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UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK IN RE INITIAL PUBLIC OFFERING SECURITIES LITIGATION X : : : : X X : : : : : : : X
ValiCert, Inc.
Master File No. 21 MC 92 (SAS)
IN RE VALICERT, INC. INITIAL PUBLIC OFFERING SECURITIES LITIGATION
01 Civ. 10889 (SAS)
AMENDED CLASS ACTION COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS
Plaintiff, by her undersigned attorneys, individually and on behalf of the Class described below, upon information and belief, based upon, inter alia, the investigation of counsel, which includes a review of public announcements made by Defendants, interviews with individuals with knowledge of the acts and practices described herein, Securities and Exchange Commission ("SEC") filings made by Defendants, press releases, and media reports, except as to Paragraph 12 applicable to the named Plaintiff which is alleged upon personal knowledge, brings this Amended Complaint (the "Complaint") against the Defendants named herein, and alleges as follows: NATURE OF THE ACTION 1. This is a securities class action alleging violations of the federal securities laws in
connection with the initial public offering conducted on or about July 27, 2000 ("IPO" or "Offering") of 4,000,000 shares of ValiCert, Inc. ("ValiCert" or the "Issuer") and the trading of ValiCert common stock in the aftermarket from the date of the IPO through December 6, 2000, inclusive (the "Class Period").
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2.
In connection with the IPO, the underwriter named as a Defendant herein
participated in a scheme to improperly enrich itself through the manipulation of the aftermarket trading in ValiCert common stock following the IPO. 3. In this regard, this underwriter created artificial demand for ValiCert stock by
conditioning share allocations in the IPO upon the requirement that customers agree to purchase shares of ValiCert in the aftermarket and, in some instances, to make those purchases at prearranged, escalating prices ("Tie-in Agreements"). 4. As part of the scheme, this underwriter required its customers to repay a material
portion of profits obtained from selling IPO share allocations in the aftermarket through one or more of the following types of transactions: (a) paying inflated brokerage commissions; (b) entering into transactions in otherwise unrelated securities for the primary purpose of generating commissions; and/or (c) purchasing equity offerings underwritten by this underwriter, including, but not limited to, secondary (or add-on) offerings that would not be purchased but for the unlawful scheme alleged herein. (Transactions "(a)" through "(c)" above will be, at varying times, collectively referred to hereinafter as "Undisclosed Compensation"). 5. In connection with the IPO, ValiCert filed with the SEC a registration statement
("Registration Statement") and a prospectus ("Prospectus"). The Registration Statement and Prospectus will be, at varying times, collectively referred to hereinafter as the "Registration Statement/Prospectus." The Registration Statement/Prospectus was declared effective by the SEC on or about July 27, 2000. 6. The Registration Statement/Prospectus was materially false and misleading in that
it failed to disclose, among other things further described herein, that the underwriter named as a 2
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Defendant herein had required Tie-in Agreements in allocating shares in the IPO and would receive Undisclosed Compensation in connection with the IPO. 7. As part and parcel of the scheme alleged herein, the underwriter named as a
Defendant herein also improperly utilized its analysts, who, unbeknownst to investors, were compromised by conflicts of interest, to artificially inflate or maintain the price of ValiCert stock by issuing favorable recommendations in analyst reports. 8. The Individual Defendants (defined below) not only benefitted from the
manipulative and deceptive schemes described herein as a result of their personal holdings of the Issuer's stock, these Defendants also knew of or recklessly disregarded the conduct complained of herein through their participation in the "Road Show" process by which underwriters generate interest in public offerings. JURISDICTION 9. This Court has jurisdiction over the subject matter of this action pursuant to
Section 22 of the Securities Act of 1933 (the "Securities Act") (15 U.S.C. 77v) and Section 27 of the Securities Exchange Act of 1934 (the "Exchange Act") (15 U.S.C. 78aa) and 28 U.S.C. 1331. 10. Plaintiff brings this action pursuant to Sections 11 and 15 of the Securities Act (15
U.S.C. 77k and 77o) and Section 10(b) and 20(a) of the Exchange Act as amended (15 U.S.C. 78j(b) and 78t(a)), and Rule 10b-5 promulgated thereunder (17 C.F.R. 240.10b-5). Venue is proper in this District as many of the material acts and injuries alleged herein occurred within the Southern District of New York.
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11.
In connection with the acts alleged in the 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. PARTIES PLAINTIFF 12. Plaintiff Jacqueline LaChance ("Plaintiff") purchased or otherwise acquired shares
of ValiCert common stock traceable to the IPO, in the open market or otherwise during the Class Period, at prices that were artificially inflated by Defendants' misconduct and was damaged thereby. DEFENDANTS THE UNDERWRITER DEFENDANT 13. Plaintiff hereby incorporates by reference the "Underwriter Defendants" section of
the Master Allegations, as if set forth herein at length. 14. The following investment banking firm acted in the following capacity with respect
to the Offering and substantially participated in the unlawful conduct alleged herein: POSITION LEAD MANAGER NAME OF UNDERWRITER Merrill Lynch
15.
The Defendant identified in the preceding paragraph will be, at varying times,
referred to hereinafter as the "Underwriter Defendant." THE ISSUER DEFENDANTS
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THE ISSUER 16. At the time of the Offering, Defendant ValiCert was a Delaware corporation with
its principal executive offices located in Mountain View, California. ValiCert is described in the Registration Statement/Prospectus as "a leading provider of end-to-end infrastructure software products and services that organizations use to conduct valid, secure and provable transactions over the Internet." INDIVIDUAL DEFENDANTS 17. Defendant Joseph Amram ("Amram") served, at the time of the Offering, as
ValiCert's President, Chief Executive Officer, and as a member of the Board of Directors. Amram signed the Registration Statement. 18. Defendant Timothy Conley ("Conley") served, at the time of the Offering, as
ValiCert's Vice-President of Finance and Chief Financial Officer. Conley signed the Registration Statement. 19. Defendants Amram and Conley will be, at varying times, collectively referred to
hereinafter as the "Individual Defendants." 20. The Issuer and the Individual Defendants will be, at varying times, collectively
referred to hereinafter as the "Issuer Defendants."
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CLASS ACTION ALLEGATIONS 21. Plaintiff brings this action as a class action pursuant to Rule 23(a) and (b)(3) of the
Federal Rules of Civil Procedure on behalf of a class consisting of all persons and entities who purchased or otherwise acquired the common stock of the Issuer during the Class Period and were damaged thereby (the "Class"). Excluded from the Class are Defendants herein, Defendants' legal counsel, members of the immediate family of the Individual Defendants, any entity in which any of the Defendants has a controlling interest, and the legal representatives, heirs, successors or assigns of any of the Defendants. 22. Members of the Class are so numerous that joinder of all members is impracticable. (a) Millions of shares of common stock were sold in the IPO and the stock was
actively traded during the Class Period; and (b) While the exact number of Class members is unknown to the Plaintiff at
this time and can only be ascertained through appropriate discovery, Plaintiff believes that there are hundreds, if not thousands, of Class members who purchased or otherwise acquired the Issuer's common stock during the Class Period. 23. Plaintiff's claims are typical of the claims of the other members of the Class.
Plaintiff and other members of the Class have sustained damages because of Defendants' unlawful activities alleged herein. Plaintiff has retained counsel competent and experienced in class and securities litigation and intends to prosecute this action vigorously. The interests of the Class will be fairly and adequately protected by Plaintiff. Plaintiff has no interests that are contrary to or in conflict with those of the Class which Plaintiff seeks to represent.
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24.
A class action is superior to all other available methods for the fair and efficient
adjudication of this controversy. Plaintiff knows of no difficulty to be encountered in the management of this action that would preclude its maintenance as a class action. Furthermore, since the damages suffered by individual members of the Class may be relatively small, the expense and burden of individual litigation make it economically impracticable for the members of the Class to seek redress individually for the wrongs they have suffered. 25. The names and addresses of the record purchasers of the Issuer's common stock
are available from the Issuer, its agents, and the underwriters who sold and distributed the Issuer's common stock in the IPO. Notice can be provided to Class members via a combination of published notice and first class mail using techniques and forms of notice similar to those customarily used in class actions arising under the federal securities laws. 26. 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'
misconduct as alleged herein; (b) Whether the Registration Statement/Prospectus omitted and/or
misrepresented material facts; (c) herein; (d) Whether, solely with respect to claims brought under the Exchange Act, Whether Defendants participated in the course of conduct complained of
the Defendants named thereunder acted with scienter; and 7
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(e)
Whether the members of the Class have sustained damages as a result of
Defendants' conduct, and the proper measure of such damages. SUBSTANTIVE ALLEGATIONS 27. Plaintiff hereby incorporates by reference the "Introductory" section of the Master
Allegations as if set forth herein at length. Plaintiff also adopts and incorporates herein by reference the allegations set forth in the Master Allegations that specifically relate to the Underwriter Defendant as if set forth herein at length. THE IPO 28. ValiCert's IPO of 4,000,000 shares was priced at $10.00 on or about July 27,
2000. The sale and distribution of this firm commitment offering was effected by an underwriting syndicate consisting of, among others, the Underwriter Defendant. Additionally, ValiCert granted the underwriting syndicate an option to purchase 600,000 additional shares at the initial offering price less underwriting discounts and commissions. 29. On the day of the IPO, ValiCert stock traded as high as $11.9375 per share, or
more than 19% above the IPO price on substantial volume. This debut, however, was not the result of normal market forces; rather, it was the result of Defendants' unlawful practices more fully described herein. 30. During the Class Period, on September 21, 2000, ValiCert's common stock traded
as a high as $27.875 per share, or more than 178% above the IPO price.
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UNLAWFUL CONDUCT IN CONNECTION WITH THE IPO 31. Consistent with its conduct in other initial public offerings, as set forth in the
Master Allegations, the Underwriter Defendant engaged in manipulative and/or other unlawful practices described more fully herein connection with the Valicert IPO. 32. Customers of the Underwriter Defendant, as a condition to obtaining an allocation
of stock in the IPO, were required or induced to agree to enter into Tie-in Agreements and/or pay Undisclosed Compensation. THE REGISTRATION STATEMENT/PROSPECTUS WAS MATERIALLY FALSE AND MISLEADING 33. In conducting the IPO, the Underwriter Defendant violated Regulation M
promulgated pursuant to the Exchange Act. Rule 101(a) of Regulation M reads as follows: Unlawful Activity. In connection with a distribution of securities, it shall be unlawful for a distribution participant or an affiliated purchaser of such person, directly or indirectly, to bid for, purchase, or attempt to induce any person to bid for or purchase, a covered security during the applicable restricted period. 17 C.F.R 242.101. 34. As explained by the SEC's Staff Legal Bulletin No. 10, dated August 25, 2000, tie-
in agreements violate Regulation M: Tie-in agreements are a particularly egregious form of solicited transactions prohibited by Regulation M. As far back as 1961, the Commission addressed reports that certain dealers participating in distributions of new issues had been making allotments to their customers only if such customers agreed to make some comparable purchase in the open market after the issue was initially sold. The Commission said that such agreements may violate the antimanipulative provisions of the Exchange Act, particularly Rule 10b6 (which was replaced by Rules 101 and 102 of Regulation M)
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under the Exchange Act, and may violate other provisions of the federal laws. Solicitations and tie-in agreements for aftermarket purchases are manipulative because they undermine the integrity of the market as an independent pricing mechanism for the offered security. Solicitations for aftermarket purchases give purchasers in the offering the impression that there is a scarcity of the offered securities. This can stimulate demand and support the pricing of the offering. Moreover, traders in the aftermarket will not know that the aftermarket demand, which may appear to validate the offering price, has been stimulated by the distribution participants. Underwriters have an incentive to artificially influence aftermarket activity because they have underwritten the risk of the offering, and a poor aftermarket performance could result in reputational and subsequent financial loss. (Emphasis added). 35. In particular, the Registration Statement/Prospectus stated: To facilitate this offering, the underwriters may engage in transactions that stabilize, maintain or affect the market price of our common stock. The underwriters may over-allot shares of our common stock, thus creating a short position in our common stock. Covered short sales are sales of shares made in an amount not greater than the underwriters' over-allotment option to purchase additional shares in this offering. The underwriters may close out any covered short position by either exercising their over-allotment option or purchasing shares in the open market. The underwriters may also make naked short sales, which are sales in excess of the over-allotment option. The underwriters must close out any naked short position by purchasing shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the shares in the open market after pricing that could adversely affect investors who purchase in the offering. In determining the source of shares to close out any covered short position, the underwriters may consider the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the over-allotment option. The representatives on behalf of the underwriters may reclaim selling concessions allowed to an underwriter or dealer.
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Similar to other purchase transactions, the underwriters' purchases to cover the syndicate short position may raise or maintain the market price of our common stock or prevent or retard a decline in the market price of our common stock. The price of our common stock may be higher than the price might otherwise exist in the open market. The underwriters are not required to engage in these activities and, if begun, may end any of these activities at any time. 36. The statements contained in the previous paragraph were materially false and
misleading because the Underwriter Defendant required customers to commit to Tie-in Agreements and created the false appearance of demand for the stock at prices in excess of the IPO price and in violation of Regulation M. At no time did the Registration Statement/Prospectus disclose that the Underwriter Defendant would require its customers seeking to purchase IPO shares to engage in transactions causing the market price of ValiCert common stock to rise, in transactions that cannot be characterized as stabilizing transactions, over-allotment transactions, syndicate covering transactions or penalty bids. 37. Because the Undisclosed Compensation was, in reality, underwriter compensation,
it was required to be disclosed in the Registration Statement/Prospectus. As Regulation S-K, Item 508 (e) provides: Underwriter's Compensation. Provide a table that sets out the nature of the compensation and the amount of discounts and commissions to be paid to the underwriter for each security and in total. The table must show the separate amounts to be paid by the company and the selling shareholders. In addition, include in the table all other items considered by the National Association of Securities Dealers to be underwriting compensation for purposes of that Association's Rules of Fair Practice. (Emphasis added).
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38.
The NASD specifically addresses what constitutes underwriting compensation in
NASD Conduct Rule 2710(c)(2)(B) (formerly Article III, Section 44 of the Association's Rules of Fair Practice): For purposes of determining the amount of underwriting compensation, all items of value received or to be received from any source by the underwriter and related persons which are deemed to be in connection with or related to the distribution of the public offering as determined pursuant to subparagraphs (3) and (4) below shall be included. (Emphasis added). 39. NASD Conduct Rule 2710(c)(2)(c) specifically requires: If the underwriting compensation includes items of compensation in addition to the commission or discount disclosed on the cover page of the prospectus or similar document, a footnote to the offering proceeds table on the cover of the prospectus or similar document shall include a cross-reference to the section on underwriting or distribution arrangements. 40. Contrary to applicable law, the Registration Statement/Prospectus did not set
forth, by footnote or otherwise, the Undisclosed Compensation. 41. Instead, the Registration Statement/Prospectus misleadingly stated that the
underwriting syndicate would receive as compensation an underwriting discount of $0.70 per share, or a total of $2,800,000, based on the spread between the per share proceeds to ValiCert ($9.30) and the Offering price to the public ($10.00 per share). This disclosure was materially false and misleading as it misrepresented underwriting compensation by failing to include Undisclosed Compensation. 42. In addition, the Registration Statement/Prospectus stated: We have been advised by the representatives of the underwriters that the underwriters propose to offer the shares of common stock to the public at the initial public offering price specified on the 12
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cover page of this prospectus [$10.00] and to selected dealers at a price that represents a concession... 43. The Registration Statement/Prospectus was materially false and misleading in that
in order to receive share allocations from the Underwriter Defendant in the IPO, customers were required to pay an amount in excess of the IPO price set forth on the cover page in the form of Undisclosed Compensation and/or Tie-in Agreements. 44. NASD Conduct Rule 2330(f) further prohibits an underwriter from sharing directly
or indirectly in the profits in any account of a customer: [N]o member or person associated with a member shall share directly or indirectly in the profits or losses in any account of a customer carried by the member or any other member. 45. The Underwriter Defendant's scheme was dependent upon customers obtaining
substantial profits by selling share allocations from the IPO and paying a material portion of such profits to the Underwriter Defendant. In this regard, the Underwriter Defendant shared in its customers' profits in violation of NASD Conduct Rule 2330(f). 46. The failure to disclose the Underwriter Defendant's unlawful profit-sharing
arrangement as described herein, rendered the Registration Statement/Prospectus materially false and misleading. 47. NASD Conduct Rule 2440 governs Fair Prices and Commissions and, in relevant
part, provides that a member: shall not charge his customer more than a fair commission or service charge, taking into consideration all relevant circumstances, including market conditions with respect to such security at the time of the transaction, the expense of executing the order and the value of any service he may have rendered by reason of his experience in and knowledge of such security and market therefor. 13
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48.
Guideline IM-2440 of the NASD states, in relevant part: It shall be deemed a violation of . . . Rule 2440 for a member to enter into any transaction with a customer in any security at any price not reasonably related to the current market price of the security or to charge a commission which is not reasonable. . . . A mark-up of 5% or even less may be considered unfair or unreasonable under the 5% policy.
49.
The Registration Statement/Prospectus was materially false and misleading due to
its failure to disclose the material fact that the Underwriter Defendant was charging customers commissions that were unfair, unreasonable, and excessive as consideration for receiving allocations of shares in the IPO. MARKET MANIPULATION THROUGH THE USE OF ANALYSTS 50. As demonstrated in the Use of Analysts section of the Master Allegations, in
furtherance of its manipulative scheme, Underwriter Defendant Merrill Lynch improperly used its analysts, who suffered from conflicts of interest, to issue glowing research reports and positive recommendations at or about the expiration of the "quiet period" so as to manipulate the Issuers aftermarket stock price. 51. On August 23, 2000, just after the expiration of the "quiet period" with respect to
the ValiCert IPO, Merrill Lynch initiated coverage with a "near term-accumulate" recommendation. THE END OF THE CLASS PERIOD 52. On December 6, 2000, The Wall Street Journal published an article concerning an
investigation of various improper initial public offering practices. DEFENDANTS' UNLAWFUL CONDUCT ARTIFICIALLY INFLATED THE PRICE OF THE ISSUER'S STOCK 14
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53.
Defendants' conduct alleged herein had the effect of inflating the price of the
Issuer's common stock above the price that would have otherwise prevailed in a fair and open market throughout the Class Period. VIOLATIONS OF THE SECURITIES ACT FIRST CLAIM (AGAINST THE ISSUER, THE INDIVIDUAL DEFENDANTS AND THE UNDERWRITER DEFENDANT FOR VIOLATION OF SECTION 11 RELATING TO THE REGISTRATION STATEMENT) 54. Plaintiff repeats and realleges the allegations set forth above as if set forth fully
herein, except to the extent that any such allegation may be deemed to sound in fraud. 55. This Claim is brought pursuant to Section 11 of the Securities Act, 15 U.S.C.
77k, on behalf of Plaintiff and other members of the Class who purchased or otherwise acquired the Issuer's common stock traceable to the IPO against the Issuer, the Individual Defendants and the Underwriter Defendant and were damaged thereby. 56. As set forth above, the Registration Statement, when it became effective,
contained untrue statements of material fact and omitted to state material facts required to be stated therein or necessary to make the statements therein not misleading. 57. The Issuer is the registrant for the IPO shares sold to Plaintiff and other members
of the Class. The Issuer issued, caused to be issued and participated in the issuance of materially false and misleading written statements and/or omissions of material facts to the investing public that were contained in the Registration Statement.
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58.
Each of the Individual Defendants, either personally or through an attorney-in-fact,
signed the Registration Statement or was a director or person performing similar functions for the Issuer at the time of the IPO. 59. 60. The Underwriter Defendant is liable as an underwriter in connection with the IPO. The Defendants named in this Claim are liable to Plaintiff and other members of
the Class who purchased or otherwise acquired shares of the Issuer's common stock traceable to the IPO. 61. By virtue of the foregoing, Plaintiff and other members of the Class who purchased
or otherwise acquired the Issuer's common stock traceable to the IPO are entitled to damages pursuant to Section 11. 62. This Claim was brought within one year after discovery of the untrue statements
and omissions in the Registration Statement, or after such discovery should have been made by the exercise of reasonable diligence, and within three years after the Issuer's common stock was first bona fide offered to the public. SECOND CLAIM (AGAINST THE INDIVIDUAL DEFENDANTS FOR VIOLATION OF SECTION 15 RELATING TO THE REGISTRATION STATEMENT) 63. Plaintiff repeats and realleges the allegations set forth above in the First Claim as if
set forth fully herein. 64. This Claim is brought against the Individual Defendants pursuant to Section 15 of
the Securities Act, 15 U.S.C. on 77o, behalf of Plaintiff and other members of the Class who purchased or otherwise acquired the Issuer's common stock traceable to the IPO. 16
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65.
The Issuer is liable under Section 11 of the Securities Act as set forth in the First
Claim herein with respect to the IPO. 66. Each of the Individual Defendants was a control person of the Issuer with respect
to the IPO by virtue of that individual's position as a senior executive officer and/or director of the Issuer. 67. The Individual Defendants, by virtue of their managerial and/or board positions
with the Company, controlled the Issuer as well as the contents of the Registration Statement at the time of the IPO. Each of the Individual Defendants was provided with or had unlimited access to copies of the Registration Statement and had the ability to either prevent its issuance or cause it to be corrected. 68. As a result, the Individual Defendants are liable under Section 15 of the Securities
Act for the Issuer's primary violation of Section 11 of the Securities Act. 69. By virtue of the foregoing, Plaintiff and other members of the Class who purchased
or otherwise acquired the Issuer's common stock traceable to the IPO are entitled to damages against the Individual Defendants. VIOLATIONS OF THE EXCHANGE ACT APPLICABILITY OF PRESUMPTION OF RELIANCE: FRAUD-ON-THE-MARKET DOCTRINE 70. Plaintiff will rely, in part, upon the presumption of reliance established by the
fraud-on-the-market doctrine in that:
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(a)
Defendants named under Claims brought pursuant to the Exchange Act
made public misrepresentations or failed to disclose material facts during the Class Period regarding the Issuer as alleged herein; (b) (c) The omissions and misrepresentations were material; Following the IPO and continuing throughout the Class Period, the Issuer's
stock was traded on a developed national stock exchange, namely the NASDAQ National Market, which is an open and efficient market; (d) (e) (f) The Issuer filed periodic reports with the SEC; The Issuer was followed by numerous securities analysts; The market rapidly assimilated information about the Issuer which was
publicly available and communicated by the foregoing means and that information was promptly reflected in the price of the Issuer's common stock; and (g) The misrepresentations and omissions and the manipulative conduct alleged
herein would tend to induce a reasonable investor to misjudge the value of the Issuer's common stock. EXCHANGE ACT CLAIMS - THE UNDERWRITER DEFENDANT THE UNDERWRITER DEFENDANT ACTED WITH SCIENTER 71. As alleged herein, the Underwriter Defendant acted with scienter in that it: (a)
knowingly or recklessly engaged in acts and practices and a course of conduct which had the effect of artificially inflating the price of the Issuer's common stock in the aftermarket; (b) knowingly or recklessly disregarded that the Registration Statement/Prospectus as set forth herein
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was materially false and misleading; and/or (c) knowingly or recklessly misused its analysts in connection with analyst reports. 72. In addition, the Underwriter Defendant violated the federal securities laws as it
sold the Issuer's shares in and/or after the IPO and/or recommended the Issuer's stock while in possession of material, non-public information which it failed to disclose. 73. As evidenced by the public statements of CSFB published by The Wall Street
Journal on or about June 29, 2001, the practices employed by the Underwriter Defendant in connection with public offerings complained of herein were widespread throughout the financial underwriting community. In this regard, CSFB, which recently settled regulatory claims of misconduct concerning its initial public offering allocation practices, stated during the pendency of the government's investigation, "[w]e continue to believe our [initial public offering] allocation policies are consistent with those employed by others in the industry." 74. The Underwriter Defendant knew from its direct participation in the manipulation
of the IPO, or recklessly disregarded as a result of its experience with other manipulated offerings as set forth in the Matrix section of the Master Allegations, that the manipulations alleged herein were taking place with respect to the IPO and were not disclosed. 75. As required by NASD Conduct Rule 3010(c), the Underwriter Defendant had in
place compliance procedures so as to better inform itself whether it was acting in the unlawful manner alleged herein. 76. Senior management of the Underwriter Defendant had regular access to and
received timely written reports tracking the account activity of each of its customers. By comparing the ratio of brokerage firm commission income per account with the amount of dollars 19
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invested by such account that received allocations of shares in the IPO, senior management knew, or was reckless in not knowing, that such commissions were disproportionately high relative to that customer's total investment and imposed on management a duty of inquiry as is customary in the industry. Such inquiry would have revealed the illegal practices described herein. Any failure to conduct such inquiry was, at the very least, reckless and further demonstrates that the Underwriter Defendant knew or recklessly disregarded the misconduct alleged herein. 77. The Underwriter Defendant also had the motive and opportunity to engage in the
wrongful conduct described herein for the following reasons, among others: (a) Such conduct increased the likelihood that the Issuer would retain the
Underwriter Defendant to undertake future investment banking services such as public offerings of equity or debt securities, financial consulting, and possible future acquisitions, thus permitting the Underwriter Defendant to receive additional fees in connection with those services. (See Additional Investment Banking Business section of the Master Allegations). (b) Such conduct increased the likelihood of attracting the business of new
issuers for the underwriting of initial and secondary public offerings, as well as debt and convertible offerings, and related investment banking fees, while simultaneously sustaining and/or enhancing its reputation as an investment bank. (See Attracting New Investment Banking Clients section of the Master Allegations). (c) The Undisclosed Compensation of the Underwriter Defendant was directly
proportional to the amount of the aftermarket price increase achieved by the manipulative scheme as its customers were required to pay a percentage of their profits. The larger the profits, the
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greater the payment. (See Maximizing Undisclosed Compensation section of the Master Allegations). (d) The Underwriter Defendant's analysts were motivated to and did issue
favorable recommendations for companies they covered because their compensation was, at least in part, tied to the amount of investment banking fees received by their firm in connection with financial services provided to such companies. (See Analyst Compensation section of the Master Allegations). (e) The Underwriter Defendant's analysts were further motivated to and did
issue favorable recommendations because they personally owned pre-IPO stock in companies they were recommending. (See Personal Investments of Analysts section of the Master Allegations).
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THIRD CLAIM (FOR VIOLATIONS OF SECTION 10(b) AND RULE 10b-5 THEREUNDER AGAINST THE UNDERWRITER DEFENDANT BASED UPON DECEPTIVE AND MANIPULATIVE PRACTICES IN CONNECTION WITH THE IPO) 78. Plaintiff repeats and realleges the allegations set forth above as though fully set
forth herein at length except for Claims brought pursuant to the Securities Act. 79. This Claim is brought pursuant to Section 10(b) of the Exchange Act and Rule
10b-5 promulgated thereunder, on behalf of Plaintiff and other members of the Class against the Underwriter Defendant. This Claim is based upon the deceptive and manipulative practices of the Underwriter Defendant. 80. During the Class Period, the Underwriter Defendant carried out a plan, scheme
and course of conduct which was intended to and, throughout the Class Period, did: (a) deceive the investing public, including Plaintiff and other members of the Class by means of material misstatements and omissions, as alleged herein; (b) artificially inflate and maintain the market price and trading volume of the Issuer's common stock; and (c) induce Plaintiff and other members of the Class to purchase or otherwise acquire the Issuer's common stock at artificially inflated prices. In furtherance of this unlawful scheme, plan and course of conduct, the Underwriter Defendant took the actions set forth herein. 81. The Underwriter Defendant employed devices, schemes, and artifices to defraud
and/or engaged in acts, practices and a course of business which operated as a fraud and deceit upon the Plaintiff and other members of the Class in an effort to inflate and artificially maintain high market prices for the Issuer's common stock in violation of Section 10(b) of the Exchange
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Act and Rule 10b-5. The Underwriter Defendant is sued as a primary participant in the unlawful conduct charged herein. 82. The Underwriter Defendant, directly and indirectly, by the use of means or
instrumentalities of interstate commerce and/or of the mails, engaged and participated in a continuous course of conduct to conceal its unlawful practices and course of business which operated as a fraud and deceit upon Plaintiff and other members of the Class. 83. The Underwriter Defendant had actual knowledge of or recklessly disregarded the
existence of the Tie-in Agreements, the requirement that customers pay Undisclosed Compensation and the manipulations alleged herein. 84. The Underwriter Defendant held itself out as an NASD member and was required
to observe high standards of commercial honor and just and equitable principles of trade (NASD Conduct Rule 2110). The Underwriter Defendant owed to Plaintiff and other members of the Class the duty to conduct the IPO and the trading of the Issuer's common stock in a fair, efficient and unmanipulated manner. 85. By virtue of the foregoing, the Underwriter Defendant violated Section 10(b) of
the Exchange Act and Rule 10b-5. 86. As a result of the manipulative conduct set forth herein, Plaintiff and other
members of the Class purchased or otherwise acquired the Issuer's common stock during the Class Period at artificially inflated prices and were damaged thereby.
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FOURTH CLAIM (FOR VIOLATIONS OF SECTION 10(b) AND RULE 10b-5 THEREUNDER AGAINST THE UNDERWRITER DEFENDANT BASED UPON MATERIALLY FALSE AND MISLEADING STATEMENTS AND OMISSIONS OF MATERIAL FACTS) 87. Plaintiff repeats and realleges the allegations set forth above as though fully set
forth herein at length except for Claims brought pursuant to the Securities Act. 88. This Claim is brought pursuant to Section 10(b) of the Exchange Act and Rule
10b-5 promulgated thereunder, on behalf of Plaintiff and other members of the Class against the Underwriter Defendant. This Claim is based upon materially false and misleading statements and omissions of material facts made by the Underwriter Defendant during the Class Period. 89. The Underwriter Defendant: (a) employed devices, schemes, and artifices to
defraud; (b) made untrue statements of material fact and/or omitted to state material facts necessary to make the statements not misleading; and (c) engaged in acts, practices and a course of business which operated as a fraud and deceit upon the Plaintiff and other members of the Class in violation of Section 10(b) of the Exchange Act and Rule 10b-5. 90. During the Class Period, the Underwriter Defendant carried out a plan, scheme
and course of conduct which was intended to and, throughout the Class Period, did: (a) deceive the investing public, including Plaintiff and other members of the Class, as alleged herein; (b) artificially inflate and maintain the market price of and demand for the Issuer's common stock; and (c) induce Plaintiff and other members of the Class to purchase or otherwise acquire the Issuer's common stock at artificially inflated prices. In furtherance of this unlawful course of conduct, the Underwriter Defendant took the actions set forth herein.
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91.
The Underwriter Defendant, directly and indirectly, by the use of means or
instrumentalities of interstate commerce and/or of the mails, engaged and participated in a continuous course of conduct to conceal material information as set forth more particularly herein, and engaged in transactions, practices and a course of business which operated as a fraud and deceit upon the Plaintiff and other members of the Class. 92. The Underwriter Defendant, either directly or through its designated
representatives, prepared and reviewed the Registration Statement/Prospectus. In addition, the Underwriter Defendant had access to drafts of the Registration Statement/Prospectus prior to the filing of said document with the SEC and the dissemination to the public. 93. The material misrepresentations and/or omissions were made knowingly or
recklessly and for the purpose and effect of, inter alia: (a) securing and concealing the Tie-in Agreements; (b) securing and concealing the Undisclosed Compensation; and/or (c) concealing that the Underwriter Defendant and its analysts who reported on the Issuer's stock had material conflicts of interest. 94. As a result of making affirmative statements in the Registration
Statement/Prospectus, or otherwise, or participating in the making of such affirmative statements, the Underwriter Defendant had a duty to speak fully and truthfully regarding such representations and to promptly disseminate any other information necessary to make the statements made, in the light of the circumstances in which they were made, not misleading. 95. The Underwriter Defendant also had a duty to disclose the material, non-public
information complained of herein or to abstain from selling the Issuer's common stock in the IPO, and/or trading or recommending the Issuer's stock while in possession of such information. 25
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96.
By reason of the foregoing, the Underwriter Defendant violated Section 10(b) of
the Exchange Act and Rule 10b-5 promulgated thereunder. 97. As a result of the dissemination of materially false and misleading information
described above, Plaintiff and other members of the Class purchased or otherwise acquired the Issuer's common stock during the Class Period without knowledge of the fraud alleged herein at artificially inflated prices and were damaged thereby. EXCHANGE ACT CLAIMS - THE ISSUER DEFENDANTS THE ISSUER DEFENDANTS ACTED WITH SCIENTER 98. As alleged herein, the Issuer Defendants acted with scienter in that they: (a)
knowingly or recklessly engaged in acts and practices and a course of conduct which had the effect of artificially inflating the price of the Issuer's common stock in the aftermarket; (b) knowingly or recklessly disregarded that the Registration Statement/Prospectus as set forth herein was materially false and misleading; and/or (c) knowingly or recklessly disregarded the misconduct of the Underwriter Defendant alleged herein. 99. The Issuer Defendants had numerous interactions and contacts with the
Underwriter Defendant prior to the IPO from which they knew or recklessly disregarded that the manipulative and deceptive scheme described herein had taken place. 100. In this regard, the Underwriter Defendant provided detailed presentations to the
Issuer Defendants regarding the registration process leading up to the IPO and the expected price performance in aftermarket trading based upon previous companies taken public by these underwriters. In addition, ...