklessly disregarded the falsity and misleading nature of the information which they caused to be disseminated to the investing public. Insider selling by Lycos's President and CEO during the Class Period is also highly probative of the defendants' scienter in the scheme, artifice to defraud, or acts, practices or course of conduct in violation of Section 10(b) and Rule 10b-5. While the defendants were concealing or obscuring negative information about the Company, defendant Davis was benefitting from the illegal course of business or course of conduct described herein by selling the Company's stock at artificially inflated prices.
BASIS OF ALLEGATIONS
39. Plaintiff has alleged the foregoing based upon the investigation of plaintiff's counsel, which included a review of Lycos's SEC filings, regulatory filings and reports, securities analysts reports and advisories about the Company, press releases and other public statements issued by the Company, media reports about the Company, and believes that substantial additional evidentiary support will exist for the allegations set forth herein after a reasonable opportunity for discovery. Among other things, the extraordinary close contemporaneity between the challenged statements and the announcement of the proposed merger overwhelming supports the inference and conclusion that defendant Davis, on behalf of Lycos, grossly misled the market when, failing to remain silent or issuing a safe "no comment" he boldly, publicly and unconditionally asserted -- falsely -- that Lycos was and would remain independent.
FIRST CLAIM
(Violations Of Section 10(b)
Of The Exchange Act And Rule 10b-5
Promulgated Thereunder Against All Defendants)
40. Plaintiff repeats and re-alleges each and every allegations contained above.
41. Each of the defendants: (a) knew or recklessly disregarded material adverse non-public information about Lycos' business, which was not disclosed; and (b) participated in drafting, reviewing and/or approving the misleading statements, releases, reports and other public representations of and about Lycos.
42. During the Class Period, defendants, with knowledge of or reckless disregard for the truth, disseminated or approved the false statements specified above, which 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.
43. Defendants have violated § 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder 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 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 the purchasers of Lycos stock during the Class Period.
44. Plaintiff and the Class have suffered damages in that, in reliance on the integrity of the market, they paid artificially inflated prices for Lycos stock. Plaintiff and the Class would not have purchased Lycos stock 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' false and misleading statements.
SECOND CLAIM
(Violation Of Section 20(a)
Of The Exchange Act Against Defendants)
45. Plaintiff repeats and re-alleges each and every allegation contained above.
46. Defendant Davis acted as a controlling person of Lycos within the meaning of Section 20(a) of the Exchange Act. By reason of his senior executive and Board position, he had the power and authority to cause Lycos to engage in the wrongful conduct complained of herein.
47. By reason of such wrongful conduct, Lycos and defendant Davis are liable pursuant to § 20(a) of the Exchange Act. 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 Lycos stock during the Class Period.
WHEREFORE, plaintiff prays for relief and judgment, as follows:
A. Determining that this action is a proper class action, designating plaintiff and lead plaintiff and certifying plaintiff as a class representative under Rule 23 of the Federal Rules of Civil Procedure and his counsel as lead counsel;
B. Awarding compensatory damages in favor of plaintiff and the other class members against all defendants, jointly and severally, for all damages sustained as a result of defendants' wrongdoing, in an amount to be proven at trial, including interest thereon;
C. Awarding plaintiff and the Class their reasonable costs and expenses incurred in this action, including counsel fees and expert fees; and
D. For such other and further relief as the Court may deem just and proper.
JURY TRIAL DEMANDED
Plaintiff hereby demands a trial by jury.
Dated: March 23, 1999
BERMAN, DEVALERIO & PEASE, LLP
By: _____________________________
Norman Berman
Jeffrey C. Block
One Liberty Square
Boston, Massachusetts 02109
Telephone: (617) 542-8300
Facsimile: (617) 542-1194
OF COUNSEL:
ABBEY, GARDY & SQUITIERI, LLP
Lee Squitieri
212 East 39th Street
New York, New York 10016
Telephone: (212) 889-3700
Facsimile: (212) 684-5191LAWRENCE E. FELDMAN & ASSOC.
Lawrence E. Feldman, Esquire
Jenkintown Plaza, Suite 230
101 Greenwood Avenue
Jenkintown, PA 19046
Telephone:(215) 885-3302
Facsimile:(215) 885-3303
Http://leflaw.com
N. Nathan Neuman, Esquire
700 Lake Drive
Ambler, PA 19002
Telephone: (215) 646-9520
Facsimile: (215) 646-9521
SHELLER, LUDWIG & BADEY
Jonathon Shub, Esquire
1528 Walnut Street, 3rd Fl.
Philadelphia, PA 19102
Telephone: (215) 790-7300
Facsimile: (215) 546-0942