Case3:11-cv-02732-CRB Document68 Filed12/15/11 Page1 of 65
1 ROBBINS GELLER RUDMAN & DOWD LLP
2 CHRISTOPHER P. SEEFER (201197) Post Montgomery Center
3 One Montgomery Street, Suite 1800 San Francisco, CA 94104
4 Telephone: 415/288-4545 415/288-4534 (fax)
6 Lead Counsel for Plaintiffs
7 UNITED STATES DISTRICT COURT
8 NORTHERN DISTRICT OF CALIFORNIA
9 In re YAHOO! INC. SECURITIES ) Master File No. 3:11-cv-02732-CRB LITIGATION ) 10 ) CLASS ACTION ) 11 This Document Relates To: ) CONSOLIDATED AMENDED ) COMPLAINT FOR VIOLATIONS OF THE
12 ALL ACTIONS. ) FEDERAL SECURITIES LAWS
13 VINCE BONATO, Individually and on Behalf ) 14 of All Others Similarly Situated, ) ) 15 Plaintiff, )
16 vs.
17 YAHOO! INC., CAROL A. BARTZ, JERRY YANG and TIMOTHY R. MORSE, 18 Defendants. 19 DEMAND FOR JURY TRIAL
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1 TABLE OF CONTENTS
2 Page
3 I. INTRODUCTION ...... 1
4 II. JURISDICTION AND VENUE...... 9
5 III. THE PARTIES...... 10
6 IV. SUBSTANTIVE ALLEGATIONS ...... 11
7 A. Yahoo Purchased 46% of the Alibaba Group in 2005 and Repeatedly 8 Trumpeted the Importance of the Investment to Yahoo and that Management Closely Monitored the Investment and Chinese Regulations 9 that Could Impact the Investment...... 11
10 B. On August 6, 2010, the Alibaba Group Transfers 100% of Alipay’s Shares to Zhejiang Alibaba E-commerce Company, a Chinese Company Majority 11 Owned by Ma, so Alipay Can Receive a License from the People’s Bank of China; and on January 27, 2011, Ma Terminates the VIE Arrangement 12 Between the Alibaba Group and Zhejiang...... 23
13 C. August 9, 2010: Defendants Make Materially False and Misleading Statements About Yahoo’s Investment in the Alibaba Group by Failing to 14 Disclose that 100% of Alipay’s Shares Had Been Transferred to Zhejiang...... 34
15 D. October 19-20, 2010 and November 8, 2010: Defendants Make Materially False and Misleading Statements about Yahoo’s Investment in the Alibaba 16 Group by Failing to Disclose that 100% of Alipay’s Shares Had Been Transferredto Zhejiang...... 36
17 E. January 25, 2011 and February 28, 2011: Defendants Make Materially 18 False and Misleading Statements about Yahoo’s Investment in the Alibaba Group by Failing to Disclose that 100% of Alipay’s Shares Had Been 19 Transferred to Zhejiang and that the VIE Arrangement Had Been Terminated...... 39
20 F. February 16, 2011: At the Goldman Sachs Technology & Internet 21 Conference, Morse Makes Misleading Statements About the Company’s Investment in Alibaba by Failing to Disclose that 100% of Alipay’s Shares 22 Had Been Transferred to Zhejiang and that the VIE Arrangement Had BeenTerminated...... 41
23 G. April 19, 2011: Defendants Knowingly Make Materially False and 24 Misleading Statements about Yahoo’s 1Q11 Financial Results and the Company’s Investment in the Alibaba Group by Concealing that 100% of 25 Alipay’s Shares Had Been Transferred to Zhejiang and that the VIE Arrangement Had Been Terminated...... 42
26 H. May 10, 2011: Defendants Reveal in Yahoo’s 1Q11 Form 10-Q that 27 Alipay’s Shares Had Been Transferred to Another Company but Continue to Mislead by Failing to Disclose the Termination of the VIE and Other 28 Facts...... 43
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2 Page 3 I. May 25, 2011-July 19, 2011: Defendants Refuse to Address Statements by theAlibaba Group and Ma...... 44
4 J. July 29, 2011-November 2011: Yahoo Announces a Resolution to the 5 Alipay Debacle, Bartz Is Fired and Shareholders Call for the Ouster of AdditionalDirectors...... 48
6 V. LOSS CAUSATION...... 51
7 VI. CLASS ACTION ALLEGATIONS ...... 54
8 VII. PRAYER FOR RELIEF ...... 60
9 VIII. JURY DEMAND...... 60
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1 I. INTRODUCTION 2 1. This is a securities class action on behalf of all persons who purchased or otherwise
3 1 acquired the common stock of Yahoo! Inc. (“Yahoo” or the “Company”) between April 19, 2011
4 1 and July 29, 2011, inclusive (the “Class Period”), against Yahoo, Jerry Yang (“Yang”), Yahoo’s co-
5 founder, “Chief Yahoo” and director; Carol A. Bartz (“Bartz”), the Company’s former Chief
6 Executive Officer (“CEO”), President and director; and Timothy R. Morse (“Morse”), Yahoo’s
7 interim CEO and Chief Financial Officer (“CFO”). Plaintiffs allege that defendants violated the
8 Securities Exchange Act of 1934 (the “1934 Act”) by making materially false and misleading
9 statements about the Company’s investment in Alibaba Group Holdings Limited (“Alibaba” or
10 “Alibaba Group”).
11 2. Prior to and during the Class Period, defendants reported the value of the Alibaba
12 I Group investment and represented that it was an “important” and “great” investment that would
13 “grow in value and continue to greatly benefit [Yahoo’s] investors over time.” They assured
14 investors that Yahoo was “always evaluating” the Alibaba investment through Yang’s position on
15 the Alibaba board and Yahoo’s “team of very strong financial experts.” They also emphasized the
16 importance of the investment by stating in every Form 10-Q and 10-K that Yahoo filed with the U.S.
17 Securities and Exchange Commission (“SEC”) that the Company’s stock price could fluctuate if
18 there were variations in the operating performance of the Alibaba Group.
19 3. All of these statements – and additional statements – were materially false and
20 1 misleading because defendants failed to disclose that: (1) on August 6, 2010, 100% of the shares of
21 Alipay, a subsidiary of the Alibaba Group, had been transferred to Zhejiang Alibaba E-commerce
22 Company Ltd. (“Zhejiang”), a Chinese company majority owned by Jack Ma (“Ma”), the CEO of
23 the Alibaba Group; (2) the consideration received by the Alibaba Group for the share transfer was
24 approximately $46 million, billions of dollars less than the estimated value of Alipay; and (3) the
25 variable interest entity (“VIE”) arrangement between the Alibaba Group and Zhejiang – that allowed
26 the Alibaba Group to consolidate Alipay after the August 2010 share transfer – was terminated on
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1 I January 27, 2011. 1 As a result of defendants’ false statements and omissions, Yahoo’s stock traded
2 1 at artificially inflated prices during the Class Period, reaching a high of $18.65 per share on May 6,
3 2011.
4 4. In October 2005, Yahoo acquired 46% of the Alibaba Group, China’s largest
5 e-commerce company, for $1 billion and the contribution of the Company’s China-based businesses.
6 1 SoftBank Corporation (“SoftBank”) owned 30% of the Alibaba Group, and Jack Ma owned 25%.
7 Ma was also the CEO of the Alibaba Group and a member of the board of directors. Yang and
8 Masayoshi Son (“Son”), the CEO of Softbank, were also members of the Alibaba Group board of
9 directors.
10 5. The Alibaba Group owned 70% of Alibaba.com after that company completed its
11 1 initial public offering in November 2007 and 100% of Taobao and Alipay. Taobao was the Chinese
12 equivalent of eBay and Alipay the Chinese equivalent of PayPal. Yahoo reported its investment in
13 the Alibaba Group at cost in “investments in equity interests,” and the reported amount of the
14 investment was approximately $2.3 billion during the Class Period.
15 6. Defendants represented, and analysts and investors agreed, that the value of Yahoo’s
16 1 investment in the Alibaba Group was substantially higher than reported. The value of Yahoo’s stake
17 in Alibaba.com alone from January 2010 through June 2011 ranged between $2.3 billion and $3.0
18 billion based on the trading price of Alibaba.com ’s stock. Before and during the Class Period,
19 defendants represented that Taobao and Alipay provided “significant additional value,” and investors
20 agreed. In April 2011, Greenlight Capital, Inc. hedge fund manager David Einhorn (“Einhorn”)
21 invested in Yahoo and wrote, “we believe that Yahoo’s most valuable asset is its 40% stake in
22 Alibaba Group’s still-private holdings, which are separate and distinct from its ownership in the
23 publicly traded Alibaba.com , which we are essentially getting for free.” Other analysts estimated
24 Yahoo’s interest in Alipay to be as much as $5 billion.
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26 1 VIEs are common arrangements that give non-Chinese investors financial control of 27 companies in industries that limit foreign ownership.
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1 7. Defendants also knew before the Class Period that there was uncertainty about
2 I whether the Chinese government would permit foreign owned companies to operate an internet
3 1 online payment company like Alipay. Indeed, during Yahoo’s May 25, 2011 investor day, Yang
4 1 stated that the Alibaba board and Yahoo had “been following the developments in this evolving
5 I licensing environment for the last few years” and knew that “[i]nternet businesses [were] generally
6 1 licensed through entities held by Chinese nationals.” During a June 14, 2011 interview with China
7 Entrepreneur Magazine, Ma said that from the first day he started Alipay, he predicted that the
8 Chinese government would control the company.
9 8. In June 2010, the People’s Bank of China (“BoC”) issued regulations that restricted
10 1 foreign ownership of online payment companies like Alipay and made it more difficult for foreign
11 owned companies to obtain a license. As a result, on August 6, 2010, the Alibaba Group board of
12 directors approved a restructuring of Alipay and transferred 100% of its shares to Zhejiang, a
13 Chinese domestic company majority owned by Ma. The Alibaba Group received $46 million for the
14 1 Alipay shares, billions of dollars less than Alipay’s value. Defendants failed to disclose this material
15 adverse change to Yahoo’s investment in the Alibaba Group.
16 9. The Alibaba Group could still consolidate Alipay after the share transfer because
17 1 there were VIE agreements between the shareholders of Zhejiang and the Alibaba Group that gave
18 the Alibaba Group de facto control of Zhejiang. On January 27, 2011, however, the Alibaba Group
19 terminated the VIE arrangement between Zhejiang and the Alibaba Group. The termination of the
20 VIE arrangement occurred the day after the Alibaba Group received two letters from the BoC asking
21 the Alibaba Group to declare whether it had a VIE connected to Alipay. Alibaba Group CEO Ma
22 stated that it was understood that if the Alibaba Group did have such a VIE, it would not receive a
23 government license because the BoC did not want foreigners controlling something strategic like a
24 payments company. Ma stated that he terminated the VIE after discussing the matter with Yang and
25 1 Son, even though they did not approve the termination, and subsequently informed them of the
26 termination. Defendants also failed to disclose this material adverse change to Yahoo’s investment
27 in the Alibaba Group.
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1 10. On May 10, 2011, however, Yahoo disclosed in its Form 10-Q for the quarter ending
2 1 March 31, 2011 that Alipay had been restructured so that 100% of its outstanding shares were held
3 1 by a Chinese company (Zhejiang) majority owned by Ma and that Yahoo, SoftBank and the Alibaba
4 I Group’s management and principal shareholders were engaged in ongoing discussions regarding the
5 terms of the restructuring. Yahoo did not disclose the amount of consideration received by the
6 1 Alibaba Group, the dates the Alipay shares were transferred to Zhejiang, the termination of the VIE
7 in January 2011 or when Yahoo learned of the Alipay share transfers and VIE termination. Investors
8 were surprised by this unexpected negative news, and Yahoo’s stock price declined 7.3%, closing at
9 $17.20 on May 11, 2011. The price decline confirmed the Alipay share transfer was material
10 adverse information.
11 11. The next day, May 12, 2011, it was reported that Alipay sent out an official
12 I announcement in the morning confirming that the ownership of Alipay was restructured in 2010 so
13 that 100% of its shares were held by Zhejiang and that the move was in accordance with the BoC’s
14 regulations issued in 2010, as well as to ensure the security of domestic financial data. The same
15 day, Yahoo issued a press release in which it stated that the Alipay share transfer occurred in August
16 2010, that Alipay was “deconsolidat[ed]” effective 1Q11, that both transactions occurred without the
17 knowledge or approval of the Alibaba Group board of directors and that Yahoo did not learn of the
18 transactions until March 31, 2011. In response to this unexpected negative news, Yahoo’s stock
19 1 price declined another 3.6% and closed at $16.55 on May, 13, 2011.
20 12. The admission in the May 12, 2011 press release that Yahoo learned of the Alipay
21 1 share transfer and “deconsolidation” on March 31, 2011 establishes that defendants knowingly
22 concealed this material adverse information from investors when they reported the Company’s 1Q11
23 results on April 19, 2011. Indeed, the financial press reported that the shareholders were “perturbed”
24 about the timing of the disclosure and why it was not disclosed earlier. Eric Jackson (“Jackson”),
25 founder of Ironfire Capital and a Yahoo shareholder, stated that “the optics [were] bad” and
26 suggested Yahoo “tried hiding this piece of news.”
27 13. After Yahoo issued the May 12, 2011 press release in which defendants claimed they
28 1 were unaware of the Alipay share transfer and “deconsolidation” until March 31, 2011, the Alibaba 670999_1 CONSOLIDATED AMENDED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS - 3:11-cv-02732-CRB - 4 - Case3:11-cv-02732-CRB Document68 Filed12/15/11 Page8 of 65
1 1 Group issued a press release on May 13, 2011 entitled “Alibaba Group Clarification with Respect to
2 1 Alipay Status and Related Statements by Yahoo!” The Alibaba Group stated in the press release
3 1 that: (1) Alibaba Group management had taken actions to comply with Chinese law governing
4 1 payment companies in order to secure a license and to continue operating Alipay; (2) the Alibaba
5 I Group board had discussed at numerous board meetings over the past three years the impending
6 I imposition of new regulatory requirements on the online payment industry, including ownership
7 structures, as they were being developed in China; (3) the Alibaba Group board was told in a July
8 2009 board meeting that a majority of Alipay’s shares had been transferred into Chinese ownership;
9 and (4) the actions taken by the Alibaba Group to comply with the licensing regulations and to
10 ensure continuation of Alipay’s operations were in the best interests of the company and its
11 shareholders. The press release did not mention that the Alibaba Group received $46 million for the
12 1 Alipay share transfer, which was billions of dollars less than Alipay’s value.
13 14. Numerous analysts and investors explicitly questioned when defendants knew about
14 1 the Alipay transfer and the timing of its disclosure even if defendants did not learn of the transfer
15 until March 31, 2011 as they claimed. They also expected to learn more about these transactions
16 during Yahoo’s May 25, 2011 investor day. But defendants failed to deny or even address the
17 claims by the Alibaba Group during Yahoo’s May 25, 2011 investor day despite numerous questions
18 from analysts. Instead, they repeated scripted remarks that Alipay had to get the license, that the
19 Alibaba Group had to receive fair compensation for the transfer and that Yahoo, SoftBank and the
20 Alibaba Group had agreed to not discuss the past.
21 15. Analysts still tried to get defendants to explain. They asked how defendants could not
22 1 have known about the Alipay share transfer and termination of the VIE when Yang was on the
23 Alibaba Group board; when the Alibaba Group Shareholders Agreement required board approval of
24 any disposition, sale or transfer of assets; when defendants admitted that they were following the
25 regulatory developments in Chinese licensing requirements; and when the Alipay share transfer
26 occurred in August 2010, right after the BoC had issued regulations in June 2010. Citing the self-
27 imposed gag order, defendants refused to answer these questions.
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1 16. On June 14, 2011, Ma made it clear that he had not agreed to the self-imposed gag
2 1 order as defendants represented during Yahoo’s May 25, 2011 investor day. That day, Ma held a
3 I press conference at the Alibaba Group’s headquarters in Hangzhou, China and also gave an 4 interview to China Entrepreneur Magazine. His statements indicated that defendants may have
5 1 known about the Alipay share transfer when it occurred on August 6, 2010 and the termination of the
6 1 VIE when it occurred on January 27, 2011. Specifically, Ma stated that: