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:
7 • The Alibaba Group’s board transferred 70% of Alipay’s shares to Zhejiang in June 2009, that the board of the Alibaba Group approved the transfer and that the approval 8 of the transfer was reflected in the minutes of the July 24, 2009 board meeting;
9 • The Alibaba Group’s board knew about the transfer of the remaining 30% of Alipay’s shares in August 2010 and that the transfer was reflected in the minutes of 10 the board meeting;
11 • Yahoo claimed it did not know about the Alipay share transfer and termination of the VIE so the Company could blame Ma and attempt to avoid responsibility for the 12 share transfer and VIE termination, and Yahoo’s failure to disclose those transactions;
13
• Ma told Yang and Son in January 2011 that the BoC asked the Alibaba Group to 14 declare whether it had a VIE connected to Alipay and that it was understood that if the Alibaba Group did have such a VIE, it would not receive a government license 15 because the BoC did not want foreigners controlling something strategic like a payments company;
16
• Ma told Yang and Son in January 2011 that he wanted to terminate the VIE to ensure 17 Alipay received the license;
18 • Son wanted Ma to keep the VIE but to lie and falsely tell the BoC that there was no VIE;
19
• Yang abstained from voting on how to respond to the BoC because all of the options 20 would make him look bad to Yahoo shareholders; and
21 • Ma informed Yang and Son that he had terminated the VIE and that, when Yang received the forms, he should have immediately told the Yahoo shareholders but 22 instead waited until May 2011 to tell them. 23 17. Defendants did not deny or even address Ma’s statements even though Ma had
24 1 violated the gag order, and his statements indicated that defendants may have known about the
25 1 Alipay share transfer and termination of the VIE when those transactions occurred in August 2010
26 1 and January 2011. Instead, on June 21, 2011, Yahoo, the Alibaba Group and SoftBank issued a joint 27 statement in which they announced another self-imposed gag order. They were engaged in 28 “constructive negotiations” and had made “substantive and encouraging progress toward an
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1 1 agreement regarding Alipay” and would “not comment in further detail until it [was] appropriate to 2 I do so.” Defendants stuck to the gag order and have never responded to Ma’s statements. 3 18. Others noted that Ma’s comments indicated that defendants may have known about
4 1 the Alipay transactions before March 31, 2011 but concealed them. Indeed, on July 8, 2011, Eric
5 1 Jackson wrote an article in which he detailed the various statements by Ma during the June 14, 2011
6 I press conference and the interview with China Entrepreneur Magazine. The title of the article –
7 “What Did Yahoo! Not Want You to Read This Morning?” – succinctly made the point.
8 19. On July 29, 2011, Yahoo announced that it had reached an agreement related to the
9 1 transfer of Alipay shares and termination of the VIE that included Alipay continuing to provide
10 payment services to the Alibaba Group and its subsidiaries on preferential terms, Alipay paying the
11 Alibaba Group a royalty and software technology service fee and the Alibaba Group receiving no
12 less than $2 billion and no more than $6 billion from an Alipay IPO or other liquidity event. That
13 resolution was an improvement on the $46 million received by the Alibaba Group; but analysts
14 reported it was not good news, and Yahoo’s stock price declined 3% and closed at $13.10 on July
15 29, 2011.
16 20. After the Class Period, there was additional fallout from the Alipay debacle. On
17 1 September 6, 2011, Yahoo announced that the Board of Directors (the “Board”) had removed Bartz
18 as CEO, replaced her with Morse as interim CEO and formed an Executive Leadership Council to
19 support a comprehensive strategic review to position the Company for future growth. The split was
20 contentious. Bartz sent an e-mail to Yahoo employees in which she wrote that she was fired over the
21 phone by Yahoo’s chairman. In a profanity-laced interview with Fortune, Bartz said that “the board
22 was so spooked by being cast as the worst board in the country” and was “[n]ow [] trying to show
23 they’re not the doofuses that they are.” She challenged Yahoo Chairman of the Board Roy Bostock
24 (“Bostock”) for firing her over the phone by asking him, “[w]hy don’t you have the balls to tell me
25 yourself” and claimed the Board “f---ed me over.” Three days later, Bartz resigned from the Yahoo
26 Board.
27 21. The financial press noted the abruptness of the firing and that a 6.2% increase in
28 I Yahoo’s stock price reflected investors belief that the firing was good news. Reports also suggested 670999_1 CONSOLIDATED AMENDED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS - 3:11-cv-02732-CRB - 7 - Case3:11-cv-02732-CRB Document68 Filed12/15/11 Page11 of 65
1 1 her firing was related to the Alipay transfer. On September 6, 2011, MarketWatch reported that
2 1 Bartz’s “tough-talking personality apparently rubbed Alibaba Chairman Jack Ma the wrong way
3 1 from their first meeting” and that “[t]he role she played in the Alibaba mess, and the inability of
4 I Yahoo shareholders to see the full value of that investment, likely was a part of her ouster.”
5 1 MarketWatch also reported that Yang was the Yahoo executive on the Alibaba board and that “he
6 1 should also be taking some responsibility as well.” On September 8, 2011, it was reported in The
7 Wall Street Journal that the relationship between Alibaba and Yahoo had become “increasingly
8 strained” since Bartz became CEO in 2009, that Alibaba and Bartz repeatedly “butted heads” and
9 that she “rarely had contact with Alibaba Chairman Jack Ma.” In the Wall Street Journal Deal
10 Journal, Stephen Grocer wrote that “[i]t is time for Jerry Yang to do himself, and all Yahoo
11 shareholders, a favor and quit the company’s board.” The same day, the London Telegraph reported
12 that “[t]he final straw came when it emerged that Yahoo! had not realised that there would be a
13 financial impact on its $1bn (£610m) stake in joint venture Alipay when there was a change of
14 ownership.”
15 22. In a September 8, 2011 letter to the Yahoo Board, Daniel S. Loeb (“Loeb”), whose
16 1 hedge fund, Third Point LLC, owns 5.1% of Yahoo’s stock, cited the “Alipay debacle” in a litany of
17 failings that had “destroyed value for all Yahoo stakeholders” and called for the ouster of additional
18 directors. Since September 2011, Yahoo has been focusing on recapitalizing the Company, and no
19 1 additional directors have been ousted. In November 2011, Loeb sent another letter to the Yahoo
20 Board expressing his deep concern for a leveraged recapitalization of Yahoo that would benefit
21 Yang at the expense of shareholders. He wrote that “it is now clear that [Yang] is simply not aligned
22 with shareholders” and demanded the removal of directors Yang and Bostock from the Board. On
23 December 1, 2011, a Yahoo shareholder filed a class action against Yahoo and the Board seeking
24 declaratory relief, injunctive relief and damages because the Board had adopted bidding procedures
25 that were designed to discourage any acquisition that could result in the replacement of the Board
26 and the diminution (or elimination) of Yang’s influence. On December 13, 2011, Loeb sent the
27 Yahoo Board another letter in which he wrote that Third Point LLC remained “extremely troubled”
28 about the Company’s efforts to maximize shareholder value but not surprised by the
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1 “mismanagement given the history of strategic bungling by Yahoo Board Chairman Roy Bostock
2 and Founder Jerry Yang.”
3 23. The following chart (which is also attached in foldout form) illustrates the primary 4 events before, during and after the Class Period and their impact on Yahoo’s stock price:
5 -W+ iIOO, Class Period April 19,2011 -July 29, 2011 6 $19
7 c / $18
8
$17 9
A_fl 10 $16 LIV / 1 I I / 11 j $15 I
9'!] 12 1Afr1 $14 1' 13
$13 14
15 $12 nnnF pst.ewas'
16 I 1 I I I I 1 I I' I I I I 0712?2010 1O5I2010 12132MO 02/22/2011 O5V2O11 0f1lI2011 O1i?Ol1 1123/2Ol1 17 C$J23120$O OI31f2OiO 11IOf2010 011J2O11 O322O11 0W2011 e912011 12O2011
18 II. JURISDICTION AND VENUE
19 24. The claims asserted herein arise under and pursuant to §§10(b) and 20(a) of the 1934
20 Act [15 U.S.C. §§78j(b) and 78t(a)] and SEC Rule 10b-5 [17 C.F.R. §240.10b-5].
21 25. This Court has jurisdiction over the subject matter of this action pursuant to 28 U.S.C.
22 §1331 and §27 of the 1934 Act.
23 26. Venue is proper in this District pursuant to 28 U.S.C. §1391(b) because defendants
24 maintain an office in this District, and many of the acts and practices complained of herein occurred
25 in substantial part in this District.
26 27. In connection with the acts and conduct alleged in this complaint, defendants, directly
27 or indirectly, used the means and instrumentalities of interstate commerce, including, but not limited
28 to, the mails and interstate wire and telephone communications.
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1 III. THE PARTIES
2 28. On October 12, 2011, Pension Trust Fund for Operating Engineers (“Pension Trust
3 1 Fund”) was appointed lead plaintiff. The Pension Trust Fund is a defined benefit plan based in
4 1 Alameda that represents the interests of more than 40,000 participants who are primarily heavy
5 1 equipment operators throughout Northern California, Northern Nevada, Utah and Hawaii. As shown
6 1 in the certification filed with the Court on August 5, 2011, the Pension Trust Fund purchased
7 299,720 shares of Yahoo stock in trades that settled on May 10, 2011 and May 11, 2011.
8 29. Defendant Yahoo is a digital media company that delivers personalized digital
9 content and experiences across devices and worldwide. Yahoo is headquartered in Sunnyvale,
10 California. Its stock trades on the NASDAQ under the symbol “YHOO.”
11 30. Defendant Jerry Yang founded Yahoo, is “Chief Yahoo,” has served as a director
12 1 since March 1995 and was the Company’s CEO from June 2007 to January 2009. He is also a
13 director of the Alibaba Group. According to Yahoo’s 2011 proxy statement, Yang “provides
14 strategic, technical, product and market expertise, [and] knowledge of international markets as a
15 result of his positions on the boards of Yahoo Japan and Alibaba, and strong relationships in Silicon
16 Valley and with many of the Company’s key business partners.” He owns 46.6 million shares, or
17 approximately 3.6% of Yahoo’s stock.
18 31. Defendant Carol A. Bartz was Yahoo’s Chief Executive Officer and a director of
19 1 Yahoo from January 2009, and Yahoo’s President since April 2009, until she was removed as CEO
20 and President by the Board on September 6, 2011. On September 9, 2011, Bartz resigned from the
21 Board. According to the Company’s bylaws, Bartz, as CEO and President, had general supervision,
22 direction and control of the business and officers of Yahoo; presided at all stockholder meetings; and
23 had the general powers and duties of management usually vested in the office of CEO. As alleged
24 herein, Bartz prepared the Company’s quarterly earnings releases, spoke during Yahoo’s quarterly
25 earnings calls and during other conference calls and signed the Forms 10-Q and 10-K filed by Yahoo
26 during her tenure at Yahoo. According to the Company’s proxy statement, Bartz received total
27 compensation of $47.2 million in 2009 and $11.9 million in 2010. The terms of her employment
28 agreement indicate that she may receive as much as $10.4 million in severance.
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1 32. Defendant Timothy R. Morse has been a Yahoo executive vice president and Chief
2 1 Financial Officer since July 2009 and the Company’s interim CEO and President since September 6,
3 2011. Under the Company’s bylaws, CFO Morse was responsible for keeping and maintaining
4 I adequate and correct books and records of Yahoo, including accounts of its assets, liabilities,
5 I receipts, disbursements, gains, losses, capital, retained earnings and shares. As alleged herein,
6 Morse prepared the Company’s quarterly earnings releases, spoke during Yahoo’s quarterly earnings
7 calls and during other conference calls and signed the Forms 10-Q and 10-K filed by Yahoo before,
8 during and after the Class Period. According to the Company’s proxy statement, Morse received
9 total compensation of $6.2 million in 2009 and $2.9 million in 2010.
10 33. Yang, Bartz and Morse are referred to herein as the “Individual Defendants.” The
11 Individual Defendants, because of their positions with the Company, possessed the power and
12 authority to control the contents of Yahoo’s quarterly reports, press releases and presentations to
13 securities analysts, money and portfolio managers and institutional investors, i.e. , the market. They
14 were provided with copies of the Company’s reports and press releases alleged herein to be
15 misleading prior to or shortly after their issuance and had the ability and opportunity to prevent their
16 issuance or cause them to be corrected. Because of their positions with the Company and their
17 1 access to material nonpublic information available to them but not to the public, the Individual
18 Defendants knew that the adverse facts specified herein had not been disclosed to and were being
19 concealed from the public and that the positive representations being made were then materially
20 false and misleading. The Individual Defendants are liable for the false statements pled herein.
21 IV. SUBSTANTIVE ALLEGATIONS
22 A. Yahoo Purchased 46% of the Alibaba Group in 2005 and Repeatedly Trumpeted the Importance of the Investment to Yahoo and that
23 Management Closely Monitored the Investment and Chinese Regulations that Could Impact the Investment
24 34. Yahoo’s investment and the structure of the Alibaba Group . On October 24, 2005,
25 Yahoo and Alibaba.com issued a press release in which they announced the completion of a strategic
26 partnership in China.
27 SUNNYVALE, Calif. and BEIJING – Oct. 24, 2005 – Yahoo! Inc. (Nasdaq:
28 YHOO), a leading global Internet company, and Alibaba.com , China’s largest
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e-commerce company, today announced the completion of their business combination in China.
2 “Together, Yahoo! and Alibaba have created one of the largest Internet 3 companies in the fastest-growing Internet market,” said Terry Semel, chairman and chief executive officer of Yahoo!. “Through this strategic partnership, we will 4 combine the best of commerce, search, communications and online advertising capabilities in new ways for Chinese consumers and businesses, under the 5 management of a strong local team.” 6 “Today marks the official start of a great strategic partnership between Alibaba.com and Yahoo! Inc.,” said Jack Ma, chairman and chief executive officer of 7 Alibaba.com. “By adding Yahoo! China to Alibaba.com ’s portfolio of businesses, we are adding services such as search and communications to our already 8 comprehensive range of e-commerce services. We look forward to growing the Yahoo! brand in China to create opportunities for consumers and businesses in China 9 and around the world.” 10 As a result, Yahoo! now owns a more than 40 percent economic interest with 35 percent voting rights, making it the largest strategic investor in Alibaba.com . 11 Through this strategic partnership, Alibaba.com becomes the only Internet company in China with a leading position in key growth sectors including business-to-business 12 e-commerce, consumer e-commerce, online payment, communications and search.
13 35. In the 2005 Form 10-K, Yahoo disclosed that it purchased approximately 46% of
14 1 Alibaba.com (40% on a fully diluted basis) for $1 billion and the contribution of the Company’s 15 China based businesses (“Yahoo! China”). The other investors in the Alibaba Group were Softbank 16 (approximately 30%) and Jack Ma (approximately 25%). The members of the board of directors 17 1 included Ma (chairman), Joe Tsai (“Tsai”), Yang and Son. Ma is also the CEO of the Alibaba Group 18 and chairman and non-executive director of Alibaba.com . Tsai is also the CFO of the Alibaba 19 Group and a non-executive director of Alibaba.com .
20 36. On November 6, 2007, the Alibaba Group completed its $1.7 billion IPO on the Hong 21 Kong stock exchange and sold an approximate 27% interest in Alibaba.com . Following that 22 transaction, the Alibaba Group owned 70% of Alibaba.com and 100% of Taobao and Alipay. The 23 following chart depicts the ownership of the Alibaba Group and the Alibaba Group’s ownership of 24 Alibaba.com, Taobao and Alipay.
25
26
27
28
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1 Yahoo US Softbank Jack Ma
2 ~25%
3 Alibaba
4
5 ______~70% 100% 100%
6 Alibaba.com TaoBao AliPay
7 37. How Yahoo accounted for and reported its investment in the Alibaba Group . The
8 investment in the Alibaba Group was accounted for using the equity method, which meant the total
9 investment – including net tangible assets, identified intangible assets and goodwill – was classified
10 as part of “investments in equity interests” on the Company’s consolidated balance sheet. Yahoo
11 also recorded its “share of the results of the Alibaba Group, and any related amortization expense
12 relating to the acquired intangible assets, one quarter in arrears within earnings in equity interests” in
13 the consolidated statements of income. The reported value of the investment was $1.4 billion at the
14 end of 2005 and increased over the next several years.
15
16
17
18
19 38. The Alibaba Group’s revenues increased each year from 2006 and totaled $1.3 billion
20 in 2010.
21
22
23 39. Yahoo reported its cumulative proportionate share of the Alibaba Group’s net income 24 as follows: 25
26
27
28
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40. Yahoo repeatedly emphasized the importance of its investment in the Alibaba
2 Group . The importance of the strategic acquisition to Yahoo’s overall business was emphasized in
3 the 2005 Form 10-K. For example, it was listed as the first highlight and key accomplishment of the
4 1 year.
5 2005 HIGHLIGHTS
6 During 2005, our key accomplishments that we believe will allow us to further our mission to provide Internet services that are essential and relevant to users
7 and businesses include:
8 Strengthened our international presence:
9 China – We entered into a strategic partnership with Alibaba.com Corporation (“Alibaba”), a large e-commerce company in China operating a leading online
10 marketplace and an online payment system. The combination of our China based businesses with Alibaba has created one of the largest Internet companies in China
11 that we believe is well positioned to provide services to China’s local emerging and fast growing Internet market.
12 41. Yahoo also reported in the 2005 Form 10-K – and in every subsequently filed Form
13 10-Q and 10-K – that its stock price could change in response to the performance of Alibaba.
14 Our stock price has been volatile historically and may continue to be
15 volatile regardless of our operating performance.
16 The trading price of our common stock has been and may continue to be subject to wide fluctuations. During 2005, the closing sale prices of our common
17 stock on the Nasdaq ranged from $30.87 to $42.50 per share and the closing sale price on February 28, 2006 was $32.06 per share. Our stock price may fluctuate in
18 response to a number of events and factors, such as quarterly variations in operating results; announcements of technological innovations or new services and
19 media properties by us or our competitors; changes in financial estimates and recommendations by securities analysts; the operating and stock price performance
20 of other companies that investors may deem comparable to us; the operating performance of companies in which we have an equity investment, including
21 Yahoo! Japan and Alibaba ; the stock price of companies in which we have an equity investment, including Yahoo! Japan; and news reports relating to trends in our
22 markets or general economic conditions.
23 42. In every Form 10-Q and 10-K filed after Yahoo’s investment in the Alibaba Group,
24 1 the Company also reported the dollar amount of the equity investment, the impact of the investment
25 on the Company’s earnings, the financial results of the Alibaba Group and other information. For
26 I example:
27 In the 2006 Form 10-K, Yahoo reported, inter alia, that it recorded a $15 million non-cash gain in 2006 from the reduction in its ownership of Alibaba from
28
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approximately 46% to 44% and a $338 million non-cash gain in 2005 from the divestiture of Yahoo! China in connection with the investment in Alibaba.
2 In the 2007 Form 10-K, Yahoo reported, inter alia, that it recorded an $8.1 million 3 non-cash gain in 2007 from the reduction in its ownership of Alibaba from 44% to 43%; that its $151 million of earnings in equity interests was net of a $17 million tax 4 benefit related to Alibaba’s loss in 2007; that the Company purchased 57.5 million shares (approximately 1%) of Alibaba.com for $101 million in Alibaba.com ’s 5 November 6, 2007 IPO; that the market value of the Alibaba.com investment was approximately $104 million as of December 31, 2007; and that Yahoo expected to 6 report a non-cash gain of $450 million to $550 million in 1Q08 related to the Alibaba.com IPO.
7 In the 2008 Form 10-K, Yahoo reported, inter alia, that its net income for the year 8 ended December 31, 2008 included a non-cash gain of $401 million related to the Alibaba.com IPO and a non-cash loss of $30 million related to the impairment of the 9 investment in Alibaba.com ; that the non-cash gain and loss were reflected in the $597 million of earnings in equity interests; that Yahoo’s ownership interest in the 10 Alibaba Group increased from 43% to 44% in 2008 due to the exchange of certain Alibaba Group shares previously held by Alibaba Group employees for shares in 11 Alibaba.com; that the Company had commercial relationships with the Alibaba Group to provide technical, development and advertising services; the financial 12 results of the Alibaba Group; that the fair value of Yahoo’s investment in Alibaba.com was $41 million; that the deficiency between the $41 million fair value 13 and the carrying value of $52 million was not indicative of a loss in value that was considered other than temporary; and that Yahoo recorded a deferred tax liability of 14 $276 million in connection with the $401 million non-cash gain related to the Alibaba.com IPO.
15 In the 2009 Form 10-K, Yahoo reported, inter alia, that Yahoo’s 2009 net income 16 included a pretax gain of $98 million from the September 2009 sale of its investment in Alibaba.com for $145 million; that Yahoo’s $74 million of other income included 17 an $8 million non-cash gain arising from the reduction of the Company’s ownership of the Alibaba Group; that in 2008, Yahoo recorded a $30 million other than 18 temporary impairment charge within earnings in equity interests to reduce the carrying value of the Alibaba.com investment to fair value; and that Yahoo still 19 owned 43% of the Alibaba Group. 20 43. Yahoo reported the equity investment and the market value of its equity investment in 21 the Alibaba Group during the Company’s earnings calls and specifically represented that Alipay 22 1 provided significant additional value. For example:
23 During the April 22, 2008 conference call attended by defendant Yang, the Company’s then-CFO stated that the market value of its direct and indirect interests 24 in the publicly traded securities of Yahoo! Japan, Alibaba.com and G Market was approximately $13.8 billion or nearly $10 per share and that the figures did “ not 25 include estimates of the value of AliBaba Group’s other privately held businesses, such as [Taobao], AliPay, and China Yahoo!, which we believe provides 26 significant additional value .”
27 During the October 21, 2008 conference call attended by defendant Yang, the Company’s then-CFO stated that the market value of its direct and indirect interests 28 in the publicly traded securities of Yahoo! Japan, Alibaba.com and G Market was
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approximately $7.9 billion or more than $5.50 per share and that the figures did “ not include estimates of the value of the Alibaba Group’s other privately held 2 businesses such as Tao Bao and Ali Pay, which we believe provides significant additional value .”
3 During the January 27, 2009, conference call attended by defendant Bartz, the 4 Company’s then-CFO stated that the market value of its direct and indirect interests in the publicly traded securities of Yahoo! Japan, Alibaba.com and G Market was 5 approximately $9.4 billion or more than $6.50 per share and that the figures did “ not include estimates of Alibaba Group’s other privately held businesses, such as 6 Taobao and Alipay, which we believe provide significant additional value .”
7 During the October 20, 2009 conference call, Morse stated that “[a]t the end of the quarter, the pretax value of our 35% stake in Yahoo Japan and our 29% indirect stake 8 in Alibaba.com was $10.3 billion or $7.27 per share. These figures are based on public market quotes and do not include estimates of the value of Alibaba 9 group[’Js privately-held businesses . We don’t have plans to liquidate, spin-off or otherwise dispose of either of these holdings. They represent a significant source of 10 long-term value for the Company and our plan is to participate in the growth of China and Japan via these two market leaders.”
11 During the October 28, 2009 analyst meeting, Morse made additional comments 12 reflecting the importance of Yahoo’s investment in Alibaba. “And finally, a component of our evaluation, it’s pretty unique, we have our region assets; Yahoo! 13 Japan, Alibaba group. I talked about these in our intent with regard to these assets on the earnings call last week so I’m not going to belabor the point, but they’re market 14 leaders. They’re great at what they do. They have tremendous upside to them. . . . We think they’re terrific assets that are going to be worth a whole lot more in the 15 future than they are today. . . . We have terrific agreements with them that actually bring dollars into our coffers every quarter. So, that’s – it’s an investment that’s 16 paying off nicely. I like investments that pay off nicely . I’m kind of simple that way.”
17 44. When Yahoo rejected Microsoft’s takeover bid in January 2008, Yang wrote in a
18 letter to employees that the offer substantially undervalued the Company, in part, because of the
19 significant growth potential of the Alibaba business.
20 45. Analysts and investors believed the value of Yahoo’s investment in the Alibaba
21 Group was billions of dollars more than the Company reported . Many industry experts and
22 analysts believed the Alibaba investment was Yahoo’s most valuable corporate asset, accounting for
23 as much as two-thirds of Yahoo’s entire $21 billion market capitalization. For example, in April
24 2011, David Einhorn, Greenlight Capital, Inc.’s hedge fund manager, wrote, “[w]e would not be
25 surprised if [Yahoo’s] 40% stake in Alibaba Group alone was ultimately worth [Yahoo’s] entire
26 current market value.” Moreover, he emphasized that the most valuable part of the investment was
27 Alipay and Taobao.
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1 We believe that Yahoo’s most valuable asset is its 40% stake in Alibaba Group’s still-private holdings , which are separate and distinct from its ownership in the 2 publicly-traded Alibaba.com , which we are essentially getting for free.
3 46. In a May 16, 2011 report, Credit Suisse analyst Spencer Wang conservatively
4 1 estimated that Alipay represented $1.27 billion or 22% of Yahoo’s $6 billion estimated value of the
5 1 entire Alibaba Group investment.
6 As detailed in the exhibit below, we conservatively estimate that Yahoo US’s Asian assets represent just under half of the company’s $21 billion market cap. We
7 note we have been purposefully conservative and have fully taxed each asset and also applied a 10%-20% minority interest discount to each. More specifically, we
8 value Yahoo US’s stake in YJ at $3.8 billion, while we value Yahoo’s interest in its three primary Chinese Internet assets (Alibaba.com , Taobao, and Alipay) at
9 approximately $6 billion, after-tax and with a minority interest discount .
5.13.2011 Y! Japan Alibaba.com TaoBao Alipay Combined 10 Market Value $20,587.3 $8,667.3 $12,000.0 $6,000.0 $47,254.6 11 x Yahoo Ownership % 34% 33% 44% 44% 38% = Yahoo Ownership Value $6,999.7 $2,860.2 $5,280.0 $2,640.0 $17,779.9 12 - Tax Basis $0.0 $1,400.0 $0.0 $0.0 $1,400.0 = Taxable Gain $6,999.7 $1,460.2 $5,280.0 $2,640.0 $16,379.9 13 x Tax Rate 40% 40% 40% 40% 40% = Theoretical Tax on Sale $2,799.9 $584.1 $2,112.0 $1,056.0 $6,552.0
14 Market Value $6,999.7 $2,860.2 $5,280.0 $2,640.0 $17,779.9 15 - Theoretical Tax on Sale $2,799.9 $584.1 $2,112.0 $1,056.0 $6,552.0 = Tax Effected Value $4,199.8 $2,276.1 $3,168.0 $1,584.0 $11,227.9 16 x (1-Minority Interest Discount) 90% 90% 80% 80% 86% = Value to YHOO $3,779.8 $2,048.5 $2,534.4 $1,267.2 $9,629.9
17 1 1 1 1 1 1 18 (Value to YHOO) $3,779.8 $2,048.5 $2,534.4 $1,267.2 $9,629.9 / Market Value $6,999.7 $5,280.0 $2,640.0 $17,779.9 19 = Effective Discount on Market Value 46% 28% 52% 52% 46% Source: Company data, Credit Suisse estimates 20 47. On May 12, 2011, Gabelli & Company, Inc. analyst Brett Harriss wrote that Alipay 21 had a value of $5 billion. On May 13, 2011, the Financial Times reported that analysts estimated the 22 value of Yahoo’s Alipay stake at about $3 billion or $2.50 per share. 23 48. Defendants repeatedly stated that they were closely monitoring Yahoo’s investment 24 in the Alibaba Group . During an interview with Fox News on October 20, 2010, Bartz stated that 25 Yahoo was “always evaluating” the Alibaba Group investment through Yang’s position on the 26 Alibaba Group board and the Company’s “team of very strong financial experts.” Defendants 27 provided similar assurances to analysts and investors who repeatedly asked about Yahoo’s 28
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1 1 investment in the Alibaba Group. For example, during Yahoo’s April 22, 2008 earnings call,
2 1 Citigroup analyst Mark Mahaney stated that the value of the Company’s Asian assets had “ always
3 I consistently been a very large part of the value from Yahoo! ” and asked Yang what strategic
4 1 options there were for Alibaba. Yang declined to discuss strategic alternatives but touted the
5 Alibaba investment as “second to none” and “unique” and stated that the Company would provide
6 1 more transparency and visibility to the Alibaba investment.
7 We’re probably not going to be able to talk too much about all of the different alternatives that we’re thinking about but suffice it to say as we think about the
8 strategic value of Yahoo! and what it means in a number of potential transactions, we certainly think the positions that we’ve been able to achieve in China and in
9 Japan are second to none and probably so unique it won’t be able to be recreated in the other form so we think of that as a scarcity value. We also obviously
10 continue to think about ways in which we can provide more transparency and visibility in those assets particularly in China there’s a mix of public and private
11 assets that probably isn’t as well understood as we like it to be. We’ll continue to be talking about those to our investors.
12 49. During Yahoo’s December 9, 2009 presentation at the Barclay’s Technology
13 conference, Barclay’s Capital analyst Doug Anmuth asked Morse if Yahoo considered selling a
14 small stake in Alibaba to try to value the investment. Morse’s response reflected the importance of
15 the investment and that defendants were closely monitoring the investment.
16 No. Just as a valuation play, no. I think there are – there’s an awful lot of
17 thinking and awful lot of writing and awful lot of opinions on Alibaba group and the various pieces out there. If someone wants to put a valuation on it, at this point I
18 don’t think that is all that hard to do to be honest. You know a big chunk of Alibaba.com. There is a lot written about [Taobao], you can make your own
19 assumptions. You can get in a range. So I wouldn’t do it for those reasons. I personally don’t see the point in selling anything in Alibaba group.
20 I think Alibaba group is doing terrific. The management team there knows
21 that market, is extremely successful in that market. Their success so early on is enviable. They are doing a great job. I personally think and Yahoo thinks this is
22 something, this is our play. This is how we play in China. Those guys are going to continue to do well. We have a ton of confidence in them and I believe, we believe
23 these assets will be worth a whole lot more in the coming years than they are now . So any notion of playing it a different way honestly doesn’t make a whole lot of
24 sense to me in the near term.
25 50. During the January 26, 2010 conference call, Jefferies & Company analyst Youssef
26 1 Squali noted the importance of the Alibaba investment by stating that “Alibaba came out pretty
27 1 boldly criticizing your position on the Google China issue” and asking Bartz to “help us understand
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1 I prospects for that relationship?” Bartz stated, “ we have a good relationship with Alibaba as we’ve
2 1 said. We have an investment in Alibaba, Jerry sits on their board. And really that is, all there is
3 to it .”
4 51. During Yahoo’s presentation at the March 3, 2010 Morgan Stanley Technology,
5 I Media & Telecom conference, Morgan Stanley analyst Mary Meeker asked Bartz to comment on her
6 1 enthusiasm for the Alibaba investment and how Yahoo could bring some of that value to
7 shareholders. Bartz responded that she was “ glad we are invested in the Internet in China through
8 1 Alibaba, because that allows us to ride the enormous – what we all know will be an enormous
9 explosive growth in the Internet and the whole use of the Internet, whether it’s shopping and
10 information and advertising and so forth .”
11 52. During the April 20, 2010 conference call, Bank of America Merrill Lynch analyst
12 Justin Post asked if there was any update on the Company’s China investments and if there was
13 “anyway you can kind of monetize those assets which make up a significant portion of the value
14 of your Company ?” Morse’s response reflected the importance of the investment.
15 In terms of monetizing the China assets, to be honest, again, we see those as a terrific, terrific investment that are become – more and more valuable over time .
16 It’s a great way to play the Chinese market. The management team there is fantastic. They have got a great position. We are very happy to be part of that. We think that
17 will be worth much more again, as we go forward here . So really, not a whole bunch we can do, especially when you talk about the private parts of the Alibaba
18 group.
19 53. During the May 26, 2010 investor day, Morgan Stanley analyst Mary Meeker noted
20 1 that Ma had indicated that he would like to buy back Alibaba shares from Yahoo and asked for
21 Bartz’s views on those comments and the potential monetization timing. Bartz stated that there was
22 I nothing to comment on because Ma had not made an offer and emphasized the success of the
23 1 business and the close relationship between Yahoo and Alibaba.
24 Actually, I and – Jack and I happened to be at the Microsoft CEO Summit last week, so we had a nice, long chat. Until we actually would see something from Jack,
25 there’s nothing to comment on, so I think it’s quite easy to talk to the press and whatever, but the good news is we had a wonderful conversation. The[ir] business is
26 going very, very well. They’ve just inked a commercial e-commerce deal with YJ, Yahoo! Japan. And so they’re both excited about that, so our little tight-knit circle
27 just gets stronger and stronger .
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54. During the Company’s June 24, 2010 shareholders meeting, shareholder Daniel 2 1 Goldsmith noted that a graph included in the annual report showed that Yahoo’s stock price 3 performed poorly from 2004 to 2009 in comparison to three indices and asked if there were any 4 I plans to return the value in Alibaba to shareholders. Bartz responded that the investment was very 5 valuable to Yahoo but that it was not liquid: 6 Alibaba is an investment we made, in fact, it very much ties into our decision to leave the Chinese market in 2005. We sold our name and the rights to use Yahoo! 7 to Alibaba, which is a privately held holding company. And we own 39% of Alibaba and right now it is a privately held, not liquid investment.
8 We believe it’s an excellent way to be invested in the Chinese market, but 9 not operate there for all of the issues we talked about earlier . There will certainly come a day that we will be able to unlock that Alibaba investment as they start 10 spinning up public companies, perhaps like Taobao and those kind of companies I’m sure you’ve read about.
11 Yahoo! Japan is a joint venture, so we actually quarterly receive revenues 12 from Yahoo! Japan; it’s quite profitable for us. Yahoo! Japan actually is a public company, so you can, as shareholders, also participate via buying their stock. At this 13 point, there’s no plans to sell the Yahoo! Japan stake because it’s very important in our relationship.
14 However, we are very aware that a great amount of our value for the 15 shareholders beyond our cash and beyond Yahoo!, Inc., the US company, is Alibaba and Japan . And over time, we will figure out how to monetize this for you. 16 But right now, the best thing – I mean, I would look at Jerry and the board at that time for that $1 billion they invested in Alibaba, for instance. I mean, we all would 17 wish for those returns. It’s been spectacular returns , and as well in YJ.
18 So, the good news is we have great investment as a company. The bad news, it’s not as liquid as you would like it to be, but it will be .
19 55. Defendants knew the Chinese government restricted foreign ownership of Chinese
20 companies . Defendants also knew that the Chinese government restricted foreign ownership of
21 Chinese companies. For example, when asked if she would consider selling the Alibaba investment
22 during a September 14, 2009 interview on CNBC, Bartz acknowledged that China was a tough
23 market to be in and that the Chinese government restricted access to Chinese companies.
24 Alibaba is an investment. Frankly, when I first got here I thought, oh my gosh, we’re 25 not in China. Everybody’s got to be in China, but we all know that China is a tough market to be in, especially media. And my firm belief is the Chinese government is 26 much more interested in media companies being Chinese media companies . So I view this as a way to profit from the China internet market through Alibaba. So I 27 view it frankly as a very good investment for the future. . . . We can [raise] a Chinese internet without the hassles of, you know, operating in the country.
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56. During the Company’s May 25, 2011 investor day, Yang stated that he, Bartz and 2 I others were aware of the changing regulatory landscape in China regarding licenses and had been 3 following developments for years. 4 Let me start by saying that over the last few years as we have continued to learn about the regulatory landscape in China around online payments all of the parties 5 involved, Yahoo!, Softbank and Alibaba’s management have established a couple of guiding posts or guiding principles that we think best serve all of us .
6 First, Alipay has to be properly licensed in China, and we believe it needs to be in 7 the first wave of companies that receive such licenses . And second, Alibaba Group needs to be appropriately compensated for any transfer of Alipay.
8 *
9 First on the China regulatory environment, the regulatory environment in 10 China is quite unique, and in the area of online payments it’s even more complex. The Alibaba board, including Yahoo! and Softbank, have been following 11 developments in this evolving licensing environment for the last few years . 12 In China, in general as sort of background, Internet businesses are generally licensed through entities held by Chinese nationals that holds the license , and then 13 those entities are structured with contracts that allow them to simultaneously meet the Chinese regulatory requirements and the economic needs of the shareholders.
14 However, in this case, the government, which is the People’s Bank of China, 15 or PBOC, has signaled that it was planning to establish its different regulatory and licensing structure around online payment companies.
16 For the past few years, it wasn’t clear what level of direct or indirect foreign 17 ownership would be allowed. Recently, based on our own inquiries and various interactions, we have come to believe that the first wave of licenses will go only to 18 Chinese-owned domestic online payment companies. 19 Furthermore, it is uncertain when foreign owned companies will be allowed to participate in this sector. Therefore, it’s critical for Alipay to be in the position to 20 receive a license in this first wave of applications. As you know, Alipay is not only the market leader but also supports a critical set of transactions on Taobao.
21 Alibaba Group’s shareholders, represented by Softbank and Yahoo!, 22 recognize that Alipay needs to receive it license. Also, any value creation can only occur if ownership was transferred to Chinese nationals. We understand that 23 other companies in the market have taken similar steps in anticipation of licensing . 24 57. During the June 14, 2011 interview with China Entrepreneur Magazine, Ma stated 25 that he predicted the government would control online payment companies from the first day that he
26 started Alipay. 27 [F]rom the first day I started Alipay, I predicted that the government would [eventually] control it. I don’t mean to boast about our proportions, or about the 28 country’s security, but the [payment] industry is something that no government in the
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1 world would let pass by. I have to let the shareholders know these things clearly: if we were a tiny company right now, it wouldn’t matter, but we’re a big one, so we 2 can’t dodge these things. But [the shareholders] don’t believe me, or they say “we’ll talk about it another time.” If they don’t agree with something, you’re stuck.
3 58. Because defendants were admittedly following developments in the evolving
4 licensing environment in China, they knew that new regulations were adopted by the BoC in June
5 2010 that impacted foreign ownership of online payment companies. The Decree of the People’s
6 BoC No. 2 was dated June 14, 2010 and stated in Article 3 that “[i]n order to provide payment
7 services, a non-financial institution should obtain a Payment Business License in accordance with
8 this Measure to become a payment institution,” that payment institutions “are under supervision and
9 regulation of the PBC” and that, “[w]ithout approval of the PBC, any non-financial institution or
10 individual shall not engage in payment businesses in any forms, explicit or disguised.” Article 7
11 stated that the “PBC is in charge of the issuance and management of the Payment Business License ”
12 and that “[a] License application shall be first reviewed by the local branch office of the PBC and
13 then submitted to the PBC headquarters for approval.” Article 8 stated that an applicant for a license
14 to conduct online payment services “shall be a limited liabilities company or a limited company
15 lawfully incorporated within the jurisdiction of the People’s Republic of China.”
16 59. The new regulations required foreign owned companies to follow special rules to
17 access the Chinese market, including the need to obtain State Council approval. As Ma and Alipay
18 CFO Jing Xiandong (“Jing”) explained during the June 14, 2011 press conference and interview with
19 China Entrepreneur Magazine, the Alipay management team’s primary concern was that State
20 Council approval would take too long and possibly result in the destruction of Alipay if the State
21 Council rejected the license application.
22 60. On June 23, 2010, it was reported by the Financial Times that new regulations issued
23 by the BoC “explicitly excluded companies with foreign capital from the new regulatory
24 framework,” which created a problem “for everyone with a shred of a foreign investment.” Indeed,
25 it was also reported that “virtually all players that matter in the Chinese market will have to
26 restructure their shareholding[s],” that the new regulations “could force leading Chinese internet
27
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1 1 companies including Tencent and Alibaba to restructure their shareholdings” and that “it is 2 1 understood that Alibaba’s management is considering hiving Alipay off.” 3 61. Thus, defendants knew that Yahoo’s investment in the Alibaba Group was one of the
4 I Company’s most important investments and comprised a substantial portion of Yahoo’s overall
5 1 market capitalization. As a result, they knew that Yahoo was required to report any material change
6 to the Alibaba Group investment. And they knew that the BoC had adopted regulations in June 2010
7 that restricted foreign ownership of online payment companies like Alipay. Indeed, as Yang
8 admitted during the May 25, 2011 investor day, he, the Alibaba Group board of directors and the
9 other defendants were “following the developments in this evolving licensing environment for the
10 last few years.”
11 B. On August 6, 2010, the Alibaba Group Transfers 100% of Alipay’s Shares to Zhejiang Alibaba E-commerce Company, a Chinese
12 Company Majority Owned by Ma, so Alipay Can Receive a License from the People’s Bank of China; and on January 27, 2011, Ma
13 Terminates the VIE Arrangement Between the Alibaba Group and Zhejiang
14 62. On August 6, 2010, the Alibaba Group did restructure the shareholdings of Alipay,
15 just as the Financial Times reported companies like Alipay would have to do given the new
16 regulations adopted by the BoC. The remaining 30% of the Alipay shares were transferred to
17 Zhejiang for $23.6 million, which, according to Alipay CFO Jing Xiandong, was the Alibaba
18 Group’s internal asset transfer price. Thus, as reported by Caixin Online on May 13, 2011, the total
19 consideration received by the Alibaba Group for the share transfer to Zhejiang was 330 million yuan
20 or approximately $46 million – billions of dollars less than Alipay’s market value. In a June 12,
21 2011 text message to Hu Shuli, the chief editor of Caixin Online, Ma acknowledged that the price
22 was less than Alipay’s market value but stated that “negotiations are still underway” and that it was
23 not credible that he would have engaged in such a stupid self-dealing transaction.
24 You really believe I’d be so stupid as to sell Alipay to myself at such a low
25 price? Or that I would keep it to myself, while so many others are working for it? Don’t you think that I would know better than to do something that is so naïve and
26 worthy of public ridicule?
27 63. In a June 24, 2011 article in Caixin Online entitled “Getting to the Bottom of the
28 1 Alipay Dispute,” it was reported that Alipay registration documents filed at the Administration of 670999_1 CONSOLIDATED AMENDED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS - 3:11-cv-02732-CRB - 23 - Case3:11-cv-02732-CRB Document68 Filed12/15/11 Page27 of 65
1 I Industry and Commerce in Hangzhou showed that the Alipay share transfer occurred in two phases,
2 1 the first occurring on June 1, 2009 and the second on August 6, 2010. In a July 8, 2011 article by
3 1 Eric Jackson entitled “What Did Yahoo! Not Want You to Read This Morning?,” it was also
4 1 reported that the transfer of 100% of Alipay’s shares occurred on August 6, 2010.
5 64. The Alibaba Group could still consolidate Alipay after the Alipay share transfers to
6 1 Zhejiang because there were VIE agreements between the shareholders of Zhejiang and the Alibaba
7 Group that gave the Alibaba Group de facto control of Zhejiang.
8 65. Defendants admitted that the share transfer needed to be disclosed by reporting the
9 1 transfer in Yahoo’s 1Q11 Form 10-Q. But that disclosure was not made until May 10, 2011, when
10 Yahoo filed the 1Q11 Form 10-Q with the SEC.
11 To expedite obtaining an essential regulatory license, the ownership of Alibaba Group’s online payment business, Alipay, was restructured so that 100
12 percent of its outstanding shares are held by a Chinese domestic company which is majority owned by Alibaba Group’s chief executive officer. Alibaba Group’s
13 management and its principal shareholders, Yahoo! and Softbank Corporation, are engaged in ongoing discussions regarding the terms of the restructuring and the
14 appropriate commercial arrangements related to the online payment business.
15 66. On May 12, 2011, defendants attempted to explain why the Alipay share transfer was
16 1 not publicly disclosed until May 10, 2011. On that date, Yahoo issued a press release in which it
17 1 reported that the transfer of the Alipay shares occurred in August 2010, that the Alibaba Group
18 1 deconsolidated Alipay in 1Q11, that both transactions occurred without the knowledge or approval
19 1 of the Alibaba Group board of directors and that the Company did not learn of the two transactions
20 until March 31, 2011.
21 On March 31, 2011, Yahoo! and Softbank were notified by Alibaba Group of two transactions that occurred without the knowledge or approval of the Alibaba
22 Group board of directors or shareholders. The first was the transfer of ownership of Alipay in August 2010. The second was the deconsolidation of Alipay effective in
23 the first quarter of 2011.
24 67. Yahoo issued that press release the same day that Alipay sent out an official
25 1 announcement confirming that the ownership of Alipay was restructured in 2010 so that 100% of its
26 shares were held by Zhejiang and that the move was in accordance with the BoC’s regulations issued
27 in 2010, as well as to ensure the security of domestic financial data.
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68. After Yahoo issued the May 12, 2011 press release in which it claimed the transfer 2 1 occurred without the knowledge or approval of the Alibaba board and that Yahoo did not learn of the 3 transfer until March 31, 2011, the Alibaba Group issued a press release on May 13, 2011 entitled 4 1 “Alibaba Group Clarification with Respect to Alipay Status and Related Statements by Yahoo!” 5 That press release indicated that defendants may have known about the Alipay share transfer before 6 March 31, 2011. 7 Alibaba Group management has taken actions to comply with Chinese law governing payment companies in order to secure a license to continue operating 8 Alipay. The Alibaba Group board discussed at numerous board meetings over the past three years the impending imposition of new regulatory requirements on the 9 online payment industry, including ownership structures, as they were being developed in China, and was told in a July 2009 board meeting that majority 10 shareholding in Alipay had been transferred into Chinese ownership . The actions taken by Alibaba Group management to comply with the licensing regulations and to 11 ensure continuation of operations are in the best interests of the company and its shareholders. The continued operation of Alipay is essential to the preservation and 12 enhancement of the value of Alibaba Group’s businesses such as Taobao, as Alipay is the payments platform for e-commerce in these businesses.
13 69. On June 1, 2011, it was reported in an article published by All Things Digital that Ma
14 said that it was impossible that the Alibaba Group board did not know about the transfer of Alipay to
15 Zhejiang. Ma made that statement during an interview with Kara Swisher after she asked about the
16 transfer and insinuated that Ma stole Alipay from the other shareholders of the Alibaba Group.
17 I heard a lot of words like “stealing.” This is like peace talks at the United Nations. 18 It’s impossible that the board doesn’t know what was going on. Yahoo is thinking about Yahoo shareholders. Softbank is thinking about its shareholders. I have to 19 think about all of them. Someone has to take responsibility to move ahead.
20 70. During a June 14, 2011 press conference and subsequent interview with China 21 Entrepreneur Magazine the same day, Ma stated that the Alibaba Group’s board had transferred 70%
22 of Alipay’s shares to Zhejiang in June 2009, that the board of the Alibaba Group approved the 23 transfer and that the approval of the transfer was reflected in the minutes of the July 24, 2009 board 24 1 meeting. 25 71. Other statements by Ma during the June 14, 2011 interview with China Entrepreneur 26 1 Magazine also indicated that defendants may have known about the transfer of the remaining 30% of 27 Alipay’s shares in August 2010 before March 31, 2011. For example, during the interview, Ma
28 acknowledged that the Alibaba Group board did not approve decisions but stated that all issues were
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1 I discussed with board members and that decisions were agreed to and reflected in the minutes of the
2 1 meetings.
3 We established the board of directors 6 years ago, and since then, not one decision has been approved by the board. A lot of things have been discussed outside of the
4 board, and the board [has] come to an agreement. It’s always been this way; there’s never been any mess of approval of opposition on the board. It’s all decided in the
5 minutes of our meetings.
6 72. In fact, in a June 24, 2011 article in Caixin Online, entitled “Getting to the Bottom of
7 1 the Alipay Dispute,” it was reported that the Alibaba Group board justified the authorization of the
8 Alipay shares being transferred to Zhejiang based on the VIE arrangement because Zhejiang was
9 1 merely a license-holding company, and Alipay-related revenue, profit, technology and intellectual
10 1 property would be transferred to the Alibaba Group. Therefore, Alibaba would be able to
11 consolidate Alipay’s financial statements.
12 73. When asked during the June 14, 2011 interview with China Entrepreneur Magazine
13 1 if Yahoo was lying when it announced that it did not know about the transfer of shares, Ma’s
14 response indicated Yahoo did.
15 CEM: Yahoo announced that they didn’t know about the transfer of shares, are they lying?
16 Ma: What do you think? Every time we have a board meeting there are minutes
17 taken. Them saying that is so they can say to their shareholders: “This is Ma’s responsibility, don’t blame me.” In reality, it’s giving me more
18 pressure and bargaining chips in negotiations. Why Yahoo only revealed the Alipay transfer in May, I don’t know that either. Now, I can only speak like
19 a politician: I don’t know why, nor do I want to. Yang Zhiyuan is still my friend, and I don’t want to embarrass my friends. I don’t want this thing to
20 become a low-brow argument – I still have to give them my respect.
21 74. Yang’s statements during Yahoo’s May 25, 2011 investor day also indicate that he
22 1 may have known about the August 6, 2010 Alipay share transfer from his attendance at Alibaba
23 1 Group board meetings, stating that the Alibaba Group “[b]oard meets just like any other private
24 I companies would meet.”
25 75. During the June 14, 2011 press conference and interview with China Entrepreneur
26 1 Magazine, Ma also explained his desire to terminate the VIE in January 2011 after receiving two
27 letters from the BoC. Ma stated that he told Yang and Son that he received a fax from the BoC on
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and that it was understood that if the Alibaba Group did have such a VIE, it would not receive a 2 1 government license because the BoC did not want foreigners controlling something strategic like a 3 payments company. 4 Ma: It’s like this, those two letters from the BoC in the first quarter of this year asked the question very clearly: do you have a VIE or not? If you do, then 5 you don’t need to report to the State Council today, but if you don’t, you need to make a declaration and guarantee it. So there’s no question of 6 whether or not a VIE is legal or not, it’s whether or not you’re going to declare it. How would you deal with that?
7 CEM: But you just said that in the three or four months before this letter came, you 8 had been considering terminating the [VIE]. 9 Ma: Before these two letters arrived, we thought this matter wasn’t such a big deal, and we were proceeding based on the VIE. But when you’re dealing 10 with the BoC, as a leader you have to decide how you’re going to change your tactics in case there’s a change in policy. This is my responsibility as 11 CEO; there are certain things you have to consider. 12 CEM: Were you always warning the board? 13 Ma: Of course. They are one-hundred percent aware of that. But until today, everyone has been avoiding responsibility. Now, I’ve been forced to tell the 14 truth, otherwise what does it have to do with me? Yang Zhiyuan and Sun Zhengyi are still my friends; there’s still affection there.
15 76. Ma explained during the interview that there were three options regarding how to
16 respond to the BoC’s letters.
17 Three options: one, close the company; two, lie; three, follow the law – first transfer 18 Alipay out, then negotiate. The first option would have been certain death, there’s no way I could have chosen it. The second is a big risk; the BoC could leave you alone 19 one day, then tie you up within an inch of your life the next. If you don’t have a board agreement, you have to take even more responsibility.
20 77. During the June 14, 2011 press conference, Alipay CFO Jing Xiandong stated that
21 Alipay received instructions from the BoC to write a statement clarifying it was a domestic firm with
22 no foreign investors. With the VIE arrangements, Alipay would have to admit that Alipay did have
23 foreign investors and a VIE arrangement, which would have required Alipay to seek approval from
24 the State Council separately. Jing said that the management team’s primary concern was that State
25 Council approval would take too long and possibly result in the destruction of Alipay if the State
26 Council rejected the license application. As explained by Jing, “[t]he only thing we could do was to
27
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1 I promptly terminate the VIE arrangement so as to meet the central bank’s licensing requirements 2 1 immediately.” 3 78. Ma stated that the response “needed to be given to the BoC the next day, and if they
4 weren’t, everything would have been automatically shut down.” Ma stated that Son “really wanted
5 to take the second route” but that he was unwilling to lie and that Son had provided a lot of stupid
6 1 advice in the past.
7 I can reliably say that if Ali Group had listened to more than 30% of Son’s advice on business and operation, this company would have died a long time ago. A lot of his
8 advice was stupid. Investors cannot be entrepreneurs.
9 79. Ma stated Yang could not make a decision because all of the options would make him
10 1 look bad to Yahoo shareholders, so he abstained from the decision.
11 CEM: Did Yang Zhiyuan also want to take the second option?
12 Ma: Yang sat on the fence; this time it was Son who jumped first. Whether or not the second option could be taken, was our biggest key difference. 13 80 As Ma stated during the June 14, 2011 press conference, he was “up until 12 a.m., the
14 other parties [Yang and Son] had yet to express their stance, saying neither yes nor no.” So Ma
15 decided to terminate the VIE and sent a response to the BoC, stating, “Zhejiang Alibaba is Alipay’s
16 sole and actual controller and no foreign investors have actual controlling rights over Alipay through
17 stock holdings, agreements or other arrangements.” Ma terminated the VIE after sending the
18 response.
19 81. Ma said that he told Son and Yang that the VIE was terminated the next day. During
20 the press conference, Ma stated, “I made the only one correct decision at that time, though maybe
21 it’s not perfect. On the second day after the license application of Alipay, we reported it to the
22 board.” During the interview with China Entrepreneur Magazine, Ma also stated that Yang and Son
23 were surprised that he terminated the VIE.
24 CEM: When you told them you were going to unilaterally cut off the control
25 agreement, were they surprised?
26 Ma: Of course they were. When Yang received the forms, he should have immediately told the Yahoo shareholders, but he waited until May to tell
27 them. So now, Yahoo’s US shareholders blame Yahoo, not us.
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In fact, during the interview, Ma stated that Yang and Son knew about the termination of the VIE but
2 1 were trying to blame him: 3 The BoC has taken 5 years to go from talking about licenses to actually giving them out. They said they’d distribute them last year, but they didn’t. What are they 4 doing? The BoC has been through a lot of tough thinking, and I can understand their inability to stand up and talk about it. The government has its reasons and the BoC is 5 wise, too. But the result is that I’m standing here with the BoC on one side, and these two bastards on the other side and they’ve squeezed me out and made me out to 6 be the bad guy. 7 82. Many analysts and the financial press explicitly questioned when defendants knew
8 1 about the Alipay share transfer and criticized the timing of the disclosure. For example, on May 12,
9 2011, Dow Jones reported that Yahoo shareholders were “perturbed” about the timing of the
10 I disclosure and that the issue was why the Company disclosed the adverse news in May rather than in
11 its annual report, which was filed in February, or during the April 19, 2011 earnings call. Eric
12 Jackson, founder of Ironfire Capital and a Yahoo shareholder, said that “the optics [were] bad,”
13 suggesting the Company “tried hiding this piece of news.” On May 12, 2011, Deutsche Bank
14 analyst Jeetil Patel issued a report in which he wrote, “surprisingly, Yahoo! did not disclose this
15 event upon receipt of notification (March 31st) or during earnings in late April, opting for disclosure
16 in its 10Q six weeks later.”
17 83. On May 13, 2011, Jefferies & Company analyst Youssef Squali issued a report in
18 1 which he also criticized Yahoo management and questioned how Alipay could be transferred without 19 the knowledge of the Alibaba Group board: 20 While our discussions with Yahoo! post release provided some clarity into the situation, and we believe that the issues will ultimately be resolved, the facts no 21 doubt raise the following questions: 22 1) How can Alipay, owned by Alibaba Group, be “transferred” without knowledge of Alibaba Group’s Board? 2) How can an asset be “transferred” without 23 prior agreement for remuneration? 3) Why were financial statements for Alipay still being consolidated by Alibaba Group after August 2010 even though the underlying 24 asset was transferred to another company, and therefore how reliable are its financial statements?, 4) Why did auditors sign off on the group’s financial statements without 25 raising those questions? 5) Why wasn’t the asset “transfer” of Alipay disclosed by involved parties right before or right after the transfer date in August 2010? This 26 “asset transfer” took place right after an order released by the People’s Bank of China requiring non-bank payment companies to obtain a regulatory license (which 27 involves 100% Chinese ownership). 5) How will Yahoo! protect its economic interests in the now “transferred” Alipay.com , and what kind of leverage does 28 Yahoo! really have at this point?, 6) Given how intertwined Alipay and Taobao are,
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1 and given that we assign significant value to it, is that relationship at risk?, 7) What are the legal ramifications if “fair” remuneration is not received?, 8) How much 2 litigation risk is there against Yahoo!? 3 84. On May 20, 2011, Capstone Investments (“Capstone”) analyst Paul Meeks issued a
4 1 report in which he wrote that Capstone was “still troubled by the differing claims made by Alibaba
5 1 Group and Yahoo as to who did and knew what when pertaining to Alibaba’s ‘deconsolidation’ of
6 1 Alipay.” Paul Meeks and other analysts reported that Yahoo would be hosting an investor day on
7 1 May 25, 2011, which would be the next time the Company “will address this fiasco in some detail.”
8 They were wrong.
9 85. During the May 25, 2011 investor day, Yang and Bartz refused to provide any details
10 I despite repeated questions from numerous analysts and instead repeated scripted remarks that
11 provided no new information.
12 Carol Bartz - Yahoo! Inc. - CEO
13 [W]e’re engaging with Softbank and Alibaba constructively. Jerry and Tim were in Asia last week for face-to-face discussions. We believe we’re making significant
14 progress.
15 We’re focused on two agreed-upon principles, one, ensuring the inter- company relationship between Alipay and Taobao is structured to preserve the value
16 within Taobao and, by extension, within the Alibaba Group and, two, ensure that Alibaba Group is appropriately compensated for the value of Alipay.
17 86. Bartz acknowledged that some analysts questioned the timing of Yahoo’s disclosures
18 but refused to address the issue, stating, “simply put, very simply put, we believe our disclosure was
19 timely and appropriate. As you can imagine, we’re not going to be able to say more about this
20 topic.”
21 87. During the May 25, 2011 investor day, Yang admitted that he, Bartz and others were
22 aware of the changing regulatory landscape in China regarding licenses, had been following
23 developments for years and knew that internet businesses were generally licensed through entities
24 held by Chinese nationals that hold the license and that the entities were then structured with
25 contracts (VIE arrangements) that allowed them to simultaneously meet the Chinese regulatory
26 requirements and the economic needs of the shareholders. As alleged below, during an October 20,
27 2010 interview with Fox News, Bartz stated that Yahoo was “always evaluating” the Alibaba
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1 investment through Yang’s position on the Alibaba board and Yahoo’s “team of very strong 2 I financial experts.” 3 88. During Yahoo’s May 25, 2011 investor day, one questioner asked why Yahoo was
4 I supposedly surprised by the Alipay transfer since defendants “were fully aware that a license needed
5 to be issued and for that to happen you needed to have 100% ownership . . . by a Chinese national.”
6 I Yang refused to answer the question and again repeated the two scripted remarks:
7 [W]e’re not going to talk about any specific timing of when we could have done this or not but, clearly, we have to solve both things. We have to get a license for the
8 business, and we have to get an economic arrangement that satisfies that licensing requirement, and you can imagine it’s not straightforward.
9 89. Recognizing that Yang and Bartz refused to answer the question, another questioner
10 asked “why it appears that you were caught by surprise by what seems common.” Bartz and Yang
11 again refused to answer the question but this time cited a self-imposed gag order:
12 Carol Bartz - Yahoo! Inc. - CEO
13 Of course, you know, I love to answer questions. Then so my husband says,
14 I’ll answer anything, even if I don’t know anything about it. But listen. We have agreed sincerely with Softbank and with Alibaba Group that none of us were going to
15 discuss the past, and I am upholding our word.
16 90. Another questioner asked defendants to “shed some light on what it is about the
17 I regulatory approval process that would preclude some sort of pre-arranged structure or, at least,
18 advance notice of what was going to happen, because it’s very counter-intuitive to believe that there
19 is a constructive process going on when parties aren’t told about asset transfers?” Yang admitted the
20 1 rules were published but claimed they were not explicit about ownership.
21 91. Section 3.1 of the October 24, 2005 Shareholders Agreement between Alibaba.com ,
22 Yahoo, Softbank, Alibaba Group management and certain other shareholders of Alibaba.com
23 required a majority of the Alibaba Group board to approve any transaction involving the disposition,
24 sale or other transfer of the assets of the Alibaba Group if the transaction exceeded $10 million.
25 During the May 25, 2011 investor day, another questioner asked how the transfer occurred without
26 board approval when the Shareholders Agreement clearly stated that any transaction above $10
27 million needed to be approved by the board as well as any core asset transferred. Yang refused to
28 answer the question and again repeated the two scripted remarks that “Alipay has to get licensed, and
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1 Alibaba Group has to be fairly compensated.” Bartz also refused to answer the question and again
2 1 invoked the self-imposed gag order: “we have an agreement with Softbank and Alibaba that we’re
3 1 not going to talk about the past.”
4 92. In addition to “always evaluating” the Alibaba investment through Yang’s position on
5 I the Alibaba board and Yahoo’s “team of very strong financial experts,” as Bartz stated on October
6 20, 2010, Yahoo also had a compliance officer at Alibaba whose job it was to provide assistance to
7 Yahoo in relation to Yahoo’s compliance with applicable laws. Section 8.3 of the October 24, 2005
8 Shareholders Agreement required Yahoo and Alibaba to mutually agree on the appointment of
9 certain personnel in the legal and finance departments of Alibaba who would provide assistance to
10 Yahoo in relation to Yahoo’s compliance with applicable laws, and Alibaba could not remove any
11 compliance officer without Yahoo’s written consent.
12 93. Yahoo received monthly management reports from Alibaba that included the
13 1 financial statements of Alibaba and its subsidiaries under §8.5(b)(iv) of the Shareholders Agreement
14 and therefore would have known about the Alipay transfer because Alipay would not have been
15 listed as a subsidiary after August 2010. Under §8.5(b)(iii), Yahoo also received a quarterly report
16 from Alibaba that included “explanations for any significant movements from the prior quarter” in
17 Alibaba’s financial statements. These reports, too, would have shown the transfer of Alipay.
18 94. During the May 25, 2011 investor day presentation, defendants tried unsuccessfully to
19 convince investors that the value of Alipay was immaterial. In fact, Morse claimed that the value of
20 Alipay was “[e]xtremely, extremely immaterial.” But that contention contradicted Bartz’s
21 statements during the October 19, 2010 conference call that there was “tremendous value in the
22 businesses they’re [Alibaba Group] growing,” the repeated statements by Bartz, Morse and Yahoo’s
23 previous CFO before the Class Period that Alipay provided “significant additional value” and the
24 views of analysts and shareholders. It is also contradicted by the settlement of the dispute
25 announced on July 29, 2011 that included the Alibaba Group’s receiving no less than $2 billion and
26 no more than $6 billion in proceeds from an Alipay IPO or other liquidity event. Moreover, that
27 settlement also included Alipay’s continuing to provide payment processing services to Taobao and
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paying the Alibaba Group’s royalties and software technology service fees that consisted of an 2 I expense reimbursement and a 49.9% share of Alipay’s consolidated pretax income. 3 95. During the May 25, 2011 investor day presentation, one analyst stated he was
4 surprised at Morse’s claim that the value of Alipay was extremely immaterial. In response, Morse
5 admitted there was value to Alipay but contended that some of that value was reflected in Taobao. 6 Unidentified Audience Member 7 I’m sort of surprised to hear you guys say that Alipay today doesn’t have a lot of value. It may not have a lot of revenue but you talk to people in China, it’s clearly 8 the market leader, as you’ve said. You think about PayPal and its relationship to eBay, it’s a huge amount of the value of eBay. So it may not have a lot of revenue, 9 but why would you say that it doesn’t have a lot of value? 10 And so, as you think about that, are you trying to figure out the value today? I think someone else sort of asked this. Are you trying to figure out the value today 11 or the value in the future, and how do you think about that? 12 Tim Morse - Yahoo! Inc. – CFO 13 So, I’ll go back to my first comments, which are you have to talk about value for Alipay in two distinct streams. There’s one stream, as you correctly observed, 14 very akin to PayPal and eBay. The relationship between Alipay in this case and Taobao, there’s a lot of value there.
15 And principle number one is that value, the economic arrangement between 16 them today continues. Okay? So, all of that value is absolutely captured in Taobao. Okay? We all agreed on that.
17 Then the second piece is there are some, not many, but some transactions 18 today that are non-Taobao related. Where those transactions may go, where that business might evolve to over the future, of course, is a matter of some speculation, 19 conjecture, a whole lot of hard work on the ground there. 20 So that is the real complexity of the negotiation. Point number one is easy. Point number two, capturing everything that will happen potentially in the future is 21 where we’re in discussions and back and forth. But again, everybody is agreed on the principle that there should be value creation there and, depending on a number of 22 different possible scenarios and future events, we’re focused on capturing that value to Alibaba Group today.
23 So, we’re not saying Alipay has no value. The effect on the income statement 24 is absolutely immaterial by deconsolidating Alipay because the current financials and economic flow is really captured in Taobao, and that will remain going forward and 25 be consolidated. And then, on the other hand, we’re handling these non-Taobao transactions, the non-Taobao business, which could go in a number of different 26 directions. Okay?
27
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1 96. The terms of the settlement, however, confirm that there was substantial value to
2 1 Alipay ($2 billion to $6 billion) independent of Alipay’s providing payment processing services to 3 1 Taobao. 4 97. As alleged above, Ma’s statements during the June 14, 2011 press conference and 5 1 interview made it clear that he had not agreed to the self-imposed gag order that defendants cited 6 I during Yahoo’s May 25, 2011 investor day for their refusal to answer questions about the transfer of 7 Alipay and the termination of the VIE arrangement. Nevertheless, after June 14, 2011, defendants 8 failed to deny or even address the statements made by Ma during the June 14, 2011 press conference 9 and interview with China Entrepreneur Magazine even though Ma’s statements indicated that 10 defendants may have known about the Alipay share transfer and termination of the VIE when those 11 transactions occurred. Instead of addressing Ma’s statements, Yahoo, SoftBank and the Alibaba 12 I Group jointly issued a press release on June 21, 2011 in which they announced another self-imposed 13 gag order. 14 Alibaba Group and its major shareholders, Yahoo! Inc and SoftBank Corp. continue to be engaged in constructive negotiations, and we have made substantive 15 and encouraging progress toward an agreement regarding Alipay. Our objective is to reach an agreement in a timely manner that serves the interests of all stakeholders. 16 The companies will not comment in further detail until it is appropriate to do so.
17 98. Defendants have stuck to the gag order and have never denied or addressed Ma’s 18 1 statements.
19 C. August 9, 2010: Defendants Make Materially False and Misleading Statements About Yahoo’s Investment in the Alibaba Group by 20 Failing to Disclose that 100% of Alipay’s Shares Had Been Transferred to Zhejiang
21 99. On August 9, 2010, Yahoo filed its 2Q10 Form 10-Q for the quarter ending June 30,
22 2010 that was signed by Bartz and Morse. The following statements about Yahoo’s investment in
23 the Alibaba Group were materially false and misleading because Yahoo failed to disclose the
24 transfer of the Alipay shares on August 6, 2010, which defendants admitted had to be disclosed by
25 reporting the transfer in Yahoo’s 1Q11 Form 10-Q filed on May 10, 2011.
26 The following table summarizes the Company’s investments in equity interests 27 (dollars in thousands):
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Percent Ownership December 31, 2009 June 30, 2010 of Common Stock 2 Alibaba Group $2,167,007 $2,205,669 43% Yahoo Japan 1,329,281 1,395,842 35% 3 Total $3,496,288 $3,601,511 4 Equity Investment in Alibaba Group . The investment in Alibaba Group Holding Limited (“Alibaba Group”) is accounted for using the equity method, and 5 the total investment, including net tangible assets, identifiable intangible assets and goodwill, is classified as part of investments in equity interests on the Company’s 6 condensed consolidated balance sheets. The Company records its share of the results of Alibaba Group, and its consolidated subsidiaries, and any related amortization 7 expense, one quarter in arrears, within earnings in equity interests in the condensed consolidated statements of income.
8 As of June 30, 2010, the difference between the Company’s carrying value of 9 its investment in Alibaba Group and its proportionate share of Alibaba Group’s stockholders’ equity is summarized as follows (in thousands):
10 Carrying value of investment in Alibaba Group $2,205,669 11 Proportionate share of Alibaba Group stockholders’ equity 1,568,767 Excess of carrying value of investment over proportionate 12 share of Alibaba Group’s stockholders’ equity* $ 636,902
13 *The excess carrying value has been primarily assigned to goodwill.
14 100. Defendants reported stock repurchases after June 30, 2010 as a subsequent event but
15 failed to disclose the transfer of 100% of the outstanding shares of Alipay to Zhejiang that occurred
16 1 just three days before the Form 10-Q was filed.
17 Note 16 SUBSEQUENT EVENTS
18 Stock Repurchase Transactions . Subsequent to June 30, 2010, the Company repurchased approximately 23.2 million shares of its common stock at an average 19 price of $14.02 per share, for a total of $326 million. Of such repurchases, $92 million was under the October 2006 program and $234 million was under the June 20 2010 program.
21 101. Defendants also reported that Yahoo’s stock price “may fluctuate in response to a
22 number of events and factors,” including “variations in . . . the operating performance of . . . Alibaba
23 Group Holding Limited,” but failed to disclose the transfer of 100% of the outstanding shares of
24 1 Alipay to Zhejiang that occurred just three days earlier and that the $46 million received by the
25 Alibaba Group in exchange for the transfer was billions of dollars less than Alipay’s value.
26 Our stock price has been volatile historically and may continue to be volatile regardless of our operating performance . 27 The trading price of our common stock has been and may continue to be 28 subject to broad fluctuations. During the three months ended June 30, 2010, the
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closing sale price of our common stock on the NASDAQ Global Select Market ranged from $13.84 to $18.97 per share and the closing sale price on July 30, 2010
2 was $13.88 per share. Our stock price may fluctuate in response to a number of events and factors, such as variations in quarterly operating results, announcements
3 and implementations of technological innovations or new services by us or our competitors; changes in financial estimates and recommendations by securities
4 analysts; the operating and stock price performance of other companies that investors may deem comparable to us; the operating performance of companies in which we
5 have an equity investment, including Yahoo Japan Corporation (“Yahoo Japan”) and Alibaba Group Holding Limited (“Alibaba Group”) ; and news reports relating
6 to us, trends in our markets, or general economic conditions.
7 102. The facts described in ¶¶62-98 establish that defendants’ statements were materially
8 1 false and misleading because they failed to disclose that 100% of Alipay’s shares had been
9 1 transferred to Zhejiang on August 6, 2010 for billions of dollars less than Alipay’s value. Indeed,
10 1 defendants admitted that the Alipay share transfer had to be disclosed by reporting the transfer in
11 Yahoo’s 1Q11 Form 10-Q filed on May 10, 2011. Those facts also indicate that defendants may
12 1 have known about the Alipay share transfer when it occurred on August 6, 2010.
13 D. October 19-20, 2010 and November 8, 2010: Defendants Make Materially False and Misleading Statements about Yahoo’s
14 Investment in the Alibaba Group by Failing to Disclose that 100% of Alipay’s Shares Had Been Transferred to Zhejiang
15 103. On October 19, 2010, Yahoo reported its 3Q10 results, including $186 million of net
16 earnings or $0.13 diluted EPS, $3,496,288,000 of investments in equity interests that included
17 $2,225,928,000 related to the Company’s investment in the Alibaba Group, and capital of $12.1
18 billion. The Company also reported that diluted EPS included a benefit of $0.04 related to a gain on
19 the sale of its direct investment in Alibaba.com .
20 104. During the conference call, Bartz and Morse repeated the statements included in the
21 press release and made additional false and misleading statements about the Company’s financial
22 results and its investment in the Alibaba Group. Morse emphasized that the market value of Yahoo’s
23 indirect stake in Alibaba.com was substantially greater than the Company’s $2.2 billion investment
24 in the Alibaba Group.
25 [E]arnings in equity interests grew 52% compared to last year, driven by solid results
26 from both Yahoo! Japan and Alibaba Group.
27 Finally, as of September 30, the pretax value of our 35% stake in Yahoo! Japan and our 29% indirect stake in Alibaba.com was roughly $10 billion, or
28 approximately $7.74 per share. These figures are based on public market quotes
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1 and do not include estimates of the value of Alibaba Group’s privately held businesses .
2 105. Bartz described the investment and its importance to Yahoo’s performance, touted the
3 success and tremendous value of the investment and represented that management was focused on
4 maximizing shareholder value:
5 Next up, Alibaba. Yahoo! made the investment in Alibaba five years ago and 6 it was great foresight by Jerry and the team to invest in a strong, local player in the Chinese market. To this day, no other Internet Company outside of China has done 7 as well with their investment in the country as we have. No one. I have tremendous respect for Jack Ma, the Alibaba team and what they’ve accomplished.
8 We know there’s tremendous value in the businesses they’re growing. It’s 9 an important investment and we’re committed to a good, productive business relationship. Beyond that I’m not going to speculate today or in the future on our 10 investment with them. Just know that with any investment, we’re focused on maximizing value for shareholders.
11 106. During an interview with Fox News the next day, October 20, 2010, Bartz assured
12 investors that Yahoo was “always evaluating” the Alibaba investment through Yang’s position on
13 the Alibaba board and Yahoo’s “team of very strong financial experts.”
14 Claman: I need to ask you about Alibaba, this Chinese site in which you have a near 15 40 percent stake that is extraordinarily valuable. Everyone is wondering are you going to cash in on that. What are you going to do with Alibaba?
16 First of all, is it 7 billion in value? Is it 11 billion. I can’t get a straight 17 number from anybody. 18 Bartz: Well, I think one of the reasons you can’t get a straight number is it’s a private company, so there’s a lot of people that are doing their best 19 analysis of that. 20 You know, the company five years ago had some trouble in China and made such a wise decision to move the business out of China and not 21 operate in China cause we see what can happen in some of the issues with that.
22 Claman: Meaning Google and that situation?
23 Bartz: And we partnered up with a fantastic entrepreneur named Jack Ma. 24 Five years later, everybody is salivating because it was such a good decision and such a good investment .
25 So we can continue to watch this investment. We’re on the board of 26 Alibaba. And we’re also always watching what is best for the shareholders .
27 Claman: Would you wait until it goes public or do you not want to miss an 28 opportunity that may be before that?
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Bartz: You’re always evaluating things like this , Liz. Any investment you’re evaluating should I take some out now, should I wait and do these things 2 later. We have a team of very strong financial experts that both work here and advise us, and we will do the right thing for the shareholder, no doubt 4 about it . 107. In the 3Q10 Form 10-Q filed on November 8, 2010 and signed by Bartz and Morse,
6 1 Yahoo reported that its equity investment in Alibaba was $2.2 billion; that Alibaba reported a net
7 1 loss of $88.7 million for the nine months ending June 30, 2010, primarily due to a $192 million
8 1 goodwill impairment charge related to the business Yahoo contributed to Alibaba in October 2005;
9 1 and that the goodwill impairment charge did not impact the Company’s earnings in equity interests
10 because Yahoo’s investment balance related to the contributed business was carried over at cost.
11 Yahoo also reported that it sold its direct investment in Alibaba.com in September 2009 for $145
12 million and recorded a $98 million pretax gain on the sale. The Company also warned that the
13 operating performance of Alibaba could cause Yahoo’s stock price to fluctuate:
14 Our stock price has been volatile historically and may continue to be volatile regardless of our operating performance .
15 The trading price of our common stock has been and may continue to be
16 subject to broad fluctuations. During the three months ended September 30, 2010, the closing sale price of our common stock on the NASDAQ Global Select Market
17 ranged from $13.11 to $15.52 per share and the closing sale price on October 29, 2010 was $16.49 per share. Our stock price may fluctuate in response to a number
18 of events and factors, such as variations in quarterly operating results, announcements and implementations of technological innovations or new services by
19 us or our competitors; changes in financial estimates and recommendations by securities analysts; the operating and stock price performance of other companies
20 that investors may deem comparable to us; the operating performance of companies in which we have an equity investment, including Yahoo Japan Corporation
21 (“Yahoo Japan”) and Alibaba Group Holding Limited (“Alibaba Group”) ; and news reports relating to us, trends in our markets, or general economic conditions.
22 108. The facts described in ¶¶62-98 establish that defendants’ statements were materially
23 false and misleading because defendants failed to disclose that 100% of Alipay’s shares had been
24 transferred to Zhejiang on August 6, 2010 for billions of dollars less than Alipay’s value. Indeed,
25 defendants admitted that the Alipay share transfer had to be disclosed by reporting the transfer in
26 Yahoo’s 1Q11 Form 10-Q filed on May 10, 2011. Those facts also indicate that defendants may
27 have known about the Alipay share transfer when it occurred on August 6, 2010.
28
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1 E. January 25, 2011 and February 28, 2011: Defendants Make Materially False and Misleading Statements about Yahoo’s 2 Investment in the Alibaba Group by Failing to Disclose that 100% of Alipay’s Shares Had Been Transferred to Zhejiang and that the VIE 3 Arrangement Had Been Terminated
4 109. On January 25, 2011, Yahoo reported its 4Q10 and FY10 results, including quarterly
5 1 net income of $312 million or $0.24 diluted EPS, annual net income of $1.2 billion or $0.90 diluted
6 1 EPS, $4,011,889,000 of investments in equity interests and capital of $12.6 billion. During the
7 I conference call, Bartz and Morse repeated the financial results included in the press release; Morse
8 I represented that the market value of the Company’s indirect investment in Alibaba.com was
9 substantially greater than Yahoo’s $2.28 billion equity investment in the Alibaba Group; and Bartz
10 touted the importance of the Alibaba Group investment to Yahoo’s future:
11 Tim Morse - Yahoo! Inc. – CFO
12 [A]s of December 31, the pretax value of our 35% stake in Yahoo! Japan and our 29% indirect stake in Alibaba.com was roughly $10.4 billion, or approximately
13 $7.93 per share. These figures are based on public market quotes and do not include estimates of the value of Alibaba Group’s privately held businesses, most
14 notably Taobao and Alipay .
15 Carol Bartz - Yahoo! Inc. - CEO
16 Next up I want to address our interest in Alibaba and Yahoo! Japan. For Alibaba, I think I can sum up our point of view quite simply. Our approximately
17 40% stake has been and continues to be a great investment. And we believe it has a bright future. Alibaba.com is growing quickly, as is Taobao, which is now
18 China’s biggest online commerce marketplace with an estimated 75% share of the market. With eCommerce exploding in the largest country in the world, we feel
19 our investment in Alibaba will grow in value and continue to greatly benefit our investors over time .
20 110. In the 2010 Form 10-K filed on February 28, 2011 and signed by Yang, Bartz, Morse
21 and the Company’s directors, Yahoo reported $4.0 billion of investments in equity interests that
22 included $2.28 billion related to the investment in the Alibaba Group. The Company also reported
23 that “[s]ince acquiring its interest in Alibaba Group, the Company has recorded, in retained earnings,
24 cumulative earnings in equity interests of $308 million and $350 million, respectively as of
25 December 31, 2009 and 2010.”
26 111. The Company also described the impact of the Alibaba investment on the Company’s
27 reported results in 2008 and 2009:
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Earnings in equity interests for the year ended December 31, 2008 included a $401 million non-cash gain related to Alibaba Group’s IPO of Alibaba.com , net of tax. In 2 connection with the IPO, we made a direct investment of 1 percent in Alibaba.com , which we sold during the third quarter of 2009 for net proceeds of $145 million. In 3 2008, we also recorded an impairment charge of $30 million, net of tax, within earnings in equity interests to reduce the carrying value of the Alibaba.com 4 investment to fair value.
5 112. The Company also warned that the operating performance of Alibaba could cause 6 I Yahoo’s stock price to fluctuate. 7 Our stock price has been volatile historically and may continue to be volatile regardless of our operating performance .
8 The trading price of our common stock has been and may continue to be 9 subject to broad fluctuations. During the year ended December 31, 2010, the closing sale price of our common stock on the NASDAQ Global Select Market ranged from 10 $13.11 to $18.97 per share and the closing sale price on February 18, 2011 was $17.66 per share. Our stock price may fluctuate in response to a number of events 11 and factors, such as variations in quarterly operating results, announcements and implementations of technological innovations or new services by us or our 12 competitors; changes in financial estimates and recommendations by securities analysts; the operating and stock price performance of other companies that investors 13 may deem comparable to us; the operating performance of companies in which we have an equity investment, including Yahoo Japan Corporation (“Yahoo Japan”) 14 and Alibaba Group Holding Limited (“Alibaba Group”) ; and news reports or rumors relating to us, trends in our markets, or general economic conditions.
15 113. The facts described in ¶¶62-98 establish that defendants’ statements were materially
16 false and misleading because they failed to disclose that 100% of Alipay’s shares had been
17 transferred to Zhejiang on August 6, 2010 for billions of dollars less than Alipay’s value. Indeed,
18 defendants admitted that the Alipay share transfer had to be disclosed by reporting the transfer in
19 Yahoo’s 1Q11 Form 10-Q filed on May 10, 2011. Those facts also indicate that defendants may
20 have known about the Alipay share transfer when it occurred on August 6, 2010.
21 114. Further, the facts described in ¶¶62-98 establish that defendants’ statements in
22 Yahoo’s 2010 Form 10-K that was filed on February 28, 2011 were also materially false and
23 misleading because defendants failed to disclose that the VIE arrangement between the Alibaba
24 Group and Zhejiang was terminated by Ma on January 27, 2011. Indeed, defendants admitted the
25 termination of the VIE had to be disclosed by reporting the “deconsolidation” of Alipay in the press
26 release issued by Yahoo on May 12, 2011. Those facts also indicate that defendants may have
27 known about the termination of the VIE when it occurred on January 27, 2011.
28
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F. February 16, 2011: At the Goldman Sachs Technology & Internet Conference, Morse Makes Misleading Statements About the 2 Company’s Investment in Alibaba by Failing to Disclose that 100% of Alipay’s Shares Had Been Transferred to Zhejiang and that the VIE 3 Arrangement Had Been Terminated 4 115. On February 16, 2011, Morse spoke at the Goldman Sachs Technology & Internet
5 conference. Goldman Sachs analyst James Mitchell asked Morse why Yahoo had not exercised its 6 1 right to take a second board seat at the Alibaba Group and whether Yahoo still possessed that right. 7 Morse responded: 8 Right, well we do. This is a right that came to us, I think it was October 24th last year, and it exists for us over the long run in perpetuity. We have not yet 9 placed a Director there, mostly because things are going well and we have a four- person Board. It’s Jack and it’s Joe on the Alibaba side and it’s Jerry on our side 10 and it’s [Son Sonn] on the Softbank side and they work well together. Things are going well. There isn’t a dramatic need at this point to upset the balance and, more 11 importantly, the person that we want to find – it’s easy because we have control over the Board seat. We could do anything we wanted. We can throw someone else on 12 the Board. I’m not sure that creates any value. 13 So we’re looking for a very specific profile person who will actually add value. We don’t see it since things are running well. Jack and Joe do a tremendous 14 job with that Company. They run the Company day-to-day. We’re just financial investors essentially. And so they’re doing a great job . We don’t see any hurry and 15 no huge catalyst to make us change that, but when we find the right person that has the right background to help create value, especially in the next number of X years 16 before it goes IPO, we’ll install that person. But it’s there aren’t very many people that have the right background, the right profile for that that will add value. So it will 17 take some time and, as I said, it’s no real hurry for us because we think things are working really well and Jack and Joe do a tremendous job .
18 116. James Mitchell then asked how important it was for Taobao and Alipay to ramp up
19 profitability as opposed to Yahoo’s focusing on monetizing those assets:
20 We’re much more interested in the long term value creation here. Again, we 21 don’t have any operational control of this Company on the ground. It’s Jack and Joe running the Company. They’re doing a tremendous job. I think the strategy that 22 they’re pursuing with regard to Taobao, with regard to Alipay, fantastic. I think they’re spot on. We don’t – we put zero pressure on them for any kind of earnings . 23 There’s nothing in the way of dividend that would back up the earnings in any event so it would just be reported on our income statement.
24 We’re in this for the long haul, want to see them do well, want to see all the 25 investors do well so the more growth and better market position they can get for themselves the better off everybody is.
26 117. Omega Advisors analyst Barry Stewart noted that Yahoo had a “big [stake] in a fast
27 growing company with speculation that it’s worth a whole bunch of money” but that Yahoo did not
28
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have any liquidity or governance rights and asked how Morse looked at achieving a path to either 2 I realizing on that value or having a better market proxy for Alibaba’s value. Morse responded: 3 Well, our view of Alibaba is it’s an investment. Jack and Joe are running it. They’re creating a lot of value there. It will be worth a lot more in the coming 4 years than it is now . We’re not all that worried, as I said earlier, about profitability or liquidity events for the moment. What we’re looking for is to have that company 5 realize its potential. There will be opportunities to monetize in the future, at the very least when it goes public. But once it goes public, just like we’re exploring with 6 Japan, there are other ways to make sure that the value is maximized for shareholders that might not have anything to do with monetization. But for now, like I said, 7 they’re doing a great job running it and we’re just – we’re doing everything we can to make sure that that growth potential is realized.
8 118. The facts described in ¶¶62-98 establish that defendants’ statements were materially
9 false and misleading because defendants failed to disclose that 100% of Alipay’s shares had been
10 transferred to Zhejiang on August 6, 2010 and because they failed to disclose that the VIE
11 arrangement between the Alibaba Group and Zhejiang was terminated by Ma on January 27, 2011.
12 Defendants admitted that the Alipay share transfer had to be disclosed by reporting the transfer in
13 Yahoo’s 1Q11 Form 10-Q filed on May 10, 2011. They also admitted the termination of the VIE
14 had to be disclosed by reporting the “deconsolidation” of Alipay in the press release issued by
15 Yahoo on May 12, 2011. Those facts also indicate that defendants may have known about the
16 Alipay share transfer when it occurred on August 6, 2010 and the termination of the VIE when it
17 occurred on January 27, 2011.
18 G. April 19, 2011: Defendants Knowingly Make Materially False and 19 Misleading Statements about Yahoo’s 1Q11 Financial Results and the Company’s Investment in the Alibaba Group by Concealing that 20 100% of Alipay’s Shares Had Been Transferred to Zhejiang and that the VIE Arrangement Had Been Terminated
21 119. On April 19, 2011, Yahoo reported its 1Q11 results, including net income of $223
22 million or $0.17 diluted EPS; $4,178,356,000 of investments in equity interests; and capital of $12.9
23 billion. During the conference call, Bartz and Morse repeated the financial results included in the
24 press release, and Morse represented that the market value of the Company’s indirect investment in
25 Alibaba.com was substantially greater than Yahoo’s $2.28 billion equity investment in the Alibaba
26 Group.
27 Finally, as of March 31, the pretax value of our 35% stake in Yahoo! Japan 28 and our 29% indirect stake in Alibaba.com was roughly $9.9 billion or a little less
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1 than $7.50 per share. These figures are based on public market quotes and do not include estimates of the value of Alibaba’s privately held businesses.
2 120. Unlike the prior conference calls, Bartz said nothing about Yahoo’s investment in the
3 Alibaba Group.
4 121. The facts described in ¶¶62-98 establish that defendants’ statements were materially
5 false and misleading because defendants failed to disclose that 100% of Alipay’s shares had been
6 transferred to Zhejiang on August 6, 2010 and that the VIE arrangement between the Alibaba Group
7 and Zhejiang was terminated by Ma on January 27, 2011. Defendants admitted that the Alipay share
8 transfer had to be disclosed by reporting the transfer in Yahoo’s 1Q11 Form 10-Q filed on May 10,
9 2011. They also admitted the termination of the VIE had to be disclosed by reporting the
10 “deconsolidation” of Alipay in the press release issued by Yahoo on May 12, 2011. More
11 importantly, defendants admitted on May 12, 2011 that they had known about these transactions
12 since March 31, 2011.
13 H. May 10, 2011: Defendants Reveal in Yahoo’s 1Q11 Form 10-Q that 14 Alipay’s Shares Had Been Transferred to Another Company but Continue to Mislead by Failing to Disclose the Termination of the VIE 15 and Other Facts 16 122. In the 1Q11 Form 10-Q filed on May 10, 2011 and signed by Bartz and Morse,
17 1 Yahoo reported that its equity investment in Alibaba was $2.3 billion; that Alibaba reported net 18 income of $32.9 million for the three months ending December 31, 2010; and that “[t]he Company
19 records its share of the results of Alibaba Group, and any related amortization expense, one quarter 20 in arrears within earnings in equity interests in the condensed consolidated statements of income.” 21 Yahoo also disclosed for the first time that Alipay had been sold but failed to disclose when the sale
22 occurred, when defendants learned about the sale, the consideration the Alibaba Group received for 23 the sale or the termination of the VIE arrangement in January 2011. 24 To expedite obtaining an essential regulatory license, the ownership of Alibaba Group’s online payment business, Alipay, was restructured so that 100 25 percent of its outstanding shares are held by a Chinese domestic company which is majority owned by Alibaba Group’s chief executive officer. Alibaba Group’s 26 management and its principal shareholders, Yahoo! and Softbank Corporation, are engaged in ongoing discussions regarding the terms of the restructuring and the 27 appropriate commercial arrangements related to the online payment business.
28
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1 123. Although defendants disclosed the transfer of the Alipay shares, which they
2 1 admittedly had known about since March 31, 2011, they continued to mislead by failing to disclose
3 1 that they knew the Alipay shares were transferred to Zhejiang on August 6, 2010; that the Alibaba
4 1 Group received $46 million for the transfer, which was billions of dollars less than Alipay’s value;
5 1 and that the VIE arrangement between the Alibaba Group and Zhejiang was terminated by Ma on
6 1 January 27, 2011. Defendants did not reveal most of these facts until they reported the
7 “deconsolidation” of Alipay in the press release issued by Yahoo on May 12, 2011. Defendants
8 contended that the Alipay share transfer and termination of the VIE were done without the
9 knowledge or approval of the Alibaba board and admitted that Yahoo learned of the transactions on
10 March 31, 2011.
11 I. May 25, 2011-July 19, 2011: Defendants Refuse to Address Statements by the Alibaba Group and Ma
12 124. As alleged above, on May 25, 2011, Yahoo held an investor day, during which it
13 refused to provide additional information about how 100% of Alipay’s shares were transferred to
14 Zhejiang in August 2010 and how the VIE was terminated in January 2011 without defendants’
15 knowledge. Yang, Bartz and Morse refused to answer questions and instead provided scripted
16 answers and cited a self-imposed gag order for not being able to answer questions.
17 125. After the Alibaba Group issued the press release on May 13, 2011 that indicated
18 defendants may have known about the Alipay share transfer and the termination of the VIE before
19 March 31, 2011, the Alibaba Group did not make any further statements until Ma’s interview with
20 Kara Swisher on June 1, 2011 and when Ma, Alipay CEO Peng Lei and Alipay CFO Jing held a
21 press conference and Ma was interviewed by China Entrepreneur Magazine, both on June 14, 2011.
22 As alleged in detail above, Ma’s statements during the press conference and interviews indicate that
23 defendants may have known about the Alipay share transfer when it occurred on August 6, 2010 and
24 the termination of the VIE when it occurred on January 27, 2011.
25 126. Defendants did not deny or even address Ma’s statements, even though Ma had
26 violated the gag order and his statements indicated that defendants may have known about the
27 Alipay share transfer and termination of the VIE when those transactions occurred in August 2010
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and January 2011. Instead, on June 21, 2011, Yahoo, the Alibaba Group and SoftBank issued a joint
2 statement in which they announced another self-imposed gag order.
3 “Alibaba Group and its major shareholders, Yahoo! Inc. and SoftBank Corp. continue to be engaged in constructive negotiations, and we have made substantive 4 and encouraging progress toward an agreement regarding Alipay. Our objective is to reach an agreement in a timely manner that serves the interests of all stakeholders. 5 The companies will not comment in further detail until it is appropriate to do so.” 6 127. During Yahoo’s June 23, 2011 shareholder meeting, Bartz reiterated the self-imposed
7 I gag order and stated that Yahoo’s objective was “very simply is to reach an agreement in a timely 8 manner that serves the interests of the stakeholders, and importantly, we all agreed to not talk
9 1 publicly about it until it’s done, because it’s very important.” 10 128. On July 6, 2011, Bloomberg reported that Ma said the negotiations would result in the
11 payment of “very large” compensation to Yahoo and SoftBank. The next day, Einhorn informed 12 investors he had sold the Yahoo shares that Greenlight Capital, Inc. had purchased in April. 13 The Partnerships bought Yahoo! (YHOO) earlier this year based on a sum of the parts analysis, which included putting substantial value on its Chinese assets. 14 Shortly after the purchase, the value of the Chinese assets came into doubt as the CEO of the Chinese unit hived-off a valuable subsidiary into a corporation that he 15 personally controls. From there, the finger pointing started in every direction. This wasn’t what we signed up for. We exited with a modest loss.
16 129. On July 8, 2011, Eric Jackson published an article entitled “What Did Yahoo! Not
17 Want You to Read This Morning?” that summarized Ma’s interview with China Entrepreneur
18 Magazine. As alleged above, Ma’s statements during that interview indicate that defendants may
19 have known about the Alipay share transfer when it occurred on August 6, 2010 and the termination
20 of the VIE when it occurred on January 27, 2011. Jackson started the article by noting that Ma had
21 been talking to the Chinese media about the transfer of Alipay to Alibaba and that the English
22 version of the transcript of Ma’s interview with China Entrepreneur Magazine had been removed
23 due to objections by Yahoo.
24 There is much bigger news about Yahoo today than David Einhorn selling his 25 stake. 26 A couple of days ago on his blog, Bill Bishop posted some details about an upcoming interview between Jack Ma and China Entrepreneur Magazine.
27 The interview is the newest example of Ma going out of his way in the 28 Chinese media to defend his actions in transferring Alipay out of Alibaba Group
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without Yahoo!’s (YHOO) or Softbank’s consent. He previously had spoken out at length to Caixin Magazine and done an extensive press conference at the company’s 2 headquarters in Hangzhou.
3 The newest interview was the most outspoken yet for Ma. Beyond Bill’s highlights in his post was a SlideShare document with the full Chinese and English 4 translation transcript – 23 pages in all. Some of the most striking language was in that document.
5 *
6 UPDATE: I removed the full text of the Jack Ma interview and English translation at 7 the request of China Entrepreneur Magazine. They did not want the full text online anywhere but their own site, and apparently Yahoo and Alibaba were upset at the 8 translation and the portrayal of some of the parties involved. The real issue was probably not the translation but what Jack Ma said . As best as I can glean the 9 Alipay compensation negotiations are not close to completion. Alibaba is doing its own translation, to “clean up” what Jack Ma said. If there are discrepencies that 10 appear to change what was said I will update again.
11 So, reading between the lines of Bill’s comments, I have to believe it’s more from Yahoo!’s side that they objected to the content of the English translated 23 12 pages, rather than Alibaba, since Jack Ma is the guy who gave the full interview in the first place .
13 130. Jackson then wrote that he had read the full post a couple of days ago, made notes and
14 then summarized the text of the interview that was no longer available. He highlighted the following
15 facts as those that Yahoo did not want people to read.
16 - In June 2009, Alibaba Group’s board transferred 70% of Alipay from the 17 Group to a Caymans-based entity controlled mostly by Ma. This Caymans entity had a Variable Interest Entity (VIE) relationship with the Group, 18 meaning that Yahoo! and Softbank still indirectly owned Alipay
19 - On June 21, 2010, the People’s Bank of China (PBoC) released rules for Chinese companies in the payment service business
20 - On August 6, 2010, the final 30% stake of Alipay was transferred over to the 21 Caymans VIE
22 - According to Ma, the Group board approved both transfers
23 - On January 26, 2011, the PBoC faxed Alibaba Group asking them to declare if they had a VIE connected to Alipay. Ma states that it was understood that 24 if the Group had a VIE, it would not receive a government license because they do not want any foreigners controlling something like a payments 25 company
26 - Ma says he had 3 choices: (1) keep the VIE and hope the government changed its mind but risk having them shut down Alipay, (2) maintain the 27 VIE but lie, or (3) terminate the VIE to comply with the government. He chose the latter but claims SoftBank’s Son wanted him to do #2 and lie.
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1 - Yang couldn’t make a decision because all of the options would make him look bad to his shareholders. So he abstained from the decision.
2 131. On July 19, 2011, Yahoo announced its 2Q11 results. During the conference call,
3 Bartz stated that the Company knew investors wanted to know “where are we with Alipay,” that
4 substantial progress had been made and that Yahoo would “continue to work in earnest on the
5 definitive agreements in a [manner] that bests serves the interests of our shareholders.” Standard &
6 Poor’s Equity analyst Scott Kessler asked if the Alipay experience provided opportunities to
7 potentially revisit some of Yahoo’s corporate-governance-related practices. That question made
8 sense given the fact that Yahoo did not disclose the Alipay share transfer and termination of the VIE
9 until May 10, 2011 and May 12, 2011, even though the Alipay share transfer occurred on August 6,
10 2010, the VIE was terminated on January 27, 2011 and defendants admitted they knew about both
11 transactions no later than March 31, 2011. Bartz initially claimed that she did not understand the
12 question and then stated that Yahoo disclosed appropriately and that there were no problems with
13 Yahoo’s corporate governance.
14 Scott Kessler – Standard & Poor’s Equity - Analyst
15 I’m wondering whether you think the recent experience related to Alipay [has]
16 provided opportunities to take a fresh approach with Alibaba and potentially revisit some of your corp governance related practices? . . .
17 Carol Bartz - Yahoo! Inc. - CEO
18 Well I actually don’t understand your questions because it does – corporate
19 governance on Yahoo!, actually, Scott, I don’t know what you’re talking about.
20 Scott Kessler – Standard & Poor’s Equity - Analyst
21 Okay, what I’m talking about is so on the corporate governance front, obviously there have been questions that have arisen related to the nature of the
22 initial disclosure, and how the Company oversaw the nature of that relationship. And I guess going forward I’m wondering whether this experience has given you guys
23 reason to say maybe we should be doing things differently than we did before. And in conjunction with that, I’m wondering whether it also offers an opportunity for you
24 to take a fresh start with your relationship with Alibaba because obviously if the companies were more aligned, presumably this issue wouldn’t have arisen as it did.
25 Carol Bartz - Yahoo! Inc. - CEO
26 Well, Scott, you have a lot of comments in there. What I will say is that we
27 believe we disclosed appropriately and that our corporate governances has no problems and so there’s nothing to change there.
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1 J. July 29, 2011-November 2011: Yahoo Announces a Resolution to the Alipay Debacle, Bartz Is Fired and Shareholders Call for the Ouster 2 of Additional Directors
3 132. On July 29, 2011, Yahoo announced that it had entered into a Framework Agreement
4 1 with the Alibaba Group, SoftBank, Alipay, Zhejiang and others to resolve the transfer of the Alipay
5 1 shares and the termination of the VIE. In the press release, Yahoo reported the key terms of the
6 I agreement:
7 • The agreement preserves the existing relationship between Taobao and Alipay. Alipay will continue to provide payment processing services to 8 Alibaba Group and its subsidiaries (including Taobao) on preferential terms.
9 • Alibaba Group will license to Alipay certain intellectual property and technology and provide certain software technology services to Alipay and its 10 subsidiaries. Alipay will pay to Alibaba Group, prior to a liquidity event, a royalty and software technology services fee, which consists of an expense 11 reimbursement and a 49.9% share of the consolidated pre-tax income of Alipay and its subsidiaries.
12 • Alibaba Group will receive no less than $2 billion and no more than $6 13 billion in proceeds from an IPO of Alipay or other liquidity event. The exact proceeds to Alibaba Group will be determined by multiplying the total equity 14 value of Alipay by 37.5%, subject to the foregoing floor and ceiling amounts. 15 133. Analysts reported that the deal indicated Yahoo was a “forced seller” and was not as
16 1 good as was hoped for. As Bloomberg reported on August 1, 2011, the 3% decline in the
17 1 Company’s stock price (from $13.50 to $13.10), the 1.7% decline in the price of SoftBank’s stock
18 1 and the 6.3% increase in the stock price of Alibaba.com reflected that the terms of the resolution
19 were more beneficial to Alibaba.com . Bloomberg specifically noted that the amount of proceeds to
20 be received by the Alibaba Group would be determined by multiplying the total equity value of
21 Alipay by 37.5% even though the Alibaba Group owned 100% of Alipay before it was transferred to
22 Zhejiang.
23 134. Stifel Nicolaus analyst Jordan Rohan reported that “on the face of it, it seems like a
24 1 good deal for Yahoo, given how acrimonious the relationship with Jack Ma and Carol Bartz had
25 become and how little leverage Yahoo had” but also noted the “drama [] exposed how Yahoo’s fate
26 in Asia is dictated by the whim of Mr. Ma,” noting that “[e]ven if the ownership of the rest of
27 Alibaba group is not altered, the path forward seems to be controlled 100 percent by Jack Ma and his
28 team.”
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1 135. Analysts also raised doubts that an Alipay offering would come soon or be as
2 1 lucrative as Yahoo hoped. Standard & Poor’s Equity analyst Scott Kessler said that Yahoo “did not
3 1 give any clarity on a potential timeline for an [IPO]” and that “[t]he Chinese government also seems
4 1 focused on domestic ownership for this company, thus making any global [IPO] unlikely if not
5 1 impossible.”
6 136. The Associated Press reported that the terms confirmed Yahoo will not make as much
7 1 money from its Alibaba investment as it would have if Alipay had not been spun off into a separate
8 company controlled by a group led by Alibaba CEO Jack Ma. It also reported that the CFOs of
9 Yahoo and Alibaba “did their best to sell the Alipay settlement as [a] good deal for all parties
10 involved, but Wall Street didn’t appear to be buying the rationale,” noting the stock price decline on
11 July 29, 2011.
12 137. Citigroup analyst Mark Mahaney reported that while the agreement “removes some
13 I uncertainty, Yahoo appears to have become a forced seller of one of its key Asian assets.” He also
14 reported that “the [$6 billion] cap on the proceeds from any Alipay liquidity event is something of a
15 negative.” Wells Fargo analyst Jason Maynard stated, “there is too much uncertainty about the
16 realizable value of the Asian assets to confidently assume this will yield a multibillion windfall asset
17 gain.”
18 138. On September 6, 2011, Yahoo announced that the Board had removed Bartz as CEO,
19 1 replaced her with Morse as interim CEO and formed an Executive Leadership Council to support a
20 comprehensive strategic review to position the Company for future growth. The split was
21 contentious. Bartz sent an e-mail to Yahoo employees in which she wrote that she was fired over the
22 phone by Yahoo’s chairman. In a profanity-laced interview with Fortune, Bartz said that “[t]he
23 board was so spooked by being cast as the worst board in the country” and was “[n]ow [] trying to
24 show that they’re not the doofuses they are.” She challenged Bostock for firing her over the phone
25 by asking him, “why don’t you have the balls to tell me yourself?” and claimed the Board “f---ed me
26 over.” Three days later, Bartz resigned from the Yahoo Board.
27 139. The financial press noted the abruptness of the firing and that a 6.2% increase in
28 I Yahoo’s stock price reflected investors belief that the firing was good news. Reports also suggested 670999_1 CONSOLIDATED AMENDED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS - 3:11-cv-02732-CRB - 49 - Case3:11-cv-02732-CRB Document68 Filed12/15/11 Page53 of 65
1 1 her firing was related to the Alipay transfer. On September 6, 2011, MarketWatch reported that
2 1 Bartz’s “tough-talking personality apparently rubbed Alibaba Chairman Jack Ma the wrong way
3 1 from their first meeting” and that “[t]he role she played in the Alibaba mess, and the inability of
4 I Yahoo shareholders to see the full value of that investment, likely was a part of her ouster.”
5 1 MarketWatch also reported that Yang was the Yahoo executive on the Alibaba board and that “he
6 1 should also be taking some responsibility as well.” On September 8, 2011, it was reported in The
7 Wall Street Journal that the relationship between Alibaba and Yahoo had become “increasingly
8 strained” since Bartz became CEO in 2009, that Alibaba and Bartz repeatedly “butted heads” and
9 that she “rarely had contact with Alibaba Chairman Jack Ma.” On September 8, 2011, Stephen
10 Grocer reported in The Wall Street Journal Deal Journal that “[i]t is time for Jerry Yang to do
11 himself, and all Yahoo shareholders, a favor and quit the company’s board.” The same day, the
12 London Telegraph reported that “the final straw came when it emerged that Yahoo! had not realised
13 that there would be a financial impact on its $1bn (£610m) stake in joint venture Alipay when there
14 was a change of ownership.”
15 140. In a September 8, 2011 letter to the Yahoo Board, Daniel Loeb, whose hedge fund,
16 1 Third Point LLC, owns 5.1% of Yahoo’s stock, cited the “Alipay debacle” in a litany of failings that
17 had “destroyed value for all Yahoo stakeholders” and called for the ouster of additional directors.
18 Since September 2011, Yahoo has been focusing on recapitalizing the Company, and no additional
19 directors have been ousted. On November 4, 2011, Yahoo issued a press release in which it
20 I announced that the Board’s comprehensive strategic review was still underway and being properly
21 managed for the benefit of all shareholders.
22 141. Not everyone agreed. The same day, Loeb sent another letter to the Yahoo Board
23 I expressing his deep concern for a leveraged recapitalization of Yahoo that would benefit Yang at the
24 expense of shareholders. He wrote that “it is now clear that [Yang] is simply not aligned with
25 shareholders” and demanded the removal of directors Yang and Bostock from the Board. On
26 December 1, 2011, a Yahoo shareholder filed a class action against Yahoo and the Board seeking
27 declaratory relief, injunctive relief and damages because the Board had adopted bidding procedures
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that were designed to discourage any acquisition that could result in the replacement of the Board 2 1 and the diminution (or elimination) of Yang’s influence. 3 142. On December 13, 2011, Loeb sent the Yahoo Board another letter in which he wrote 4 1 that Third Point LLC remained “extremely troubled” about the Company’s efforts to maximize 5 shareholder value but not surprised by the “mismanagement given the history of strategic bungling 6 1 by Yahoo Board Chairman Roy Bostock and Founder Jerry Yang.” 7 Third Point LLC, as the beneficial owner of 5.2% of Yahoo! Inc.’s (“Yahoo”) outstanding shares, remains extremely troubled by news reports regarding the 8 dysfunction and inequity being exhibited in the process of maximizing stockholder value that the Board is allegedly “managing.” We are disturbed but not surprised by 9 this mismanagement given the history of strategic bungling by Yahoo Board Chairman Roy Bostock and Founder Jerry Yang, which has been chronicled in our 10 previous letters and in numerous critical media and analyst reports. As significant shareholders with our own fiduciary duties to investors to uphold, we cannot stand by 11 silently if such reports are accurate and Yahoo, a company in no need of cash, plans to engage in a sweetheart PIPE deal which will serve only to entrench Mr. Yang and 12 the current board while massively disenfranchising public shareholders and permanently robbing us of the opportunity to obtain a control premium.
13 V. LOSS CAUSATION
14 143. As detailed above, defendants’ false representations and omissions of material facts
15 caused Yahoo’s stock to trade at artificially inflated prices and operated as a fraud and deceit on
16 purchasers of the Company’s securities. By May 6, 2011, Yahoo’s stock price closed at a Class
17 Period high of $18.65 and continued to trade at artificially inflated prices until Yahoo began to
18 reveal the previously concealed adverse facts concerning the transfer of Alipay and the termination
19 of the VIE and their impact on the Company’s condition. As a result, Yahoo’s stock price declined
20 to $13.10 on July 29, 2011, 30% lower than the Class Period high price of $18.65. Class members
21 who purchased Yahoo stock during the Class Period suffered economic loss, i.e. , damages, under the
22 federal securities laws.
23 144. As alleged above, on May 10, 2011, Yahoo filed its Form 10-Q for 1Q11 and
24 revealed for the first time that Alipay was transferred from Alibaba to a Chinese domestic company
25 that was majority owned by Ma and that defendants were discussing the terms of the transaction.
26 Following this unexpected negative news, Yahoo’s stock price declined 7.3% from $18.55 on May
27
28
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1 10, 2011 to $17.20 on May 11, 2011. By comparison, the NDX declined 0.8%, the SPGIINTR
2 2 declined 1.8% and the S&P 500 declined 1.1%.
3 145. On May 12, 2011, Yahoo issued a press release in which it revealed for the first time
4 1 that the ownership of Alipay was transferred in August 2010 and that Alipay was “deconsolidat[ed]”
5 1 effective 1Q11. Defendants claimed that the transactions occurred without the knowledge or
6 1 approval of the Alibaba board of directors or shareholders and that Yahoo did not learn of the
7 transactions until March 31, 2011. Yahoo reported it was working closely with Alibaba and
8 Softbank to protect economic value for all interested parties. On this unexpected negative news,
9 Yahoo’s stock price declined 3.6% from $17.17 on May 12, 2011 to $16.55 on May 13, 2011
10 (Friday). By comparison, the NDX declined 1.2%, the SPGIINTR declined 0.9% and the S&P 500
11 declined 0.8%.
12 146. As alleged above, the financial press and many analysts questioned when defendants
13 1 knew about the Alipay share transfer and termination of the VIE and criticized the timing of the
14 disclosures. Then the Alibaba Group issued a press release on May 13, 2011 that indicated
15 1 defendants may have known about these transactions before March 31, 2011. On Sunday, May 15,
16 2011, Yahoo issued a press release in which it reported that “Alibaba Group, and its major
17 stockholders Yahoo! Inc. and Softbank Corporation, are engaged in and committed to productive
18 negotiations to resolve the outstanding issues related to Alipay in a manner that serves the interests
19 of all shareholders as soon as possible.” The Company did not address Alibaba’s May 13, 2011
20 press release. In response to this unexpected negative news, Yahoo’s stock price declined 4.5% to
21 $15.81 on Monday, May 16, 2011. By comparison, the NDX declined 1.7%, the SPGIINTR
22 declined 3.1% and the S&P 500 declined 0.6%.
23 147. As alleged in detail above, during the May 25, 2011 investor day, Yang, Bartz and
24 Morse refused to provide any details despite repeated questions from numerous analysts. Bartz
25 2 In Yahoo’s 2010 Form 10-K, the Company compared its stock price to the NASDAQ 100 26 Index (“NDX”), the Standard & Poor’s North American Technology-Internet Index, formerly the Goldman Sachs Internet Trading Index (the “SPGIINTR”), and the Standard & Poor’s 500 Stock 27 Index (the “S&P 500”).
28
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1 I stated, “we believe our disclosure was timely and appropriate. As you can imagine, we’re not going
2 to be able to say more about this topic,” and defendants repeatedly provided scripted remarks that
3 1 failed to address when they knew about the transfer of Alipay or why the transfer was not publicly
4 I disclosed earlier. In response to this unexpected negative news, Yahoo’s stock price declined 1.1%
5 1 from $16.15 on May 25, 2011 to $15.98 on May 26, 2011. By comparison, the NDX increased
6 0.6%, the SPGIINTR increased 0.7% and the S&P 500 increased 0.4%.
7 148. On July 19, 2011, Yahoo reported its 2Q11 results and lowered guidance; and, as
8 1 alleged above, Bartz stated that Yahoo was still working with the Alibaba Group to resolve the
9 transfer of the Alipay shares to Zhejiang and the termination of the VIE. She also stated that the
10 Company believed it disclosed appropriately and that there were no problems with Yahoo’s
11 corporate governance. In response to this unexpected negative news, the price of Yahoo’s stock
12 declined 7.6% from $14.59 on July 19, 2011 to $13.48 on July 20, 2011. By comparison, the NDX
13 declined 0.4%, the SPGIINTR declined 1.8% and the S&P 500 declined 0.1%.
14 149. On July 29, 2011, Yahoo announced that it had reached an agreement on Alipay with
15 1 Softbank and Alibaba Group. The key terms included: (1) Alipay’s continuing to provide payment
16 processing services to Alibaba Group and its subsidiaries (including Taobao) on preferential terms;
17 (2) Alibaba Group’s licensing to Alipay certain IP and technology and providing certain software
18 technology services; (3) Alipay’s paying the Alibaba Group a royalty and software technology
19 service fee consisting of an expense reimbursement and a 49.9% share of Alipay’s consolidated
20 pretax income; and (4) Alibaba Group’s receiving no less than $2 billion and no more than $6 billion
21 in proceeds from an Alipay IPO or other liquidity event. The exact amount to the Alibaba Group
22 will be determined by multiplying the total equity value of Alipay by 37.5% subject to the foregoing
23 floor and ceiling amounts.
24 150. In response to this news, Yahoo’s stock price declined 3% from $13.50 on July 28,
25 2011 to $13.10 on July 29, 2011. By comparison, the NDX declined 0.4%, the SPGIINTR declined
26 0.8% and the S&P 500 declined 0.6%.
27 151. The declines in Yahoo’s stock price following the partial disclosures compared to the
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1 changed market or industry conditions or Company-specific facts unrelated to the fraudulent
2 conduct. 3 1 VI. CLASS ACTION ALLEGATIONS 4 152. Plaintiffs bring this action as a class action pursuant to Rule 23 of the Federal Rules
5 of Civil Procedure on behalf of all persons who purchased Yahoo common stock on the open market 6 during the Class Period and were damaged thereby (the “Class”). Excluded from the Class are 7 defendants, directors and officers of Yahoo and their families and affiliates. 8 153. The members of the Class are so numerous that joinder of all members is 9 impracticable. From August 2010 to July 2011, there were approximately 1.3 billion outstanding
10 shares owned by hundreds, if not thousands, of persons. Thus, the disposition of their claims in a
11 class action will provide substantial benefits to the parties and the Court. 12 154. There is a well defined community of interest in the questions of law and fact 13 involved in this case. Questions of law and fact common to the members of the Class that
14 predominate over questions which may affect individual Class members include:
15 (a) Whether the federal securities laws were violated by defendants; 16 (b) Whether defendants engaged in a fraudulent scheme and omitted and/or 17 I misrepresented material facts; 18 (c) Whether defendants’ statements omitted material facts necessary to make the
19 statements made, in light of the circumstances under which they were made, not misleading;
20 (d) Whether defendants knew or recklessly disregarded that their statements were
21 materially false and misleading;
22 (e) Whether the prices of Yahoo common stock were artificially inflated; 23 (f) Whether defendants’ fraudulent scheme, misrepresentations and omissions
24 caused Class members to suffer economic losses, i.e. , damages; and
25 (g) The extent of damages sustained by Class members and the appropriate 26 measure of damages. 27 155. Plaintiffs’ claims are typical of those of the Class because plaintiffs and the Class
28 purchased Yahoo common stock during the Class Period and sustained damages from defendants’
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1 1 wrongful conduct. Plaintiffs will adequately protect the interests of the Class and has retained
2 I counsel who are experienced in class action securities litigation. Plaintiffs have no interests that 3 1 conflict with those of the Class. 4 156. A class action is superior to other available methods for the fair and efficient
5 I adjudication of this controversy. A class action will achieve economies of time, effort and expense
6 1 and provide uniformity of decision to the similarly situated members of the Class without sacrificing 7 procedural fairness or bringing about other undesirable results. Class members have not indicated an 8 interest in prosecuting separate actions as none have been filed. The number of Class members and 9 the relatively small amounts at stake for individual Class members make separate suits 10 impracticable. No difficulties are likely to be encountered in the management of this action as a
11 class action. 12 157. In addition, a class action is superior to other methods of fairly and efficiently
13 I adjudicating this controversy because the questions of law and fact common to the Class 14 predominate over any questions affecting only individual Class members. Although individual Class
15 members have suffered disparate damages, the fraudulent scheme and the misrepresentations and
16 omissions causing damages are common to all Class members. Further, there are no individual 17 issues of reliance that could make this action unsuited for treatment as a class action because all 18 Class members relied on the integrity of the market and are entitled to the fraud-on-the-market
19 presumption of reliance. 20 158. The market for Yahoo’s common stock was open, well developed and efficient at all
21 I relevant times. Yahoo’s stock met the requirements for listing, and was listed and actively traded, on 22 the NASDAQ, a highly efficient and automated market. As a regulated issuer, Yahoo filed periodic
23 public reports with the SEC. Yahoo regularly communicated with public investors via established
24 market communication mechanisms, including through regular disseminations of press releases on 25 the national circuits of major newswire services and through other wide-ranging public disclosures,
26 such as communications with the financial press and other similar reporting services. 27 159. As alleged above, the change in the price of Yahoo’s stock – compared to the changes 28 in the three indices – in response to the release of unexpected material positive and negative
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1 I information about the Company shows there was a cause-and-effect relationship between the public
2 I release of the unexpected information about Yahoo and the price movement in the Company’s stock.
3 1 The average weekly trading volume of Yahoo’s stock from August 2010 to July 2011 was
4 1 approximately 113 million shares, or 8.6% of total outstanding shares. Numerous analysts followed
5 I Yahoo, attended the Company’s conference calls and issued reports prior to, during and after the
6 1 Class Period. The Company was eligible to register securities on Form S-3. Institutional investors
7 owned an average of 989 million shares or approximately 75% of Yahoo’s average outstanding
8 shares (1.3 billion).
9 160. As a result of the foregoing, the market for Yahoo common stock promptly digested
10 current information regarding Yahoo from all publicly available sources and reflected such
11 information in the Company’s stock price. Under these circumstances, all purchasers of Yahoo
12 common stock during the Class Period suffered similar injury through their purchases of Yahoo
13 common stock at artificially inflated prices and the subsequent revelations concerning declines in
14 price, and a presumption of reliance applies.
15 FIRST CLAIM FOR RELIEF
16 For Violation of Section 10(b) of the 1934 Act and Rule 10b-5
17 (Against All Defendants)
18 161. Plaintiffs repeat and reallege the above paragraphs as though fully set forth herein.
19 162. During the Class Period, defendants engaged in a scheme and fraudulent course of
20 I conduct to misrepresent Yahoo’s true financial condition; approved or furnished false information
21 I underlying the false statements specified above, which they knew or recklessly disregarded were
22 I misleading in that they contained misrepresentations; and failed to disclose material facts necessary
23 in order to make the statements made, in light of the circumstances under which they were made, not
24 misleading.
25 163. By engaging in the acts, practices and omissions previously alleged, each of the
26 1 defendants violated §10(b) of the 1934 Act and Rule 10b-5 by:
27 (a) Employing devices, schemes and artifices to defraud;
28
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1 (b) Making untrue statements of material facts or omitting to state material facts
2 necessary in order to make the statements made, in light of the circumstances under which they were 3 1 made, not misleading; or 4 (c) Engaging in acts, practices and a course of business that operated as a fraud or 5 deceit upon plaintiffs and others similarly situated in connection with their purchases of Yahoo’s 6 publicly traded securities during the Class Period. 7 164. During the Class Period, defendants made, disseminated and/or approved each of the 8 statements specified in §IV above. 9 165. Each of the statements specified in §IV above was materially false or misleading at 10 the time it was made because it contained misrepresentations of fact or failed to disclose material 11 facts necessary to make the statements not misleading in light of the circumstances in which it was
12 made. 13 166. The statutory safe harbor conditionally provided by 15 U.S.C. §78u-5 for certain 14 forward-looking statements does not apply to any of the statements alleged herein to be materially 15 false or misleading because:
16 (a) The statements were not forward-looking or identified as such when made; 17 (b) The statements were not accompanied by meaningful cautionary language that
18 sufficiently identified the specific important factors that could cause actual results to differ
19 materially from those in the statements; or
20 (c) The statements were made by defendants with actual knowledge that the
21 statements were false or misleading. 22 167. Defendants made, disseminated or approved the statements specified in §IV.G.-H.
23 above while knowing that the statements were false or misleading because they failed to disclose 24 facts necessary to prevent the statements from misleading investors in light of the circumstances
25 under which they were made. 26 168. Plaintiffs and the Class purchased Yahoo securities in reliance upon the truth and
27 accuracy of the statements specified in §IV above and the other information that was publicly
28 reported by defendants about Yahoo and its operations and without knowledge of the facts,
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1 transactions, circumstances and conditions fraudulently misrepresented to or concealed from the
2 1 market during the Class Period, as specified above.
3 169. Plaintiffs and the Class have suffered damages because they:
4 (a) Paid artificially inflated prices for Yahoo’s publicly traded securities;
5 (b) Purchased Yahoo securities on an open, developed and efficient public
6 1 market; and
7 (c) Incurred economic loss when the prices of the securities declined as the direct
8 and proximate result of the public dissemination of information that was inconsistent with
9 I defendants’ prior public statements or otherwise alerted the market to facts, transactions,
10 circumstances and conditions concealed by defendants’ misrepresentations and omissions or the
11 economic consequences thereof.
12 170. Plaintiffs and the Class would not have purchased Yahoo’s publicly traded securities
13 at the prices they paid, or at all, if they had been aware that the market prices had been artificially
14 and falsely inflated by defendants’ fraudulent conduct and misleading statements.
15 SECOND CLAIM FOR RELIEF
16 For Violation of Section 20(a) of the 1934 Act (Against All Defendants)
17 171 Plaintiffs repeat and reallege the above paragraphs as if fully set forth herein.
18 172. Defendants and/or persons under their control violated §10(b) of the 1934 Act and
19 Rule 10b-5 by their acts and omissions described above, causing economic injury to plaintiffs and
20 other members of the Class.
21 173. By virtue of their positions as controlling persons, defendants are each liable pursuant
22 to §20(a) of the 1934 Act for the acts and omissions of their co-defendants in violation of the 1934
23 Act.
24 174. Each of the defendants acted as a controlling person of some or all of their co-
25 defendants, as set forth below, because they each had the capacity to control, or did actually exert
26 control, over the actions of their co-defendants in violation of the federal securities laws.
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1 175. Yang controlled Bartz, Morse and Yahoo through his position of power and control
2 I and his responsibilities as Yahoo’s founder, as the “Chief Yahoo” and as a member of the Board; his
3 I power to hire and fire and his supervisory authority over Bartz, Morse and other members of
4 I Yahoo’s senior management; his power and responsibility to manage the day-to-day operations of
5 1 Yahoo, including those relating to Yahoo’s investment in the Alibaba Group; and his ability to
6 I control the contents of Yahoo’s press releases, conference calls, SEC filings and other public
7 statements.
8 176. Bartz controlled Morse and Yahoo through her position of power and control and her
9 I responsibilities as Yahoo’s CEO, President and as a member of the Board; her power to hire and fire
10 and her supervisory authority over Morse and other members of Yahoo’s senior management; her
11 power and responsibility to manage the day-to-day operations of Yahoo, including those relating to
12 Yahoo’s investment in the Alibaba Group; and her ability to control the contents of Yahoo’s press
13 releases, conference calls, SEC filings and other public statements.
14 177. Morse controlled Yahoo through his position of power and control and his
15 I responsibilities as Yahoo’s CFO; his power to hire and fire and his supervisory authority over other
16 members of Yahoo’s senior management; his power and responsibility to manage the day-to-day
17 operations of Yahoo, including those relating to the Company’s investment in the Alibaba Group;
18 and his ability to control the contents of Yahoo’s press releases, conference calls, SEC filings and
19 other public statements.
20 178. The Company had the power to control and influence Yang, Bartz and Morse by
21 virtue of its power to hire, fire, supervise and otherwise control the actions of its employees,
22 including Yang, Bartz and Morse, and the salaries, bonuses, incentive compensation and other
23 employment consideration and arrangements provided to them.
24 179. Each of the Individual Defendants had direct and supervisory involvement in the day-
25 to-day operations of Yahoo and, therefore, is presumed to have had the power to, and did, control or
26 influence the business practices or conditions giving rise to the securities violations alleged herein
27 and the content of the statements that misled investors about those conditions and practices as
28 alleged above. By virtue of their high-level executive positions, ownership of and contractual rights
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1 with Yahoo and their participation in or awareness of the Company’s operations and intimate 2 knowledge of the matters discussed in the public statements filed by the Company with the SEC and
3 disseminated to the investing public, defendants had the power to influence and control, and did 4 influence and control, directly or indirectly, the decision making of the Company, including the
5 content and dissemination of the false and misleading statements alleged above. 6 VII. PRAYER FOR RELIEF 7 WHEREFORE, plaintiffs pray for judgment as follows: 8 A. Declaring this action to be a proper class action pursuant to Rule 23; 9 B. Awarding plaintiffs and the members of the Class damages, interest and costs; and 10 C. Awarding such other relief as the Court may deem just and proper. 11 VIII. JURY DEMAND 12 Plaintiffs demand a trial by jury. 13 DATED: December 15, 2011 ROBBINS GELLER RUDMAN & DOWD LLP 14 CHRISTOPHER P. SEEFER
15
16 /s/ Christopher P. Seefer CHRISTOPHER P. SEEFER
17 Post Montgomery Center 18 One Montgomery Street, Suite 1800 San Francisco, CA 94104 19 Telephone: 415/288-4545 415/288-4534 (fax)
20 Lead Counsel for Plaintiffs
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1 CERTIFICATE OF SERVICE
2 I hereby certify that on December 15, 2011, I authorized the electronic filing of the foregoing
3 with the Clerk of the Court using the CM/ECF system which will send notification of such filing to
4 the e-mail addresses denoted on the attached Electronic Mail Notice List, and I hereby certify that I
5 caused to be mailed the foregoing document or paper via the United States Postal Service to the non-
6 CM/ECF participants indicated on the attached Manual Notice List.
7 I further certify that I caused this document to be forwarded to the following Designated
8 Internet Site at: http://securities.stanford.edu .
9 I certify under penalty of perjury under the laws of the United States of America that the
10 foregoing is true and correct. Executed on December 15, 2011.
11 /s/ Christopher P. Seefer
12 CHRISTOPHER P. SEEFER
13 ROBBINS GELLER RUDMAN 14 & DOWD LLP Post Montgomery Center 15 One Montgomery Street, Suite 1800 San Francisco, CA 94104 16 Telephone: 415/288-4545
17 415/288-4534 (fax) E-mail:[email protected]
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Mailing Information for a Case 3:11-cv-02732-CRB
Electronic Mail Notice List
The following are those who are currently on the list to receive e-mail notices for this case.
• Brian Joseph Barry , Esq [email protected]
• Joseph Daniel Cohen [email protected]
• Mark R.S. Foster [email protected],[email protected],[email protected]
• Christopher T. Heffelfinger [email protected] ,[email protected]
• Dennis J. Herman [email protected],[email protected],[email protected],[email protected],[email protected],[email protected]
• Iron Workers Mid-South Pension Fund [email protected]
• Reed R. Kathrein [email protected],[email protected],[email protected],[email protected]
• Danielle Suzanne Myers [email protected] ,[email protected],[email protected]
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• Brian J. Robbins [email protected]
• Darren Jay Robbins [email protected]
• Christopher Paul Seefer [email protected] ,[email protected],[email protected],[email protected]
• Samuel S. Song [email protected],[email protected],[email protected]
• David Conrad Walton [email protected]
Manual Notice List
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• (No manual recipients)
https://ecf.cand.uscourts.gov/cgi-bin/MailList.pl?19889414880941-L_366_0-1 12/15/2011