In re Iac/Interactivecorp Securities Litigation
| Decision Date | 21 March 2007 |
| Docket Number | No. 04 Civ. 7447(RJH).,04 Civ. 7447(RJH). |
| Citation | 478 F.Supp.2d 574 |
| Parties | In re IAC/INTERACTIVECORP SECURITIES LITIGATION. |
| Court | U.S. District Court — Southern District of New York |
Frederick Taylor Isquith, Sr., Gregory M. Nespole, Wolf Haldenstein Adler Freeman & Herz LLP, Beth Ann Keller, Faruqi & Faruqi, LLP, New York, NY, Jeffrey S. Nobel, Schatz & Nobelm Hartford, CT, Samuel Howard Rudman, Mark Samuel Reich, Lerach, Coughlin, Stoia, Geller, Rudman & Robbins, LLP, Melville, NY, for Plaintiffs.
Catherine A. Torell, Cohen, Milstein, Hausfeld & Toll, P.L.L.C., Stephen R. DiPrima, Wachtell, Lipton, Rosen & Katz, New York, NY, for Movant.
Pending before the Court are three related suits brought against IAC/InterActiveCorp ("IAC" or the "Company") and certain directors and high-ranking officers. Plaintiffs in the first suit represent an uncertified class of investors who purchased or otherwise acquired IAC publicly traded securities between March 31, 2003, to August 3, 2004 ("class period"), including former shareholders of companies whose stock was exchanged for IAC stock. The other two suits are shareholder derivative actions that the Court has consolidated with the class action suit for pretrial purposes. The gravamen of both the Consolidated Amended Class Complaint ("Class Complaint" or "CC") and the Verified Consolidated Shareholder Derivative Complaint ("Derivative Complaint" or "DC") is that, during the class period, defendants inflated the price of IAC's stock by making materially false and misleading statements or omissions regarding the health of IAC's travel business, thus enabling IAC to maximize the value of its stock in the stock-for-stock acquisitions of LendingTree, Expedia, and Hotels.com, and permitting certain individual defendants to benefit by selling 7.78 million shares of their IAC stock for proceeds of $258.9 million.1 Following the release of IAC's second-quarter 2004 earnings, IAC's stock price dropped by sixteen percent or $4.23 per share, from $27.03 per share at close on August 3, 2004 to $22.80 at close on August 4, 2004.
Defendants have moved to dismiss the Class Complaint pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, and have moved to dismiss the Derivative Complaint pursuant to Rule 23.1 for failure to make demand on IAC's board of directors. For the reasons set forth below, the Court grants defendants' motions [68] and [69], thereby dismissing both Complaints in their entirety.
Class plaintiffs are IAC shareholders who purport to bring claims on behalf of a putative class of shareholders who purchased or otherwise acquired shares of IAC between March 31, 2003 and August 3, 2004. (CC ¶¶ 14-19.) Derivative plaintiffs Lisa Butler and Stuart Garber likewise allege to be owners and holders of IAC common stock. (DC ¶¶ 21-22.) Derivative plaintiffs assert factual allegations identical to those made in the Class Complaint. (Compare CC ¶¶ 40-94 with DC ¶¶ 56-108.)
IAC, a Delaware corporation headquartered in New York City, sells goods and services over the internet. (CC ¶¶ 20, 32; DC ¶ 6.) IAC's strategy during the class period was to become a multi-brand interactive commerce company. (CC ¶¶ 2, 45; DC ¶¶ 23, 60.) IAC was organized into eight divisions, namely Travel (Expedia, Hotels.com, Hotwire, Interval International, and TV Travel Shop), Electronic Retailing (HSN, a home shopping service), Ticketing (Ticketmaster and ReserveAmerica), Personals (Match.com), Financial Services and Real Estate (LendingTree.com), Teleservices (Precision Response Corporation), Local and Media Services (Citysearch, Evite, Entertainment Publications, Inc. and TripAdvisor, Inc.), and Interactive Development (ZeroDegrees). (CC ¶¶ 2, 32; DC ¶ 6.) Prior to being spun off into a separate public company in August of 2005, the travel business was IAC's largest operating segment. (CC ¶ 32; DC ¶ 6.) In fiscal year 2003, IAC sold over $10 billion in travel services, and Travel alone provided seventy percent of the Company's net income during the first six months of 2004. (CC ¶ 32; DC ¶ 6.)
The following are the officers and directors who are named as individual defendants in the Class Complaint: Barry Diller, Victor A. Kaufman, Dara Khosrowshahi, Julius Genachowski, Richard N. Barton, Erik C. Blachford, Robert R. Bennett, Edgar Bronfman, Jr., Donald R. Keough, Mariee-Josée Kravis, John C. Malone, Gen. H. Norman Schwarzkopf, Alan Spoon, and Diane von Furstenberg. (CC ¶¶ 21-31.) The Class Complaint alleges that all of the individual defendants, with the exception of Genachowski and Blachford, signed allegedly false and misleading registration statements pursuant to IAC's acquisitions during the class period. (Id. ¶¶ 30-31.) Barry Diller is the chief executive and chairman of the Company. (Id. ¶ 21.) Victor A. Kaufman is vice chairman "of the Board of Directors,"2 and he served previously as chairman of the Company and as its chief financial officer. (Id. ¶ 26.) At the time that the Class Complaint was filed, Dara Khosrowshahi was IAC's chief financial officer and an Executive Vice President. Julius Genachowski was Chief of Business Operations and an Executive. Vice President. (Id. ¶ 22.) Bennett, Bronfman, Keough, Kravis, Malone, Schwarzkopf, Spoon, and von Furstenberg were directors of IAC at the time of the acquisitions (collectively, "Director Defendants"). (Id. ¶ 30.) Richard N. Barton became a member of IAC's board of directors in February 2003. (CC ¶ 24.) Barton founded Expedia and served as its president and chief executive, and as a director, from September 1999 to March 2003, when IAC announced that it would acquire the rest of the shares of Expedia that it did not already own. (Id. ¶¶ 24, 37.) The Class Complaint also names as defendant Erik C. Blachford, who became the new Chief Executive Officer of Expedia following Barton's resignation, and, after Expedia merged with IAC, served as president and chief executive of IAC Travel until January 1, 2005. (Id. ¶¶ 25, 40.)
The Derivative Complaint, names all of the individuals described above, with the exception of Blachford, and in addition names the following individuals as defendants: Steven Rattner, a director of IAC since April 2004; Anne M. Busquet, a director of IAC at all relevant times until May 2003; and Jean-Renee Fourtou, a director of IAC at all relevant times until June 2003. (DC ¶¶ 24-40.)
The following allegations are set forth in the Complaints and are accepted as true for purposes of these motions to dismiss. Cooper v. Parsky, 140 F.3d 433, 440 (2d Cir.1998).
During the class period, IAC's goal was to become the world's largest and most profitable interactive commerce company by pursuing a multi-brand strategy. (CC ¶ 45; DC ¶ 60.) IAC grew through acquisitions. (CC ¶ 35; DC ¶ 9.) Prior to the class period, the Company purchased controlling interests in Ticketmaster and Expedia and acquired substantially all of the assets of the two entities that operated Hotels.com's websites. Id. During the class period, IAC acquired LendingTree as well as the shares that IAC did not already own in Expedia and Hotels.com in stock-for-stock transactions. (CC ¶¶ 40, 44, 48; DC ¶¶ 56, 59, 63.) On September 22, 2003, IAC announced the purchase of Hotwire, a discount travel website founded by Texas Pacific Group and American Airlines, America West Airlines, Continental Airlines, Northwest Airlines, United Airlines, and USAirways. (CC ¶¶ 65-67; DC ¶¶ 79-82.) The Company also announced the formation of a single travel division, IAC Travel, that would include Expedia, Hotels.com, Interval International, TV Travel Shop, and Hotwire. (CC ¶¶ 2, 25; DC ¶ 6.)
On November 5, 2003, IAC announced in its Form 8-K filed with the Securities and Exchange Commission ("SEC") that its earnings projection for full-year 2004 — measured as Operating Income Before Amortization ("OIBA"), IAC's principal profitability metric — was "in the range of $1.0 billion to $1.2 billion." (Form 8-K, Exhibit 99.3 (Nov. 5, 2003) (Defs.' Mot. to Dismiss the Class Complaint ("Mot. Dismiss CC"), DiPrima Aff. Ex. 6); CC ¶ 69; DC ¶ 83). On the quarterly analyst call following this earnings release, Diller stated that "we believe we will continue to have strong growth over the next years" and that "we do know at least enough about next year to tell you that our best guess is that our operating income, before amortization ... ought to be between $1 billion and $1.2 billion." (CC ¶ 70; DC ¶ 84.) Management repeated this projection at its November 11 "Investors Day" conference. (CC ¶¶ 74-76; DC ¶¶ 88-90.)
A. Supplier and Customer Problems
During the class period, IAC Travel's subsidiaries acted primarily as intermediaries between suppliers and consumers by aggregating, travel-related products such as hotel rooms and airline tickets and selling them over the internet. (CC ¶ 32; DC ¶¶ 6, 23.) For example, Hotels.com contracted with major hotel chains for nonexclusive rights to sell hotel room bookings for the hotel chains in exchange for a fee. (CC ¶ 33; DC ¶ 7.) A customer reserving a hotel room on Hotels.com's website paid Hotels.com directly; Hotels.com then paid a pre-negotiated price to the hotel chain for that room. Hotwire worked similarly: the hotel and airline partners permitted Hotwire to access their unsold inventory of hotel rooms and airline seats for sale at discounted prices. Expedia, on the other hand, bought rooms wholesale and then marked them up for sale at retail prices. (Id.)
Because of IAC Travel's role as an intermediary, its business model depended on the ability of its subsidiaries to obtain a favorable supply of hotel rooms and airline seats. Plaintiffs allege, however, that during the class period, IAC concealed significant supply problems within its travel business. (CC ¶¶ 9(...
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